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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K



|x | Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------

For the fiscal year ended December 31, 2005

Commission File No. 000-49789

HENRY COUNTY BANCSHARES, INC.

(Name of Issuer as Specified in Its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Georgia                                                        |  | 58-1485511                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|4806 N. Henry Boulevard Stockbridge, Georgia                   |  | 30281                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

(770) 474-7293

Issuers Telephone Number, Including Area Code

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

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

COMMON STOCK, $2.50 PAR VALUE

(Title of Class)

Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of
the Securities

Act. Yes ̈No x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ̈No x

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



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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer (see definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act).

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act of 1934). Yes ̈No  x

State the aggregate market value of the voting stock held by nonaffiliates computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of June 30, 2005: $135,881,996 (based on the stock price of $19.00 as of that date).

State the
number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: 7,151,684 shares of $2.50 par value common stock as of February 8, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the information required by Part III of this Annual Report are incorporated by reference from the Registrants definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Annual Report.



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Table of Contents



|                  |  |                                                                                                              |  |     
|----------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                  |  |                                                                                                              |  | Page
|PART I            |  |                                                                                                              |  |     
|                  |  | Forward Looking Statement Disclosure                                                                         |  | 1   
|Item 1.           |  | Business                                                                                                     |  | 2   
|Item 1A.          |  | Risk Factors                                                                                                 |  | 14  
|Item 1B.          |  | Unresolved Staff Comments                                                                                    |  | 16  
|Item 2.           |  | Properties                                                                                                   |  | 16  
|Item 3.           |  | Legal Proceedings                                                                                            |  | 17  
|Item 4.           |  | Submission of Matters to a Vote of Security Holders                                                          |  | 17  
|                  |  |                                                                                                             
|PART II           |  |                                                                                                              |  |     
|Item 5.           |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 17  
|Item 6.           |  | Selected Financial Data                                                                                      |  | 20  
|Item 7.           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 21  
|Item 7A.          |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 43  
|Item 8.           |  | Financial Statements and Supplementary Data                                                                  |  | 44  
|Item 9.           |  | Changes in and Disagreements with Accountants on Accounting And Financial Disclosure                         |  | 45  
|Item 9A.          |  | Controls and Procedures                                                                                      |  | 45  
|Item 9B.          |  | Other Information                                                                                            |  | 48  
|                  |  |                                                                                                             
|PART III          |  |                                                                                                              |  |     
|Item 10.          |  | Directors and Executive Officers of the Registrant                                                           |  | 49  
|Item 11.          |  | Executive Compensation                                                                                       |  | 49  
|Item 12.          |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 49  
|Item 13.          |  | Certain Relationships and Related Transactions                                                               |  | 49  
|Item 14.          |  | Principal Accountant Fees and Services                                                                       |  | 49  
|                  |  |                                                                                                             
|PART IV           |  |                                                                                                              |  |     
|Item 15.          |  | Exhibits and Financial Statement Schedules                                                                   |  | 50  
|                  |  |                                                                                                             
|Signatures        |  |                                                                                                              |  | 51  
|                  |  |                                                                                                             
|Index to Exhibits |  |                                                                                                              |  | 53  



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Forward Looking Statement Disclosure

Statements in this Annual Report regarding future events or performance
are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the PSLRA) and are made pursuant to the safe harbors of the PSLRA. Actual results of Henry County Bancshares, Inc.
(the Company) could be quite different from those expressed or implied by the forward-looking statements. Any statements containing the words could, may, will, should, plan,
believes, anticipates, estimates, predicts, expects, projections, potential, continue, or words of similar import, constitute forward-looking
statements, as do any other statements that expressly or implicitly predict future events, results, or performance. Factors that could cause results to differ from results expressed or implied by our forward-looking statements include, among
others, risks discussed in the text of this Annual Report as well as the following specific items:



| |  |  | General economic conditions, whether national or regional, that could affect the demand for loans or lead to increased loan losses;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Competitive factors, including increased competition with community, regional, and national financial institutions, that may lead to pricing pressures that reduce yields the Company
achieves on loans and increase rates the Company pays on deposits, loss of the Companys most valued customers, defection of key employees or groups of employees, or other losses;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increasing or decreasing interest rate environments, including the shape and level of the yield curve, that could lead to decreases in net interest margin, lower net interest and
fee income, including lower gains on sales of loans, and changes in the value of the Companys investment securities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changing business or regulatory conditions, or new legislation, affecting the financial services industry that could lead to increased costs, changes in the competitive balance
among financial institutions, or revisions to our strategic focus;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes or failures in technology or third party vendor relationships in important revenue production or service areas, or increases in required investments in technology that could
reduce our revenues, increase our costs or lead to disruptions in our business.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Readers are cautioned not to place undue
reliance on our forward-looking statements, which reflect managements analysis only as of the date of the statements. The Company does not intend to publicly revise or update forward-looking statements to reflect events or circumstances that
arise after the date of this report.

Readers should carefully review all disclosures we file from time to time with the Securities and
Exchange Commission (SEC).



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Part I



|Item 1. | BUSINESS
|------- | --------

General

Henry County Bancshares, Inc. (the Company), headquartered in Stockbridge, Georgia, is a Georgia business corporation which operates as a bank holding company. The Company was incorporated on June 22,
1982 for the purpose of reorganizing The First State Bank (the Bank) to operate within a holding company structure. The Bank is a wholly owned subsidiary of the Company.

The Companys principal activities consist of owning and supervising the Bank, which engages in a full service commercial and consumer banking
business, as well as a variety of deposit services provided to its customers. The Company also conducts mortgage lending operations through its wholly owned subsidiary, First Metro Mortgage Co., which provides the Companys customers with a
wide range of mortgage banking services and products.

The Company, through the Bank and First Metro Mortgage Co., derives substantially
all of its income from the furnishing of banking and banking related services.

The Company directs the policies and coordinates the
financial resources of the Bank and of First Metro Mortgage Co. The Company provides and performs various technical and advisory services for its subsidiaries, coordinates their general policies and activities, and participates in their major
decisions.

The Companys filings with the SEC, including its annual report on Form 10-K, quarterly reports on Form 10-Q, periodic
reports on Form 8-K and amendments to these reports, are accessible free of charge at our website at http://www.firststateonline.com as soon as reasonably practicable after filing with the SEC. By making this reference to our website, we do not
intend to incorporate into this report any information contained in the website. The website should not be considered part of this report.

The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers including the Company that file electronically with the SEC.

The First State Bank

The Bank was chartered by the Georgia Department of Banking and Finance in 1964. The Bank operates through its main office at 4806 North Henry Boulevard, Stockbridge, Georgia 30281, as well as five (5) full service branches located at
Hudson Bridge Road in Stockbridge, East Atlanta Road in Ellenwood, John Frank Ward Boulevard in McDonough, Bill Gardner Parkway in Locust Grove and on Highway 155 in McDonough. The Bank owns two lots for the construction of future branches in Henry
County, at the intersection of Chambers Road and Jonesboro Road as well as Highway 81 in McDonough. The Bank owns an additional parcel of real estate adjacent to its main office location in Stockbridge, Georgia, upon which is situated a small house
leased to an unaffiliated insurance company.



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The Bank engages in a full service commercial and consumer banking business in its primary market area of
Henry County and surrounding counties, as well as a variety of deposit services provided to its customers. The Bank offers on-line banking services to its customers. Checking, savings, money market accounts and other time deposits are the primary
sources of the Banks funds for loans and investments. The Bank offers a full complement of lending activities, including commercial, consumer installment, real estate, home equity and second mortgage loans, with particular emphasis on short
and medium term obligations. Commercial lending activities are directed principally to businesses whose demands for funds fall within the Banks lending limits. Consumer lending is oriented primarily to the needs of the Banks customers.
Real estate loans include short term acquisition and construction loans. The Bank focuses primarily on residential and commercial construction loans, commercial loans secured by machinery and equipment with a developed resale market, working capital
loans on a secured short term basis to established businesses in the primary service area, home equity loans of up to 80% of the current market value of the underlying real estate, residential real estate loans of up to 90% of value with adjustable
rates or balloon payments due within five (5) years, and loans secured by savings accounts, other time accounts, cash value of life insurance, readily marketable stocks and bonds, or general use machinery and equipment for which a resale market
has developed. The Bank makes both secured and unsecured loans to persons and entities which meet criteria established by the Bank and the executive committee. Approximately 91% of the Banks loan portfolio is concentrated in loans secured by
real estate, most of which is located in the Banks primary market area. The Bank, as a matter of state law and bank policy, does not extend credit to any single borrower or group of related borrowers in excess of 25% of statutory capital, or
approximately $10,000,000. The lending policies and procedures of the Bank are periodically reviewed and modified by the Board of Directors of the Bank in order to ensure risks are acceptable and to protect the Banks financial position in the
market. Among other services offered are drive-up windows, night deposits, safe deposits, travelers checks, credit cards, cashiers checks, notary public and other customary bank services. The Bank does not offer trust services.

The Bank maintains correspondent relationships with Wachovia Bank, Bank of America, The Bankers Bank, SunTrust Bank, Federal Home Loan
Bank, and the Federal Reserve of Atlanta. These banks provide certain services to the Bank such as investing excess funds, wire transfer of funds, safekeeping of investment securities, loan participation and investment advice.

The banking business in and around Henry County, Georgia is highly competitive which includes certain major banks which have acquired formerly locally
owned institutions. These banks have considerably greater resources and lending limits than the Bank. In addition to commercial banks and savings banks, the Bank competes with other financial institutions, such as credit unions, agricultural credit
associations, and investment firms which provide services similar to checking accounts and commercial lending. The Bank competes with numerous institutions within the primary service areas, including local branches of Bank of America, SunTrust Bank,
Wachovia and BB&T. As of December 31, 2005 the Bank held approximately 33% of the deposit accounts in the Henry County area. Neither the Company nor the Bank



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generates a material amount of revenue from foreign countries, nor does either have material long-lived assets, customer relationships, mortgages or
servicing rights, deferred policy acquisition costs, or deferred tax assets in foreign countries. Thus, the Company has no significant risks attributable to foreign operations.

The Bank relies substantially on personal conduct of its officers, directors and shareholders, as well as a broad product line, competitive services, and
an aggressive local advertising campaign and promotional activities to attract business and to acquaint potential customers with the Banks personal services. The Banks marketing approach emphasizes the advantages of dealing with an
independent, locally owned and headquartered commercial bank attuned to the particular needs of small to medium size businesses, professionals and individuals in the community.

As of February 8, 2006 the Bank had 137 full time employees and 26 part time employees. None of the Banks employees are represented by a
collective bargaining group. The Bank considers its relationships with its employees to be good.

A history of the Banks financial
position for the fiscal years ended December 31, 2003, 2004 and 2005, is as follows:



|               |  |             |             |      |   |             |  |   |            
|-------------- |  | ----------- | ----------- | ---- | - | ----------- |  | - | -----------
|               |  | Years Ended
|               |  | 12/31/2005  |             | 2004 |   | 2003       
|Total Assets   |  | $           | 631,033,297 |      | $ | 570,528,323 |  | $ | 515,137,333
|Total Deposits |  | $           | 545,247,129 |      | $ | 470,313,491 |  | $ | 427,033,134
|Net Income     |  | $           | 10,275,922  |      | $ | 8,383,164   |  | $ | 7,735,909  

First Metro Mortgage Co.

First Metro Mortgage Co. was formed in 1985 to provide mortgage loan origination services in the same primary market area as the Bank. Its offices are
located at the Banks branch facility on Hudson Bridge Road in Stockbridge, Georgia. First Metro Mortgage Co. initiates long term mortgage loans but immediately sells those loans in the secondary market to investors pursuant to agreements
between the investors and the company prior to funding. Under the agreements, investors generally have limited right of recourse to the company for normal representations and warranties and, in some cases, delinquencies within the first three to six
months, which lead to loan default and foreclosure. These recourse provisions represent off-balance sheet risks in the normal course of business. These loans are sold with servicing rights attached, therefore, no servicing rights are retained by
First Metro Mortgage Co.

First Metro Mortgage Co. realized a net loss of $42,624 for 2005, net income of $26,239 for 2004 and $317,435 for
2003. First Metro Mortgage Co. was merged into and became a subsidiary of The First State Bank, effective July 1, 2003.



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Supervision and Regulation

Bank Holding Company Regulations - Henry County Bancshares, Inc.

The Company is a registered holding company under the federal Bank Holding Company Act and the Georgia Bank Holding Company Act and is regulated under
such act by the Board of Governors of Federal Reserve System (the Federal Reserve) and by the Georgia Department of Banking and Finance (the Georgia Department), respectively.

Reporting and Examination.

As a bank holding company, the Company is required to file annual reports with the Federal Reserve and the Georgia Department and provide such additional information as the applicable regulator may require pursuant to the federal and
Georgia Bank Holding Company Acts. The Federal Reserve and the Georgia Department may also conduct examinations of the Company to determine whether the Company is in compliance with Bank Holding Company Acts and regulations promulgated thereunder.

Acquisitions.

The Federal Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before: (1) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any
bank; (2) acquiring all or substantially all of the assets of a bank; and (3) before merging or consolidating with another bank holding company. A bank holding company is also generally prohibited from engaging in, or acquiring, direct or
indirect control of more than five percent (5%) of the voting shares of any company engaged in non-banking activities, unless the Federal Reserve has found those activities to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by regulation to be proper incidents to the business of a bank holding company including making or servicing loans and certain types of leases, engaging
in certain insurance and discount brokerage activities, performing certain data processing services, acting in certain circumstances as a fiduciary or investment or financial advisor, owning savings associations, and making investments in certain
corporations for projects designed primarily to promote community welfare.

The Georgia Department requires similar approval prior to the
acquisition of any additional banks. A Georgia bank holding company is generally prohibited from acquiring ownership or control of 5% or more of the voting shares of a bank unless the bank being acquired is either a bank for purposes of the Federal
Bank Holding Company Act, or a federal or state savings and loan association or savings bank or federal savings bank whose deposits are insured by the Federal Savings and Loan Insurance Corporation and such bank has been in existence and
continuously operating as a bank for a period of three years or more prior to the date of application to the Department for approval of such acquisition.

Source of Strength to Subsidiary Banks.

The Federal Reserve (pursuant to regulation and published
statements) has maintained that a bank holding company must serve as a source of financial strength to its subsidiary banks. In adhering to the Federal Reserve policy, the Company may be required to provide financial



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support to its subsidiary banks at a time when, absent such Federal Reserve policy, the Company may not deem it advisable to provide such assistance.
Similarly, the Federal Reserve also monitors the financial performance and prospects of non-bank subsidiaries with an inspection process to ascertain whether such non-banking subsidiaries enhance or detract from the Companys ability to serve
as a source of strength for its subsidiary banks.

Capital Requirements.

The holding company is subject to regulatory capital requirements imposed by the Federal Reserve applied on a consolidated basis with banks owned by the
holding company. Bank holding companies must have capital (as defined in the rules) equal to eight (8) percent of risk-weighted assets. The risk weights assigned to assets are based primarily on credit risk. For example, securities with an
unconditional guarantee by the United States government are assigned the least risk category. A risk weight of 50% is assigned to loans secured by owner-occupied one-to-four family residential mortgages. The aggregate amount of assets assigned to
each risk category is multiplied by the risk weight assigned to that category to determine the weighted values, which are added together to determine total risk-weighted assets.

The Federal Reserve also requires the maintenance of minimum capital leverage ratios to be used in tandem with the risk-based guidelines in assessing the
overall capital adequacy of bank holding companies. The guidelines define capital as either Tier 1 (primarily shareholder equity) or Tier 2 (certain debt instruments and a portion of the allowance for loan losses). Tier 1 capital for banking
organizations includes common equity, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock and qualifying cumulative perpetual preferred stock. (Cumulative perpetual preferred
stock is limited to 25 percent of Tier 1 capital.) Tier 1 capital excludes goodwill; amounts of mortgage servicing assets, nonmortgage servicing assets, and purchased credit card relationships that, in the aggregate, exceed 100 percent of Tier 1
capital; nonmortgage servicing assets and purchased credit card relationships that in the aggregate, exceed 25 percent of Tier 1 capital; all other identifiable intangible assets; and deferred tax assets that are dependent upon future taxable
income, net of their valuation allowance, in excess of certain limitations.

Effective June 30, 1998, the Federal Reserve has
established a minimum ratio of Tier 1 capital to total assets of 3.0 percent for strong bank holding companies (rated composite 1 under the BOPEC rating system of bank holding companies), and for bank holding companies that have
implemented the Boards risk-based capital measure for market risk. For all other bank holding companies, the minimum ratio of Tier 1 capital to total assets is 4.0 percent. Banking organizations with supervisory, financial, operational, or
managerial weaknesses, as well as organizations that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels. Higher capital ratios may be required for any bank holding company if
warranted by its particular circumstances or risk profile. Bank holding companies are required to hold capital commensurate with the level and nature of the risks, including the volume and severity of problem loans, to which they are exposed.



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As of December 31, 2005 the Company maintained Tier 1 and Total Risk-Based Capital Ratios of 11.53%
and 12.44% respectively. A more detailed analysis of the Companys capital and comparison to regulatory requirements is included in Note 12 in the audited financial statements included herein.

The Riegle-Neal Interstate Banking and Branching Efficiency Act.

Prior to the enactment of the Interstate Banking and Branching Efficiency Act of 1994 (the Riegle-Neal Act), interstate expansion of bank
holding companies was prohibited, unless such acquisition was specifically authorized by a statute of the state in which the target bank was located. Pursuant to the Riegle-Neal Act, effective September 29, 1995 an adequately capitalized and
adequately managed holding company may acquire a bank across state lines, without regard to whether such acquisition is permissible under state law. A bank holding company is considered to be adequately capitalized if it meets all
applicable federal regulatory capital standards.

While the Riegle-Neal Act precludes a state from entirely insulating its banks from
acquisition by an out-of-state holding company, a state may still provide that a bank may not be acquired by an out-of-state company unless the bank has been in existence for a specified number of years, not to exceed five years. Additionally, the
Federal Reserve is directed not to approve an application for the acquisition of a bank across state lines if: (i) the applicant bank holding company, including all affiliated insured depository institutions, controls or after the acquisition
would control, more than ten (10) percent of the total amount of deposits of all insured depository institutions in the United States (the ten percent concentration limit) or (ii) the acquisition would result in the holding
company controlling thirty (30) percent or more of the total deposits of insured depository institutions in any state in which the holding company controlled a bank or branch immediately prior to the acquisition (the thirty percent
concentration limit). States may waive the thirty percent concentration limit, or may make the limits more or less restrictive, so long as they do no discriminate against out-of-state bank holding companies.

The Riegle-Neal Act also provides that, beginning on June 1, 1997, banks located in different states may merge and operate the resulting institution
as a bank with interstate branches. However, a state may (i) prevent interstate branching through mergers by passing a law prior to June 1, 1997 that expressly prohibits mergers involving out-of-state banks, or (ii) permit such merger
transactions prior to June 1, 1997. Under the Riegle-Neal Act, an interstate merger transaction may involve the acquisition of a branch of an insured bank without the acquisition of the bank itself, but only if the law of the state in which the
branch is located permits this type of transaction.

Under the Riegle-Neal Act, a state may impose certain conditions on a branch of an
out-of-state bank resulting from an interstate merger so long as such conditions do not have the effect of discriminating against out-of-state banks or bank holding companies, other than on the basis of a requirement of nationwide reciprocal
treatment. The ten (10) percent concentration limit and the thirty (30) percent concentration limit described above, as well as the rights of the states to modify or waive the thirty (30) percent concentration limit, apply to
interstate bank mergers in the same manner as they apply to the acquisition of out-of-state banks.



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A bank resulting from an interstate merger transaction may retain and operate any office that any bank
involved in the transaction was operating immediately before the transaction. After completion of the transaction, the resulting bank may establish or acquire additional branches at any location where any bank involved in the transaction could have
established or acquired a branch. The Riegle-Neal Act also provides that the appropriate federal banking agency may approve an application by a bank to establish and operate an interstate branch in any state that has in effect a law that expressly
permits all out-of-state banks to establish and operate such a branch.

In response to the Riegle-Neal Act, effective June 1, 1997,
Georgia permitted interstate branching, although only through merger and acquisition. In addition, Georgia law provides that a bank may not be acquired by an out-of-state company unless the bank has been in existence for five years. Georgia has also
adopted the thirty percent concentration limit, but permits state regulators to waive it on a case-by-case basis.

The
Gramm-Leach-Bliley Act of 1999.

The Gramm-Leach-Bliley Act (the GLB Act) dramatically increases the ability of eligible
banking organizations to affiliate with insurance, securities, and other financial firms and insured depository institutions. The GLB Act permits eligible banking organizations to engage in activities and to affiliate with nonbank firms engaged in
activities that are financial in nature or incidental to such financial activities, and also includes some additional activities that are complementary to such financial activities.

The definition of activities that are financial in nature or that are incidental to such financial activities is handled by the GLB Act in two ways.
First, there is a laundry list of activities that are designated as financial in nature. Second, the authorization of new activities as financial in nature or incidental to a financial activity requires a consultative process between the Federal
Reserve Board and the Secretary of the Treasury with each having the authority to veto proposals of the other. The Federal Reserve Board has the discretion to determine what activities are complementary to financial activities.

The precise scope of the authority to engage in these new financial activities, however, depends on the type of banking organization, whether it is a
holding company, a subsidiary of a bank, or a bank. The GLB Act repealed two sections of the Glass-Stegall Act, Sections 20 and 32, which restricted affiliations between securities firms and banks. The GLB Act authorizes two types of banking
organizations to engage in expanded securities activities. The GLB Act authorizes a new type of bank holding company called a financial holding company to have a subsidiary company that engages in securities underwriting and dealing without
limitation as to the types of securities involved. The GLB Act also permits a bank to control a financial subsidiary that can engage in many of the expanded securities activities permitted for financial holding companies. However, additional
restrictions apply to bank financial subsidiaries.



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Since the Bank Holding Company Act of 1956, and its subsequent amendments, federal law has limited the
types of activities that are permitted for a bank holding company, and it is has also limited the types of companies that a bank holding company can control. The GLB Act retains the bank holding company regulatory framework, but adds a new provision
that authorizes enlarged authority for the new financial holding company form of organization to engage in any activity of a financial nature or incidental thereto. A new Section 4(k) of the Bank Holding Company Act provides that a financial
holding company may engage in any activity, and may acquire and retain shares of any company engaged in any activity, that the Federal Reserve Board in coordination with the Secretary of the Treasury determines by regulation or order to be financial
in nature or incidental to such financial activities, or is complementary to financial activities.

The GLB Act also amends the Bank
Holding Company Act to prescribe eligibility criteria for financial holding companies, defines the scope of activities permitted for bank holding companies that do not become financial holding companies, and establishes consequences for financial
holding companies that cease to maintain the status needed to qualify as a financial holding company.

There are three special criteria to
qualify for the enlarged activities and affiliation. First, all the depository institutions in the bank holding company organization must be well-capitalized. Second, all of the depository institutions of the bank holding company must be well
managed. Third, the bank holding company must have filed a declaration of intent with the Federal Reserve Board stating that it intends to exercise the expanded authority under the GLB Act and certify to the Federal Reserve Board that the bank
holding companys depository institutions meet the well-capitalized and well managed criteria. The GLB Act also requires the bank to achieve a rating of satisfactory or better in meeting community credit needs at the most recent examination of
such institution under the Community Reinvestment Act.

Once a bank holding company has filed a declaration of its intent to be a financial
holding company, as long as there is no action by the Federal Reserve Board giving notice that it is not eligible, the company may proceed to engage in the activities and enter into the affiliations under the large authority conferred by the GLB
Acts amendments to the Bank Holding Company Act. The holding company does not need prior approval from the Federal Reserve Board to engage in activities that the GLB Act identifies as financial in nature or that the Federal Reserve Board has
determined to be financial in nature or incidental thereto by order or regulation.

The GLB Act retains the basic structure of the Bank
Holding Company Act. Thus, a bank holding company that is not eligible for the expanded powers of a financial holding company is now subject to the amended Section 4(c)(8) of the Bank Holding Company Act which freezes the activities that are
authorized and defined as closely related to banking activities. Under this Section, a bank holding company is not eligible for the expanded activities permitted under new Section 4(k) and is limited to those specific activities previously
approved by the Federal Reserve Board.



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The GLB Act also addresses the consequences when a financial holding company that has exercised the
expanded authority fails to maintain its eligibility to be a financial holding company. The Federal Reserve Board may impose such limitations on the conduct or activities of a noncompliant financial holding company or any affiliate of that company
as the Board determines to be appropriate under the circumstances and consistent with the purposes of the Act.

The GLB Act is essentially
a dramatic liberalization of the restrictions placed on banks, especially bank holding companies, regarding the areas of financial businesses in which they are allowed to compete.

Regulation of Subsidiary Banks.

As a state-chartered bank, The First State Bank is examined and regulated by the Federal Deposit Insurance Corporation (FDIC) and the Georgia Department. The major functions of the FDIC with respect to
insured banks include paying depositors to the extent provided by law in the event an insured bank is closed without adequately providing for payment of the claim of depositors, acting as a receiver of state banks placed in receivership when so
appointed by state authorities, and preventing the continuance or development of unsound and unsafe banking practices. In addition, the FDIC also approves conversions, mergers, consolidations, and assumption of deposit liability transactions between
insured banks and noninsured banks or institutions to prevent capital or surplus diminution in such transactions where the resulting, continued or assumed bank is an insured nonmember state bank.

Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the federal Bank Holding Company Act on any extension of credit
to the bank holding company or any of its subsidiaries, on investment in the stock or other securities thereof and on the taking of such stock or securities as collateral for loans to any borrower. In addition, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in-arrangements in connection with any extension of credit or provision of any property or services.

The Georgia Department regulates all areas of the banks banking operations, including mergers, establishment of branches, loans, interest rates, and reserves. The Bank must have the approval of the Commissioner
to pay cash dividends, unless at the time of such payment:

a. the total classified assets at the most recent examination of such bank do
not exceed 80% of Tier 1 capital plus Allowance for Loan Losses as reflected at such examination;

b. the aggregate amount of dividends
declared or anticipated to be declared in the calendar year does not exceed 50% of the net profits, after taxes but before dividends, for the pervious calendar year; and

c. the ratio of Tier 1 Capital to Adjusted Total Assets shall not be less than six (6) percent.



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State chartered banks are also subject to State of Georgia banking and usury laws restricting the amount
of interest which it may charge in making loans or other extensions of credit.

Expansion through Branching, Merger or
Consolidation.

With respect to expansion, the banks were previously prohibited from establishing branch offices or facilities outside
of the county in which their main office was located, except:



| | (1) | in adjacent counties in certain situations, or
| | --- | ----------------------------------------------



| | (2) | by means of merger or consolidation with a bank which has been in existence for at least five years.
| | --- | ----------------------------------------------------------------------------------------------------

In addition, in the case of a merger or consolidation, the acquiring bank must have been in existence for at least 24 months prior to the merger. However, effective July 1, 1998, Georgia law permits, with
required regulatory approval, the establishment of de novo branches in an unlimited number of counties within the State of Georgia by the subsidiary bank(s) of bank holding companies then engaged in the banking business in the State of Georgia. This
law may result in increased competition in the market area of the Companys subsidiary banks.

Capital
Requirements.

The FDIC adopted risk-based capital guidelines that went into effect on December 31, 1990 for all FDIC insured state
chartered banks that are not members of the Federal Reserve System. Beginning December 31, 1992, all banks were required to maintain a minimum ratio of total capital to risk weighted assets of eight (8) percent of which at least four
(4) percent must consist of Tier 1 capital. Tier 1 capital of state chartered banks (as defined by the regulation) generally consists of: (i) common stockholders equity; (ii) qualifying noncumulative perpetual preferred stock and
related surplus; and (iii) minority interests in the equity accounts of consolidated subsidiaries. In addition, the FDIC adopted a minimum ratio of Tier 1 capital to total assets of banks, referred to as the leverage capital ratio of three
(3) percent if the FDIC determines that the institution is not anticipating or experiencing significant growth and has well-diversified risk, including no undue interest rate exposure, excellent asset quality, high liquidity, good earnings and,
in general is considered a strong banking organization, rated Composite 1 under the Uniform Financial Institutions Rating System (the CAMEL rating system) established by the Federal Financial Institutions Examination Council. All other
financial institutions are required to maintain leverage ratio of four (4) percent.

Effective October 1, 1998, the FDIC amended
its risk-based and leverage capital rules as follows: (1) all servicing assets and purchase credit card relationships (PCCRs) that are included in capital are each subject to a ninety percent (90%) of fair value limitation
(also known as a ten percent (10%) haircut); (2) the aggregate amount of all servicing assets and PCCRs included in capital cannot exceed 100% of Tier I capital; (3) the aggregate amount of nonmortgage servicing assets
(NMSAs) and PCCRS included in capital cannot exceed 25% of



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Tier 1 capital; and (4) all other intangible assets (other than qualifying PCCRS) must be deducted from Tier 1 capital.

Amounts of servicing assets and PCCRs in excess of the amounts allowable must be deducted in determining Tier 1 capital. Interest-only Strips receivable,
whether or not in security form, are not subject to any regulatory capital limitation under the amended rule.

FDIC
Insurance Assessments.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), enacted in December,
1991, provided for a number of reforms relating to the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions and improvement of accounting standards. One aspect of the act is the
requirement that banks will have to meet certain safety and soundness standards. In order to comply with the act, the Federal Reserve and the FDIC implemented regulations defining operational and managerial standards relating to internal controls,
loan documentation, credit underwriting, interest rate exposure, asset growth, director and officer compensation, fees and benefits, asset quality, earnings and stock valuation.

The regulations provide for a risk based premium system which requires higher assessment rates for banks which the FDIC determines pose greater risks to
the Bank Insurance Fund (BIF). Under the regulations, banks pay an assessment depending upon risk classification.

To arrive at
risk-based assessments, the FDIC places each bank in one of nine risk categories using a two step process based on capital ratios and on other relevant information. Each bank is assigned to one of three groups: (i) well capitalized,
(ii) adequately capitalized, or (iii) under capitalized, based on its capital ratios. The FDIC also assigns each bank to one of three subgroups based upon an evaluation of the risk posed by the bank. The three subgroups include
(i) banks that are financially sound with only a few minor weaknesses, (ii) banks with weaknesses which, if not corrected, could result in significant deterioration of the bank and increased risk to the BIF, and (iii) those banks that
pose a substantial probability of loss to the BIF unless corrective action is taken. FDICIA imposes progressively more restrictive constraints on operations management and capital distributions depending on the category in which an institution is
classified. As of December 31, 2005, The First State Bank met the definition of a well-capitalized institution.

Under FDICIA
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.



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Community Reinvestment Act.

The Company and the Bank are subject to the provisions of the Community Reinvestment Act of 1977, as amended (the CRA) and the federal banking
agencies regulations issued thereunder. Under the CRA, all banks and thrifts have a continuing and affirmative obligation, consistent with its safe and sound operation to help meet the credit needs for their entire communities, including low-
and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institutions discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA.

The CRA requires a depository institutions primary federal
regulator, in connection with its examination of the institution, to assess the institutions record of assessing and meeting the credit needs of the community served by that institution, including low- and moderate-income neighborhoods. The
regulatory agencys assessment of the institutions record is made available to the public. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the
records of each subsidiary depository institution of the applicant bank holding company, and such records may be the basis for denying the application.

The evaluation system used to judge an institutions CRA performance consists of three tests: (1) a lending test; (2) an investment test; and (3) a service test. Each of these tests will be applied
by the institutions primary federal regulator taking into account such factors as: (i) demographic data about the community; (ii) the institutions capacity and constraints; (iii) the institutions product offerings
and business strategy; and (iv) data on the prior performance of the institution and similarly-situated lenders.

In addition, a
financial institution will have the option of having its CRA performance evaluated based on a strategic plan of up to five years in length that it had developed in cooperation with local community groups. In order to be rated under a strategic plan,
the institution will be required to obtain the prior approval of its federal regulator.

The interagency CRA regulations provide that an
institution evaluated under a given test will receive one of five ratings for the test: (1) outstanding; (2) high satisfactory; (3) low satisfactory; (4) needs to improve; and (5) substantial noncompliance. An institution
will receive a certain number of points for its rating on each test, and the points are combined to produce an overall composite rating. Evidence of discriminatory or other illegal credit practices would adversely affect an institutions
overall rating. The First State Bank received a satisfactory rating as a result of its most recent CRA examination.

Anti-Terrorism Legislation.

In the wake of the tragic 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 (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against
specified financial transactions and account relationships as well as enhanced due diligence and know your customer standards in their dealings with foreign financial institutions and foreign customers. For example, the



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enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps:



| |  |  | to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | 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
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The USA PATRIOT Act requires financial institutions to establish anti-money laundering programs. The USA PATRIOT Act sets
forth minimum standards for these programs, including:



| |  |  | the development of internal policies, procedures, and controls;
| | - |  | ---------------------------------------------------------------



| |  |  | the designation of a compliance officer;
| | - |  | ----------------------------------------



| |  |  | an ongoing employee training program; and
| | - |  | -----------------------------------------



| |  |  | an independent audit function to test the programs.
| | - |  | ---------------------------------------------------

In
addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and
organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed to have violated the privacy
provisions of the Gramm-Leach-Bliley Act, as discussed above.



|Item 1A. | RISK FACTORS
|-------- | ------------

The following are certain risks that management believes are specific to our
business. This should not be viewed as an all inclusive list or in any particular order.



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Future loan losses may exceed our allowance for loan losses

We are subject to credit risk, which is the risk of losing principal or interest due to borrowers failure to repay loans in accordance with their
terms. A downturn in the economy or the real estate market in our market areas or a rapid change in interest rates could have a negative effect on collateral values and borrowers ability to repay. This deterioration in economic conditions
could result in losses to the Bank in excess of loan loss allowances. To the extent loans are not paid timely by borrowers, the loans are placed on non-accrual, thereby reducing interest income. To the extent loan charge-offs exceed our financial
models, increased amounts charged to the provision for loan losses would reduce income.

Rapidly changing interest rate environments could reduce our
net interest margin, net interest income, fee income and net income

Interest and fees on loans and securities, net of interest paid on
deposits and borrowings, are a large part of our net income. Interest rates are key drivers of our net interest margin and subject to many factors beyond the control of management. As interest rates change, net interest income is affected. Rapid
increases in interest rates in the future could result in interest expense increasing faster than interest income because of mismatches in financial instrument maturities. Further, substantially higher interest rates generally reduce loan demand and
may result in slower loan growth particularly in construction lending, an important factor in the Companys revenue growth over the years. Decreases or increases in interest rates could have a negative effect on the spreads between the interest
rates earned on assets and the rates of interest paid on liabilities, and therefore decrease net interest income. See Quantitative and Qualitative Disclosures about Market Risk.

Slower than anticipated growth in new branches and new product and service offerings could result in reduced net income

We have placed a strategic emphasis on expanding our branch network and product offerings. Executing this strategy carries risks of slower than
anticipated growth both in new branches and new products. New branches and products require a significant investment of both financial and personnel resources. Lower than expected loan and deposit growth in new investments can decrease anticipated
revenues and net income generated by those investments, and opening new branches and introducing new products could result in more additional expenses than anticipated and divert resources from current core operations.

The financial services industry is very competitive

We face competition in attracting and retaining deposits, making loans, and providing other financial services throughout our market area. Our competitors include other community banks, larger banking institutions, and a wide range of other
financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies and other non-bank businesses. Many of these competitors have substantially greater resources than us. For a more complete
discussion of our competitive environment, see Business  Competition in Item 1 above. If we are unable to compete effectively, we will lose market share and income from deposits, loans, and other products may be reduced.



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Inability to hire or retain certain key professionals, management and staff could adversely affect our revenues and
net income

We rely on key personnel to manage and operate our business, including major revenue generating functions such as our loan
and deposit portfolios. The loss of key staff may adversely affect our ability to maintain and manage these portfolios effectively, which could negatively effect our revenues. In addition, loss of key personnel could result in increased recruiting
and hiring expenses, which could cause a decrease in our net income.

No active trading market for the common stock may ever develop

There is no public market for our common stock and it does not trade on any national securities exchange or over the counter. We can give no assurance
that an active trading market will ever develop for the common stock. If an active trading market does not develop, you may not be able to sell your common stock when desired at a price that would be acceptable to you.



|Item 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None.



|Item 2. | PROPERTIES
|------- | ----------

The assets of the Company consist almost entirely of its equity ownership in The First
State Bank and First Metro Mortgage Co. The assets of First Metro Mortgage Co. consist almost entirely of loans originated and the proceeds of those loans when sold to investors. The assets of the Bank consist primarily of loans and investment
securities. However, it also owns the real estate and improvements thereon from which it conducts its banking operations. Those locations are more particularly described as follows:

4806 N. Henry Boulevard, Stockbridge, Georgia - This location houses the Banks main office, a two-story building containing 20,800 square
feet constructed in 1965. It is a full service bank facility equipped with an ATM machine and four lane drive-up service.

4800 N. Henry
Boulevard, Stockbridge, Georgia - This location houses the operations center for the Bank. It is a single story building constructed in 1999, consisting of 20,622 square feet.

295 Fairview Road, Ellenwood, Georgia - This is a full service banking location with ATM and drive-thru service. It is a single story building
containing 3,520 square feet.

114 John Frank Ward Boulevard, McDonough, Georgia - This site contains a 4,000 square foot single
story building with ATM and drive-thru service.



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1810 Hudson Bridge Road, Stockbridge, Georgia - This location contains a two-story facility
consisting of 4,787 square feet. The lower floor contains a full service banking location, with ATM and drive-thru service. The upper floor houses the operations of First Metro Mortgage Co.

4979 Bill Gardner Parkway, Locust Grove, GeorgiaThis location contains a one-story building consisting of 4,000 square feet, with ATM and
drive-thru service.

2316 Highway 155, McDonough, GeorgiaThis full service banking location is a single-story facility
consisting of approximately 5,500 square feet with ATM and drive-thru service.

The Bank also owns two additional parcels of land located
in Henry County at the intersection of Chambers Road and Jonesboro Road and at Highway 81 in McDonough.

The Bank conducts its own data
processing and owns the equipment used for that purpose. The Bank also owns the furniture, fixtures and equipment located on its premises and several automobiles.



|Item 3. | LEGAL PROCEEDINGS
|------- | -----------------

The Bank is involved in various legal actions from normal business activities.
Management believes that the liability, if any, arising from such actions will not have a material adverse effect on the Companys financial statements. Neither the Bank nor the Company is a party to any proceeding to which any director,
officer or affiliate of the issuer, or any owner of more than five percent (5%) of its voting stock is a party adverse to the Bank or the Company.



|Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

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

Part II



|Item 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY, PURCHASES OF EQUITY SECURITIES, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------

Stock Price and Dividends

There is no
established public trading market for the Companys common stock. It is not traded on an exchange or in the over-the-counter market. There is no assurance that an active market will develop for the Companys common stock in the future.
Therefore, management of the Company is furnished with only limited information concerning trades of the Companys common stock. The following table sets forth for each quarter during the most two recent fiscal years the number of shares traded
and the high and low per share sales price to the extent known to management.



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|               |  |                         |  |                              |       |                             |   |      
|-------------- |  | ----------------------- |  | ---------------------------- | ----- | --------------------------- | - | -----
|YEAR 2005      |  | NUMBER OF SHARES TRADED |  | HIGH SALES PRICE (Per Share) |       | LOW SALES PRICE (Per Share)
|First Quarter  |  | 9,779                   |  | $                            | 18.75 |                             | $ | 18.50
|Second Quarter |  | 16,756                  |  | $                            | 19.00 |                             | $ | 18.75
|Third Quarter  |  | 11,980                  |  | $                            | 20.00 |                             | $ | 19.00
|Fourth Quarter |  | 12,588                  |  | $                            | 20.00 |                             | $ | 19.50
|               |  |                         | 
|YEAR 2004      |  | NUMBER OF SHARES TRADED |  | HIGH SALES PRICE (Per Share) |       | LOW SALES PRICE (Per Share)
|First Quarter  |  | 7,610                   |  | $                            | 19.00 |                             | $ | 17.00
|Second Quarter |  | 4,885                   |  | $                            | 20.00 |                             | $ | 17.50
|Third Quarter  |  | 12,244                  |  | $                            | 18.00 |                             | $ | 17.50
|Fourth Quarter |  | 53,382                  |  | $                            | 19.00 |                             | $ | 17.50

The Company has historically paid dividends on an annual basis. Any declaration and payment of
dividends will be based on the Companys earnings, economic conditions, and the evaluation by the Board of Directors of other relevant factors. The Companys ability to pay dividends is dependent on cash dividends paid to it by the Bank
and by First Metro Mortgage Co. The ability of the Bank to pay dividends to the Company is restricted by applicable regulatory requirements. The following table sets forth cash dividends which have been declared and paid by the Company since
January 1, 2003:



|               |  |                                       |              
|-------------- |  | ------------------------------------- | -------------
|               |  | Cash Dividends Declared Per Share
($)
|Fiscal 2005    |  |                                       |              
|First Quarter  |  | $                                     | .09 per share
|Second Quarter |  | $                                     | .09 per share
|Third Quarter  |  | $                                     | .09 per share
|Fourth Quarter |  | $                                     | .22 per share
|Fiscal 2004    |  |                                       |              
|First Quarter  |  | $                                     | .09 per share
|Second Quarter |  | $                                     | .09 per share
|Third Quarter  |  | $                                     | .09 per share
|Fourth Quarter |  | $                                     | .14 per share
|Fiscal 2003    |  |                                       |              
|First Quarter  |  | $                                     | .08 per share
|Second Quarter |  | $                                     | .08 per share
|Third Quarter  |  | $                                     | .08 per share
|Fourth Quarter |  | $                                     | .14 per share



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##### Table of Contents

As of February 8, 2006, 7,151,684 shares of common stock were outstanding held of record by
approximately 567 persons (not including the number of persons or entities holding stock in nominee or street name through various brokerage houses).

The holders of the Companys common stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available. Funds for the payment of dividends of the Company are
primarily obtained from dividends paid by the Bank.

There are no shares of the Companys common stock that are subject to outstanding
options or warrants to purchase, or that are convertible into, common equity of the Company, and there were no sales of unregistered securities of the Company in 2005.

Issuer Purchases of Equity Securities

The Company did not purchase shares of the
Companys common stock during the quarter ended December 31, 2005.



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The following table presents selected historical consolidated financial information for
us and our subsidiaries and is derived from the consolidated financial statements and related notes included in this annual report. This information is only a summary and should be read in conjunction with our historical financial statements and
related notes.



|                                    |  |                                           |           |      |   |           |  |      |           |      |   |           |  |   |          
|----------------------------------- |  | ----------------------------------------- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                    |  | As of and For the Year Ended December 31,
|                                    |  | 2005                                      |           | 2004 |   | 2003      |  | 2002 |           | 2001
|Total Loans                         |  | $                                         | 518,114   |      | $ | 486,723   |  | $    | 418,637   |      | $ | 350,277   |  | $ | 304,688  
|Total Deposits                      |  |                                           | 545,247   |      |   | 470,313   |  |      | 427,033   |      |   | 420,149   |  |   | 436,664  
|Total Borrowings                    |  |                                           | 19,988    |      |   | 42,058    |  |      | 34,835    |      |   | 20,287    |  |   | 15,692   
|Total Assets                        |  |                                           | 631,033   |      |   | 570,528   |  |      | 515,137   |      |   | 489,153   |  |   | 496,185  
|Interest Income                     |  |                                           | 36,602    |      |   | 28,685    |  |      | 25,748    |      |   | 27,298    |  |   | 33,224   
|Interest Expense                    |  |                                           | 13,859    |      |   | 10,022    |  |      | 9,429     |      |   | 10,977    |  |   | 16,507   
|Net Interest Income                 |  |                                           | 22,743    |      |   | 18,663    |  |      | 16,319    |      |   | 16,321    |  |   | 16,717   
|Provision for Loan Losses           |  |                                           | 546       |      |   | 443       |  |      | 472       |      |   | 540       |  |   | 550      
|Net Interest Income After Provision |  |                                           | 22,197    |      |   | 18,220    |  |      | 15,847    |      |   | 15,781    |  |   | 16,167   
|Non-Interest Income                 |  |                                           | 3,983     |      |   | 4,322     |  |      | 5,531     |      |   | 4,546     |  |   | 4,644    
|Non-Interest Expense                |  |                                           | 10,239    |      |   | 9,548     |  |      | 9,417     |      |   | 9,134     |  |   | 8,782    
|Income Before Income Taxes          |  |                                           | 15,941    |      |   | 12,994    |  |      | 11,961    |      |   | 11,193    |  |   | 12,029   
|Provision for Income Taxes          |  |                                           | 5,665     |      |   | 4,611     |  |      | 4,225     |      |   | 3,859     |  |   | 4,056    
|Net Income                          |  |                                           | 10,276    |      |   | 8,383     |  |      | 7,736     |      |   | 7,334     |  |   | 7,973    
|Net Income Per Share                |  |                                           | 1.44      |      |   | 1.17      |  |      | 1.08      |      |   | 1.02      |  |   | 1.11     
|Cash Dividends Declared             |  |                                           | 0.49      |      |   | 0.41      |  |      | 0.38      |      |   | 0.35      |  |   | 0.38     
|Book Value Per Share                |  |                                           | 8.77      |      |   | 7.87      |  |      | 7.18      |      |   | 6.52      |  |   | 5.81     
|Weighted Average Shares             |  |                                           | 7,151,684 |      |   | 7,159,873 |  |      | 7,160,992 |      |   | 7,161,609 |  |   | 7,185,993



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QUARTERLY DATA



|                                                    |  |                                       |        |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|--------------------------------------------------- |  | ------------------------------------- | ------ | ------------ | - | ------------- |  | ------------ | ----- | ------------- | - | ------------ |  | ------------- | ----- | ------------ | - | ----- |  | - | ----- |  | - | -----
|                                                    |  | Years Ended December 31,             
|                                                    |  | 2005                                  |        | 2004        
|                                                    |  | FourthQuarter                         |        | ThirdQuarter |   | SecondQuarter |  | FirstQuarter |       | FourthQuarter |   | ThirdQuarter |  | SecondQuarter |       | FirstQuarter
|                                                    |  | (In thousands, except per share data)
|Interest income                                     |  | $                                     | 10,103 |              | $ | 9,600         |  | $            | 8,747 |               | $ | 8,152        |  | $             | 7,720 |              | $ | 7,257 |  | $ | 6,919 |  | $ | 6,789
|Interest expense                                    |  |                                       | 3,951  |              |   | 3,687         |  |              | 3,269 |               |   | 2,952        |  |               | 2,685 |              |   | 2,537 |  |   | 2,425 |  |   | 2,375
|                                                    |  |                                       |        |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|Net interest income                                 |  |                                       | 6,152  |              |   | 5,913         |  |              | 5,478 |               |   | 5,200        |  |               | 5,035 |              |   | 4,720 |  |   | 4,494 |  |   | 4,414
|Provision for loan losses                           |  |                                       | 70     |              |   | 155           |  |              | 160   |               |   | 161          |  |               | 45    |              |   | 103   |  |   | 145   |  |   | 150  
|                                                    |  |                                       |        |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|Net interest income after provision for loan losses |  |                                       | 6,082  |              |   | 5,758         |  |              | 5,318 |               |   | 5,039        |  |               | 4,990 |              |   | 4,617 |  |   | 4,349 |  |   | 4,264
|Noninterest income                                  |  |                                       | 927    |              |   | 1,055         |  |              | 1,011 |               |   | 990          |  |               | 1,039 |              |   | 1,080 |  |   | 1,148 |  |   | 1,055
|Noninterest expenses                                |  |                                       | 2,673  |              |   | 2,561         |  |              | 2,470 |               |   | 2,535        |  |               | 2,504 |              |   | 2,426 |  |   | 2,450 |  |   | 2,168
|                                                    |  |                                       |        |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|Income before income taxes                          |  |                                       | 4,336  |              |   | 4,252         |  |              | 3,859 |               |   | 3,494        |  |               | 3,525 |              |   | 3,271 |  |   | 3,047 |  |   | 3,151
|Provision for income taxes                          |  |                                       | 1,347  |              |   | 1,577         |  |              | 1,438 |               |   | 1,303        |  |               | 1,267 |              |   | 1,103 |  |   | 1,159 |  |   | 1,082
|                                                    |  |                                       |        |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|Net income                                          |  | $                                     | 2,989  |              | $ | 2,675         |  | $            | 2,421 |               | $ | 2,191        |  | $             | 2,258 |              | $ | 2,168 |  | $ | 1,888 |  | $ | 2,069
|                                                    |  |                                       |        |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|Earnings per share                                  |  | $                                     | .42    |              | $ | .37           |  | $            | .34   |               | $ | .31          |  | $             | 0.32  |              | $ | 0.30  |  | $ | 0.26  |  | $ | 0.29 
|                                                    |  |                                       |        |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      



|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following is a
discussion of our financial condition and the financial condition of our bank subsidiary, The First State Bank and our mortgage subsidiary, First Metro Mortgage Co. at December 31, 2005 and 2004 and the results of operations for the three years
in the period ended December 31, 2005. 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.



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A Warning About 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 by us,
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

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America as defined by the Public Company Accounting Oversight Board and conform to general practices within the
banking industry. Our significant accounting policies are described in the notes to the consolidated financial statements. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on
the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors that management believes to be reasonable under
the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the
reporting periods.

We believe the following are critical accounting policies that require the most significant estimates and assumptions that are
particularly susceptible to a significant change in the preparation of our financial statements.

Allowance for loan losses

A provision for loan losses is based on managements opinion of an amount that is adequate to absorb losses inherent in the existing loan portfolio. The allowance
for loan losses is established through a provision for loan losses based on managements evaluation of current economic conditions, volume and composition of the loan portfolio, the fair market value or the estimated net realizable value of
underlying collateral, historical charge off experience, the level of nonperforming and past due loans, and other indicators derived from reviewing the loan portfolio. The evaluation includes a review of all loans on which full collection may not be
reasonably assumed. Should the factors that are considered in determining the allowance for loan losses change over time, or should managements estimates prove incorrect, a different amount may be reported for the allowance and the associated
provision for loan losses. For example, if economic conditions in our market area experience an unexpected and adverse change, we may need to increase our allowance for loan losses by taking a charge against earnings in the form of an additional
provision for loan loss.



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Overview

The year
2005 was highlighted by continued loan and core deposit growth as Henry County continues to remain a growth leader in the metropolitan Atlanta area. Our loan portfolio grew in excess of $30 million, while our core deposit growth exceeded $60
million. Total deposits exceeded $74 million as we utilized wholesale deposits in addition to core deposits to fund our loan growth. We continued to remain the market leader as measured by deposits in Henry County, representing 33% market share as
of June 30, 2005. We reported net income of $10,275,922 in 2005 as compared to $8,383,164 in 2004 and $7,735,909 in 2003. As a result of continued growth in average earning assets, coupled with increases in the Prime lending rate, our net
interest margins increased to 3.90% at year end 2005, compared to 3.61% at year end 2004.

We believe that our continued branch expansion within the Henry
County market, as well as our commitment to quality customer service, will allow us to take advantage of this continued growth.



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Financial Condition at December 31, 2005 and 2004

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



|                                   |  |                        |         |      |   |        
|---------------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                                   |  | December 31,          
|                                   |  | 2005                   |         | 2004
|                                   |  | (Dollars in Thousands)
|Cash and due from banks            |  | $                      | 15,951  |      | $ | 17,106 
|Interest-bearing deposits in banks |  |                        | 388     |      |   | 330    
|Federal funds sold                 |  |                        | 9,600   |      |   |       
|Securities                         |  |                        | 72,702  |      |   | 54,241 
|Loans held for sale                |  |                        | 822     |      |   | 578    
|Loans, net                         |  |                        | 513,142 |      |   | 482,234
|Premises and equipment             |  |                        | 9,041   |      |   | 9,097  
|Other assets                       |  |                        | 9,387   |      |   | 6,942  
|                                   |  |                        |         |      |   |        
|                                   |  | $                      | 631,033 |      | $ | 570,528
|                                   |  |                        |         |      |   |        
|Total deposits                     |  | $                      | 545,247 |      | $ | 470,313
|Other borrowings                   |  |                        | 19,988  |      |   | 42,058 
|Other liabilities                  |  |                        | 3,050   |      |   | 1,891  
|Stockholders equity               |  |                        | 62,748  |      |   | 56,266 
|                                   |  |                        |         |      |   |        
|                                   |  | $                      | 631,033 |      | $ | 570,528
|                                   |  |                        |         |      |   |        

As of December 31, 2005, we had total assets of $631 million, an increase of 10.61% over December 31,
2004. Total interest-earning assets were $602 million at December 31, 2005 as compared to $542 million at December 31, 2004 or 95% of total assets, respectively. Our primary interest-earning assets at December 31, 2005 were loans,
which made up 86% of total interest-earning assets as compared to 90% at December 31, 2004. Increases of $74.9 million in deposit growth, offset by decreases in other borrowings of $22.0 million were primarily used to fund loan growth of $30.9
million as well as increasing the investment securities portfolio by $18.4 million, as well as federal funds sold by $9.6 million. Our total equity increased by $6.5 million year-to-date as net income of $10.3 million was offset by increased
unrealized losses on securities available-for-sale, net of tax of $290,000 and by dividends paid of $3.5 million.

The funding component of this change was
accomplished through the continued emphasis on raising core deposits as well as using alternative funding sources such as wholesale certificates of deposit, Federal Home Loan Bank Advances and other short term borrowings. The Company is favorably
positioned for moderate increases in interest rates and will continue to accept opportunity cost in the short term to preserve earnings stability for the long term.

The securities portfolio provides the Company with a source of liquidity and a relatively stable source of income. The Companys investment policy focuses on the use of the securities portfolio to manage the
interest rate risk created by the inherent mismatch of the loan and deposit portfolios. The Companys asset/liability management committee meets quarterly to review economic trends and makes recommendations as to the structure of the securities
portfolio based upon this review and the Companys projected funding needs. The Companys securities portfolio continued to shorten in duration during 2005 as maturities and pay downs were being used to facilitate the funding of loans.



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Our securities portfolio, consisting of U.S. Government and Agency, mortgage-backed, municipal and equity securities
amounted to $73 million at December 31, 2005. Unrealized losses on securities available-for-sale were $605,274 at December 31, 2005 as compared to unrealized losses of $165,627 at December 31, 2004. Unrealized gains on securities
held-to-maturity were $1,381 at December 31, 2005 as compared to $10,916 at December 31, 2004. 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.

Since lending activities generate the primary source of revenue,
the Companys main objective is to adhere to sound lending practices. The Board of Directors has delegated loan policy decisions and loan approval authority to the Executive Committee of the Board of Directors. The Executive Committee is
composed of five outside directors and the Chief Executive Officer. The Executive Committee establishes lending policies that include underwriting guidelines on the various types of loans made as well as guidance on loan terms. The Company employs a
loan approval process in which individual loan officers are provided with independent approval authority based upon their experience and training. When prospective loans are analyzed, both interest rate and credit quality objectives are considered
in determining whether to make a given loan. Parameters are set on the amount of credit that can be extended to one borrower. The largest amount that can generally be extended to any one borrower without obtaining approval from the Executive
Committee of the Board of Directors is $150,000. The Executive Committee is authorized to extend credit to one borrower on an unsecured basis of up to 15% of statutory capital or approximately $6.0 million and on a secured basis of up to 25% of
statutory capital or approximately $10 million.

The Bank offers a variety of loans to retail customers in the communities we serve.

Consumer Loans:

Consumer loans in general carry a moderate degree of
risk compared to other loans. They are generally more risky than traditional residential real estate but less risky than commercial loans. Risk of default is generally determined by the well being of the national and local economies. During times of
economic stress there is usually some level of job loss both nationally and locally, which directly affects the ability of the consumer to repay debt. Risk on consumer type loans is generally managed through policy limitations on debt levels
consumer borrowers may carry and limitations on loan terms and amounts depending upon collateral type.

Various types of consumer loans include the
following:



| |  |  | Home equity loans - open and closed end
| | - |  | ---------------------------------------



| |  |  | Vehicle financing
| | - |  | -----------------



| |  |  | Loans secured by deposits
| | - |  | -------------------------



| |  |  | Secured and unsecured personal loans
| | - |  | ------------------------------------

The various types of consumer loans
all carry varying degrees of risk for the Bank. Loans secured by deposits carry little or no risk and in our experience have had a zero default rate. Home equity lines carry additional risk because of the increased difficulty of converting real
estate to cash in the event of a default. However, underwriting policy provides mitigation to this risk in the form of a maximum loan to value ratio of 90% on a



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collateral type that has historically appreciated in value. The Bank also requires the customer to carry adequate insurance coverage to pay all mortgage debt
in full if the collateral is destroyed. Vehicle financing carries additional risks over loans secured by real estate in that the collateral is declining in value over the life of the loan and is mobile. Risks inherent in vehicle financing are
managed by matching the loan term with the age and remaining useful life of the collateral to ensure the customer always has an equity position and is never upside down. Collateral is protected by requiring the customer to carry
insurance showing the bank as loss payee. The Bank also has a blanket policy that covers the Bank in the event of a lapse in the borrowers coverage and also provides assistance in locating collateral when necessary. Secured personal loans
carry additional risks over the previous types in that they are generally smaller and made to borrowers with somewhat limited financial resources and credit histories. These loans are secured by a variety of collateral with varying degrees of
marketability in the event of default. Risk on these types of loans is managed primarily at the underwriting level with guidelines for debt to income ratio limitations and conservative collateral valuations. Unsecured personal loans carry the
greatest degree of risk in the consumer portfolio. Without collateral, the Bank is completely dependent on the commitment of the borrower to repay and the stability of the borrowers income stream. Again, primary risk management occurs at the
underwriting stage with guidelines for debt to income ratios, time in present job and in industry and policy guidelines relative to loan size as a percentage of net worth and liquid assets.

Commercial and Industrial Loans

The Bank makes loans to small and
medium sized businesses in our primary trade area for purposes such as new or upgrades to plant and equipment, inventory acquisition and various working capital purposes. Commercial loans are granted to borrowers based on cash flow, ability to repay
and degree of management expertise. This type loan may be subject to many different types of risk, which will differ depending on the particular industry the borrower is involved with. General risks to an industry, or segment of an industry, are
monitored by senior management on an ongoing basis, when warranted. Individual borrowers who may be at risk due to an industry condition may be more closely analyzed and reviewed at a Loan Committee or Board of Directors level. On a regular basis,
commercial and industrial borrowers are required to submit statements of financial condition relative to their business to the Bank for review. These statements are analyzed for trends and the loan is assigned a credit grade accordingly. Based on
this grade the loan may receive an increased degree of scrutiny by management up to and including additional loss reserves being required.

This type loan
is almost always collateralized. Generally, business assets are used and may consist of general intangibles, inventory, equipment or real estate. Collateral is subject to risk relative to conversion to a liquid asset if necessary as well as risks
associated with degree of specialization, mobility and general collectibility in a default situation. To mitigate this risk to collateral, it is underwritten to strict standards including valuations and general acceptability based on the Banks
ability to monitor its ongoing health and value.

Commercial Real Estate:

The Bank grants loans to borrowers secured by commercial real estate located in our market area. In underwriting these type loans we consider the historic and projected future cash flows of the real estate, we make an
assessment of the physical condition and general location of the property and the effect these factors will have on its future desirability from a tenant standpoint. We will generally lend up to a maximum 75% loan to value ratio and require a
minimum debt coverage ratio of 1.25% or other compensating factors.

Commercial real estate offers some risks not found in traditional residential real
estate lending. Repayment is dependent upon successful management and marketing of properties and on the level of expense necessary to maintain the property. Repayment of these loans may be adversely affected by conditions in the real estate



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market or the general economy. Also commercial real estate loans typically involve relatively large loan balances to single borrowers. To mitigate these
risks, we monitor our loan concentration and loans are audited by a third party auditor. This type loan generally has a shorter maturity than other loan types giving the Bank an opportunity to reprice, restructure or decline to renew the credit. As
with other loans, commercial real estate loans are graded depending upon strength of credit and performance. A lower grade will bring increased scrutiny by management and the Board of Directors.

Construction and Development Loans:

The Bank makes residential
construction and development loans to customers in our market area. Loans are granted for both speculative projects and those being built with end buyers already secured. This type loan is subject primarily to market and general economic risk caused
by inventory build-up in periods of economic prosperity. During times of economic stress this type loan has typically had a greater degree of risk than other loan types. To mitigate that risk, the Board of Directors and management reviews the entire
portfolio on a monthly basis. The percentage of our portfolio being built on a speculative basis is tracked very closely. On a quarterly basis the portfolio is segmented by market area to allow analysis of exposure and a comparison to current
inventory levels in these areas. To further mitigate risk, this type loan is accorded a larger percentage loan loss allowance than other loan types. Loan policy also provides for limits on speculative lending by borrower and by real estate project.

Loan Participations:

The Bank sells loan
participations in the ordinary course of business when an originated loan exceeds its legal lending limit as defined by state banking laws. These loan participations are sold to other financial institutions without recourse. (As of December 31,
2005 the Bank had no loan participations sold).

The Bank will also purchase loan participations from time to time from other banks in the ordinary
course of business usually without recourse. Purchased loan participations are underwritten in accordance with the Banks loan policy and represent a source of loan growth to the Bank. Although the originating financial institution provides
much of the initial underwriting documentation, management is responsible for the appropriate underwriting, approval and the on-going evaluation of the loan. One risk associated with purchasing loan participations is that the Bank often relies on
information provided by the selling bank regarding collateral value and the borrowers capacity to pay. To the extent this information is not accurate, the Bank may experience a loss on these participations. Otherwise, the Bank believes that
the risk related to purchased loan participations is consistent with other similar type loans in the loan portfolio. If a purchased loan participation defaults, the Bank usually has no recourse against the selling bank but will take other
commercially reasonable steps to minimize its loss. (As of December 31, 2005, the Bank had purchased 31 loan participations. The total principal amount of these participations comprised 9.70% of our total portfolio on December 31, 2005).

Through the Companys mortgage subsidiary, First Metro Mortgage Co., first mortgage loans are originated for immediate sale to investors. The loans
are sold with servicing rights attached; therefore, no servicing rights are retained by the Company. Gains and losses on the sale of loans are recognized at the settlement date and are determined by the difference between the selling price and the
carrying value of the loans sold.

All loans originated by First Metro Mortgage Co. are classified as loans held for sale on the balance sheet because of
the intention to immediately sell these loans. The balance of the loans held for sale represents individual mortgage loans that have been funded for which proceeds from, the investor have not yet been received. Loans held for sale are carried at the
lower of aggregate cost or fair value.



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However, because the proceeds from the investors for the sale of these loans are usually received within fourteen days,
the aggregate cost and fair value of these loans are the same.

For the year ended December 31, 2005, First Metro Mortgage Co. originated 268 loans
totaling $38 million. These mortgage banking activities are performed exclusively by First Metro Mortgage Co. No similar activities are conducted at the Bank level. All loans originated by the Bank are classified as held for investment.

We have 91% of our loan portfolio collateralized by real estate located in our primary market area of Henry County, Georgia and surrounding counties. Our real estate
mortgage portfolio consists of loans collateralized by one to four-family and multifamily residential properties (10%), construction loans to build one to four-family and multifamily residential properties (55%), and nonresidential properties
consisting primarily of small business commercial properties (35%).

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 monthly basis by management and periodically by State and Federal regulatory authorities. As determined under
guidelines established by regulatory authorities and internal policy, our liquidity ratio of 15% at December 31, 2005 was considered satisfactory.

At
December 31, 2005, we had loan commitments outstanding of $104 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. We had arrangements with two commercial banks for additional short-term advances of $31.6 million,
of which none had been drawn upon as of December 31, 2005. We also have the ability to borrow up to $102 million, subject to available collateral, from the Federal Home Loan Bank.

At December 31, 2005, our capital ratios were considered adequate based on regulatory minimum capital requirements. Stockholders' equity increased in 2005 by $6.5 million as net income of $10.3 million was offset
by a decrease in other comprehensive income related to our securities available-for-sale of $290,167, and by dividends paid of $3.5 million. 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, 2005, the Bank could pay dividends of $5.2 million without regulatory approval.



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The minimum capital requirements to be considered well capitalized under prompt corrective action provisions and the
actual capital ratios for Henry County Bancshares, Inc. and the Bank as of December 31, 2005 are as follows:



|                           |  |              |   |  |       |   |  |                        |  
|-------------------------- |  | ------------ | - |  | ----- | - |  | ---------------------- | -
|                           |  | Actual       |  
|                           |  | Consolidated |   |  | Bank  |   |  | RegulatoryRequirements |  
|Leverage capital ratio     |  | 9.73         | % |  | 9.60  | % |  | 5.00                   | %
|Risk-based capital ratios: |  |              |   |  |       |   |  |                        |  
|Core capital               |  | 11.53        |   |  | 11.37 |   |  | 6.00                   |  
|Total capital              |  | 12.44        |   |  | 12.28 |   |  | 10.00                  |  

These ratios may decline as asset growth continues, but are expected to exceed the regulatory minimum requirements
to be considered well-capitalized. Anticipated future earnings will assist in keeping these ratios at satisfactory levels above the regulatory minimum requirement to be considered well-capitalized.

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.

We do not engage in any transactions or have relationships or other arrangements with an unconsolidated entity. These include special purpose and similar entities or other off-balance sheet arrangements. We also do not trade in energy,
weather or other commodity based contracts.



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Results of Operations For The Years Ended December 31, 2005, 2004 and 2003

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



|                          |  |                          |        |      |   |        |  |   |       
|------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                          |  | Years Ended December 31,
|                          |  | 2005                     |        | 2004 |   | 2003  
|                          |  | (Dollars in Thousands)  
|Interest income           |  | $                        | 36,602 |      | $ | 28,685 |  | $ | 25,748
|Interest expense          |  |                          | 13,859 |      |   | 10,022 |  |   | 9,429 
|                          |  |                          |        |      |   |        |  |   |       
|Net interest income       |  |                          | 22,743 |      |   | 18,663 |  |   | 16,319
|Provision for loan losses |  |                          | 546    |      |   | 443    |  |   | 472   
|Other income              |  |                          | 3,983  |      |   | 4,322  |  |   | 5,531 
|Other expenses            |  |                          | 10,239 |      |   | 9,548  |  |   | 9,417 
|                          |  |                          |        |      |   |        |  |   |       
|Pretax income             |  |                          | 15,941 |      |   | 12,994 |  |   | 11,961
|Income taxes              |  |                          | 5,665  |      |   | 4,611  |  |   | 4,225 
|                          |  |                          |        |      |   |        |  |   |       
|Net income                |  | $                        | 10,276 |      | $ | 8,383  |  | $ | 7,736 
|                          |  |                          |        |      |   |        |  |   |       

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 increased to 3.90% in 2005 from 3.61% in 2004. The average yield on interest-earning assets increased to 6.27% in 2005 from 5.55 % in 2004. The average yield on interest-bearing liabilities increased to 3.05% in 2005
from 2.50 % in 2004. By increasing higher yielding loan assets, we were able to increase our net interest income during 2005.

The net yield on
average interest-earning assets increased to 3.61% in 2004 from 3.57% in 2003. The average yield on interest-earning assets decreased to 5.55% in 2004 from 5.63% in 2003. The average yield on interest-earning liabilities decreased to 2.50% in 2004
from 2.67% in 2003.

Net interest income increased by $4.1 million in 2005 as compared to an increase of $2.3 million in 2004 and a decrease of $2,000 in
2003 compared to 2002. The increase in 2005 was attributed to an overall increase in average interest-earning assets, coupled with increases in the Prime lending rate since December 2004.



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Provision for Loan Losses

The provision for loan losses increased by $103,150 to $546,150 in 2005 and decreased by $29,500 to $443,000 in 2004. The amounts provided are due primarily to our
assessment of the inherent risk in the loan portfolio. Please see the section titled Allowance for Loan Losses for a more detailed explanation of our assessment criteria as it relates to providing for loan losses. We believe that the
$4.9 million in the allowance for loan losses at December 31, 2005, or .96% of total net outstanding loans and the $4.5 million in the allowance for loan losses at December 31, 2004, or .92% of total net outstanding loans, are adequate at
their respective dates to absorb known risks in the portfolio based upon our historical experience. Our net charge-offs were minimal in 2005, 2004 and 2003 as the ratio of charged-off loan to average loans outstanding was .01%, .03% and .03%,
respectively. 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 income consists
of service charges on deposit accounts, other service charges and fees, gain on sale of land and mortgage banking income. Other income was $4.0 million in 2005 as compared to $4.3 million in 2004. The decrease is due primarily to decreased service
charges on deposit accounts of $372,000, as well as less significant decreases in mortgage banking income of $122,000. Decreases in service charges on deposit accounts can be attributed in part to the introduction of two non-service charge demand
deposit accounts during 2005.

Other income was $4.3 million in 2004 as compared to $5.5 million in 2003. The decrease is due primarily to decreased
mortgage banking income earned by First Metro Mortgage Co. of $916,000, as well as less significant decreases in service charges on deposit accounts of $70,000. Mortgage banking income decreased significantly as a result of the slow down in mortgage
re-financings during 2004.

Other Expenses

Other expenses were $10.2 million in 2005 as compared to $9.5 million in 2004, an increase of $690,627. Gross salaries and employee benefits increased by $541,666, primarily as a result of normal salary and
incentive increases of $388,000 coupled with decreases in capitalized loan fees in the amount of $154,000. The number of full time equivalent employees was 150 at December 31, 2005 as compared to 145 at December 31, 2004. Salaries and
employee benefits, net of capitalized loan fees of $1.3 million, amounted to $5.8 million at December 31, 2004 as compared to $5.8 million at December 31, 2003. Equipment and occupancy expenses increased by $109,552 in 2005 as
compared to 2004, primarily as a result of increased computer and fixtures depreciation expense as a result of the Company upgrading its ATM network during 2005. Other operating expenses increased by only $39,409 as there was no significant increase
or decrease in individual other operating expense accounts, other than the costs normally associated with continued growth.

The increase in other expenses
to $9.5 million in 2004 from $9.4 million in 2003 was due to increased salary and employee benefits of $36,379 increased equipment and occupancy expense of $93,417 and increased other operating expenses of $1,155.



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Income Tax

Income tax expense was $5.6 million in 2005 as compared to $4.6 million in 2004. The increase is due to higher pretax income, in addition to a lower volume of nontaxable securities held in the securities portfolio.
Income tax expense as a percentage of pretax income was 36% at December 31, 2005 and 35% at December 31, 2004.

The increase in income tax
expense to $4.6 million in 2004 from $4.2 million in 2003 was due to higher pretax income and to a lower volume of nontaxable securities. Income tax as a percentage of pretax income was 35% in 2004 and 2003.



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SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA

The tables and schedules on the following pages set forth certain financial information and statistical data with respect to: the distribution of assets, liabilities and
stockholders equity; interest rates and interest differentials; interest rate sensitivity gap ratios; the securities portfolio; the loan portfolio; including types of loans, maturities and sensitivities 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.

The following table sets forth the amount of our interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest yield/rate for total interest-earning assets and
total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets.



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Table 1 - Distribution of Assets, Liabilities and Stockholders Equity Interest Rates and Interest Differentials



|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|-------------------------------------------- |  | ------------------------ | ------- | - | -------------- | - | ------------ | ---- | ---- | ------------------ |  | - | -------------- | - | ------------ | - | ------ | ------------------ | ---- | - | -------------- | - | ------------ | - |  | - | ------ |  | ---- | -
|                                             |  | Years Ended December 31, |        
|                                             |  | 2005                     |         |   | 2004           |   |              | 2003 |     
|                                             |  | AverageBalances(1)       |         |   | Income/Expense |   | Yields/Rates |      |      | AverageBalances(1) |  |   | Income/Expense |   | Yields/Rates |   |        | AverageBalances(1) |      |   | Income/Expense |   | Yields/Rates |  
|                                             |  | (Dollars in Thousands)   |        
|Taxable securities                           |  | $                        | 52,793  |   |                | $ | 1,639        |      | 3.10 | %                  |  | $ | 46,995         |   |              | $ | 1,365  |                    | 2.90 | % |                | $ | 45,133       |   |  | $ | 1,340  |  | 2.97 | %
|Nontaxable securities (4)                    |  |                          | 5,677   |   |                |   | 226          |      | 3.98 | %                  |  |   | 7,615          |   |              |   | 325    |                    | 4.27 |   |                |   | 11,019       |   |  |   | 447    |  | 4.06 |  
|Federal funds sold                           |  |                          | 13,895  |   |                |   | 495          |      | 3.56 | %                  |  |   | 6,115          |   |              |   | 82     |                    | 1.34 |   |                |   | 21,574       |   |  |   | 218    |  | 1.01 |  
|Interest-bearing deposits in banks           |  |                          | 521     |   |                |   | 15           |      | 2.88 | %                  |  |   | 351            |   |              |   | 7      |                    | 1.99 |   |                |   | 810          |   |  |   | 23     |  | 2.84 |  
|Loans (2) (3)                                |  |                          | 510,733 |   |                |   | 34,226       |      | 6.70 | %                  |  |   | 455,993        |   |              |   | 26,906 |                    | 5.90 |   |                |   | 378,992      |   |  |   | 23,720 |  | 6.26 |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Total interest-earning assets                |  |                          | 583,619 |   |                |   | 36,601       |      | 6.27 | %                  |  |   | 517,069        |   |              |   | 28,685 |                    | 5.55 |   |                |   | 457,528      |   |  |   | 25,748 |  | 5.63 |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Unrealized gains (losses) on securities      |  |                          | (426    | ) |                |   |              |      |      |                    |  |   | 173            |   |              |   |        |                    |      |   |                |   | 636          |   |  |   |        |  |      |  
|Allowance for loan losses                    |  |                          | (4,782  | ) |                |   |              |      |      |                    |  |   | (4,394         | ) |              |   |        |                    |      |   |                |   | (4,061       | ) |  |   |        |  |      |  
|Cash and due from banks                      |  |                          | 19,822  |   |                |   |              |      |      |                    |  |   | 21,002         |   |              |   |        |                    |      |   |                |   | 22,915       |   |  |   |        |  |      |  
|Other assets                                 |  |                          | 17,934  |   |                |   |              |      |      |                    |  |   | 18,095         |   |              |   |        |                    |      |   |                |   | 14,339       |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Total                                        |  | $                        | 616,167 |   |                |   |              |      |      |                    |  | $ | 551,945        |   |              |   |        |                    |      |   |                | $ | 491,357      |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Interest-bearing demand & savings            |  | $                        | 153,669 |   |                |   | 3,204        |      | 2.09 | %                  |  | $ | 138,513        |   |              |   | 2,113  |                    | 1.53 |   |                | $ | 122,672      |   |  |   | 1,759  |  | 1.43 |  
|Time                                         |  |                          | 278,152 |   |                |   | 9,609        |      | 3.45 | %                  |  |   | 231,004        |   |              |   | 6,761  |                    | 2.93 |   |                |   | 210,406      |   |  |   | 6,765  |  | 3.22 |  
|Borrowings                                   |  |                          | 22,759  |   |                |   | 1,046        |      | 4.60 | %                  |  |   | 30,939         |   |              |   | 1,148  |                    | 3.71 |   |                |   | 19,669       |   |  |   | 905    |  | 4.60 |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Total interest-bearing liabilities           |  |                          | 454,580 |   |                |   | 13,859       |      | 3.05 | %                  |  |   | 400,456        |   |              |   | 10,022 |                    | 2.50 |   |                |   | 352,747      |   |  |   | 9,429  |  | 2.67 |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Noninterest-bearing demand                   |  |                          | 97,100  |   |                |   |              |      |      |                    |  |   | 93,034         |   |              |   |        |                    |      |   |                |   | 86,162       |   |  |   |        |  |      |  
|Other liabilities                            |  |                          | 4,484   |   |                |   |              |      |      |                    |  |   | 4,049          |   |              |   |        |                    |      |   |                |   | 3,048        |   |  |   |        |  |      |  
|Stockholders equity                         |  |                          | 60,003  |   |                |   |              |      |      |                    |  |   | 54,406         |   |              |   |        |                    |      |   |                |   | 49,400       |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Total                                        |  | $                        | 616,167 |   |                |   |              |      |      |                    |  | $ | 551,945        |   |              |   |        |                    |      |   |                | $ | 491,357      |   |  |   |        |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Net interest income                          |  |                          |         |   |                | $ | 22,742       |      |      |                    |  |   |                |   |              | $ | 18,663 |                    |      |   |                |   |              |   |  | $ | 16,319 |  |      |  
|                                             |  |                          |         |   |                |   |              |      |      |                    |  |   |                |   |              |   |        |                    |      |   |                |   |              |   |  |   |        |  |      |  
|Net interest spread                          |  |                          |         |   |                |   |              |      | 3.22 | %                  |  |   |                |   |              |   |        |                    | 3.04 | % |                |   |              |   |  |   |        |  | 2.96 | %
|Net yield on average interest-earning assets |  |                          |         |   |                |   |              |      | 3.90 | %                  |  |   |                |   |              |   |        |                    | 3.61 | % |                |   |              |   |  |   |        |  | 3.57 | %



|(1) | Average balances were determined using the daily average balances.
|--- | ------------------------------------------------------------------



|(2) | Average balances of loans include nonaccrual loans.
|--- | ---------------------------------------------------



|(3) | Interest and fees on loans include $223,000, $218,000, and $207,000 of loan fee income for the years ended December 31, 2005, 2004, and 2003, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Yields on nontaxable securities are not presented on a tax-equivalent basis.
|--- | ----------------------------------------------------------------------------

Table 2 - 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 years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes
attributable to (1) change in volume (change in volume multiplied by old rate); (2) change in rate (change in rate multiplied by old volume); and (3) a combination of change in rate and change in volume. The changes in interest income
and interest expense attributable to both volume and rate have been allocated proportionately to the change due to volume and the change due to rate.



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|                                                                  |  |                                      |       |   |                                      |   |       |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |       |  
|----------------------------------------------------------------- |  | ------------------------------------ | ----- | - | ------------------------------------ | - | ----- | --- |  | - | ----- | - |  | ------ | ----- | - | --- | - | ------ | - |  | - | ----- | -
|                                                                  |  | Years Ended December 31,             |      
|                                                                  |  | 2005 to 2004                         |       |   | 2004 to 2003                         |  
|                                                                  |  | Increase (decrease) due to change in |       |   | Increase (decrease) due to change in |  
|                                                                  |  | Rate                                 |       |   | Volume                               |   |       | Net |  |   | Rate  |   |  | Volume |       |   | Net |  
|                                                                  |  | (Dollars in Thousands)               |      
|Income from interest-earning assets:                              |  |                                      |       |   |                                      |   |       |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |       |  
|Interest and fees on loans                                        |  | $                                    | 3,436 |   |                                      | $ | 3,884 |     |  | $ | 7,320 |   |  | $      | 4,604 |   |     | $ | (1,418 | ) |  | $ | 3,186 |  
|Interest on taxable securities                                    |  |                                      | 176   |   |                                      |   | 98    |     |  |   | 274   |   |  |        | 54    |   |     |   | (29    | ) |  |   | 25    |  
|Interest on nontaxable securities                                 |  |                                      | (78   | ) |                                      |   | (21   | )   |  |   | (99   | ) |  |        | (144  | ) |     |   | 22     |   |  |   | (122  | )
|Interest on federal funds sold                                    |  |                                      | 179   |   |                                      |   | 234   |     |  |   | 413   |   |  |        | (191  | ) |     |   | 55     |   |  |   | (136  | )
|Interest on interest-bearing deposits in banks                    |  |                                      | 4     |   |                                      |   | 4     |     |  |   | 8     |   |  |        | (10   | ) |     |   | (6     | ) |  |   | (16   | )
|                                                                  |  |                                      |       |   |                                      |   |       |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |       |  
|Total interest income                                             |  |                                      | 3,717 |   |                                      |   | 4,199 |     |  |   | 7,916 |   |  |        | 4,313 |   |     |   | (1,376 | ) |  |   | 2,937 |  
|                                                                  |  |                                      |       |   |                                      |   |       |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |       |  
|Expense from interest-bearing liabilities:                        |  |                                      |       |   |                                      |   |       |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |       |  
|Interest on interest-bearing demand deposits and savings deposits |  |                                      | 251   |   |                                      |   | 840   |     |  |   | 1,091 |   |  |        | 237   |   |     |   | 117    |   |  |   | 354   |  
|Interest on time deposits                                         |  |                                      | 1,662 |   |                                      |   | 1,186 |     |  |   | 2,848 |   |  |        | 631   |   |     |   | (635   | ) |  |   | (4    | )
|Interest on borrowings                                            |  |                                      | (342  | ) |                                      |   | 240   |     |  |   | (102  | ) |  |        | 443   |   |     |   | (200   | ) |  |   | 243   |  
|                                                                  |  |                                      |       |   |                                      |   |       |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |       |  
|Total interest expense                                            |  |                                      | 1,571 |   |                                      |   | 2,266 |     |  |   | 3,837 |   |  |        | 1,311 |   |     |   | (718   | ) |  |   | 593   |  
|                                                                  |  |                                      |       |   |                                      |   |       |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |       |  
|Net interest income                                               |  | $                                    | 2,146 |   |                                      | $ | 1,933 |     |  | $ | 4,079 |   |  | $      | 3,002 |   |     | $ | (658   | ) |  | $ | 2,344 |  
|                                                                  |  |                                      |       |   |                                      |   |       |     |  |   |       |   |  |        |       |   |     |   |        |   |  |   |       |  

Asset/Liability Management

Our asset/liability mix is monitored on a regular basis and a report evaluating the interest rate sensitive assets and interest rate sensitive liabilities is prepared and presented to the Board of Directors on a
quarterly 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 adversely affect net interest income, 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 adversely affect net interest income. 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.



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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 the amount of 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 which would negatively affect our liquidity position.

At December 31, 2005 our cumulative one year interest rate sensitivity gap ratio was 114%. Our targeted ratio is 80% to 120% in this
time horizon. This indicates that our interest-earning assets will reprice during this period at a rate faster than our interest-bearing liabilities.

The following table sets forth the distribution of the repricing of our interest-earning assets and interest-bearing liabilities as of December 31, 2005, the interest rate sensitivity gap (i.e., interest rate
sensitive assets less interest rate sensitive liabilities), the cumulative interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e., interest rate sensitive assets divided by interest rate sensitive liabilities) 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 since 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.



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|                                               |  |                        |         |                                   |   |         |                                   |  |                 |         |       |   |         |  |   |        
|---------------------------------------------- |  | ---------------------- | ------- | --------------------------------- | - | ------- | --------------------------------- |  | --------------- | ------- | ----- | - | ------- |  | - | -------
|                                               |  | WithinThreeMonths      |         | AfterThreeMonthsButWithinOne Year |   |         | After OneYear ButWithinFive Years |  | After FiveYears |         | Total
|                                               |  | (Dollars in Thousands)
|Interest-earning assets:                       |  |                        |         |                                   |   |         |                                   |  |                 |         |       |   |         |  |   |        
|Interest-bearing deposits in banks             |  | $                      | 388     |                                   | $ |        |                                   |  | $               |        |       | $ |        |  | $ | 388    
|Federal funds sold                             |  |                        | 9,600   |                                   |   |        |                                   |  |                 |        |       |   |        |  |   | 9,600  
|Securities                                     |  |                        | 7,858   |                                   |   | 26,773  |                                   |  |                 | 30,646  |       |   | 5,973   |  |   | 71,250 
|Loans                                          |  |                        | 304,220 |                                   |   | 72,949  |                                   |  |                 | 128,190 |       |   | 13,577  |  |   | 518,936
|                                               |  |                        |         |                                   |   |         |                                   |  |                 |         |       |   |         |  |   |        
|Total interest-earning assets                  |  |                        | 322,066 |                                   |   | 99,722  |                                   |  |                 | 158,836 |       |   | 19,550  |  |   | 600,174
|                                               |  |                        |         |                                   |   |         |                                   |  |                 |         |       |   |         |  |   |        
|Interest-bearing liabilities:                  |  |                        |         |                                   |   |         |                                   |  |                 |         |       |   |         |  |   |        
|Interest-bearing demand and savings            |  | $                      | 160,385 |                                   | $ |        |                                   |  | $               |        |       | $ |        |  | $ | 160,385
|Time deposits                                  |  |                        | 62,424  |                                   |   | 146,541 |                                   |  |                 | 91,281  |       |   |        |  |   | 300,246
|Repurchase agreements                          |  |                        |        |                                   |   |        |                                   |  |                 | 5,000   |       |   |        |  |   | 5,000  
|Other borrowings                               |  |                        | 1,060   |                                   |   |        |                                   |  |                 | 13,928  |       |   |        |  |   | 14,988 
|                                               |  |                        |         |                                   |   |         |                                   |  |                 |         |       |   |         |  |   |        
|Total interest-bearing liabilities             |  | $                      | 223,869 |                                   | $ | 146,541 |                                   |  | $               | 110,209 |       | $ |        |  | $ | 480,619
|                                               |  |                        |         |                                   |   |         |                                   |  |                 |         |       |   |         |  |   |        
|Interest rate sensitivity gap                  |  | $                      | 98,197  |                                   | $ | (46,819 | )                                 |  | $               | 48,627  |       | $ | 19,550  |  | $ | 119,555
|                                               |  |                        |         |                                   |   |         |                                   |  |                 |         |       |   |         |  |   |        
|Cumulative interest rate sensitivity gap       |  | $                      | 98,197  |                                   | $ | 51,378  |                                   |  | $               | 100,005 |       | $ | 119,555 |  |   |        
|                                               |  |                        |         |                                   |   |         |                                   |  |                 |         |       |   |         |  |   |        
|Interest rate sensitivity gap ratio            |  |                        | 1.44    |                                   |   | .68     |                                   |  |                 | 1.44    |       |   | 0.00    |  |   |        
|                                               |  |                        |         |                                   |   |         |                                   |  |                 |         |       |   |         |  |   |        
|Cumulative interest rate sensitivity gap ratio |  |                        | 1.44    |                                   |   | 1.14    |                                   |  |                 | 1.21    |       |   | 1.25    |  |   |        
|                                               |  |                        |         |                                   |   |         |                                   |  |                 |         |       |   |         |  |   |        

We actively manage the mix of asset and liability maturities to control the effects of changes in
the general level of interest rates on net interest income. Except for its effect on the general level of interest rates, inflation does not have a material impact on us due to the rate variability and short-term maturities of our earning assets. In
particular, approximately 73% of the loan portfolio is comprised of loans that have variable rate terms or mature within one year. Most mortgage loans are made on a variable rate basis with rates being adjusted every one to five years.



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INVESTMENT PORTFOLIO

Types of Investments

The carrying amounts of securities at the dates indicated are summarized as follows:



|                                      |  |                        |        |      |   |        |  |   |       
|------------------------------------- |  | ---------------------- | ------ | ---- | - | ------ |  | - | ------
|                                      |  | December 31,          
|                                      |  | 2005                   |        | 2004 |   | 2003  
|                                      |  | (Dollars in Thousands)
|U.S. Government and agency securities |  | $                      | 60,192 |      | $ | 38,129 |  | $ | 33,770
|Mortgage-backed securities            |  |                        | 4,886  |      |   | 7,878  |  |   | 13,987
|Municipal securities                  |  |                        | 5,567  |      |   | 5,875  |  |   | 9,316 
|                                      |  |                        |        |      |   |        |  |   |       
|                                      |  |                        | 70,645 |      |   | 51,882 |  |   | 57,073
|Equity securities                     |  |                        | 2,057  |      |   | 2,359  |  |   | 983   
|                                      |  |                        |        |      |   |        |  |   |       
|                                      |  | $                      | 72,702 |      | $ | 54,241 |  | $ | 58,056
|                                      |  |                        |        |      |   |        |  |   |       

Maturities

The amounts of debt securities, including the weighted average yield in each category as of December 31, 2005 are shown in the following table according to contractual maturity classifications (1) one year or less, (2) after
one through five years, (3) after five through ten years and (4) after ten years. Equity securities are not included in the table because they have no contractual maturity.



|                                      |  |                  |        |           |                             |   |        |                             |           |  |      |        |  |           |       |  |      |  
|------------------------------------- |  | ---------------- | ------ | --------- | --------------------------- | - | ------ | --------------------------- | --------- |  | ---- | ------ |  | --------- | ----- |  | ---- | -
|                                      |  | One year or less |        |           | After one throughfive years |   |        | After five throughten years |          
|                                      |  | Amount           |        | Yield (1) |                             |   | Amount |                             | Yield (1) |  |      | Amount |  | Yield (1) |      
|U.S. Government and agency securities |  | $                | 32,723 |           | 3.29                        | % |        | $                           | 27,469    |  | 4.00 | %      |  | $         |      |  |     | %
|Mortgage-backed securities            |  |                  | 73     |           | 5.04                        |   |        |                             | 1,147     |  | 4.04 |        |  |           | 504   |  | 5.18 |  
|Municipal securities                  |  |                  | 1,644  |           | 3.51                        |   |        |                             | 1,665     |  | 3.79 |        |  |           | 1,715 |  | 3.78 |  
|                                      |  |                  |        |           |                             |   |        |                             |           |  |      |        |  |           |       |  |      |  
|                                      |  | $                | 34,440 |           | 3.30                        |   |        | $                           | 30,281    |  | 3.99 |        |  | $         | 2,219 |  | 4.09 |  
|                                      |  |                  |        |           |                             |   |        |                             |           |  |      |        |  |           |       |  |      |  



|                                      |  |                 |       |           |       |   |        |   |           |  |      |  
|------------------------------------- |  | --------------- | ----- | --------- | ----- | - | ------ | - | --------- |  | ---- | -
|                                      |  | After ten years |       |           | Total |  
|                                      |  | Amount          |       | Yield (1) |       |   | Amount |   | Yield (1) | 
|U.S. Government and agency securities |  | $               |      |           |      | % |        | $ | 60,192    |  | 3.62 | %
|Mortgage-backed securities            |  |                 | 3,162 |           | 4.61  |   |        |   | 4,886     |  | 4.55 |  
|Municipal securities                  |  |                 | 543   |           | 5.36  |   |        |   | 5,567     |  | 3.84 |  
|                                      |  |                 |       |           |       |   |        |   |           |  |      |  
|                                      |  | $               | 3,705 |           | 4.72  |   |        | $ | 70,645    |  | 3.70 |  
|                                      |  |                 |       |           |       |   |        |   |           |  |      |  



|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The weighted average yields for municipal securities are not stated on a tax-equivalent basis.
|--- | ----------------------------------------------------------------------------------------------



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LOAN PORTFOLIO

Types of Loans

Loans by type of collateral are presented below:



|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------ |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                               |  | December 31,           |        
|                               |  | 2005                   |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                               |  | (Dollars in Thousands) |        
|Commercial                     |  | $                      | 36,349  |   |      | $ | 47,246  |      |  | $ | 55,075  |   |  | $    | 58,994  |   |  | $ | 51,486  |  
|Real estate - construction     |  |                        | 260,912 |   |      |   | 223,907 |      |  |   | 156,821 |   |  |      | 102,602 |   |  |   | 71,955  |  
|Real estate  mortgage         |  |                        | 210,366 |   |      |   | 203,598 |      |  |   | 191,944 |   |  |      | 165,546 |   |  |   | 159,276 |  
|Consumer installment and other |  |                        | 10,487  |   |      |   | 11,972  |      |  |   | 14,797  |   |  |      | 23,135  |   |  |   | 21,971  |  
|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                               |  |                        | 518,114 |   |      |   | 486,723 |      |  |   | 418,637 |   |  |      | 350,277 |   |  |   | 304,688 |  
|Less allowance for loan losses |  |                        | (4,972  | ) |      |   | (4,489  | )    |  |   | (4,178  | ) |  |      | (3,827  | ) |  |   | (3,377  | )
|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loans                      |  | $                      | 513,142 |   |      | $ | 482,234 |      |  | $ | 414,459 |   |  | $    | 346,450 |   |  | $ | 301,311 |  
|                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  

Maturities and Sensitivities to Changes in Interest Rates

Total loans as of December 31, 2005 are shown in the following table according to contractual maturity classifications (1) one year or less, (2) after one
year through five years, and (3) after five years.



|                             |  |                        |        
|---------------------------- |  | ---------------------- | -------
|                             |  | (Dollars in Thousands)
|Commercial                   |  |                        |        
|One year or less             |  | $                      | 14,293 
|After one through five years |  |                        | 20,317 
|After five years             |  |                        | 1,739  
|                             |  |                        |        
|                             |  |                        | 36,349 
|                             |  |                        |        
|Construction                 |  |                        |        
|One year or less             |  |                        | 250,787
|After one through five years |  |                        | 10,125 
|After five years             |  |                        | 0      
|                             |  |                        |        
|                             |  |                        | 260,912
|                             |  |                        |        
|Other                        |  |                        |        
|One year or less             |  |                        | 57,559 
|After one through five years |  |                        | 129,283
|After five years             |  |                        | 34,011 
|                             |  |                        |        
|                             |  |                        | 220,853
|                             |  |                        |        
|                             |  | $                      | 518,114
|                             |  |                        |        



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The following table summarizes loans at December 31, 2005 with the due dates after one year for predetermined and
floating or adjustable interest rates.



|                                      |  |                        |        
|------------------------------------- |  | ---------------------- | -------
|                                      |  | (Dollars in Thousands)
|Predetermined interest rates          |  | $                      | 129,073
|Floating or adjustable interest rates |  |                        | 66,403 
|                                      |  |                        |        
|                                      |  | $                      | 195,476
|                                      |  |                        |        

Risk Elements

The following table presents the aggregate of nonperforming loans for the categories indicated.



|                                                                                                                                                                               |  |                        |       |      |       |      |   |       |  |      |       |  |   |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ----- | ---- | ----- | ---- | - | ----- |  | ---- | ----- |  | - | -----
|                                                                                                                                                                               |  | December 31,          
|                                                                                                                                                                               |  | 2005                   |       | 2004 |       | 2003 |   | 2002  |  | 2001
|                                                                                                                                                                               |  | (Dollars in Thousands)
|Loans accounted for on a nonaccrual basis                                                                                                                                      |  | $                      | 782   |      | 498   |      | $ | 346   |  | $    | 296   |  | $ | 304  
|Loans contractually past due ninety days or more as to interest or principal payments and still Accruing                                                                       |  |                        | 4,173 |      | 3,251 |      |   | 1,654 |  |      | 1,048 |  |   | 1,197
|Loans, the term of which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the
financial position of the borrower |  |                        |      |      |      |      |   |      |  |      |      |  |   |     
|Potential problem loans                                                                                                                                                        |  |                        |      |      |      |      |   | 15    |  |      | 120   |  |   |     

The reduction in interest income associated with nonaccrual loans as of December 31, 2005 is as follows:



|                                                                                       |  |                        |   
|-------------------------------------------------------------------------------------- |  | ---------------------- | --
|                                                                                       |  | (Dollars in Thousands)
|Interest income that would have been recorded on nonaccrual loans under original terms |  | $                      | 67
|                                                                                       |  |                        |   
|Interest income that was recorded on nonaccrual loans                                  |  | $                      |  
|                                                                                       |  |                        |   

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.

Our policy is to discontinue the accrual of interest income when, in the opinion of management, collection of such interest becomes doubtful. This status is determined 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. Accrual of interest on such loans is resumed when, in managements judgment, the collection of interest and principal becomes probable. Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention
that have not been included in the table above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources. These classified loans do
not represent material credits about which management is aware and which causes management to have serious doubts as to the ability of such borrowers to comply with the loan



40



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repayment terms. In the event of non-performance by the borrower, these loans have collateral pledged which would prevent the recognition of substantial
losses.

SUMMARY OF LOAN LOSS EXPERIENCE

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



|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                            |  | December 31,           |        
|                                                                            |  | 2005                   |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                                            |  | (Dollars in Thousands) |        
|Average amount of loans outstanding                                         |  | $                      | 510,733 |   |      | $ | 455,993 |      |  | $ | 378,992 |   |  | $    | 333,224 |   |  | $ | 286,646 |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance of allowance for loan losses at beginning of year                   |  | $                      | 4,489   |   |      | $ | 4,178   |      |  | $ | 3,827   |   |  | $    | 3,377   |   |  | $ | 2,884   |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loans charged off:                                                          |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate                                                                 |  |                        | (21     | ) |      |   | (17     | )    |  |   | (25     | ) |  |      | (5      | ) |  |   | (29     | )
|Commercial                                                                  |  |                        | (12     | ) |      |   | (45     | )    |  |   | (15     | ) |  |      |        |   |  |   |        |  
|Consumer installment                                                        |  |                        | (53     | ) |      |   | (91     | )    |  |   | (122    | ) |  |      | (124    | ) |  |   | (54     | )
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        | (86     | ) |      |   | (153    | )    |  |   | (162    | ) |  |      | (129    | ) |  |   | (83     | )
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries of loans previously charged off:                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate                                                                 |  |                        | 9       |   |      |   | 6       |      |  |   | 1       |   |  |      |        |   |  |   |        |  
|Commercial                                                                  |  |                        | 1       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Consumer installment                                                        |  |                        | 13      |   |      |   | 15      |      |  |   | 40      |   |  |      | 39      |   |  |   | 26      |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                        | 23      |   |      |   | 21      |      |  |   | 41      |   |  |      | 39      |   |  |   | 26      |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loans charged off during the year                                       |  |                        | (63     | ) |      |   | (132    | )    |  |   | (121    | ) |  |      | (90     | ) |  |   | (57     | )
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Additions to allowance charged to expense during year                       |  |                        | 546     |   |      |   | 443     |      |  |   | 472     |   |  |      | 540     |   |  |   | 550     |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance of allowance for loan losses at end of year                         |  | $                      | 4,972   |   |      | $ | 4,489   |      |  | $ | 4,178   |   |  | $    | 3,827   |   |  | $ | 3,377   |  
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Ratio of net loans charged off during the year to average loans Outstanding |  |                        | 0.01    | % |      |   | 0.03    | %    |  |   | 0.03    | % |  |      | 0.03    | % |  |   | 0.02    | %
|                                                                            |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  

Allowance for Loan Losses

The allowance for loan losses is maintained at a level that is deemed appropriate by us to adequately cover all known and inherent risks in the loan portfolio. Our evaluation considers significant factors relative to
the credit risk and loss exposure in the loan portfolio, including past due and classified loans, historical experience, underlying collateral values, and current economic conditions that may affect the borrowers ability to repay. The
allowance for loan losses is evaluated by segmenting the loan portfolio into unclassified and classified loans. An allowance percentage is applied to the unclassified loans to establish a general allowance for loan losses. The allowance percentage
determined is based upon our experience specifically and the historical experience of the banking industry generally. The classified loans, including impaired loans, are analyzed



41



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individually in order to establish a specific allowance for loan losses. 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.

As of the indicated dates, we had made no allocations of
our allowance for loan losses to specifically correspond to the categories of loans listed below. 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:



|                               |  |                        |       |                                                  |        |   |        |      |                                                  |  |        |        |  |                                                  |       |  |        |   |                                                  |   |       |        |        |                                                  |  |   |       |  |        |  
|------------------------------ |  | ---------------------- | ----- | ------------------------------------------------ | ------ | - | ------ | ---- | ------------------------------------------------ |  | ------ | ------ |  | ------------------------------------------------ | ----- |  | ------ | - | ------------------------------------------------ | - | ----- | ------ | ------ | ------------------------------------------------ |  | - | ----- |  | ------ | -
|                               |  | December 31,           |      
|                               |  | 2005                   |       |                                                  | 2004   |   |        | 2003 |                                                  |  | 2002   |        |  | 2001                                             |      
|                               |  | Amount                 |       | Percent of Loans in Each Category to Total Loans |        |   | Amount |      | Percent of Loans in Each Category to Total Loans |  |        | Amount |  | Percent of Loans in Each Category to Total Loans |       |  | Amount |   | Percent of Loans in Each Category to Total Loans |   |       | Amount |        | Percent of Loans in Each Category to Total Loans | 
|                               |  | (Dollars in Thousands) |      
|Commercial                     |  | $                      | 554   |                                                  | 7.01   | % |        | $    | 647                                              |  | 9.71   | %      |  | $                                                | 813   |  | 13.15  | % |                                                  | $ | 800   |        | 16.84  | %                                                |  | $ | 675   |  | 16.90  | %
|Real estate-construction       |  |                        | 2,066 |                                                  | 50.35  |   |        |      | 1,698                                            |  | 46.00  |        |  |                                                  | 1,015 |  | 37.46  |   |                                                  |   | 841   |        | 29.29  |                                                  |  |   | 844   |  | 23.62  |  
|Real estate-mortgage           |  |                        | 1,827 |                                                  | 40.60  |   |        |      | 1,526                                            |  | 41.83  |        |  |                                                  | 1,625 |  | 45.85  |   |                                                  |   | 1,530 |        | 47.26  |                                                  |  |   | 1,351 |  | 52.28  |  
|Consumer installment and other |  |                        | 525   |                                                  | 2.04   |   |        |      | 618                                              |  | 2.46   |        |  |                                                  | 725   |  | 3.54   |   |                                                  |   | 656   |        | 6.61   |                                                  |  |   | 507   |  | 7.20   |  
|                               |  |                        |       |                                                  |        |   |        |      |                                                  |  |        |        |  |                                                  |       |  |        |   |                                                  |   |       |        |        |                                                  |  |   |       |  |        |  
|Total allowance                |  |                        | 4,972 |                                                  | 100.00 | % |        |      | 4,489                                            |  | 100.00 | %      |  | $                                                | 4,178 |  | 100.00 | % |                                                  | $ | 3,827 |        | 100.00 | %                                                |  | $ | 3,377 |  | 100.00 | %
|                               |  |                        |       |                                                  |        |   |        |      |                                                  |  |        |        |  |                                                  |       |  |        |   |                                                  |   |       |        |        |                                                  |  |   |       |  |        |  

DEPOSITS

Average amounts of deposits and average rates paid thereon, classified as to noninterest-bearing demand deposits, interest-bearing demand and savings deposits and time deposits, are presented below. (1)



|                                             |  |                         |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  
|-------------------------------------------- |  | ----------------------- | ------- | ---- | ---- | - | ------ | ---- | ------- |  | ---- | ------ |  | ---- | ------- |  | ---- | -
|                                             |  | Year Ended December 31, |        
|                                             |  | 2005                    |         |      | 2004 |   |        | 2003 |        
|                                             |  | Amount                  |         | Rate |      |   | Amount |      | Rate    |  |      | Amount |  | Rate |        
|                                             |  | (Dollars in Thousands)  |        
|Noninterest-bearing demand deposits          |  | $                       | 97,101  |      |     | % |        | $    | 93,034  |  |     | %      |  | $    | 86,162  |  |     | %
|Interest-bearing demand and savings deposits |  |                         | 153,669 |      | 2.09 |   |        |      | 138,513 |  | 1.53 |        |  |      | 122,672 |  | 1.43 |  
|Time deposits                                |  |                         | 278,152 |      | 3.45 |   |        |      | 231,004 |  | 2.93 |        |  |      | 210,406 |  | 3.22 |  
|                                             |  |                         |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  
|Total deposits                               |  | $                       | 528,922 |      |      |   |        | $    | 462,551 |  |      |        |  | $    | 419,240 |  |      |  
|                                             |  |                         |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  



|(1) | Average balances were determined using the daily average balances.
|--- | ------------------------------------------------------------------

The
amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2005 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)
|Three months or less           |  | $                      | 30,508 
|Over three through six months  |  |                        | 24,093 
|Over six through twelve months |  |                        | 36,081 
|Over twelve months             |  |                        | 41,519 
|                               |  |                        |        
|Total                          |  | $                      | 132,201
|                               |  |                        |        



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RETURN ON EQUITY AND ASSETS

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



|                           |  |                          |   |  |       |   |  |       |  
|-------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                           |  | Years Ended December 31, |  
|                           |  | 2005                     |   |  | 2004  |   |  | 2003  |  
|Return on assets (1)       |  | 1.67                     | % |  | 1.52  | % |  | 1.57  | %
|Return on equity (2)       |  | 17.13                    |   |  | 15.41 |   |  | 15.66 |  
|Dividend payout ratio (3)  |  | 34.03                    |   |  | 35.02 |   |  | 35.18 |  
|Equity to assets ratio (4) |  | 9.74                     |   |  | 9.86  |   |  | 10.05 |  



|(1) | Net income divided by average total assets.
|--- | -------------------------------------------



|(2) | Net income divided by average equity.
|--- | -------------------------------------



|(3) | Dividends declared per share divided by earnings per share.
|--- | -----------------------------------------------------------



|(4) | Average equity divided by average total assets.
|--- | -----------------------------------------------



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

We are
exposed only to U.S. dollar interest rate changes and accordingly, we manage exposure by considering the possible changes in the net interest margin. We do not have any trading instruments nor do we classify any portion of the investment portfolio
as held for trading. We do not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage-backed securities that are commonly pass through securities. Finally, we have no exposure to foreign
currency exchange rate risk, commodity price risk, and other market risks. Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as interest rate risk. The
repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of our asset/liability management program, the timing of repriced assets and liabilities is referred to as Gap
management. It is our policy to maintain a Gap ratio in the one-year time horizon of .80 to 1.20.

GAP management alone is not enough to properly manage
interest rate sensitivity, because interest rates do not respond at the same speed or at the same level to market rate changes. For example, savings and money market rates are more stable than loans tied to a Prime rate and thus respond
with less volatility to a market rate change.

We use a third party simulation model to monitor changes in net interest income due to changes in market
rates. The model of rising, falling and stable interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market rate swings. The analysis of impact on net interest margins as well as market
value of equity over a twelve-month period is subjected to a 200 basis point increase and decrease in rate. The 4thquarter model reflects an increase of 22% in net interest income and a 14% increase in economic value of equity for a 200 basis point increase in rates. The same model shows a 1% increase in net interest income and a 12% decrease in economic value
of equity for a 200 basis point decrease in rates. Our investment committee monitors changes on a quarterly basis, measures the changing values based on the models performance and determines an appropriate interest rate policy for management
to follow in order to minimize the impact on earnings and market value equity in the projected rate environment.



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|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

The following
consolidated financial statements of the Registrant and its subsidiaries are included on Exhibit 13 of this Annual Report on Form 10-K:



|                                                                                               |  | 
|---------------------------------------------------------------------------------------------- |  | 
|Report of Independent Registered Public Accounting Firm                                        |  | 
|                                                                                               | 
|Consolidated Balance Sheets - December 31, 2005 and 2004                                       |  | 
|                                                                                               | 
|Consolidated Statements of Income - Years Ended December 31, 2005, 2004 and 2003               |  | 
|                                                                                               | 
|Consolidated Statements of Comprehensive Income - Years Ended December 31, 2005, 2004 and 2003 |  | 
|                                                                                               | 
|Consolidated Statements of Stockholders Equity - Years Ended December 31, 2005, 2004 and 2003 |  | 
|                                                                                               | 
|Consolidated Statements of Cash Flows - Years Ended December 31, 2005, 2004 and 2003           |  | 
|                                                                                               | 
|Notes to Consolidated Financial Statements                                                     |  | 



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|Item 9. | CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | -----------------------------------------------------------------------------------

None.



|Item 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Chief Executive Officer and the Principal Financial and Accounting Officer, of the design and operation of our disclosure controls and procedures. Based on this evaluation, our
Chief Executive Officer and principal Financial and Accounting Officer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal controls or in other factors that could affect internal controls subsequent to the date of this evaluation, and there have been no corrective actions with respect to significant deficiencies or
material weaknesses.

Managements Report on Internal Control over Financial Reporting

The management of Henry County Bancshares, Inc. and subsidiaries is responsible for establishing and maintaining adequate internal control over financial
reporting. This internal control system has been designed to provide reasonable assurance to the Companys management and board of directors regarding the preparation and fair presentation of the Companys published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The management of Henry
County Bancshares, Inc. and subsidiaries has assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2005. To make this assessment, we used the criteria for effective internal control over
financial reporting described in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that, as of December 31, 2005, the Companys
internal control over financial reporting met those criteria.

Our independent auditors have issued an attestation report on our assessment
of the Companys internal control over financial reporting. You may find this report on page 46 of this Annual Report.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Henry County Bancshares, Inc. and Subsidiaries

Stockbridge, Georgia

We have audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial
Reporting, that Henry County Bancshares, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control  Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Henry County Bancshares, Inc. and subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based
on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.



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In our opinion, managements assessment that Henry County Bancshares, Inc. and subsidiaries
maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, Henry County Bancshares, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Henry County Bancshares, Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated statements of income, comprehensive income, stockholders equity and cash flows for each of the three years in the period ended December 31, 2005, and our report dated
February 14, 2006 expressed an unqualified opinion.

/s/ MAULDIN & JENKINS, LLC

Atlanta, Georgia

February 14, 2006



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|Item 9B. | OTHER INFORMATION
|-------- | -----------------

None.



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Part III



|Item 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------

Code of Ethics

Henry County Bancshares, Inc. has adopted a Code of Ethics that applies to the Companys principal executive officer and principal financial and
accounting officers. A copy of the Henry County Bancshares, Inc. Code of Ethics will be provided to any person, without charge, upon written request made to Thomas L. Redding, Henry County Bancshares, Inc., 4806 N. Henry Boulevard, Stockbridge,
Georgia 30281.

The remaining information required by this Item is incorporated by reference to the Companys definitive Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.



|Item 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The information required by this Item is incorporated by reference to the
Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.



|Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The information required by this Item is incorporated by reference to the Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this Annual Report.



|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------

The information required by this Item is
incorporated by reference to the Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.



|Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

The information required by this Item is incorporated by
reference to the Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.



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Part IV



|Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------

The following documents are filed as part of this
report.

(1) Financial statements: The consolidated statements of financial conditions of Henry County Bancshares, Inc. and its
subsidiaries as of December 31, 2004 and 2005, and the related consolidated statements of income, changes in stockholders equity and cash flows for each of the years in the three-year period ended December 31, 2005, together with the
related notes and the independent auditors report of Mauldin & Jenkins, LLC, independent accountants.

(2) Financial
statement schedules: All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

(3) Exhibits: A list of the Exhibits as required by Item 601 of Regulation S-K to be filed as part of this Annual Report is shown on the Exhibit Index filed herewith.



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Signatures

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |  |  |                               |  |                   |  |                                                    
|-------------------- |  |  |  | ----------------------------- |  | ----------------- |  | ---------------------------------------------------
|                     |  |  |  | HENRY COUNTY BANCSHARES, INC.
|                     |  |  | 
|Date: March 13, 2006 |  |  |  | By:                           |  | /s/ David H. Gill
|                     |  |  |  |                               |  |                   |  | David H. Gill President and Chief Executive Officer



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KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
David H. Gill, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file
the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite
or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the
following persons in the capacities indicated on March 13, 2006.



|                                              |  |                                             
|--------------------------------------------- |  | --------------------------------------------
|                                              | 
|/s/ Paul J. Cates, Jr. PAUL J. CATES,
JR.     |  | Director                                    
|                                              | 
|/s/ H. K. Elliott, Jr. H. K. ELLIOTT,
JR.     |  | Director                                    
|                                              | 
|/s/ G. R. Foster, III G. R. FOSTER,
III       |  | Director                                    
|                                              | 
|/s/ David H. Gill DAVID H.
GILL               |  | President, Chief Executive Officer, Director
|                                              | 
|/s/ Edwin C. Kelley, Jr. EDWIN C.
KELLEY, JR. |  | Director                                    
|                                              | 
|/s/ Mary Lynn E. Lambert MARY LYNN E.
LAMBERT |  | Director                                    
|                                              | 
|/s/ Robert O. Linch ROBERT O.
LINCH           |  | Director and Chairman of the Board          
|                                              | 
|/s/ William C. Strom WILLIAM C.
STROM         |  | Director and Executive Vice President       
|                                              | 
|/s/ Ronald M. Turpin RONALD M.
TURPIN         |  | Director                                    
|                                              | 
|/s/ James C. Waggoner JAMES C.
WAGGONER       |  | Director                                    
|                                              | 
|/s/ Thomas L. Redding THOMAS L.
REDDING       |  | Chief Financial and Accounting Officer      



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                   
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                       
|            | 
|3.1         |  | Articles of Incorporation of Henry County Bancshares, Inc. (incorporated by reference to Exhibit 3(i) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789 dated July
30, 2002.)                        
|            | 
|3.2         |  | Articles of Correction dated June 24, 1982 (incorporated by reference to Exhibit 3(ii) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July 30,
2002.)                                      
|            | 
|3.3         |  | Articles of Amendment dated May 27, 1997 (incorporated by reference to Exhibit 3(iii) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July 30,
2002.)                                       
|            | 
|3.4         |  | Articles of Amendment dated September 16, 1997 (incorporated by reference to Exhibit 3(iv) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July 30,
2002.)                                  
|            | 
|3.5         |  | Bylaws of Henry County Bancshares, Inc. dated May 2, 1983 (incorporated by reference to Exhibit 3(v) of the Registration Statement, Amendment No. 2, on Form 10, File No. 000-49789, dated July
30, 2002.)                        
|            | 
|3.6         |  | Amendment to Bylaws of Henry County Bancshares, Inc. dated December 12, 1996 (incorporated by reference to Exhibit 3(vi) of the Registration Statement, Amendment No. 2, on Form 10, File No.
000-49789, dated July 30, 2002.)    
|            | 
|10.1        |  | Participation Agreement - Executive Salary Continuation Plan - David H. Gill (incorporated by reference to Exhibit 10(i) of the Registration Statement, Amendment No. 2, on Form 10, File No.
000-49789, dated July 30, 2002.)    
|            | 
|10.2        |  | Participation Agreement - Executive Salary Continuation Plan - William C. Strom (incorporated by reference to Exhibit 10(ii) of the Registration Statement, Amendment No. 2, on Form 10, File
No. 000-49789, dated July 30, 2002.)
|            | 
|11          |  | Statement of Computation of Net Earnings Per Share                                                                                                                                                                                
|            | 
|13          |  | Consolidated Financial Statements of Registrant as of December 31, 2005 and 2004.                                                                                                                                                 
|            | 
|21          |  | Schedule of subsidiaries of the Registrant                                                                                                                                                                                        
|            | 
|24          |  | Power of Attorney relating to this Form 10-K is set forth on the signature page of this Form 10-K.                                                                                                                                
|            | 
|31.1        |  | Rule 13a-14(a)/15d-14(a) Certifications of the Registrants Chief Executive Officer                                                                                                                                               
|            | 
|31.2        |  | Rule 13a-14(a)/15d-14(a) Certifications of the Registrants Chief Financial and Accounting Officer                                                                                                                                
|            | 
|32          |  | Section 1350 Certifications                                                                                                                                                                                                       



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