**UNITY HOLDINGS, INC.SELECTED FINANCIAL DATA**

| ** **

** **

**UNITY HOLDINGS, INC.** |                   |                   |                   |                   |                   |
|--------------------------------------------------|-------------------|-------------------|-------------------|-------------------|-------------------|
| **SELECTED FINANCIAL DATA**                      |                   |                   |                   |                   |                   |
| ** **                                       | ** **        |                   |                   |                   |                   |  |
| **(Dollars in 000s)**                            |                   | **2006**          | **2005**          | **2004**          | **2003**          | **2002** |
| **STATEMENT OF  CONDITION**                      |                   |                   |                   |                   |                   |
| **Assets:**                                      | ** **        |                   |                   |                   |                   |  |
| Cash & Due From Banks                        | 4,972        | 3,765        | 2,817        | 2,898        | 3,574        |
| Federal Funds Sold \ Int. Earning Deps           | 248          | 857          | 3,800        | 59           | 873          |
| Investment Securities                            | 22,355       | 21,145       | 15,488       | 12,281       | 13,124       |
| Gross Loans                                      |                   | 224,117      | 195,599      | 167,333      | 138,257      | 107,854  |
| Loan Loss Provision                              | 2,791        | 2,445        | 2,259        | 1,866        | 1,471        |
|  Net Loans                                  |                   | 221,326      | 193,154      | 165,074      | 136,391      | 106,383  |
| Fixed Assets                                     |                   | 11,813       | 9,402        | 8,091        | 4,993        | 5,102  |
| Other Assets                                     |                   | 5,859        | 5,011        | 4,191        | 3,227        | 1,881  |
| **TOTAL ASSETS**                                 | ** **        | **266,573 ** | **233,334 ** | **199,461 ** | **159,849 ** | **130,937 ** |
| **Liabilities & Capital:**                   |                   |                   |                   |                   |                   |
| Core Deposits                                    |                   | 128,348      | 113,668      | 77,340       | 44,646       | 41,788  |
| Time Dep's                                       |                   | 81,136       | 69,651       | 84,070       | 84,824       | 76,183  |
| Total Deposits                                   |                   | 209,484      | 183,319      | 161,410      | 129,470      | 117,971  |
| FHLB & Other Borrowings                      | 33,850       | 29,250       | 19,150       | 13,109       | 0            |
| Guaranteed subordinated debentures               | 3,093        | 3,093        | 3,093        | 3,093        | 0            |
| Borrowings                                       |                   | 36,943       | 32,343       | 22,243       | 16,202       | 0  |
| Other Liabilties                                 |                   | 2,042        | 974          | 843          | 890          | 958  |
| TOTAL LIABILITIES                                | 248,469      | 216,636      | 184,496      | 146,562      | 118,929      |
| Redeemable KSOP shares                           | 506          | 106          | 82           | 74           | 66           |
| Capital                                          |                   | 17,598       | 16,592       | 14,883       | 13,213       | 11,944  |
| **TOTAL LIAB. & CAPITAL**                    | **266,573 ** | **233,334 ** | **199,461 ** | **159,849 ** | **130,939 ** |
|                                                  |                   |                   |                   |                   |                   |  |
| **INCOME STATEMENT**                             | ** **        | ** **        | ** **        |                   |                   |
| Interest Income                                  |                   | 18,942       | 14,435       | 10,949       | 9,449        | 8,467  |
| Interest Expense                                 |                   | 8,967        | 6,114        | 3,930        | 3,474        | 3,766  |
| Net Interest Income                              | 9,975        | 8,321        | 7,019        | 5,975        | 4,701        |
|    Provision for Loan Losses           | 461          | 221          | 732          | 495          | 529          |
| Net Int Income after LL Prov                     | 9,514        | 8,100        | 6,287        | 5,480        | 4,172        |
| Noninterest Income                               | 1,598        | 1,296        | 1,090        | 1,070        | 1,071        |
| Noninterest Expense                              | 8,104        | 6,479        | 4,993        | 4,515        | 3,968        |
| Income Before Taxes                              | 3,008        | 2,917        | 2,384        | 2,035        | 1,275        |
| Income Tax Expense                               | 1,010        | 954          | 773          | 673          | 442          |
| **DIRECT NET INCOME**                            | **1,998 **   | **1,963 **   | **1,611 **   | **1,362 **   | **833 **     |

28

----

**UNITY HOLDINGS, INC.SELECTED FINANCIAL DATA**

| **(Dollars in 000s)**                         |               | **2006**        | **2005**        | **2004**        | **2003**        | **2002**      |
|-----------------------------------------------|---------------|-----------------|-----------------|-----------------|-----------------|---------------|
|                                               |               |                 |                 |                 |                 |               |
| **AVERAGE BALANCES**                          |               |                 |                 |                 |                 |
| Gross Loans                                   |               | 207,771    | 178,667    | 150,704    | 122,142    | 97,565   |
| Earning Assets                                |               | 231,127    | 202,736    | 166,420    | 137,259    | 111,978  |
| Assets                                        |               | 248,627    | 217,312    | 175,840    | 137,134    | 111,907  |
| Deposits                                      |               | 199,600    | 175,995    | 141,075    | 123,628    | 109,484  |
| Borrowings & guaranteed subordinated debt | 30,452   | 23,848     | 19,284     | 8,965      | 464        |
| Stockholders Equity                           | 17,095   | 15,738     | 14,235     | 12,512     | 9,648      |
|                                               |               |                 |                 |                 |                 |               |
| Shares outstanding at year end                | 990,030  | 1,014,510  | 1,013,510  | 1,013,510  | 1,009,910  |
| Weighted Avg Shares  (undiluted)         | 993,036  | 1,014,154  | 1,013,510  | 1,010,719  | 896,086    |
|                                               |               |                 |                 |                 |                 |               |
| **KEY RATIOS**                                |               |                 |                 |                 |                 |               |
| Return on Average Assets                      | 0.80     | 0.90       | 0.92       | 0.99       | 0.74       |
| Return on Average Equity                      | 11.69    | 12.47      | 11.32      | 10.89      | 8.63       |
| Dividend Payout Ratio                         | 0.00     | 0.00       | 0.00       | 0.00       | 0.00       |
| Net Interest Margin                           | 4.32     | 4.10       | 4.22       | 4.35       | 4.20       |
| Equity To Assets                              |               | 6.60       | 7.11       | 7.46       | 8.27       | 9.12     |
| Earnings Per Share (undiluted)                | 2.01     | 1.94       | 1.59       | 1.35       | 0.93       |
| Average Book Value per Share                  | 17.27    | 15.51      | 14.05      | 12.35      | 9.55       |

29

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**Management's Discussion and Analysis**

**Of Financial Condition and Results ofOperations**

The following is a discussion of our financialcondition and the financial condition of our bank subsidiary, Unity NationalBank, at December 31, 2006 and 2005 and the results of operations for the yearsthen ended. The purpose of this discussion is to focus on information about ourfinancial condition and results of operations that are not otherwise apparentfrom our audited consolidated financial statements.  Reference should be madeto those statements and the selected financial data presented elsewhere in thisreport for an understanding of the following discussion and analysis.

**Forward-Looking Statements**

We may from time to time make written or oralforward-looking statements, including statements contained in filings with theSecurities and Exchange Commission and our reports to stockholders.  Statementsmade in this report, other than those concerning historical information, shouldbe considered forward-looking and subject to various risks and uncertainties. Forward-looking statements are made based upon management's belief as well asassumptions made by, and information currently available to, managementpursuant to "safe harbor" provisions of the Private Securities LitigationReform Act of 1995.  Our actual results may differ materially from the resultsanticipated in forward-looking statements due to a variety of factors,including governmental monetary and fiscal policies, deposit levels, loandemand, loan collateral values, securities portfolio values, interest rate riskmanagement, the effects of competition in the banking business from othercommercial banks, thrifts, mortgage banking firms, consumer finance companies,credit unions, securities brokerage firms, insurance companies, money marketfunds and other financial institutions operating in our market area andelsewhere, including institutions operating through the Internet, changes in governmentalregulation relating to the banking industry, including regulations relating tobranching and acquisitions, failure of assumptions underlying the establishmentof reserves for loan losses, including the value of collateral underlyingdelinquent loans and other factors.  We caution that these factors are notexclusive.  We do not undertake to update any forward-looking statement thatmay be made from time to time by us, or on our behalf.

**Critical Accounting Policies**

We have adopted various accountingpolicies which govern the application of accounting principles generallyaccepted in the United States of America in the preparation of our financialstatements.  Our significant accounting policies are described in the footnotesto the consolidated financial statements at December 31, 2006.

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

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

30

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Overview**

Our 2006 results were highlighted by reportingnet income of $1,997,900.  The Company continued to leverage its equity basethrough strong loan and deposit growth coupled with operating expense control. The Company also deployed capital in market expansion to take advantage ofbusiness opportunities in contiguous counties.

**Financial Condition at December 31, 2006 and 2005**

As of December 31, 2006, we had total assets of$266.6 million, an increase of 14.2% over December 31, 2005.  Totalinterest-earning assets were $246.7 million at December 31, 2006 or 93% oftotal assets, the same percentage as reported at December 31, 2005.  Ourprimary interest-earning assets at December 31, 2006 were loans, which made up 91%of total interest-earning assets at December 31, 2006 as compared to 90% atDecember 31, 2005.  Our loan to total funding ratio was 92% at December 31, 2006and December 31, 2005.  Increased funding levels from deposit growth of $26.2million and borrowings of $4.6 million were used primarily to fund loan growthof $28.5 million and growth in investments of $1.2 million.  

Our securities portfolio was $19.8 million atDecember 31, 2006, compared to $18.9 million at December 31, 2005.  Funds inexcess of the loan portfolio are generally used to purchase investments toacquire an acceptable yield on funds.  Fixed assets increased $2.4 million in2006 over year ending 2005 levels.  Our Calhoun, Gordon County, office openedupon completion in August 2006.

**Liquidity and Capital Resources**

The purpose of liquidity management is to ensurethat there are sufficient cash flows to satisfy demands for credit, depositwithdrawals, and other needs.  Traditional sources of liquidity include assetmaturities and growth in core deposits.  A company may achieve its desiredliquidity objectives from the management of assets and liabilities and throughfunds provided by operations.  Funds invested in short-term marketableinstruments and the continuous maturing of other earning assets are sources ofliquidity from the asset perspective.  The liability base provides sources ofliquidity through deposit growth, the maturity structure of liabilities, andaccessibility to external sources of funds.

As our loan demand has continued to increase, wehave increased the use of external funding sources in a manner to achieveacceptable net interest margins and to mitigate interest rate risk in thebalance sheet.  Federal Home Loan Bank ("FHLB") advances were $33.9 million atDecember 31, 2006 compared to $29.2 million at December 31, 2005.  The Bankalso used FHLB advances to lock in acceptable margins when they proved moreeconomically acceptable compared to other external funding sources.  Secondarymarket time deposits stood at $16.5 million at December 31, 2006 compared to $14.1million for the same period last year.  

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

Our liquidity and capital resources aremonitored on a periodic basis by management and Federal regulatoryauthorities.  As determined under guidelines established by the Asset/LiabilityCommittee and acceptable current banking practices, our core liquidity ratio was8.20% at December 31, 2006.  The Company's liquidity tightened somewhat duringthe fourth quarter as loan demand became strong.  Deposit increases have easedthese liquidity pressures.  Management considers the low liquidity levels atyear end to be atypical.

31

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

At December 31, 2006, we had loan commitmentsoutstanding of approximately $38.2 million.  Because these commitmentsgenerally have fixed expiration dates and many will expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  If needed, we have the ability to borrow and purchase federalfunds from other financial institutions.  At December 31, 2006, we had an arrangementwith two correspondent commercial banks for short-term unsecured advances of $4.5million and $5.0 million each. Also in place with a correspondent commercialbank is a security repurchase agreement utilizing securities available for saleas the underlying collateral with a line of secured credit of approximately $4million.   At December 31, 2006, we also had the ability to borrow anadditional $2.7 million from the Federal Home Loan Bank.  By having thisreadily available credit, our secondary liquidity ratio was 45.9%,substantially higher than our 20% minimum directive.

At December 31, 2006, our capital levels were compliantwith regulatory minimum capital requirements.  Our stockholders' equityincreased primarily due to net income of $1,997,900.  For regulatory purposes,the net unrealized losses on securities available-for-sale are excluded in thecomputation of the capital ratios.

In the future, our primary source of fundsavailable to Unity Holdings, Inc. will be the payment of dividends by theBank.  Banking regulations limit the amount of the dividends that may be paidwithout prior approval of the bank's regulatory agency.  Currently, the Bankcan pay $6.0 million in dividends without regulatory approval.

The minimum capital requirements to beconsidered "well capitalized" under prompt corrective action provisions and theactual capital ratios for us and the Bank as of December 31, 2006 are asfollows:

|                             | **Actual**       | ** ** | **Regulatory** |
|-----------------------------|------------------|------------|----------------|
|                             | **Consolidated** | ** ** | **Bank**       | ** ** | **Requirements** |
| Leverage  capital ratio     | 8.32 %      |            | 7.93 %    |  | 5.00 % |
| Risk-based  capital ratios: |                  |            |                |  |  |
|     Core capital  | 9.34 %      |            | 8.91 %    |  | 6.00 % |
|     Total capital | 10.59 %     |            | 10.16 %   |  | 10.00 % |
|                             |                  |            |                |  |  |

These ratios may decline as asset growthcontinues, but are expected to exceed the regulatory minimum requirements. Anticipated future earnings will keep these ratios at satisfactory levels.  Wehave adequate cash resources and a line of credit available at the holdingcompany level to maintain "well-capitalized" status at the subsidiary bank.

We believe that our liquidity and capitalresources are adequate and will meet our foreseeable short and long-termneeds.  We anticipate that we will have sufficient funds available to meetcurrent loan commitments and to fund or refinance, on a timely basis, our othermaterial commitments and liabilities.

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

Effects of Inflation

The impact of inflation on banks differs fromits impact on non-financial institutions.  Banks, as financial intermediaries,have assets which are primarily monetary in nature and that tend to fluctuatein concert with inflation.  A bank can reduce the impact of inflation if it canmanage its rate sensitivity gap.  This gap represents the difference betweenrate sensitive assets and rate sensitive liabilities.  We, through ourasset/liability committee, attempt to structure the assets and liabilities andmanage the rate sensitivity gap, thereby seeking to minimize the potentialeffects of inflation.  For information on the management of our interest ratesensitive assets and liabilities, see "Asset/Liability Management".

32

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Results of Operations****For The Years EndedDecember 31, 2006 and 2005**

Net Interest Income

Our results of operations are determined by ourability to manage interest income and expense effectively, to minimize loan andinvestment losses, to generate non-interest income, and to control operatingexpenses.  Because interest rates are determined by market forces and economicconditions, our ability to generate net interest income depends on our abilityto obtain an adequate net interest spread between the rate we pay oninterest-bearing liabilities and the rate we earn on interest-earning assets.

Our tax equivalent net yield on average interest-earningassets was 4.37% in 2006 as compared to 4.17% in 2005.  Average net interest-bearingassets grew $28.4 million in 2006 as compared to 2005.  Average loans increasedby $29.1 million for the year ended December 31, 2006 as compared to the sameperiod in 2005.  Average interest-bearing liabilities increased by $24.9 millionwith average interest bearing demand deposits and money market deposits accountingfor the vast majority of this increase.  The rate earned on averageinterest-earning assets increased to 8.20% in 2006 from 7.12% in 2005.  Therate paid on average interest-bearing liabilities increased to 4.19% in 2006from 3.26% in 2005.  The rising rate environment had a positive effect on assetyields as a whole.  Concurrently, the cost of funds also increased.  We soldsome investment securities to provide liquidity for loan growth rather thanborrow funds at a higher cost.  The Company grew its money market and otherdemand deposits by $18.9 million, which carried a cost of 3.99%.  This actionwas favorable when compared to the other funding alternatives withsignificantly higher interest costs.

Provision for Loan Losses

The provision for loan losses was approximately $462,000and $221,000 in 2006 and 2005, respectively.  The amounts provided were dueprimarily to the growth of the portfolio and to our assessment of the inherentrisk in the portfolio.  Loan loss experience for the Bank is low compared toother banks of similar size.  Net charge-offs for 2006 were $115,000 ascompared to $35,000 for 2005.  Management continually evaluates its loan lossreserve for adequacy.  The allowance for loan losses as a percentage of totalloans was 1.25% at December 31, 2006 and December 31, 2005.

Other Income

Other income consists of service charges ondeposit accounts, mortgage loan origination fees, and other miscellaneousrevenues and fees.  Other income was $1,598,000 in 2006 as compared to $1,296,000for 2005.  Mortgage loan origination income increased $173,000 for the yearended December 31, 2006 when compared to the year ended December 31, 2005.  TheCompany added to its mortgage lending division, and the business unit continuesto produce strong results.  Service charges on deposit accounts increased $135,000for the year ended December 31, 2006 as compared to the same period in 2005.  Otheroperating income increased $20,000 for 2006 over 2005.

Other Expenses

Other expenses of $8,104,000 for 2006 representan approximately 25% increase over the $6,479,000 posted for 2005.  Salariesand employee benefits increased $1,244,000 in 2006 over 2005.  During the year,the bank acquired additional production staff, some of whom were associatedwith the new Calhoun office.  These personnel additions should position thebank for increased market share in new and existing markets.  Occupancy expenseincreased $158,000 for the year ended December 31, 2006 when compared to theyear ended December 31, 2005.  The new Calhoun office and new technologyinitiatives, such as branch deposit capture and remote deposit capture, werethe primary drivers of the equipment and occupancy increases.  As businessvolumes grow, so do our processing and personnel costs. The increase in totalother operating expenses of $223,000 is directly related to the overall growthof the Bank.

33

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

Income Tax

Income tax expense was $1,011,000 in 2006 ascompared to $954,000 in 2005.  The rate of income tax compared to pretax incomewas 34% in 2006 as compared to 33% in 2005.  

Asset/Liability Management

Our objective is to manage assets andliabilities to provide a satisfactory, consistent level of profitability withinthe framework of established cash, loan, investment, borrowing, and capitalpolicies.  Specific officers are charged with the responsibility for monitoringpolicies and procedures designed to ensure acceptable composition of theasset/liability mix. Management's overall philosophy is to support asset growthprimarily through growth of core deposits of all categories made by localindividuals, partnerships, and corporations.

Our asset/liability mix is monitored on aregular basis with a report reflecting the interest rate-sensitive assets andinterest rate-sensitive liabilities being prepared and presented to the Bank'sBoard of Directors on a quarterly basis.  The objective of this policy is tomonitor interest rate-sensitive assets and liabilities so as to minimize theimpact of substantial movements in interest rates on earnings.  An asset orliability is considered to be interest rate-sensitive if it will reprice ormature within the time period analyzed, usually one year or less. The interestrate-sensitivity gap is the difference between the interest-earning assets andinterest-bearing liabilities scheduled to mature or reprice within such timeperiod.  A gap is considered "asset-sensitive" when the amount of interestrate-sensitive assets exceeds the amount of interest rate-sensitiveliabilities.  A gap is considered "liability-sensitive" when the amount ofinterest rate-sensitive liabilities exceeds the interest rate-sensitiveassets.  During a period of rising interest rates, a liability-sensitive gapwould tend to affect net interest income adversely, while an asset-sensitivegap would tend to result in an increase in net interest income. Conversely,during a period of falling interest rates, a liability-sensitive gap would tendto result in an increase in net interest income, while an asset-sensitive gapwould tend to affect net interest income adversely.  If our assets andliabilities were equally flexible and moved concurrently, the impact of anyincrease or decrease in interest rates on net interest income would be minimal.

A simple interest rate "gap" analysisby itself may not be an accurate indicator of how net interest income will beaffected by changes in interest rates.  Accordingly, we also evaluate how therepayment of particular assets and liabilities is impacted by changes ininterest rates.  Income associated with interest-earning assets and costsassociated with interest-bearing liabilities may not be affected uniformly bychanges in interest rates.  In addition, the magnitude and duration of changesin interest rates may have a significant impact on net interest income.  Forexample, although certain assets and liabilities may have similar maturities orperiods of repricing, they may react in different degrees to changes in marketinterest rates.  Interest rates on certain types of assets and liabilitiesfluctuate in advance of changes in general market rates, while interest rateson other types may lag behind changes in general market rates.  In addition,certain assets, such as adjustable rate mortgage loans, have features(generally referred to as "interest rate caps and floors") that limitchanges in interest rates.  Prepayment and early withdrawal levels also coulddeviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease duringperiods of rising interest rates.

Changes in interest rates also affect ourliquidity position.  We currently price deposits in response to market ratesand it is management's intention to continue this policy.  If deposits are notpriced in response to market rates, a loss of deposits could occur that wouldnegatively affect our liquidity position.

34

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

The following table sets forth the distributionof the repricing of our interest-earning assets and interest-bearingliabilities as of December 31, 2006, the interest rate-sensitivity gap, thecumulative interest rate-sensitivity gap, the interest rate-sensitivity gapratio and the cumulative interest rate-sensitivity gap ratio.  The table alsosets forth the time periods in which interest-earning assets andinterest-bearing liabilities will mature or may reprice in accordance withtheir contractual terms.  However, the table does not necessarily indicate theimpact of general interest rate movements on the net interest margin as therepricing of various categories of assets and liabilities is subject tocompetitive pressures and the needs of our customers.  The non-maturity depositportfolio, for example, can reprice in its entirety at any time.  However, ratechanges on several types of these deposits happen rarely.  In addition, variousassets and liabilities indicated as repricing within the same period may infact, reprice at different times within such period and at different rates.

|                                                 |                                      |               |                     | **Within**                  | **Over Three**      | **Over One**        | **After**           |                   |
|-------------------------------------------------|--------------------------------------|---------------|---------------------|-----------------------------|---------------------|---------------------|---------------------|-------------------|
|                                                 |                                      |               |                     | **Three**                   | **Months To**       | **Year to**         | **Three**           |                   |
|                                                 |                                      |               |                     | **Months**                  | **One Year**        | **Three Years**     | **Years**           | **Total**         |
|                                                 |                                      |               |                     | **( Dollars in Thousands)** |
| **Interest-earning assets:**                    |                                      |               |                     |                             |                     |                     |
|                                                 | Interest-bearing deposits in  banks  | 248      | -    | -            | -    | 248            |
|                                                 | Fed funds sold                       |               | -    | -            | -    | -    | -    |
|                                                 | Securities                           |               |                     | 1                      | 2,665          | 1,674          | 18,015         | 22,355       |
|                                                 | Loans                                |               |                     | 116,376                | 33,154         | 45,523         | 29,372         | 224,425      |
|                                                 | **   Total**               | ** **    | ** **          | **116,625 **           | **35,819 **    | **47,197 **    | **47,387 **    | **247,028 ** |
|                                                 |                                      |               |                     |                             |                     |                     |                     |                   |
| **Interest-bearing  liabilities:**              |                                      |               |                     |                             |                     |
|                                                 | Interest-bearing demand  deposits    | 17,005   | -    | -            | -    | 17,005         |
|                                                 | Savings & Money Market  Deposits | 111,343  | -    | -            | -    | 111,343        |
|                                                 | Time Deposits                        |               | 10,895         | 34,708                 | 31,471         | 4,062          | 81,136         |
|                                                 | Federal Funds Purchased              |               | 338            | -            | -    | -    | 338            |
|                                                 | Other Borrowings                     |               | 450            | 18,450                 | 12,950         | 2,000          | 33,850         |
|                                                 | Subordinated Debentures              |               | 3,093          | -            | -    | -    | 3,093          |
|                                                 |    Total                   |               |                     | **143,124 **           | **53,158 **    | **44,421 **    | **6,062 **     | **246,765 ** |
|                                                 |                                      |               |                     |                             |                     |                     |                     |                   |
| Interest rate sensitivity  gap                  |                                      | (26,499)      | (17,339)            | 2,776                  | 41,325         | 263            |
| Cumulative interest rate  sensitivity gap       | (26,499)                             | (43,838)      | (41,062)            | 263                    |                     |
| Interest rate sensitivity  gap ratio            | 0.81                            | 0.67     | 1.06           | 7.82                   |                     |
| Cumulative interest rate  sensitivity gap ratio | 0.81                            | 0.78     | 0.83           | 1.00                   |                     |
|                                                 |                                      |               |                     |                             |                     |                     |                     |                   |

35

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**SELECTED FINANCIAL INFORMATION AND STATISTICALDATA**

The following tables and schedules set forthcertain significant financial information and statistical data with respect to:the distribution of assets, liabilities and stockholders' equity, the interestrates we experience; our investment portfolio; our loan portfolio, includingtypes of loans, maturities, and sensitivities of loans to changes in interestrates and information on nonperforming loans; summary of the loan lossexperience and allowance for loan losses; and types of deposits.

36

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**INTEREST RATES AND INTEREST DIFFERENTIALS**

** **

**Average Balance Sheets, Interest and Rates**

The table below shows the year-to-date averagebalance for each category of interest earning assets and interest-bearingliabilities for the indicated periods and the average rate of interest earnedor paid thereon. 

37

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

|                                                               | **For the Years  Ended December 31,** |
|---------------------------------------------------------------|---------------------------------------|
| ** **                                                    | ** **                            | ** ** | **2006** |  |  |  |  |  | **2005** |  |  |
|                                                               | ** **                            | ** ** | **Interest** |  | **Weighted** |  | ** ** | ** ** | **Interest** |  | **Weighted** |
|                                                               | **Average**                           |  | **Income/** |  | **Average** |  | **Average** |  | **Income/** |  | **Average** |
|                                                               | **Balance**                           |  | **Expense** |  | **Rate** |  | **Balance** |  | **Expense** |  | **Rate** |
| (Dollars in Thousands)                                        |                                       |  |  |  |  |  |  |  |  |  |  |
|                                                               |                                       |  |  |  |  |  |  |  |  |  |  |
| **ASSETS**                                                    |                                       |  |  |  |  |  |  |  |  |  |  |
| Interest earning assets:                                      | ** **                            |  |  |  |  |  | ** ** |  |  |  |  |
| Interest bearing deposits in banks                            | ** $**                           | **260 ** |  | ** $** | **8 ** |  | **3.08 %** |  |  $ | 299  |  |  $ | 7  |  | 2.34 % |
| Federal funds sold                                            | **1,062 **                       |  | **58 ** |  | **5.46 %** |  | 2,429  |  | 68  |  | 2.80 % |
| Taxable Investments, amortized cost                           | **16,467 **                      |  | **808 ** |  | **4.91 %** |  | 15,289  |  | 653  |  | 4.27 % |
| Non-taxable investments, amortized cost                       | **5,567 **                       |  | **239 ** |  | **4.29 %** |  | 6,052  |  | 259  |  | 4.28 % |
| Loans                                                         | **207,771 **                     |  | **17,829 ** |  | **8.58 %** |  | 178,667  |  | 13,448  |  | 7.53 % |
|     Total interest earning assets              | **231,127 **                     |  | ** $** | **18,942 ** |  | **8.20 %** |  | 202,736  |  |  $ | 14,435  |  | 7.12 % |
| Allowance for Loan losses                                     | **(2,604)**                           |  | ** ** |  |  |  | (2,228) |  |  |  |  |
| Other assets                                                  | **20,104 **                      |  | ** ** |  |  |  | 16,804  |  |  |  |  |
|     Total assets                               | ** $**                           | **248,627 ** |  | ** ** |  |  |  |  $ | 217,312  |  |  |  |  |
|                                                               |                                       |  |  |  |  |  |  |  |  |  |  |
|                                                               |                                       |  |  |  |  |  |  |  |  |  |  |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**            |                                       |  |  |  |  |  |  |  |  |  |  |
| Interest bearing liabilities:                                 |                                       |  |  |  |  |  |  |  |  |  |  |
| Deposits:                                                     |                                       |  |  |  |  |  |  |  |  |  |  |
| Demand, including MMDA                                        | ** $**                           | **102,207 ** |  | ** $** | **4,078 ** |  | **3.99 %** |  |  $ | 81,808  |  |  $ | 2,430  |  | 2.97 % |
| Savings                                                       | **4,402 **                       |  | **66 ** |  | **1.50 %** |  | 3,744  |  | 53  |  | 1.42 % |
| Time                                                          | **77,068 **                      |  | **3,430 ** |  | **4.45 %** |  | 77,393  |  | 2,745  |  | 3.55 % |
| Federal funds purchased                                       | **571 **                         |  | **25 ** |  | **4.38 %** |  | 689  |  | 24  |  | 3.48 % |
| FHLB advances & other borrowings                          | **26,781 **                      |  | **1,118 ** |  | **4.17 %** |  | 20,782  |  | 667  |  | 3.21 % |
| Guaranteed subodinated debentures                             | **3,093 **                       |  | **250 ** |  | **8.08 %** |  | 3,093  |  | 195  |  | 6.30 % |
|     Total interest bearing liabilities         | **214,122 **                     |  | ** $** | **8,967 ** |  | **4.19 %** |  | 187,509  |  |  $ | 6,114  |  | 3.26 % |
|                                                               |                                       |  |  |  |  |  |  |  |  |  |  |
| Non-interest bearing demand deposits                          | **15,923 **                      |  |  |  |  |  | 13,050  |  |  |  |  |
| Other liabilities                                             | **1,487 **                       |  |  |  |  |  | 1,015  |  |  |  |  |
| Stockholders' equity                                          | **17,095 **                      |  |  |  |  |  | 15,738  |  |  |  |  |
|     Total liabilities and stockholders' equity | ** $**                           | **248,627 ** |  |  |  |  |  |  $ | 217,312  |  |  |  |  |
|                                                               |                                       |  |  |  |  |  |  |  |  |  |  |
| Net interest income                                           |                                       |  | ** $** | **9,975 ** |  |  |  |  |  |  $ | 8,321  |  |  |
|                                                               |                                       |  |  |  |  |  |  |  |  |  |  |
| Net interest spread                                           |                                       |  |  |  | **4.01 %** |  |  |  |  |  | 3.86 % |
| Net interest margin (TE)                                      |                                       |  |  |  | **4.37 %** |  |  |  |  |  | 4.17 % |

Non-accrual loans and the interest income whichwas recorded on these loans, if any, are included in the yield calculation forloans in all periods reported.  

(TE) -Tax Equivalent.  Loan fees of $1,204,000 and $1,014,000 are included in theyields for 2006 and 2005, respectively.

** **

38

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Rate and Volume Analysis**

The following table shows a summary of thechanges in interest income and interest expense resulting from changes involume and changes in rates for each major category of interest earning assetsand interest-bearing liabilities for 2006 over 2005.  The changes in interestincome and interest expense attributable to both volume and rate have beenallocated proportionately on a consistent basis to the change due to volume andthe change due to rate.

|                                                        | **2006 vs. 2005**       |
|--------------------------------------------------------|-------------------------|
|                                                        | **Rate**                |  | **Volume** |  | **Net** |
|                                                        | (Dollars in  Thousands) |
| *Income  from interest-earning assets:*                |                         |  |  |  |  |
| Interest  bearing deposits in banks                    |  $                 | 2  |  |  $ | (1) |  |  $ | 1  |
| Federal  funds sold                                    | 42                 |  | (52) |  | (10) |
| Taxable  Investments, amortized cost                   | 103                |  | 52  |  | 155  |
| Non-taxable  investments, amortized cost               | 1                  |  | (21) |  | (20) |
| Loans                                                  | 2,020              |  | 2,361  |  | 4,381  |
| Total  interest income                                 |  $                 | 2,168  |  |  $ | 2,339  |  |  $ | 4,507  |
|                                                        |                         |  |  |  |  |
| *Expense  from interest-bearing liabilities:*          |                         |  |  |  |  |
| Demand,  including MMDA                                |  $                 | 954  |  |  $ | 694  |  |  $ | 1,648  |
| Savings                                                | 3                  |  | 10  |  | 13  |
| Time                                                   | 697                |  | (12) |  | 685  |
| Federal  funds purchased                               | 5                  |  | (4) |  | 1  |
| FHLB  advances & other borrowings                  | 230                |  | 221  |  | 451  |
| Guaranteed  subodinated debentures                     | 55                 |  | -  |  | 55  |
|      Total interest bearing liabilities |  $                 | 1,944  | ** ** |  $ | 909  | ** ** |  $ | 2,853  |
|                                                        |                         |  |  |  |  |
| NET  INTEREST INCOME                                   |  $                 | 224  |  |  $ | 1,430  |  |  $ | 1,654  |
|                                                        |                         |  |  |  |  |

39

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**INVESTMENT PORTFOLIO**

** **

**Types of Investments**

Our securities portfolio, consisting of U.S.Government sponsored agencies, mortgage-backed, municipal and restricted equitysecurities, amounted to $22.5 million at December 31, 2006, compared to $21.1million at December 31, 2005.  Most of the Company's funds were used to fundstrong loan growth rather than in the investment portfolio.  We have notspecifically identified any securities for sale in future periods that, if sodesignated, would require a charge to operations if the market value would notbe reasonably expected to recover prior to the time of sale.

The carrying amounts of securities and thecorresponding interest yield, which are all classified as available-for-sale,are summarized as follows:

| ** **                                  |                 | **December 31,  2006**      |                  |
|---------------------------------------------|-----------------|-----------------------------|------------------|
| ** **                                  |                 | ** **                  | ** **       |  |  | **Weighted** | ** ** |
|                                             |                 | **Amortized**               | ** **       | **Fair** |  | **Average** | ** ** |
|                                             |                 | **Cost**                    | ** **       | **Value** |  | **Yield** | ** ** |
|                                             |                 | **(Dollars in  Thousands)** |                  | ** ** | ** ** |
| U.S. Government sponsored agency securities | ** $**     | **10,239 **            | ** **       | ** $** | **10,119 ** |  | **4.70 ** | **%** |
| Mortgage-backed securities                  | **3,727 ** | ** **                  | **3,647 **  |  | **4.40 ** | ** ** |
| Municipal securities                        | **5,961 ** | ** **                  | **6,049 **  |  | **6.50 ** | ** ** |
| Restricted equity securities                | **2,540 ** | ** **                  | **2,540 **  |  | **6.04 ** | ** ** |
|                                             |                 | ** $**                 | **22,467 ** | ** ** | ** $** | **22,355 ** |  | **5.23 ** | **%** |
|                                             |                 |                             |                  |  |  |  |  |
|                                             |                 |                             |                  |  |  |  |  |
|                                             |                 | December 31, 2005           |                  |
|                                             |                 |                             |                  |  |  | **Weighted** |  |
|                                             |                 | Amortized                   |                  | Fair |  | **Average** |  |
|                                             |                 | Cost                        |                  | Value |  | **Yield** |  |
|                                             |                 | (Dollars in  Thousands)     |                  | ** ** |  |
| U.S. Government sponsored agency securities |  $         | 8,993                  |                  |  $ | 8,804  |  | 4.23  | % |
| Mortgage-backed securities                  | 4,566      |                             | 4,456       |  | 4.45  |  |
| Municipal securities                        | 5,568      |                             | 5,619       |  | 6.48  |  |
| Restricted equity securities                | 2,265      |                             | 2,265       |  | 3.92  |  |
|                                             |                 |  $                     | 21,392      |  |  $ | 21,144  |  | 4.89  | % |
|                                             |                 |                             |                  |  |  | ** ** | ** ** |
|                                             |                 |                             |                  |  |  |  |  |  |  |  |  |

40

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Maturities**

The amounts of debt securities are shown in thefollowing table according to contractual maturity classifications (1) one yearor less, (2) after one through three years, (3) after three through five yearsand (4) after five years.  Restricted equity securities are not included in thetable because they have no contractual maturity.  

| ** **           |                  | **December 31,  2005**      |                  |             |                |
|----------------------|------------------|-----------------------------|------------------|-------------|----------------|
| ** **           |                  | ** **                  | ** **       |             |                | **Weighted** | ** ** |
|                      |                  | **Amortized**               | ** **       | **Fair**    |                | **Average** | ** ** |
|                      |                  | **Cost**                    | ** **       | **Value**   |                | **Yield** | ** ** |
|                      |                  | **(Dollars in  Thousands)** |                  | ** **  | ** **     |
| One  Year or Less    | ** $**      | **125 **               | ** **       | ** $** | **125 **  |  | **5.81 ** | **%** |
| One  to Three Years  | **1,698 **  | ** **                  | **1,674 **  |             | **4.46 ** | ** ** |
| Three  to Five Years | **4,707 **  | ** **                  | **4,673 **  |             | **5.14 ** | ** ** |
| Over  Five Years     | **13,397 ** | ** **                  | **13,342 ** |             | **5.34 ** | ** ** |
|                      |                  | ** $**                 | **19,927 ** | ** **  | ** $**    | **19,814 ** |  | **5.23 ** | **%** |

**LOAN PORTFOLIO**

We generally require that loans collateralizedby real estate not exceed the collateral values by the following percentagesfor each type of real estate loan as follows:

| One- to four-family residential properties                        | 85% |
|-------------------------------------------------------------------|-----|
| Construction loans on one- to four-family  residential properties | 80% |
| Nonresidential property                                           | 80% |

For commercial, consumer, and other non-realestate loans, we require collateral commensurate with the repayment ability andcreditworthiness of the borrower.

The specific economic and credit risksassociated with our loan portfolio, especially the real estate portfolio,include, but are not limited to, a general downturn in the economy which couldaffect unemployment rates in our market area, general real estate marketdeterioration, interest rate fluctuations, deteriorated or non-existingcollateral, title defects, inaccurate appraisals, financial deterioration ofborrowers, fraud, and any violation of banking protection laws.  Constructionlending can also present other specific risks to the lender such as whetherdevelopers can find builders to buy lots for home construction, whether thebuilders can obtain financing for the construction, whether the builders cansell the home to a buyer, and whether the buyer can obtain permanentfinancing.  Currently, real estate values and employment trends in our marketarea are stable.  However, global uncertainties could negatively impact thelocal economy.

We attempt to reduce these economic and creditrisks not only by adhering to loan to value guidelines, but also byinvestigating the creditworthiness of the borrower and monitoring theborrower's financial position.  Also, we establish and periodically review ourlending policies and procedures.  National banking regulations limit exposureby prohibiting loan relationships that exceed 15% of the Bank's statutorycapital.  Because of the Company's capital strength, the Company qualifies forthe OCC's pilot lending program, which increases the lending limit to 25% ofstatutory capital.

41

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Types of Loans**

The amounts of loans outstanding at theindicated dates are shown in the following table according to the type of loan.

|                                        | **2006**                |                   | **2006**           |                  | 2005                |         | 2005               |
|----------------------------------------|-------------------------|-------------------|--------------------|------------------|---------------------|---------|--------------------|
|                                        | **Total**               |                   | **%**              |                  | Total               |         | %                  |
| (Dollars in Thousands)                 |                         |                   |                    |                  |                     |         |                    |
| Commercial, financial and agricultural | ** $**             | **13,726 **  |                    | 6.1  % |                     |  $ | 11,014        |  | 5.6  % |
| Real estate - construction             | **43,293  **  |                   | 19.3  %  |                  | 35,408    |         | 18.1  %  |
| Real estate - mortgage                 | **160,832  ** |                   | 71.7  %  |                  | 142,881   |         | 72.9  %  |
| Consumer, installment and other        | **6,574  **   |                   | 2.9  %   |                  | 6,695     |         | 3.4  %   |
|                                        | **224,425  ** |                   | 100.0  % |                  | 195,998   |         | 100.0  % |
| Unearned income                        | **(308)**               |                   |                    |                  | (399)               |         |                    |
| Allowance for loan losses              | **(2,791)**             |                   |                    |                  | (2,445)             |         |                    |
| **Loans, net**                         | ** $**             | **221,326 ** | ** **         | ** **       |                     |  $ | 193,154            |  |  |

**Maturities and Sensitivities of Loans to Changesin Interest Rates**

Total loans as of December 31, 2006 are shown inthe following table according to contractual maturity.  

|                               | **Commercial**              |              | **Construction**  |         | **Other**          |  | **Total**          |
|-------------------------------|-----------------------------|--------------|-------------------|---------|--------------------|--|--------------------|
|                               | **(Dollars in  Thousands)** |
| Within Three Months           |  $                     | 6,447   |                   |  $ | 35,493        |  |  $            | 72,315  |  |  $ | 114,255  |
| Over Three Months to One Year | 2,046             |              | 7,590   |         | 20,692   |  | 30,328   |
| Over One Year to Three Years  | 2,591             |              | 180     |         | 42,022   |  | 44,793   |
| Over Three Years              | 2,642             |              | 30      |         | 32,377   |  | 35,049   |
|                               |  $                     | 13,726  |                   |  $ | 43,293        |  |  $            | 167,406  |  |  $ | 224,425  |

The following table summarizes loans at December31, 2006 with due dates after one year that have predetermined and floating oradjustable interest rates.

|                                        | **(Dollars**      |
|----------------------------------------|-------------------|
|                                        | **in Thousands)** |
| Predetermined  interest rates          |  $           | 29,749  |
| Floating  or adjustable interest rates | 50,093       |
|                                        |  $           | 79,842  |
|                                        |                   |

42

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Risk Elements**

Information with respect to nonaccrual, pastdue, restructured and other problem loans at December 31, 2006 and 2005 isas follows:

|                                                                                         |            |                  | **December 31,** |
|-----------------------------------------------------------------------------------------|------------|------------------|------------------|
|                                                                                         |            |                  | **2006**         |  | **2005** |
| **Nonperforming loans:**                                                                | ** ** |                  |                  |  |  |
| Nonaccrual loans                                                                        |            |                  | **4,235 **  |  | 2,964  |
| Restructured loans                                                                      |            |                  | **59 **     |  | 221  |
| Other real estate owned                                                                 |            |                  | **118 **    |  | 132  |
| **  Total nonperforming loans**                                                    | ** ** |                  | **4,412 **  |  | 3,317  |
|                                                                                         |            |                  | ** **       |  |  |
| **Potential problem loans:**                                                            | ** ** |                  | ** **       |  |  |
| Loans 90 days or more past due and still accruing                                       |            | **94 **     |                  | 38  |
| **Total nonperforming and potential problem loans**                                     |            | **4,506 **  |                  | **3,355 ** |
|                                                                                         |            |                  | ** **       | ** ** | ** ** |
| Nonperforming assets to total loans and other real estate                               |            | **2.01 %**  | ** **       | **1.71 %** |
| Reserve for loan losses to nonperforming loans                                          |            | **61.95 %** | ** **       | **72.88 %** |
|                                                                                         |            |                  | ** **       |  |  |
| Interest at contracted rates (a)                                                        |            |                  | **494 **    |  | 124  |
| Interest recorded as income                                                             |            |                  | 0           |  | 0  |
| Reduction of Interest Income for period                                                 |            |                  | **494 **    |  | **124 ** |
|                                                                                         |            |                  |                  |  |  |
| (a)  Interest income on nonaccruals that would have beeen  recorded, if the loans  |
|       remained current and in accordance with original  terms. |            |                  |                  |

It is our policy to discontinue the accrual ofinterest income when, in the opinion of management, collection of interestbecomes doubtful.  This status is accorded interest when (1) there is asignificant deterioration in the financial condition of the borrower and fullrepayment of principal and interest is not expected and (2) the principal orinterest is more than ninety days past due, unless the loan is bothwell-secured and in the process of collection.

Nonaccrual loans at December 31, 2006 were $4,235,000,compared to $2,964,000 at  December 31, 2005.  The increase is primarily theresult of two large loans for the same customer being placed in nonaccrualstatus in the second quarter.  These loans are fully collateralized bycommercial real estate.  The larger loans are in process of being collectedwith no significant losses.

Loans that are classified for regulatorypurposes as loss, doubtful, substandard, or special mention that have not beenincluded in the table above do not represent or result from trends oruncertainties that management reasonably expects will materially impact futureoperating results, liquidity, or capital resources.  These classified loans donot represent material credits about which management is aware of anyinformation that causes management to have serious doubts as to the ability ofsuch borrowers to comply with the loan repayment terms.

** **

43

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**SUMMARY OF LOAN LOSS EXPERIENCE**

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

|                                                                              | **Year Ended  December 31,** |
|------------------------------------------------------------------------------|------------------------------|
|                                                                              | **2006**                     |  | **2005** |
|                                                                              | **(Dollars in  Thousands)**  |
| Average amount of loans outstanding                                          | ** $**                  | **207,771 ** |  |  $ | 165,074  |
|                                                                              | ** **                   |  |  |
| Balance of allowance for loan losses at beginning of  period                 | **2,445 **              |  | 2,259  |
|                                                                              | ** **                   |  |  |
| Loans charged off:                                                           | ** **                   |  |  |
| Installment loans                                                            | **94 **                 |  | 80  |
| Real estate-mortgage                                                         | **- **                  |  | -  |
| Commercial                                                                   | **53 **                 |  | -  |
|                                                                              | **147 **                |  | 80  |
|                                                                              | ** **                   |  |  |
| Loans recovered:                                                             | ** **                   | ** ** |  |
| Installment loans                                                            | **30 **                 |  | 25  |
| Real estate mortgage                                                         | **- **                  |  | 3  |
| Commercial                                                                   | **2 **                  |  | 17  |
|                                                                              | **32 **                 |  | 45  |
|                                                                              | ** **                   |  |  |
| Net charge-offs                                                              | **115 **                |  | 35  |
|                                                                              | ** **                   |  |  |
| Additions to allowance charged to operating expense during  year             | **461 **                |  | 221  |
| Balance of allowance for loan losses at end of year                          | ** $**                  | **2,791 ** | ** ** |  $ | 2,445  |
|                                                                              | ** **                   |  |  |
| Ratio of net loans charged off during the year to average  loans outstanding | **0.06 %**              |  | 0.02 % |
|                                                                              |                              |  |  |

44

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Allowance for Loan Losses**

Management continuallyevaluates its loan loss reserve for adequacy.  Our evaluation considerssignificant factors relative to the credit risk and loss exposure in the loanportfolio, including past due and classified loans, historical experience,underlying collateral values, and current economic conditions that may affectthe borrower's ability to repay.  The allowance for loan losses is evaluated bysegmenting the loan portfolio into unclassified and classified loans.  Theunclassified loans are further segmented by loan type with an allowancepercentage applied to each type in order to establish a general allowance forloan losses.  The allowance percentage determined is based upon the historicalloss experience of each loan category.  Further, we allocate a reserve for theloan portfolio in general based on industry standards.  The classified loans,including impaired loans, are analyzed individually in order to establish aspecific allowance for loan losses.  This evaluation is inherently subjective,as it requires estimates that are susceptible to significant change. Ultimately, losses may vary from current estimates and future additions to theallowance may be necessary.  Thus, there can be no assurance that charge-offsin future periods will not exceed the allowance for loan losses as estimated atany point in time.  Management believes the loan loss reserve is adequate atthis time.

As of December 31, 2006 and 2005, ourallocations of the allowance for loan losses do not specifically correspond tothe categories of loans listed below.   The following table represents our bestestimate for the allocation of the allowance for loan losses to types of loans,as of the indicated dates.  The unallocated portion represents excess reservesover our regular reserve calculations.

|                                            | **December 31,  2006**      |                 | **December 31,  2005**                                |
|--------------------------------------------|-----------------------------|-----------------|-------------------------------------------------------|
|                                            | **Amount**                  |                 | **Percent of Loans  in each category to total loans** |  | **Amount** |  | **Percent of Loans  in each category to total loans** |
|                                            | **(Dollars in  Thousands)** | ** **      | **(Dollars in  Thousands)**                           |
| Commercial,  financial and agricultural    |  $                     | 128        |                                                       | 6.12 % |  |  |  $ | 99  |  | 5.62 % |  |
| Real  estate - construction                |  $                     | 404        |                                                       | 19.29 % |  |  |  $ | 317  |  | 18.07 % |  |
| Real  estate - mortgage                    |  $                     | 1,499      |                                                       | 71.66 % |  |  |  $ | 1,280  |  | 72.90 % |  |
| Consumer,  installment and other           |  $                     | 74         |                                                       | 2.93 % |  |  |  $ | 72  |  | 3.42 % |  |
| Specific  allocation for rated  loans |  $                     | 562        |                                                       | N/A |  |  |  $ | 461  |  | N/A |  |
| Unallocated                                |  $                     | 124        |                                                       | N/A |  |  |  $ | 216  |  | N/A |  |
|                                            | ** $**                 | **2,791 ** | ** **                                            | **100 %** | ** ** | ** ** | ** $** | **2,445 ** | ** ** | **100 %** | ** ** |
|                                            |                             |                 |                                                       |  |  |  |  |  |  |
|                                            |                             |                 |                                                       |  |  |  |  |  |  |  |  |  |  |

45

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**DEPOSITS**

Average amount of deposits and average ratespaid thereon, classified as to noninterest-bearing demand deposits,interest-bearing demand deposits, savings deposits, and time deposits, for theyear is presented below. 

| ** **                                  | **December 31,  2006**      | ** **        | **December 31,  2005**      |
|---------------------------------------------|-----------------------------|-------------------|-----------------------------|
|                                             | **Average**                 | ** **        |                             | **Average** | ** ** |
|                                             | **Balance (1)**             | **Percent**       |                             | **Balance (1)** | **Percent** |
|                                             | **(Dollars in  Thousands)** |                   | **(Dollars in  Thousands)** |
| Noninterest-bearing demand deposits         | ** $**                 | **15,923 **  | **N/A   **   |  |  $ | 13,050  | **N/A   ** |
| Interest-bearing demand deposits & MMDA | **102,207 **           | **3.99 %**   |                             | 81,808  | 2.97 % |
| Savings Deposits                            | **4,402 **             | **1.50 %**   |                             | 3,744  | 1.42 % |
| Time Deposits                               | **77,068 **            | **4.45 %**   |                             | 77,393  | 3.55 % |
|                                             | ** $**                 | **199,600 ** | **3.79 %**             |  |  $ | 175,995  | 2.97 % |
|                                             |                             |                   |                             |  |  |

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

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

|                                        | **(Dollars in  Thousands)** |
|----------------------------------------|-----------------------------|
|                                        |                             |
| Three  months or less                  |  $                     | 5,316  |
| Over  three months through six months  | 4,919                  |
| Over  six months through twelve months | 11,544                 |
| Over  twelve months                    | 17,534                 |
|                                        |  $                     | 39,313  |
|                                        |                             |

46

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