UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the fiscal year ended December 31, 2006 or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934


                        Commission File Number: 000-30273

                           CHESTATEE BANCSHARES, INC.
                           --------------------------
           (Name of small business issuer as specified in its Charter)

Georgia                                                               58-2535333
---------------------------------                         ----------------------
(State or other jurisdiction                                       (IRS Employer
of  incorporation or organization)                        Identification Number)

6639 Highway 53 East
Dawsonville, Georgia 30534                                        (706) 216-2265
---------------------------                               ----------------------
(Address of principal                                        (Issuer's telephone
executive offices)                                                       number)

         Securities registered under Section 12(b) of the Exchange Act:

Title of each class                                             Name of Exchange
-------------------                                             ----------------
None                                                                        None

         Securities registered under Section 12(g) of the Exchange Act:

Title of each class                                             Name of Exchange
-------------------                                             ----------------
Common Stock                                                                None
no par value per share

Check whether the issuer (1) has filed all reports 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.   Yes  [X]       No  [_]

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

Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). [_]

The issuer's revenues for the most recent fiscal year were $ 22,153,246.

There were 3,447,381 outstanding shares of common stock, no par value per share,
as of December 31, 2006. The aggregate market value of the voting stock of the
Registrant held by non-affiliates of the Registrant, as of December 31, 2006,
was $27,236,143 based on the last sales price on such date.



<PAGE>


                                     PART I
                                     ------

ITEM 1.  DESCRIPTION OF BUSINESS
         -----------------------

History
-------

     Chestatee Bancshares, Inc., referred to as the Company, is a bank holding
company incorporated October 13, 1999 under the laws of the State of Georgia. We
were formed for the principal purpose of acquiring Chestatee State Bank, a state
banking institution chartered under the laws of the State of Georgia on December
31, 1997. Pursuant to a Plan of Reorganization effective March 31, 2000, we
acquired all of the issued and outstanding shares of common stock, $5.00 par
value of the Bank. As a result of this transaction, the former stockholders of
the Bank became the stockholders of the Company, and the Bank became a
wholly-owned subsidiary of the Company.

     The Company formed Chestatee Financial Services, Inc. on November 13, 2000,
which began doing business in the first quarter of 2001. We also formed
Chestatee Residential Mortgage, Inc. on March 7, 2001, which began doing
business in the second quarter of 2001. Our assets consist primarily of our
ownership of the capital stock of the Bank, Chestatee Financial and Chestatee
Residential Mortgage. Unless otherwise expressly stated, the information
presented regarding the Company includes the Company, the Bank, Chestatee
Financial and Chestatee Residential Mortgage on a consolidated basis.

     The Company's principal place of business is located at 6639 Highway 53
East, Dawsonville, Dawson County, Georgia. The Bank has conducted its general
banking business since opening on May 15, 1998, from its main office located at
6639 Highway 53 East, Dawsonville, Dawson County, Georgia. The Bank has three
full-service branches: one located in downtown Dawsonville at 86 Highway 53
West, Dawsonville, Dawson County, Georgia; a second located in Pickens County,
Georgia at 34 Holcombe Way, Marblehill, Georgia; and a third located in Forsyth
County, located at 2675 Freedom Parkway, Cumming, Georgia. The Bank has closed
its full service branch in the Ingle's Supermarket and the branch providing loan
production services only in Lumpkin County. Chestatee Financial and Chestatee
Residential Mortgage conduct their respective businesses at 6639 Highway 53
East, Dawsonville, Dawson County, Georgia.

Business
--------

     The assets of the Company consist primarily of our ownership of the capital
stock of the Bank, Chestatee Financial and Chestatee Residential Mortgage. The
Company is authorized to engage in any activity permitted by law to a
corporation, subject to applicable federal and state regulatory restrictions on
the activities of bank holding companies. This structure provides us with
greater flexibility than permitted to the Bank, affording the Company
opportunities to expand and diversify our business activities. While management
has no present plans to engage in any other business activities, we may, from
time to time, study the feasibility of establishing or acquiring subsidiaries to
engage in other business activities to the extent permitted by law.


                                       2
<PAGE>



     The Bank operates a full-service banking business and engages in a broad
range of commercial banking activities, including accepting customary types of
demand and timed deposits, making individual, consumer, commercial, and
installment loans, money transfers, safe deposit services, and making
investments in U. S. government and municipal services to meet the banking needs
of individuals, small- to medium-sized businesses, and farmers. The Bank does
not offer trust services.

     The Bank performs banking services customary for a full service bank of
similar size and character. These services include the furnishing of personal
and commercial checking accounts, other demand and time deposit accounts, and
the extension of personal and commercial loans and lines of credit. The
principal business of the Bank is to attract and accept deposits from the public
and to make loans and other investments. The principal sources of funds for the
Bank's loans and investments are demand, time, savings, and other deposits,
including negotiable order of withdrawal or NOW accounts, installment payments
and prepayments on loans granted, sales to other lenders or institutions of
loans or participation in loans; fees paid by other lenders or institutions for
servicing loans sold by the Bank to it; and borrowings.

     The principal sources of income for the Bank are interest and fees
collected on loans, including fees received for servicing loans sold to other
lenders or institutions and, to a lesser extent, interest and dividends
collected on other investments. The principal expenses of the Bank include
interest paid on savings and other deposits, including NOW accounts, interest
paid on borrowings by the Bank, employee compensation, office expenses and other
overhead expenses.

     The Bank is authorized to make both secured and unsecured commercial and
consumer loans to individuals, partnerships, corporations and other entities.
The Bank's lending business consists principally of making secured real estate
loans, including residential and commercial construction loans, and primary and
secondary mortgage loans for the acquisition or improvement of personal
residences. In addition, the Bank makes consumer loans to individuals and
commercial loans to small and medium-sized businesses and professional concerns.

     Loans secured by real estate are the primary component of the Bank's loan
portfolios, constituting approximately $209 million, or 83%, of the Bank's total
loans at December 31, 2006. These loans consist of commercial real estate loans,
construction and development loans and residential real estate loans and home
equity loans. The Bank also makes loans for commercial purposes in various lines
of business. At December 31, 2006, the Bank held approximately $36 million, or
14% of the Bank's total loans, in commercial loans, excluding for these purposes
commercial loans secured by real estate included above. The Bank makes a variety
of loans to individuals for personal and household purposes, including secured
and unsecured installment and term loans, lines of credit, and revolving lines
of credit such as credit cards. At December 31, 2006, the Bank held
approximately $8 million in consumer loans, representing 3% of the Bank's total
loans.


                                       3
<PAGE>
     The Bank's loan approval policies provide for various levels of officer
lending authority. When the aggregate outstanding loans to a single borrower
exceeds that individual officer's lending authority, the loan request must be
considered and approved by an officer with a higher lending limit or by the
officers' loan committee. Individual officers' lending limits range from $10,000
to $250,000, depending on security, seniority and the type of loan. The
president and chief lending officer each have a lending limit of $250,000 and
jointly have a lending limit of $500,000. The directors' loan committee, which
consists of the president and six outside directors, has a lending limit of
$1,000,000. Loans above $1,000,000 require approval by the majority of the full
Board of Directors.

     The Bank has a continuous loan review procedure involving multiple officers
of the Bank which is designed to promote early identification of credit quality
problems. All loan officers are charged with the responsibility of rating their
loans and reviewing those loans on a periodic basis, the frequency of which
increases as the quality of the loan deteriorates.

     The Bank offers a variety of deposit programs to individuals and to small
to medium-sized businesses and other organizations at interest rates generally
consistent with local market conditions. The Bank is authorized to accept and
pay interest on deposits from individuals, corporations, partnerships and any
other type of legal entity, including fiduciaries, such as private trusts.
Qualified deposits are insured by the FDIC in an amount up to $100,000.

     The following table sets forth the mix of depository accounts at the Bank
as a percentage of total deposits at December 31, 2006:

                                                           December 31, 2006

     Non-interest bearing demand...................................       9%
     Interest-bearing demand.......................................      32%
     Savings.......................................................       1%
     Time Deposits.................................................      22%
     Certificates of Deposit of $100,000 or more...................      36%

              Total................................................   100.0%

The Bank is a member of a network of automated teller machines, which permits
the Bank's customers to perform certain transactions in numerous cities in
Georgia and throughout the country.

     The data processing work of the Bank is processed with Fidelity IFS, f/k/a
Intercept Group of Thomson, Georgia. The Bank issues credit cards. The Bank also
offers its customers a variety of checking and savings accounts. The installment
loan department makes both direct consumer loans and also purchases retail
installment contracts from sellers of consumer goods.


                                       4
<PAGE>

     The Bank principally serves the residents of Dawsonville and Dawson County.
Dawson County has grown approximately 23% since the 2000 census according to
U.S. Census Bureau statistics, from about 16,000 persons in 2000 to an estimated
20,000 by December 2005 (the latest data available). Dawsonville and Dawson
County have a diverse commerce, including retail, manufacturing, service and
farming sector economies. Dawsonville also serves as the county seat for Dawson
County, Georgia, with a significant number of residents employed in government.
Dawsonville, located approximately 15 miles north of Cumming, Georgia and 22
miles west of Gainesville, Georgia, is situated in the center of the development
corridor extending north from Atlanta between Interstate 75 and Interstate 85.
The Bank also serves the adjacent counties of Cherokee, Forsyth, Gilmer, Hall,
Lumpkin and Pickens.

     As of December 31, 2006, the Bank has a correspondent relationship with The
Bankers Bank of Atlanta, Georgia. The correspondent bank provides certain
services to the Bank, such as investing its excess funds, processing checks and
other items, buying and selling federal funds, handling money fund transfers and
exchanges, shipping coins and currency, providing security and safekeeping of
funds and other valuable items, handling loan participation and furnishing
management investment advice on the Bank's securities portfolio.

     Chestatee Financial renders securities brokerage and investment advisory
services, and offers insurance and annuity products. All services and
solicitations are provided by an independent contractor through affiliates of
Mass Mutual and the subsidiary engages no employees.

     Chestatee Residential Mortgage provides mortgage lending and mortgage
origination services. The subsidiary has partnered with Guaranty First Mortgage,
LLC and Shelter Mortgage Corporation, furnishing services and making
solicitations through Guaranty Mortgage Services, LLC. All services are provided
by independent contractors engaged by Guaranty Mortgage Services. Guaranty
Mortgage Services obtains commitments from secondary mortgage purchasers,
originates mortgage loans on terms corresponding to such commitments and
generates fee income to supplement their interest income. No mortgage loans are
held by the Bank or by Chestatee Residential Mortgage for resale nor are any
loans held for mortgage servicing.

     Neither the Company nor its subsidiaries has any material patents,
licenses, franchises or concessions. No material expenditures were made by the
Company during its last two fiscal years on material research activities
relating to the development of services or the improvement of existing services.
Based upon present business activities, compliance with federal, state and local
provisions regulating discharge of materials into the environment will have no
material effects upon the capital expenditures, earnings and competitive
position of the Company.

     The Company may engage in any activity permitted by law to a corporation,
subject to applicable federal and state regulatory restrictions on the
activities of bank holding companies. While we have no present plans to engage
in any other business activities, management may, from time to time, study the
feasibility of establishing or acquiring subsidiaries to engage in other
business activities to the extent permitted by law.


                                       5
<PAGE>

Competition
-----------

     The banking business is highly competitive. The Bank competes as financial
intermediaries with other commercial banks, thrift institutions, credit unions,
and money market mutual funds operating in Dawson County, as well as in the
adjacent counties of Cherokee, Forsyth, Gilmer, Hall, Lumpkin and Pickens. Many
of the Bank's competitors have significantly greater resources and higher
lending limits (by virtue of their greater capitalization). Credit unions and
money market mutual funds with which the Bank competes may have competitive
advantages as a result of their being subject to different, and possibly less
stringent, regulatory requirements.

     As of December 31, 2006, six non-locally owned banks had offices in Dawson
County. There are only two locally owned bank in Dawson County. BestBank, a bank
headquartered in Milwaukee, Wisconsin, operates a branch office in Dawson
County. BB&T operates one office in Dawson County. United Community Bank
maintains two branch offices in Dawson County. Regions Bank, headquartered in
Birmingham, Alabama, maintains a branch office. GB&T has acquired Mountain State
Bank and maintains offices in Dawson County and Forsyth County. First Citizens
Bank is the only other locally-owned bank in the county. While there are no
other financial institutions with offices in our region, numerous financial
institutions within the Atlanta metropolitan area market their services to our
residents. In addition to these banks, there are several finance companies,
credit union offices, and other non-traditional providers of service that
compete in the Bank's market. Many local businesses and individuals have
deposits outside the primary service areas of the Bank with these financial
institutions. Georgia law allows banks in Georgia to establish newly-formed
branch banks in areas in which the Bank serves, which branches, if established,
also would compete with the Bank.

Employees
---------

     Except for the officers of the Company, who are also officers of the Bank,
the Company does not have any employees. As of December 31, 2006, the Bank had
67 full-time and 7 part-time employees. Chestatee Financial and Chestatee
Residential Mortgage had no full-time or part-time employees, with all services
rendered by independent contractors. In our opinion, the Company and the Bank
each enjoy an excellent relationship with its employees. We are not a party to
any collective bargaining agreement.


                                       6
<PAGE>

Selected Financial Information
------------------------------

     A history of the Company's financial position for the period ended December
31, 2006, is as follows (audited, dollar amounts in thousands, except for per
share information):

Total Assets.................................................$      299,675
Total Deposits...............................................$      262,504
Total Shareholders Equity....................................$       28,082
Net Income...................................................$        2,963
Number of Issued and Outstanding Shares......................     3,447,381
Book Value Per Share.........................................$         8.15
Net Income Per Share.........................................$         0.86

A history of the Company's financial position for the year ended December 31,
2005, is as follows (audited, dollar amounts in thousands, except for per share
information):

Total Assets.................................................$      254,839
Total Deposits...............................................$      215,982
Total Shareholders Equity....................................$       25,266
Net Income...................................................$        2,410
Number of Issued and Outstanding Shares......................     3,446,281
Book Value Per Share.........................................$         7.33
Net Income Per Share.........................................$         0.70

Monetary Policies
-----------------

     The results of operations of the Company and the Bank are significantly
affected by the credit policies of monetary authorities, particularly the Board
of Governors of the Federal Reserve System. The Federal Reserve'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 to curb inflation or combat a recession. The
monetary policies of the Federal Reserve 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. In view of changing conditions in the national economy and in the
money markets, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve System, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand, or
the business and earnings of the Bank.


                                       7
<PAGE>

Supervision and Regulation
--------------------------

     The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions and provide for
general regulatory oversight over virtually all aspects of operations. These
laws and regulations generally are intended to protect depositors, not
shareholders. This discussion is only a summary of various statutory and
regulatory provisions, qualified by reference to the particular statutory and
regulatory provisions. Any change in applicable laws or regulations may have a
material effect on our business and prospects. We are unable to predict the
nature or the extent of the effect on our business and earnings that fiscal or
monetary policies, economic control or new federal or state legislation may have
in the future.

     The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 and is registered with and subject to the regulation
of the Federal Reserve. As a bank holding company, the Company is required to
file with the Federal Reserve annual reports and other reports and information
as may be required under the Bank Holding Company Act. The Federal Reserve may
conduct examinations of the Company and the Bank to determine whether we are in
compliance with the regulations promulgated under the Bank Holding Company Act.
The Bank Holding Company Act requires a bank holding company to obtain prior
approval of the Federal Reserve to acquire the ownership or control of more than
5% of any class of voting stock of any bank not already controlled by it, for it
or any subsidiary (other than a bank) to acquire all or substantially all of the
assets of a bank, and to merge or consolidate with any other bank holding
company.

     Federal law imposes certain limitations on extensions of credit and other
transactions between banks that are members of the Federal Reserve System and
other affiliates (which includes any holding company of which a bank is a
subsidiary and any other non-bank subsidiary of that holding company). Banks
that are not members of the Federal Reserve System also are subject to these
limitations. Further, federal law prohibits a bank holding company and its
subsidiaries from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property, or the furnishing of services.

     Under Federal Reserve policy, a bank holding company is expected to act as
a source of financial strength to its bank subsidiaries and to commit resources
to support these subsidiaries. This support may be required at times when,
absent such policy, the bank holding company might not otherwise provide such
support. Under these provisions, a bank holding company may be required to loan
money to its subsidiary banks in the form of capital notes or other instruments
which qualify for capital under regulatory rules. Any loans by the bank holding
company to subsidiary banks are likely to be unsecured and subordinate to the
bank's depositors and will be senior to the securities offered in this
prospectus.


                                       8
<PAGE>



     The Company also is subject to regulation as a bank holding company under
the Georgia Financial Institutions Code, which requires registration and filing
of periodic information with the Georgia Department of Banking and Finance.
Registration with the Georgia Department includes information relating to the
financial condition, operations, management and inter-company relationships of
the Company and the Bank. The Georgia Department also may require other
information or make examinations as is necessary to keep itself informed as to
whether the Company is in compliance with the provisions of Georgia law and
related regulations and orders.

     Under the provisions of the Georgia Financial Institutions Code, it is
unlawful without the prior approval of the Georgia Department for any bank
holding company to acquire ownership or control of more than 5% of the voting
shares of a bank, for any bank holding company or a subsidiary thereof (other
than a bank) to acquire all or substantially all of the assets of a bank, or for
any bank holding company to merge or consolidate with any other bank holding
company. It is also unlawful under the Georgia Financial Institutions Code for
any bank holding company to acquire direct or indirect ownership or control of
more than 5% of the voting shares of any presently operating bank unless the
bank has been in existence and continuously operating or incorporated as a bank
for a period of five years or more prior to the date of application to the
Georgia Department for approval of such acquisition. In addition, in any
acquisition by an existing bank holding company, the initial banking subsidiary
of the bank holding company must have been incorporated for not less than two
years before the holding company can acquire another bank.

     The Bank is incorporated under the laws of the State of Georgia and subject
to examination by the Georgia Department. The Georgia Department regulates all
areas of the Bank's commercial banking operations, including reserves, loans,
mergers, consolidations, reorganizations, issuance of securities, payment of
dividends, interest rates, establishment of branches, and other aspects of its
operations.

     Additionally, the Bank is insured and regulated by the Federal Deposit
Insurance Corporation. The major functions of the FDIC with respect to insured
banks include paying off depositors to the extent provided by law if a bank is
closed without making adequate provisions to pay the claims of depositors,
acting as the receiver of state banks placed in receivership when appointed
receiver by state authorities, and preventing the continuance or development of
unsound and unsafe banking practices. In addition, the FDIC is authorized to
examine insured banks that are not members of the Federal Reserve System, such
as the Bank, to determine their condition for insurance purposes. The FDIC also
is authorized to approve mergers, consolidations and assumption of deposit
liability transactions between insured banks and non-insured banks or
institutions, and to prevent capital or surplus diminution in these transactions
where the resulting, continued, or assumed bank is an insured non-member state
bank. The FDIC closely examines non-member banks for compliance with federal
statutes such as the Reinvestment Act of 1977 and the Truth-in-Lending Act.

                                       9
<PAGE>
     Federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profiles
among banks and bank holding companies, account for off-balance sheet exposure,
and minimize disincentives for holding liquid assets. The resulting-capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums.

     The capital-based regulatory framework contains five categories of
compliance with regulatory capital requirements, including "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." To qualify as a "well capitalized"
institution, a bank must have a leverage ratio of no less than 5%, a Tier I
risk-based ratio of no less than 6%, and a total risk-based capital ratio of no
less than 10%. The bank also must not be under any order or directive from the
appropriate regulatory agency to meet and maintain a specific capital level. 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 I capital. The degree of regulatory scrutiny of a
financial institution will increase, and the permissible activities of the
institution will decrease, as it moves downward through the capital categories.
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. Tier I capital includes
stockholders' equity, qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, but excludes goodwill
and most other intangible assets 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. Failure to meet
capital guidelines could subject a bank to a variety of enforcement remedies,
including the termination of deposit insurance by the FDIC, and to certain
restrictions on its business.

     Under Federal Deposit Insurance Corporation Improvement Act of 1991 (or
FDICIA), regulators must take prompt corrective action against depository
institutions that do not meet minimum capital requirements. FDICIA and the
related regulations establish five capital categories as shown in the following
table:

                                                  TOTAL RISK-           TIER
CLASSIFICATION                                    BASED CAPITAL         BASED

Well Capitalized (1)                                    10%               6%
Adequately Capitalized (1)                               8%               4%(2)
Undercapitalized (3)                                    <8%              <4%
Significantly Undercapitalized (3)                      <6%              <3%
Critically Undercapitalized (3)                          --               --

(1)  An institution must meet all three minimums
(2)  3% for composite I-rated institutions, subject to appropriate federal
     banking agency guidelines
(3)  An institution is classified as "undercapitalized" if it is below the
     specified capital level for any of the three capital measures

                                       10


<PAGE>
A depository institution may be deemed to be in a capitalization category that
is lower than is indicated by its actual capital position if it receives a less
than satisfactory examination rating in any one of four categories. As a
depository institution moves downward through the capitalization categories, the
degree of regulatory scrutiny will increase and the permitted activities of the
institution will decrease. Action may be taken by a depository institution's
primary federal regulator against an institution that falls into one of the
three "undercapitalized" categories, including the requirement of filing a
capital plan with the institution's primary federal regulator, prohibition on
the payment of dividends and management fees, restrictions on executive
compensation, and increased supervisory monitoring. Other restrictions may be
imposed on the institution either by its primary federal regulator or by the
FDIC, including requirements to raise additional capital, sell assets, or sell
the institution.

     FDICIA also requires that all depository institutions with assets in excess
of $150 million prepare and submit to the FDIC and appropriate federal and state
banking regulators audited annual financial statements. The FDIC has provided by
regulation that these provisions of the FDICIA do not apply to depository
institutions with assets of less than $500 million. These institutions must file
reports containing a statement by management of its responsibilities and by the
depository institution's independent public accountant attesting to the accuracy
of management's annual assessment of its financial reporting, internal controls
and regulatory compliance. The institution also must establish an audit
committee composed of members of the board of directors who are independent of
management. An enactment of the FDICIA also has resulted in the promulgation of
regulations by regulatory agencies which will tend to restrict to some degree
the real estate lending practices of financial institutions.

     The Federal Reserve also has implemented a leverage ratio, which is Tier I
capital as a percentage of average total assets less intangible assets, 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 Federal Reserve
has established a minimum 3% leverage ratio of Tier I capital to total assets
for the most highly rated bank holding companies and insured banks. All other
bank holding companies and insured banks will be required to maintain a leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
tangible Tier I leverage ratio is the ratio of a banking organization's Tier I
capital, less all intangibles, to total assets, less all intangibles.

     In addition to the capital standards imposed by federal banking regulators,
the Georgia Department of Banking and Finance has the authority to impose a
primary capital ratio as a condition to the approval of bank's charter or
acquisition. This standard, which may exceed the FDIC capital standards, is
calculated as the ratio of total equity to total assets, each as adjusted for
unrealized gains and losses on securities and allowance for loan losses. This
heightened requirement may be imposed at any time.


                                       11
<PAGE>

     At December 31, 2006, the Company is considered to be adequately
capitalized and the Bank is considered to be well-capitalized according to the
total risk-based regulatory capital requirement. We believe the Bank will remain
"well-capitalized" for the foreseeable future. However, rapid growth, poor loan
portfolio performance or poor earnings performance, or a combination of these
factors, could change our capital position in a short period of time, making an
additional capital infusion necessary.

     The deposits of the Bank currently are insured to a maximum of $100,000 per
depositor, subject to aggregation rules. The FDIC establishes rates for the
payment of premiums by federally insured banks and thrifts for deposit
insurance. Since 1993, insured depository institutions like the Bank have paid
for deposit insurance under a risk-based premium system. Insurance of deposits
may be terminated by the FDIC upon a finding 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.

     The Riegle Community Development and Regulatory Improvement Act of 1994 (or
RCDRIA) provides certain regulatory relief, requiring each federal agency to
streamline and modify its regulations and policies, remove inconsistencies and
eliminate outmoded and duplicative requirements. The RCDRIA directs the federal
agencies to coordinate examinations among affiliate banks, coordinate
examinations with other federal banking agencies, and work to coordinate with
state banking agencies. The federal banking agencies also are directed to work
jointly in developing a system for banks and savings associations to file
reports and statements electronically and to adopt a single form for filing core
information in reports and statements.

     The federal Interstate Banking Act permits, among other things, bank
holding companies to acquire banks in any state. It also permits bank holding
companies to establish new branches across state lines if the individual states
into which a potential entrant proposes to branch specifically pass legislation
to "opt-in." Georgia elected to allow merger transactions beginning June 1,
1997. The Interstate Banking Act authorizes interstate mergers involving the
acquisition of a branch of a bank without the acquisition of the bank only as
state law permits an out-of-state bank to acquire a branch without acquiring the
bank. Georgia has not authorized these transactions. State minimum age laws for
banks to be acquired will be preserved unless state law provides for a minimum
age period of more than five years. After consummation of any interstate merger
transaction, a resulting bank may establish or operate additional branches at
any location where any bank involved in the transaction could have established
or operated a branch under applicable federal or state law.


                                       12
<PAGE>

     The Board of Governors of the Federal Reserve System is authorized to
approve the acquisition by a well capitalized and adequately managed bank
holding company of a bank that is located in another state without regard to
whether the acquisition is prohibited under the laws of any state. Again, state
minimum age laws for banks to be acquired will be preserved unless the state law
provides for a minimum age period of more than five years. The Federal Reserve
may not approve an interstate acquisition which would result in the acquirer
controlling more than 10% of the total amount of deposits of insured depository
institutions in the United States with 30% or more of the deposits in the home
state of the target bank. A state may waive the 30% limit based on a criterion
that does not discriminate against out of state institutions. The limitations do
not apply to the initial entry into a state by a bank holding company unless the
state has a deposit concentration cap that applies on a nondiscriminatory basis
to in-state or out-of-state bank holding companies making an initial
acquisition. Anti-trust laws are not affected by the Interstate Banking Act.

     The Community Reinvestment Act (or CRA) requires that, in connection with
examinations of financial institutions within their respective jurisdictions,
the Federal Reserve, the FDIC or any other appropriate federal agency, shall
evaluate the record of each financial institution in meeting the credit needs of
its local, including low and moderate income neighborhoods. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. Failure to adequately meet these criteria could pose
additional requirements and limitations on the bank. We were examined for CRA
compliance in August 2005 and received a CRA rating of "satisfactory."

     In the wake of the events of September 11th, on October 26, 2001, the
President signed the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001. The Patriot Act
also made significant changes to the Bank Secrecy Act. Under the Patriot Act,
financial institutions are subject to prohibitions against specified financial
transactions and account relationships as well as enhanced due diligence and of
identifying customers when establishing new relationships and standards in their
dealings with foreign financial institutions and foreign customers. For example,
the enhanced due diligence policies, procedures, and controls generally require
financial institutions to take reasonable steps:

     o    To conduct enhanced scrutiny of account relationships to guard against
          money laundering and report any suspicious transaction;

     o    To ascertain the identity of the nominal and beneficial owners of, and
          the source of funds deposited into, each account as needed to guard
          against money laundering and report any suspicious transactions;

     o    To ascertain for any foreign bank, the shares of which are not
          publicly traded, the identity of the owners of the foreign bank, and
          the nature and extent of the ownership interest of each such owner;
          and

     o    To ascertain whether any foreign bank provides correspondent accounts
          to other foreign banks and, if so, the identity of those foreign banks
          and related due diligence information.

                                       13
<PAGE>
Under the Patriot Act, financial institutions are to establish anti-money
laundering programs to enhance their Bank Secrecy Act program. The Patriot Act
sets forth minimum standards for these programs, including:

     o    The development of internal policies, procedures, and controls;

     o    The designation of a compliance officer;

     o    An ongoing employee training program; and

     o    An independent audit function to test the programs.

Bank management believes that the Bank is currently in compliance with the
Patriot Act.


ITEM 2.  DESCRIPTION OF PROPERTY
         -----------------------

     The Company's principal executive offices are located at 6639 Highway 53
East, Dawsonville, Georgia 30534. The property, owned by the Bank, consists of
approximately 11,000 square feet and houses offices, operations and storage. The
Company does not lease any separate office space from the Bank. Management
believes the physical facilities are suitable for the Company's current
operations.

     The Bank conducts its operations from its main office location at 6639
Highway 53 East, Dawsonville, Georgia 30534 and from three branches: its
downtown branch located at 86 Highway 53 West, Dawsonville, Dawson County,
Georgia 30534; its Marblehill branch, located at 34 Holcomb Way, Marblehill,
Pickens County, Georgia 30148; and its Keith Bridge Commons branch, located at
2675 Freedom Parkway, Cumming, Georgia 30041.

     The Bank's office consists of its main building with four drive-up windows
and an automated teller machine and an adjacent parking lot, situated on 1.1
acres of land. The Bank purchased 5,600 square feet of office space adjacent to
the main building of the Bank for administrative offices. The $1.5 million
purchase price for the administrative offices was paid to CSB Partners, LLP, an
entity owned by all of our directors.

     The downtown branch, in continuous operation since it opened in October
2000, consists of approximately 2,500 square feet, with an ATM and two drive-up
windows. The Bank's branch in Pickens County consists of approximately 3,300
square feet, with two drive-up windows and two ATMs, one located at the branch
and an offsite ATM located nearby, with an adjacent parking lot, situated on
1.08 acres. The building and land of the branch is owned by the Bank and opened
in May 2001. The Bank's branch in Forsyth County, which opened in May 2003,
consists of approximately 5,100 square feet, with three drive-up windows and one
ATM. The building and land of the branch is owned by the Bank.


                                       14
<PAGE>
     Chestatee Financial and Chestatee Residential Mortgage operate infrequently
out of the main offices of the Bank at 6639 Highway 53 East, Dawsonville,
Georgia 30534. The independent contractors engaged by each render services
independently from limited undesignated office space. Consequently, no lease
exists and no rent is charged at present.


ITEM 3.  LEGAL PROCEEDINGS
         -----------------

     Management is not aware of any other material pending legal proceedings to
which the Company, the Bank, Chestatee Financial or Chestatee Residential
Mortgage are a party or to which any of their property is subject, other than
ordinary routine legal proceedings incidental to our business.


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

     The Company did not submit any matter during the fourth quarter of the
fiscal year ending December 31, 2006 to a vote of security holders.


                                     PART II
                                     -------

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
         --------------------------------------------------------

     The Company is authorized by its articles of incorporation to issue
10,000,000 shares of no par value voting common stock and up to 10,000,000
shares of no par value non-voting common stock. There is no established trading
market for our common stock and we have no market maker. We have no reason to
expect an established trading market will develop in our common shares.

     Our common stock is ordinarily traded infrequently in private transactions
and no substantial reliable information is typically available as to trades of
the common stock or as to the prices at which common stock has traded. We have,
however, engaged in three separate offerings of our no par value common stock at
a price of $10 per share since October 2001: 600,000 shares sold as of January
15, 2002 pursuant to a registration statement that went effective December 12,
2001; another 350,000 shares sold as of May 21, 2002 pursuant to a registration
statement that went effective February 7, 2002; and finally 250,000 shares sold
as of March 24, 2003 pursuant to a registration statement that went effective as
of October 25, 2002. Of the 250,000 shares, 75,690 shares of common stock were
sold as of December 31, 2002.


                                       15
<PAGE>
     The Company is allowed to declare and pay dividends in authorized but
unissued shares of our stock, provided there is transferred to capital stock an
amount equal to the value of the shares distributed and provided further that
after payment of the dividend we continue to maintain required levels of paid-in
capital and appropriated retained earnings. In the year ended December 31, 2000,
we effected a two-for-one share split of its common stock in the form of a
common stock dividend to shareholders of record as of the close of business on
October 31, 2000. As a result of the stock split, the number of shares of common
stock issued and outstanding increased from 950,000 to 1,900,000 and the market
value per share of the common stock, based upon the limited trading information
available to management, dropped from $16.00 per share to approximately $8.00
per share. We paid a 10% stock dividend to our shareholders in September 2005.

     The Company is not generally made aware of the number of shares of our
common stock traded or the prices at which such shares have traded by our
shareholders. Management has reviewed the limited information available as to
the ranges at which our common stock has been sold by our shareholders. The
following table sets forth the estimated price range for sales of our common
stock for each quarter of the last two fiscal years, after adjustment to reflect
the two-for-one share split of our common stock, based on limited available
information.

           YEAR       NUMBER OF SHARES        HIGH SELLING       LOW SELLING
                          TRADED(1)               PRICE             PRICE
2006
    First Quarter           7,536                $11.00             $10.00
    Second Quarter         23,479                $11.00             $10.00
    Third Quarter           9,850                $12.00             $11.00
    Fourth Quarter            -                    -                   -

2005
    First Quarter           6,600                $10.00             $10.00
    Second Quarter         29,170                $10.00             $10.00
    Third Quarter          27,701                $10.00             $10.00
    Fourth Quarter         10,959                $11.00             $10.00


(1)  According to information available to us, there are no trades between
     family members during the year ended December 31, 2006 to our knowledge.
     The data regarding the common stock is provided for information purposes
     only and should not be viewed as indicative of the actual or market value
     of the common stock.

As of March 1, 2007, the Company had 3,447,381 shares of its voting common stock
held by approximately 1,200 shareholders of record.


                                       16
<PAGE>
     The Company is a legal entity separate and distinct from the Bank. The
principal source of cash flow for the Company is dividends from the Bank,
Chestatee Residential Mortgage and Chestatee Financial. There are various
statutory and regulatory limitations on the payment of dividends by the Bank, as
well as by the Company to its shareholders. The payment of dividends by the
Company and the Bank may be affected or limited by regulatory requirements and
policies, such as the maintenance of adequate capital. If, in the opinion of the
applicable regulatory authority, a bank under its jurisdiction is engaged in or
is about to engage in an unsafe or unsound practice (which could include the
payment of dividends depending on the institution's financial condition), such
authority may require, after notice and hearing, that the bank cease and desist
from such practice. The FDIC issued a policy statement that provides that
insured banks generally should only pay dividends out of current operating
earnings. The Federal Reserve has issued a policy statement to the same effect
for bank holding companies. In addition, all insured depository institutions are
subject to the capital-based limitations required by the FDICIA.

     Under Georgia law, the Bank must obtain approval of the Georgia Department
before they may pay cash dividends out of retained earnings if the total
classified assets at the most recent examination of such bank exceed 80% of the
equity capital, the aggregate amount of dividends declared or anticipated to be
declared in the calendar year exceeds 50% of the net profits, after taxes but
before dividends, for the previous calendar year, or the ratio of equity capital
to adjusted assets is less than 6%. As discussed above, additional capital
requirements imposed by the Georgia Department may limit the Bank's ability to
pay dividends to the Company. The Company declared a cash dividend of $0.12 per
share in the year ended December 31, 2006, and paid $0.06 per share during that
year. The remaining $0.06 per share was paid January 2007. No assurance can be
given that the Company will declare any dividends in the future, or if declared,
what amounts would be declared or whether such dividends would continue.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
         ---------------------------------------------------------

     The following is a discussion of our financial condition and the financial
condition of our bank subsidiary, Chestatee State Bank, our mortgage subsidiary,
Chestatee Residential Mortgage, Inc. ("CRM") and our financial services
subsidiary, Chestatee Financial Services, Inc. ("CFS") at December 31, 2006 and
2005 and the results of operations for the years then ended. The purpose of this
discussion is to focus on information about our financial condition and results
of operations that are not otherwise apparent from our audited financial
statements. Reference should be made to those statements and the selected
financial data presented elsewhere in this report for an understanding of the
following discussion and analysis.

                                       17


<PAGE>

Forward-Looking Statements

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

Critical Accounting Policies

     We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements. Our significant accounting policies are described
in the footnotes to the consolidated financial statements at December 31, 2006.

     Certain accounting policies involve significant judgments and assumptions
by us which have a material impact on the carrying value of certain assets and
liabilities. We consider these accounting policies to be critical accounting
policies. The judgments and assumptions we use are based on historical
experience and other factors, which we believe to be reasonable under the
circumstances. Because of the nature of the judgments and assumptions we make,
actual results could differ from these judgments and estimates which could have
a material impact on our carrying values of assets and liabilities and our
results of operations.

     We believe the allowance for loan losses is a critical accounting policy
that requires the most significant judgments and estimates used in preparation
of our consolidated financial statements. Refer to the portion of this
discussion that addresses our allowance for loan losses for a description of our
processes and methodology for determining our allowance for loan losses.


                                       18
<PAGE>

Overview

     In 2006, we reported net income of $2,963,000 as compared to $2,410,000 in
2005. The improvement in earnings reflects growth in earning assets. Our primary
market area of Dawson, Pickens and Forsyth County, Georgia continues to grow.

Financial Condition at December 31, 2006 and 2005

     The following is a summary of our balance sheets for the periods indicated:

                                              Years Ended December 31,
                                           2006                      2005
                                      -------------             --------------
                                               (Dollars in Thousands)

Cash and due from banks               $       4,543             $        4,811
Interest-bearing deposits in banks              749                      3,944
Federal funds sold                           12,593                     10,088
Securities                                   20,695                     27,514
Loans, net                                  249,082                    196,554
Premises and equipment                        7,296                      7,585
Other assets                                  4,717                      4,343
                                      -------------             --------------

                                      $     299,675             $      254,839
                                      =============             ==============

Total deposits                        $     262,504             $      215,982
Other borrowings                              7,000                     12,250
Other liabilities                             2,089                      1,341
Stockholders' equity                         28,082                     25,266
                                      -------------             --------------

                                      $     299,675             $      254,839
                                      =============             ==============

     As of December 31, 2006, we had total assets of $300 million, an increase
of 18% over December 31, 2005. Total interest-earning assets were $283 million
at December 31, 2006 or 94% of total assets as compared to 93% of total assets
at December 31, 2005. Our primary interest-earning assets at December 31, 2006
were loans, which made up 88% of total interest-earning assets as compared to
83% at December 31, 2005. Our ratio of loans to deposits and other borrowings
was 92% at December 31, 2006 as compared to 86% at December 31, 2005. Deposit
growth of $47 million, cash flows provided from maturing securities of $7
million were primarily used to reduce Federal Home Loan Bank advances by $5
million and to fund loan growth of $54 million.


                                       19
<PAGE>



     Our securities portfolio, consisting of U.S. Agencies, mortgage-backed
securities, municipal securities and restricted equity securities, amounted to
$20.7 million at December 31, 2006. Net unrealized losses on securities
available-for-sale were $325,000 at December 31, 2006 as compared to $584,000 at
December 31, 2005. At December 31, 2006, the Company had no securities
designated as held-to-maturity. We have not specifically identified any
securities for sale in future periods, which, if so designated, would require a
charge to operations if the market value would not be reasonably expected to
recover prior to the time of sale.

     We have 83% of our loan portfolio collateralized by real estate located in
our primary market area of Dawson County, Georgia and surrounding counties. Our
real estate mortgage portfolio consists of loans collateralized by one to
four-family residential properties (7%), multifamily residential properties
(1%), loans to finance farmland (1%), construction loans to build one to
four-family residential properties (62%), and nonresidential properties
consisting primarily of small business commercial properties (29%). We generally
require that loans collateralized by real estate not exceed 80% of the
collateral value.

     The remaining 17% of the loan portfolio consists of commercial, consumer,
and other loans. We require collateral commensurate with the repayment ability
and creditworthiness of the borrower.

     The specific economic and credit risks associated with our loan portfolio,
especially the real estate portfolio, include, but are not limited to:

     o    a general downturn in the economy which could affect unemployment
          rates in our market area,
     o    general real estate market deterioration,
     o    interest rate fluctuations,
     o    deteriorated or non-existing collateral, title defects, inaccurate
          appraisals,
     o    financial deterioration of borrowers, fraud, and
     o    any violation of banking protection laws.

Construction lending can also present other specific risks to the lender such as
whether developers can find builders to buy lots for home construction, whether
the builders can obtain financing for the construction, whether the builders can
sell the home to a buyer, and whether the buyer can obtain permanent financing.
Although there has been a general slowing in nation's economy in 2006, the real
estate values and employment trends in our market area did not significantly
deteriorate. We cannot predict what impact a continuing decline in the national
economy or a prolonged U.S. presence in Iraq would have on the local economy.

     We attempt to reduce these economic and credit risks not only by adhering
to loan to value guidelines, but also by investigating the creditworthiness of
the borrower and monitoring the borrower's financial position. Also, we
establish and periodically review our lending policies and procedures. State
banking regulations limit exposure by prohibiting secured loan relationships
that exceed 25% of the Bank's statutory capital and unsecured loan relationships
that exceed 15% of the Bank's statutory capital.


                                       20
<PAGE>
Liquidity and Capital Resources

     The purpose of liquidity management is to ensure that there are sufficient
cash flows to satisfy demands for credit, deposit withdrawals, and our other
needs. Traditional sources of liquidity include asset maturities and growth in
core deposits. A company may achieve its desired liquidity objectives from the
management of assets and liabilities and through funds provided by operations.
Funds invested in short-term marketable instruments and the continuous maturing
of other earning assets are sources of liquidity from the asset perspective. The
liability base provides sources of liquidity through deposit growth, the
maturity structure of liabilities, and accessibility to market sources of funds.

     Scheduled loan payments are a relatively stable source of funds, but loan
payoffs and deposit flows fluctuate significantly, being influenced by interest
rates and general economic conditions and competition. We attempt to price
deposits to meet asset/liability objectives consistent with local market
conditions.

     Our liquidity and capital resources are monitored on a periodic basis by
management, State and Federal regulatory authorities. As determined under
guidelines established by regulatory authorities and internal policy, our
liquidity was considered satisfactory.

     At December 31, 2006, we had unfunded loan commitments outstanding of $70
million. Because these commitments generally have fixed expiration dates and
many will expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. If needed, we have the ability
on a short-term basis to borrow and purchase federal funds from other financial
institutions. At December 31, 2006, we had arrangements with four commercial
banks for additional short-term advances of $16,200,000.

     At December 31, 2006, our capital ratios were considered adequate based on
regulatory minimum capital requirements. Stockholders' equity increased in 2006
by $2.8 million due to net income of $2.96 million, proceeds from the issuance
of stock related to an exercise of options of $10,000, an addition of $96,000
related to stock based compensation and a decrease in other comprehensive income
related to our securities available-for-sale of $161,000 along with the payment
of $413,000 in dividends to shareholders. For regulatory purposes, the net
unrealized gains and losses on securities available-for-sale are excluded in the
computation of the capital ratios.

     In the future, the primary source of funds available to us will be the
payment of dividends by the Bank. Banking regulations limit the amount of the
dividends that may be paid without prior approval of the Bank's regulatory
agency. At December 31, 2006, $1,500,000 dividends could be paid by the Bank
without regulatory approval.


                                       21
<PAGE>



     The minimum capital requirements to be considered well capitalized under
prompt corrective action provisions and the actual capital ratios for Chestatee
Bancshares, Inc. and the Bank as of December 31, 2006 are as follows:

                                               Actual
                                     -------------------------        Regulatory
                                     Consolidated         Bank      Requirements
                                     ------------         ----      ------------

     Leverage capital ratio              9.93%            9.60%            5.00%
     Risk-based capital ratios:
         Core capital                    9.97             9.63             6.00
         Total capital                  11.22            10.88            10.00

We expect that these ratios may decline with continued asset growth, but remain
in excess of the regulatory minimum requirements. Anticipated future earnings
will assist in keeping these ratios at satisfactory levels.

     We believe that our liquidity and capital resources are adequate and will
meet our foreseeable short and long-term needs. We anticipate that we will have
sufficient funds available to meet current loan commitments and to fund or
refinance, on a timely basis, our other material commitments and liabilities.

     Management is not aware of any other known trends, events or uncertainties,
other than those discussed above, that will have or that are reasonably likely
to have a material effect on our liquidity, capital resources or operations.
Management is also not aware of any current recommendations by the regulatory
authorities that, if they were implemented, would have such an effect.

Effects of Inflation
--------------------

     The impact of inflation on banks differs from its impact on non-financial
institutions. Banks, as financial intermediaries, have assets that are primarily
monetary in nature and that tend to fluctuate in concert with inflation. A bank
can reduce the impact of inflation if it can manage its rate sensitivity gap.
This gap represents the difference between rate sensitive assets and rate
sensitive liabilities. We, through our asset-liability committee, attempt to
structure the assets and liabilities and manage the rate sensitivity gap,
thereby seeking to minimize the potential effects of inflation. For information
on the management of the Bank's interest rate sensitive assets and liabilities,
see the "Asset/Liability Management" section.


                                       22
<PAGE>



Results of Operations For The Years Ended December 31, 2006 and 2005

     The following is a summary of our operations for the years indicated.

                                          Years Ended December 31,
                                       2006                      2005
                                  -------------             --------------
                                           (Dollars in Thousands)

Interest income                   $      21,135             $       16,354

Interest expense                          8,509                      5,809
                                  -------------             --------------

Net interest income                      12,626                     10,545

Provision for loan losses                 1,140                        674

Other income                              1,018                      1,090

Other expenses                            7,890                      7,307
                                  -------------             --------------

Pretax income                             4,614                      3,654

Income taxes                              1,651                      1,244
                                  -------------             --------------

Net income                        $       2,963             $        2,410
                                  =============             ==============

Net Interest Income
-------------------

     Our results of operations are determined by our ability to manage interest
income and expense effectively, to minimize loan and investment losses, to
generate non-interest income, and to control operating expenses. Because
interest rates are determined by market forces and economic conditions beyond
our control, our ability to generate net interest income depends on our ability
to obtain an adequate net interest spread between the rate we pay on
interest-bearing liabilities and the rate we earn on interest-earning assets.

     The net yield on average interest-earning assets was 4.88% in 2006 as
compared to 4.20% in 2005. Average interest-earning assets increased overall by
$8 million as average loans increased by $22 million, average investments
decreased $6 million, fed funds sold decreased by $5 million, and interest
bearing deposits with others decreased $2 million. Average interest-bearing
liabilities increased by $2 million as average interest bearing demand deposits
decreased $5 million, average time deposits increased $18 million and average
other borrowings decreased $10 million. The rate earned on average
interest-earning assets increased to 8.17% in 2006 from 6.52% in 2005. The rate
paid on average interest-bearing liabilities increased to 3.93% in 2006 as
compared to 2.71% in 2005. The increase in our net yield was due primarily to an
increase in loans and a rising rate environment experienced during the first
half of 2006. We would expect to see a decrease in net yield should the prime
lending rate decrease.



                                       23
<PAGE>
Provision for Loan Losses
-------------------------

     The provision for loan losses was $1,140,000 in 2006 as compared to
$674,000 in 2005. Management's evaluation of the adequacy of the allowance for
loan losses is based on known and inherent risks in the portfolio, adverse
situations that may affect the borrowers' ability to repay, estimated value of
underlying collateral, and an analysis of current economic conditions.

     Management believes that, given this review and analysis, the $3,734,000 in
the allowance for loan losses at December 31, 2006, or 1.48% of total net
outstanding loans and the $4,111,000 in the allowance for loan losses at
December 31, 2005, or 2.05% of total net loans outstanding, are adequate at
their respective dates to absorb known risks in the portfolio based upon the
Bank's historical experience. No assurance can be given, however, that increased
loan volume, and adverse economic conditions or other circumstances will not
result in increased losses in our loan portfolio.

Other Income
------------

     Other operating income consists of service charges on deposit accounts and
other miscellaneous revenues and fees. Other operating income was $1,018,000 in
2006 as compared to $1,090,000 in 2005. The net decrease is due primarily to a
decrease in service charges on deposit accounts of $100,000.

Other Expense
-------------

     Other expenses were $7,890,000 in 2006 as compared to $7,307,000 in 2005,
an increase of $583,000. Salaries and employee benefits increased by $578,000
due to annual salary increases, an increase in the number of full time
equivalent employees to 70 at December 31, 2006 from 69 at December 31, 2005 and
the expense associated with the stock option plans as discussed in Note 1 of the
consolidated financial report. The more significant variances found in other
expense categories are an increase in director fees of $49,000, an increase in
legal fees of $79,000, a decrease in stationery and supplies expense of $76,000,
a decrease in audit fees of $25,000, and a decrease in occupancy and equipment
expense of $49,000.

Income Tax
----------

     We have reported income tax expense in 2006 of $1,651,000 as compared to an
income tax expense in 2005 of $1,245,000. The rate of the tax expense as a
percentage of our pretax income was 36% in 2006 and 34% in 2005.

Asset/Liability Management
--------------------------

     Our objective is to manage assets and liabilities to provide a
satisfactory, consistent level of profitability within the framework of
established cash, loan, investment, borrowing, and capital policies. Certain
officers are charged with the responsibility for monitoring policies and
procedures designed to ensure acceptable composition of the asset/liability mix.
Management's overall philosophy is to support asset growth primarily through
growth of core deposits of all categories made by local individuals,
partnerships, and corporations.

                                       24
<PAGE>

     Our asset/liability mix is monitored on a regular basis with a report
reflecting the interest rate-sensitive assets and interest rate-sensitive
liabilities being prepared and presented to the Bank's Board of Directors on a
monthly basis. The objective of this policy is to monitor interest
rate-sensitive assets and liabilities so as to minimize the impact of
substantial movements in interest rates on earnings. An asset or liability is
considered to be interest rate-sensitive if it will reprice or mature within the
time period analyzed, usually one year or less. The interest rate-sensitivity
gap is the difference between the interest-earning assets and interest-bearing
liabilities scheduled to mature or reprice within such time period. A gap is
considered positive when the amount of interest rate-sensitive assets exceeds
the amount of interest rate-sensitive liabilities. A gap is considered negative
when the amount of interest rate-sensitive liabilities exceeds the interest
rate-sensitive assets. During a period of rising interest rates, a negative gap
would tend to affect net interest income adversely, while a positive gap would
tend to result in an increase in net interest income. Conversely, during a
period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. If our assets and liabilities were equally flexible
and moved concurrently, the impact of any increase or decrease in interest rates
on net interest income would be minimal.

     A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, we also evaluate how the repayment of particular assets and
liabilities is impacted by changes in interest rates. Income associated with
interest-earning assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition, the
magnitude and duration of changes in interest rates may have a significant
impact on net interest income. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Interest rates on
certain types of assets and liabilities fluctuate in advance of changes in
general market rates, while interest rates on other types may lag behind changes
in general market rates. In addition, certain assets, such as adjustable rate
mortgage loans, have features (generally referred to as "interest rate caps and
floors") that limit changes in interest rates. Prepayment and early withdrawal
levels also could deviate significantly from those assumed in calculating the
interest rate gap. The ability of many borrowers to service their debts also may
decrease during periods of rising interest rates.

     Changes in interest rates also affect our liquidity position. We currently
price deposits in response to market rates and it is management's intention to
continue this policy. If deposits are not priced in response to market rates, a
loss of deposits could occur that would negatively affect our liquidity
position.

     At December 31, 2006, our cumulative one year interest rate-sensitivity gap
ratio was 97%. Our targeted ratio is 80% to 120% in this time horizon. This
indicates that our interest-earning assets exceed our interest-bearing
liabilities.

                                       25
<PAGE>
     The following table sets forth the distribution of the repricing of our
interest-earning assets and interest-bearing liabilities as of December 31,
2006, the interest rate-sensitivity gap, the cumulative interest
rate-sensitivity gap, the interest rate-sensitivity gap ratio and the cumulative
interest rate-sensitivity gap ratio. The table also sets forth the time periods
in which interest-earning assets and interest-bearing liabilities will mature or
may reprice in accordance with their contractual terms. However, the table does
not necessarily indicate the impact of general interest rate movements on the
net interest margin as the repricing of various categories of assets and
liabilities is subject to competitive pressures and the needs of our customers.
In addition, various assets and liabilities indicated as repricing within the
same period may in fact, reprice at different times within such period and at
different rates.
<TABLE>
<CAPTION>

                                                    After Three        After One
                                                       Months          Year but
                                     Within             but             Within             After
                                      Three            Within            Five              Five
                                     Months           One Year           Years             Years              Total
                               ------------------------------------------------------------------------------------
                                                                     (Dollars in Thousands)
<S>                            <C>               <C>              <C>               <C>              <C>
Interest-earning assets:
     Interest-bearing
        deposits in banks      $         749     $           -    $            -    $           -    $          749
     Federal funds sold               12,593                 -                 -                -            12,593
     Securities                            -             1,000             1,281           18,414            20,695
     Loans                           185,560            23,036            39,102            5,307           253,005
                               -------------     -------------    --------------    -------------    --------------

                                     198,902            24,036            40,383           23,721           287,042
                               -------------     -------------    --------------    -------------    --------------
Interest-bearing liabilities:
     Interest-bearing demand
     deposits                         83,398                 -                 -                -            83,398
     Savings                           3,228                 -                 -                -             3,228
     Certificates of deposit          55,769            81,519            16,200                -           153,488
     Other borrowings                  4,500             1,250            1,250                 -             7,000
                               -------------     -------------    --------------    -------------    --------------

                                     146,895            82,769            17,450                -           247,114
                               -------------     -------------    --------------    -------------    --------------
Interest rate sensitivity
     gap                       $      52,007     $    (58,733)    $       22,933    $      23,721    $       39,928
                               =============     =============    ==============    =============    ==============
Cumulative interest rate
     sensitivity gap           $     52,007      $     (6,726)    $       16,207    $      39,928
                               =============     =============    ==============    =============
Interest rate sensitivity
     gap ratio                          1.35              0.29              2.31                -
                               =============     =============    ==============    =============
Cumulative interest rate
     sensitivity gap ratio              1.35             0.97              1.07              1.16
                               =============     =============    ==============    =============
</TABLE>


               SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA

     The tables and schedules on the following pages set forth certain
significant financial information and statistical data with respect to: the
distribution of our assets, liabilities and stockholders' equity; the interest
rates we experience; our investment portfolio; our loan portfolio, including
types of loans, maturities, and sensitivities of loans to changes in interest
rates and information on nonperforming loans; summary of the loan loss
experience and allowance for loan losses; types of deposits and the return on
equity and assets.


                                       26
<PAGE>
                    DISTRIBUTION OF ASSETS, LIABILITIES, AND
                              STOCKHOLDERS' EQUITY:
                    INTEREST RATES AND INTEREST DIFFERENTIALS

Average Balances

     The condensed average balance sheet for the year indicated is presented
below. (1)
<TABLE>
<CAPTION>

                                                              Years Ended December 31,
                                                           2006                      2005
                                                      -------------             --------------
                                                               (Dollars in Thousands)
<S>                                                   <C>                       <C>
ASSETS

     Cash and due from banks                          $       3,798             $        4,175
     Interest-bearing deposits in banks                       3,465                      5,901
     Taxable securities                                      23,405                     29,281
     Tax-free securities                                      1,334                      1,458
     Securities valuation account                             (544)                      (422)
     Federal funds sold                                      11,948                     17,043
     Loans (2)                                              219,213                    197,695
     Allowance for loan losses                              (4,022)                    (3,650)
     Other assets                                            12,015                     11,439
                                                      -------------             --------------
                                                      $     270,612             $      262,920
                                                      =============             ==============

     Total interest-earning assets                    $     258,821             $      250,956
                                                      =============             ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

     Deposits:
         Noninterest-bearing demand                   $      25,543             $       22,906
         Interest-bearing demand                             90,814                     95,720
         Savings                                              3,541                      3,900
         Time                                               113,323                     95,596
                                                      -------------             --------------
              Total deposits                                233,221                    218,122

     Other borrowings                                         9,009                     19,413
     Other liabilities                                        1,690                      1,283
                                                      -------------             --------------
              Total liabilities                             243,920                    238,818
     Stockholders' equity                                    26,692                     24,102
                                                      -------------             --------------
                                                      $     270,612             $      262,920
                                                      =============             ==============

     Total interest-bearing liabilities               $     216,687             $      214,629
                                                      =============             ==============
</TABLE>

(1)  For each category, average balances were determined using the daily average
     balances during the year.
(2)  Nonaccrual loans included in average balances for 2006 and 2005 were
     $2,012,000 and $1,009,000 respectively.

                                       27

<PAGE>

Interest Income and Interest Expense

     The following tables set forth the amount of our interest income and
interest expense for each category of interest-earning assets and
interest-bearing liabilities and the average interest rate for total
interest-earning assets and total interest-bearing liabilities, net interest
spread and net yield on average interest-earning assets.
<TABLE>
<CAPTION>

                                                                     Years Ended December 31,
                                                                2006                          2005
                                                                      Average                       Average
                                                       Interest          Rate        Interest          Rate
                                                       --------          ----        --------          ----
                                                                      (Dollars in Thousands)
<S>                                                    <C>                <C>        <C>                <C>
      INTEREST INCOME:
      Interest and fees on loans (1)                   $ 19,439           8.87%      $  14,667          7.42%
      Interest on deposits in banks                         194          5.60              178         3.01
      Interest on taxable securities                        867          3.79              950         3.29
      Interest on tax-free securities                        52          3.91               57         3.90
      Interest on federal funds sold                        583          4.88              502         2.95
                                                       --------                      ---------
      Total interest income                              21,135          8.17           16,354         6.52
                                                       --------                         ------

      INTEREST EXPENSE:
      Interest on interest-bearing
           demand deposits                                2,905          3.20            2,186         2.28
      Interest on savings deposits                           32          0.89               13         0.34
      Interest on time deposits                           5,329          4.70            3,138         3.28
      Interest on other borrowings                          243          2.69              472         2.43
                                                       --------                      ---------
      Total interest expense                              8,509          3.93            5,809         2.71
                                                       --------                      ---------

      NET INTEREST INCOME                              $ 12,626                      $  10,545

      Net interest spread                                                 4.24%                         3.81%
                                                                    ==========                    ==========
      Net yield on average interest-earning assets                        4.88%                         4.20%
                                                                    ==========                    ==========
</TABLE>

(1)  Interest and fees on loans includes $1,432,000 and $1,025,000 of loan fee
     income for the years ended December 31, 2006 and 2005, respectively. There
     was no interest income recognized on nonaccrual loans during 2006 or 2005.

Rate and Volume Analysis

     The following table describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and expense during the year
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to:

     o    change in volume (change in volume multiplied by old rate);
     o    change in rate (change in rate multiplied by old volume); and
     o    a combination of change in rate and change in volume.

                                       28
<PAGE>
     The changes in interest income and interest expense attributable to both
volume and rate have been allocated proportionately on a consistent basis to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>

                                                                Year Ended December 31,
                                                                     2006 vs. 2005
                                                                    Changes Due To:
                                                        Rate            Volume              Net
                                                   -------------------------------------------------
                                                                (Dollars in Thousands)
<S>                                                <C>               <C>              <C>
Increase (decrease) in:
     Income from interest-earning assets:
         Interest and fees on loans                $        3,064    $       1,708    $        4,772
         Interest on deposits in banks                        110             (94)                16
         Interest on taxable securities                       131            (214)              (83)
         Interest on tax-free securities                        -              (5)               (5)
         Interest on federal funds sold                       262            (181)                81
                                                   --------------    -------------    --------------
                  Total interest income                     3,567            1,214             4,781
                                                   --------------    -------------    --------------

     Expense from interest-bearing liabilities:
         Interest on interest-bearing
              demand deposits                                 836            (117)               719
         Interest on savings deposits                          20              (1)                19
         Interest on time deposits                          1,534              657             2,191
         Interest on other borrowings                          46            (275)             (229)
                                                   --------------    -------------    --------------
                  Total interest expense                    2,436              264             2,700
                                                   --------------    -------------    --------------

                  Net interest income              $        1,131    $         950    $       2,081
                                                   ==============    =============    ==============
</TABLE>


                              INVESTMENT PORTFOLIO

Types of Investments

     The carrying amounts of securities at the dates indicated, of which
$20,695,000 is classified as available-for-sale, are summarized as follows:
<TABLE>
<CAPTION>

                                                            Years Ended December 31,
                                                         2006                      2005
                                                    -------------             --------------
                                                             (Dollars in Thousands)
<S>                                                 <C>                       <C>
     U.S. Government sponsored agencies             $       7,503             $        7,616
     Mortgage-backed securities                            11,044                     17,551
     Municipals                                             1,323                      1,294
     Restricted equity securities                             825                      1,053
                                                    -------------             --------------
                                                    $      20,695             $       27,514
                                                    =============             ==============
</TABLE>


                                       29
<PAGE>



Maturities

     The amounts of debt securities in each category as of December 31, 2006 are
shown in the following table according to contractual maturity classifications:

     o    one year or less,
     o    after one through five years,
     o    after five through ten years and
     o    after ten years.

Restricted equity securities are not included in the table because they have no
contractual maturity.
<TABLE>
<CAPTION>
                                                                         After one                 After five
                                           One year or less         through five years         through ten years
                                        Amount       Yield (1)    Amount       Yield (1)     Amount       Yield (1)

<S>                                     <C>              <C>      <C>              <C>       <C>              <C>
U.S. Government sponsored agencies      $     990        4.00%    $     956        3.09%     $  5,557         3.73%
Mortgage-backed securities                      -            -          272         3.70        1,073          2.83
Municipals                                      -            -            -            -            -             -
                                        ---------    ---------    ---------     --------     --------     ---------
     Total debt securities              $     990        4.00%    $   1,228        3.23%     $  7,195         3.30%
                                        =========                 =========                  ========

                                                                      After ten years                 Total
                                                                  Amount       Yield (1)     Amount       Yield (1)

U.S. Government sponsored agencies                                $       -            -        7,503         3.68%
Mortgage-backed securities                                            9,699         4.37       11,044          4.20
Municipals                                                            1,323         5.62        1,323          5.62
                                                                  ---------     --------     --------     ---------
     Total debt securities                                        $  11,022        4.52%     $ 19,870         4.10%
                                                                  =========                  ========
</TABLE>

(1)  The weighted average yields were computed using coupon interest, adding
     discount accretion or subtracting premium amortization, as appropriate, on
     a ratable basis over the life of each security. Yields for tax-free
     municipal securities are shown as a tax equivalent yield.


                                       30
<PAGE>



                                 LOAN PORTFOLIO

Types of Loans

     The amounts of loans outstanding at the indicated dates are shown in the
following table according to the type of loan.
<TABLE>
<CAPTION>

                                              Years Ended December 31,
                                           2006                      2005
                                      -------------             --------------
                                               (Dollars in Thousands)
<S>                                   <C>                       <C>
     Commercial                       $      36,413             $       41,492
     Real estate-construction               130,325                     69,204
     Real estate-mortgage                    78,335                     80,399
     Consumer installment and other           7,743                      9,570
                                      -------------             --------------
                                            252,816                    200,665
     Less allowance for loan losses         (3,734)                    (4,111)
                                      -------------             --------------
     Net loans                        $     249,082             $      196,554
                                      =============             ==============
</TABLE>


Maturities and Sensitivities of Loans to Changes in Interest Rates

     Total loans as of December 31, 2006 are shown in the following table
according to contractual maturity classifications:

     o    one year or less,
     o    after one through five years, and
     o    after five years.

                                                      (Dollars in Thousands)
Commercial
     One year or less                                    $           22,318
     After one through five years                                    10,179
     After five years                                                 3,916
                                                         ------------------
                                                                     36,413

Construction
     One year or less                                               126,554
     After one through five years                                     3,771
     After five years                                                     -
                                                         ------------------
                                                                    130,325

Other
     One year or less                                                56,433
     After one through five years                                    25,362
     After five years                                                 4,283
                                                         ------------------
                                                                     86,078
                                                         ------------------
                                                         $          252,816
                                                         ==================

                                       31
<PAGE>
     The following table summarizes loans at December 31, 2006 with the due
dates after one year that have predetermined and floating or adjustable interest
rates.

                                                         (Dollars in Thousands)

     Predetermined interest rates                           $           43,789
     Floating or adjustable interest rates                              52,175
                                                            ------------------
                                                            $           95,964
                                                            ==================

Risk Elements

     Information with respect to nonaccrual, past due, restructured and other
problem loans at December 31, 2006 and 2005 is as follows:
<TABLE>
<CAPTION>

                                                                 Years Ended December 31,
                                                              2006                      2005
                                                         -------------             --------------
                                                                  (Dollars in Thousands)
<S>                                                      <C>                       <C>
     Nonaccrual loans                                    $         888             $        2,456
     Loans contractually past due ninety
         days or more as to interest or
         principal payments and still accruing                       5                         49
     Restructured loans                                              0                          0
     Potential problem loans                                         0                          0
     Interest income that would have been recorded
         on nonaccrual and restructured loans under
         original terms                                            113                         70
     Interest income that was recorded on
         nonaccrual and restructured loans                           0                          0

</TABLE>

     Potential problem loans are defined as loans about which we have serious
doubts as to the ability of the borrower to comply with the present loan
repayment terms and which may cause the loan to be placed on nonaccrual status,
to become past due more than ninety days, or to be restructured.

     It is our policy to discontinue the accrual of interest income when, in the
opinion of management, collection of interest becomes doubtful. This status is
accorded interest when (1) there is a significant deterioration in the financial
condition of the borrower and full repayment of principal and interest is not
expected and (2) the principal or interest is more than ninety days past due,
unless the loan is both well-secured and in the process of collection.


                                       32
<PAGE>



                         SUMMARY OF LOAN LOSS EXPERIENCE

     The following table summarizes average loan balances for the year
determined using the daily average balances during the year; changes in the
allowance for loan losses arising from loans charged off; recoveries on loans
previously charged off; additions to the allowance which have been charged to
operating expense; and the ratio of net charge-offs during the year to average
loans.

     Loans charged off in 2006 include the charge off of a $1 million commercial
and financial loan. The Company recognized provision expense which was accrued
to the allowance for loan losses in prior years in anticipation of the
settlement of this credit. Loans charged off in 2006 also include the
restructure of a $1.4 million commercial and financial loan, our portion of a
larger loan in which several banks participated. The restructuring resulted in
write-downs for all banks involved in the credit. Our portion of the write-down
totaled $389,000. With the recognition of these charge-offs, the Company's ratio
of allowance for loan losses to loans has become more in line with industry
standards.
<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                                2006                      2005
                                                           -------------             --------------
                                                                    (Dollars in Thousands)

<S>                                                        <C>                       <C>
     Average amount of loans outstanding                   $     219,213             $      203,314
                                                           =============             ==============

     Balance of allowance for loan losses
     at beginning of year                                  $       4,111             $        3,620
                                                           =============             ==============

     Loans charged off
     Commercial and financial                                      1,409                         56
     Real estate- mortgage                                            13                         38
     Installment                                                     111                        140
                                                           -------------             --------------
                                                                   1,533                        234
                                                           -------------             --------------
     Loans recovered
     Commercial and financial                                          -                          -
     Real estate mortgage                                              -                          2
     Installment                                                      16                         49
                                                           -------------             --------------
                                                                      16                         51
                                                           -------------             --------------

     Net charge-offs                                               1,517                        183
                                                           -------------             --------------
     Additions to allowance charged to operating
     expense during year                                           1,140                        674
                                                           -------------             --------------

     Balance of allowance for loan losses at end of year   $       3,734             $        4,111
                                                           =============             ==============
     Ratio of net loans charged off during the
     year to average loans outstanding                             0.69%                      0.09%
                                                           ============              =============
</TABLE>

                                       33
<PAGE>


Allowance for Loan Losses

     The allowance for loan losses is maintained at a level that is deemed
appropriate by management to adequately cover all known and inherent risks in
the loan portfolio. Management's evaluation of the loan portfolio includes a
loan classification program. Under the program, as each loan is made, we assign
a loan grade. Each loan grade is assigned an allowance percentage determined
based on our experience specifically and the historical experience of the
banking industry generally. Loan classifications are then subject to periodic
review by the responsible lending officers and by senior management based upon
their judgment, our loan loss experience, current economic conditions that may
affect the borrower's ability to repay, lender requirements, the underlying
collateral value of the loans and other appropriate information. Management
relies predominantly on this ongoing review of the loan portfolio to assess the
risk characteristics of the portfolio in the aggregate and to determine
adjustments, if any, to our allowance for loan losses.

     Based upon this ongoing review, we may identify loans that could be
impaired. A loan is considered impaired when it is probable that we will be
unable to collect all principal and interest due in accordance with the
contractual terms of the loan agreement. When we identify a loan as impaired,
the allowance for loan losses is increased if we determine that the amount of
impairment is in excess of the allowance of the allowance determined under our
loan classification program. We maintain an allowance for loan losses of no less
than 1.25% of outstanding loans at all times.

     As of December 31, 2006 and 2005, we had made no allocations of our
allowance for loan losses to specific categories of loans. Based on our best
estimate, the allocation of the allowance for loan losses to types of loans, as
of the indicated dates, is as follows:
<TABLE>
<CAPTION>

                                       December 31, 2006                  December 31, 2005

                                         Percent of loans in                Percent of loans in
                                                each category                      each category
                                  Amount       to total loans        Amount       to total loans
                                  -----------  --------------        -----------  --------------
                                                      (Dollars in Thousands)
<S>                               <C>                     <C>        <C>                     <C>
Commercial                        $       373             14%        $     1,644             21%
Real estate - construction              1,494             52                 690             34
Real estate - mortgage                  1,680             31               1,489             40
Consumer installment
     loans and other                      187              3                 288              5
                                  -----------         ------         -----------         ------
                                  $     3,734            100%        $     4,111             100%
                                  ===========         ======         ===========         =======
</TABLE>



                                       34
<PAGE>

                                    DEPOSITS

     Average amount of deposits and average rates paid thereon, classified
as to noninterest-bearing demand deposits, interest-bearing demand deposits,
savings deposits, and time deposits is presented below. (1)
<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                                2006                               2005
                                                     Amount         Percent        Amount          Percent
                                                     ------         -------        ------          -------
                                                                    (Dollars in Thousands)
<S>                                                  <C>                           <C>
Noninterest-bearing demand deposits                  $    25,543         -%        $    22,906        -%
Interest-bearing demand deposits                          90,814      3.20              95,720     2.28
Savings deposits                                           3,541      0.89               3,900     0.34
Time deposits                                            113,323      4.70              95,596     3.28
                                                     -----------                   -----------
                                                     $   233,221                   $   218,122
                                                     ===========                   ===========
</TABLE>

(1)  Average balances were determined using the daily average balances during
     the year.

     The amounts of time certificates of deposit issued in amounts of $100,000
or more as of December 31, 2006 are shown below by category, which is based on
time remaining until maturity of (1) three months or less, (2) over three
through six months, (3) over six through twelve months, and (4) over twelve
months.

                                                       (Dollars in Thousands)

         Less than 3 months                                $           29,689
         Three months through twelve months                            52,066
         Over one year through three years                             11,226
         Over three years                                               1,992
                                                           ------------------
                  Total                                    $           94,983
                                                           ==================


                    RETURN ON ASSETS AND STOCKHOLDERS' EQUITY

     The following rate of return information for the year indicated is
presented below.

                                                     Years Ended December 31,
                                                     2006              2005
                                                -------------     --------------

     Return on assets (1)                              1.09%              .92 %
     Return on equity (2)                             11.10             10.00
     Dividend payout ratio (3)                        13.95                 -
     Equity to assets ratio (4)                        9.86              9.17

(1)  Net income divided by average total assets.
(2)  Net income divided by average equity.
(3)  Dividends declared per share of common stock divided by net income per
     share.
(4)  Average equity divided by average total assets.



                                       35
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS
         --------------------






                      CHESTATEE BANCSHARES, INC.
                           AND SUBSIDIARIES

                     CONSOLIDATED FINANCIAL REPORT

                           DECEMBER 31, 2006










<PAGE>

                           CHESTATEE BANCSHARES, INC.
                                AND SUBSIDIARIES

                          CONSOLIDATED FINANCIAL REPORT
                                DECEMBER 31, 2006




                                TABLE OF CONTENTS


                                                                           Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.....................F-1

FINANCIAL STATEMENTS

     Consolidated balance sheets............................................F-2
     Consolidated statements of income......................................F-3
     Consolidated statements of comprehensive income........................F-4
     Consolidated statements of stockholders' equity........................F-5
     Consolidated statements of cash flows..................................F-6
     Notes to consolidated financial statements..........................F-7-25








                                       i

<PAGE>


                        REPORT OF INDEPENDENT REGISTERED
                             PUBLIC ACCOUNTING FIRM


To the Board of Directors
Chestatee Bancshares, Inc.
Dawsonville, Georgia

     We have audited the accompanying consolidated balance sheets of Chestatee
Bancshares, Inc. and subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
2006. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chestatee
Bancshares, Inc. and subsidiaries as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.

                                           /s/   MAULDIN & JENKINS, LLC
                                           -----------------------------




Atlanta, Georgia
February 28, 2007


                                      F-1

<PAGE>
<TABLE>
<CAPTION>

                   CHESTATEE BANCSHARES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2006 and 2005

                                                                2006            2005
                                                          -------------    -------------
                                     Assets
                                     ------
<S>                                                       <C>              <C>
Cash and due from banks                                   $   4,543,372    $   4,811,307
Interest-bearing deposits in banks                              748,417        3,944,005
Federal funds sold                                           12,593,000       10,088,000
Securities available for sale, at fair value                 19,870,102       26,461,118
Restricted equity securities, at cost                           824,600        1,052,500

Loans                                                       252,815,886      200,664,996
Less allowance for loan losses                                3,733,653        4,111,154
                                                          -------------    -------------
          Loans, net
                                                            249,082,233      196,553,842
                                                          -------------    -------------

Premises and equipment, net                                   7,296,075        7,585,628
Other assets                                                  4,717,391        4,342,902
                                                          -------------    -------------

          Total assets                                    $ 299,675,190    $ 254,839,302
                                                          =============    =============


                      Liabilities and Stockholders' Equity
                      ------------------------------------

Deposits
    Noninterest-bearing                                   $  22,389,682    $  25,173,468
    Interest-bearing                                        240,114,601      190,809,158
                                                          -------------    -------------
          Total deposits                                    262,504,283      215,982,626
Other borrowings                                              7,000,000       12,250,000
Other liabilities                                             2,088,812        1,340,799
                                                          -------------    -------------
          Total liabilities                                 271,593,095      229,573,425
                                                          -------------    -------------

Commitments and contingencies

Stockholders' equity
    Common stock, no par value; 20,000,000 shares
      authorized; 3,447,381 and 3,446,281 shares issued
      and outstanding, respectively                          24,862,868       24,757,151
    Retained earnings                                         3,421,829          872,405
    Accumulated other comprehensive loss                       (202,602)        (363,679)
                                                          -------------    -------------
          Total stockholders' equity                         28,082,095       25,265,877

          Total liabilities and stockholders' equity      $ 299,675,190    $ 254,839,302
                                                          =============    =============
</TABLE>


                 See Notes to Consolidated Financial Statements.

                                      F-2

<PAGE>
<TABLE>
<CAPTION>

                   CHESTATEE BANCSHARES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                     YEARS ENDED DECEMBER 31, 2006 AND 2005

                                                             2006           2005
                                                         ------------    -----------
Interest income
<S>                                                      <C>            <C>
    Loans                                                $ 19,438,985   $ 14,667,170
    Taxable Securities                                        866,889        950,549
    Nontaxable Securities                                      52,201         56,811
    Federal funds sold                                        583,104        502,075
    Interest-bearing deposits in banks                        194,137        177,841
                                                         ------------    -----------
              Total interest income                        21,135,316     16,354,446
                                                         ------------    -----------

Interest expense
    Deposits                                                8,266,447      5,337,995
    Other borrowings                                          242,569        471,663
                                                         ------------    -----------
              Total interest expense                        8,509,016      5,809,658
                                                         ------------    -----------

              Net interest income                          12,626,300     10,544,788
Provision for loan losses                                   1,139,919        673,682
                                                         ------------    -----------
              Net interest income after
                provision for loan losses                  11,486,381      9,871,106
                                                         ------------    -----------

Other income
      Service charges and fees                                802,685        903,092
      Losses on sales of securities available for sale             --        (51,712)
      Other operating income                                  215,245        239,079
                                                         ------------    -----------
              Total other income                            1,017,930      1,090,459
                                                         ------------    -----------

Other expenses
    Salaries and employee benefits                          4,561,575      3,984,070
    Occupancy and equipment expenses                          925,890        975,210
    Other operating expenses                                2,403,232      2,348,122
                                                         ------------    -----------
              Total other expenses                          7,890,697      7,307,402
                                                         ------------    -----------

              Net income before income taxes                4,613,614      3,654,163

Income tax expense                                          1,650,636      1,244,610
                                                         ------------    -----------

              Net income                                 $  2,962,978    $ 2,409,553
                                                         ============    ===========


Basic earnings per share                                 $       0.86    $      0.70
                                                         ============    ===========

Diluted earnings per share                               $       0.84    $      0.69
                                                         ============    ===========

Cash dividends per share                                 $       0.12    $       --
                                                         ============    ===========
</TABLE>


                 See Notes to Consolidated Financial Statements.

                                      F-3

<PAGE>
<TABLE>
<CAPTION>

                   CHESTATEE BANCSHARES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                     YEARS ENDED DECEMBER 31, 2006 AND 2005


                                                                            2006          2005
                                                                        -----------   -----------
<S>                                                                     <C>           <C>
Net income                                                              $ 2,962,978   $ 2,409,553

Other comprehensive income (loss):
        Unrealized holding gains (losses) on securities
           available for sale arising during the three month and
           nine month period, net of taxes (benefits of $97,682
           and ($148,752)                                                   161,077      (217,299)

       Reclassification adjustment for losses realized in net income,
           net of tax benefits of (18,616)                                       --        33,096
                                                                        -----------   -----------

Other comprehensive income (loss)                                           161,077      (184,203)
                                                                        -----------   -----------

Comprehensive income                                                    $ 3,124,055   $ 2,225,350
                                                                        ===========   ===========
</TABLE>


                 See Notes to Consolidated Financial Statements.

                                      F-4
<PAGE>
<TABLE>
<CAPTION>


                   CHESTATEE BANCSHARES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 2006 AND 2005


                                                   Common Stock                             Accumulated
                                            ----------------------------                       Other          Total
                                                                Amount        Retained     Comprehensive   Stockholders'
                                              Shares           Paid In        Earnings     Income (Loss)      Equity
                                            ----------     --------------   ------------   ------------   -------------
<S>                                          <C>           <C>              <C>            <C>            <C>
Balance, December 31, 2004                   3,123,000     $   21,554,341   $  1,564,212   $  (179,476)   $  22,939,077
    Net income                                       -                  -      2,409,553              -       2,409,553
    Stock options exercised                     11,000             80,000              -              -          80,000
    Stock based compensation                         -                  -         21,450              -          21,450
    Stock dividend declared                    312,281          3,122,810    (3,122,810)              -               -
    Other comprehensive income                       -                  -              -      (184,203)       (184,203)
                                            ----------     --------------   ------------   ------------   -------------
Balance, December 31, 2005                   3,446,281         24,757,151        872,405      (363,679)      25,265,877
    Net income                                       -                  -      2,962,978              -       2,962,978
    Stock options exercised                      1,100             10,000              -              -          10,000
    Stock based compensation                         -             95,717              -              -          95,717
    Cash dividend declared, $.12 per share           -                  -      (413,554)              -       (413,554)
    Other comprehensive income                       -                  -              -        161,077         161,077
                                            ----------     --------------   ------------   ------------   -------------
Balance, December 31, 2006                   3,447,381     $   24,862,868   $  3,421,829   $  (202,602)   $  28,082,095
                                            ==========     ==============   ============   ============   =============
</TABLE>


                 See Notes to Consolidated Financial Statements.

                                      F-5

<PAGE>
<TABLE>
<CAPTION>


                   CHESTATEE BANCSHARES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 2006 AND 2005


                                                                       2006            2005
                                                                   ------------    ------------
<S>                                                                <C>             <C>
OPERATING ACTIVITIES
    Net income                                                     $  2,962,978    $  2,409,553
                                                                   ------------    ------------
    Adjustments to reconcile net income to net cash
        provided by operating activities:
        Depreciation                                                    776,965         540,084
        Deferred income taxes                                           191,027        (292,252)
        Provision for loan losses                                     1,139,919         673,682
        Amortization and accretion of securities                        179,709         185,408
        (Gain) loss on sales of securities available for sale                --          51,712
        Stock-based compensation expense                                 95,717          21,450
        Increase in interest receivable                                (443,312)        (52,627)
        Increase in interest payable                                    349,001         126,575
        Net other operating activities                                  (27,650)       (178,790)
                                                                   ------------    ------------

              Net cash provided by operating activities               5,224,354       3,484,795
                                                                   ------------    ------------

INVESTING ACTIVITIES
    Net decrease in interest-bearing deposits in banks                3,195,588       2,406,297
    Net increase in federal funds sold                               (2,505,000)     (5,997,000)
    Purchases of securities available for sale                               --      (7,148,816)
    Proceeds from maturities of securities available for sale         6,670,065       6,023,719
    Proceeds from sales of securities available for sale                     --       3,950,357
    Net decrease in restricted equity securities                        227,900         579,300
    Net increase in loans                                           (53,668,310)     (3,404,236)
    Proceeds from sales of other real estate                                 --              --
    Proceeds from sales of premises and equipment                        10,218              --
    Purchase of premises and equipment                                 (497,630)       (221,822)
                                                                   ------------    ------------

              Net cash used in investing activities                 (46,567,169)     (3,812,201)
                                                                   ------------    ------------

FINANCING ACTIVITIES
    Net increase in deposits                                         46,521,657      15,588,785
    Proceeds from other borrowings                                    3,500,000              --
    Payments on other borrowings                                     (8,750,000)    (13,950,000)
    Cash dividends paid on common stock                                (206,777)             --
    Net proceeds from common stock issued                                10,000          80,000
                                                                   ------------    ------------
              Net cash provided by financing activities              41,074,880       1,718,785
                                                                   ------------    ------------

Net increase (decrease) in cash and due from banks                     (267,935)      1,391,379

Cash and due from banks, beginning of period                          4,811,307       3,419,928
                                                                   ------------    ------------

Cash and due from banks, end of period                             $  4,543,372    $  4,811,307
                                                                   ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
    Cash paid for:
          Interest                                                 $  8,160,015    $  5,683,083
          Income taxes                                             $  1,422,194    $  1,559,452

    Principal balances of loans transferred to other real estate   $         --    $         --

    Financed sales of other real estate owned                      $         --    $         --

</TABLE>


                 See Notes to Consolidated Financial Statements.

                                      F-6

<PAGE>

                   CHESTATEE BANCSHARES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Nature of Operations

          Chestatee Bancshares, Inc. (the "Company") is a bank holding company
          whose principal activity is the ownership and management of its
          wholly-owned subsidiaries, Chestatee State Bank (the "Bank"),
          Chestatee Residential Mortgage, Inc. ("CRM"), and Chestatee Financial
          Services, Inc. ("CFS"). The Bank is a commercial bank located in
          Dawsonville, Dawson County, Georgia. The Bank provides a full range of
          banking services in its primary market area of Dawson County and the
          surrounding counties. CRM, which as a member in Guaranty Mortgage
          Services, LLC, a nonaffiliated company, provides residential mortgage
          lending and origination services to customers in the Bank's primary
          market area. CFS provides investment and financial services to
          customers in the Bank's primary market area. CRM and CFS commenced
          operations in 2001.

          Basis of Presentation

          The consolidated financial statements include the accounts of the
          Company and its subsidiaries. Significant intercompany transactions
          and balances are eliminated in consolidation.

          In preparing financial statements in conformity with accounting
          principles generally accepted in the United States of America,
          management is required to make estimates and assumptions that affect
          the reported amounts of assets and liabilities as of the balance sheet
          date and the reported amounts of revenues and expenses during the
          reporting period. Actual results could differ from those estimates.

          Material estimates that are particularly susceptible to significant
          change relate to the determination of the allowance for loan losses,
          the valuation of foreclosed real estate and contingent assets and
          liabilities. The determination of the adequacy of the allowance for
          loan losses is based on estimates that are susceptible to significant
          changes in the economic environment and market conditions. In
          connection with the determination of the estimated losses on loans and
          the valuation of foreclosed real estate, management obtains
          independent appraisals for significant collateral.

          Cash, Due From Bank and Cash Flows

          For purposes of reporting cash flows, cash and due from banks include
          cash on hand, cash items in process of collection and amounts due from
          banks. Cash flows from loans, interest-bearing deposits in banks,
          federal funds sold, restricted equity securities, and deposits are
          reported net.

          The Bank is required to maintain reserve balances in cash or on
          deposit with the Federal Reserve Bank, based on a percentage of
          deposits. The total of those reserve balances was approximately
          $870,000 and $902,000 at December 31, 2006 and 2005, respectively.

          Securities

          Debt securities that management has the positive intent and ability to
          hold to maturity are classified as held to maturity and recorded at
          amortized cost. Securities not classified as held to maturity, are
          classified as available for sale and recorded at fair value with
          unrealized gains and losses excluded from earnings and reported in
          other comprehensive income. Restricted equity securities without a
          readily determinable fair value are recorded at cost.

          The amortization of premiums and accretion of discounts are recognized
          in interest income using methods approximating the interest method
          over the life of the securities. Realized gains and losses, determined
          on the basis of the cost of specific securities sold, are included in
          earnings on the settlement date.

                                      F-7
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Securities (Continued)

          Declines in the fair value of securities below their cost that are
          deemed to be other than temporary are reflected in earnings as
          realized losses. In estimating other-than-temporary impairment losses,
          management considers (1) the length of time and the extent to which
          the fair value has been less than cost, (2) the financial condition
          and near-term prospects of the issuer, and (3) the intent and ability
          of the Company to retain its investment in the issuer for a period of
          time sufficient to allow for any anticipated recovery in fair value.

          Loans

          Loans are reported at their outstanding unpaid principal balances less
          unearned income and the allowance for loan losses. Interest income is
          accrued on the outstanding principal balance. Nonrefundable loan fees
          and costs for loans are deferred and recognized as an adjustment of
          the related loan yield over the life of the loan using a method which
          approximates a level yield.

          The accrual of interest on loans is discontinued when, in management's
          opinion, the borrower may be unable to meet payments as they become
          due, unless the loan is well-secured. All interest accrued but not
          collected for loans that are placed on nonaccrual or charged off is
          reversed against interest income, unless management believes that the
          accrued interest is recoverable through the liquidation of collateral.
          Interest income on nonaccrual loans is recognized on the cash-basis or
          cost-recovery method, until the loans are returned to accrual status.
          Loans are returned to accrual status when all the principal and
          interest amounts are brought current and future payments are
          reasonably assured.

          A loan is considered impaired when it is probable, based on current
          information and events, the Company will be unable to collect all
          principal and interest payments due in accordance with the contractual
          terms of the loan agreement. Impaired loans are measured by either the
          present value of expected future cash flows discounted at the loan's
          effective interest rate, the loan's obtainable market price, or the
          fair value of the collateral if the loan is collateral dependent. The
          amount of impairment, if any, and any subsequent changes are included
          in the allowance for loan losses. Interest on accruing impaired loans
          is recognized as long as such loans do not meet the criteria for
          nonaccrual status.

          Allowance for Loan Losses

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

          The allowance is an amount that management believes will be adequate
          to absorb estimated losses relating to specifically identified loans,
          as well as probable credit losses inherent in the balance of the loan
          portfolio, based on an evaluation of the collectibility of existing
          loans and prior loss experience. This evaluation also takes into
          consideration such factors as changes in the nature and volume of the
          loan portfolio, overall portfolio quality, review of specific problem
          loans, concentrations and current economic conditions that may affect
          the borrower's ability to pay. This evaluation does not include the
          effects of expected losses on specific loans or groups of loans that
          are related to future events or expected changes in economic
          conditions. While management uses the best information available to
          make its evaluation, future adjustments to the allowance may be
          necessary if there are significant changes in economic conditions. In
          addition, regulatory agencies, as an integral part of their
          examination process, periodically review the Bank's allowance for loan
          losses, and may require the Bank to make additions to the allowance
          based on their judgment about information available to them at the
          time of their examinations.

                                      F-8
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Allowance for Loan Losses (Continued)

          The allowance consists of specific, general and unallocated
          components. The specific component relates to loans that are
          classified as doubtful, substandard or special mention. For such loans
          that are also classified as impaired, an allowance is established when
          the discounted cash flows or collateral value of the impaired loan is
          lower than the carrying value of that loan. The general component
          covers non-classified loans and is based on historical loss experience
          adjusted for qualitative factors. An unallocated component is
          maintained to cover uncertainties that could affect management's
          estimate of probable losses. The unallocated component of the
          allowance reflects the margin of imprecision inherent in the
          underlying assumptions used in the methodologies for estimating
          specific and general losses in the portfolio.

          Premises and Equipment

          Land is carried at cost. Premises and equipment are carried at cost
          less accumulated depreciation. Depreciation is computed principally by
          straight-line methods over the estimated useful lives of the assets.
          Other Real Estate Owned

          Other real estate owned represents properties acquired through or in
          lieu of loan foreclosure and are initially recorded at the lower of
          cost or fair value less estimated costs to sell. Any write-down to
          fair value at the time of transfer to other real estate owned is
          charged to the allowance for loan losses. Costs of improvements are
          capitalized, whereas costs relating to holding other real estate owned
          and subsequent adjustments to the value are expensed. There was no
          other real estate owned at December 31, 2006 or December 31, 2005.

          Income Taxes

          Deferred income tax assets and liabilities are determined using the
          balance sheet method. Under this method, the net deferred tax asset or
          liability is determined based on the tax effects of the temporary
          differences between the book and tax bases of the various balance
          sheet assets and liabilities and gives current recognition to changes
          in tax rates and laws.

          Stock-Based Compensation

          At December 31, 2006, the Company has two stock-based compensation
          plans, which are described more fully in Note 8. Prior to January 1,
          2006, the Company accounted for these plans under the recognition and
          measurement provisions of APB Opinion No. 25, Accounting for Stock
          Issued to Employees, and related Interpretations, as permitted by FASB
          Statement No. 123, Accounting for Stock-Based Compensation. Options
          granted under the plans had exercise prices equal to the fair market
          value of the underlying common stock on the date of grant, therefore
          no compensation costs were recognized in connection with these
          options. The company also has remaining options outstanding that were
          granted to certain executive officers under employee agreements.
          Options earned under these agreements were granted at prices based
          upon the year-end book value of the Company. Compensation costs were
          recognized for the difference between fair value and book value per
          share on these options.


                                      F-9
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Stock-Based Compensation (Continued)

          During 2005 the Company decided to accelerate the vesting on 45,837
          options to avoid the income statement impact of adopting SFAS 123 in
          future years. In accordance with APB 25 the Company estimated that
          11,230 or 24.5% of these options would have otherwise become
          unexercisable over the next three years. The Company estimates the
          incremental intrinsic value per share to be $1.91 at the measurement
          date; therefore the Company recognized $21,450 in compensation costs
          for the years ended December 31, 2005. The following table illustrates
          the effect on net income and earnings per share if the Company had
          applied the fair value recognition provisions of SFAS No. 123,
          Accounting for Stock-Based Compensation, to stock-based employee
          compensation.
<TABLE>
<CAPTION>

                                                                 For the Year Ended
                                                                  December 31, 2005
                                                                 ------------------
<S>                                                              <C>
          Net income, as reported                                $        2,409,553
          Deduct: Total stock-based employee compensation
             expense determined under fair value based
             method for all awards, net of related tax effects             (225,387)
                                                                 ------------------
          Pro forma net income                                   $        2,184,166
                                                                 ==================
          Earnings per share:
            Basic - as reported                                  $              .70
                                                                 ==================
            Basic - pro forma                                    $              .63
                                                                 ==================
            Diluted - as reported                                $              .69
                                                                 ==================
            Diluted - pro forma                                  $              .62
                                                                 ==================
</TABLE>

          Effective January 1, 2006, the Company adopted the fair value
          recognition provisions of FASB Statement No. 123(R), Share-Based
          Payment, using the modified-prospective-transition method. Under the
          modified-prospective-method, compensation cost recognized for all
          share-based payments granted on or after January 1, 2006, is based on
          the grant-date fair value estimated in accordance with the provisions
          of Statement 123(R). The Company estimates the incremental intrinsic
          value per share to be $3.96 at the measurement date; therefore the
          Company recognized $95,717 in compensation costs for the year ended
          December 31, 2006. Results for prior periods have not been restated.

          Prior to the adoption of Statement 123(R), the Company would have
          presented all tax benefits of deductions resulting from the exercise
          of stock options as operating cash flows in the statement of cash
          flows. Statement 123(R) requires the cash flows resulting from the tax
          benefits resulting from tax deductions in excess of the compensation
          cost recognized for those options (excess tax benefits) to be
          classified as financing cash flows.

          Earnings Per Share

          Basic earnings per share are computed by dividing net income by the
          weighted-average number of shares of common stock outstanding. Diluted
          earnings per share are computed by dividing net income by the sum of
          the weighted-average number of shares of common stock outstanding and
          potential common shares. Potential common shares consist of stock
          options.

          Comprehensive Income

          Accounting principles generally require that recognized revenue,
          expenses, gains and losses be included in net income. Although certain
          changes in assets and liabilities, such as unrealized gains and losses
          on available for sale securities, are reported as a separate component
          of the equity section of the balance sheet, such items, along with net
          income, are components of comprehensive income.

                                      F-10
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Impact of Recently Issued Accounting Standards

          In May 2005, the FASB issued SFAS No. 154, Accounting Changes and
          Error Corrections - a replacement of APB Opinion No. 20 and FASB
          Statement No. 3. SFAS No. 154 changes the requirements for the
          accounting for and reporting of a change in accounting principle. It
          applies to all voluntary changes in accounting principle and to
          changes required by an accounting pronouncement that does not include
          specific transition provisions. This Statement requires retrospective
          application to prior period financial statements of changes in
          accounting principle, unless it is impractical to determine either the
          period-specific or cumulative effects of the change. SFAS No. 154 is
          effective for accounting changes made in fiscal years beginning after
          December 15, 2005. The adoption of this standard did not have a
          material impact on the consolidated financial statements of the
          Company.

          In November 2005, the FASB issued Staff Position (FSP) No. FAS 115-1
          and FAS 124-1, The Meaning of Other than Temporary Impairment and Its
          Application to Certain Investments. FSP 115-1 addresses the
          determination as to when an investment is considered impaired, whether
          that impairment is other than temporary, and the measurement of the
          impairment loss. This Staff Position is effective for periods
          beginning after December 15, 2005, with earlier application permitted.
          Implementation of this guidance is not expected to have a material
          impact on the consolidated financial statements of the Company.

NOTE 2.   SECURITIES

          The amortized cost and fair value of securities are summarized as
          follows:
<TABLE>
<CAPTION>
                                                           Gross            Gross
                                         Amortized      Unrealized       Unrealized        Fair
                                            Cost           Gains           Losses          Value
                                      ---------------  -------------   -------------   ------------
<S>                                   <C>               <C>            <C>             <C>
           Securities Available for
           Sale
              December 31, 2006:
              U.S. Treasury and U.S.
                 Government agencies  $    7,620,273    $         -    $   (117,550)   $  7,502,723
              State, county and
              municipal
                 Securities                1,334,111          1,134         (12,451)      1,322,794
              Mortgage-backed
              securities                  11,241,183          2,768        (199,366)     11,044,585
                                      ---------------  -------------   -------------   ------------
                                      $   20,195,567    $     3,902    $   (329,367)   $ 19,870,102
                                      ===============  =============   =============   ============

              December 31, 2005:
              U.S. Treasury and U.S.
                 Government agencies  $    7,789,019    $         -    $   (173,486)   $  7,615,533
              State, county and
              municipal
                 Securities                1,334,770              -         (40,657)      1,294,113
              Mortgage-backed
              securities                  17,921,553              -        (370,081)     17,551,472
                                      ---------------  -------------   -------------   ------------
                                      $   27,045,342    $         -    $   (584,224)   $ 26,461,118
                                      ===============  =============   =============   ============
</TABLE>
          Securities with a carrying value of $11,618,000 and $19,194,000 at
          December 31, 2006 and 2005 were pledged to secure public deposits and
          for other purposes required or permitted by law.

                                      F-11
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2.   SECURITIES (Continued)

          The amortized cost and fair value of debt securities as of December
          31, 2006 by contractual maturity are shown below.

                                                  Securities Available for Sale
                                               ---------------------------------
                                                  Amortized           Fair
                                                     Cost             Value
                                               ---------------   ---------------

           Due in less than one year           $     1,000,000   $      989,375
           Due from one to five years                  997,956          956,060
           Due from five to ten years                5,622,317        5,557,288
           Due after ten years                       1,334,111        1,322,794
           Mortgage-backed securities               11,241,183       11,044,585
                                               ---------------   ---------------
                                               $    20,195,567   $   19,870,102
                                               ===============   ===============

          The following table shows the gross unrealized losses and fair value
          of securities, aggregated by category and length of time that
          securities have been in a continuous unrealized loss position at
          December 31, 2006.
<TABLE>
<CAPTION>

                                              Less Than Twelve Months            Over Twelve Months
                                           ----------------------------   -----------------------------
                                               Gross                           Gross
                                             Unrealized         Fair         Unrealized       Fair
                                               Losses           Value          Losses         Value
                                           ------------     -----------   -------------   -------------
<S>                                        <C>            <C>             <C>             <C>
          December 31, 2006:
            U.S. Treasury and U.S.
               Government agencies         $        --    $           -   $   (117,550)   $   7,502,723
            State, county  and municipal        (2,500)         505,888         (9,951)         290,049
            securities
            Mortgage-backed securities            (441)         400,792       (198,925)      10,048,110
                                           ------------   -------------   -------------   --------------
                                           $    (2,941)   $     906,680   $   (326,426)   $  17,840,882
                                           ============   =============   =============   ==============
</TABLE>

          Management evaluates securities for other-than-temporary impairment at
          least on a quarterly basis, and more frequently when economic or
          market concerns warrant such evaluation. The unrealized losses in the
          portfolio are believed to be temporary due to all securities meeting
          the criteria of acceptable investment grade and all being backed by
          government agencies or municipalities. In the event that these
          securities are held to maturity, no losses should be realized. Also at
          December 31, 2006, there were 35 securities with unrealized losses.
          One security had depreciation of slightly more than 4% from the
          Company's amortized cost basis. The fair value of this security
          totaled $956,060.

                                      F-12

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.   LOANS

          The composition of loans is summarized as follows:

                                                        December 31,
                                              ---------------------------------
                                                  2006                2005
                                              -------------    ----------------
          Commercial and industrial           $  36,413,000    $     41,492,000
          Real estate - construction            130,325,000          69,204,000
          Real estate - mortgage                 78,335,000          80,399,000
          Consumer and other                      7,935,419           9,731,000
                                              -------------    ----------------
                                                 253,005,419        200,826,000
          Unearned income                          (189,533)           (161,004)
          Allowance for loan losses              (3,733,653)         (4,111,154)
                                              -------------    ----------------
          Loans, net                          $ 249,082,233    $    196,553,842
                                              =============    ================

          Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>

                                                                 Years Ended December 31,
                                                               ---------------------------
                                                                    2006          2005
                                                               ------------    -----------
<S>                                                            <C>             <C>
          Balance, beginning of year                           $  4,111,154    $ 3,620,445
             Provision for loan losses                            1,139,919        673,682
             Loans charged off                                   (1,533,600)      (234,512)
             Recoveries of loans previously charged off              16,180         51,539
                                                               ------------    -----------
          Balance, end of year                                 $  3,733,653    $ 4,111,154
                                                               ============    ===========
</TABLE>

          The total recorded investment in impaired loans was $888,498 and
          $2,455,832 at December 31, 2006 and 2005, respectively. There were no
          impaired loans that had related allowances for loan losses determined
          in accordance with SFAS No. 114, Accounting by Creditors for
          Impairment of a Loan, at December 31, 2006 and 2005. The average
          recorded investment in impaired loans for 2006 and 2005 was $2,011,910
          and $1,009,015, respectively. Interest income recognized for cash
          payments received on impaired loans was not material for the years
          ended December 31, 2006 and 2005.

          In the ordinary course of business, the Company has granted loans to
          certain related parties, including directors, executive officers, and
          their affiliates. The interest rates on these loans were substantially
          the same as rates prevailing at the time of the transaction and
          repayment terms are customary for the type of loan. Changes in related
          party loans for the year ended December 31, 2006 are as follows:

          Balance, beginning                              $     7,112,322
               Advances                                           986,626
               Repayments                                      (3,712,628)
                                                          ---------------
          Balance, ending                                 $     4,386,320
                                                          ===============

                                      F-13

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4.   PREMISES AND EQUIPMENT

          Premises and equipment are summarized as follows:

                                                         December 31,
                                               -------------------------------
                                                    2006             2005
                                               -------------    --------------
          Land and land improvements           $   1,405,872    $    1,405,872
          Buildings                                5,596,054         5,576,531
          Equipment                                2,896,004         3,102,148
                                               -------------    --------------
                                                   9,897,930        10,084,551
          Accumulated depreciation                (2,601,855)       (2,498,923)
                                               -------------    --------------
                                               $   7,296,075    $    7,585,628
                                               =============    ==============

NOTE 5.   DEPOSITS

          The aggregate amount of time deposits in denominations of $100,000 or
          more at December 31, 2006 and 2005 was $94,972,752 and $42,233,944,
          respectively. The Company had brokered certificates of deposit at
          December 31, 2006 and 2005 of $32,490,000 and $2,000,000,
          respectively. The scheduled maturities of time deposits at December
          31, 2005 are as follows:

          2007                                                  $ 117,891,407
          2008                                                     24,776,981
          2009                                                      6,045,751
          2010                                                      1,741,804
          2011                                                      3,031,644
                                                                -------------
                                                                $ 153,487,587
                                                                =============

          At December 31, 2006 and 2005, overdraft demand deposits reclassified
          to loans totaled $51,241 and $29,424, respectively.





                                      F-14

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6.   OTHER BORROWINGS

          Other borrowings consist of the following:
<TABLE>
<CAPTION>

                                                                                December 31,
                                                                       ----------------------------
                                                                            2006           2005
                                                                       -------------   ------------
<S>                                                                    <C>             <C>
          Adjustable rate advance from Federal Home Loan Bank with     $   3,500,000   $          -
             interest payable quarterly (interest rate adjusts
             quarterly, 5.33% at December 31, 2006), matures May 28,
             2008.
          Fixed rate advance from Federal Home Loan Bank with
             interest payable monthly at 1.99%, matures June 20, 2006.             -      1,250,000
          Fixed rate advance from Federal Home Loan Bank with
             interest payable monthly at 2.84%, matures June 20, 2008.     1,250,000      1,250,000
          Fixed rate advance from Federal Home Loan Bank with
             interest payable monthly at 2.59%, matures September 26,
             2006.                                                                 -      5,000,000
          Fixed rate advance from Federal Home Loan Bank with
             interest payable monthly at 2.50%, matures June 20, 2007.     1,250,000      1,250,000
          Fixed rate advance from Federal Home Loan Bank with
             interest payable monthly at 2.75%, matures October 3,
             2006.                                                                 -      1,000,000
          Fixed rate advance from Federal Home Loan Bank with
             interest payable monthly at 2.16% matures January 30,
             2006.                                                                 -      1,500,000
          Fixed rate advance from Federal Home Loan Bank with
             interest payable monthly at 2.68%, matures January 29,
             2007.                                                         1,000,000      1,000,000
                                                                       -------------   ------------
                                                                       $   7,000,000   $ 12,250,000
                                                                       =============   ============
</TABLE>

          The advances from the Federal Home Loan Bank are secured by
          approximately $8.6 million in mortgage-backed securities and Federal
          Home Loan Bank stock of $824,600.

          Contractual maturities of other borrowings as of December 31, 2006 are
          as follows:

          2007                                                     $ 2,250,000
          2008                                                       4,750,000
                                                                   ------------
                                                                   $ 7,000,000
                                                                   ============

NOTE 7.   EMPLOYEE AND DIRECTOR BENEFIT PLANS

          Deferred Compensation Plans

          The Company has a deferred compensation plan providing for death and
          retirement benefits for its chief executive officer, chief financial
          officer and executive vice president. The estimated amounts to be paid
          under the compensation plan are being funded through the purchase of
          life insurance policies on the officers. The balance of the policy
          cash surrender values included in other assets at December 31, 2006
          and 2005 is $1,516,962 and $1,458,091, respectively. Income recognized
          on the policies amounted to $58,871 and $46,145. The balance of
          deferred compensation included in other liabilities at December 31,
          2006 and 2005 is $329,692 and $241,778, respectively. Expense
          recognized for deferred compensation was $87,914 and $75,691 for the
          years ended December 31, 2006 and 2005, respectively.

                                      F-15
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7.   EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

          401(k) Plan

          The Company has a 401(k) plan available to all eligible employees,
          subject to certain minimum age and service requirements. Contributions
          charged to expense were $136,590 and $61,227 for the years ended
          December 31, 2006 and 2005, respectively.


NOTE 8.   STOCK-BASED COMPENSATION

          The Company has two stock option plans and has reserved a total of
          628,000 options, of which 188,000 are subject to shareholder approval,
          for grant to the Company's officers and directors. Options are granted
          at the fair value of the Company's common stock at the date of grant
          and expire ten years from the date of grant.

          The Company also has outstanding options related to previous employee
          agreements with certain of its executive officers whereby stock
          options are earned based upon the performance of the Company. Options
          earned under these agreements are priced at the Company's book value
          as of year-end and expire ten years from the date the options are
          earned.

          The number of stock options outstanding for 2005 along with the
          related exercise prices has been restated to reflect the 10% stock
          dividend declared in 2005.

          Other pertinent information related to the options follows:
<TABLE>
<CAPTION>

                                                          2006                            2005
                                               --------------------------      ----------------------------
                                                                Weighted-                       Weighted-
                                                                 Average                         Average
                                                                Exercise                         Exercise
                                                Shares            Price          Shares           Price
                                               ----------     -----------      -----------      -----------
<S>                                               <C>         <C>                  <C>          <C>
           Under option, beginning of year        428,800     $      8.05          426,800      $      8.00
              Granted                              30,000           12.00           13,000             9.22
              Exercised                            (1,100)           9.09          (11,000)            7.27
              Cancelled                                --                               -
                                               ----------                      -----------
           Under option, end of year              457,700            8.31          428,800             8.05
                                               ==========                      ===========

           Exercisable, end of year               360,237            7.86          337,137             7.77
                                               ==========                      ===========
           Weighted-average fair value of
           options granted during the year          $3.96                           $ 4.01
</TABLE>


                                      F-16

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8.   STOCK-BASED COMPENSATION (Continued)

          Information pertaining to options outstanding at December 31, 2006 is
          as follows:
<TABLE>
<CAPTION>

                                            Options Outstanding                  Options Exercisable
                                ------------------------------------------     -----------------------
                                                 Weighted-
                                                  Average        Weighted-                   Weighted-
                                                 Remaining        Average                     Average
                Range of           Number       Contractual       Exercise        Number     Exercise
            Exercise Prices      Outstanding        Life           Price       Exercisable     Price
           -----------------    ------------    ------------     ----------    -----------  ----------
<S>          <C>     <C>              <C>               <C>      <C>                <C>     <C>
             $4.32 - $4.57            17,600            3.50     $     4.45         17,600  $    4.45
            $7.27 - $10.00           410,100            6.61           8.21        342,637       8.03
            $10.00 - $12.00           30,000           10.00          12.00             --         --
                                ------------                                   -----------
                                     457,700            6.71           8.31         360,237      7.86
                                ============                                   ============
</TABLE>

          The fair value of the options is estimated on the date of grant using
          the Black-Scholes option-pricing model with the following
          weighted-average assumptions.
<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                         --------------------------
                                                                          2006               2005
                                                                         --------       -----------
<S>                                                                        <C>              <C>
          Dividend yield (as a percent of the fair value of the stock)       1.0%               0%
          Expected life                                                  10 years         10 years
          Expected volatility                                              16.63%           16.98%
          Risk-free interest rate                                           4.63%            4.35%
</TABLE>


NOTE 9.   INCOME TAXES

          Income tax expense consists of the following:

                                               Years Ended December 31,
                                            --------------------------------
                                                  2006            2005
                                            -------------     --------------
           Current                          $   1,459,609     $    1,536,862
           Deferred                               191,027           (292,252)
                                            -------------     --------------
                Income tax expense          $   1,650,636     $    1,244,610
                                            =============     ==============

          The Company's income tax expense differs from the amounts computed by
          applying the federal income tax statutory rates to income before
          income taxes. A reconciliation of the differences is as follows:

                                                          2006          2005
                                                     ------------   -----------

          Income taxes at federal statutory rate     $  1,568,629   $ 1,242,415
          Tax-free income                                 (70,907)      (66,827)
          Surtax exemption                                  9,052         7,381
          State income tax                                198,002       149,263
          Other items                                     (54,140)      (87,622)
                                                     ------------   -----------
               Income tax expense                    $  1,650,636   $ 1,244,610
                                                     ============   ===========



                                      F-17

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.   INCOME TAXES (Continued)

          The components of deferred income taxes are as follows:

                                                          December 31,
                                                 ------------------------------
                                                     2006            2005
                                                 --------------   -------------
          Deferred tax assets:
             Loan loss reserves                  $      991,044   $   1,279,170
             Deferred loan fees                          71,522          60,839
             Stock options                                    -          12,740
             Deferred compensation                      124,412          91,237
             Nonaccrual loans                            42,482          27,032
             Other                                            -             372
             Securities available for sale              122,863         220,545
                                                 --------------   -------------
                                                      1,352,323       1,691,935
                                                 ---------------  -------------
          Deferred tax liabilities:
             Depreciation                               286,303         324,466
                                                 --------------   -------------

                 Net deferred tax assets         $    1,066,020   $   1,367,469
                                                 ==============   =============


NOTE 10.  EARNINGS PER SHARE

          Presented below is a summary of the components used to calculate basic
          and diluted earnings per share.
<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                                ----------------------------
                                                                   2006            2005
                                                                ------------   -------------
<S>                                                            <C>              <C>
           Basic Earnings  Per Share:
           Weighted average common shares outstanding              3,446,995        3,438,222
                                                               =============    =============

           Net income                                          $   2,962,978    $   2,409,553
                                                               =============    =============

           Basic earnings  per share                           $         .86    $         .70
                                                               =============    =============

           Diluted Earnings Per Share:
           Weighted average common shares outstanding              3,446,995        3,438,222
           Net effect of the assumed exercise of stock
           options based on the treasury stock method
           using average market prices for the year                   70,531           73,305
                                                               -------------    -------------
           Total weighted average common shares and
           common stock equivalents outstanding                    3,517,526        3,511,527
                                                               =============    =============

           Net income                                          $   2,962,978    $   2,409,553
                                                               =============    =============

           Diluted earnings  per share                         $         .84    $         .69
                                                               =============    =============
</TABLE>


                                      F-18
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11.  COMMITMENTS AND CONTINGENCIES

          Loan Commitments

          The Company is party to financial instruments with off-balance sheet
          risk in the normal course of business to meet the financing needs of
          its customers. These financial instruments may include commitments to
          extend credit and standby letters of credit. They involve, to varying
          degrees, elements of credit risk and interest rate risk in excess of
          the amount recognized in the balance sheets. The majority of all
          commitments to extend credit and standby letters of credit are
          variable rate instruments.

          The Company's exposure to credit loss in the event of nonperformance
          by the other party to the financial instrument for commitments to
          extend credit and standby letters of credit is represented by the
          contractual amount of those instruments. The Company uses the same
          credit policies in making commitments and conditional obligations as
          they do for on-balance sheet instruments. A summary of the Company's
          commitments is as follows:
                                                          December 31,
                                                  ----------------------------
                                                      2006            2005
                                                  ------------    ------------

          Commitments to extend credit            $ 67,046,000    $ 38,974,000
          Financial standby letters of credit        1,049,000       1,225,000
          Credit card commitments                    2,610,000       4,230,000
                                                  ------------    ------------
                                                  $ 70,705,000    $ 44,429,000
                                                  ============    ============

          Commitments to extend credit are agreements to lend to a customer as
          long as there is no violation of any condition established in the
          contract. Commitments generally have fixed expiration dates or other
          termination clauses and may require payment of a fee. Since many of
          the commitments are expected to expire without being drawn upon, the
          total commitment amounts do not necessarily represent future cash
          requirements. The amount of collateral obtained, if deemed necessary
          by the Company upon extension of credit is based on management's
          credit evaluation of the party. Collateral held varies, but may
          include accounts receivable, inventory, property and equipment,
          residential real estate, and income-producing commercial properties.

          Standby letters of credit are conditional commitments issued by the
          Company to guarantee the performance of a customer to a third party.
          Those guarantees are primarily issued to support public and private
          borrowing arrangements. The credit risk involved in issuing letters of
          credit is essentially the same as that involved in extending loans to
          customers. Collateral held varies as specified above and is required
          in instances which the Company deems necessary.

          At December 31, 2006 and 2005, the carrying amount of liabilities
          related to the Company's obligation to perform under financial standby
          letters of credit was insignificant. The Company has not been required
          to perform on any financial standby letters of credit, and the Company
          has not incurred any losses on financial standby letters of credit for
          the years ended December 31, 2006 and 2005.

          Contingencies

          In the normal course of business, the Company is involved in various
          legal proceedings. In the opinion of management, any liability
          resulting from such proceedings would not have a material adverse
          effect on the Company's financial statements.


                                      F-19
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12.  CONCENTRATIONS OF CREDIT

          The Company originates primarily commercial, residential, and consumer
          loans to customers in Dawson County and surrounding counties. The
          ability of the majority of the Company's customers to honor their
          contractual loan obligations is dependent on the economy in the Dawson
          County area.

          Approximately eighty two percent of the Company's loan portfolio is
          concentrated in real estate loans, of which a substantial portion is
          secured by real estate in the Company's primary market area.
          Accordingly, the ultimate collectibility of the loan portfolio is
          susceptible to changes in market conditions in the Company's primary
          market area. The other significant concentrations of credit by type of
          loan are set forth in Note 3.

          The Company, as a matter of policy, does not generally extend credit
          to any single borrower or group of related borrowers in excess of 25%
          of statutory capital, or approximately $6.0 million.

NOTE 13.  REGULATORY MATTERS

          The Bank is subject to certain restrictions on the amount of dividends
          that may be declared without prior regulatory approval. At December
          31, 2006, approximately $1.5 million in dividends could be paid
          without prior regulatory approval.

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

          Quantitative measures established by regulation to ensure capital
          adequacy require the Company and the Bank to maintain minimum amounts
          and ratios of Total and Tier I capital to risk-weighted assets and of
          Tier I capital to average assets. Management believes, as of December
          31, 2006 and 2005, the Company and the Bank met all capital adequacy
          requirements to which they are subject.

          As of December 31, 2006, the most recent notification from the Federal
          Deposit Insurance Corporation categorized the Bank as well capitalized
          under the regulatory framework for prompt corrective action. To be
          categorized as well capitalized, the Bank must maintain minimum Total
          risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
          in the following table. There are no conditions or events since that
          notification that management believes have changed the Bank's
          category. Prompt corrective action provisions are not applicable to
          bank holding companies.


                                      F-20
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13.  REGULATORY MATTERS (CONTINUED)

          The Company and the Bank's actual capital amounts and ratios are
          presented in the following table.
<TABLE>
<CAPTION>
                                                                                                   To Be Well
                                                                             For Capital        Capitalized Under
                                                                              Adequacy          Prompt Corrective
                                                       Actual                 Purposes          Action Provisions
                                               -----------------------    ------------------  ---------------------
                                                 Amount       Ratio       Amount     Ratio      Amount       Ratio
                                                ----------  ----------    --------   -------  ------------   ------
                                                                      (Dollars in Thousands)
                                                --------------------------------------------------------------------
<S>                                             <C>           <C>     <C>                <C>  <C>            <C>
          December 31, 2006:
          Total Capital to Risk Weighted Assets
             Consolidated                       $  31,833     11.22   $    22,694        8%   $       N/A       N/A
             Bank                               $  30,874     10.88   $    22,694        8%   $    28,368       10%
          Tier I Capital to Risk Weighted
          Assets
             Consolidated                       $  28,285      9.97   $    11,347        4%   $       N/A       N/A
             Bank                               $  27,326      9.63   $    11,347        4%   $    17,021        6%
          Tier I Capital to Average Assets
             Consolidated                       $  28,285      9.93   $    11,388        4%   $       N/A       N/A
             Bank                               $  27,326      9.60   $    11,388        4%   $   14,235         5%
          December 31, 2005:
          Total Capital to Risk Weighted
          Assets
             Consolidated                      $   28,433    12.75%   $   17,840         8%   $       N/A       N/A
             Bank                              $   27,803    12.47%   $   17,840         8%   $    22,300       10%
          Tier I Capital to Risk Weighted
          Assets
             Consolidated                      $   25,629    11.49%   $    8,920         4%   $       N/A       N/A
             Bank                              $   24,999    11.21%   $    8,920         4%   $    13,380        6%
          Tier I Capital to Average Assets
             Consolidated                      $   25,629     9.88%   $   10,370         4%   $       N/A       N/A
             Bank                              $   24,999     9.64%   $   10,370         4%   $   12,962         5%
</TABLE>


NOTE 14.  FAIR VALUE OF FINANCIAL INSTRUMENTS

          The fair value of a financial instrument is the current amount that
          would be exchanged between willing parties, other than in a forced
          liquidation. Fair value is best determined based upon quoted market
          prices. However, in many instances, there are no quoted market prices
          for the Company's various financial instruments. In cases where quoted
          market prices are not available, fair value is based on discounted
          cash flows or other valuation techniques. These techniques are
          significantly affected by the assumptions used, including the discount
          rate and estimates of future cash flows. Accordingly, the fair value
          estimates may not be realized in an immediate settlement of the
          instrument. SFAS No. 107, Disclosures about Fair Values of Financial
          Instruments, excludes certain financial instruments and all
          nonfinancial instruments from its disclosure requirements.
          Accordingly, the aggregate fair value amounts presented may not
          necessarily represent the underlying fair value of the Company.

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

          Cash, Due From Banks, Interest-Bearing Deposits at Other Financial
          Institutions and Federal Funds Sold:   The carrying amount of cash,
          due from banks, interest-bearing deposits at other financial
          institutions and federal funds sold approximates fair value.

          Securities:   Fair value of securities is based on available quoted
          market prices. The carrying amount of equity securities with no
          readily determinable fair value approximates fair value.


                                      F-21
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.  FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

          Loans:   The carrying amount of variable-rate loans that reprice
          frequently and have no significant change in credit risk approximates
          fair value. The fair value of fixed-rate loans is estimated based on
          discounted contractual cash flows, using interest rates currently
          being offered for loans with similar terms to borrowers with similar
          credit quality. The fair value of impaired loans is estimated based on
          discounted contractual cash flows or underlying collateral values,
          where applicable.

          Deposits:   The carrying amount of demand deposits, savings deposits,
          and variable-rate certificates of deposit approximates fair value. The
          fair value of fixed-rate certificates of deposit is estimated based on
          discounted contractual cash flows using interest rates currently being
          offered for certificates of similar maturities.

          Other Borrowings:   The carrying amount of variable rate borrowings
          approximate fair value. The fair value of fixed rate other borrowings
          are estimated based on discounted contractual cash flows using the
          current incremental borrowing rates for similar type borrowing
          arrangements.

          Accrued Interest:   The carrying amount of accrued interest
          approximates their fair value.

          Off-Balance Sheet Instruments:   The carrying amount of commitments to
          extend credit and standby letters of credit approximates fair value.
          The carrying amount of the off-balance sheet financial instruments is
          based on fees charged to enter into such agreements.

          The carrying amounts and estimated fair values of the Company's
          financial instruments are as follows:
<TABLE>
<CAPTION>

                                                                    December 31,
                                           ---------------------------------------------------------------
                                                        2006                             2005
                                           -------------------------------   -----------------------------
                                             Carrying           Fair           Carrying          Fair
                                              Amount            Value           Amount           Value
                                           --------------   --------------   --------------  -------------
<S>                                        <C>              <C>              <C>             <C>
          Financial assets:
             Cash, due from banks,
             interest-
                bearing deposits in banks,
                and funds sold             $  17,884,789    $  17,884,789    $  18,843,312   $  18,843,312
             Securities available for sale    19,870,102       19,870,102       26,461,119      26,461,119
             Restricted equity securities        824,600          824,600        1,052,500       1,052,500
             Loans                           252,815,886      250,980,541      200,664,996     198,742,124
             Accrued interest receivable       1,749,541        1,749,541        1,306,229       1,306,229

          Financial liabilities:
             Deposits                        262,504,283      273,686,573      215,982,626     214,626,000
             Other borrowings                  7,000,000        6,889,699       12,250,000      11,865,816
             Accrued interest payable            822,420          822,420          473,419         473,419
</TABLE>


                                      F-22
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15.  SUPPLEMENTAL SEGMENT INFORMATION

          The Company has three reportable segments: commercial banking,
          residential mortgage lending and origination, and other financial
          services. The commercial banking segment provides traditional banking
          services offered through the Bank. The residential mortgage lending
          and origination segment provides these services offered through CRM.
          The financial services segment provides these services through CFS.

          The accounting policies of the segments are the same as those
          described in the summary of significant accounting policies. The
          Company evaluates performance based on profit and loss from operations
          before income taxes not including nonrecurring gains and losses.

          The Company accounts for intersegment revenues and expenses as if the
          revenue/expense transactions were to third parties, that is, at
          current market prices.

          The Company's reportable segments are strategic business units that
          offer different products and services and are managed separately
          because of these differing products and services.
<TABLE>
<CAPTION>
          ----------------------------------------------------------------------------------------------------------
                                                               INDUSTRY SEGMENTS
          --------------------------------------------------------------------------------------------------------
          For the Year         Commercial                                  All
          Ended
          --------------------------------------------------------------------------------------------------------
          December 31, 2006      Banking       Mortgage    Financial      Other       Eliminations       Total
<S>                          <C>              <C>          <C>         <C>           <C>              <C>
          Interest income    $   21,135,316   $        -   $       -   $         -   $           -    $  21,135,316

          Interest expense        8,509,016            -           -             -               -        8,509,016

          Net interest
          income                 12,626,300            -           -             -               -       12,626,300

          Intersegment net
          interest income
          (expense)                       -            -           -             -               -                -

          Other revenue
          from external
          sources                   960,012       42,199      15,719             -               -        1,017,930

          Depreciation              776,965            -           -             -               -          776,965

          Provision for
          loan losses             1,139,919            -           -             -               -        1,139,910

          Segment profit
          (loss) before
          taxes                    4,738,194      40,267       13,761      (178,608)             -        4,613,614

          Segment assets         299,597,461     355,670      58,025       806,366       (1,142,332)    299,675,190

          Expenditures for
          premises and
          equipment                 497,630            -           -             -               -         497,630


          ----------------------------------------------------------------------------------------------------------
                                                               INDUSTRY SEGMENTS
          ----------------------------------------------------------------------------------------------------------
          For the Year         Commercial                                  All
          Ended
          ----------------------------------------------------------------------------------------------------------
          December 31, 2005      Banking       Mortgage    Financial      Other       Eliminations       Total

          Interest income    $   16,354,446   $        -   $       -   $         -   $           -   $  16,354,446

          Interest expense        5,809,658            -           -             -               -       5,809,658

          Net interest
          income                 10,544,788            -           -             -               -      10,544,788

          Intersegment net
          interest income
          (expense)                       -            -           -             -               -               -

          Other revenue
          from external
          sources                 1,034,119       45,148      11,192             -               -       1,090,459

          Depreciation              540,084            -           -             -               -         540,084

          Provision for
          loan losses               673,682            -           -             -               -         673,682

          Segment profit
          (loss) before
          taxes                    3,689,512      44,726       10,931      (91,006)              -        3,654,163

          Segment assets         254,774,071     316,365      45,162       304,755       (601,051)      254,839,302

          Expenditures for
          premises and
          equipment                 221,822            -           -             -               -         221,822

</TABLE>

                                      F-23
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16.  SUPPLEMENTARY FINANCIAL DATA

          Components of other income and expenses in excess of 1% of total
          revenue are as follows:

                                                 Years Ended December 31,
                                                 ------------------------
                                                    2006          2005
                                                 ---------     ----------
          Other expenses:
             Legal and professional              $ 250,344     $  256,848
             Stationery and supplies               143,307        219,064
             Data processing                       314,156        313,213


NOTE 17.  STOCK DIVIDEND

          On July 19, 2005, the Board of Directors of the Company declared a 10%
          stock dividend payable to shareholders of record as of August 20,
          2005. Accordingly, 312,281 shares were issued to shareholders and an
          amount equal to the fair value of the shares, ($10 per share as of
          August 20, 2005), was transferred from retained earnings to common
          stock.


NOTE 18.  PARENT COMPANY FINANCIAL INFORMATION

          The following information presents the condensed balance sheet,
          statements of operations and cash flows of Chestatee Bancshares, Inc.
          as of and for the years ended December 31, 2006 and 2005:
<TABLE>
<CAPTION>

                            CONDENSED BALANCE SHEETS

                                                                    2006           2005
                                                               -------------  ---------------
<S>                                                            <C>            <C>
          Assets
             Cash                                              $    252,271   $      258,584
             Investment in subsidiaries                          27,516,265       24,994,882
             Other assets                                           554,096           46,171
                                                               -------------  ---------------

               Total assets                                    $ 28,322,632   $   25,299,637
                                                               =============  ===============

          Liabilities
             Other liabilities                                 $    240,537   $       33,760
                                                               -------------  ---------------

          Stockholders' equity                                   28,082,095       25,265,877
                                                               -------------  ---------------

               Total liabilities and stockholders' equity      $ 28,322,632   $   25,299,637
                                                               =============  ===============
</TABLE>


                                      F-24
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 18. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>

                       CONDENSED STATEMENTS OF OPERATIONS
                                                                             2006           2005
                                                                          ----------     ----------
<S>                                                                       <C>            <C>
          Income:
             Dividends declared by subsidiary                             $  750,000     $        -
                                                                          ----------     ----------

          Expenses:
             Employee benefits                                                95,717     $   21,450
             Interest                                                              -              -
             Other                                                            82,891         69,556
                                                                          ----------     ----------
               Total expenses                                                178,608         91,006
                                                                          ----------     ----------

               Income (loss) before income tax benefits and equity
               in undistributed income of subsidiaries                       571,392        (91,006)

          Income tax benefits                                                (31,280)       (26,247)
                                                                          -----------    ----------

               Income (loss) before equity in undistributed
               income of subsidiaries                                        602,672        (64,759)

          Equity in undistributed income
          of subsidiaries                                                   2,360,306      2,474,312
                                                                          -----------    -----------

               Net income                                                 $ 2,962,978    $ 2,409,553
                                                                          ===========    ===========


                       CONDENSED STATEMENTS OF CASH FLOWS
                                                                              2006            2005
                                                                          -----------     ----------
          OPERATING ACTIVITIES
             Net income                                                   $ 2,962,978     $ 2,409,553
             Adjustments to reconcile net income to net cash
               provided by (used in) operating activities:
               Undistributed income of subsidiaries                        (2,360,306)     (2,474,312)
               Increase in dividends receivable                              (500,000)             -
               Stock-based compensation                                        95,717          21,450
               Net other operating activities                                  (7,925)             76
                                                                          -----------     -----------

               Net cash provided by (used in) operating activities            190,464         (43,233)
                                                                          -----------     -----------

          FINANCING ACTIVITIES
             Cash dividends paid on common stock                             (206,777)             -
             Exercise of stock options                                         10,000          80,000
                                                                          -----------     -----------

               Net cash provided by (used in) financing activities           (196,777)         80,000
                                                                          -----------     -----------

          Net (decrease) increase in cash                                     (6,313)          36,767

          Cash at beginning of year                                           258,584         221,817
                                                                          -----------     -----------

          Cash at end of year                                             $   252,271     $   258,584
                                                                          ===========     ===========

</TABLE>



                                      F-25
<PAGE>

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          ---------------------------------------------------------------
          FINANCIAL DISCLOSURE
          --------------------

     The Company and the Bank have had no changes in or disagreements with our
independent auditors, Mauldin & Jenkins, LLC, during our two most recent
fiscal years or any period since that time. Chestatee Financial and Chestatee
Residential Mortgage have had no changes in or disagreements with its
independent auditors, Mauldin & Jenkins, LLC, since their inception.


ITEM 8A.  CONTROLS AND PROCEDURES
          -----------------------

     Based upon an evaluation of our disclosure controls and procedures within
ninety days prior to the filing of this annual report pursuant to Rule 13a-14 of
the Exchange Act, under the supervision and with the participation of
management, our President and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company required to be included in
the Company's Exchange Act filings. There have been no significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation.


ITEM 8B.  OTHER INFORMATION
          -----------------

     The Company has no information required to be disclosed in a report on Form
8-K that was not reported.


                                    PART III
                                    --------

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          -------------------------------------------------------------
          COMPLIANCE WITH SECTION 16(a) OF  THE EXCHANGE ACT
          --------------------------------------------------

     The following paragraphs set forth for each director, principal officer and
significant employee of the Company:

     o    the name of each director of the Company;
     o    the year he was first elected a director;
     o    a description of his position and offices with the Company (other than
          as a director), if any; and
     o    a brief description of his principal occupation and business
          experience during at least the last five years.

The paragraphs may provide certain other information about each director,
principal officer and significant employee of the Company as appropriate.


                                       61
<PAGE>
     Each director of the Company also serves as a director of the Bank,
Chestatee Financial and Chestatee Residential Mortgage. Except as otherwise
disclosed, there are no family relationships between any of our directors or
executive officers, and no director is a member of the board of directors of a
publicly held company required to file reports with the Securities and Exchange
Commission. Our directors are elected by a majority of votes cast at the annual
meeting of the shareholders and serve until the next annual meeting of
shareholders and until a successor is duly elected and qualified.
<TABLE>
<CAPTION>

Directors
---------
________________________________________________________________________________________________________
Name                        Age       Term as Director        Business Experience
________________________________________________________________________________________________________
<S>                         <C>                <C>           <C>
R. Millard Bowen            64           Since 1999          Owner of Millard Bowen Communities;
                                                             principal of several real estate related
                                                             business entities
________________________________________________________________________________________________________
Marcus C. Byrd, Jr.         53           Since 1999          Owner of Byrd's Mini-Storage, Byrd's
                                                             U-Haul, Byrd's Intent Land Fill, Inc, and
                                                             North Georgia Trailer Center, Inc.
________________________________________________________________________________________________________
Glennon C. Grogan           67           Since 1999          President of  Newco Sports and Outdoor
                                                             Lighting and the Secretary/Treasurer and
                                                             50% owner of Etowah Environment Group,
                                                             Inc. (waste management); principal of
                                                             several real estate ventures(1)
________________________________________________________________________________________________________
James H. Grogan             63           Since 1999          President and 50% owner of Etowah
                                                             Environmental Group, Inc. (waste
                                                             management); principal of several real
                                                             estate ventures(2)
________________________________________________________________________________________________________
Andrew M. ("Jack") Head     53           Since 1999          President of Head Management Group;
                                                             involved as an owner or director or both
                                                             in resort development and restaurant
                                                             franchise businesses; past Chairman and
                                                             Chief Executive Officer of Head
                                                             Distributing Company (wholesale groceries)
________________________________________________________________________________________________________
J. Philip Hester, Sr.       54           Since 1999          President and Chief Executive Officer of
                                                             Chestatee State Bank, Chestatee Financial
                                                             Services and Chestatee Residential
                                                             Mortgage; former President, Chief
                                                             Executive Officer, and a director of the
                                                             First Community Bank of Dawsonville from
                                                             1990 until 1999; former President, Chief
                                                             Executive Officer, and a director of the
                                                             Waycross Company & Trust from 1987 to
                                                             1990; engaged in banking business in
                                                             various capacities since 1975
_______________________________________________________________________________________________________
B. Todd Howard              40           Since 1999          President of BTH Investments; President
                                                             and co-owner of The Lumber Depot d/b/a
                                                             Coal Mountain Builders Supply; co-owner
                                                             of Oakmont Investment Group LLP; member
                                                             of the Gilmer County Homebuilders
                                                             Association
_______________________________________________________________________________________________________
</TABLE>

______________
(1)  Brother of James H. Grogan
(2)  Brother of Glennon C. Grogan

                                       62
<PAGE>
<TABLE>
<CAPTION>

________________________________________________________________________________________________________
Name                        Age       Term as Director        Business Experience
_______________________________________________________________________________________________________
<S>                         <C>                <C>           <C>
David E. Johnson            64           Since 1999          President and owner of Sleeveco, Inc.
                                                             (manufacturer of plastic packaging
                                                             materials), a finalist in "Georgia Family
                                                             Business of the Year 2002;" 2001
                                                             Businessman of the Year for Dawson County
_______________________________________________________________________________________________________
W. Alan McRae               54           Since 1999          Owner of McRae & Stolz, Inc. (real
                                                             estate development firm)
_______________________________________________________________________________________________________
Kim M. Mills                45           Since 1999          Principal of Mills Fuel Service, Inc.;
                                                             served as a director of First Community
                                                             Bank of Dawsonville from 1994 through 1997
_______________________________________________________________________________________________________
</TABLE>
Except as disclosed, there are no family relationships between any of our
directors. No director is a member of the board of directors of a publicly held
company which is required to file reports with the Securities and Exchange
Commission.

     All of our directors are independent within the meaning of Rule 4200(a)(15)
of the Nasdaq Market Rules with the exception of Philip Hester, who serves as
our President and Chief Executive Officer. Our independent directors meet
periodically without Philip Hester on matters requiring independence.

     The Board of Directors provides a process for shareholders of the Company
to send communications to the Board of Directors. Shareholders and other parties
interested in communicating directly with our Board of Directors may do so by
writing to the Chestatee Bancshares, Inc., Board of Directors, 6639 Highway 53
East, Dawsonville, Georgia 30534. All correspondence received under this process
is compiled by the assistant to Deborah McLeod and presented to the Board of
Directors or, if specified, to that director. Concerns relating to accounting,
internal controls or auditing matters are handled in accordance with procedures
established by the Audit Committee as set forth in the Audit Charter previously
disseminated to shareholders of the Company in our 2006 proxy statement.
Shareholders wishing to communicate directly with our independent directors
should send all correspondence to 6639 Highway 53 East, Dawsonville, Georgia
30534, Attention: Audit Committee.

     It is the policy of the Company that all directors be present at the Annual
Meeting, barring unforeseen or extenuating circumstances. All directors were
present at our 2006 Annual Meeting with the exception of Alan McRae.







                                       63
<PAGE>



     During the previous five years, no director of the Company was the subject
of a legal proceeding (as defined below) that is material to an evaluation of
the ability or integrity of the Director. "Legal proceeding" includes:

     o    any bankruptcy petition filed by or against any business of which such
          person was a general partner or executive officer either at the time
          of bankruptcy or within two years prior to that time;
     o    any conviction in a criminal proceeding or being subject to a pending
          criminal proceeding (excluding traffic violations and other minor
          offenses);
     o    any order, judgment or decree of any court of competent jurisdiction,
          permanently or temporarily enjoining, barring, suspending or otherwise
          limiting his involvement in any type of business, securities or
          banking activities; and
     o    any finding by a court of competent jurisdiction (in a civil action),
          the Commission or the Commodity Futures Trading Commission to have
          violated a federal or state securities or commodities law, such
          judgment having not been reversed, suspended or vacated.

No director is a party in a material proceeding adverse to our interests or the
interests of our subsidiaries.

     The Board of Directors holds regularly scheduled meetings monthly and
annual meetings are called from time to time as needed. Twelve meetings of our
Board of Directors were held during the last full fiscal year. All directors
during the last full fiscal year attended at least 75% of the aggregate of the
total number of meetings of our Board of Directors held during that time and
meetings of the committees of which that director was a member. We have
established a number of committees to assist it in the discharge of our duties,
including an audit committee, nominating committee and a compensation committee.

     The Audit Committee operates pursuant to the Charter approved by the
Company's Board of Directors. The Audit Committee Charter sets out the
responsibilities, authority and specific duties of the Audit Committee. The
Charter specifies, among other things, the structure and membership requirements
of the Audit Committee, as well as the relationship of the Audit Committee to
the independent accountants, the internal audit department, and management of
the Company. The Audit Committee generally approves the engagement of our
principal accountant to render audit and non-audit services prior to the
engagement of the accountant and the provision of those services. The Audit
Committee is thereafter responsible for reviewing the financial statements and
audit reports of our independent auditors, in serving as liaison with those
independent auditors on behalf of the Company, and discussing the audit function
and results of the audit with the Board of Directors pursuant to its Charter.
The Audit Committee consists of Messrs. Glen Grogan, Head, Howard and McRae. The
Audit Committee met five times in 2006.



                                       64
<PAGE>



     The Company does not have an audit committee financial expert. In the
market in which the Company operates there are a limited number of persons that
possess all of the attributes required under regulations to qualify as an audit
committee financial expert. To date no person has acceded to the Company's
proposal to join our Board of Directors to serve as the audit committee
financial expert. The Company continuously seeks qualified persons to serve in
this capacity. The Board of Directors has concluded that no member of the Audit
Committee has a relationship which, in the opinion of the Board of Directors,
would interfere with the exercise of his independent judgment in carrying out
the responsibilities of a director and each is an "independent director" within
the meaning of Rule 4200(a)(15) of the Nasdaq Market Rules.

     The Company's Audit Committee has issued the following report with respect
to the audited financial statements of the Company for the fiscal year ended
December 31, 2006:

     o    The Audit Committee has reviewed and discussed with the Company's
          management the Company's fiscal 2006 audited financial statements;
     o    The Audit Committee has discussed with the Company's independent
          auditors, Mauldin & Jenkins, LLC, the matters required to be
          discussed by Statement on Auditing Standards No. 61;
     o    The Audit Committee has received the written disclosures and letter
          from the independent auditors required by Independence Standards Board
          No. 1 (which relates to the auditors' independence from the Company
          and its related entities) and has discussed with the auditors their
          independence from the Company; and

Based on the review and discussions referred to in the three items above, the
Audit Committee recommended to the Board of Directors that the fiscal 2006
audited financial statements be included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2006.

     The Nominating Committee is comprised of Messrs. McRae, Mills and Jim
Grogan. Each member has been judged by the Board of Directors an "independent
director" within the meaning of Rule 4200(a)(15) of the Nasdaq Market Rules. The
committee met once in 2006. The Nominating Committee does not have a charter.

     The Nominating Committee has a policy for consideration of candidates for
the Board of Directors as recommended by shareholders of the Company. Nominees
meet personally with the members of the committee and are interviewed to
determine the individual's independence, skills and experience relative to the
needs of the Company. In its evaluation of prospective candidates for director,
the committee looks for individuals generally recognized as successful in
business or community efforts, that enjoy a reputation for honesty and
integrity, that have demonstrated commitment to the communities in which the
Bank operates and that have demonstrated in meetings with the committee his or
her commitment to the best interests of the shareholders and employees of the
Company and the Bank. There is no difference in the nominee evaluation process
if the candidate is nominated by a shareholder or otherwise.





                                       65
<PAGE>



     The process whereby the Nominating Committee identifies candidates may
include identification of individuals well-known in the community in which the
Company operates and individuals recommended to the committee by current
directors or officers who know those individuals through business or other
professional relationships, as well as recommendations of individuals to the
committee from shareholders and customers. Nominations made by shareholders and
customers must be in writing and delivered or mailed to the President of the
Company by a date not later than the 120th calendar day before the date of our
proxy statement released to shareholders in connection with the previous year's
annual meeting. The committee also identifies nominees recommended by
shareholders or groups of shareholders beneficially owning more than 5% of our
voting common stock for at least one year as of the date the recommendation was
made. Any nominations by shareholders must contain the: (a) name and residence
address of the nominating shareholder; (b) name and address of each proposed
nominee; (c) principal occupation of each proposed nominee; and (d) number of
shares of common stock of the Company owned by each proposed nominee.
Nominations not made in accordance with this procedure may be disregarded by the
presiding officer of the Annual Meeting, in his discretion, and upon his
instruction the inspector of election may disregard all votes cast for each such
nominee.

     The Nominating Committee did not receive any nominees by any shareholders
by a date not later than the 120th calendar day before the date of our proxy
statement released to shareholders in connection with the previous year's annual
meeting. There have not been any material changes to the procedures by which
shareholders may recommend nominees to our committee since our proxy statement
for last year's annual meeting. All nominees are either executive officers or
standing for re-election.

     The Compensation Committee is composed of Messrs. Head, McRae and Johnson.
That committee, which met two times in 2006, reviews and evaluates the
compensation policy of the Company, including bonuses, option grants, and
director compensation. Each member has been judged by the Board of Directors an
"independent director" within the meaning of Rule 4200(a)(15) of the Nasdaq
Market Rules. No members are or were officers or employees of the Company or our
subsidiaries. The Compensation Committee does not have a charter.

     The Compensation Committee has broad authority to review management's
performance, assess market competition and set guidelines for compensation of
our directors and executive officers. The committee does not delegate its
authority regarding compensation but does periodically seek input from Philip
Hester in his capacity as President and Chief Executive Office and Deborah
McLeod in her capacity as Chief Financial Officer. The committee has not to date
sought advice of compensation consultants as to the amount or form of management
compensation.



                                       66

<PAGE>



<TABLE>
<CAPTION>

Executive Officers
------------------
__________________________________________________________________________________________________________________
Name and Office                         Age       Period of Service      Business Experience
__________________________________________________________________________________________________________________
<S>                                    <C>           <C>                <C>
J. Philip Hester, Sr.,                  54           Since 1999          Former President, Chief Executive
President and Chief Executive                                            Officer, and Director of the First
Officer                                                                  Community Bank of Dawsonville from 1990
                                                                         until 1999; former President, Chief
                                                                         Executive Officer, and Director of the
                                                                         Waycross Company & Trust from 1987 to
                                                                         1990; engaged in banking business in
                                                                         various capacities since 1975
__________________________________________________________________________________________________________________
James M. Curry,                         55           Since 2001          Employed by SunTrust Bank, N.A. from 1985
Executive Vice-President of the                                          until joining Chestatee State Bank
Chestaee State Bank
__________________________________________________________________________________________________________________
Deborah F. McLeod,                      47           Since 2002          Employed by Citizens Bank of Forsyth,
Executive Vice-President and Chief                                       from 2001 until joining the Company;
Financial Officer of the Company                                         employed by BB&T following its
and its subsidiaries                                                     acquisition of Century South Banks until
                                                                         2001
__________________________________________________________________________________________________________________
</TABLE>


There are no family relationships between any of our executive officers. During
the previous five years, no executive officer of the Company or its subsidiaries
was the subject of a legal proceeding (as defined above) that is material to an
evaluation of the ability or integrity of the executive officer. No executive
officer is a party in a material proceeding adverse to the interests of the
Company or its subsidiaries.

     During the previous five years, no executive officer of the Company or its
subsidiaries was the subject of a legal proceeding (as defined above) that is
material to an evaluation of the ability or integrity of the executive officer.
No executive officer is a party in a material proceeding adverse to the
interests of the Company or its subsidiaries.

Code of Ethics
--------------

     The Board of Directors has adopted, effective December 31, 2005, the Code
of Business Conduct and Ethics for the Company. The Code applies to the Chief
Executive Officer and the Chief Financial Officer, each instructed to pursue the
objectives of the Code:

     o    reasonably deterring wrongdoing and promoting honest and ethical
          conduct
     o    full, fair, accurate, timely and understandable disclosure in reports
          and documents
     o    compliance with government laws, rules and regulations
     o    prompt internal reporting of violations of the Code
     o    accountability for adherence to the Code

The Chief Executive Officer and the Chief Financial Officer are further
instructed to make recommendations to the Board of Directors periodically of
ways to improve such Code, and the Company will timely disclose any such
amendment in accordance with the regulations.


                                       67
<PAGE>



Compensation of Directors
-------------------------

     The Company and the Bank pay each director a $12,000 annual retainer fee.
Members of the various committees are also paid $100 for each committee meeting
attended (except for the chair of each committee that receives $150 for each
meeting attended). Directors may also be reimbursed from time to time for
expenses related to service as a member of the Board of Directors. The directors
are also entitled to participate in the 2000 Non-Employee Stock Option Plan
approved by our shareholders.

     The Non-Employee Plan was adopted by the Board of Directors of the Company
at its meeting on October 17, 2000 and became effective when approved by the
affirmative vote of a majority of the shares of the common stock represented at
the Annual Meeting of Shareholders on April 17, 2001. The Non-Employee Plan
terminates automatically 10 years after its adoption by the Board of Directors
and may be terminated on any earlier date at the discretion of the Board of
Directors. The Company has authorized and reserved for issuance upon the
exercise of options pursuant to the Non-Employee Plan an aggregate of 220,000
shares of common stock. If any option is canceled, expires or terminates without
the respective director exercising it in full, options with respect to those
unpurchased shares of common stock may be granted to that same director or to
another eligible individual or individuals under the terms of this Non-Employee
Plan.

     Each director (other than Mr. Hester, an employee of the Company and its
subsidiaries) was granted an option to acquire 16,500 shares of our common stock
in the year ended December 31, 2000 and 1,100 shares of our common stock each in
the years ended December 31, 2001, 2002, 2003, 2004 and 2005. The options
granted in 2000 have an exercise price of $7.27 per share and can be exercised
at any time prior to October 17, 2010. The options granted in 2001, 2002, 2003,
2004 and 2005 have an exercise price of $9.09 per share and can be exercised at
any time prior to January 1, 2011, 2012, 2013, 2014 and 2015, respectively.
Millard Bowen is the only director that has exercised any portion of his option.
The Non-Employee Plan states that each director will be granted as of the first
business day of each calendar year after December 31, 2002 an option to purchase
an additional 1,100 shares of our common stock at an exercise price of no less
than the average market price of the common stock on the date of the grant and
exercisable within 10 years from the date of the grant. The options granted in
2005 exhausted the 220,000 shares of common stock authorized and reserved for
issuance under the Non-Employee Plan.


                                       68

<PAGE>



ITEM 10.     EXECUTIVE COMPENSATION
             ----------------------

     The following table sets forth the cash and cash equivalent forms of
compensation received by the principal executive officer of the Company and its
named executive officers in the fiscal year ended December 31, 2006, and all
cash and cash equivalent forms of compensation received by the chief executive
officer and all named executive officers of the Company as a group. Perquisites
with an aggregate compensation amount of less than $10,000 may not be included.
<TABLE>
<CAPTION>

                                                        SUMMARY COMPENSATION TABLE
                                                        --------------------------

_________________________________________________________________________________________________________________________________
Name and Principal Position Year    Salary      Bonus     Stock   Option   Non-Equity  Nonqualified    All Other        Total
                                                          Awards  Awards    Incentive      and       Compensation
                                                                              Plan       Deferred
                                                                          Compensation Compensation
                                                                                         Earnings
_________________________________________________________________________________________________________________________________
(a)                         (b)       (c)        (d)        (e)    (f)         (g)         (h)            (i)            (j)
_________________________________________________________________________________________________________________________________
<S>                         <C>    <C>         <C>                <C>                    <C>            <C>         <C>
J. Philip Hester, Sr.,      2006   $ 197,305   $ 90,465           19,800                 $ 54,309       $ 1,932     $ 363,811(1)
CEO, President, Director
                           ______________________________________________________________________________________________________
                            2005   $ 180,895   $ 95,712                                  $ 55,831                   $ 332,438(2)
_________________________________________________________________________________________________________________________________

James M. Curry,             2006   $ 126,948   $ 63,366           15,840                 $ 34,811       $ 1,130     $ 242,095(1)
Executive VP
                           ______________________________________________________________________________________________________
                            2005   $ 121,163   $ 69,904                                  $ 23,946                   $ 215,013(2)
_________________________________________________________________________________________________________________________________

Deborah F. McLeod,          2006   $ 126,948   $ 63,366           15,840                 $ 25,794        $ 490      $ 232,438(1)
CFO, Executive VP
                           ______________________________________________________________________________________________________
                            2005   $ 121,163   $ 69,904                                  $ 7,955                     $199,002(2)
_________________________________________________________________________________________________________________________________
</TABLE>


________________

(1)  The Company has accrued a deferred compensation expense under the defined
     contribution plan totaling $42,543, contributed $11,766 to its 401(k) plan
     for eligible employees for Mr. Hester and accrued bonuses totaling $90,465
     during the fiscal year ended December 31, 2006. The Company accrued
     deferred compensation expense under a defined contribution plan totaling
     $27,194, contributed $7,617 to its 401(k) plan and accrued a bonus of
     $63,366 for Mr. Curry. The Company accrued a bonus of $63,366, contributed
     $7,617 to its 401(k) plan and accrued a deferred compensation expense under
     the defined contribution plan totaling $18,177 for Ms. McLeod. Premiums
     paid by the Company for personal life insurance policies of the named
     executives are shown in column (i). Column (f) shows the fair value of
     stock options at grant date computed in accordance with FAS 123R.

(2)  The Company has accrued a deferred compensation expense under the defined
     contribution plan totaling $50,897, contributed $4,934 to its 401(k) plan
     for eligible employees for Mr. Hester and accrued a bonus totaling $88,454
     during the fiscal year ended December 31, 2005. The Company accrued
     deferred compensation expense under a defined contribution plan totaling
     $20,474, contributed $3,472 to its 401(k) plan and accrued a bonus of
     $65,081 for Mr. Curry. The Company accrued a bonus of $65,081, contributed
     $3,635 to its 401(k) plan and accrued a deferred compensation expense under
     the defined contribution plan totaling $4,320 for Ms. McLeod.

                                       69

<PAGE>

     J. Philip Hester, Sr., President and Chief Executive Officer, as well as a
director, of the Company, the Bank, Chestatee Financial Services and Chestatee
Residential Mortgage, entered into an Amended and Restated Employment Agreement
with the Bank effective September 17, 2001 for a term ending December 31, 2004,
with automatic renewals of one year each absent termination for death,
disability, cause, termination without cause or voluntary resignation through
December 31, 2009. Mr. Hester's base salary from the effective date is $143,325,
increasing 5% annually beginning January 1, 2002. In addition to the base
salary, Mr. Hester will receive a performance bonus based upon a criteria
established by the Compensation Committee of the Board of Directors during the
last calendar quarter of each fiscal year for the subsequent year. The Board of
Directors approved retirement benefits for Mr. Hester funded through the
purchase of life insurance policies on his life. The balance of the policy cash
surrender values included in other assets at December 31, 2006 is $739,966 and
the income recognized on the policies amounted to $26,692 for the year ended
December 31, 2006. The deferred compensation liability was $235,870 and expense
recognized was $42,543 at and for the year ended December 31, 2006. Mr. Hester
is also entitled to certain additional benefits, including an automobile
allowance, a $1 million term life insurance policy, annual paid vacation,
healthcare insurance and disability insurance.

     As a condition of employment, Mr. Hester was required to purchase at least
10,000 shares of the Bank's common stock. The shares were converted to shares of
the Company by virtue of the merger of the Company and the Bank on March 31,
2000. In 2004, Mr. Hester was granted an option to purchase 55,000 shares of our
common stock. The exercise price of the options is $9.09 per share, the fair
market value per share of our common stock at the time the options were granted,
payable in cash. The option expires ten years after the date granted. In
addition, Mr. Hester was previously granted an option to purchase 46,200 shares
of our common stock. The exercise price of the options is $7.27 per share, the
fair market value per share of our common stock at the time the options were
granted, payable in cash. The option expires ten years after the date granted.
As of December 31, 2006, Mr. Hester had already earned options to acquire up to
17,600 shares of the common stock under his original employment agreement after
giving effect to the two-for-one stock split in October 2000 and 10% stock
dividend issued September 2005. At December 31, 2006, Mr. Hester had earned
options to acquire 85,801 shares of common stock.

     Mr. Curry entered into an employment agreement with the Bank effective
December 31, 2001. The initial term of the agreement runs through December 31,
2004, with automatic renewals of one year each absent termination for death,
disability, cause, termination without cause or voluntary resignation through
December 31, 2009. Mr. Curry was initially paid a base salary at inception of
$100,000 annually, that salary to be increased annually by 5% commencing January
1, 2003. In addition, Mr. Curry is entitled to receive a performance bonus each
year based upon a criteria established by the Compensation Committee of the
Board of Directors during the last calendar quarter of each fiscal year for the
subsequent year. The Board of Directors approved retirement benefits for Mr.
Curry funded through the purchase of life insurance policies on his life. The
balance of the policy cash surrender values included in other assets at December
31, 2006 is $459,700 and the income recognized on the policies amounted to
$17,219 for the year ended December 31, 2006. The deferred compensation
liability was $71,325 and expense recognized was $27,194 at and for the year
ended December 31, 2006. In addition to his salary and customary benefits, Mr.
Curry was granted an option to acquire up to 33,000 shares of the Company's
common stock, vesting one fifth annually beginning August 17, 2006. Mr. Curry
had previously been granted 16,500 shares of the Company's common stock, which
were fully vested at December 31, 2006. The exercise price of the options is
$9.09 per share, the fair market value per share of our common stock at the time
the options were granted, payable in cash. The option expires ten years after
the date granted. At December 31, 2006, Mr. Curry had earned options to acquire
34,101 shares of common stock. Mr. Curry is also entitled to certain additional
benefits, including an automobile allowance, a $500,000 term life insurance
policy, annual paid vacation, healthcare insurance and disability insurance.



                                       70
<PAGE>
     Ms. McLeod entered into an employment agreement with the Bank effective
July 1, 2002. The initial term of the agreement runs through December 31, 2004,
with automatic renewals of one year each absent termination for death,
disability, cause, termination without cause or voluntary resignation through
December 31, 2009. Ms. McLeod is paid a base salary at inception of $100,000
annually, that salary to be increased annually by 5% commencing January 1, 2003.
The Board of Directors approved retirement benefits for Ms. McLeod funded
through the purchase of life insurance policies on her life. The balance of the
policy cash surrender values included in other assets at December 31, 2006 is
$317,296 and the income recognized on the policies amounted to $14,960 for the
year ended December 31, 2006. The deferred compensation liability was $22,497
and expense recognized was $18,177 at and for the year ended December 31, 2006.
In addition, Ms. McLeod is entitled to receive a performance bonus each year
based upon a criteria established by the Compensation Committee of the Board of
Directors during the last calendar quarter of each fiscal year for the
subsequent year. In addition to her salary and customary benefits, Ms. McLeod
was granted an option to acquire up to 33,000 shares of the Company's common
stock, vesting one fifth annually beginning August 17, 2006. Ms. McLeod had
previously been granted 11,000 shares of the Company's common stock, vesting one
third annually beginning July 1, 2003. The exercise price of the options is
$9.09 per share, the fair market value per share of our common stock at the time
the options were granted, payable in cash. The option expires ten years after
the date granted. At December 31, 2006, Ms. McLeod had earned options to acquire
24,935 shares of common stock. Ms. McLeod is also entitled to certain additional
benefits, including an automobile allowance, a $500,000 term life insurance
policy, annual paid vacation, healthcare insurance and disability insurance.

     The Amended and Restated Employment Agreements for Ms. McLeod and Messrs.
Hester and Curry contain a provision for a change in control of the Company or
the Bank. In such event, they will be entitled to receive their base salary for
the remainder of the term but not less than 18 months. There is a change in
control for purposes of the agreement if either any person or group acting in
concert acquires 50% or more of the outstanding shares of our common stock or we
sell substantially all of our assets.



                                       71
<PAGE>



     The following table provides information on outstanding equity awards made
to executive officers. The Company has not issued stock awards to any employee.
Refer to the Stock-Based Compensation section of Note 1. of the Notes to
Consolidated Financial Statements for further details regarding the Company's
employee stock option plans.
<TABLE>
<CAPTION>

                                            OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
                                            --------------------------------------------

                                              Option Awards                                       Stock Awards
                      ______________________________________________________________  _____________________________________
                                                                                                                   Equity
                                                                                                                 Incentive
                                                                                                                    Plan
                                                                                                          Equity  Awards:
                                                                                                        Incentive  Market
                                                                                                           Plan      or
                                                                                                         Awards:   Payout
                                                                                                Market    Number   Value
                                                                                        Number  Value       of       of
                                                        Equity                            of      of     Unearned Unearned
                                                      Incentive                         shares  Shares   Shares,  Shares,
                                                         Plan                             or      or      Units    Units
                                                        Awards                          Units   Units       or       or
                            Number      Number          Number                            of      of      Other     Other
                              of          of              of                            Stock   Stock     Rights   Rights
                          Securities   securities     Securities                         That    That      That     That
                          Underlying   Underlying     Underlying                         Have    Have      Have     Have
                         Unexercised  Unexercised    Unexercised  Options    Option      Not     Not        Not     Not
       Name and          Options (#)  Options (#)      Unearned   Exercise Expiration   Vested  Vested    Vested   Vested
   Principal Position    Exercisable Unexercisable   Options (#)  Price ($)   Date       (#)      ($)       (#)      ($)
___________________________________________________________________________________________________________________________
          (a)              (b)          (c)            (d)          (e)       (f)         (g)     (h)       (i)     (j)
___________________________________________________________________________________________________________________________
<S>                       <C>           <C>           <C>          <C>      <C>   <C>     <C>     <C>      <C>       <C>
 J. Philip Hester, Sr.    8,800          -              -          4.32     12/31/09       -       -         -       -
 CEO, President,          8,800          -              -          4.32     12/31/10       -       -         -       -
 Director                46,200          -              -          7.27     12/31/11       -       -         -       -
                         22,001        32,999           -          9.09     08/17/14       -       -         -       -
                            -          5,000            -          12.00    12/20/16       -       -         -       -


 James M. Curry          16,500          -              -          9.09     12/31/11       -       -         -       -
 Executive VP            17,601        15,399           -          9.09     08/17/14       -       -         -       -
                            -          4,000            -          12.00    12/20/16       -       -         -       -

 Deborah F. McLeod       11,000          -              -          9.09     12/31/11       -       -         -       -
 CFO, Executive VP       13,935        19,065           -          9.09     08/17/14       -       -         -       -
                            -          4,000            -          12.00    12/20/16       -       -         -       -
</TABLE>



                                       72

<PAGE>

     Employees of the Company and its subsidiaries are entitled to participate
in the 2000 Employee Stock Option Plan approved by our shareholders. The plan
became effective when adopted by the Board of Directors in 2000 and approved by
our shareholders in 2001. The plan will terminate automatically ten years after
its adoption by the Board of Directors and may be suspended or terminated on any
earlier date at the discretion of our Board of Directors for any reason.

     The purpose of the plan is to provide a means whereby the Company may
attract able persons to remain in or to enter the employ of the Company, or any
subsidiary, provide a means whereby those employees upon whom the
responsibilities of the successful administration, management, planning and
organization of the Company may rest can acquire and maintain stock ownership,
and provide such employees with additional incentive and reward opportunities
designed to enhance the profitable growth of the Company over the long term.
Accordingly, the plan provides for the granting of incentive stock options and
nonqualified options, or any combination of the foregoing, as is best suited to
the circumstances of the particular employees.

     The grant of incentive stock options or nonqualified options is conditioned
upon the Company obtaining any required regulatory permit authorizing the
Company to issue such options. No shares will be issued under the plan unless
the issuance and delivery of such shares comply with (or are exempt from) all
applicable requirements of law, including without limitation federal and
applicable state securities acts, and the rules and regulations promulgated
thereunder. Further, shares will not be issued under the plan unless the
issuance and delivery of such shares comply with all applicable restrictions
imposed under the Bank Holding Company Act and the rules and regulations
promulgated thereunder.

     Any grant of an option under the plan is evidenced by an agreement between
the Company and the employee. The option is subject to all applicable terms and
conditions of the plan and may be subject to any other terms and conditions
which are not inconsistent with the plan and which the Board of Directors deems
appropriate.

     A majority of the members of the Board of Directors has the authority to
alter or amend the plan. Notice of any change in the plan during the year,
however, must be given to the shareholders at the annual meeting and must be
proposed for ratification by a majority vote of the shareholders represented at
the meeting in person or by proxy. If the shareholders fail to ratify the change
in the Plan, such change shall not become effective and additional option shares
shall not be available for grant.

     The Board of Directors has approved the amendment of the plan to provide
for options to acquire up to a maximum of 370,000 shares of the Company's stock.
The plan previously provided for options to acquire up to a maximum of 220,000
shares. The change is sought to provide a means whereby the Company can continue
to implement the purposes of the plan.


                                       73
<PAGE>


     The following table sets forth the cash and cash equivalent forms of
compensation received by the directors of the Company for the fiscal year ended
December 31, 2006.
<TABLE>
<CAPTION>
                                             DIRECTOR COMPENSATION TABLE
                                             ---------------------------

_________________________________________________________________________________________________________________________
                                                                                   Non-Qualified
                                                                      Non-Equity      Deferred
                       Fees Earned or               Options Awards  Incentive Plan  Compensation   All Other
Name                    Paid in Cash   Stock Awards                  Compensation     Earnings    Compensation    Total
_________________________________________________________________________________________________________________________
(a)                         (b)            (c)            (d)            (e)            (f)           (g)          (h)
_________________________________________________________________________________________________________________________
<S>                       <C>              <C>            <C>            <C>            <C>           <C>        <C>
R. Millard Bowen          $ 12,500          -              -              -              -             -         $ 12,500
_________________________________________________________________________________________________________________________
Marcus C. Byrd, Jr.       $ 14,600          -              -              -              -             -         $ 14,600
_________________________________________________________________________________________________________________________
Glennon C. Grogan         $ 12,900          -              -              -              -             -         $ 12,900
_________________________________________________________________________________________________________________________
James H. Grogan           $ 15,900          -              -              -              -             -         $ 15,900
_________________________________________________________________________________________________________________________
Andrew M. Head            $ 13,050          -              -              -              -             -         $ 13,050
_________________________________________________________________________________________________________________________
B. Todd Howard            $ 12,500          -              -              -              -             -         $ 12,500
_________________________________________________________________________________________________________________________
David E. Johnson          $ 14,400          -              -              -              -             -         $ 14,400
_________________________________________________________________________________________________________________________
W. Alan McRae             $ 13,200          -              -              -              -             -         $ 13,200
_________________________________________________________________________________________________________________________
Kim M. Mills              $ 14,200          -              -              -              -             -         $ 14,200
_________________________________________________________________________________________________________________________
</TABLE>

     The Company and Chestatee State Bank pay each director a $12,000 annual
retainer fee. Members of the various committees are also paid $100 for each
committee meeting attended (except for the chair of each committee who receives
$150 for each meeting attended). Directors may also be reimbursed from time to
time for expenses related to service as a member of the Board of Directors. The
directors are also entitled to participate in the 2000 Non-Employee Stock Option
Plan approved by our shareholders.

     The plan was adopted by the Board of Directors of the Company at its
meeting on October 17, 2000 and became effective when approved by the
affirmative vote of a majority of the shares of the common stock represented at
the Annual Meeting of Shareholders on April 17, 2001. The plan terminates
automatically 10 years after its adoption by the Board of Directors and may be
terminated on any earlier date at the discretion of the Board of Directors. The
Company has authorized and reserved for issuance upon the exercise of options
pursuant to the plan an aggregate of 220,000 shares of common stock. If any
option is canceled, expires or terminates without the respective director
exercising it in full, options with respect to those unpurchased shares of
common stock may be granted to that same director or to another eligible
individual or individuals under the terms of this plan.


                                       74

<PAGE>



     Each director (other than Mr. Hester, an employee of the Company and its
subsidiaries) was granted an option to acquire 16,500 shares of our common stock
in the year ended December 31, 2000 and 1,100 shares of our common stock each in
the years ended December 31, 2001, 2002, 2003, 2004 and 2005. The options
granted in 2000 have an exercise price of $7.27 per share and can be exercised
at any time prior to October 17, 2010. The options granted in 2001, 2002, 2003,
2004 and 2005 have an exercise price of $9.09 per share and can be exercised at
any time prior to January 1, 2011, 2012, 2013, 2014 and 2015, respectively.
Millard Bowen is the only director that has exercised any portion of his option.
The plan states that each director will be granted as of the first business day
of each calendar year after December 31, 2002 an option to purchase an
additional 1,100 shares of our common stock at an exercise price of no less than
the average market price of the common stock on the date of the grant and
exercisable within 10 years from the date of the grant. The options granted in
2005 exhausted the 220,000 shares of common stock authorized and reserved for
issuance under the plan.

     The Board of Directors has approved the amendment of the plan to provide
for options to acquire up to a maximum of 258,000 shares of the Company's stock.
The plan previously provided for options to acquire up to a maximum of 220,000
shares. The change is sought to provide a means whereby the Company can secure
and retain the services of independent directors by giving them an opportunity
to invest in our future success. The shareholders will consider the approval of
the amendment of the plan at the 2007 annual meeting.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          --------------------------------------------------------------

     The Company is authorized by its articles of incorporation to issue
10,000,000 shares of no par value voting common stock and up to 10,000,000
shares of no par value non-voting common stock. Of the 10,000,000 shares of the
voting common stock, 3,447,381 are issued and outstanding to approximately 1,200
holders of record as of March 20, 2007. There are no shares of the non-voting
common stock issued or outstanding.

     Each share of the common stock is entitled to one vote. Abstentions and
broker-non-votes by Shareholders represented in person or by proxy will be
excluded from the total number of shares cast even if otherwise present and
entitled to vote at the Annual Meeting. Consequently, in the case of action on
any proposal in which a quorum is present, the action will be approved if the
number of votes cast in favor of the proposal exceed the number of votes cast
against the proposal.

     There is no established trading market for our common stock and we have no
market maker for our common stock. With the exception of the public offering of
1,200,000 shares by the Company in three separate offering beginning in October
2001 and ending in March 2003, the common stock is only traded infrequently in
private transactions. Therefore, we have no substantial reliable information
available as to trades of the common stock or as to the prices at which our
common stock is traded. Further, we have no reason to expect that an established
trading market will develop in our common stock.


                                       75
<PAGE>
     The following table sets forth information with respect to the beneficial
ownership, as of March 20, 2007, of shares of common stock by:

     o    each of the Company's directors,
     o    the Company's named executive officers,
     o    each person known by the Company to be the beneficial owner of more
          than five percent of the Company's outstanding Common Stock, and
     o    all directors and executive officers of the Company as a group, and
          the percentage of the outstanding shares of Common Stock represented
          thereby.

To our knowledge, no person owns more than 5% of our voting or non-voting common
stock.

Except as noted below, the Company believes that each of the persons listed has
sole investment and voting power with respect to the shares included in the
table.

__________________________________________________________________________
Name and Address                 Amount and Nature of     Percent of
of Beneficial Owner              Beneficial Ownership        Class
__________________________________________________________________________
R. Millard Bowen                     168,465(1)               4.5%
5072 Bristol Industrial Way
Buford, Georgia  30518
__________________________________________________________________________
Marcus C. Byrd, Jr.                  156,631(2)               4.1%
1661 Highway 9 South
Dawsonville, Georgia  30534
__________________________________________________________________________
James M. Curry                        34,101(3)               0.9%
312 Point Olympus Drive
Gainesville, Georgia  30506
__________________________________________________________________________
Glennon C. Grogan                     89,296(4)               2.4%
1980 Hughes Drive
Cumming, Georgia  30040
__________________________________________________________________________
James H. Grogan                       97,026(5)               2.6%
4210 Gravitt Road
Cumming, Georgia  30040
__________________________________________________________________________


(1)  Includes 11,000 shares available upon exercise of his options but excludes
     22,000 shares owned by Mr. Bowen's spouse for which he disclaims beneficial
     ownership.
(2)  Includes 22,000 shares available upon exercise of his options and 23,320
     shares held in trust by Mr. Byrd in his individual retirement account and
     7,801 shares held by an affiliate, Byrd Howard Properties. The figure
     excludes 2,200 shares owned by Mr. Byrd's spouse for which he disclaims
     beneficial ownership, but includes 4,510 shares held as custodian for his
     daughter.
(3)  Mr. Curry's shares are available upon exercise of his options.
(4)  Includes 22,000 shares available upon exercise of his options.
(5)  Includes 22,000 shares available upon exercise of his options.



                                       76

<PAGE>

__________________________________________________________________________
Name and Address                 Amount and Nature of     Percent of
of Beneficial Owner              Beneficial Ownership        Class
__________________________________________________________________________
Andrew M. ("Jack") Head              155,810(1)               4.1%
2928 Ridgewood Road
Atlanta, Georgia  30327
__________________________________________________________________________
J. Philip Hester, Sr.                125,253(2)               3.3%
32 Lakeshore Circle
Dawsonville, Georgia  30534
__________________________________________________________________________
B. Todd Howard                        91,731(3)               2.4%
3315 Dahlonega Highway
Cumming, Georgia  30040
__________________________________________________________________________
David E. Johnson                     168,380(4)               4.5%
260 Gold Leaf Terrace
Dawsonville, Georgia  30534
__________________________________________________________________________
W. Alan McRae                        114,340(5)               3.0%
499 Johnson Ferry Road
Atlanta, Georgia  30328
__________________________________________________________________________
Deborah F. McLeod                     30,182(6)               0.8%
33 Sheep Wallow Road
Dahlonega, Georgia  30533
__________________________________________________________________________
Kim M. Mills                          48,890(7)               1.3%
57 Brights Way
Dawsonville, Georgia  30534
__________________________________________________________________________
All executives officers and
directors as a group (12 persons)     1,280,105              33.9%
__________________________________________________________________________



Each of the persons listed in the above table has the right to acquire
beneficial ownership of our shares as provided by footnote within sixty days of
March 20, 2007, such shares included in his beneficial ownership pursuant to
Rule 13d-3(d)(1) of the Securities Exchange Act of 1934 (the "1934 Act").
__________________
(1)  Includes 22,000 shares available upon exercise of his options, 22,000
     shares held in the John F. Head, Jr. Family Partnership, LLP and 220 shares
     owned by his son but excludes 2,200 shares owned by Mr. Head's spouse and
     220 shares owned each by his two adult daughters, for which Mr. Head
     disclaims beneficial ownership.
(2)  Includes 85,801 shares available upon exercise of his options as well as
     33,770 shares held in an individual retirement account for his benefit and
     2,269 shares held jointly with Mr. Hester's spouse.
(3)  Includes 22,000 shares available upon exercise of his options as well as
     5,000 shares held jointly with his ex-spouse, 6,930 shares held as
     custodian for the benefit of his minor children and 7,801 shares held by an
     affiliate, Byrd Howard Properties.
(4)  Includes 22,000 shares available upon exercise of his options as well as
     97,790 shares held in an individual retirement account.
(5)  Includes 22,000 shares available upon exercise of his options as well as
     13,750 shares held in the McRae and Stolz Money Purchase Pension Plan.
(6)  Includes 24,935 shares available upon exercise of her options.
(7)  Includes 22,000 shares available upon exercise of his options, 1,155 shares
     held jointly with a family member, and 1,100 shares owned by his spouse.

                                       77
<PAGE>

         Each of the following directors has pledged some or all of his shares
as collateral to secure an obligation.


Director                                   Number of Shares Pledged
--------                                   ------------------------
Marcus C. Byrd, Jr.                        50,000 shares
Andrew M. ("Jack") Head                    25,000 shares
David E. Johnson                           40,000 shares
W. Alan McRae                              70,000 shares

Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------

     Based solely upon a review of Forms 3, 4 and 5, and amendments thereto,
furnished to the Company pursuant to Rule 16a-3(d) during the year ended
December 31, 2006, no person, who at any time during the year was a director,
executive officer or beneficial owner of more than 10% of any class of our
equity securities, failed to file on a timely basis reports required by Section
16(a) of the Exchange Act.

     Each of the directors have been nominated and will stand for election at
the annual meeting of shareholders to be held May 8, 2007. The directors so
elected will serve for a one year period until the next annual meeting of the
shareholders on May 13, 2008 and until any successor is duly elected and
qualified. The Company has no reason to believe any director so nominated will
be unable or unwilling to serve. If a nominee should be unable to accept
election as a director, which is not expected, the proxies may be voted with the
discretionary authority of each person serving as a proxy. The election of a
director requires the affirmative vote of a plurality of the votes cast by the
shares of the common stock entitled to vote at the Annual Meeting.


ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
            ----------------------------------------------

     The Company has had and expects to have in the future banking transactions
in the ordinary course of its business with its directors, principal officers,
principal shareholders, certain relatives of such persons, and their affiliates
such as corporations, partnerships, and other organizations in which such
directors and officers have an interest, on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated parties. Such transactions have not
involved more than the normal risk of collectibility or presented other
unfavorable features.

     As of December 31, 2006, our bank had outstanding loans to certain of our
directors, executive officers and relatives of such persons and their
associates, which aggregated approximately $4,386,320. This represented
approximately 16% of our $28,082,095 equity capital accounts. The bank also paid
Wallace Landscaping, an affiliate of former director Russ Wallace, $64,000 for
materials and labor in 2006. We have not transacted within the previous two
years, nor do we expect to transact in the immediate future, any business with
any director, principal officer, or principal shareholder which exceeds 10% of
our equity capital accounts or $5 million, whichever is less.



                                       78
<PAGE>
ITEM 13.     EXHIBITS AND REPORTS ON FORM 8-K
             --------------------------------

Index to Exhibits
-----------------

Number       Description                                                  Page
------       -----------                                                  ----

   3.1       Articles of Incorporation                                    (1)
   3.2       Bylaws                                                       (1)
  10.2       Data Processing Contract                                     (2)
  10.3       International Services Agreement                             (2)
  10.4       Employment Agreement                                         (2)
  10.5       Lease Agreement                                              (1)
  10.6       2000 Non-Employee Stock Option Plan                          (2)
  10.7       2000 Employee Stock Option Plan                              (2)
  10.8       Form of Non-Employee Stock Option Agreement                  (2)
  10.9       Employee Stock Option Agreement                              (2)
  10.10      Broker's Payee Contract                                      (4)
  10.11      Securities Brokerage Agreement                               (4)
  10.12      Career Agency Banking Contract                               (4)
  10.13      Subscription Agreement                                       (4)
  10.14      Operating Agreement                                          (4)
  10.15      Lease Agreement                                              (4)
  10.16      Lease Agreement                                              (4)
  11         Statement re: Computation of Per Share Earnings              85
  14         Code of Ethics                                               (5)
  21         Subsidiaries of the Registrant                               (3)
  23         Consent of Mauldin & Jenkins, LLC                            86
  24         Power of Attorney                                            87
  31         Rules 13a-14(a) and 15d-14(a) Certifications                 88
  32         Certifications Pursuant to 18 U.S.C. Section 1350            90

Description of Exhibits
-----------------------

Number       Description

  3.1        Articles of Incorporation of Chestatee Bancshares, Inc. (1)
  3.2        Bylaws of Chestatee Bancshares, Inc. (1)
 10.2        Data  Processing  Contract  between  Chestatee  State Bank and
             its  successors, dated January 20, 1998 (2)
 10.3        International  Services  Agreement between Chestatee State Bank
             and The Bankers Bank, dated April, 27, 1998 (2)
 10.4        Amended and Restated  Employment  Agreement dated September 17,
             2001 between J. Philip Hester, Sr. and Chestatee Bancshares and
             Chestatee State Bank (2)



                                       79
<PAGE>



Description of Exhibits (cont'd)
--------------------------------

Number       Description

  10.5       Lease  Agreement  between BDR Properties,  LLC and Chestatee State
             Bank,  dated November 1, 2000 (1)
  10.6       2000 Non-Employee Stock Option Plan (2)
  10.7       2000 Employee Stock Option Plan (2)
  10.8       Form of Non-Employee Stock Option Agreement (2)
  10.9       Employee Stock Option  Agreement  between J. Philip  Hester,  Sr.
             and Chestatee Bancshares and Chestatee State Bank(2)
  10.10      Broker's  Payee  Contract  between MML  Insurance  Agency,  Inc.
             and  Chestatee Financial, Inc. (4)
  10.11      Securities Brokerage Agreement between Chestatee Financial,  Inc.
             and Agreement with MML Investors Services, Inc. (4)
  10.12      Career Agency System  Banking  Contract  between  Chestatee
             Bancshares,  Inc., Stephen Squires, and the Massachusetts Mutual
             Life Insurance Company (4)
  10.13      Subscription  Agreement  between  Chestatee  Residential  Mortgage,
             Inc.  and Guaranty  Mortgage  Services,  LLC,  Guaranty First
             Mortgage,  LLC and Shelter Mortgage Corporation (4)
  10.14      Operating Agreement between Chestatee Residential  Mortgage,  Inc.
             and Guaranty Mortgage  Services,  LLC,  Guaranty First  Mortgage,
             LLC and Shelter  Mortgage Corporation (4)
  10.15      Lease between Chestatee State Bank and Norman Adams dated
             July 12, 2001 (4)
  10.16      Lease  Agreement  between  Chestatee  State  Bank and CSB
             Partners,  LLP dated January 1, 2001 (4)


(1)  Incorporated by reference to the Company's Annual Report on Form 10-KSB
     filed March 29, 2000.
(2)  Incorporated by reference to the Company's Registration Statement on Form
     SB-2 filed with the SEC on October 16, 2001.
(3)  Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
     filed May 14, 2001.
(4)  Incorporated by reference to the Company's Annual Report on Form 10-KSB
     filed March 29, 2002.
(5)  Incorporated by reference to the Company's Annual Report on Form 10-KSB
     filed March 29, 2004.



                                       80
<PAGE>



Description of Exhibits (cont'd)
--------------------------------

 11          Statement re: Computation of Per Share Earnings
 14          Code of Ethics for Principal Officers(5)
 21          Subsidiaries of the Registrant(3)
 23          Consent of Mauldin & Jenkins, LLC
 24          Power of Attorney  dated March 29, 2007  executed by officers and
             a majority of directors of Chestatee Bancshares, Inc.
 31.1        Rules 13a-14(a) and 15d-14(a) Certifications for CEO
 31.2        Rules 13a-14(a) and 15d-14(a) Certifications for CFO
 32          Certifications  of CEO and CFO Pursuant to 18 U.S.C.  Section
             1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
             Act of 2002


Reports On Form 8-K
-------------------

     There was no Form 8-K filing during the last quarter of the year ended
December 31, 2006.


ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES
            --------------------------------------

Audit Fees
----------

     Aggregate fees billed for professional services rendered for the audit of
our annual financial statements for the years ended December 31, 2006 and 2005
and the reviews of our quarterly financial statements included with our
quarterly reports on Forms 10-QSB during this two year period are $53,500 and
$52,200, respectively.

Audit-Related Fees
------------------

     Aggregate fees billed for assurance and related services reasonably related
to the performance of the audit or review of our financial statements for the
years ended December 31, 2006 and 2005 are $0 and $6,064, respectively. There
were no other audit related services rendered.

Tax Fees
--------

     Aggregate fees billed for professional services rendered for tax
compliance, tax advice and tax planning for the years ended December 31, 2006
and 2005 are $7,500 and $7,158, respectively. The nature of those services were
tax preparation fees.




                                       81
<PAGE>



All Other Fees
--------------

     The aggregate fees billed for professional services rendered for all other
products and services for the years ended December 31, 2006 and 2005 are $0 and
$0, respectively. There were no other services rendered.

Pre-Approval Engagement
-----------------------

     Before our principal accountant is engaged to render audit and non-audit
services to the Company, the engagement is generally approved by our audit
committee. During the year ended December 31, 2006, the audit committee approved
approximately 100% of audit services. There were no financial systems design and
implementation services or non-audit services.







                                       82

<PAGE>





                                   SIGNATURES


     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                             CHESTATEE BANCSHARES, INC.


                             BY: /s/ J. Philip Hester, Sr.
                                 -----------------------------------------------
                                 J. Philip Hester, Sr., Chief Executive Officer,
                                 President and Director

DATE:    March 29, 2007


                             BY: /s/ Deborah F. McLeod
                                 ------------------------------------------
                                 Deborah F. McLeod, Chief Financial Officer
                                 and Executive Vice President

DATE:    March 29, 2007







                                       83

<PAGE>



     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.


/s/ J. Philip Hester, Sr.                   /s/ Andrew M. Head
-------------------------                   ------------------
J. Philip Hester, Sr.                       Andrew M. Head
Chief Executive Officer, President and      Director
Director (principal executive officer)      March 29, 2007
March 29, 2007

/s/ Ralph Millard Bowen                     /s/ Bruce T. Howard
-----------------------                     -------------------
Ralph Millard Bowen                         Bruce T. Howard
Director                                    Director
March 29, 2007                              March 29, 2007

/s/ Marcus C. Byrd, Jr.                     /s/ David E. Johnson
-----------------------                     --------------------
Marcus C. Byrd, Jr.                         David E. Johnson
Director                                    Chairman of the Board of Directors
March 29, 2007                              March 29, 2007

/s/ Glennon C. Grogan                       /s/ William A. McRae
---------------------                       --------------------
Glennon C. Grogan                           William A. McRae
Director                                    Director
March 29, 2007                              March 29, 2007

/s/ James H. Grogan                         /s/ Kim M. Mills
-------------------                         ----------------
James H. Grogan                             Kim M. Mills
Secretary and Director                      Director
March 29, 2007                              March 29, 2007

/s/ Deborah F. McLeod
---------------------
Deborah F. McLeod
Chief Financial Officer (principal
accounting officer) and Executive
Vice President
March 29, 2007


                                       84
<PAGE>

                                                                      EXHIBIT 11



STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS

                                                        Years Ended December 31,
                                                       -------------------------
                                                           2006          2005
                                                       ----------     ----------

Weighted average shares of common stock
  outstanding during the year                           3,446,995      3,440,254

Shares of common stock issuable in connection
  with assumed exercise of options under the
  treasury stock method                                    68,213         73,305
                                                       ----------     ----------

Total                                                   3,515,208      3,513,559
                                                       ==========     ==========

Net income                                             $2,962,978     $2,409,553
                                                       ==========     ==========

Per share amount - basic                                      .86            .70

Per share amount - diluted                                    .84            .69






                                       85
<PAGE>



                                                                      EXHIBIT 23

CONSENT OF INDEPENDENT AUDITOR






                         Consent of Independent Auditor

     We have issued our report dated February 28, 2007, accompanying the
financial statements of Chestatee Bancshares, Inc. as of and for the year ending
December 31, 2006, contained in the Form 10-KSB for the year ended December 31,
2006. We consent to the use of the aforementioned report in the Form 10-KSB for
the year ended December 31, 2006.

                                              /s/ MAULDIN & JENKINS, LLC
                                              ------------------------------

Atlanta, Georgia
March 29, 2007






                                       86



<PAGE>



                                                                      EXHIBIT 24

POWER OF ATTORNEY

                                POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. Philip Hester, Sr., his Attorney-in-Fact, with
full power of substitution, for him and in his name, place and stead, and in any
and all capacities, to sign this Form 10-KSB and any amendment thereto, and to
file the same, with exhibits thereto and such other documents in connection
therewith, with the Securities and Exchange Commission, and hereby ratifies and
confirms all that said Attorney-in-Fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof.

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.



/s/ J. Philip Hester, Sr.                   /s/ Andrew M. Head
-------------------------                   ------------------
J. Philip Hester, Sr.                       Andrew M. Head
Chief Executive Officer, President and      Director
Director (principal executive officer)      March 29, 2007
March 29, 2007

/s/ Ralph Millard Bowen                     /s/ Bruce T. Howard
-----------------------                     -------------------
Ralph Millard Bowen                         Bruce T. Howard
Director                                    Director
March 29, 2007                              March 29, 2007

/s/ Marcus C. Byrd, Jr.                     /s/ David E. Johnson
-----------------------                     --------------------
Marcus C. Byrd, Jr.                         David E. Johnson
Director                                    Chairman of the Board of Directors
March 29, 2007                              March 29, 2007

/s/ Glennon C. Grogan                       /s/ William A. McRae
---------------------                       --------------------
Glennon C. Grogan                           William A. McRae
Director                                    Director
March 29, 2007                              March 29, 2007

/s/ James H. Grogan                         /s/ Kim M. Mills
-------------------                         ----------------
James H. Grogan                             Kim M. Mills
Secretary and Director                      Director
March 29, 2007                              March 29, 2007

/s/ Deborah F. McLeod
---------------------
Deborah F. McLeod
Chief Financial Officer (principal
accounting officer) and Executive
Vice President
March 29, 2007


                                       87



<PAGE>

                                                                    EXHIBIT 31.1

RULES 13a-14(a) AND 15d-14(a) CERTIFICATION

                CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
                     PURSUANT TO 15 U.S.C. 78m(a) OR 78o(d)
                     (Section 302 of the Sarbanes-Oxley Act)

I, J. Philip Hester, Sr., certify that:

1. I have reviewed this annual report on Form 10-KSB of Chestatee Bancshares,
Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

         a. designed such disclosure controls and procedures, or caused such
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

         b. evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and

         c. disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing similar functions):

         a. all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

         b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.


Date:    March 29, 2007             By: /s/ J. Philip Hester, Sr.
                                        ----------------------------------------
                                        J. Philip Hester, Sr., President and CEO
                                        (Principal Executive Officer)




                                       88
<PAGE>



                                                                    EXHIBIT 31.2

RULES 13a-14(a) AND 15d-14(a) CERTIFICATION

                CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
                     PURSUANT TO 15 U.S.C. 78m(a) OR 78o(d)
                     (Section 302 of the Sarbanes-Oxley Act)

I, Deborah F. McLeod, certify that:

1. I have reviewed this annual report on Form 10-KSB of Chestatee Bancshares,
Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

         a. designed such disclosure controls and procedures, or caused such
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

         b. evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and

         c. disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing similar functions):

         a. all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

         b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.


Date: March 29, 2007          BY:  /s/ Deborah F. McLeod
                                   --------------------------------------------
                                   Deborah F. McLeod, CFO and Treasurer
                                   (Principal Financial and Accounting Officer)

                                       89
<PAGE>


                                                                    EXHIBIT 32.1

                  CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
                           PURSUANT TO 18 U.S.C. 1350
                     (Section 906 of the Sarbanes-Oxley Act)

     I, J. Philip Hester, Sr., President and Chief Executive Officer of
Chestatee Bancshares, Inc. (the "Registrant"), do hereby certify in accordance
with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, based on my knowledge:

     (i)  the annual report on Form 10-KSB of the Registrant, to which this
          certificate is attached as an exhibit (the "Report"), fully complies
          with the requirements of section 13(a) or 15(d) of the Securities
          Exchange Act of 1934 (15 U.S.C. 78m(a); and

     (ii) the information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
          of the Registrant.


Date:  March 29, 2007           BY:  /s/ J. Philip Hester, Sr.
                                     ------------------------------------------
                                     J. Philip Hester, Sr., C.E.O. and President


                                       90
<PAGE>


                                                                    EXHIBIT 32.2

                  CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
                           PURSUANT TO 18 U.S.C. 1350
                     (Section 906 of the Sarbanes-Oxley Act)

     I, Deborah F. McLeod, Chief Financial Officer and Treasurer of Chestatee
Bancshares, Inc. (the "Registrant"), do hereby certify in accordance with 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, based on my knowledge:

     (i)  the annual report on Form 10-KSB of the Registrant, to which this
          certificate is attached as an exhibit (the "Report"), fully complies
          with the requirements of section 13(a) or 15(d) of the Securities
          Exchange Act of 1934 (15 U.S.C. 78m(a); and

     (ii) the information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
          of the Registrant.


Date:  March 29, 2007               BY:  /s/ Deborah F. McLeod
                                         ---------------------------------------
                                         Deborah F. McLeod, C.F.O. and Treasurer



                                       91
<PAGE>