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EXHIBIT 13













LOGO









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2005



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Annual Report to Shareholders



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##### Table of Contents

TABLE OF CONTENTS



|                                                        |  |         
|------------------------------------------------------- |  | --------
|                                                        |  | Page No.
|Report of Management                                    |  | 3       
|Selected Financial Information and Other Data           |  | 4       
|Managements Discussion and Analysis                    |  | 6       
|Report of Independent Registered Public Accounting Firm |  | 22      
|Consolidated Financial Statements                       |  |         
|Balance Sheets                                          |  | 23      
|Statements of Operations                                |  | 24      
|Statements of Comprehensive Income                      |  | 25      
|Statements of Changes in Shareholders Equity           |  | 26      
|Statements of Cash Flows                                |  | 27      
|Notes to Consolidated Financial Statements              |  | 28      
|Management and Bank Personnel                           |  | 46      
|General Corporate Information                           |  | 47      



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Report of Management



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Dear Bank of Wilmington Corporation Shareholders:









[PRESIDENTS LETTER TO SHAREHOLDERS]











Best regards,



[SIG To Come]



Cameron Coburn

Chairman, President and CEO



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SELECTED FINANCIAL INFORMATION AND OTHER DATA



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|                                                      |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|----------------------------------------------------- |  | --------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                      |  | At or for the Years Ended December 31,        |          
|                                                      |  | 2005                                          |           |   | 2004 |   |           | 2003 |  |   | 2002      |   |  | 2001 |          
|                                                      |  | (Dollars in thousands, except per share data) |          
|INCOME STATEMENT DATA:                                |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest income                                       |  | $                                             | 16,412    |   |      | $ | 8,596     |      |  | $ | 6,527     |   |  | $    | 6,747     |   |  | $ | 6,888     |  
|Interest expense                                      |  |                                               | 7,113     |   |      |   | 2,742     |      |  |   | 2,103     |   |  |      | 2,927     |   |  |   | 4,169     |  
|                                                      |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income                                   |  |                                               | 9,299     |   |      |   | 5,854     |      |  |   | 4,424     |   |  |      | 3,820     |   |  |   | 2,719     |  
|Provision for loan losses                             |  |                                               | 1,499     |   |      |   | 892       |      |  |   | 291       |   |  |      | 575       |   |  |   | 399       |  
|Noninterest income                                    |  |                                               | 1,048     |   |      |   | 746       |      |  |   | 512       |   |  |      | 447       |   |  |   | 353       |  
|Noninterest expense                                   |  |                                               | 6,381     |   |      |   | 4,626     |      |  |   | 3,628     |   |  |      | 3,055     |   |  |   | 2,471     |  
|Provision for income taxes                            |  |                                               | 785       |   |      |   | (66       | )    |  |   |          |   |  |      |          |   |  |   |          |  
|                                                      |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income                                            |  | $                                             | 1,682     |   |      | $ | 1,148     |      |  | $ | 1,017     |   |  | $    | 637       |   |  | $ | 202       |  
|                                                      |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|PER SHARE DATA AND SHARES OUTSTANDING:(1)             |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic net income (loss) per share                     |  | $                                             | 0.49      |   |      | $ | 0.41      |      |  | $ | 0.55      |   |  | $    | 0.38      |   |  | $ | 0.15      |  
|Diluted net income (loss) per share                   |  |                                               | 0.48      |   |      |   | 0.40      |      |  |   | 0.54      |   |  |      | 0.38      |   |  |   | 0.15      |  
|Book value at period end                              |  |                                               | 7.21      |   |      |   | 6.85      |      |  |   | 6.17      |   |  |      | 5.26      |   |  |   | 4.67      |  
|Weighted average number of common shares outstanding: |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic                                                 |  |                                               | 3,415,582 |   |      |   | 2,768,040 |      |  |   | 1,856,758 |   |  |      | 1,670,518 |   |  |   | 1,349,979 |  
|Diluted                                               |  |                                               | 3,496,780 |   |      |   | 2,840,524 |      |  |   | 1,897,315 |   |  |      | 1,684,273 |   |  |   | 1,349,989 |  
|Shares outstanding at period end                      |  |                                               | 3,416,068 |   |      |   | 3,405,183 |      |  |   | 2,706,409 |   |  |      | 1,700,009 |   |  |   | 1,606,259 |  
|                                                      |  |                                               |           |   |     
|BALANCE SHEET DATA:                                   |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total assets                                          |  | $                                             | 343,327   |   |      | $ | 201,533   |      |  | $ | 129,785   |   |  | $    | 112,762   |   |  | $ | 101,833   |  
|Loans receivable                                      |  |                                               | 278,386   |   |      |   | 162,399   |      |  |   | 104,042   |   |  |      | 87,741    |   |  |   | 83,181    |  
|Allowance for loan losses                             |  |                                               | 3,510     |   |      |   | 2,106     |      |  |   | 1,661     |   |  |      | 1,481     |   |  |   | 1,165     |  
|Other interest-earning assets                         |  |                                               | 55,667    |   |      |   | 31,251    |      |  |   | 24,171    |   |  |      | 22,605    |   |  |   | 15,962    |  
|Total deposits                                        |  |                                               | 284,134   |   |      |   | 170,168   |      |  |   | 106,077   |   |  |      | 103,862   |   |  |   | 90,933    |  
|Borrowings                                            |  |                                               | 32,310    |   |      |   | 7,400     |      |  |   | 6,500     |   |  |      |          |   |  |   | 3,000     |  
|Shareholders equity                                  |  |                                               | 24,635    |   |      |   | 23,338    |      |  |   | 16,712    |   |  |      | 8,593     |   |  |   | 7,496     |  
|                                                      |  |                                               |           |   |     
|SELECTED PERFORMANCE RATIOS:                          |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Return on average assets                              |  |                                               | 0.62      | % |      |   | 0.70      | %    |  |   | 0.89      | % |  |      | 0.59      | % |  |   | 0.22      | %
|Return on average shareholders equity                |  |                                               | 6.96      | % |      |   | 6.45      | %    |  |   | 10.38     | % |  |      | 7.80      | % |  |   | 3.19      | %
|Net interest margin(2)                                |  |                                               | 3.54      | % |      |   | 3.68      | %    |  |   | 3.93      | % |  |      | 3.68      | % |  |   | 3.05      | %
|Net interest spread(3)                                |  |                                               | 3.05      | % |      |   | 3.32      | %    |  |   | 3.61      | % |  |      | 3.30      | % |  |   | 2.48      | %
|Efficiency ratio(4)                                   |  |                                               | 61.67     | % |      |   | 70.09     | %    |  |   | 73.50     | % |  |      | 71.60     | % |  |   | 80.44     | %
|                                                      |  |                                               |           |   |     
|ASSET QUALITY RATIOS (AT PERIOD END):                 |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Nonperforming loans to period-end loans               |  |                                               | 0.42      | % |      |   | 0.61      | %    |  |   | 0.83      | % |  |      | 0.73      | % |  |   | 0.81      | %
|Allowance for loan losses to period-end loans         |  |                                               | 1.26      | % |      |   | 1.30      | %    |  |   | 1.60      | % |  |      | 1.69      | % |  |   | 1.40      | %
|Allowance for loan losses to nonperforming loans      |  |                                               | 298.98    | % |      |   | 212.02    | %    |  |   | 191.80    | % |  |      | 230.69    | % |  |   | 172.59    | %
|Nonperforming assets to total assets(5)               |  |                                               | 0.34      | % |      |   | 0.59      | %    |  |   | 0.67      | % |  |      | 0.70      | % |  |   | 0.66      | %
|Net loan charge-offs to average loans outstanding     |  |                                               | 0.04      | % |      |   | 0.34      | %    |  |   | 0.12      | % |  |      | 0.30      | % |  |   | 0.13      | %



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|                              |  |                                               |   |  |       |   |  |       |   |  |       |   |  |       |  
|----------------------------- |  | --------------------------------------------- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|                              |  | At or for the Years Ended December 31,        |  
|                              |  | 2005                                          |   |  | 2004  |   |  | 2003  |   |  | 2002  |   |  | 2001  |  
|                              |  | (Dollars in thousands, except per share data) |  
|                              |  |                                               |   |  |      
|CAPITAL AND LIQUIDITY RATIOS: |  |                                               |   |  |       |   |  |       |   |  |       |   |  |       |  
|Total Capital Ratio           |  | 13.29                                         | % |  | 14.87 | % |  | 16.98 | % |  | 10.74 | % |  | 10.34 | %
|Tier 1 Capital Ratio          |  | 12.09                                         | % |  | 13.64 | % |  | 15.73 | % |  | 9.48  | % |  | 9.09  | %
|Leverage Capital Ratio        |  | 10.69                                         | % |  | 12.29 | % |  | 13.92 | % |  | 7.70  | % |  | 7.45  | %
|Equity to assets ratio        |  | 7.18                                          | % |  | 11.57 | % |  | 12.88 | % |  | 7.62  | % |  | 7.36  | %
|                              |  |                                               |   |  |      
|OTHER DATA:                   |  |                                               |   |  |       |   |  |       |   |  |       |   |  |       |  
|Full service branch offices   |  | 3                                             |   |  | 3     |   |  | 2     |   |  | 2     |   |  | 2     |  
|Loan production offices       |  |                                              |   |  |      |   |  | 1     |   |  |      |   |  |      |  
|Full-time employees           |  | 62                                            |   |  | 50    |   |  | 36    |   |  | 30    |   |  | 27    |  

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|(1) |  | Computed based on the weighted average number of shares outstanding during each period. Basic and diluted net income per share has been computed based on the
weighted average number of shares outstanding during each period after retroactively adjusting for a 5-for-4 stock split on June 30, 2005.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Net interest margin is net interest income divided by average interest earning assets.
|--- |  | --------------------------------------------------------------------------------------

|(3) |  | Net interest spread is the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income.
|--- |  | ---------------------------------------------------------------------------------------------------------

|(5) |  | Nonperforming assets consist of non-accruing loans, restructured loans and foreclosed assets, where applicable.
|--- |  | ---------------------------------------------------------------------------------------------------------------



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Managements Discussion and Analysis



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Managements discussion and analysis is intended to assist readers in
the understanding and evaluation of the financial condition and consolidated results of operations of Bank of Wilmington Corporation (the Company). The analysis includes detailed discussions for each of the factors affecting the
Companys operating results and financial condition for the years ended December 31, 2005 and 2004. It should be read in conjunction with the audited consolidated financial statements and accompanying notes included in this report and the
supplemental financial data appearing throughout this discussion and analysis. Because the Company has no operations and conducts no business on its own other than owning Bank of Wilmington (the Bank) and BKWW Statutory Trust I (the
Trust), the discussion contained in this Managements Discussion and Analysis concerns primarily the business of the Bank. However, for ease of reading and because the financial statements are presented on a consolidated basis, the
Company and its subsidiaries are collectively referred to herein as the Company unless otherwise noted.



DESCRIPTION OF BUSINESS



The Companys headquarters and operations are located in Wilmington, North Carolina and it conducts business primarily in New Hanover, Pender and Brunswick Counties. Bank of Wilmington Corporation is a North Carolina-chartered bank
holding company incorporated on June 20, 2005 for the sole purpose of serving as the parent holding company for Bank of Wilmington, a North Carolina state-chartered bank that began banking operations on June 22, 1998. On September 1,
2005, Bank of Wilmington Corporation completed a reorganization and share exchange in which Bank of Wilmington became our wholly-owned subsidiary. Upon formation, one share of the Banks $3.50 par value common stock was exchanged for one newly
issued share of the Companys $3.50 par value common stock. In addition, on October 4, 2005, the Company formed a new unconsolidated wholly-owned subsidiary, BKWW Statutory Trust I, to facilitate the issuance of trust preferred securities.
The Company currently has no operations and conducts no business on its own other than owning the Bank and the Trust. The formation of the Company had no impact on the operations of the Bank. The consolidated capitalization, assets, liabilities,
income and expenses of the Company immediately following its formation were substantially the same as those of the Bank immediately prior to the formation.



We engage in a general, community-oriented commercial and consumer banking business. The primary business of the Company is to solicit deposits and invest
those funds by originating loans in its established market area. The Companys lending activities are oriented to the small-to-medium sized business as well as to the consumer/retail customer located in New Hanover, Pender and Brunswick
Counties. The Company offers commercial, consumer, and mortgage lending products. Funds are also invested, to a lesser extent, in investment securities, Federal funds and interest earning accounts with correspondent banks. The deposit services
offered by the Company include small business and personal checking, savings accounts and certificates of deposit. The Company concentrates on customer relationships in building deposit base. Additional sources of funding available to the Company
include borrowings from the Federal Home Loan Bank, Federal funds purchased from correspondent banks and brokered certificates of deposit.



The Company operates two full-service branch locations in addition to its corporate headquarters and Main Office at 1117 Military Cutoff Road in
Wilmington, NC. The other branches are located at 3702 South College Road in Wilmington, NC and Unit 1-A, 14572 US Highway 17 in Hampstead, NC. A loan production office opened in January 2006 is located at 206 North Topsail Drive, Suite D in Surf
City, NC. It will be converted to a full-service branch later in 2006. The Company is also expanding into its Brunswick County market by opening a full-service branch in second quarter 2006 at 503 Olde Waterford Way, Suite 104 in Leland, NC.



On December 31, 2005, the Company had total consolidated
assets of approximately $343.3 million, total consolidated loans of approximately $278.4 million, total consolidated deposits of approximately $284.1 million, and total consolidated shareholders equity of approximately $24.6 million. The
Companys deposits are insured under the FDICs Bank Insurance Fund to the maximum amount permitted by law.



Business Strategy



The primary elements of the Companys business strategy are described below.



| |  |  | Focus.    We will continue to focus on community banking and to distinguish our bank from our competition through our commitment to customers and
quality service.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Growth.    We believe we will have opportunities to grow as larger financial institutions continue to expand and to de-emphasize community banking
philosophies and customer contact. We will seek to grow in our existing banking market (internally and through additional offices), and to expand into new markets as appropriate opportunities arise.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Profitability.    We believe the cornerstone of community banking is a commitment to service, and that earnings are directly related to our ability to
cross-sell our products and services. We also believe that we must control expenses. We will seek to increase our revenues by promoting relationship banking with our customers and containing our operating expenses.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Employees.    We believe that one of our greatest strengths is our experienced staff which is dedicated to a philosophy of customer service and community
banking. We will seek to retain employees who are motivated and relationship oriented.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



FINANCIAL CONDITION

DECEMBER 31, 2005 AND 2004



The Company experienced significant growth in 2005, ending the year with
total assets of $343.3 million, an increase of $141.8 million or 70.4% from the beginning of year total assets of $201.5 million. The Company had an aggressive growth plan designed to leverage the $5.5 million in additional capital received from a
common stock offering completed in the fourth quarter of 2004. Loan demand remained high in our growing market area. Therefore, to take advantage of future growth opportunities, the Company formed a statutory trust that issued $10 million in trust
preferred securities in the fourth quarter of 2005 to obtain additional funds to augment the Banks regulatory capital for even further leverage. Part of this plan included further expansion into Pender County with the Surf City branch and the
Brunswick County market with the Leland branch office planned in 2006. Total customer deposits increased by $114.0 million or 67.0% during the year. This deposit growth, combined with our net income of $1.7 million, and additional borrowings of
$25.0 million (including the $10 million trust preferred issue), provided funding for the growth of $22.2 million in investments available for sale and $116.0 million in total loans receivable during the year. Our total shareholders equity
increased by $1.3 million during the year, principally due to the retention of net income of $1.7 million earned during the year offset by the $467,000 decline in the net market valuation of investment securities available for sale. Our regulatory
capital was successfully maintained at well capitalized levels throughout the period.



Total earning assets increased $140.4 million or 72.5% during the year, increasing from $193.7 million at year end 2004 to $334.1 million at year end
2005. Loans made up the largest percentage of the increase. Gross loans increased by $116.0 million or 71.4%, from $162.4 million at December 31, 2004 to $278.4 million at December 31, 2005. Construction loans experienced the most
significant net growth during the year, increasing $68.0 million or 139.7%, from $48.7 million to $116.7 million. Mortgages on one-to-four family homes increased dramatically as well, increasing $17.0 million or 109.7%, from $15.4 million at period
end 2004 to $32.4 million at period end 2005. This increase in construction and residential real estate loans was aided by the population growth in our market area and the efforts of specialized construction lenders on our staff. Net growth in other
loan categories were as follows: commercial mortgage loans increased $19.0 million or 27.9% from $68.3 million to $87.3 million, home equity lines of credit increased $8.1 million or 50.2% from $16.2 million to $24.3 million, commercial loans
increased $2.5 million or 21.1%, from $12.0 million to $14.5 million, and consumer loans increased $1.6 million or 80.5%, from $2.0 million to $3.6 million.



The composition of the loan portfolio, by category, as of December 31, 2005 is as follows: 41.9% construction loans, 31.3% commercial mortgage loans,
11.6% one-to-four family mortgage loans, 8.7% home equity lines of credit, 5.2% commercial loans, and 1.3% consumer loans. The composition of the loan portfolio at December 31, 2004 was as follows: 42.0% commercial mortgage loans, 29.9%
construction loans, 10.0% home equity lines of credit, 9.5% one-to-four family mortgages, 7.4% commercial, and 1.2% consumer.



The amortized cost of the Companys investment portfolio was $49.5 million and the fair market value was $48.7 million at December 31, 2005. All
investments are accounted for as available for sale under Financial Accounting Standards Board (FASB) No. 115 and are presented at their fair market value. The portfolio experienced a net increase of $22.2 million or 84.0%,
increasing from $26.4 million at year end 2004 to $48.7 million at year end 2005. The largest category increase in the investment portfolio was in municipal bonds. The Company made a significant investment in



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municipal bonds to take advantage of the tax-effect yield since we became fully taxable in 2005. Municipal bonds increased by $16.7 million or 4,155.0%,
growing from $403,000 to $17.1 million. The Companys investment portfolio consisted of U.S. Government agency securities, municipal bonds, collateralized mortgage obligations (CMOs), mortgage-backed securities, and corporate bonds. The Company
also owned $1.4 million of Federal Home Loan Bank stock at December 31, 2005 compared with $592,000 at December 31, 2004. The Company had $199,000 in time deposits in other banks and $5.4 million in funds invested in short-term overnight
deposits at Federal Home Loan Bank at December 31, 2005. At year end 2004, there was $4.2 million invested in short-term overnight deposits at Federal Home Loan Bank and no time deposits in other banks.



Non-interest earning assets total $12.8 million at December 31, 2005
versus $9.9 million at December 31, 2004, increasing by $3.0 million or 29.3%. Premises and equipment totaled approximately $1.8 million at December 31, 2005, reflecting a $693,000 net increase over the prior year. The Company added an
administrative support facility located behind its Main Office headquarters during September 2005, remodeled the second floor of its Main Office branch, and expanded its Hampstead branch office during the year that accounted for most of the
increase. The Company has $5.3 million invested in bank owned life insurance at December 31, 2005. This investment increased in cash surrender value by $199,000 during 2005. Other assets increased by $1.2 million primarily due to an increase in
equity investment in the Trust and changes in deferred tax assets. Accrued interest receivable increased by $911,000 due to the higher volume of earning assets. Cash and due from banks remained virtually the same at $1.8 million at year end 2005 and
2004.



Total deposits increased by $113.9 million or 67.0%,
growing from $170.2 million at December 31, 2004 to $284.1 million at December 31, 2005. Time deposits experienced the greatest increase growing by $94.0 million or 74.4%, from $126.2 million at year end 2004 to $220.2 million at year end
2005. Increases in other deposit categories included $11.6 million in non-interest bearing demand deposits growing to $26 million, $8.1 million in money market and NOW accounts growing to $35.3 million, and $310,000 in savings accounts growing to
$2.6 million.



The composition of the deposit base, by
category, at December 31, 2005 was as follows: 77.5% in time deposits, 12.4% in money market and NOW accounts, 9.2% in non-interest bearing demand deposits, and 0.9% in savings accounts. The composition of the deposit base at December 31,
2004 was as follows: 74.2% in time deposits, 16.0% in money market and NOW accounts, 8.5% in non-interest bearing demand deposits, and 1.3% in savings accounts. At December 31, 2005 the Company had $96.0 million in time deposits of $100,000 or
more compared to $43.1 million at December 31, 2004. Earning assets growth during 2005 required the Company to rely more heavily on retail and brokered time deposits as a source of funds.



Total borrowings increased by $24.9 million, from $7.4 million at
December 31, 2004 to $32.3 million at December 31, 2005. Total borrowings at December 31, 2005 consisted of $22.0 million in long-term Federal Home Loan Bank advances in addition to $10.3 million in junior subordinated debt issued to
the Trust in connection with the issuance of trust preferred securities. At December 31, 2004, the Company had $2.4 million in short-term and $5.0 million in long-term Federal Home Loan Bank advances.



Accrued expenses and other liabilities increased by $1.6 million to $2.2
million at December 31, 2005 compared to $627,000 at December 31, 2004. Accrued interest payable increased due to the volume of interest-bearing liabilities added during 2005. Also contributing to the increase in accrued expenses were
expenses associated with a newly implemented supplemental retirement plan for certain officers and directors during 2005.



Total stockholders equity increased by $1.3 million between December 31, 2004 and December 31, 2005. The increase was principally the result of
net income for 2005 of $1.7 million offset by the $467,000 decline in the net of tax market valuation of investment securities available for sale plus $82,000 in additional capital from the exercise of stock options.



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RESULTS OF OPERATIONS FOR THE YEARS ENDED

DECEMBER 31, 2005 AND 2004



Overview.    The Company achieved net income of $1,682,000 in 2005, an increase of $534,000 from net income of $1,148,000 earned in 2004. On a per share basis, net income for 2005 was $0.49
per share basic and $0.48 per share diluted as compared with $0.41 per share basic and $0.40 per share diluted in 2004. The earnings per basic and diluted share were restated for the prior period for the effect of a 5 for 4 stock split effected on
June 30, 2005. This improvement in net operating results is primarily attributable to a $3.4 million increase in net interest income from year to year, achieved principally as a result of significant growth in our interest earning assets. This
increased net interest income, combined with an increase of $302,000 in non-interest income, was tempered by an increase of $607,000 in loan loss provision and growth related increases of $1.8 million in non-interest expenses. The Company was also
fully taxable during 2005, recording an income tax provision of $785,000 versus an income tax benefit of $66,000 in 2004. This difference was principally due to adjustments to the valuation allowance associated with deferred tax assets. Return on
average assets was 0.62% and 0.70% for the years ended December 31, 2005 and 2004, respectively. Return on average equity for the year ended December 31, 2005 was 6.96% compared to 6.45% for the prior period. The 65.2% growth in total
average assets during 2005 resulted in a slight decline in return on average assets for the current year compared to 2004.



Net Interest Income.    Like most financial institutions, the primary component of earnings for the Company is net interest
income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from
changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and
the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as
well as by levels of noninterest-bearing liabilities and capital.



Net interest income increased to $9.3 million for the year ended December 31, 2005, a $3.4 million or 58.8% increase from the $5.9 million earned in 2004. The significant growth in our average interest-earning assets of $103.3 million
from $159.4 million during 2004 to $262.7 million during 2005 was the primary reason for the improvement in the level of our net interest income. We benefited from the increase in the level of our interest-earning assets coupled with the effects of
an 86 basis point increase in the average yield on those assets from 5.39% at the end of 2004 to 6.25% at the end of 2005. The Companys variable rate interest-earning assets benefited from the 2.00% total prime rate increases from 5.25% to
7.25% by year end 2005. Also, the Company made a significant increase, $16.7 million, in higher yielding municipal securities in its investment portfolio with our fully taxable status in 2005. Our average interest-bearing liabilities increased by
$90.0 million, or 68.1%, consistent with our increase in interest-earning assets. While our average cost of interest-bearing liabilities increased by 113 basis points from 2.07% to 3.20%, the impact was mitigated by the volume increase in
interest-earning assets. While our net interest income increased significantly from period to period, our net interest spread and margin both decreased. For the year ending December 31, 2005, our net interest spread was 3.05% and our net
interest margin was 3.54%. For the year ending December 31, 2004, our net interest spread was 3.32% and our net interest margin was 3.68%. The Companys increased reliance on interest-bearing liabilities to fund earning assets caused the
decline in interest margin and spread. The ratio of average interest-earning assets to average interest-bearing liabilities was 118.25% at December 31, 2005 compared to 120.61% at December 31, 2004.



Total average interest earning assets were $262.7 million for the year ended
December 31, 2005, increasing by $103.3 million or 64.8% when compared to an average of $159.4 million for the year ended December 31, 2004. Average loans outstanding increased by $86.9 million or 66.4% to $217.6 million for 2005 from
$130.7 million for 2004. The average balance of investment securities grew by $13.6 million or 62.7% to $35.3 million for 2005 from $21.7 million for 2004. Other average interest earning assets grew from $7.0 million to $9.7 million. Total average
interest-bearing liabilities increased by $90.0 million with interest-bearing deposits increasing by $76.1 million or 60.0% and borrowings increasing by $13.9 million or 251.8%.



Total interest income increased by $7.8 million for 2005 compared to 2004. This increase was the combined net result of a
$6.1 increase in interest income due to growth in earning assets and a $1.7 million increase in interest income due to the increase in yield. Interest expense increased by $2.5 million due to growth in interest-bearing funds and increased by $1.8
million due to the higher cost of interest-bearing liabilities.



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##### Table of Contents

Provision for Loan Losses.    The Company recorded a $1.5 million provision
for loan losses in 2005, representing an increase of $607,000 from the $892,000 provision made for 2004. The increase in the provision for loan losses for 2005 as compared to the same period in 2004 resulted mainly from growth in total loans
outstanding. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level we deem appropriate. In evaluating the allowance for loan losses, we consider factors that include growth, composition and industry
diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrowers ability to repay, estimated value of any underlying collateral, prevailing economic conditions and
other relevant factors. Total loans outstanding increased by $116.0 million during 2005. At December 31, the allowance for loan losses was $3.5 million for 2005 and $2.1 million for 2004, representing 1.26% and 1.30%, respectively, of loans
outstanding, and 298.98% and 212.02%, respectively, of nonperforming loans. Although the percentage of loan loss allowance to total loans outstanding decreased with the large growth in loans outstanding, management believes the overall quality of
the remaining portfolio has improved; hence, the level of loan loss allowance to nonperforming loans increased for the period. Nonperforming loans to total loans outstanding decreased from 0.61% for 2004 to 0.42% for 2005.



Non-Interest Income.    Non-interest income
increased to $1.0 million for 2005 as compared with $746,000 for 2004, an increase of $302,000. Service fees and charges, which represent a relatively stable and predictable source of non-interest income, totaled $644,000 for 2005, a 19.3% increase
over the $540,000 of service fees and charges earned in 2004. Contributing to the increase in non-interest income were increases of $97,000 in fees produced by our mortgage origination department and $102,000 in income from our investment in
bank-owned life insurance. The Company purchased $5.0 million in bank owned life insurance in July 2004 to fund supplemental retirement benefits for certain officers and directors under arrangements that were implemented during 2005.



Non-Interest Expenses.    Non-interest expenses
totaled $6.4 million for 2005, an increase of $1.8 million over the $4.6 million reported for 2004. As a percentage of average assets, total non-interest expenses decreased from 2.82% in 2004 to 2.35% for 2005. While we added additional overhead
related to expanding our staff and facilities, we aggressively grew our loan portfolio to accommodate the extra expense. Salaries and employee benefits increased by $861,000 as a result of personnel additions, normal compensation adjustments, higher
costs for group insurance coverage, and certain incentive awards made in recognition of our improvement in performance. Also, the Company recognized expenses of $211,000 related to the 2005 implementation of supplemental retirement benefits for
certain officers and directors versus none for this activity in 2004. Occupancy and equipment costs increased by $195,000 due to the addition of a new administrative support facility, expansion of our Hampstead branch and remodeling of our Main
Office second floor. Other non-interest expenses increased by $699,000 to a total of $2.0 million for 2005 as compared with $1.3 million for 2004. Those increases included an increase of $188,000 in data processing and check processing costs as a
result of growth and additional services, an increase of $100,000 in advertising costs, and an increase of $74,000 in shareholder expense related to formation of the holding company. Other increases resulted principally from the Companys
growth. The Company has further expansion plans for 2006 with the addition of two new full-service branches. Management believes that salary and occupancy expenses will increase in the near-term as the Company pursues growth in accordance with its
strategic plan. Also, data processing expense is tied closely to transaction and account volumes so these expenses should increase as the Company continues to grow.



The Company had an income tax expense of $785,000 for the year ended December 31, 2005 compared to an income tax
benefit in the amount of $66,000 for the year ended December 31, 2004. This difference is principally due to adjustments to the valuation allowance associated with deferred tax assets. The Companys effective tax rate was 31.8% in 2005 and
32.9% in 2004.



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##### Table of Contents

Average Balances and Average Rates Earned and Paid.    The following table
sets forth, for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities,
resultant yields or costs, net interest income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Nonaccrual loans have been included in determining average loans.



|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|-------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | -------- | - | ----------- | ---- | ---- | -------------- |  | - | -------- | - | ----------- | - | ----- | -------------- | ---- | - | -------- | - | ----------- | - |  | - | ----- |  | ---- | -
|                                                                                 |  | For the Years Ended December 31, |        
|                                                                                 |  | 2005                             |         |   | 2004     |   |             | 2003 |     
|                                                                                 |  | Averagebalance                   |         |   | Interest |   | Averagerate |      |      | Averagebalance |  |   | Interest |   | Averagerate |   |       | Averagebalance |      |   | Interest |   | Averagerate |  
|                                                                                 |  | (Dollars in thousands)           |        
|Interest-earning assets:                                                         |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Loans                                                                            |  | $                                | 217,604 |   |          | $ | 14,728      |      | 6.77 | %              |  | $ | 130,734  |   |             | $ | 7,663 |                | 5.86 | % |          | $ | 92,269      |   |  | $ | 5,878 |  | 6.37 | %
|Investment securities available for sale                                         |  |                                  | 35,326  |   |          |   | 1,453       |      | 4.11 | %              |  |   | 21,697   |   |             |   | 855   |                | 3.94 | % |          |   | 15,912      |   |  |   | 600   |  | 3.77 | %
|Other                                                                            |  |                                  | 9,739   |   |          |   | 231         |      | 2.37 | %              |  |   | 6,973    |   |             |   | 78    |                | 1.12 | % |          |   | 4,409       |   |  |   | 49    |  | 1.11 | %
|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Total interest-earning assets                                                    |  |                                  | 262,669 |   |          |   | 16,412      |      | 6.25 | %              |  |   | 159,404  |   |             |   | 8,596 |                | 5.39 | % |          |   | 112,590     |   |  |   | 6,527 |  | 5.80 | %
|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Other assets                                                                     |  |                                  | 8,589   |   |          |   |             |      |      |                |  |   | 4,816    |   |             |   |       |                |      |   |          |   | 1,898       |   |  |   |       |  |      |  
|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Total assets                                                                     |  | $                                | 271,258 |   |          |   |             |      |      |                |  | $ | 164,220  |   |             |   |       |                |      |   |          | $ | 114,488     |   |  |   |       |  |      |  
|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Interest-bearing liabilities:                                                    |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Deposits:                                                                        |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Savings, NOW and money market                                                    |  | $                                | 34,606  |   |          |   | 619         |      | 1.79 | %              |  | $ | 28,846   |   |             |   | 267   |                | 0.93 | % |          | $ | 26,636      |   |  |   | 275   |  | 1.03 | %
|Time deposits                                                                    |  |                                  | 168,090 |   |          |   | 5,702       |      | 3.39 | %              |  |   | 97,793   |   |             |   | 2,378 |                | 2.43 | % |          |   | 68,872      |   |  |   | 1,822 |  | 2.65 | %
|Borrowings                                                                       |  |                                  | 19,442  |   |          |   | 792         |      | 4.07 | %              |  |   | 5,527    |   |             |   | 97    |                | 1.76 | % |          |   | 487         |   |  |   | 6     |  | 1.23 | %
|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Total interest-bearing liabilities                                               |  |                                  | 222,138 |   |          |   | 7,113       |      | 3.20 | %              |  |   | 132,166  |   |             |   | 2,742 |                | 2.07 | % |          |   | 95,995      |   |  |   | 2,103 |  | 2.19 | %
|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Demand deposits                                                                  |  |                                  | 24,127  |   |          |   |             |      |      |                |  |   | 13,717   |   |             |   |       |                |      |   |          |   | 8,339       |   |  |   |       |  |      |  
|Other liabilities                                                                |  |                                  | 826     |   |          |   |             |      |      |                |  |   | 534      |   |             |   |       |                |      |   |          |   | 353         |   |  |   |       |  |      |  
|Shareholders equity                                                             |  |                                  | 24,167  |   |          |   |             |      |      |                |  |   | 17,803   |   |             |   |       |                |      |   |          |   | 9,801       |   |  |   |       |  |      |  
|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Total liabilities and shareholders equity                                       |  | $                                | 271,258 |   |          |   |             |      |      |                |  | $ | 164,220  |   |             |   |       |                |      |   |          | $ | 114,488     |   |  |   |       |  |      |  
|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Net interest income and interest rate spread                                     |  |                                  |         |   |          | $ | 9,299       |      | 3.05 | %              |  |   |          |   |             | $ | 5,854 |                | 3.32 | % |          |   |             |   |  | $ | 4,424 |  | 3.61 | %
|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Net interest margin                                                              |  |                                  |         |   |          |   |             |      | 3.54 | %              |  |   |          |   |             |   |       |                | 3.68 | % |          |   |             |   |  |   |       |  | 3.93 | %
|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                                  | 118.25  | % |          |   |             |      |      |                |  |   | 120.61   | % |             |   |       |                |      |   |          |   | 117.29      | % |  |   |       |  |      |  
|                                                                                 |  |                                  |         |   |          |   |             |      |      |                |  |   |          |   |             |   |       |                |      |   |          |   |             |   |  |   |       |  |      |  



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##### Table of Contents

Rate/Volume Analysis.    The following table analyzes the dollar amount of
changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior
periods rate), (ii) changes attributable to rate (changes in rate multiplied by the prior periods volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate
multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable to rate.



|                                         |  |                            |       |                            |   |       |       |  |        |       |      |   |       |       |   |      |   |  |   |       |  
|---------------------------------------- |  | -------------------------- | ----- | -------------------------- | - | ----- | ----- |  | ------ | ----- | ---- | - | ----- | ----- | - | ---- | - |  | - | ----- | -
|                                         |  | Year Ended                 |       | Year Ended                 |  
|                                         |  | December 31, 2005 vs. 2004 |       | December 31, 2004 vs. 2003 |  
|                                         |  | Increase (Decrease) Due to |       | Increase (Decrease) Due to |  
|                                         |  | Volume                     |       | Rate                       |   |       | Total |  | Volume |       | Rate |   |       | Total |  
|                                         |  | (Dollars in thousands)     |      
|Interest income:                         |  |                            |       |                            |   |       |       |  |        |       |      |   |       |       |   |      |   |  |   |       |  
|Loans                                    |  | $                          | 5,486 |                            | $ | 1,579 |       |  | $      | 7,065 |      | $ | 2,353 |       | $ | (568 | ) |  | $ | 1,785 |  
|Investment securities available for sale |  |                            | 549   |                            |   | 49    |       |  |        | 598   |      |   | 223   |       |   | 32   |   |  |   | 255   |  
|Other                                    |  |                            | 48    |                            |   | 105   |       |  |        | 153   |      |   | 29    |       |   | 0    |   |  |   | 29    |  
|                                         |  |                            |       |                            |   |       |       |  |        |       |      |   |       |       |   |      |   |  |   |       |  
|Total interest income                    |  |                            | 6,083 |                            |   | 1,733 |       |  |        | 7,816 |      |   | 2,605 |       |   | (536 | ) |  |   | 2,069 |  
|                                         |  |                            |       |                            |   |       |       |  |        |       |      |   |       |       |   |      |   |  |   |       |  
|Interest expense:                        |  |                            |       |                            |   |       |       |  |        |       |      |   |       |       |   |      |   |  |   |       |  
|Deposits:                                |  |                            |       |                            |   |       |       |  |        |       |      |   |       |       |   |      |   |  |   |       |  
|Savings, NOW and money market            |  |                            | 78    |                            |   | 274   |       |  |        | 352   |      |   | 22    |       |   | (30  | ) |  |   | (8    | )
|Time deposits                            |  |                            | 2,047 |                            |   | 1,277 |       |  |        | 3,324 |      |   | 734   |       |   | (178 | ) |  |   | 556   |  
|Borrowings                               |  |                            | 406   |                            |   | 289   |       |  |        | 695   |      |   | 75    |       |   | 16   |   |  |   | 91    |  
|                                         |  |                            |       |                            |   |       |       |  |        |       |      |   |       |       |   |      |   |  |   |       |  
|Total interest expense                   |  |                            | 2,531 |                            |   | 1,840 |       |  |        | 4,371 |      |   | 831   |       |   | (192 | ) |  |   | 639   |  
|                                         |  |                            |       |                            |   |       |       |  |        |       |      |   |       |       |   |      |   |  |   |       |  
|Net interest income increase             |  | $                          | 3,552 |                            | $ | (107  | )     |  | $      | 3,445 |      | $ | 1,774 |       | $ | (344 | ) |  | $ | 1,430 |  
|                                         |  |                            |       |                            |   |       |       |  |        |       |      |   |       |       |   |      |   |  |   |       |  



LIQUIDITY AND CAPITAL RESOURCES



Our sources of funds are customer deposits, cash and
demand balances due from other banks, interest-earning deposits in other banks and investment securities available for sale. These funds, together with loan repayments, are used to make loans and to fund continuing operations. In addition, at
December 31, 2005, we had credit availability with the Federal Home Loan Bank of Atlanta (FHLB) of approximately $51.4 million and credit lines with various financial institutions in the amount of $11.7 million. We had $22.0 million
in borrowings outstanding under these credit facilities at December 31, 2005. In addition, the Company had $10.3 million in subordinated long-term debt payable to the Trust. Total deposits were $284.1 million and $170.2 million at
December 31, 2005 and 2004, respectively. Because loan demand has exceeded the rate of growth in core deposits, we have relied heavily on time deposits as a source of funds. Certificates of deposit are the only deposit accounts that have stated
maturity dates, and those deposits are generally considered to be rate sensitive. At December 31, 2005 and 2004, time deposits represented 77.5% and 74.2%, respectively, of total deposits. Certificates of deposit of $100,000 or more represented
33.8% and 25.3%, respectively, of total deposits at December 31, 2005 and 2004. The Company has certificates of deposit acquired by advertising rates on the Internet and some obtained through deposit brokers. On December 31, 2005, those
out-of-market deposits amounted to approximately $83.8 million, or approximately 29.5% of total deposits and approximately 38.1% of total certificates of deposit. The Company uses brokered certificates of deposit as an alternative funding source.
Brokered deposits represent a source of fixed rate funds that do not need to be collateralized like Federal Home Loan Bank borrowings. The Company expects to continue to utilize the brokered deposit market in the future. With the exception of these
out-of-market deposits, management believes most of our other time deposits are relationship-oriented and, while it will be necessary to pay competitive rates to retain those deposits at their maturities, there are other subjective factors that will
determine their continued retention. Based upon prior experience, management anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.



Management anticipates that we will rely primarily upon customer deposits, loan repayments and current earnings to provide
liquidity, and will use funds thus generated to make loans and to purchase securities, primarily securities issued by the federal government and its agencies, municipals, and mortgage-backed securities. As of December 31, 2005, liquid



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##### Table of Contents

assets (cash and due from banks, interest-earning bank deposits, federal funds sold, time deposits in other banks and investment securities available for
sale) were approximately $56.1 million, which represented 16.4% of total assets and 19.8% of total deposits. At December 31, 2005, outstanding commitments to extend credit were $23.9 million, stand-by letters of credit totaled $293,000 and
available line of credit balances totaled $72.3 million. Management believes that the combined aggregate liquidity position of the Company is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the
near term.



We are subject to minimum capital requirements. The
following table indicates the Companys capital ratios at December 31, 2005. All capital ratios place the Company and the Bank in excess of the minimum necessary to be considered well capitalized under regulatory guidelines.



|                                |  |                      |   |  |                    |   |  |                            |  
|------------------------------- |  | -------------------- | - |  | ------------------ | - |  | -------------------------- | -
|                                |  | At December 31, 2005 |  
|                                |  | ActualRatio          |   |  | MinimumRequirement |   |  | WellCapitalizedRequirement |  
|Total risk-based capital ratio  |  | 13.3                 | % |  | 8.0                | % |  | 10.0                       | %
|Tier 1 risk-based capital ratio |  | 12.1                 | % |  | 4.0                | % |  | 6.0                        | %
|Leverage ratio                  |  | 10.7                 | % |  | 4.0                | % |  | 5.0                        | %



ASSET/LIABILITY MANAGEMENT



Our results of operations depend substantially on our net
interest income. Like most financial institutions, our interest income and cost of funds are affected by general economic conditions and by competition in the market place.



The purpose of asset/liability management is to provide stable net interest income growth by protecting our earnings from
undue interest rate risk arising from volatile interest rates and changes in the balance sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk, market risk, and capital adequacy. We maintain, and have
complied with, an asset/liability management policy approved by our Board of Directors that provides guidelines for controlling exposure to interest rate risk by utilizing the following ratios and trend analysis: liquidity, equity, volatile
liability dependence, portfolio maturities, maturing assets and maturing liabilities. Our policy is to control the exposure of our earnings to changing interest rates by generally endeavoring to maintain a position within a narrow range around an
earnings neutral position, which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes.



When suitable lending opportunities are not sufficient to utilize available funds, we have generally invested such funds in
securities, primarily securities issued by governmental agencies, municipals, and mortgage-backed securities. Our securities portfolio contributes to our profits and plays an important part in our overall interest rate risk management. However,
management of the securities portfolio alone cannot balance overall interest rate risk. The securities portfolio must be used in combination with other asset/liability techniques to actively manage the balance sheet. Our primary objectives in the
overall management of the securities portfolio are safety, liquidity, yield, asset/liability management (interest rate risk), and investing in securities that can be pledged for public deposits.



In reviewing our needs with regard to proper management of our
asset/liability program, management estimates our future needs, taking into consideration historical periods of high loan demand and low deposit balances, estimated loan and deposit increases (due to increased demand through marketing), and
forecasted interest rate changes.



The analysis of an
institutions interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is a standard tool for the measurement of exposure to interest rate risk. The
following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2005 that are projected to reprice or mature in each of the future time periods shown. Except as stated below, the
amounts of assets and liabilities shown which reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the
next upcoming adjustment period. In making the gap computations, assumptions made regarding prepayment rates and deposit decay rates have been used for interest-earning assets or interest-bearing liabilities. Loan prepayment rates were provided by
Vining Sparks IBG, L.P.s Portfolio Strategies Group based on their experience in a national



13



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##### Table of Contents

banking market with a normal mix of loans. Deposit decay rates were derived from the proprietary model from the Office of the Comptroller of the
Currencys Risk Analysis Division. In addition, the table reflects scheduled principal payments which will be received throughout the lives of the loans. The interest rate sensitivity of our assets and liabilities illustrated in the following
table would vary substantially if different assumptions were used or if our actual experience differs from that indicated by the assumptions.



|                                                                                   |  |                                         |         |   |               |   |          |                  |  |   |             |   |  |       |        |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ------------- | - | -------- | ---------------- |  | - | ----------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                                                   |  | Terms to Repricing at December 31, 2005 |        
|                                                                                   |  | Within 3Months                          |         |   | 4 to 12Months |   |          | 1 Year to5 Years |  |   | Over 5Years |   |  | Total |       
|                                                                                   |  | (Dollars in thousands)                  |        
|Interest-earning assets:                                                           |  |                                         |         |   |               |   |          |                  |  |   |             |   |  |       |        |   |  |   |         |  
|Loans receivable:                                                                  |  |                                         |         |   |               |   |          |                  |  |   |             |   |  |       |        |   |  |   |         |  
|Adjustable rate                                                                    |  | $                                       | 173,449 |   |               | $ | 126      |                  |  | $ | 5           |   |  | $     | 58     |   |  | $ | 173,638 |  
|Fixed rate                                                                         |  |                                         | 8,531   |   |               |   | 15,449   |                  |  |   | 79,130      |   |  |       | 1,638  |   |  |   | 104,748 |  
|Investments securities available for sale                                          |  |                                         | 699     |   |               |   | 2,364    |                  |  |   | 21,720      |   |  |       | 23,872 |   |  |   | 48,655  |  
|Interest-earning and time deposits in other banks                                  |  |                                         | 5,419   |   |               |   |         |                  |  |   | 199         |   |  |       |       |   |  |   | 5,618   |  
|Stock in FHLB of Atlanta                                                           |  |                                         | 1,394   |   |               |   |         |                  |  |   |            |   |  |       |       |   |  |   | 1,394   |  
|                                                                                   |  |                                         |         |   |               |   |          |                  |  |   |             |   |  |       |        |   |  |   |         |  
|Total interest-earning assets                                                      |  | $                                       | 189,492 |   |               | $ | 17,939   |                  |  | $ | 101,054     |   |  | $     | 25,568 |   |  | $ | 334,053 |  
|                                                                                   |  |                                         |         |   |               |   |          |                  |  |   |             |   |  |       |        |   |  |   |         |  
|Interest-bearing liabilities:                                                      |  |                                         |         |   |               |   |          |                  |  |   |             |   |  |       |        |   |  |   |         |  
|Deposits:                                                                          |  |                                         |         |   |               |   |          |                  |  |   |             |   |  |       |        |   |  |   |         |  
|Money market, NOW and savings                                                      |  | $                                       | 5,754   |   |               | $ | 11,686   |                  |  | $ | 20,492      |   |  | $     |       |   |  | $ | 37,932  |  
|Time                                                                               |  |                                         | 19,613  |   |               |   | 83,806   |                  |  |   | 20,600      |   |  |       | 127    |   |  |   | 124,146 |  
|Time over $100,000                                                                 |  |                                         | 13,589  |   |               |   | 62,196   |                  |  |   | 20,245      |   |  |       |       |   |  |   | 96,030  |  
|Borrowings                                                                         |  |                                         | 15,310  |   |               |   |         |                  |  |   | 9,000       |   |  |       | 8,000  |   |  |   | 32,310  |  
|                                                                                   |  |                                         |         |   |               |   |          |                  |  |   |             |   |  |       |        |   |  |   |         |  
|Total interest-bearing liabilities                                                 |  | $                                       | 54,266  |   |               | $ | 157,688  |                  |  | $ | 70,337      |   |  | $     | 8,127  |   |  | $ | 290,418 |  
|                                                                                   |  |                                         |         |   |               |   |          |                  |  |   |             |   |  |       |        |   |  |   |         |  
|Interest sensitivity gap per period                                                |  | $                                       | 135,226 |   |               | $ | (139,749 | )                |  | $ | 30,717      |   |  | $     | 17,441 |   |  | $ | 43,635  |  
|Cumulative interest sensitivity gap                                                |  | $                                       | 135,226 |   |               | $ | (4,523   | )                |  | $ | 26,194      |   |  | $     | 43,635 |   |  | $ | 43,635  |  
|Cumulative gap as a percentage of total interest-earning assets                    |  |                                         | 40.48   | % |               |   | (1.35    | )%               |  |   | 7.84        | % |  |       | 13.06  | % |  |   | 13.06   | %
|Cumulative interest-earning assets as a percentage of interest-bearing liabilities |  |                                         | 349.19  | % |               |   | 97.87    | %                |  |   | 109.28      | % |  |       | 115.02 | % |  |   | 115.02  | %



CRITICAL ACCOUNTING POLICIES



This discussion and analysis of financial condition and
results of operations is based on our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and
judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates which are based upon historical experience and on other assumptions that we believe to
be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.



Our significant accounting policies are described in Note B to our audited financial statements. We consider the following accounting policies to be most
critical in their potential effect on our financial position or results of operations:



Allowance for Loan Losses.    The most critical estimate concerns our allowance for loan losses. We record provisions for loan losses based upon known problem loans and estimated
deficiencies in the existing loan portfolio. Our methodology for assessing the allowance for loan losses consists of two key components, including a specific allowance for identified problem or impaired loans and a formula allowance for the
remainder of the portfolio.



Identified problem and impaired
loans are measured for impairment based on the present value of expected future cash flows discounted at the loans effective interest rate, the loans observable market price or the fair value of the collateral if the loan is collateral
dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. The adequacy of the allowance is also reviewed by our management based upon its evaluation of then-existing economic
and business conditions affecting our key lending areas and other conditions, such as new loan products, collateral values, loan concentrations, changes in the mix and volume of the loan portfolio; trends in



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portfolio credit quality, including delinquency and charge-off rates; and current economic conditions that may affect a borrowers ability to repay.
Although our management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating
environment.



Interest Income
Recognition.    Interest on loans is included in income as earned based upon interest rates applied to unpaid principal. Interest is not accrued on loans 90 days or more past due unless the loans are adequately secured
and in the process of collection. Interest is not accrued on other loans when management believes collection is doubtful. All loans considered impaired are non-accruing. Interest on non-accruing loans is recognized as payments are received when the
ultimate collectibility of interest is no longer considered doubtful. When a loan is placed on non-accrual status, all interest previously accrued is reversed against current-period interest income.



OFF-BALANCE SHEET ARRANGEMENTS



Information about the Companys off-balance sheet risk exposure is
presented in Note L to the accompanying financial statements. As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as special purpose entities (SPEs), which generally are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2005, we are not involved in any
unconsolidated SPE transactions.



ADDITIONAL FINANCIAL INFORMATION



Loans Receivable



The following table sets forth, at the dates indicated, the Companys
loan portfolio composition by type of loan:



|                                   |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |  
|---------------------------------- |  | ---------------------- | ------- | - | --------------- | ------ | - | ------ | - | ------- | --------------- |  | ------ | -
|                                   |  | At December 31,        |        
|                                   |  | 2005                   |         |   | 2004            |       
|                                   |  | Amount                 |         |   | Percentof Total |        |   | Amount |   |         | Percentof Total | 
|                                   |  | (Dollars in thousands) |        
|Commercial and industrial          |  | $                      | 14,512  |   |                 | 5.21   | % |        | $ | 11,979  |                 |  | 7.37   | %
|Real estate:                       |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |  
|Construction                       |  |                        | 116,633 |   |                 | 41.86  | % |        |   | 48,655  |                 |  | 29.95  | %
|Commercial mortgage                |  |                        | 87,263  |   |                 | 31.32  | % |        |   | 68,254  |                 |  | 42.01  | %
|1-4 family mortgage                |  |                        | 32,364  |   |                 | 11.62  | % |        |   | 15,430  |                 |  | 9.50   | %
|Consumer                           |  |                        | 3,546   |   |                 | 1.27   | % |        |   | 1,965   |                 |  | 1.21   | %
|Home equity lines of credit        |  |                        | 24,286  |   |                 | 8.72   | % |        |   | 16,174  |                 |  | 9.96   | %
|                                   |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |  
|Subtotal                           |  |                        | 278,604 |   |                 | 100.00 | % |        |   | 162,457 |                 |  | 100.00 | %
|                                   |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |  
|Less:    Allowance for loan losses |  |                        | (3,510  | ) |                 |        |   |        |   | (2,106  | )               |  |        |  
|Deferred loan fees, net            |  |                        | (218    | ) |                 |        |   |        |   | (58     | )               |  |        |  
|                                   |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |  
|Net loans                          |  | $                      | 274,876 |   |                 |        |   |        | $ | 160,293 |                 |  |        |  
|                                   |  |                        |         |   |                 |        |   |        |   |         |                 |  |        |  



15



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The following table presents at December 31, 2005 (1) the aggregate maturities of loans in the
named categories of our loan portfolio and (2) the aggregate amounts of variable and fixed rate loans that mature after one year:



|                                |  |                        |         |           |   |              |  |       |       |  |   |        
|------------------------------- |  | ---------------------- | ------- | --------- | - | ------------ |  | ----- | ----- |  | - | -------
|                                |  | Within 1Year           |         | 1-5 Years |   | After 5Years |  | Total
|                                |  | (Dollars in thousands)
|Commercial and industrial       |  | $                      | 6,571   |           | $ | 7,941        |  | $     |      |  | $ | 14,512 
|Real estateconstruction        |  |                        | 99,030  |           |   | 17,603       |  |       |      |  |   | 116,633
|Real estatecommercial mortgage |  |                        | 17,242  |           |   | 66,915       |  |       | 3,106 |  |   | 87,263 
|Real estate1-4 family mortgage |  |                        | 14,674  |           |   | 17,544       |  |       | 146   |  |   | 32,364 
|                                |  |                        |         |           |   |              |  |       |       |  |   |        
|Total                           |  | $                      | 137,517 |           | $ | 110,003      |  | $     | 3,252 |  | $ | 250,772
|                                |  |                        |         |           |   |              |  |       |       |  |   |        
|Fixed rate loans                |  |                        |         |           | $ | 89,354       |  | $     | 2,086 |  | $ | 91,440 
|Variable rate loans             |  |                        |         |           |   | 20,649       |  |       | 1,166 |  |   | 21,815 
|                                |  |                        |         |           |   |              |  |       |       |  |   |        
|Total                           |  |                        |         |           | $ | 110,003      |  | $     | 3,252 |  | $ | 113,255
|                                |  |                        |         |           |   |              |  |       |       |  |   |        



Asset Quality



Maintaining a high level of asset quality is a primary goal in our lending
function, and we employ a formal internal loan review process to ensure adherence to the lending policies approved by our Board of Directors. A systematic evaluation process fundamentally drives the function of determining the allowance for loan
losses. This ongoing process serves as the basis for determining, on a monthly basis, the allowance for loan losses and any resulting provision to be charged against earnings. Consideration is given to historical loan loss experience, the value and
adequacy of collateral, economic conditions in our market area and other factors. For loans determined to be impaired, the allowance is based on discounted cash flows using the loans initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to
significant change. The allowance for loan losses represents managements estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio.



Our policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following timely
collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a non-accrual status are generally collateralized, and probable losses are considered in the determination of the allowance
for loan losses.



Nonperforming Assets



The following table sets forth information with respect to our nonaccrual
loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans), and total nonperforming assets.



|                                                 |  |                        |        |   |      |   |        |  
|------------------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                 |  | At December 31,        |       
|                                                 |  | 2005                   |        |   | 2004 |  
|                                                 |  | (Dollars in thousands) |       
|Nonaccrual loans                                 |  | $                      | 1,174  |   |      | $ | 993    |  
|Restructured loans                               |  |                        |       |   |      |   |       |  
|                                                 |  |                        |        |   |      |   |        |  
|Total nonperforming loans                        |  |                        | 1,174  |   |      |   | 993    |  
|Real estate owned                                |  |                        |       |   |      |   | 195    |  
|                                                 |  |                        |        |   |      |   |        |  
|Total nonperforming assets                       |  | $                      | 1,174  |   |      | $ | 1,188  |  
|                                                 |  |                        |        |   |      |   |        |  
|Accruing loans past due 90 days or more          |  | $                      |       |   |      | $ |       |  
|Allowance for loan losses                        |  |                        | 3,510  |   |      |   | 2,106  |  
|Nonperforming loans to period end loans          |  |                        | 0.42   | % |      |   | 0.61   | %
|Allowance for loan losses to period end loans    |  |                        | 1.26   | % |      |   | 1.30   | %
|Allowance for loan losses to nonperforming loans |  |                        | 298.98 | % |      |   | 212.02 | %
|Nonperforming assets to total assets             |  |                        | 0.34   | % |      |   | 0.59   | %



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Though our nonperforming loans increased by $181,000, or by approximately 18.2%, from December 31,
2004 to December 31, 2005, the amount of nonperforming loans as a percentage of our total loans decreased from 0.61% to 0.42% during the same period. An aggregate of approximately 77.0% of our nonperforming loans at December 31, 2005
consisted of two loans amounting to an aggregate of approximately $904,000. One of these loans totaling approximately $640,000 is secured by real estate and is in foreclosure after being released from bankruptcy. Based on our appraisal of the
collateral, we do not expect any significant loss of principal related to this loan. The other loan totaling approximately $264,000 is secured principally by real estate along with inventory. We anticipated a potential loss of 15% of the principal
balance which we have currently reserved in our loan loss allocation. Subject to inventory liquidation values, additional losses of up to 20% may be incurred.



Our financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on our loan portfolio, unless a
loan is placed on a nonaccrual basis. Loans are placed on a nonaccrual basis when they become 90 days past due or whenever we believe that collection has become doubtful. Amounts received on non-accrual loans generally are applied first to principal
and then to interest only after all principal has been collected. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or
principal, have been granted due to the borrowers weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. Loans are charged off
when the collection of principal and interest has become doubtful and the loans no longer can be considered sound collectible assets (or, in the case of unsecured loans, when they become 90 days past due).



Interest on nonaccrual loans foregone was approximately $76,000 and $38,000
for the years ended December 31, 2005 and 2004, respectively.



Allowance for Loan Losses



The allowance for
loan losses is maintained at a level considered adequate by management to provide for anticipated loan losses based on managements assessment of various factors affecting the loan portfolio, including a review of problem loans, business
conditions and loss experience and an overall evaluation of the quality of the underlying collateral. The allowance is increased by provisions charged to operations and reduced by loans charged off, net of recoveries.



While management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in
making the final determination. In addition, various regulatory agencies may require us to make adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination. The following
table shows the allocation of our allowance for loan losses at the dates indicated. The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses and other factors that may affect future loan losses in the
categories of loans shown.



|                            |  |                        |       |                    |        |   |        |   |                    |  |        |  
|--------------------------- |  | ---------------------- | ----- | ------------------ | ------ | - | ------ | - | ------------------ |  | ------ | -
|                            |  | At December 31,        |      
|                            |  | 2005                   |       |                    | 2004   |  
|                            |  | Amount                 |       | % ofTotalLoans (1) |        |   | Amount |   | % ofTotalLoans (1) | 
|                            |  | (Dollars in thousands) |      
|Balance applicable to:      |  |                        |       |                    |        |   |        |   |                    |  |        |  
|Commercial                  |  | $                      | 410   |                    | 5.21   | % |        | $ | 303                |  | 7.37   | %
|Real estatemortgage        |  |                        | 2,611 |                    | 84.8   | % |        |   | 1,468              |  | 81.46  | %
|Consumer                    |  |                        | 38    |                    | 1.27   | % |        |   | 48                 |  | 1.21   | %
|Home equity lines of credit |  |                        | 298   |                    | 8.72   | % |        |   | 206                |  | 9.96   | %
|                            |  |                        |       |                    |        |   |        |   |                    |  |        |  
|Total allocated             |  |                        | 3,357 |                    | 100.00 | % |        |   | 2,025              |  | 100.00 | %
|                            |  |                        |       |                    |        |   |        |   |                    |  |        |  
|Unallocated                 |  |                        | 153   |                    |        |   |        |   | 81                 |  |        |  
|                            |  |                        |       |                    |        |   |        |   |                    |  |        |  
|Total                       |  | $                      | 3,510 |                    |        |   |        | $ | 2,106              |  |        |  
|                            |  |                        |       |                    |        |   |        |   |                    |  |        |  

---

|(1) |  | Represents total of all outstanding loans in each category as a percent of total loans outstanding.
|--- |  | ---------------------------------------------------------------------------------------------------



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The following table sets forth for the periods indicated information regarding changes in our allowance
for loan losses.



|                                                                      |  |                           |       |   |      |   |       |  
|--------------------------------------------------------------------- |  | ------------------------- | ----- | - | ---- | - | ----- | -
|                                                                      |  | At or for the Years Ended |      
|                                                                      |  | December 31,              |      
|                                                                      |  | 2005                      |       |   | 2004 |  
|                                                                      |  | (Dollars in thousands)    |      
|Balance at beginning of period                                        |  | $                         | 2,106 |   |      | $ | 1,661 |  
|Charge-offs:                                                          |  |                           |       |   |      |   |       |  
|Real estatemortgage                                                  |  |                           |      |   |      |   | (50   | )
|Home equity lines of credit                                           |  |                           | (43   | ) |      |   | (32   | )
|Commercial and industrial                                             |  |                           | (131  | ) |      |   | (415  | )
|Loans to individuals                                                  |  |                           | (10   | ) |      |   | (6    | )
|                                                                      |  |                           |       |   |      |   |       |  
|Total charge-offs                                                     |  |                           | (184  | ) |      |   | (503  | )
|                                                                      |  |                           |       |   |      |   |       |  
|Recoveries:                                                           |  |                           |       |   |      |   |       |  
|Real estatemortgage                                                  |  |                           | 4     |   |      |   | 11    |  
|Home equity lines of credit                                           |  |                           | 74    |   |      |   |      |  
|Commercial and industrial                                             |  |                           | 10    |   |      |   | 42    |  
|Loans to individuals                                                  |  |                           | 1     |   |      |   | 3     |  
|                                                                      |  |                           |       |   |      |   |       |  
|Total recoveries                                                      |  |                           | 89    |   |      |   | 56    |  
|                                                                      |  |                           |       |   |      |   |       |  
|Net (charge-offs) recoveries                                          |  |                           | (95   | ) |      |   | (447  | )
|Provision for loan losses charged to operations                       |  |                           | 1,499 |   |      |   | 892   |  
|                                                                      |  |                           |       |   |      |   |       |  
|Balance at end of period                                              |  | $                         | 3,510 |   |      | $ | 2,106 |  
|                                                                      |  |                           |       |   |      |   |       |  
|Ratio of net loan charge-offs to average loans outstanding            |  |                           | 0.04  | % |      |   | 0.34  | %
|Ratio of allowance for loan losses to loans outstanding at period-end |  |                           | 1.26  | % |      |   | 1.30  | %



Investments



Our portfolio of investment securities, all of which are available for sale,
consists of U.S. government agency securities, municipals, corporate bonds, and mortgage-backed securities (including collateralized mortgage obligations). Securities to be held for indefinite periods of time and not intended to be held to maturity
are classified as available for sale and carried at fair value with any unrealized gains or losses reflected as an adjustment to shareholders equity. Securities held for indefinite periods of time include securities that management intends to
use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates and/or significant prepayment risks. It is our policy to classify all investment securities as available for sale.



|                           |  |                        |        |                      |   |                       |  |             |     |  |   |       
|-------------------------- |  | ---------------------- | ------ | -------------------- | - | --------------------- |  | ----------- | --- |  | - | ------
|                           |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | MarketValue
|                           |  | (Dollars in thousands)
|December 31, 2005          |  |                        |        |                      |   |                       |  |             |     |  |   |       
|U.S. government agencies   |  | $                      | 5,958  |                      | $ |                      |  | $           | 100 |  | $ | 5,858 
|Municipals                 |  |                        | 17,285 |                      |   | 16                    |  |             | 153 |  |   | 17,148
|Corporate bonds            |  |                        | 536    |                      |   |                      |  |             | 12  |  |   | 524   
|Mortgage-backed securities |  |                        | 25,730 |                      |   |                      |  |             | 605 |  |   | 25,125
|                           |  |                        |        |                      |   |                       |  |             |     |  |   |       
|                           |  | $                      | 49,509 |                      | $ | 16                    |  | $           | 870 |  | $ | 48,655
|                           |  |                        |        |                      |   |                       |  |             |     |  |   |       
|December 31, 2004          |  |                        |        |                      |   |                       |  |             |     |  |   |       
|U.S. government agencies   |  | $                      | 4,478  |                      | $ | 1                     |  | $           | 25  |  | $ | 4,454 
|Municipals                 |  |                        | 404    |                      |   |                      |  |             | 1   |  |   | 403   
|Mortgage-backed securities |  |                        | 21,650 |                      |   | 58                    |  |             | 129 |  |   | 21,579
|                           |  |                        |        |                      |   |                       |  |             |     |  |   |       
|                           |  | $                      | 26,532 |                      | $ | 59                    |  | $           | 155 |  | $ | 26,436
|                           |  |                        |        |                      |   |                       |  |             |     |  |   |       



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The following table provides the amortized costs, carrying values, intervals of maturities or repricings,
and weighted average yields of our investment portfolio at December 31, 2005:



|                                     |  |               |        |           |   |                      |  |      |  
|------------------------------------ |  | ------------- | ------ | --------- | - | -------------------- |  | ---- | -
|                                     |  | AmortizedCost |        | FairValue |   | WeightedAverageYield | 
|Securities available for sale:       |  |               |        |           |   |                      |  |      |  
|U.S. Government agencies:            |  |               |        |           |   |                      |  |      |  
|Due after one but within five years  |  | $             | 4,999  |           | $ | 4,899                |  | 4.22 | %
|Due after five but within ten years  |  |               | 959    |           |   | 959                  |  | 5.17 | %
|                                     |  |               |        |           |   |                      |  |      |  
|                                     |  |               | 5,958  |           |   | 5,858                |  | 4.38 | %
|                                     |  |               |        |           |   |                      |  |      |  
|Municipals:                          |  |               |        |           |   |                      |  |      |  
|Due after one but within five years  |  |               | 2,268  |           |   | 2,244                |  | 3.35 | %
|Due after five but within ten years  |  |               | 10,924 |           |   | 10,820               |  | 3.99 | %
|Due after ten years                  |  |               | 4,093  |           |   | 4,084                |  | 4.18 | %
|                                     |  |               |        |           |   |                      |  |      |  
|                                     |  |               | 17,285 |           |   | 17,148               |  | 3.95 | %
|                                     |  |               |        |           |   |                      |  |      |  
|Corporate bonds:                     |  |               |        |           |   |                      |  |      |  
|Due after one but within five years  |  |               | 536    |           |   | 524                  |  | 6.22 | %
|                                     |  |               |        |           |   |                      |  |      |  
|                                     |  |               | 536    |           |   | 524                  |  | 6.22 | %
|                                     |  |               |        |           |   |                      |  |      |  
|Mortgage-backed securities:          |  |               |        |           |   |                      |  |      |  
|Due in one year or less              |  |               | 3,133  |           |   | 3,063                |  | 4.38 | %
|Due after one but within five years  |  |               | 14,403 |           |   | 14,053               |  | 4.30 | %
|Due after five but within ten years  |  |               | 6,619  |           |   | 6,467                |  | 4.59 | %
|Due after ten years                  |  |               | 1,575  |           |   | 1,542                |  | 4.83 | %
|                                     |  |               |        |           |   |                      |  |      |  
|                                     |  |               | 25,730 |           |   | 25,125               |  | 4.42 | %
|                                     |  |               |        |           |   |                      |  |      |  
|Total securities available for sale: |  |               |        |           |   |                      |  |      |  
|Due in one year or less              |  |               | 3,133  |           |   | 3,063                |  | 4.38 | %
|Due after one but within five years  |  |               | 22,206 |           |   | 21,720               |  | 4.29 | %
|Due after five but within ten years  |  |               | 18,502 |           |   | 18,246               |  | 4.26 | %
|Due after ten years                  |  |               | 5,668  |           |   | 5,626                |  | 4.36 | %
|                                     |  |               |        |           |   |                      |  |      |  
|                                     |  | $             | 49,509 |           | $ | 48,655               |  | 4.26 | %
|                                     |  |               |        |           |   |                      |  |      |  



For purposes of the
maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may
mature earlier than their weighted-average contractual maturities because of principal prepayments.



We do not engage in, nor do we presently intend to engage in, securities trading activities and, therefore, we do not maintain a trading account. At
December 31, 2005 and 2004, there were no securities of any issuer (other than governmental agencies) that exceeded 10% of our shareholders equity.



Deposits



The following table sets forth the amounts and maturities of our certificates of deposit.



|                         |  |                      |        |                   |   |                   |  |               |        |       |   |        |  |   |        
|------------------------ |  | -------------------- | ------ | ----------------- | - | ----------------- |  | ------------- | ------ | ----- | - | ------ |  | - | -------
|                         |  | At December 31, 2005
|                         |  | 3 Monthsor Less      |        | Over 3 to6 Months |   | Over 6 to12Months |  | Over 12Months |        | Total
|Certificates of deposit: |  |                      |        |                   |   |                   |  |               |        |       |   |        |  |   |        
|Less than $100,000       |  | $                    | 19,613 |                   | $ | 34,354            |  | $             | 49,452 |       | $ | 20,727 |  | $ | 124,146
|$100,000 or more         |  |                      | 13,589 |                   |   | 24,767            |  |               | 37,429 |       |   | 20,245 |  |   | 96,030 
|                         |  |                      |        |                   |   |                   |  |               |        |       |   |        |  |   |        
|Total                    |  | $                    | 33,202 |                   | $ | 59,121            |  | $             | 86,881 |       | $ | 40,972 |  | $ | 220,176
|                         |  |                      |        |                   |   |                   |  |               |        |       |   |        |  |   |        



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The following table sets forth for the periods indicated the average balances outstanding and average
interest rates for each major category of deposits.



|                                       |  |                                 |         |             |      |   |               |   |             |  |      |  
|-------------------------------------- |  | ------------------------------- | ------- | ----------- | ---- | - | ------------- | - | ----------- |  | ---- | -
|                                       |  | For the Year Ended December 31, |        
|                                       |  | 2005                            |         |             | 2004 |  
|                                       |  | AverageAmount                   |         | AverageRate |      |   | AverageAmount |   | AverageRate | 
|                                       |  | (Dollars in thousands)          |        
|Savings, NOW and money market deposits |  | $                               | 34,606  |             | 1.79 | % |               | $ | 28,846      |  | 0.93 | %
|Time deposits                          |  |                                 | 168,090 |             | 3.39 | % |               |   | 97,793      |  | 2.43 | %
|                                       |  |                                 |         |             |      |   |               |   |             |  |      |  
|Total interest-bearing deposits        |  |                                 | 202,696 |             | 3.12 | % |               |   | 126,639     |  | 2.09 | %
|Non-interest-bearing deposits          |  |                                 | 24,127  |             |     |   |               |   | 13,717      |  |     |  
|                                       |  |                                 |         |             |      |   |               |   |             |  |      |  
|Total deposits                         |  | $                               | 226,823 |             | 2.79 | % |               | $ | 140,356     |  | 1.88 | %
|                                       |  |                                 |         |             |      |   |               |   |             |  |      |  



Borrowings



As an additional source of funding, we use advances from the Federal Home
Loan Bank of Atlanta under a line of credit with a maximum borrowing availability of $51.4 million at December 31, 2005. Advances are secured by loans and investments. We had $22.0 million and $7.4 million in advances outstanding at Federal
Home Loan Bank at December 31, 2005 and 2004, respectively.



We also had $10.3 million in long-term subordinated debentures outstanding payable to our subsidiary, BKWW Statutory Trust I, at December 31, 2005 and none in 2004.



In addition, we may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks
totaling $11.0 million at December 31, 2005. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and term of advances. These lines of credit are payable on demand and bear interest based
upon the daily federal funds rate. We had no advances outstanding against these lines of credit at December 31, 2005 and 2004.



We maintain a credit facility with the Federal Reserve Bank of Richmond under which we had a maximum borrowing availability of approximately $650,000 at
December 31, 2005. The line of credit is secured by an investment security available for sale. No amount was outstanding under this line of credit at December 31, 2005 and 2004.



RECENT ACCOUNTING PRONOUNCEMENTS



See Note B to the financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and
effects on results of operations and financial condition.



20



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##### Table of Contents

FORWARD-LOOKING INFORMATION



This Annual Report includes forward-looking statements. Those statements include statements about our profitability,
liquidity, allowance for loan losses, nonperforming loans, interest rate sensitivity, market risk, our ability to compete in our markets, our business strategies, and other such statements that are not historical facts. They usually will contain
words such as may, will, expect, believe, anticipate, likely, estimate, continue or similar terms, or the negative or other variations of those terms. We
have based those forward-looking statements on our current expectations and projections about future events, but we do not guarantee our future performance described in the statements or that the facts or events described in the statements actually
will happen. Our actual performance, or any of those events or facts that actually occur, may never occur or be realized, may be materially different from, or may occur in a way substantially different from, the results, facts or events indicated by
the forward-looking statements. Other factors that could influence the accuracy of those forward-looking statements include, but are not limited to, customer acceptance of our services, products and fee structure, the financial success or changing
strategies of our customers, the competitive nature of the financial services industry and our ability to compete effectively against other financial institutions in our banking market, weather and similar conditions (particularly the effect of
hurricanes on our customers and the coastal communities in which we do business), actions of government regulators, the level of market interest rates, general economic conditions, and other developments or changes in our business that we do not
expect. We have no obligation to publicly update or otherwise revise any of the forward-looking statements as a result of any new information, future events or otherwise.



21



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---





LOGO



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Shareholders and the Board of Directors

Bank of Wilmington Corporation

Wilmington, North Carolina



We
have audited the accompanying consolidated balance sheets of Bank of Wilmington Corporation and subsidiary (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, comprehensive income, changes in
shareholders equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.



We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bank of Wilmington Corporation and subsidiary at December 31, 2005 and 2004 and the results of its
operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.



LOGO

Raleigh, North Carolina

March 28, 2006



22



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##### Table of Contents

BANK OF WILMINGTON CORPORATION

CONSOLIDATED BALANCE SHEETS



December 31, 2005
and 2004



|                                                                                                                                                               |  |                                               |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                               |  | 2005                                          |         |   | 2004 |  
|                                                                                                                                                               |  | (In thousands, exceptshare and per sharedata) |        
|ASSETS                                                                                                                                                         |  |                                               |         |  
|Cash and due from banks                                                                                                                                        |  | $                                             | 1,854   |   |      | $ | 1,882   |  
|Interest-earning deposits in other banks                                                                                                                       |  |                                               | 5,419   |   |      |   | 4,223   |  
|Investment securities available for sale, at fair value (Note C)                                                                                               |  |                                               | 48,655  |   |      |   | 26,436  |  
|Time deposits in other banks                                                                                                                                   |  |                                               | 199     |   |      |   |        |  
|Loans (Note D)                                                                                                                                                 |  |                                               | 278,386 |   |      |   | 162,399 |  
|Allowance for loan losses (Note D)                                                                                                                             |  |                                               | (3,510  | ) |      |   | (2,106  | )
|                                                                                                                                                               |  |                                               |         |   |      |   |         |  
|Net Loans                                                                                                                                                      |  |                                               | 274,876 |   |      |   | 160,293 |  
|Accrued interest receivable                                                                                                                                    |  |                                               | 1,645   |   |      |   | 734     |  
|Premises and equipment, net (Notes E and H)                                                                                                                    |  |                                               | 1,845   |   |      |   | 1,152   |  
|Stock in Federal Home Loan Bank of Atlanta, at cost                                                                                                            |  |                                               | 1,394   |   |      |   | 592     |  
|Foreclosed real estate                                                                                                                                         |  |                                               |        |   |      |   | 195     |  
|Bank owned life insurance                                                                                                                                      |  |                                               | 5,296   |   |      |   | 5,097   |  
|Other assets (Note I)                                                                                                                                          |  |                                               | 2,144   |   |      |   | 929     |  
|                                                                                                                                                               |  |                                               |         |   |      |   |         |  
|Total Assets                                                                                                                                                   |  | $                                             | 343,327 |   |      | $ | 201,533 |  
|                                                                                                                                                               |  |                                               |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                           |  |                                               |         |   |      |   |         |  
|Deposits                                                                                                                                                       |  |                                               |         |   |      |   |         |  
|Demand                                                                                                                                                         |  | $                                             | 26,025  |   |      | $ | 14,407  |  
|Savings                                                                                                                                                        |  |                                               | 2,594   |   |      |   | 2,284   |  
|Money market and NOW                                                                                                                                           |  |                                               | 35,339  |   |      |   | 27,244  |  
|Time (Note F)                                                                                                                                                  |  |                                               | 220,176 |   |      |   | 126,233 |  
|                                                                                                                                                               |  |                                               |         |   |      |   |         |  
|Total Deposits                                                                                                                                                 |  |                                               | 284,134 |   |      |   | 170,168 |  
|Short term borrowings (Note G)                                                                                                                                 |  |                                               |        |   |      |   | 2,400   |  
|Long term borrowings (Note G)                                                                                                                                  |  |                                               | 32,310  |   |      |   | 5,000   |  
|Accrued interest payable                                                                                                                                       |  |                                               | 457     |   |      |   | 142     |  
|Accrued expenses and other liabilities                                                                                                                         |  |                                               | 1,791   |   |      |   | 485     |  
|                                                                                                                                                               |  |                                               |         |   |      |   |         |  
|Total Liabilities                                                                                                                                              |  |                                               | 318,692 |   |      |   | 178,195 |  
|                                                                                                                                                               |  |                                               |         |   |      |   |         |  
|SHAREHOLDERS EQUITY (Note K)                                                                                                                                  |  |                                               |         |   |      |   |         |  
|Common stock, $3.50 par value, 12,500,000 shares authorized; 3,416,068 and 3,405,183 shares issued and outstanding at December 31, 2005
and 2004, respectively |  |                                               | 11,956  |   |      |   | 11,918  |  
|Additional paid-in capital                                                                                                                                     |  |                                               | 11,052  |   |      |   | 11,008  |  
|Accumulated retained earnings                                                                                                                                  |  |                                               | 2,153   |   |      |   | 471     |  
|Accumulated other comprehensive loss                                                                                                                           |  |                                               | (526    | ) |      |   | (59     | )
|                                                                                                                                                               |  |                                               |         |   |      |   |         |  
|Total shareholders equity                                                                                                                                     |  |                                               | 24,635  |   |      |   | 23,338  |  
|                                                                                                                                                               |  |                                               |         |   |      |   |         |  
|Commitments (Notes D, H and L)                                                                                                                                 |  |                                               |         |   |      |   |         |  
|Total liabilities and shareholders equity                                                                                                                     |  | $                                             | 343,327 |   |      | $ | 201,533 |  
|                                                                                                                                                               |  |                                               |         |   |      |   |         |  



See accompanying notes.



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BANK OF WILMINGTON CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS



Years
Ended December 31, 2005 and 2004



|                                                    |  |                                                |           |   |      |   |           |  
|--------------------------------------------------- |  | ---------------------------------------------- | --------- | - | ---- | - | --------- | -
|                                                    |  | 2005                                           |           |   | 2004 |  
|                                                    |  | (In thousands, exceptshare and per share data) |          
|INTEREST INCOME                                     |  |                                                |           |   |      |   |           |  
|Loans                                               |  | $                                              | 14,728    |   |      | $ | 7,663     |  
|Investment securities available for sale            |  |                                                | 1,453     |   |      |   | 855       |  
|Other interest-earning assets                       |  |                                                | 231       |   |      |   | 78        |  
|                                                    |  |                                                |           |   |      |   |           |  
|Total Interest income                               |  |                                                | 16,412    |   |      |   | 8,596     |  
|                                                    |  |                                                |           |   |      |   |           |  
|INTEREST EXPENSE                                    |  |                                                |           |   |      |   |           |  
|Money market, NOW and savings deposits              |  |                                                | 619       |   |      |   | 267       |  
|Time deposits (Note F)                              |  |                                                | 5,702     |   |      |   | 2,378     |  
|Short term borrowings                               |  |                                                |          |   |      |   | 97        |  
|Long term borrowings                                |  |                                                | 792       |   |      |   |          |  
|                                                    |  |                                                |           |   |      |   |           |  
|Total interest expense                              |  |                                                | 7,113     |   |      |   | 2,742     |  
|                                                    |  |                                                |           |   |      |   |           |  
|Net interest income                                 |  |                                                | 9,299     |   |      |   | 5,854     |  
|Provision for loan losses (Note D)                  |  |                                                | 1,499     |   |      |   | 892       |  
|                                                    |  |                                                |           |   |      |   |           |  
|Net interest income after provision for loan losses |  |                                                | 7,800     |   |      |   | 4,962     |  
|                                                    |  |                                                |           |   |      |   |           |  
|NON-INTEREST INCOME                                 |  |                                                |           |   |      |   |           |  
|Service fees and charges                            |  |                                                | 644       |   |      |   | 540       |  
|Loss on sale of investments                         |  |                                                | (10       | ) |      |   | (5        | )
|Income from bank owned life insurance               |  |                                                | 199       |   |      |   | 97        |  
|Other                                               |  |                                                | 215       |   |      |   | 114       |  
|                                                    |  |                                                |           |   |      |   |           |  
|Total non-interest income                           |  |                                                | 1,048     |   |      |   | 746       |  
|                                                    |  |                                                |           |   |      |   |           |  
|NON-INTEREST EXPENSE                                |  |                                                |           |   |      |   |           |  
|Salaries and employee benefits                      |  |                                                | 3,438     |   |      |   | 2,577     |  
|Occupancy and equipment                             |  |                                                | 977       |   |      |   | 782       |  
|Other (Note J)                                      |  |                                                | 1,966     |   |      |   | 1,267     |  
|                                                    |  |                                                |           |   |      |   |           |  
|Total non-interest expense                          |  |                                                | 6,381     |   |      |   | 4,626     |  
|                                                    |  |                                                |           |   |      |   |           |  
|Income before income taxes                          |  |                                                | 2,467     |   |      |   | 1,082     |  
|Income taxes (Note I)                               |  |                                                | 785       |   |      |   | (66       | )
|                                                    |  |                                                |           |   |      |   |           |  
|Net income                                          |  | $                                              | 1,682     |   |      | $ | 1,148     |  
|                                                    |  |                                                |           |   |      |   |           |  
|NET INCOME PER COMMON SHARE                         |  |                                                |           |   |      |   |           |  
|Basic                                               |  | $                                              | .49       |   |      | $ | .41       |  
|                                                    |  |                                                |           |   |      |   |           |  
|Diluted                                             |  | $                                              | .48       |   |      | $ | .40       |  
|                                                    |  |                                                |           |   |      |   |           |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING          |  |                                                |           |   |      |   |           |  
|Basic                                               |  |                                                | 3,415,582 |   |      |   | 2,768,040 |  
|                                                    |  |                                                |           |   |      |   |           |  
|Diluted                                             |  |                                                | 3,496,780 |   |      |   | 2,840,524 |  
|                                                    |  |                                                |           |   |      |   |           |  



See accompanying notes.



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BANK OF WILMINGTON CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



Years Ended December 31, 2005 and 2004



|                                                                                    |  |                |       |   |      |   |       |  
|----------------------------------------------------------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | -
|                                                                                    |  | 2005           |       |   | 2004 |  
|                                                                                    |  | (In thousands) |      
|NET INCOME                                                                          |  | $              | 1,682 |   |      | $ | 1,148 |  
|                                                                                    |  |                |       |   |      |   |       |  
|OTHER COMPREHENSIVE LOSS                                                            |  |                |       |   |      |   |       |  
|Unrealized loss on investment securities available for sale arising during the year |  |                | (768  | ) |      |   | (77   | )
|Tax effect                                                                          |  |                | 295   |   |      |   | 39    |  
|Reclassification of losses recognized in net income                                 |  |                | 10    |   |      |   | 5     |  
|Tax effect                                                                          |  |                | (4    | ) |      |   | (2    | )
|                                                                                    |  |                |       |   |      |   |       |  
|Total other comprehensive loss                                                      |  |                | (467  | ) |      |   | (35   | )
|                                                                                    |  |                |       |   |      |   |       |  
|Comprehensive income                                                                |  | $              | 1,215 |   |      | $ | 1,113 |  
|                                                                                    |  |                |       |   |      |   |       |  



See accompanying notes.



25



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BANK OF WILMINGTON CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



Years Ended December 31, 2005 and 2004



|                             |  |                                   |   |  |                          |        |                                      |  |   |                                     |  |   |             |   |  |   |      |   |  |   |        |  
|---------------------------- |  | --------------------------------- | - |  | ------------------------ | ------ | ------------------------------------ |  | - | ----------------------------------- |  | - | ----------- | - |  | - | ---- | - |  | - | ------ | -
|                             |  | Common stock                      |   |  | Additionalpaid-incapital |        | Accumulatedretainedearnings(deficit) |  |   | Accumulatedother com-prehensiveloss |  |   | Totalequity |  
|                             |  | Shares                            |   |  | Amount                   |        |                                      |  |   |                                    
|                             |  | (in thousands, except share data) |  
|Balance at December 31, 2003 |  | 2,706,409                         |   |  | $                        | 9,472  |                                      |  | $ | 7,942                               |  | $ | (677        | ) |  | $ | (24  | ) |  | $ | 16,712 |  
|Net income                   |  |                                  |   |  |                          |       |                                      |  |   |                                    |  |   | 1,148       |   |  |   |     |   |  |   | 1,148  |  
|Other comprehensive loss     |  |                                  |   |  |                          |       |                                      |  |   |                                    |  |   |            |   |  |   | (35  | ) |  |   | (35    | )
|Sale of common stock         |  | 698,024                           |   |  |                          | 2,443  |                                      |  |   | 3,066                               |  |   |            |   |  |   |     |   |  |   | 5,509  |  
|Exercise of stock options    |  | 750                               |   |  |                          | 3      |                                      |  |   |                                    |  |   |            |   |  |   |     |   |  |   | 3      |  
|                             |  |                                   |   |  |                          |        |                                      |  |   |                                     |  |   |             |   |  |   |      |   |  |   |        |  
|Balance at December 31, 2004 |  | 3,405,183                         |   |  |                          | 11,918 |                                      |  |   | 11,008                              |  |   | 471         |   |  |   | (59  | ) |  |   | 23,338 |  
|Net income                   |  |                                  |   |  |                          |       |                                      |  |   |                                    |  |   | 1,682       |   |  |   |     |   |  |   | 1,682  |  
|Other comprehensive loss     |  |                                  |   |  |                          |       |                                      |  |   |                                    |  |   |            |   |  |   | (467 | ) |  |   | (467   | )
|Repurchase of common stock   |  | (302                              | ) |  |                          | (1     | )                                    |  |   | 1                                   |  |   |            |   |  |   |     |   |  |   |       |  
|Exercise of stock options    |  | 11,187                            |   |  |                          | 39     |                                      |  |   | 43                                  |  |   |            |   |  |   |     |   |  |   | 82     |  
|                             |  |                                   |   |  |                          |        |                                      |  |   |                                     |  |   |             |   |  |   |      |   |  |   |        |  
|Balance at December 31, 2005 |  | 3,416,068                         |   |  | $                        | 11,956 |                                      |  | $ | 11,052                              |  | $ | 2,153       |   |  | $ | (526 | ) |  | $ | 24,635 |  
|                             |  |                                   |   |  |                          |        |                                      |  |   |                                     |  |   |             |   |  |   |      |   |  |   |        |  



See accompanying notes.



26



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BANK OF WILMINGTON CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



Years
Ended December 31, 2005 and 2004



|                                                                                  |  |                |          |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | -------------- | -------- | - | ---- | - | ------- | -
|                                                                                  |  | 2005           |          |   | 2004 |  
|                                                                                  |  | (In thousands) |         
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                |          |   |      |   |         |  
|Net income                                                                        |  | $              | 1,682    |   |      | $ | 1,148   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                |          |   |      |   |         |  
|Depreciation and amortization                                                     |  |                | 324      |   |      |   | 259     |  
|Deferred income taxes                                                             |  |                | (354     | ) |      |   | (390    | )
|Realized loss on investment securities available for sale                         |  |                | 10       |   |      |   | 5       |  
|Gain on sale of foreclosed real estate                                            |  |                | (8       | ) |      |   |        |  
|Provision for loan losses                                                         |  |                | 1,499    |   |      |   | 892     |  
|Change in assets and liabilities:                                                 |  |                |          |   |      |   |         |  
|Increase in accrued interest receivable                                           |  |                | (911     | ) |      |   | (271    | )
|Increase in other assets                                                          |  |                | (570     | ) |      |   | (108    | )
|Increase in accrued interest payable                                              |  |                | 315      |   |      |   | 72      |  
|Increase in accrued expenses and other liabilities                                |  |                | 1,306    |   |      |   | 59      |  
|Increase in cash surrender value-bank owned life insurance                        |  |                | (199     | ) |      |   | (97     | )
|                                                                                  |  |                |          |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                | 3,094    |   |      |   | 1,569   |  
|                                                                                  |  |                |          |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                |          |   |      |   |         |  
|Purchases of available for sale investment securities                             |  |                | (32,190  | ) |      |   | (16,631 | )
|Maturities, sales and calls of available for sale investment securities           |  |                | 9,118    |   |      |   | 8,227   |  
|Net increase in loans from originations and repayments                            |  |                | (116,326 | ) |      |   | (59,007 | )
|Purchases of bank premises and equipment                                          |  |                | (933     | ) |      |   | (274    | )
|Proceeds from sale of foreclosed real estate                                      |  |                | 447      |   |      |   | 8       |  
|(Increase) decrease in time deposits in other banks                               |  |                | (199     | ) |      |   | 200     |  
|Purchase bank owned life insurance                                                |  |                |         |   |      |   | (5,000  | )
|Purchase of FHLB stock                                                            |  |                | (801     | ) |      |   | (263    | )
|                                                                                  |  |                |          |   |      |   |         |  
|Net Cash used by investing activities                                             |  |                | (140,884 | ) |      |   | (72,740 | )
|                                                                                  |  |                |          |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                |          |   |      |   |         |  
|Net increase in deposits                                                          |  |                | 113,966  |   |      |   | 64,091  |  
|Net decrease in short term borrowings                                             |  |                | (7,400   | ) |      |   | 900     |  
|Net increase in long term borrowings                                              |  |                | 32,310   |   |      |   |        |  
|Net proceeds from issuance of common stock                                        |  |                | 82       |   |      |   | 5,512   |  
|                                                                                  |  |                |          |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                | 138,958  |   |      |   | 70,503  |  
|                                                                                  |  |                |          |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                | 1,168    |   |      |   | (668    | )
|Cash and cash equivalents, beginning                                              |  |                | 6,105    |   |      |   | 6,773   |  
|                                                                                  |  |                |          |   |      |   |         |  
|Cash and cash equivalents, ending                                                 |  | $              | 7,273    |   |      | $ | 6,105   |  
|                                                                                  |  |                |          |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                 |  |                |          |   |      |   |         |  
|Interest paid                                                                     |  | $              | 6,828    |   |      | $ | 2,670   |  
|Cash paid for income taxes                                                        |  |                | 275      |   |      |   | 326     |  
|SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES            |  |                |          |   |      |   |         |  
|Unrealized holding losses on available-for-sale securities, net of taxes          |  | $              | (467     | ) |      | $ | (35     | )
|Transfers from loans to foreclosed real estate                                    |  |                | 200      |   |      |   | 203     |  



See accompanying notes.



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



December 31, 2005 and 2004



NOTE AORGANIZATION
AND OPERATIONS



Bank of Wilmington (the Bank)
was incorporated May 26, 1998 and began banking operations on June 22, 1998. Bank of Wilmington Corporation (the Company), a North Carolina-chartered bank holding company, was incorporated on June 20, 2005 for the sole
purpose of serving as the parent bank holding company for Bank of Wilmington. On September 1, 2005, Bank of Wilmington Corporation completed a corporate reorganization in which Bank of Wilmington became its wholly-owned subsidiary. Upon
formation, one share of the Banks $3.50 par value common stock was exchanged for one newly issued share of the Companys $3.50 par value common stock. The Bank is engaged in general commercial and retail banking in southeastern North
Carolina, principally New Hanover, Pender and Brunswick Counties, operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank
undergoes periodic examinations by those regulatory authorities. The Company is regulated by the Federal Reserve Board. On October 4, 2005, the Company formed a new unconsolidated wholly-owned subsidiary, BKWW Statutory Trust I (the
Trust), a Delaware statutory trust, to facilitate the issuance of trust preferred securities. All significant intercompany transactions have been eliminated. The Trust is not consolidated in these financial statements due to the adoption
of FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities. The junior subordinated debentures issued by the Company to the Trust are included in long-term borrowings and the Companys equity interest in the
Trust is included in other assets.



NOTE BSUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES



The following is a description of the
significant accounting and reporting policies the Company follows in preparing and presenting its financial statements.



Effects of Stock Split



On June 30, 2005, the Company declared a 5-for-4 stock split in the form of a 25% stock dividend. All references to per share results and weighted
average common and common equivalent shares outstanding have been adjusted to reflect the effects of this stock split. The effects of the stock split have also been reflected in the Companys balance sheets as of December 31, 2005 and
2004.



Use of Estimates



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses.



Cash and Cash Equivalents



For the purpose of presentation in the statement of cash
flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions Cash and due from banks and Interest-earning deposits in other banks. Federal regulations require institutions to set aside
specified amounts of cash as reserves against transaction and time deposits. As of December 31, 2005, the daily average gross reserve requirement was $877,000.



Investment Securities Available for Sale



Investment securities available for sale are reported at fair value and consist of debt instruments that are not classified as either trading securities
or as held to maturity securities. Unrealized holding gains and losses, net of applicable deferred income tax, on available for sale securities are reported as a net amount in other comprehensive loss.



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



Gains and losses on the sale of investment securities available for sale are determined using the specific-identification method. Declines in the fair value
of individual investment securities available for sale below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest method over the period to maturity.



Loans



Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any
deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The
accrual of interest on impaired loans is discontinued when, in managements opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income
is subsequently recognized only to the extent cash payments are received.



Allowance for Loan Losses



The provision for
loan losses is based upon managements estimate of the amount needed to maintain the allowance for loan losses at an adequate level. In making the evaluation of the adequacy of the allowance for loan losses, management gives consideration to
current economic conditions, statutory examinations of the loan portfolio by regulatory agencies, delinquency information and managements internal review of the loan portfolio. Loans are considered impaired when it is probable that all amounts
due under the contractual terms of the loan will not be collected. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, or upon the fair value
of the collateral if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. While management uses the best
information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, regulatory examiners may require the Company to
recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.



Premises and Equipment



Premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful
lives of the assets or based on the lease terms for leasehold improvements. Estimated useful lives are 12 to 39 years for buildings and leasehold improvements, 5 to 7 years for furniture, fixtures and equipment and 3 to 5 years for computers and
related equipment. Repairs and maintenance costs are charged to operations as incurred and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from
the accounts and any gains or losses are reflected in current operations.



Stock in Federal Home Loan Bank of Atlanta



As
a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of Atlanta (FHLB). This investment is carried at cost. Due to the redemption provisions of the FHLB, the Company estimated that fair value equals
cost and that this investment was not impaired.



Foreclosed Real Estate



Assets acquired through, or in lieu of, loan foreclosure
are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



management, and the assets are carried at the lower of the carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in other non-interest expense on the statements of operations.



Income Taxes



Deferred
tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are also
recognized for operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced
by a valuation allowance if it is more likely than not that the tax benefits will not be realized.



Comprehensive Income



The Company reports as comprehensive income all changes in shareholders equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of
comprehensive income that are excluded from net income. The Companys only component of other comprehensive income is unrealized gains and losses on investment securities available for sale.



Stock Compensation Plans



Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the Companys stock option plans have no intrinsic value at the grant date and, under APB Opinion No. 25, no compensation cost is recognized for them. The Company
has elected to continue with the accounting methodology in APB Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures as if the fair value based method of accounting had
been applied.



|                                                                                                                                      |  |                                             |       |   |      |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                                                                      |  | 2005                                        |       |   | 2004 |  
|                                                                                                                                      |  | (Amounts inthousands, except per sharedata) |      
|Net income:                                                                                                                           |  |                                             |       |   |      |   |       |  
|As reported                                                                                                                           |  | $                                           | 1,682 |   |      | $ | 1,148 |  
|Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax
effects |  |                                             | (125  | ) |      |   | (48   | )
|                                                                                                                                      |  |                                             |       |   |      |   |       |  
|Pro forma                                                                                                                             |  | $                                           | 1,557 |   |      | $ | 1,100 |  
|                                                                                                                                      |  |                                             |       |   |      |   |       |  
|Basic net income per share:                                                                                                           |  |                                             |       |   |      |   |       |  
|As reported                                                                                                                           |  | $                                           | 0.49  |   |      | $ | 0.41  |  
|Pro forma                                                                                                                             |  |                                             | 0.46  |   |      |   | 0.40  |  
|Diluted net income per share:                                                                                                         |  |                                             |       |   |      |   |       |  
|As reported                                                                                                                           |  | $                                           | 0.48  |   |      | $ | 0.40  |  
|Pro forma                                                                                                                             |  |                                             | 0.45  |   |      |   | 0.39  |  



30



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2005: dividend yield of 0.00 percent; expected volatility of 14.29 percent; risk-free interest rate of 4.50 percent; and expected life of 7
years.



Net Income Per Common Share and Common Shares Outstanding



Basic and diluted net income per share has been computed
based on the weighted average number of shares outstanding during each period after retroactively adjusting for a 5-for-4 stock split on June 30, 2005. In addition, all components of stockholders equity presented on the consolidated
balance sheets and the statements of changes in shareholders equity have been retroactively restated for the effects of this split.



Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential
common shares that may be issued by the Company relate to outstanding stock options.



Basic and diluted net income per share have been computed based upon net income as presented in the accompanying statements of operations divided by the weighted average number of common shares outstanding or assumed
to be outstanding after retroactively adjusting for the stock split as summarized below:



|                                                                                                                             |  |           |  |          
|---------------------------------------------------------------------------------------------------------------------------- |  | --------- |  | ---------
|                                                                                                                             |  | 2005      |  | 2004     
|Weighted average number of common shares used in computing basic net income per share                                        |  | 3,415,582 |  | 2,768,040
|Effect of dilutive stock options                                                                                             |  | 81,198    |  | 72,484   
|                                                                                                                             |  |           |  |          
|Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share |  | 3,496,780 |  | 2,840,524
|                                                                                                                             |  |           |  |          



For the year ended
December 31, 2005, there were 155,625 options that were antidilutive due to the exercise price exceeding the average market price for the period and for the year ended December 31, 2004, there were no options that were antidilutive.



Recent Accounting Pronouncements



On December 12, 2003, the American Institute of Certified Public
Accountants (AICPA) released Statement of Position (SOP) 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This statement of position addresses accounting for differences between
contractual cash flows and cash flows expected to be collected from investors initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. This SOP is
effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 on January 1, 2005 did not have a material impact on the consolidated financial statements.



In November 2003, the Emerging Issues Task Force (EITF)
issued EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03- 01). EITF 03-01 provided guidance for evaluating whether an investment is other-than-temporarily
impaired and requires certain disclosures with respect to these investments. In September 2004, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position (FSP EITF 03-1-b) to delay the requirement to
record impairment losses in accordance with EITF 03-01. The guidance also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requirements for disclosures about unrealized losses that have not
been recognized as other-than-temporary impairments. In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, which addresses the



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



determination as to when an investment is considered impaired. This FSP nullifies certain requirements of EITF 03-01 and supersedes EITF Topic No. D-44,
Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. This FSP is to be applied to reporting periods beginning after December 15, 2005. The Company does not expect the
impact of this FSP to have a material effect on its consolidated financial statements.



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(r) (SFAS No. 123(r)), Share-Based Payment, which is a revision of FASB Statement
No. 123 Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. SFAS No. 123(r) requires companies to recognize in the income statement the grant-date
fair value of stock options and other equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the award, which will often be the shorter of the vesting period or the
period the employee will be retirement eligible. SFAS No. 123(r) sets accounting requirements for share-based compensation to employees, including employee-stock purchase plans (ESPPs). Awards to most nonemployee
directors will be accounted for as employee awards. This Statement was to be effective for public companies that do not file as small business issuers as of the beginning of interim or annual reporting periods beginning after June 15, 2005. In
April 2005, the Securities and Exchange Commission (SEC) issued Release No. 2005-57, which defers the effective date of SFAS No. 123(r) for many registrants. Registrants that do not file as small business users must adopt
SFAS No. 123(r) as of the beginning of their first annual period beginning after June 15, 2005. Accordingly, the Company will adopt SFAS No. 123(r) on January 1, 2006. If we had included the cost of employee stock option
compensation in our consolidated financial statements, our net income for the fiscal years ended December 31, 2005 and 2004 would have decreased by approximately $125,000 and $48,000 respectively. Accordingly, the adoption of SFAS
No. 123(r) may have a material effect on our consolidated financial statements.



In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107), which contains guidance on applying the requirements in SFAS No. 123(r). SAB 107 provides guidance on valuation
techniques, development of assumptions used in valuing employee share options and related MD&A disclosures. SAB 107 is effective for the period in which SFAS No. 123(r) is adopted. The Company will adopt SAB 107 on January 1, 2006, and
is currently evaluating the effect on its consolidated financial statements.



In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS No. 154), Accounting Changes and Error Corrections, which replaces APB Opinion No. 20
Accounting Changes and FASB Statement No. 3 Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in an accounting
principle. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after
December 15, 2005. The Company will adopt SFAS No. 154 on January 1, 2006 with no expected material effect on its consolidated financial statements.



From time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure
drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial
statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts



Reclassification



Certain amounts in the 2004 financial statements have been reclassified to conform with the 2005 presentation. The reclassifications had no effect on net
income or shareholders equity as previously reported.



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



NOTE CINVESTMENT SECURITIES



The following is a summary of the securities portfolio by major
classification at December 31, 2005 and 2004 (amounts in thousands):



|                               |  |               |        |                      |   |                       |  |           |     |  |   |       
|------------------------------ |  | ------------- | ------ | -------------------- | - | --------------------- |  | --------- | --- |  | - | ------
|                               |  | 2005         
|                               |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|Securities available for sale: |  |               |        |                      |   |                       |  |           |     |  |   |       
|U. S. Government agencies      |  | $             | 5,958  |                      | $ |                      |  | $         | 100 |  | $ | 5,858 
|Municipals                     |  |               | 17,285 |                      |   | 16                    |  |           | 153 |  |   | 17,148
|Corporate bonds                |  |               | 536    |                      |   |                      |  |           | 12  |  |   | 524   
|Mortgage-backed securities     |  |               | 25,730 |                      |   |                      |  |           | 605 |  |   | 25,125
|                               |  |               |        |                      |   |                       |  |           |     |  |   |       
|                               |  | $             | 49,509 |                      | $ | 16                    |  | $         | 870 |  | $ | 48,655
|                               |  |               |        |                      |   |                       |  |           |     |  |   |       



|                               |  |               |        |                      |   |                       |  |           |     |  |   |       
|------------------------------ |  | ------------- | ------ | -------------------- | - | --------------------- |  | --------- | --- |  | - | ------
|                               |  | 2004         
|                               |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|Securities available for sale: |  |               |        |                      |   |                       |  |           |     |  |   |       
|U. S. Government agencies      |  | $             | 4,478  |                      | $ | 1                     |  | $         | 25  |  | $ | 4,454 
|Municipals                     |  |               | 404    |                      |   |                      |  |           | 1   |  |   | 403   
|Mortgage-backed securities     |  |               | 21,650 |                      |   | 58                    |  |           | 129 |  |   | 21,579
|                               |  |               |        |                      |   |                       |  |           |     |  |   |       
|                               |  | $             | 26,532 |                      | $ | 59                    |  | $         | 155 |  | $ | 26,436
|                               |  |               |        |                      |   |                       |  |           |     |  |   |       



The following tables
show investments gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2005 and 2004. All unrealized
losses on investment securities are considered by management to be temporarily impaired given the credit ratings on these investments.



|                                      |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|------------------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | ---
|                                      |  | 2005               
|                                      |  | Less Than 12 Months |        | 12 Months or More |   | Total    
|                                      |  | Fairvalue           |        | Unrealizedlosses  |   | Fairvalue |  | Unrealizedlosses |        | Fairvalue |   | Unrealizedlosses
|Securities available for sale:        |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|U.S. government agencies              |  | $                   | 2,466  |                   | $ | 34        |  | $                | 2,433  |           | $ | 67               |  | $ | 4,899  |  | $ | 101
|Municipals                            |  |                     | 12,576 |                   |   | 149       |  |                  | 391    |           |   | 4                |  |   | 12,967 |  |   | 153
|Corporate bonds                       |  |                     | 524    |                   |   | 11        |  |                  |       |           |   |                 |  |   | 524    |  |   | 11 
|Mortgage-backed securities            |  |                     | 14,410 |                   |   | 289       |  |                  | 9,227  |           |   | 316              |  |   | 23,637 |  |   | 605
|                                      |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|Total temporarily impaired securities |  | $                   | 29,975 |                   | $ | 483       |  | $                | 12,051 |           | $ | 387              |  | $ | 42,027 |  | $ | 870
|                                      |  |                     |        |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



At December 31, 2005, temporarily impaired securities, 12 months or
more, consisted of four U.S. government agency securities, one municipal security and sixteen mortgage-backed securities. The Company believes the impairment relates to the current interest rate environment and there is not a permanent impairment.
The remaining securities that have an unrealized loss have been impaired for less than 12 months, which includes four U.S. government agency securities, twenty-four municipal securities, one corporate bond, and twenty-two mortgage-backed securities.
The Company believes these impairments are temporary and relate to the current interest rate environment. It is managements opinion that none of the impairments are permanent.



|                                      |  |                     |        |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|------------------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | ---------------- | ----- | --------- | - | ---------------- |  | - | ------ |  | - | ---
|                                      |  | 2004               
|                                      |  | Less Than 12 Months |        | 12 Months or More |   | Total    
|                                      |  | Fairvalue           |        | Unrealizedlosses  |   | Fairvalue |  | Unrealizedlosses |       | Fairvalue |   | Unrealizedlosses
|Securities available for sale:        |  |                     |        |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|U.S. government agencies              |  | $                   | 3,474  |                   | $ | 26        |  | $                |      |           | $ |                 |  | $ | 3,474  |  | $ | 26 
|Municipals                            |  |                     | 403    |                   |   | 1         |  |                  |      |           |   |                 |  |   | 403    |  |   | 1  
|Mortgage-backed securities            |  |                     | 13,544 |                   |   | 102       |  |                  | 2,305 |           |   | 26               |  |   | 15,848 |  |   | 128
|                                      |  |                     |        |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|Total temporarily impaired securities |  | $                   | 17,421 |                   | $ | 129       |  | $                | 2,305 |           | $ | 26               |  | $ | 19,725 |  | $ | 155
|                                      |  |                     |        |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    



Securities with a
carrying value of $7.1 million and $1.3 million at December 31, 2005 and 2004, respectively, were pledged to secure borrowings or deposits.



The amortized cost and fair values of securities available for sale at December 31, 2005 by contractual maturity are shown below. Actual expected
maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.



|                                       |  |                              |        |           |   |       
|-------------------------------------- |  | ---------------------------- | ------ | --------- | - | ------
|                                       |  | Securities Availablefor Sale
|                                       |  | AmortizedCost                |        | FairValue
|Due in one year or less                |  | $                            | 4,285  |           | $ | 4,178 
|Due after one year through five years  |  |                              | 19,556 |           |   | 19,139
|Due after five years through ten years |  |                              | 19,109 |           |   | 18,839
|Due after ten years                    |  |                              | 6,559  |           |   | 6,499 
|                                       |  |                              |        |           |   |       
|                                       |  | $                            | 49,509 |           | $ | 48,655
|                                       |  |                              |        |           |   |       



Proceeds from
maturities, sales and calls of investment securities during the years ended December 31, 2005 and 2004 were $9.1 million and $8.2 million respectively. The Company realized gross gains of approximately $14,000 and $22,000 in 2005 and 2004,
respectively, and gross losses of approximately $24,000 and $27,000 in 2005 and 2004, respectively.



NOTE DLOANS



Following is a summary of loans at December 31, 2005 and 2004:



|                                |  |      |         |   |      |   |         |  
|------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                |  | 2005 |         |   | 2004 |  
|Real estatemortgage loans      |  | $    | 236,260 |   |      | $ | 132,339 |  
|Home equity lines of credit     |  |      | 24,286  |   |      |   | 16,174  |  
|Commercial and industrial loans |  |      | 14,512  |   |      |   | 11,979  |  
|Loans to individuals            |  |      | 3,546   |   |      |   | 1,965   |  
|                                |  |      |         |   |      |   |         |  
|Subtotal                        |  |      | 278,604 |   |      |   | 162,457 |  
|Net deferred loan fees          |  |      | (218    | ) |      |   | (58     | )
|                                |  |      |         |   |      |   |         |  
|Total                           |  | $    | 278,386 |   |      | $ | 162,399 |  
|                                |  |      |         |   |      |   |         |  



34



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



Loans are primarily made in southeastern North Carolina, principally New
Hanover County and adjacent counties. Real estate loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions.



Impaired loans consist of nonaccrual loans totaling approximately $1.2
million at December 31, 2005 and $993,000 at December 31, 2004, with $160,000 and $284,000, respectively, of the allowance for loan losses allocated to such loans as of those dates. The average investment in impaired loans was $1.7 million
and $1.3 million for the years ended December 31, 2005 and 2004, respectively. Such loans had the effect of reducing interest income by approximately $76,000 and $38,000 during the years ended December 31, 2005 and 2004, respectively.



An analysis of the allowance for loan losses follows:



|                                |  |      |       |   |      |   |       |  
|------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                |  | 2005 |       |   | 2004 |  
|Balance at beginning of year    |  | $    | 2,106 |   |      | $ | 1,661 |  
|                                |  |      |       |   |      |   |       |  
|Provision charged to operations |  |      | 1,499 |   |      |   | 892   |  
|                                |  |      |       |   |      |   |       |  
|Charge-offs:                    |  |      |       |   |      |   |       |  
|Equity lines of credit          |  |      | (43   | ) |      |   | (32   | )
|Real estate mortgage loans      |  |      |      |   |      |   | (50   | )
|Loans to individuals            |  |      | (10   | ) |      |   | (6    | )
|Commercial                      |  |      | (131  | ) |      |   | (415  | )
|                                |  |      |       |   |      |   |       |  
|Total charge-offs               |  |      | (184  | ) |      |   | (503  | )
|                                |  |      |       |   |      |   |       |  
|Recoveries:                     |  |      |       |   |      |   |       |  
|Equity lines of credit          |  |      | 74    |   |      |   |      |  
|Real estate mortgage loans      |  |      | 4     |   |      |   | 11    |  
|Loans to individuals            |  |      | 1     |   |      |   | 3     |  
|Commercial                      |  |      | 10    |   |      |   | 42    |  
|                                |  |      |       |   |      |   |       |  
|Total recoveries                |  |      | 89    |   |      |   | 56    |  
|                                |  |      |       |   |      |   |       |  
|Net charge-offs                 |  |      | (95   | ) |      |   | (447  | )
|                                |  |      |       |   |      |   |       |  
|Balance at end of year          |  | $    | 3,510 |   |      | $ | 2,106 |  
|                                |  |      |       |   |      |   |       |  



The Company has
granted loans to certain directors and executive officers of the Company and their related interests. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable
transactions with other borrowers and, in managements opinion, do not involve more than the normal risk of collectibility. All loans to directors and executive officers or their related interests are submitted to the Board of Directors for
approval. A summary of loans to directors, executive officers and their interests follows:



|                                                                |  |   |       |  
|--------------------------------------------------------------- |  | - | ----- | -
|Loans to directors and officers as a group at December 31, 2004 |  | $ | 1,979 |  
|Disbursements during year                                       |  |   | 4,168 |  
|Amounts collected during year                                   |  |   | (884  | )
|                                                                |  |   |       |  
|Loans to directors and officers as a group at December 31, 2005 |  | $ | 5,263 |  
|                                                                |  |   |       |  



At December 31,
2005, the Company had pre-approved but unused available credit totaling $2.6 million to directors, executive officers and their related interests.



35



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



NOTE EPREMISES AND EQUIPMENT



Following is a summary of premises and equipment at December 31, 2005
and 2004:



|                              |  |      |        |   |      |   |        |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                              |  | 2005 |        |   | 2004 |  
|Buildings                     |  | $    | 833    |   |      | $ | 787    |  
|Furniture and equipment       |  |      | 1,829  |   |      |   | 1,524  |  
|Leasehold improvements        |  |      | 345    |   |      |   | 10     |  
|Automobiles                   |  |      | 21     |   |      |   |       |  
|Construction in progress      |  |      | 231    |   |      |   | 5      |  
|Less accumulated depreciation |  |      | (1,414 | ) |      |   | (1,174 | )
|                              |  |      |        |   |      |   |        |  
|Total                         |  | $    | 1,845  |   |      | $ | 1,152  |  
|                              |  |      |        |   |      |   |        |  



Depreciation and
amortization amounting to $254,000 and $228,000 for the years ended December 31, 2005 and 2004, respectively, is included in occupancy and equipment expense. Outstanding construction commitments at December 31, 2005 were approximately
$176,000.



NOTE FDEPOSITS



Time deposits in denominations of $100,000 or more were $96.0 million and
$43.1 million at December 31, 2005 and 2004, respectively. Interest expense on such deposits aggregated $2.3 million in 2005 and $703,000 in 2004.



At December 31, 2005, the scheduled maturities of certificates of deposit are as follows:



|                                 |  |                   |         |                 |   |        |  |   |        
|-------------------------------- |  | ----------------- | ------- | --------------- | - | ------ |  | - | -------
|                                 |  | Less than$100,000 |         | $100,000or more |   | Total 
|Three months or less             |  | $                 | 19,613  |                 | $ | 13,589 |  | $ | 33,202 
|Over three months to six months  |  |                   | 34,354  |                 |   | 24,767 |  |   | 59,121 
|Over six months to twelve months |  |                   | 49,452  |                 |   | 37,429 |  |   | 86,881 
|Over twelve months               |  |                   | 20,727  |                 |   | 20,245 |  |   | 40,972 
|                                 |  |                   |         |                 |   |        |  |   |        
|Total                            |  | $                 | 124,146 |                 | $ | 96,030 |  | $ | 220,176
|                                 |  |                   |         |                 |   |        |  |   |        



NOTE GBORROWINGS



The Company may purchase federal funds through unsecured
federal funds lines of credit with various correspondent banks totaling $11.0 million. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and term of advances. These lines of credit are payable
on demand and bear interest based upon the daily federal funds rate. The Company had no amounts outstanding as of December 31, 2005 or 2004.



The Company may obtain advances as a member of the Federal Home Loan Bank of Atlanta. The Company had outstanding FHLB advances of $22.0 million at
December 31, 2005 and $7.4 million at December 31, 2004. The $22.0 million outstanding at December 31, 2005 is comprised of an advance for $5.0 million that matures May 12, 2006 and bears interest at a quarterly variable rate
(currently 4.35%) and three fixed rate advances of $3.0 million each with rates of 4.15%, 4.27%, and 4.48% maturing April 27, 2007, 2008, and 2009 respectively. The FHLB advances also include an $8.0 million advance with the rate fixed for 10
years at 4.10%, then it converts to a variable rate for five additional years maturing on August 25, 2015. All of these advances at the Federal Home Loan Bank of Atlanta are secured by a blanket lien on our qualifying 1-4 family first
mortgages, commercial real estate loans, home equity lines of credit, and second mortgages in addition to securities totaling $5.8 million currently pledged. The Company has a maximum borrowing availability from FHLB of $51.4 million as of
December 31, 2005.



36



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



The Company has a credit facility with the Federal Reserve Bank of Richmond,
secured by an investment security available for sale, under which the Company had a maximum borrowing availability of approximately $650,000 at December 31, 2005. No amount was outstanding under this credit facility at December 31, 2005.



The Company has long-term debt of $10.3 million in trust
preferred securities payable to its subsidiary, BKWW Statutory Trust I. This debt was issued on October 4, 2005 and is callable in five years with a final maturity of October 4, 2035. The Company also has a long-term subordinated debenture
totaling $310,000 payable to its subsidiary, BKWW Statutory Trust I, bearing the same rate and terms as the trust preferred securities. The Trust was formed for the sole purpose of issuing trust preferred securities and investing the proceeds from
the sale of such trust preferred securities in junior subordinated debentures. The debentures held by the Trust are the sole assets of the Trust. The Company owns 100% of the Trusts outstanding common securities and unconditionally guarantees
the Trusts financial obligations. The debentures and the trust preferred securities bear a quarterly adjustable interest rate, currently 5.89%. The interest rate is equal to 140 basis points over the three-month LIBOR (London Inter-Bank
Offered Rate). The trust preferred securities generally rank equal to the trust common securities in priority of payment, but will rank prior to trust common securities if, and so long as, the Company fails to make principal or interest payment on
the debentures. Concurrently with the issuance of the debentures and the trust preferred securities, the Company entered into a Guaranty Agreement, dated October 4, 2005, related to the trust preferred securities for the benefit of the holders.
The debentures and trust preferred securities each have 30-year lives and will each be callable by the Company or the Trust, at their option, after five years. The Company has the option to defer interest for up to five years on the debentures. The
debentures qualify as Tier I capital under Federal Reserve Board guidelines.



NOTE HLEASES



The Company leases its
main office, the land on which its Pine Valley branch is located, space in a shopping center for the Hampstead office and the temporary Surf City office in addition to a permanent facility for Surf City opening later in 2006, office space behind its
main office for the support services department, and has contracted for space in a shopping center for its new Waterford office opening in 2006, all under operating leases. These leases are for terms of twelve years, fifteen years, three years, 10
months (temporary), six years (permanent), and ten years, respectively, with renewal options up to thirty-five years. Future rentals under these leases are as follows:



|           |  |   |      
|---------- |  | - | -----
|2006       |  | $ | 489  
|2007       |  |   | 472  
|2008       |  |   | 402  
|2009       |  |   | 411  
|2010       |  |   | 414  
|Thereafter |  |   | 614  
|           |  |   |      
|           |  | $ | 2,802
|           |  |   |      



37



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



NOTE IINCOME TAXES



The significant components of the income tax (benefit) for the years ended
December 31, 2005 and 2004 are as follows:



|                                                                                             |  |      |       |   |      |   |      |  
|-------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ---- | -
|                                                                                             |  | 2005 |       |   | 2004 |  
|Current tax provision:                                                                       |  |      |       |   |      |   |      |  
|Federal                                                                                      |  | $    | 925   |   |      | $ | 271  |  
|State                                                                                        |  |      | 214   |   |      |   | 53   |  
|                                                                                             |  |      |       |   |      |   |      |  
|Total current tax provision                                                                  |  |      | 1,139 |   |      |   | 324  |  
|                                                                                             |  |      |       |   |      |   |      |  
|Deferred tax provision:                                                                      |  |      |       |   |      |   |      |  
|Federal                                                                                      |  |      | (292  | ) |      |   | 30   |  
|State                                                                                        |  |      | (62   | ) |      |   | 2    |  
|                                                                                             |  |      |       |   |      |   |      |  
|Total deferred tax provision                                                                 |  |      | (354  | ) |      |   | 32   |  
|                                                                                             |  |      |       |   |      |   |      |  
|Provision for income tax expense before adjustment to deferred tax asset valuation allowance |  |      | 785   |   |      |   | 356  |  
|Decrease in valuation allowance                                                              |  |      |      |   |      |   | (422 | )
|                                                                                             |  |      |       |   |      |   |      |  
|Income tax (benefit)                                                                         |  | $    | 785   |   |      | $ | (66  | )
|                                                                                             |  |      |       |   |      |   |      |  



The difference between
the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:



|                                                     |  |      |     |   |      |   |      |  
|---------------------------------------------------- |  | ---- | --- | - | ---- | - | ---- | -
|                                                     |  | 2005 |     |   | 2004 |  
|Tax computed at the statutory federal rate           |  | $    | 839 |   |      | $ | 368  |  
|Increase (decrease) resulting from:                  |  |      |     |   |      |   |      |  
|State income taxes, net of federal tax effect        |  |      | 100 |   |      |   | 36   |  
|Adjustment to deferred tax asset valuation allowance |  |      |    |   |      |   | (422 | )
|Bank owned life insurance                            |  |      | (68 | ) |      |   |     |  
|Other permanent differences                          |  |      | (86 | ) |      |   | (48  | )
|                                                     |  |      |     |   |      |   |      |  
|Provision for income taxes                           |  | $    | 785 |   |      | $ | (66  | )
|                                                     |  |      |     |   |      |   |      |  



Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31,
2005 and 2004 are as follows:



|                                         |  |      |       |   |      |   |      |  
|---------------------------------------- |  | ---- | ----- | - | ---- | - | ---- | -
|                                         |  | 2005 |       |   | 2004 |  
|Deferred tax assets relating to:         |  |      |       |   |      |   |      |  
|Allowance for loan losses                |  | $    | 1,210 |   |      | $ | 700  |  
|Unrealized loss on investment securities |  |      | 329   |   |      |   | 37   |  
|Other                                    |  |      | 27    |   |      |   | 10   |  
|                                         |  |      |       |   |      |   |      |  
|Total deferred tax assets                |  |      | 1,566 |   |      |   | 747  |  
|                                         |  |      |       |   |      |   |      |  
|Deferred tax liabilities relating to:    |  |      |       |   |      |   |      |  
|Deferred loan costs                      |  |      | (241  | ) |      |   | (107 | )
|Prepaid expenses                         |  |      | (41   | ) |      |   | (25  | )
|Bank premises and equipment differences  |  |      | (124  | ) |      |   | (101 | )
|                                         |  |      |       |   |      |   |      |  
|Total deferred tax liabilities           |  |      | (406  | ) |      |   | (233 | )
|                                         |  |      |       |   |      |   |      |  
|Net recorded deferred tax asset          |  | $    | 1,160 |   |      | $ | 514  |  
|                                         |  |      |       |   |      |   |      |  



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



It is managements opinion that realization of the net deferred tax
asset is more likely than not based on the Companys history of taxable income and estimates of future taxable income.



NOTE JOTHER NON-INTEREST EXPENSE



The major components of other non-interest expense for the years ended December 31, 2005 and 2004 are as follows:



|                                              |  |      |       |      |   |      
|--------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                              |  | 2005 |       | 2004
|Advertising and promotion                     |  | $    | 322   |      | $ | 246  
|Data processing and other outsourced services |  |      | 581   |      |   | 381  
|Postage, printing and office supplies         |  |      | 92    |      |   | 76   
|Professional services                         |  |      | 294   |      |   | 151  
|Other                                         |  |      | 677   |      |   | 413  
|                                              |  |      |       |      |   |      
|Total                                         |  | $    | 1,966 |      | $ | 1,267
|                                              |  |      |       |      |   |      



NOTE KREGULATORY MATTERS



The Company, as a North Carolina banking corporation, may
pay cash dividends only out of undivided profits as determined pursuant to North Carolina General Statutes. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such limitation is in the public
interest and is necessary to ensure financial soundness of the bank.



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



Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios, as prescribed by
regulations, of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. As of February 14, 2005, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company as well
capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Companys category. Management believes, as of December 31, 2005
and 2004, that all capital adequacy ratios place the Company and the Bank in excess of the minimum necessary to be deemed well capitalized under regulatory guidelines in the table below:



|                                                        |  |               |        |              |                     |   |                    |     |   |                       |      |  
|------------------------------------------------------- |  | ------------- | ------ | ------------ | ------------------- | - | ------------------ | --- | - | --------------------- | ---- | -
|                                                        |  | Actual        |        |              | MinimumRequirements |  
|                                                        |  | CapitalAmount |        | CapitalRatio |                     |   | ForCapitalAdequacy |     |   | To Be WellCapitalized |     
|As of December 31, 2005                                 |  |               |        |              |                     |   |                    |     |   |                       |      |  
|Total capitalTier II capital (to risk-weighted assets) |  | $             | 38,654 |              | 13.3                | % |                    | 8.0 | % |                       | 10.0 | %
|Tier I capital (to risk-weighted assets)                |  |               | 35,144 |              | 12.1                | % |                    | 4.0 | % |                       | 6.0  | %
|LeverageTier I capital (to average assets)             |  |               | 35,144 |              | 10.7                | % |                    | 4.0 | % |                       | 5.0  | %
|As of December 31, 2004                                 |  |               |        |              |                     |   |                    |     |   |                       |      |  
|Total capitalTier II capital (to risk-weighted assets) |  | $             | 25,503 |              | 14.9                | % |                    | 8.0 | % |                       | 10.0 | %
|Tier I capital (to risk-weighted assets)                |  |               | 23,397 |              | 13.6                | % |                    | 4.0 | % |                       | 6.0  | %
|LeverageTier I capital (to average assets)             |  |               | 23,397 |              | 12.3                | % |                    | 4.0 | % |                       | 5.0  | %



39



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



NOTE LOFF-BALANCE SHEET RISK



The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial
instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.



Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on managements credit evaluation of the
borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.



A summary of the contract amounts of the Companys exposure to off-balance sheet risk as of December 31, 2005 is as follows:



|                                                                    |  |   |             
|------------------------------------------------------------------- |  | - | ------------
|Financial instruments whose contract amounts represent credit risk: |  |   |             
|Commitments to extend credit                                        |  | $ | 23.9 million
|Undisbursed lines of credit                                         |  |   | 72.3 million
|Commercial and standby letters of credit                            |  |   | 293,000     



NOTE MDISCLOSURES ABOUT FAIR
VALUES OF FINANCIAL INSTRUMENTS



Financial instruments
include cash and due from banks, interest-earning deposits in other banks, investment securities, time deposits in other banks, loans, stock in FHLB of Atlanta, deposit accounts and borrowings. Fair value estimates are made at a specific moment in
time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Companys entire holdings of a particular
financial instrument. Because no active market readily exists for a portion of the Companys financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.



The following
methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:



Cash and Due from Banks, Interest-Earning Deposits and Time Deposits in Other Banks



The carrying amounts for cash and due from banks, interest-earning deposits, and time deposits in other banks approximate
fair value because of the short maturities of those instruments.



Investment
Securities



Fair value for investment securities equals
quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.



40



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



Loans



For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.



Accrued Interest Receivable and Payable



The
carrying amount is a reasonable estimate of fair value.



Stock in Federal
Home Loan Bank of Atlanta



The fair value for FHLB stock
approximates carrying value, based on the redemption provisions of the Federal Home Loan Bank.



Bank Owned Life Insurance



The fair value of bank owned life insurance is equivalent to the cash surrender value of the underlying policies.



Deposits



The fair value of demand, savings, money market and NOW deposits is the amount payable on demand at the reporting date. The fair value of time deposits is
estimated based on discounting cash flows using the rates currently offered for instruments of similar remaining maturities.



Borrowings



The fair value of borrowings is based upon discounting expected cash flows using current rates at which borrowings of similar maturity could be obtained.



Financial Instruments with Off-Balance Sheet Risk



With regard to financial instruments with off-balance sheet risk discussed
in Note L, it is not practicable to estimate the fair value of future financing commitments.



The carrying amounts and estimated fair values of the Companys financial instruments, none of which are held for trading purposes, are as follows at December 31, 2005 and 2004:



|                                         |  |                |         |                     |   |                |  |                     |         |  |   |        
|---------------------------------------- |  | -------------- | ------- | ------------------- | - | -------------- |  | ------------------- | ------- |  | - | -------
|                                         |  | 2005           |         | 2004               
|                                         |  | Carryingamount |         | Estimatedfair value |   | Carryingamount |  | Estimatedfair value
|                                         |  | (In thousands)
|Financial assets:                        |  |                |         |                     |   |                |  |                     |         |  |   |        
|Cash and due from banks                  |  | $              | 1,854   |                     | $ | 1,854          |  | $                   | 1,882   |  | $ | 1,882  
|Interest-earning deposits in other banks |  |                | 5,419   |                     |   | 5,419          |  |                     | 4,223   |  |   | 4,223  
|Investment securities                    |  |                | 48,655  |                     |   | 48,655         |  |                     | 26,436  |  |   | 26,436 
|Time deposits in other banks             |  |                | 199     |                     |   | 199            |  |                     |        |  |   |       
|Loans                                    |  |                | 274,876 |                     |   | 273,727        |  |                     | 160,293 |  |   | 160,863
|Accrued interest receivable              |  |                | 1,645   |                     |   | 1,645          |  |                     | 734     |  |   | 734    
|Stock in FHLB of Atlanta                 |  |                | 1,394   |                     |   | 1,394          |  |                     | 592     |  |   | 592    
|Bank owned life insurance                |  |                | 5,296   |                     |   | 5,296          |  |                     | 5,097   |  |   | 5,097  
|Financial liabilities:                   |  |                |         |                     |   |                |  |                     |         |  |   |        
|Deposits                                 |  |                | 284,134 |                     |   | 282,055        |  |                     | 170,168 |  |   | 169,221
|Borrowings                               |  |                | 32,310  |                     |   | 32,310         |  |                     | 7,400   |  |   | 7,400  
|Accrued interest payable                 |  |                | 457     |                     |   | 457            |  |                     | 142     |  |   | 142    



41



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



NOTE NEMPLOYEE AND DIRECTOR BENEFIT PLANS



401(K) Retirement Plan



The Company has adopted a 401(k) retirement plan that covers all eligible employees. During 2005 and 2004, the Company
matched 100% of employee contributions, with the Companys contribution limited to 6.0% of each employees salary for the years ended December 31, 2005 and 2004. Matching contributions are funded when accrued. Expenses under the plan
totaled $131,000 and $102,000 for the years ended December 31, 2005 and 2004, respectively.



Stock Option Plans



During 1999 the Company adopted, with shareholder approval, an Employee Stock Option Plan (the Employee Plan) and a Director Stock Option Plan (the Director Plan). Each plan was amended as of June 17, 2005 with
shareholder approval to increase the number of shares available for options to purchase shares of the Companys common stock. As of December 31, 2005, the Employee Plan made available options to purchase 341,624 shares of the
Companys common stock and the Director Plan made available options to purchase 204,974 shares of the Companys common stock, for an aggregate number of common shares reserved for options of 546,598. At December 31, 2005, the exercise
price of 164,977 outstanding options is $7.36, the exercise price of 74,225 outstanding options is $4.17, and the exercise price of 155,625 outstanding options is $10.76. Options of 159,688 granted under the Director Plan vested immediately at the
time of grant and 39,375 granted under the Director Plan vested after six months, while the options granted under the Employee Plan vest over a five-year period for 123,264 options, over a four-year period for 34,375 options, and over a three-year
period for 81,875 options. All unexercised options expire ten years after the date of grant. A summary of the Companys option plans as of and for the periods ended December 31, 2005 and 2004 is as follows:



|                        |  |                                 |   |  |                     |   |                     |                              |       |                   |         |   |                              |   |     
|----------------------- |  | ------------------------------- | - |  | ------------------- | - | ------------------- | ---------------------------- | ----- | ----------------- | ------- | - | ---------------------------- | - | ----
|                        |  |                                 |   |  | Outstanding Options |   | Exercisable Options
|                        |  | SharesAvailablefor FutureGrants |   |  | NumberOutstanding   |   |                     | WeightedAverageExercisePrice |       | NumberOutstanding |         |   | WeightedAverageExercisePrice
|At December 31, 2003    |  | 16,133                          |   |  | 251,389             |   |                     | $                            | 6.40  |                   | 230,831 |   |                              | $ | 6.36
|Options granted/vesting |  |                                |   |  |                    |   |                     |                              |      |                   | 19,208  |   |                              |   |    
|Options exercised       |  |                                |   |  | (750                | ) |                     |                              | 4.17  |                   | (750    | ) |                              |   | 4.17
|Options forfeited       |  |                                |   |  |                    |   |                     |                              |      |                   |        |   |                              |   |    
|                        |  |                                 |   |  |                     |   |                     |                              |       |                   |         |   |                              |   |     
|At December 31, 2004    |  | 16,133                          |   |  | 250,639             |   |                     |                              | 6.41  |                   | 249,289 |   |                              |   | 8.03
|Plan amendment          |  | 278,925                         |   |  |                    |   |                     |                              |      |                   |        |   |                              |   |    
|Options granted/vesting |  | (155,625                        | ) |  | 155,625             |   |                     |                              | 10.76 |                   | 1,250   |   |                              |   |    
|Options exercised       |  |                                |   |  | (11,187             | ) |                     |                              | 7.29  |                   | (11,187 | ) |                              |   | 7.29
|Options forfeited       |  | 250                             |   |  | (250                | ) |                     |                              | 4.17  |                   | (250    | ) |                              |   | 4.17
|                        |  |                                 |   |  |                     |   |                     |                              |       |                   |         |   |                              |   |     
|At December 31, 2005    |  | 139,683                         |   |  | 394,827             |   |                     | $                            | 8.10  |                   | 239,102 |   |                              | $ | 6.99
|                        |  |                                 |   |  |                     |   |                     |                              |       |                   |         |   |                              |   |     



The weighted average
remaining life of options exercisable as of December 31, 2005 is 6 years.



The Company amended its stock option plans with shareholder approval effective June 17, 2005 which added 278,925 additional options available for grants.



Employment Agreement



The Company has entered into an employment agreement with its chief executive officer. The agreement provides for a
three-year term but, upon each anniversary, the agreement may be extended for an additional year so that the remaining term shall always be three years. The agreement provides for benefits as spelled out in the contract and cannot



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



be terminated by the Board of Directors, except for cause, without prejudicing the officers right to receive certain vested rights, including
compensation, for the remaining term of the agreement. In the event of a change in control of the Company, as defined in the agreement, the agreement will automatically be extended for three years from the date of such change in control and the
acquirer will be bound to the terms of the contract for that period.



Termination Agreements



The Company has
entered into special termination agreements with three key employees which provide for severance pay benefits in the event of a change in control of the Company which results in the termination of such employees or diminished compensation, duties or
benefits within two years of a change in control. The employees covered under this agreement are entitled to a cash payment equal to two times their annual compensation for income tax purposes for the most recent tax year prior to the change in
control. The agreements are initially effective for a three-year period and are automatically extended annually for an additional year unless the Companys Board of Directors takes specific action not to grant the automatic extension.



Supplemental Employee Retirement Plan and Endorsement Split Dollar Plans



In 2005, the Company implemented a non-qualifying
deferred compensation plan for four key executive officers. The Company purchased life insurance policies on these four key executive officers and certain other key officers during 2004 in order to provide future funding of benefit payments. The
Company has agreed to share with the officers designated beneficiaries a portion of the total death benefits payable under the policies following their deaths. The insurance policies are owned by the Company and the Company is entitled to
receive all death benefits remaining after payment to the officers beneficiary. We expect to recover in full our life insurance investment.



Benefits for each executive officer participating in the deferred compensation plan will accrue and vest during the period of employment, and will be paid
in monthly benefit payments over the participants life after retirement. The plan also provides for payment of disability or death benefits in the event a participating officer becomes permanently disabled or dies prior to attainment of
retirement age. If the Company has a change in control before the officer reaches retirement age, the participating officer will be entitled to a benefit. Provisions of approximately $211,000 were expensed for future benefits to be provided under
this plan for the year ended December 31, 2005 and none in 2004. The total liability under this plan was approximately $211,000 at December 31, 2005 and none in 2004 and is included in accrued expenses and other liabilities in the
accompanying consolidated statements of financial condition.



Director
Elective Income Deferral Agreements and Split Dollar Plans for Directors



In 2005, the Company has entered into Director Elective Income Deferral Agreements with each non-employee director. Interest on the amount deferred is credited by the Bank on the last business day of that year at a
rate equal to the prime rate reported in the Wall Street Journal on that day, plus fifty basis points. The interest crediting rate for 2005 was 7.75%. Total deferred fees and credited interest will be paid to the director either in a lump sum
or in installments over 120 months from retirement on or after reaching the normal retirement age of 65. The expense incurred by the Company for these agreements was approximately $37,000 for the year ended December 31, 2005 and none in 2004.
The total liability under these agreements was approximately $37,000 at December 31, 2005 and none in 2004 and is included in accrued expenses and other liabilities in the accompanying consolidated statements of financial condition.



In order to fund the benefits payable under the Director Elective Income
Deferral Agreements, the Company has purchased life insurance policies on each director. The policies are designed to offset the programs costs during the lifetime of the participant and to provide complete recovery of all the programs
costs at their death. The Company has agreed to share with the directors designated beneficiaries a portion of the total death benefits payable under the policies following their deaths. The insurance policies are owned by the Company and the
Company is entitled to receive all death benefits remaining after payment to the directors beneficiary. We expect to recover in full our life insurance investment.



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



Consulting Agreement



The Company has entered into a Consulting Agreement with one key executive officer under which he will continue to provide
services to the Company as a consultant for a two-year period following his expected termination of employment in February 2007. He will still be entitled to benefits in the event of his disability or change in control of the Company during the
two-year term. His estate will be paid a lump sum amount equal to payments due under the Agreement for its remaining term if he dies during the two-year term.



NOTE OPARENT COMPANY FINANCIAL INFORMATION



Condensed financial information of Bank of Wilmington Corporation, the parent company, at December 31, 2005 is presented below. Bank of Wilmington
Corporation was incorporated on June 20, 2005; therefore, financial information is presented only for the year 2005.



CONDENSED BALANCE SHEET



|                                                 |  |                |        |  
|------------------------------------------------ |  | -------------- | ------ | -
|                                                 |  | 2005           |       
|                                                 |  | (In thousands) |       
|ASSETS:                                          |  |                |        |  
|Equity investment in subsidiaries                |  | $              | 34,929 |  
|Other assets                                     |  |                | 91     |  
|                                                 |  |                |        |  
|TOTAL ASSETS                                     |  | $              | 35,020 |  
|                                                 |  |                |        |  
|LIABILITIES AND SHAREHOLDERS EQUITY:            |  |                |        |  
|Junior subordinated debt                         |  | $              | 10,310 |  
|Other liabilities                                |  |                | 75     |  
|Shareholders equity                             |  |                | 24,635 |  
|                                                 |  |                |        |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY       |  | $              | 35,020 |  
|                                                 |  |                |        |  
|                                                
|CONDENSED STATEMENT OF OPERATIONS                | 
|                                                 | 
|                                                 |  | 2005           |       
|                                                 |  | (In thousands) |       
|Dividends from subsidiary                        |  | $              | 116    |  
|Equity in undistributed net income of subsidiary |  |                | 620    |  
|Miscellaneous expenses                           |  |                | (99    | )
|                                                 |  |                |        |  
|NET INCOME                                       |  | $              | 637    |  
|                                                 |  |                |        |  



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##### Table of Contents

BANK OF WILMINGTON CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 31, 2005 and 2004



CONDENSED STATEMENT OF CASH FLOWS



|                                                 |  |                |         |  
|------------------------------------------------ |  | -------------- | ------- | -
|                                                 |  | 2005           |        
|                                                 |  | (In thousands) |        
|CASH FLOWS FROM OPERATING ACTIVITIES:            |  |                |         |  
|Net income                                       |  | $              | 637     |  
|Equity in undistributed net income of subsidiary |  |                | (620    | )
|Change in other assets                           |  |                | (91     | )
|Change in other liabilities                      |  |                | 75      |  
|                                                 |  |                |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES        |  |                | 1       |  
|                                                 |  |                |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:            |  |                |         |  
|Investment in Trust                              |  |                | 311     |  
|Investment in Bank                               |  |                | 10,000  |  
|                                                 |  |                |         |  
|NET CASH USED BY INVESTING ACTIVITIES            |  |                | (10,311 | )
|                                                 |  |                |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:            |  |                |         |  
|Proceeds from issuance of common stock, net      |  |                | 310     |  
|Proceeds from long-term borrowings               |  |                | 10,000  |  
|                                                 |  |                |         |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES        |  |                | 10,310  |  
|                                                 |  |                |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS        |  |                |        |  
|CASH AND CASH EQUIVALENTS, BEGINNING             |  |                |        |  
|                                                 |  |                |         |  
|CASH AND CASH EQUIVALENTS, ENDING                |  | $              |        |  
|                                                 |  |                |         |  



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##### Table of Contents

Management and Bank Personnel

---



DIRECTORS



Cameron Coburn

President and Chief Executive Officer of Bank of Wilmington Corporation



W. Lee Crouch, Jr.

Realtor/Broker of Intracoastal Realty Corporation



Windell Daniels

President of United National Tours; Real Estate Developer



Craig S. Relan

Private Investor



Jerry D. Sellers

Partner, Sellers Tile Co., Inc.



J. Davie Waggett

Owner, Winter Park Discount Drugs and Seashore Discount Drugs



Walter O. Winter

Real Estate Investor



EXECUTIVE OFFICERS



Cameron Coburn

President and Chief Executive
Officer



Betty V. Norris

Senior Vice President/Treasurer and Chief Financial Officer



Larry W. Flowers

Executive Vice President and
Chief Credit Officer



Lynn M. Burney

Senior Vice President and Chief Operations Officer



Michelle L. Southerland

Vice President and
Corporate Secretary



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##### Table of Contents

General Corporate Information

---



Bank of Wilmington Office Locations





|                          |  |                                  
|------------------------- |  | ---------------------------------
|Main Office               |  | Pine Valley Branch Office        
|1117 Military Cutoff Road |  | 3702 South College Road          
|Wilmington, NC 28405      |  | Wilmington, NC 28412             
|                          | 
|Surf City Branch Office   |  | Hampstead Branch Office          
|206 North Topsail Drive   |  | Hampstead Station Shopping Center
|Suite D                   |  | Unit 1-A                         
|Surf City, NC 28445       |  | 14572 US Highway 17              
|                          |  | Hampstead, NC 28443              



Market for Common
Stock



Bank of Wilmington Corporations common stock is listing for
trading on The Nasdaq Capital Market under the symbol BKWW. As of December 31, 2005, there were 3,416,068 shares of common stock outstanding which were held by approximately 802 shareholders of record.



|                                          |  |  |  |                                                                                        |  |   |       |  |   |       |  | 
|----------------------------------------- |  |  |  | -------------------------------------------------------------------------------------- |  | - | ----- |  | - | ----- |  | 
|Stock Transfer Agent                      |  |  |  |                                                                                        |  |   |       |  |   |       |  | 
|                                          |  |  |  |                                                                                        |  |   |       |  |   |       |  | 
|Registrar and Transfer Company            |  |  |  |                                                                                        |  |   |       |  |   |       |  | 
|10 Commerce Drive Cranford, NJ 07016-3572 |  |  |  | The table below presents the trading prices for the Companys stock for 2005 and 2004: |  |  
|                                          |  |  |  |                                                                                        |  |   |       |  |   |       |  | 
|Regulatory and Securities Counsel         |  |  |  |                                                                                        |  |   | High  |  |   | Low   |  | 
|                                          |  |  |  | 2005                                                                                   |  | $ | 9.46  |  | $ | 9.00  |  | 
|Ward and Smith, PA                        |  |  |  | First quarter                                                                          |  |   | 10.73 |  |   | 8.40  |  | 
|Post Office Box 867                       |  |  |  | Second quarter                                                                         |  |   | 10.95 |  |   | 9.66  |  | 
|New Bern, NC 28563-0867                   |  |  |  | Third quarter                                                                          |  |   | 10.85 |  |   | 10.00 |  | 
|                                          |  |  |  | Fourth quarter                                                                         |  |   |       |  |   |       |  | 
|Independent Auditors                      |  |  |  | 2004                                                                                   |  |   |       |  |   |       |  | 
|                                          |  |  |  | First quarter                                                                          |  | $ | 9.56  |  | $ | 9.20  |  | 
|Dixon Hughes PLLC                         |  |  |  | Second quarter                                                                         |  |   | 9.36  |  |   | 8.45  |  | 
|Suite 200                                 |  |  |  | Third quarter                                                                          |  |   | 9.45  |  |   | 8.48  |  | 
|2501 Blue Ridge Road                      |  |  |  | Fourth quarter                                                                         |  |   | 9.54  |  |   | 8.76  |  | 
|Raleigh, NC 27607                         |  |  |  |                                                                                        |  |   |       |  |   |       |  | 



Annual Report on
Form 10-KSB



A copy of Bank of Wilmington Corporations 2005 Annual
Report on Form 10-KSB, as filed with the Securities and Exchange Commission, is available without charge to shareholders upon written request to Betty V. Norris, Senior Vice President/Treasurer, Bank of Wilmington Corporation, 1117 Military Cutoff
Road, Wilmington, NC 28405.



This Annual Report serves as the annual
financial disclosure statement furnished pursuant to the Federal Deposit Insurance Corporations rules and regulations. This statement has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance
Corporation.



47