**U.S.SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM10-KSB**

**(Mark One)**

**x****        Annual report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

**For fiscal year ended December31, 2006**

**o****        Transition report underSection 13 or 15(d) of the Securities Exchange Act of 1934****

**For the transition periodfrom                             to                             **

**CommissionFile Number:  000-51147**

**FIRSTBANKFINANCIAL SERVICES, INC.**

(Name of Small Business Issuer in Its Charter)

| **Georgia**                               |   | ** **                         |
|-------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of          |   | **20-2198785**                     |
| incorporation or  organization)           |   | (IRS Employer  Identification No.) |
|                                      |   |                               |
| **120  Keys Ferry Street, McDonough, GA** |   | **30253**                          |
| (Address of  Principal Executive Offices) |   | (Zip Code)                         |

 

**(678) 583-2265**

(Issuer’s Telephone Number, Including AreaCode)

Securities registered pursuant to Section 12(b) ofthe Act:  **None**.

Securities registered pursuant to Section 12(g) ofthe Act:  **CommonStock, Par Value $5.00 Per Share.**

Check whether the issuer is not required to filereports pursuant to Section 13 or 15(d) of the Exchange Act. o

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for past 90days.  Yes   x    No   o

Check if disclosure of delinquent filers in responseto Item 405 of Regulation S-B is not contained in this form, and no disclosurewill be contained, to the best of registrant’s knowledge, in definitive proxyor information statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB.  o

Check whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act):  Yes   o   No   x

State the issuer’s revenues for its most recentfiscal year:  **$19,195,426**

State the aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was sold, or the average bid and asked priceof such common equity, as of a specified date within the past 60 days:  **$34,252,652 as of March15, 2007.**

APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each ofthe issuer’s classes of common equity, as of the latest practicable date:  **2,831,676 sharesoutstanding of common stock as of March 15, 2007.**

Transitional Small Business Disclosure format(check one):  Yes   x   No   o

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for 2007 Annual Meeting of Shareholders (Part III,Items 9, 10 and 11)

 

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**TABLE OF CONTENTS**
| PART I     |   |                                                                                                                                    |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                    |
| ITEM 1.    |   | DESCRIPTION OF  BUSINESS                                                                                                                |
| ITEM 2.    |   | DESCRIPTION OF PROPERTY                                                                                                                 |
| ITEM 3.    |   | LEGAL PROCEEDINGS                                                                                                                       |
| ITEM 4.    |   | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                    |
|       |   |                                                                                                                                    |
| PART II    |   |                                                                                                                                    |
|       |   |                                                                                                                                    |
| ITEM 5.    |   | MARKET FOR  COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                                               |
| ITEM 6.    |   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                             |
| ITEM 7.    |   | FINANCIAL STATEMENTS                                                                                                                    |
| ITEM 8.    |   | CHANGES IN  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                                   |
| ITEM 8A.   |   | CONTROLS AND  PROCEDURES                                                                                                                |
| ITEM 8B.   |   | OTHER INFORMATION                                                                                                                       |
|       |   |                                                                                                                                    |
| PART III   |   |                                                                                                                                    |
|       |   |                                                                                                                                    |
| ITEM 9.    |   | DIRECTORS,  EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT |
| ITEM 10.   |   | EXECUTIVE  COMPENSATION                                                                                                                 |
| ITEM 11.   |   | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                                        |
| ITEM 12.   |   | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                                              |
| ITEM  13.  |   | EXHIBITS                                                                                                                                |
| ITEM 14.   |   | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                                                 |
|       |   |                                                                                                                                    |
| SIGNATURES |

 

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**PART I**

**ITEM 1.  DESCRIPTION OF BUSINESS**

**General**

FirstBank FinancialServices, Inc. (the “Company”) is a bank holding company whose principalactivity is the ownership and management of its wholly-owned subsidiary,FirstBank Financial Services (formerly First Bank of Henry County) (the “Bank”).  On February 1, 2005, pursuant to an Agreementand Plan of Share Exchange approved by the Bank’s shareholders, the Companyacquired all of the Bank’s common stock in exchange for one share of theCompany’s stock.

The Bank began its bankingoperations on January 28, 2002, after receiving final approval from theGeorgia Department of Banking and Finance (“GDBF”) and the Federal DepositInsurance Corporation (“FDIC”) to organize the Bank as a state-charteredcommercial bank with federally insured deposits.

The Bank is a full-servicecommercial bank specializing in meeting the needs of individuals and small- tomedium-sized businesses and professional concerns in Henry County.  The Bank focuses on community involvement andpersonal service while providing customers with sophisticated financialproducts.  The Bank offers a broad arrayof competitively priced deposit services, including interest-bearing andnoninterest-bearing checking accounts, statement savings accounts, money marketdeposits, certificates of deposit and individual retirement accounts.  In addition, the Bank complements its lendingand deposit products by offering ATM and debit cards, travelers’ checks,official checks, credit cards, direct deposit, automatic transfers, savingsbonds, night depository, stop payments, collections, wire transfers andoverdraft protection.

**Market Area and Competition**

All phases of the Company’sbanking activities are highly competitive. The Company competes actively with commercial banks, as well as financecompanies, credit unions, and other financial institutions located within itsprimary market area of Henry County, Georgia. The Bank competes with all of the super-regionals as well asnational competitors, including:  Bank ofAmerica, SunTrust, Wachovia, The First State Bank, Heritage Bank, FirstNational Bank, Park Avenue Bank and BB&T. Most of these institutions have offices within two miles of the locationof the Bank’s main office.  Presently, 20commercial banks serve Henry County with a total of 54 branches.  The FDIC publishes market share data for theperiod ending June 30th ofeach year.  Based on the last reporteddates, The Bank has an approximately 10% market share in the Henry Countymarket which is the third largest in the county.

The Bank’s primary market isspecifically southern Henry County.  Thecities of McDonough and Stockbridge, which are the focal points of the Bank’scurrent primary service area, are immediately accessible to traffic from alldirections via Interstate 75.  HenryCounty is located approximately 25 miles southeast of downtown Atlanta, in thesouthern portion of the Metropolitan Atlanta MSA, and 20 miles southeast ofHartsfield International Airport.

The Bank will enter into theClayton County, Georgia market in 2007.

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**Lending Services**

**Lending Policy. **The Bank aggressivelyseeks creditworthy borrowers within its primary service area.  The Bank’s primary lending function is tomake loans to small- to medium-sized businesses.  In addition to commercial loans, the Bankmakes installment loans, home equity loans, real estate loans and secondmortgage loans to individual consumers.  Our current loan portfolio is comprised ofthe following:
| Loan Category   | ** ** | **Ratio** | ** ** |
|----------------------|------------|-----------|------------|
| Commercial Lending   |       | 8         | %          |
| Real Estate  Lending |       | 90        | %          |
| Consumer Lending     |       | 2         | %          |

 

**LoanApproval and Review.**  The Bank’s loan approval provides for variouslevels of officer lending authority. When the total amount of loans to a single borrower exceeds anindividual officer’s lending authority, an officer with a higher lending limitor the Bank’s Loan Committee determines whether to approve the loan request.

**LendingLimits. **The Bank’s legal lending limits are 15% ofits unimpaired capital and surplus for unsecured loans and 25% of itsunimpaired capital and surplus for loans secured by readily marketablecollateral.  As of December 31, 2006, theBank’s legal lending limit for unsecured loans was approximately $3,342,000****and its legal lending limit for securedloans was approximately $5,570,000.****Whilethe Bank generally employs more conservative lending limits, the Board ofDirectors has discretion to lend up to its legal lending limits.

**CreditRisks**.  The principal economic risk associated witheach category of the loans that the Bank makes is the creditworthiness of theborrower.  General economic conditionsand the strength of the services and retail market segments affect borrowercreditworthiness.  Risks associated withreal estate loans also include fluctuations in the value of real estate, newjob creation trends, tenant vacancy rates and, in the case of commercialborrowers, the quality of the borrower’s management.  In addition, a commercial borrower’s abilityboth to evaluate properly changes in the supply and demand characteristicsaffecting its markets for products and services and to respond effectively tothese changes are significant factors in the creditworthiness of a commercialborrower.  General economic factorsaffecting a borrower’s ability to repay include interest, inflation andemployment rates, as well as other factors affecting a borrower’s customers,suppliers and employees.

The well-established banksin Henry County are likely to make proportionately more loans to medium- tolarge-sized businesses than the Bank. Many of the commercial loans that the Bank makes are made to small- tomedium-sized businesses, which may be less able to withstand competitive,economic and financial pressures than larger borrowers.

**CommercialLoans**.  The Bank makes loans to small- tomedium-sized businesses whose demand for funds falls within the legal lendinglimits of the Bank.  This category ofloans includes loans made to individual, partnership or corporate borrowers,and obtained for a variety of business purposes.  Risks associated with these loans can besignificant and include but are not limited to fraud, bankruptcy, economicdownturn, deteriorated or non-existing collateral and changes in interestrates.

**Real EstateLoans**.  The Bank makes and holds real estate loans,consisting primarily of single-family residential construction loans for one-to four-unit family structures.  The Bankrequires a first lien position on the land associated with the constructionproject and offers these loans to professional building contractors andhomeowners.  Loan disbursements requireon-site inspections to assure the

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project is on budget andthat the loan proceeds are being used for the construction project and notbeing diverted to another project.  Theloan-to-value ratio for these loans is predominantly 80% of the lower of theas-built appraised value or project cost, and is a maximum of 90% if the loanis amortized.  Loans for construction canpresent a high degree of risk to the lender, depending upon, among otherthings, whether the builder can sell the home to a buyer, whether the buyer canobtain permanent financing, whether the transaction produces income in theinterim and the nature of changing economic conditions.

**ConsumerLoans**.  The Bank makes a variety of loans to individualsfor personal, family and household purposes, including secured and unsecuredinstallment and term loans, home equity loans and lines of credit.  Consumer loan repayments depend upon theborrower’s financial stability and are more likely to be adversely affected bydivorce, job loss, illness and personal hardships.  Because depreciable assets such as boats,cars and trailers secure many consumer loans, the Bank amortizes these loansover the useful life of the asset.  Tominimize the risk that the borrower cannot afford the monthly payments, fixedmonthly obligations are limited to no more than 40% of the borrower’s grossmonthly income.  The borrower should alsobe employed for at least 12 months prior to obtaining the loan.  The loan officer reviews the borrower’s pastcredit history, past income level, debt history and, when applicable, cash flowto determine the impact of all of these factors on the borrower’s ability tomake future payments as agreed.

**Investments**

In addition to loans, theBank makes other investments primarily in obligations of the United States orobligations guaranteed as to principal and interest by the United States.  As of December 31, 2006, investmentsecurities comprised approximately 14% of the Bank’s assets, with net loans comprisingapproximately 75%.  No investment in anyof these instruments exceeds applicable limitation imposed by law orregulation.

**Deposits**

The Bank offers a wide rangeof commercial and consumer deposit accounts, including checking accounts, moneymarket accounts, a variety of certificates of deposit, and IRA accounts.  The Bank attracts deposits with an aggressivemarketing plan, a broad product line and competitive products and services.  The primary sources of deposits are HenryCounty residents, local businesses and their employees and brokered deposits.

**Asset and Liability Management**

The Bank manages its assetsand liabilities to provide an optimum and stable net interest margin, aprofitable after-tax return on assets and return on equity, and adequateliquidity.  These management functionsare conducted within the framework of the Bank’s written loan and investmentpolicies.  The Bank attempts to maintaina balanced position between rate-sensitive assets and rate-sensitiveliabilities.  It charts assets andliabilities on a matrix by maturity, effective duration, and interestadjustment period, and endeavors to manage any gaps in maturity ranges.

**Employees**

As of December 31, 2006, theBank had 48****full-timeemployees.  The Bank is not a party toany collective bargaining agreement and, in the opinion of management, enjoysexcellent relations with its employees.

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**Supervision and Regulation**

Both the Company and theBank are subject to extensive state and federal banking regulations that imposerestrictions on and provide for general regulatory oversight of our operations.These laws generally are intended to protect depositors and not shareholders.The following discussion describes the material elements of the regulatoryframework that applies to us.

**The Company**

Because we own all of thecapital stock of the Bank, we are a bank holding company under the federal BankHolding Company Act of 1956 (the “Bank Holding Company Act”). As a result, weare primarily subject to the supervision, examination and reportingrequirements of the Bank Holding Company Act and the regulations of the FederalReserve Board. As a bank holding company located in Georgia, the GeorgiaDepartment of Banking and Finance also regulates and monitors all significantaspects of our operations.

***Acquisitions of Banks.***** **The Bank Holding Company Act requires everybank holding company to obtain the Federal Reserve Board’s prior approvalbefore:

·                                          acquiring direct or indirect ownership orcontrol of any voting shares of any bank if, after the acquisition, the bankholding company will directly or indirectly own or control more than 5% of thebank’s voting shares;

·                                          acquiring all or substantially all of theassets of any bank; or

·                                          merging or consolidating with any other bankholding company.

Additionally, the BankHolding Company Act provides that the Federal Reserve Board may not approve anyof these transactions if it would result in or tend to create a monopoly or,substantially lessen competition or otherwise function as a restraint of trade,unless the anti-competitive effects of the proposed transaction are clearlyoutweighed by the public interest in meeting the convenience and needs of thecommunity to be served. The Federal Reserve Board is also required to considerthe financial and managerial resources and future prospects of the bank holdingcompanies and banks concerned and the convenience and needs of the community tobe served. The Federal Reserve Board’s consideration of financial resourcesgenerally focuses on capital adequacy, which is discussed below.

Under the Bank HoldingCompany Act, if adequately capitalized and adequately managed, we, as well asother banks located within Georgia, may purchase a bank located outside ofGeorgia. Conversely, an adequately capitalized and adequately managed bankholding company located outside of Georgia may purchase a bank located insideGeorgia. In each case, however, restrictions may be placed on the acquisitionof a bank that has only been in existence for a limited amount of time or will resultin specified concentrations of deposits. Currently, Georgia law prohibits abank holding company from acquiring control of a financial institution untilthe target financial institution has been incorporated for three years. Becauseour the bank has been chartered for more than three years, this limitationwould not limit our ability to sell.

***Change in Bank Control.***Subject to various exceptions, the Bank Holding Company Act and theChange in Bank Control Act, together with related regulations, require FederalReserve Board approval prior to any person or company acquiring “control” of abank holding company. Control is conclusively presumed to exist if anindividual or company acquires 25% or more of any class of voting securities ofthe bank holding company. Control is rebuttably presumed to exist if a personor company acquires 10% or more, but less than 25%, of any class of votingsecurities and either:

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·                                          the bank holding company has registeredsecurities under Section 12 of the Securities Act of 1934; or

·                                          no other person owns a greater percentage ofthat class of voting securities immediately after the transaction.

Our common stock isregistered under Section 12 of the Securities Exchange Act of 1934. Theregulations provide a procedure for challenging any rebuttable presumption ofcontrol.

***Permitted Activities.***A bank holding company is generally permitted under the Bank HoldingCompany Act, to engage in or acquire direct or indirect control of more than 5%of the voting shares of any company engaged in the following activities:

·                                          banking or managing or controlling banks; and

·                                          any activity that the Federal Reserve Boarddetermines to be so closely related to banking as to be a proper incident tothe business of banking.

Activities that the Federal ReserveBoard has found to be so closely related to banking as to be a proper incidentto the business of banking include:

·                                          factoring accounts receivable;

·                                          making, acquiring, brokering or servicingloans and related activities;

·                                          leasing personal or real property;

·                                          operating a non-bank depository institution,such as a savings association;

·                                          trust company functions;

·                                          financial and investment advisory activities;

·                                          conducting discount securities brokerageactivities;

·                                          underwriting and dealing in governmentobligations and money market instruments;

·                                          providing specified management consulting andcounseling activities;

·                                          performing selected data processing servicesand support services;

·                                          acting as agent or broker in selling creditlife insurance and other types of insurance in connection with credittransactions; and

·                                          performing selected insurance underwritingactivities.

Despite prior approval, theFederal Reserve Board may order a bank holding company or its subsidiaries toterminate any of these activities or to terminate its ownership or control ofany subsidiary when it has reasonable cause to believe that the bank holdingcompany’s continued ownership, activity or control constitutes a serious riskto the financial safety, soundness or stability of it or any of its banksubsidiaries.

In addition to thepermissible bank holding company activities listed above, the FinancialServices Modernization Act of 1999, or the Gramm-Leach-Bliley Act, revised andexpanded the provisions of the Bank Holding Company Act by permitting a bankholding company to qualify and elect to become a financial holdingcompany.  Under the regulationsimplementing the Gramm-Leach-Bliley Act, a financial holding company may engagein additional activities that are financial in nature or

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incidental or complementaryto financial activity. The following activities are considered financial innature:

·                                          lending, trust and other banking activities;

·                                          insuring, guaranteeing or indemnifyingagainst loss or harm, or providing and issuing annuities and acting asprincipal, agent or broker for these purposes, in any state;

·                                          providing financial, investment or advisoryservices;

·                                          issuing or selling instruments representinginterests in pools of assets permissible for a bank to hold directly;

·                                          underwriting, dealing in or making a marketin securities;

·                                          other activities that the Federal ReserveBoard may determine to be so closely related to banking or managing orcontrolling banks as to be a proper incident to managing or controlling banks;

·                                          foreign activities permitted outside of theUnited States if the Federal Reserve Board has determined them to be usual inconnection with banking operations abroad;

·                                          merchant banking through securities orinsurance affiliates; and

·                                          insurance company portfolio investments.

On December 18, 2006, theSEC and the Federal Reserve issued joint proposed rules, which would implementthe “broker” exception for banks under Section 3(a)(4) of the Exchange Act of1934 and would be adopted as part of the Gramm-Leach-Bliley Act.  The proposed rules would implement thestatutory exceptions that allow a bank, subject to certain conditions, tocontinue to conduct securities transactions for the Bank’s customers as part ofits trust and fiduciary, custodial and deposit “sweep” functions, and to refercustomers to a securities broker-dealer pursuant to a networking arrangementwith the broker-dealer.

To qualify to become afinancial holding company, any subsidiary bank must be well capitalized andwell managed and must have a Community Reinvestment Act rating of at least “satisfactory.”Additionally, we would be required to file an election with the Federal ReserveBoard to become a financial holding company and must provide the FederalReserve Board with 30 days’ written notice prior to engaging in a permittedfinancial activity. While we meet the qualification standards applicable tofinancial holding companies, we have not elected to become a financial holdingcompany at this time.

***Support of Subsidiary Institution. ***Under FederalReserve Board policy, we are expected to act as a source of financial strengthand commit resources to support the Bank. This support may be required at timeswhen, without this Federal Reserve Board policy, we might not be inclined toprovide it. Accordingly, in connection with the formation of the bank holdingcompany we made a commitment to the Federal Reserve Board not to incur any debtwithout its approval. In addition, any capital loans made by us to the Bankwill be repaid only after its deposits and various other obligations are repaidin full. In the unlikely event of our bankruptcy, any commitment we give to afederal bank regulatory agency to maintain the capital of the Bank will beassumed by the bankruptcy trustee and entitled to a priority of payment.

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**The Bank**

Since the Bank is acommercial bank chartered under the laws of the State of Georgia, we areprimarily subject to the supervision, examination and reporting requirements ofthe FDIC and the Georgia Department of Banking and Finance. The FDIC andDepartment of Banking and Finance regularly examine the bank’s operations andhave the authority to approve or disapprove mergers, the establishment ofbranches and similar corporate actions. Both regulatory agencies have the powerto prevent the continuance or development of unsafe or unsound bankingpractices or other violations of law. Additionally, our deposits are insured bythe FDIC to the maximum extent provided by law. We are also subject to numerousstate and federal statutes and regulations that affect our business, activitiesand operations.

***Branching.***Undercurrent Georgia law, we may open branch offices throughout Georgia with theprior approval of the Department of Banking and Finance. In addition, withprior regulatory approval, we may acquire branches of existing banks located inGeorgia. the Bank and any other national or state-chartered bank generally maybranch across state lines only if allowed by the applicable states’ laws.Georgia law, with limited exceptions, currently permits branching across statelines only through interstate mergers.

Under the Federal DepositInsurance Act, states may “opt-in” and allow out-of-state banks to branch intotheir state by establishing a new start-up branch in the state. Currently,Georgia has not opted-in to this provision. Therefore, interstate merger is theonly method through which a bank located outside of Georgia may branch intoGeorgia. This provides a limited barrier of entry into the Georgia bankingmarket, which protects us from an important segment of potential competition.However, because Georgia has elected not to opt-in, our ability to establish anew start-up branch in another state is limited. Many states that have electedto opt-in have done so on a reciprocal basis, meaning that an out-of-state bankmay establish a new start-up branch only if their home state has also electedto opt-in. Consequently, until Georgia changes its election, the only way wewill be able to branch into states that have elected to opt-in on a reciprocalbasis will be through interstate merger.

***Prompt Corrective Action. ***The Federal Deposit Insurance CorporationImprovement Act of 1991 establishes a system of prompt corrective action toresolve the problems of undercapitalized financial institutions.  Under this system, the federal bankingregulators have established five capital categories, well capitalized,adequately capitalized, undercapitalized, significantly undercapitalized andcritically undercapitalized, in which all institutions are placed.  The federal banking regulators have alsospecified by regulation the relevant capital levels for each of the othercategories.  As of December 31, 2006, theBank qualified for the well-capitalized category.

Federal banking regulatorsare required to take various mandatory supervisory actions and are authorizedto take other discretionary actions with respect to institutions in the threeundercapitalized categories.  Theseverity of the action depends upon the capital category in which theinstitution is placed.  Generally,subject to a narrow exception, the banking regulator must appoint a receiver orconservator for an institution that is critically undercapitalized.

An institution that isassigned to any of the “undercapitalized,” “significantly undercapitalized” or“critically undercapitalized” categories is required to submit an acceptablecapital restoration plan to its appropriate federal banking regulators.  A bank holding company must guarantee that asubsidiary depository institution meets its capital restoration plan, subjectto various limitations.  The controllingholding company’s obligation to fund a capital restoration plan is limited tothe lesser of 5% of an undercapitalized subsidiary’s assets at the time itbecame undercapitalized or the amount required to meet regulatory capitalrequirements.  An undercapitalizedinstitution is also generally prohibited from

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increasing its average totalassets, making acquisitions, establishing any branches or engaging in any newline of business, except under an accepted capital restoration plan or withFDIC approval.  The regulations alsoestablish procedures for downgrading an institution to a lower capital categorybased on supervisory factors other than capital.

***FDIC Insurance Assessments.*** TheFDIC has adopted a risk-based assessment system for insured depositoryinstitutions that takes into account the risks attributable to differentcategories and concentrations of assets and liabilities.  The system assesses higher rates on thoseinstitutions that pose greater risks to the Deposit Insurance Fund (the“DIF”).  The FDIC places each institutionin one of four risk categories using a two-step process based first on capitalratios (the capital group assignment) and then on other relevant information(the supervisory group assignment). Within the lower risk category, Risk Category I, rates will vary basedon each institution’s CAMELS component ratings, certain financial ratios, andlong-term debt issuer ratings.

Capital group assignmentsare made quarterly and an institution is assigned to one of three capitalcategories: (1) well capitalized; (2) adequately capitalized; and (3)undercapitalized.  These three categoriesare substantially similar to the prompt corrective action categories describedabove, with the “undercapitalized” category including institutions that areundercapitalized, significantly undercapitalized and criticallyundercapitalized for prompt corrective action purposes.  The FDIC also assigns an institution to oneof three supervisory subgroups based on a supervisory evaluation that theinstitution’s primary federal banking regulator provides to the FDIC andinformation that the FDIC determines to be relevant to the institution’sfinancial condition and the risk posed to the deposit insurance funds.  Assessments range from 5 to 43 cents per $100of deposits, depending on the institution’s capital group and supervisorysubgroup.  Institutions that are wellcapitalized will be charged a rate between 5 and 7 cents per $100 of deposits.

In addition, the FDICimposes assessments to help pay off the $780 million in annual interestpayments on the $8 billion Financing Corporation bonds issued in the late 1980sas part of the government rescue of the thrift industry.  This assessment rate is adjusted quarterlyand is set at 1.22 cents per $100 of deposits for the first quarter of 2007.

The FDIC may terminate itsinsurance of deposits if it finds that the institution has engaged in unsafeand unsound practices, is in an unsafe or unsound condition to continueoperations, or has violated any applicable law, regulation, rule, order orcondition imposed by the FDIC.

***Community Reinvestment Act. ***The Community Reinvestment Act requires that,in connection with examinations of financial institutions within theirrespective jurisdictions, the Federal Reserve, the FDIC or the OCC shallevaluate the record of each financial institution in meeting the credit needsof its local community, including low and moderate-income neighborhoods.  These facts are also considered in evaluatingmergers, acquisitions and applications to open a branch or facility.  Failure to adequately meet these criteriacould impose additional requirements and limitations on the Bank.  Additionally, we must publicly disclose theterms of various Community Reinvestment Act-related agreements.

***Allowance for Loan and Lease Losses. ***TheAllowance for Loan and Lease Losses (the “ALLL”) represents one of the mostsignificant estimates in the Bank’s financial statements and regulatoryreports.  Because of its significance,the Bank has developed a system by which it develops, maintains and documents acomprehensive, systematic and consistently applied process for determining theamounts of the ALLL and the provision for loan and lease losses.  The Interagency Policy Statement on theAllowance for Loan and Lease Losses, issued on December 13, 2006, encouragesall banks to ensure controls are in place to consistently determine the ALLL inaccordance with GAAP, the bank’s stated policies and procedures, management’sbest judgment and relevant supervisory guidance.

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Consistent with supervisoryguidance, the Bank maintains a prudent and conservative, but not excessive,ALLL, that is at a level that is appropriate to cover estimated credit losseson individually evaluated loans determined to be impaired as well as estimatedcredit losses inherent in the remainder of the loan and lease portfolio.  The Bank’s estimate of credit losses reflectsconsideration of all significant factors that affect the collectibility of theportfolio as of the evaluation date.  See“Management’s Discussion and Analysis – Critical Accounting Policies.”

***Commercial Real Estate Lending***.  TheBank’s lending operations may be subject to enhanced scrutiny by federalbanking regulators based on its concentration of commercial real estateloans.  On December 6, 2006, the federalbanking regulators issued final guidance to remind financial institutions ofthe risk posed by commercial real estate (“CRE”) lending concentrations.  CRE loans generally include land development,construction loans and loans secured by multifamily property, and nonfarm,nonresidential real property where the primary source of repayment is derivedfrom rental income associated with the property.  The guidance prescribes the followingguidelines for its examiners to help identify institutions that are potentiallyexposed to significant CRE risk and may warrant greater supervisory scrutiny:

·                                          total reported loans for construction, landdevelopment and other land represent 100% or more of the institutions totalcapital, or

·                                          total commercial real estate loans represent300% or more of the institution’s total capital, and the outstanding balance ofthe institution’s commercial real estate loan portfolio has increased by 50% ormore during the prior 36 months.

***Other Regulations. ***Interest and other charges collected orcontracted for by the Bank are subject to state usury laws and federal lawsconcerning interest rates. The Bank’s loan operations will be subject tofederal laws applicable to credit transactions, such as the:

·                                          Federal Truth-In-Lending Act, governingdisclosures of credit terms to consumer borrowers;

·                                          Home Mortgage Disclosure Act of 1975,requiring financial institutions to provide information to enable the publicand public officials to determine whether a financial institution is fulfillingits obligation to help meet the housing needs of the community it serves;

·                                          Equal Credit Opportunity Act, prohibitingdiscrimination on the basis of race, creed or other prohibited factors inextending credit;

·                                          Fair Credit Reporting Act of 1978, as amendedby the Fair and Accurate Credit Transactions Act, governing the use andprovision of information to credit reporting agencies, certain identity theftprotections, and certain credit and other disclosures;

·                                          Fair Debt Collection Act, governing themanner in which consumer debts may be collected by collection agencies;

·                                          Servicemembers Civil Relief Act, whichamended the Soldiers’ and Sailors’ Civil Relief Act of 1940, governing therepayment terms of, and property rights underlying, secured obligations ofpersons in military service; and

·                                          rules and regulations of the variousfederal agencies charged with the responsibility of implementing these federallaws.

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The Bank’s depositoperations are subject to federal laws applicable to depository accounts, suchas the :

·                                          Right to Financial Privacy Act, which imposesa duty to maintain confidentiality of consumer financial records and prescribesprocedures for complying with administrative subpoenas of financial records;

·                                          Electronic Funds Transfer Act and RegulationE issued by the Federal Reserve Board to implement that act, which governautomatic deposits to and withdrawals from deposit accounts and customers’rights and liabilities arising from the use of automated teller machines andother electronic banking services;

·                                          Truth-In-Savings Act, requiring certaindisclosures for consumer deposit accounts; and

·                                          rules and regulations of the various federalbanking regulators charged with the responsibility of implementing thesefederal laws.

**CapitalAdequacy**

We are required to complywith the capital adequacy standards established by the Federal Reserve Board,in the case of the Company, and the FDIC, in the case of the bank.

The Federal Reserve Boardhas established a risk-based and a leverage measure of capital adequacy forbank holding companies. The risk-based capital standards are designed to makeregulatory capital requirements more sensitive to differences in risk profilesamong banks and bank holding companies, to account for off-balance-sheetexposure, and to minimize disincentives for holding liquid assets. Assets andoff-balance-sheet items, such as letters of credit and unfunded loancommitments, are assigned to broad risk categories, each with appropriate riskweights. The resulting capital ratios represent capital as a percentage oftotal risk-weighted assets and off-balance-sheet items.

The minimum guideline forthe ratio of total capital to risk-weighted assets is 8%. Total capitalconsists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capitalgenerally consists of common stock, minority interests in the equity accountsof consolidated subsidiaries, noncumulative perpetual preferred stock and alimited amount of qualifying cumulative perpetual preferred stock, lessgoodwill and other specified intangible assets. Tier 1 Capital must equal atleast 4% of risk-weighted assets. Tier 2 Capital generally consists ofsubordinated debt, other preferred stock and a limited amount of loan lossreserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1Capital. At December 31 2006, our ratio of total capital to risk-weightedassets was 16.32 % and our ratio of Tier 1 Capital to risk-weighted assets was15.31%.

In addition, the FederalReserve Board has established minimum leverage ratio guidelines for bankholding companies. These guidelines provide for a minimum ratio of Tier 1Capital to average assets, less goodwill and other specified intangible assets,of 3% for bank holding companies that meet specified criteria, including havingthe highest regulatory rating and implementing the Federal Reserve Board’srisk-based capital measure for market risk. All other bank holding companiesgenerally are required to maintain a leverage ratio of at least 4%.****At December 31, 2006, ourleverage ratio was 13.16%. The guidelines also provide that bank holdingcompanies experiencing internal growth or making acquisitions will be expectedto maintain strong capital positions substantially above the minimumsupervisory levels without reliance on intangible assets. The Federal ReserveBoard considers the leverage ratio and other indicators of capital strength inevaluating proposals for expansion or new activities.

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Failure to meet capitalguidelines could subject a bank and a bank holding company to a variety ofenforcement remedies, including issuance of a capital directive, thetermination of deposit insurance by the FDIC, a prohibition on acceptingbrokered deposits and certain other restrictions on its business. As describedabove, significant additional restrictions can be imposed on FDIC-insureddepository institutions that fail to meet applicable capital requirements.

**Payment ofDividends**

The Company is a legalentity separate and distinct from the Bank. The principal sources of our cashflow, including cash flow to pay dividends to its shareholders, are dividendsthat we receive from the bank. Statutory and regulatory limitations apply tothe payment of dividends by a subsidiary bank to its bank holding company.These same limitations apply to a bank holding company’s payment of dividendsto its shareholders. Our payment of dividends may also be affected by otherfactors, such as the requirement to maintain adequate capital above regulatoryguidelines.

Statutory and regulatorylimitations apply to our payment of dividends to our shareholders. If, in theopinion of the federal banking regulator, we were engaged in or about to engagein an unsafe or unsound practice, the federal banking regulator could require,after notice and a hearing, that we cease and desist from its practice. Thefederal banking agencies have indicated that paying dividends that deplete adepository institution’s capital base to an inadequate level would be an unsafeand unsound banking practice. Under the Federal Deposit Insurance CorporationImprovement Act of 1991, a depository institution may not pay any dividend ifpayment would cause it to become undercapitalized or if it already isundercapitalized. Moreover, the federal agencies have issued policy statementsthat provide that insured banks should generally only pay dividends out ofcurrent operating earnings

The Department of Bankingand Finance also regulates our dividend payments and must approve dividendpayments that would exceed 50% of the bank’s net income for the prior year. Ourpayment of dividends may also be affected or limited by other factors, such asthe requirement to maintain adequate capital above regulatory guidelines.  At December 31, 2006, the Bank could pay cashdividends of approximately $1,339,000 to the Company without prior regulatoryapproval.

In 2006, we declared no cashdividends. We have not declared a cash dividend since our inception and we donot expect to do so in the foreseeable future. Instead, we anticipate that allof our earnings, if any, will be used for working capital, to support ouroperations and to finance the growth and development of our business. Anyfuture determination relating to dividend policy will be made at the discretionof our Board of Directors and will depend on many of the statutory andregulatory factors mentioned above.

**Restrictionson Transactions with Affiliates**

The Company and the Bank aresubject to the provisions of Section 23A of the Federal Reserve Act.Section 23A places limits on the amount of:

·                                          a bank’s loans or extensions of credit toaffiliates;

·                                          a bank’s investment in affiliates;

·                                          assets a bank may purchase from affiliates,except for real and personal property exempted by the Federal Reserve Board;

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·                                          loans or extensions of credit to thirdparties collateralized by the securities or obligations of affiliates; and

·                                          a bank’s guarantee, acceptance or letter ofcredit issued on behalf of an affiliate.

The total amount of the abovetransactions is limited in amount, as to any one affiliate, to 10% of a bank’scapital and surplus and, as to all affiliates combined, to 20% of a bank’scapital and surplus. In addition to the limitation on the amount of thesetransactions, each of the above transactions must also meet specifiedcollateral requirements. We must also comply with other provisions designed toavoid the taking of low-quality assets.

We are subject to theprovisions of Section 23B of the Federal Reserve Act which, among otherthings, prohibit an institution from engaging in the above transactions withaffiliates unless the transactions are on terms substantially the same, or atleast as favorable to the institution or its subsidiaries, as those prevailingat the time for comparable transactions with nonaffiliated companies.

The total amount of theabove transactions is limited in amount, as to any one affiliate, to 10% of abank’s capital and surplus and, as to all affiliates combined, to 20% of abank’s capital and surplus.  In additionto the limitation on the amount of these transactions, each of the abovetransactions must also meet specified collateral requirements.  The Bank must also comply with otherprovisions designed to avoid the taking of low-quality assets.

The Company and the Bank arealso subject to the provisions of Section 23B of the Federal Reserve Act which,among other things, prohibit an institution from engaging in the abovetransactions with affiliates unless the transactions are on terms substantiallythe same, or at least as favorable to the institution or its subsidiaries, asthose prevailing at the time for comparable transactions with nonaffiliatedcompanies.

We are subject torestrictions on extensions of credit to our executive officers, directors, principalshareholders and their related interests. These extensions of credit(1) must be made on substantially the same terms, including interest ratesand collateral, as those prevailing at the time for comparable transactionswith third parties and (2) must not involve more than the normal risk ofrepayment or present other unfavorable features.

**Privacy**

Under the Gramm-Leach-BlileyAct, financial institutions are required to disclose their policies forcollecting and protecting confidential information. Customers generally mayprevent financial institutions from sharing nonpublic personal financialinformation with nonaffiliated third parties except under narrow circumstances,such as the processing of transactions requested by the consumer or when the financialinstitution is jointly sponsoring a product or service with a nonaffiliatedthird party. Additionally, financial institutions generally may not discloseconsumer account numbers to any nonaffiliated third party for use intelemarketing, direct mail marketing or other marketing to consumers. We haveestablished policies and procedures to assure our compliance with all privacyprovisions of the Gramm-Leach-Bliley Act.

**Anti-Terrorismand Money Laundering Legislation**

We are subject to theUniting and Strengthening America by Providing Appropriate Tools Required toIntercept and Obstruct Terrorism of 2001 (the USA PATRIOT Act), the BankSecrecy Act and rules and regulations of the Office of Foreign AssetsControl (the OFAC). These statutes and related

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rules and regulationsimpose requirements and limitations on specific financial transactions andaccount relationships, intended to guard against money laundering and terrorismfinancing. We have established a customer identification program pursuant toSection 326 of the USA PATRIOT Act and the Bank Secrecy Act, and otherwisehas implemented policies and procedures to comply with the foregoing rules.

**FederalDeposit Insurance Reform**

On February 8, 2006,President Bush signed the Federal Deposit Insurance Reform Act of 2005 (the“FDIRA”). Among other things, FDIRA changes the federal deposit insurancesystem by:

·                                          raising the coverage level for qualifyingretirement accounts to $250,000, subject to future indexing;

·                                          authorizing the FDIC and the National CreditUnion Administration to index deposit insurance coverage for inflation, forstandard accounts and qualifying retirement accounts, every five yearsbeginning April 1, 2007;

·                                          prohibiting undercapitalized financialinstitutions from accepting employee benefit plan deposits;

·                                          merging the Bank Insurance Fund and SavingsAssociation Insurance Fund into a new Deposit Insurance Fund (the DIF); and

·                                          providing credits to financial institutionsthat capitalized the FDIC prior to 1996 to offset future assessment premiums.

FDIRA also authorizes theFDIC to revise the current risk-based assessment system, subject to notice andcomment and caps the amount of the DIF at 1.50% of domestic deposits.  The FDIC must issue cash dividends, awardedon a historical basis, for the amount of the DIF over the 1.50% ratio.  Additionally, if the DIF exceeds 1.35% ofdomestic deposits at year-end, the FDIC must issue cash dividends, awarded on ahistorical basis, for half of the amount of the excess.

**FinancialServices Regulatory Relief Act**

President Bush signed theFinancial Services Regulatory Relief Act of 2006 (“Regulatory Relief Act”) intolaw on October 13, 2006.  The RegulatoryRelief Act repeals certain reporting requirements regarding loans to bankexecutive officers and principal shareholders. These changes have eliminatedthe statutory requirements for (1) the report to the Board of Directors when anexecutive officer becomes indebted to another institution in an aggregateamount that is greater than the officer would receive from his or her owninstitution; (2) the report filed by the institution that listed all creditsmade to executive officers since the previous report of condition; and (3) thereport to the Board of Directors that is required when an executive officer ora principal shareholder become indebted to a correspondent bank.

The Regulatory Relief Actincreased the size of a bank eligible for 18-month (rather than annual)examinations from $250 million to $500 million. The Regulatory Relief Act amends the privacy rules of Gramm-Leach-Blileyto clarify that CPA’s are not required to notify their customers of privacy anddisclosure policies as long as they are subject to state law restraints ondisclosure of non-public personal information without customer approval.  Finally, the Regulatory Relief Act requiresthat the federal banking regulators develop model privacy notice forms, andbanks adopting the model forms will be afforded a regulatory safe harbor underthe disclosure requirements of Gramm-Leach-Bliley.

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**ProposedLegislation and Regulatory Action**

New regulations and statutesare regularly proposed that contain wide-ranging potential changes to thestructures, regulations and competitive relationships of financial institutionsoperating and doing business in the United States.  We cannot predict whether or in what form anyproposed regulation or statute will be adopted or the extent to which ourbusiness may be affected by any new regulation or statute.

**Effect ofGovernmental Monetary Polices**

Our earnings are affected bydomestic economic conditions and the monetary and fiscal policies of the UnitedStates government and its agencies.  TheFederal Reserve Board’s monetary policies have had, and are likely to continueto have, an important impact on the operating results of commercial banksthrough its power to implement national monetary policy in order, among otherthings, to curb inflation or combat a recession.  The monetary policies of the Federal ReserveBoard affect the levels of bank loans, investments and deposits through itscontrol over the issuance of United States government securities, itsregulation of the discount rate applicable to member banks and its influenceover reserve requirements to which member banks are subject.  We cannot predict the nature or impact offuture changes in monetary and fiscal policies.

**Risk Factors**

*Aninvestment in our common stock involves risks. If any of the following risks or other risks, which have not beenidentified or which we may believe are immaterial or unlikely, actually occur,our business, financial condition and results of operations could beharmed.  In such a case, the tradingprice of our common stock could decline, and shareholders may lose all or partof their investment.  The risks discussedbelow also include forward-looking statements, and our actual results maydiffer substantially from those discussed in these forward-looking statements.*

***We could suffer loan losses from a decline in credit quality.***

We could sustain losses ifborrowers, guarantors and related parties fail to perform in accordance withthe terms of their loans. We have adopted underwriting and credit monitoringprocedures and policies, including the establishment and review of theallowance for credit losses that we believe are appropriate to minimize thisrisk by assessing the likelihood of nonperformance, tracking loan performanceand diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpectedlosses that could materially adversely affect our results of operations.

***If the value of real estate in our core market were to declinematerially, a significant portion of our loan portfolio could becomeunder-collateralized, which could have a material adverse effect on ourbusiness, financial condition and results of operations.***

With most of our loansconcentrated in Henry County, a decline in local economic conditions couldadversely affect the values of our real estate collateral.  Consequently, a decline in local economicconditions may have a greater effect on our earnings and capital than on theearnings and capital of larger financial institutions whose real estate loanportfolios are geographically diverse.

In addition to consideringthe financial strength and cash flow characteristics of borrowers, we oftensecure loans with real estate collateral. At December 31, 2006, approximately 90% of our loans had real estate asa primary or secondary component of collateral. The real estate collateral in each case provides an alternate source ofrepayment in the event of default by the borrower and may deteriorate in

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value during the time thecredit is extended.  If we are requiredto liquidate the collateral securing a loan to satisfy the debt during a periodof reduced real estate values, our earnings and capital could be adverselyaffected.

***Our profitability is vulnerable to interest rate fluctuations.***

Our profitability dependssubstantially upon our net interest income. Net interest income is thedifference between the interest earned on assets, such as loans and investmentsecurities, and the interest paid for liabilities, such as savings and timedeposits and out-of-market certificates of deposit.  Market interest rates for loans, investmentsand deposits are highly sensitive to many factors beyond our control.  Recently, interest rate spreads havegenerally narrowed due to changing market conditions, policies of variousgovernment and regulatory authorities and competitive pricing pressures, and wecannot predict whether these rate spreads will narrow even further.  This narrowing of interest rate spreads couldadversely affect our financial condition and results of operations.  In addition, we cannot predict whether interestrates will continue to remain at present levels.  Changes in interest rates may causesignificant changes, up or down, in our net interest income. Depending on ourportfolio of loans and investments, our results of operations may be adverselyaffected by changes in interest rates.

***Our business strategy includes the continuation of growth plans, andour financial condition and results of operations could be negatively affectedif we fail to grow or fail to manage our growth effectively.***

We intend to continuepursuing a growth strategy for our business. Our prospects must be consideredin light of the risks, expenses and difficulties frequently encountered bycompanies in growth stages of development. We cannot assure you we will be ableto expand our market presence in our existing markets or successfully enter newmarkets or that any such expansion will not adversely affect our results ofoperations.  Failure to manage our growtheffectively could have a material adverse effect on our business, financialcondition, results of operations, or future prospects, and could adversely affectour ability to successfully implement our business strategy.  Also, if our growth occurs more slowly thananticipated or declines, our results of operations could be materiallyadversely affected.

Our ability to growsuccessfully will depend on a variety of factors including the continuedavailability of desirable business opportunities, the competitive responsesfrom other financial institutions in our market areas and our ability to manageour growth. While we believe we have the management resources and internalsystems in place to manage our future growth, there can be no assurance thatgrowth opportunities will be available or growth will be managed successfully.

***Additional growth may require us to raise additional capital in thefuture, but that capital may not be available when it is needed, which couldadversely affect our financial condition and results of operations.***

We are required by federaland state regulatory authorities to maintain adequate levels of capital tosupport our operations. We anticipate that our current capital resources willsatisfy our capital requirements for the foreseeable future. We may at somepoint, however, need to raise additional capital to support our continuedgrowth.

Our ability to raiseadditional capital, if needed, will depend on conditions in the capital marketsat that time, which are outside our control, and on our financialperformance.  Accordingly, we cannotassure you of our ability to raise additional capital, if needed, on termsacceptable to us.  If we cannot

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raise additional capitalwhen needed, our ability to further expand our operations could be materiallyimpaired.

***Our plans for future expansion depend, in some instances, on factorsbeyond our control, and an unsuccessful attempt to achieve growth could have amaterial adverse effect on our business, financial condition, results ofoperations and future prospects.***

We expect to continue toengage in new branch expansion in the future. We may also seek to acquire other financial institutions, or parts ofthose institutions, though we have no present plans in that regard.  Expansion involves a number of risks,including:

·                                          the time and costs of evaluating new markets,hiring experienced local management and opening new offices;

·                                          the time lags between these activities andthe generation of sufficient assets and deposits to support the costs of theexpansion;

·                                          we may not be able to finance an acquisitionwithout diluting the interests of our existing shareholders;

·                                          the diversion of our management’s attentionto the negotiation of a transaction may detract from their businessproductivity;

·                                          we may enter into new markets where we lackexperience; and

·                                          we may introduce new products and serviceswith which we have no prior experience into our business.

***Our corporate culture has contributed to our success, and if we cannotmaintain this culture as we grow, we could lose the teamwork and increasedproductivity fostered by our culture, which could harm our business.***

We believe that a criticalcontributor to our success has been our corporate culture, which we believefosters teamwork and increased productivity. As our organization grows and we are required to implement more complexorganization management structures, we may find it increasingly difficult to maintainthe beneficial aspects of our corporate culture.  This could negatively impact our futuresuccess.

***An economic downturn, especially one affecting our market areas, couldadversely affect our financial condition, results of operations or cash flows.***

Our success depends upon thegrowth in population, income levels, deposits and housing starts in our primarymarket areas.  If the communities inwhich we operate do not grow, or if prevailing economic conditions locally ornationally are unfavorable, our business may not succeed. Unpredictableeconomic conditions may have an adverse effect on the quality of our loanportfolio and our financial performance. Economic recession over a prolongedperiod or other economic problems in our market areas could have a materialadverse impact on the quality of the loan portfolio and the demand for ourproducts and services.  Future adversechanges in the economies in our market areas may have a material adverse effecton our financial condition, results of operations or cash flows.  Further, the banking industry in Georgia isaffected by general economic conditions such as inflation, recession,unemployment and other factors beyond our control.  As a community bank, we are less able tospread the risk of unfavorable local economic conditions than larger or moreregional banks. Moreover, we cannot give any assurance that we will benefitfrom any market growth or favorable economic conditions in our primary marketareas even if they do occur.

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***Our recentresults may not be indicative of our future results, and may not provideguidance to assess the risk of an investment in our common stock.***

We may not be able to sustain our historical rate of growth or may noteven be able to grow our business at all. In addition, our recent and rapid growth may distort some of ourhistorical financial ratios and statistics. In the future, we may not have the benefit of several recently favorablefactors, such as a generally increasing interest rate environment, a strongresidential mortgage market or the ability to find suitable expansionopportunities. Various factors, such as economic conditions, regulatory andlegislative considerations and competition, may also impede or prohibit ourability to expand our market presence. If we experience a significant decrease in our historical rate ofgrowth, our results of operations and financial condition may be adverselyaffected due to a high percentage of our operating costs being fixed expenses.

***Competition from other financial institutions mayadversely affect our profitability.***

The banking business is highly competitive, and we experience strongcompetition from many other financial institutions. We compete with commercialbanks, credit unions, savings and loan associations, mortgage banking firms,consumer finance companies, securities brokerage firms, insurance companies,money market funds and other financial institutions, which operate in ourprimary market areas and elsewhere.

We compete with these institutions both in attracting deposits and inmaking loans.  In addition, we have toattract our customer base from other existing financial institutions and fromnew residents. Many of our competitors are well-established and much largerfinancial institutions. While we believe we can and do successfully competewith these other financial institutions in our markets, we may face acompetitive disadvantage as a result of our smaller size and lack of geographicdiversification.

Although we compete by concentrating our marketing efforts in ourprimary market area with local advertisements, personal contacts and greaterflexibility in working with local customers, we can give no assurance that thisstrategy will be successful.

***Opening new offices may not result in increasedassets or revenues for us.***

The investment necessary for branchexpansion may negatively impact our efficiency ratio.  There is a risk that we will be unable tomanage our growth, as the process of opening new branches may divert our timeand resources.  There is also risk thatwe may fail to open any additional branches, and a risk that, if we do openthese branches, they may not be profitable which would negatively impact ourresults of operations.

***We are subject to extensive regulation that could limitor restrict our activities and impose financial requirements or limitations onthe conduct of our business, which limitations or restrictions could adverselyaffect our profitability.***

As a bank holding company, we are primarily regulated by the Board ofGovernors of the Federal Reserve System (“Federal Reserve Board”).  Our subsidiary bank is primarily regulated bythe Federal Deposit Insurance Corporation (the “FDIC”) and the GeorgiaDepartment of Banking and Finance. Our compliance with Federal Reserve Board,FDIC and Department of Banking and Finance regulations is costly and may limitour growth and restrict certain of our activities, including payment ofdividends, 

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mergersand acquisitions, investments, loans and interest rates charged, interest ratespaid on deposits and locations of offices. We are also subject to capitalrequirements of our regulators.

The laws and regulations applicable to the banking industry couldchange at any time, and we cannot predict the effects of these changes on ourbusiness and profitability.  Becausegovernment regulation greatly affects the business and financial results of allcommercial banks and bank holding companies, our cost of compliance couldadversely affect our ability to operate profitably.

The Sarbanes-Oxley Act of 2002, the related rules and regulationspromulgated by the SEC that currently apply to us and the related exchangerules and regulations, have increased the scope, complexity and cost ofcorporate governance, reporting and disclosure practices.  As a result, we may experience greatercompliance costs.

***As a community bank, we have different lending risksthan larger banks.***

We provide services to our local community.  Our ability to diversify our economic risksis limited by our own local market and economy. We lend primarily to small to medium-sized businesses, and, to a lesserextent, individuals which may expose us to greater lending risks than those ofbanks lending to larger, better-capitalized businesses with longer operatinghistories.

We manage our credit exposure through careful monitoring of loanapplicants and loan concentrations in particular industries, and through loanapproval and review procedures. We have established an evaluation processdesigned to determine the adequacy of our allowance for loan losses. While thisevaluation process uses historical and other objective information, theclassification of loans and the establishment of loan losses is an estimatebased on experience, judgment and expectations regarding our borrowers, theeconomies in which we and our borrowers operate, as well as the judgment of ourregulators. We cannot assure you that our loan loss reserves will be sufficientto absorb future loan losses or prevent a material adverse effect on ourbusiness, financial condition, or results of operations.

***Changes in monetary policies may have an adverseeffect on our business, financial condition and results of operations.***

Our financial condition and results of operations are affected bycredit policies of monetary authorities, particularly the Federal ReserveBoard.  Actions by monetary and fiscalauthorities, including the Federal Reserve Board, could have an adverse effecton our deposit levels, loan demand or business and earnings.

***If we fail to retain our key employees, our growthand profitability could be adversely affected.***

Our success is, and is expected to remain, highly dependent on ourexecutive management team, consisting of Thaddeus M. Williams, ourPresident and Chief Executive Officer, Lisa J. Maxwell, our Executive VicePresident and Chief Financial Officer and William M. Waller, our Executive VicePresident and Senior Lending Officer. This is particularly true because, as a community bank, we depend on ourmanagement team’s ties to the community to generate business for us. Our growthwill continue to place significant demands on our management, and the loss ofany such person’s services may have an adverse effect upon our growth andprofitability.

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***Our directors and executive officers own asignificant portion of our common stock and can influence stockholderdecisions.***

Ourdirectors and executive officers, as a group, beneficially owned approximately23.9% of our fully diluted outstanding common stock as of December 31,2006.  As a result of their ownership,the directors and executive officers will have the ability, if they voted theirshares in concert, to influence the outcome of all matters submitted to ourstockholders for approval, including the election of directors.

***Our ability to pay dividends is limited and we may beunable to pay future dividends.  As aresult, capital appreciation, if any, of our common stock may be your soleopportunity for gains on your investment for the foreseeable future.***

We make no assurances that we will pay anydividends in the future.  Any futuredetermination relating to dividend policy will be made at the discretion of ourBoard of Directors and will depend on a number of factors, including our futureearnings, capital requirements, financial condition, future prospects,regulatory restrictions and other factors that our Board of Directors may deemrelevant.  The holders of our commonstock are entitled to receive dividends when, and if declared by our Board ofDirectors out of funds legally available for that purpose.  As part of our consideration to pay cashdividends, we intend to retain adequate funds from future earnings to supportthe development and growth of our business. In addition, our ability to pay dividends is restricted by federalpolicies and regulations.  It is thepolicy of the Federal Reserve Board that bank holding companies should pay cashdividends on common stock only out of net income available over the past yearand only if prospective earnings retention is consistent with the organization’sexpected future needs and financial condition. Further, our principal source of funds to pay dividends is cashdividends that we receive from the bank.

***Environmental liability associated with lendingactivities could result in losses.***

In the course of our business, we may foreclose on and take title toproperties securing our loans.  Ifhazardous substances are discovered on any of these properties, we may beliable to governmental entities or third parties for the costs of remediationof the hazard, as well as for personal injury and property damage.  Many environmental laws can impose liabilityregardless of whether we knew of, or were responsible for, thecontamination.  In addition, if wearrange for the disposal of hazardous or toxic substances at another site, wemay be liable for the costs of cleaning up and removing those substances fromthe site, even if we neither own nor operate the disposal site.  Environmental laws may require us to incursubstantial expenses and may materially limit the use of properties that weacquire through foreclosure, reduce their value or limit our ability to sellthem in the event of a default on the loans they secure.  In addition, future laws or more stringentinterpretations or enforcement policies with respect to existing laws mayincrease our exposure to environmental liability.

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**ITEM 2.****                  DESCRIPTIONOF PROPERTY**

The Bank’s main office islocated at 120 Keys Ferry Street, McDonough, Georgia 30253.  The main office is a one-story building ofapproximately 6,700 square feet and features traditional bankarchitecture.  The Bank’s main officeincludes a three-lane drive-up facility, an external ATM and adequate parking.

The Bank’s Stockbridge branch sits on 1.11 acres andis located at 4421 N. Henry Boulevard, Stockbridge, Georgia 30281.  The branch is a one-story building ofapproximately 4,200 square feet and features traditional bankarchitecture.  The branch includes atwo-lane drive-up facility, an external ATM and adequate parking.

The Bank’s South Point Branch is situated on 1.25 acres and is locatedat 1375 Highway 20 West, McDonough, Georgia 30253.  The building is a two-story building ofapproximately 7,000 square feet and also features traditional bankarchitecture.  The branch includes atwo-lane drive-up facility, an external ATM and adequate parking.

In 2006, the Bank entered into a contract topurchase a branch site with an existing bank building.  This branch is located at 6145 N. MainStreet, Morrow, Georgia 30260 which is in Clayton County.  The branch sits on 3.22 acres and is aone-story building of approximately 6,000 square feet.  The property was subsequently purchased onJanuary 19, 2007.

**ITEM 3.****                 ****LEGAL PROCEEDINGS**

We are aware of no material pending legal proceedings to which theCompany is a party or of which any of its properties are subject; nor are weaware of any material proceedings to be contemplated by any governmentalauthority; nor do we know of any material proceedings, pending or contemplated,in which any director, officer or affiliate or any principal security holder ofthe Company or any associate of any of the foregoing, is a party or has aninterest adverse to the Company.

**ITEM 4.****                 ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

No matter was submitted to a vote of security holders during the fourthquarter of 2006.

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**PART II**

**ITEM 5.****                 ****MARKET FOR COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS**

The Company’s common stock began trading on the OTC Bulletin Boardunder the symbol “FBHC” in the second quarter of 2004.  On December 12, 2005, NASDAQ changed thesymbol to “FBFS”, in connection with the formation of the bank holdingcompany.  The market for our common stockmust be characterized as a limited market due to its relatively low tradingvolume and lack of analyst coverage.  Thefollowing table sets forth for the periods indicated the quarterly high and lowbid quotation per share as reported by the OTC Bulletin Board.  These quotations also reflect inter-dealerprices without retail markups, markdowns or commissions, and may notnecessarily represent actual transactions. The trades of our common stock on the OTC Bulletin Board represents thehigh end of the stock prices.
| ** **                           | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------|------------|----------|------------|---------|------------|
| Fiscal year  ended December 31, 2006 |       |     |       |    |       |
| First Quarter                        |       | 14.79    |       | 12.50   |       |
| Second Quarter                       |       | 15.42    |       | 13.96   |       |
| Third Quarter                        |       | 14.42    |       | 13.75   |       |
| Fourth Quarter                       |       | 16.95    |       | 13.96   |       |
| Fiscal year  ended December 31, 2005 |       |     |       |    |       |
| First Quarter                        |       | 14.39    |       | 11.55   |       |
| Second Quarter                       |       | 13.14    |       | 10.98   |       |
| Third Quarter                        |       | 13.26    |       | 12.46   |       |
| Fourth Quarter                       |       | 12.92    |       | 11.58   |       |

 

The Company had 880 shareholders as of March 15, 2007.

On November 16, 2006, the Company approved a six-for-five stock splitpayable in the form of a 20 percent stock dividend to shareholders ofrecord as of December 1, 2006 payable to shareholders on December 29,2006.

The Company did not repurchase any of its stock in2006.

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**ITEM 6.****                 ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following is adiscussion of our financial condition at December 31, 2006 and 2005 and theresults of operations for the years then ended. The purpose of this discussionis to focus on information about our financial condition and our results ofoperations that are not otherwise apparent from our audited consolidatedfinancial statements.  Reference shouldbe made to those statements and the selected financial data presented elsewherein this report for an understanding of the following discussion and analysis.

**Forward-Looking Statements**

We may from time to timemake written or oral forward-looking statements, including statements containedin our filings with the Securities and Exchange Commission and reports tostockholders.  Statements made in thisannual report, other than those concerning historical information, should beconsidered forward-looking and subject to various risks and uncertainties.  Such forward-looking statements are madebased upon management’s belief as well as assumptions made by, and informationcurrently available to, management pursuant to “safe harbor” provisions of thePrivate Securities Litigation Reform Act of 1995.  Our actual results may differ materially fromthe results anticipated in forward-looking statements due to a variety offactors, 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 ingovernmental regulation relating to the banking industry, including regulationsrelating to branching and acquisitions, failure of assumptions underlying theestablishment of allowance for loan losses, including the value of collateralunderlying delinquent loans and other factors. We caution that such factors are not exclusive.  We do not undertake to update anyforward-looking statement that may be made from time to time by, or on behalfof us.

**Critical Accounting Policies**

We have adopted variousaccounting policies which govern the application of accounting principlesgenerally accepted in the United States of America in the preparation of ourconsolidated financial statements.  Oursignificant accounting policies are described in the footnotes to theconsolidated financial statements at December 31, 2006 which are made a part ofthis annual report.

Certain accounting policiesinvolve significant judgments and assumptions by us which have a materialimpact on the carrying value of certain assets and liabilities.  We consider these accounting policies to becritical accounting policies.  The judgmentsand assumptions we use are based on historical experience and other factors,which we believe to be reasonable under the circumstances.  Because of the nature of the judgments andassumptions 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 a critical accountingpolicy that requires the most significant judgments and estimates used in thepreparation of our consolidated financial statements.  Refer to the portion of this discussion thataddresses our allowance for loan losses for a description of our processes andmethodology for determining our allowance for loan losses.

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Anotherof our critical accounting policies involves stock-based compensation. Theassumptions used in the determination of the fair value of stock optionsgranted ultimately determine the recognition of stock-based compensationexpense.  The short-cut method was usedto determine the expected life of the options. This method, as prescribed by SAB Topic 14.D.2, calculates the expectedterm based on the midpoint between the vesting date of the option and the endof the contractual term.  Expectedvolatility was based upon the historical volatility of the Company’sstock.  Risk-free interest rates forperiods within the contractual life of the option are based upon the U.S.Treasury yield curve in effect at the time of the grant.  Because of the need to retain capital forexpected growth and past history, the expected dividend rate is 0%.  These assumptions have a significant impacton the amount of expense recognized for stock-based compensation.

**Overview**

Our 2006 results were highlighted by the overall asset growth of $54.6million in the Company’s total assets and by net earnings of $2,561,713.  The Company’s capital base will allow forsubstantial growth in 2007.  Our primarymarket area of Henry Counties, Georgia continues to grow and we arestrategically positioned to take advantage of the growth.  The area’s growth should provide a base forcontinued profitability.

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

Followingis a summary of our balance sheets for the periods indicated:
| ** **                     | ** ** | **December 31,**                | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(Dollars in Thousands)** | ** ** |
|                           |       |                                 |       |   |   |
| Cash and due  from banks       |       | $                                    | 5,838      |   | $ | 2,027 |   |
| Federal funds  sold            |       | 11,614                               |       | 13,765 |   |
| Securities  available-for-sale |       | 39,559                               |       | 31,125 |   |
| Restricted  equity securities  |       | 2,014                                |       | 1,584 |   |
| Loans, net                     |       | 208,005                              |       | 166,757 |   |
| Premises and  equipment        |       | 6,013                                |       | 4,113 |   |
| Other assets                   |       | 4,037                                |       | 3,110 |   |
|                           |       |                                 |       |   |   |
|                           |       | $                                    | 277,080    |   | $ | 222,481 |   |
|                           |       |                                 |       |   |   |
| Total deposits                 |       | $                                    | 216,412    |   | $ | 174,336 |   |
| Other borrowings               |       | 22,000                               |       | 22,000 |   |
| Subordinated  debentures       |       | 8,248                                |       | — |   |
| Other liabilities              |       | 2,667                                |       | 1,362 |   |
| Stockholders’  equity     |       | 27,753                               |       | 24,783 |   |
|                           |       |                                 |       |   |   |
|                           |       | $                                    | 277,080    |   | $ | 222,481 |   |

 

As of December 31, 2006, we had total assets of $277 million. Our totalassets grew by 25% in 2006.   Depositgrowth of $42 million, consisting of a $6 million increase in brokered depositsand a $36 million increase in local deposits were used to fund net loan growthof $41 million with the remainder being primarily invested in securities.  Loan demand continues to be strong in ourprimary market area of Henry County, Georgia and surrounding counties.  Our loan to available funding ratio hasremained steady since December 31, 2005, holding in the 80-90% range.  We expect that loan and deposit growth willbe significant during the coming year. Stockholders’ equity has increased by $2.97 million due to net income of$2.6 million, decreased unrealized losses on securities available-for-sale, netof tax, of $164,583, increased unrealized losses on interest rate floors, netof tax, of $77,280, and increased by the recognition of share basedcompensation as required by SFAS 123(R) of $321,082.  We have not identified any permanentimpairment in the securities portfolio, and no loss will be recognized in ourincome statement if those securities with unrealized losses are held tomaturity.

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Securities

Our securities portfolio, consisting of U.S. Government and Agencysecurities, mortgage-backed securities and state and municipal securities,amounted to $39.6 million at December 31, 2006. Unrealized losses on securities amounted to $497,809 at December 31,2006.  Management has not specificallyidentified any securities for sale in future periods that, if so designated,would require a charge to operations if the market value would not bereasonably expected to recover prior to the time of sale.

Loans

We have 90% of our loan portfolio collateralized by real estate locatedin our primary market area of Henry County, Georgia and surroundingcounties.  Our real estate mortgages andconstruction portfolio consists of loans collateralized by one- to four-familyresidential properties (4%), construction loans to build one- to four-familyresidential properties (77%), and nonresidential properties consistingprimarily of small business commercial properties (19%).  We generally require that loanscollateralized by real estate not exceed the collateral values by the followingpercentages for each type of real estate loan as follows.
| One- to four-family  residential properties                       |   | 80 | % |
|-------------------------------------------------------------------|--------|----|---|
| Construction  loans on one- to four-family residential properties |   | 80 | % |
| Nonresidential property                                           |   | 90 | % |

 

The remaining 10% of the loan portfolio consists of commercial,consumer, and other loans.  We requirecollateral commensurate with the repayment ability and creditworthiness of theborrower.

The specific economic and credit risks associated with our loanportfolio, especially the real estate portfolio, include, but are not limitedto, a general downturn in the economy which could affect unemployment rates inour market area, general real estate market deterioration, interest ratefluctuations, deteriorated or non-existing collateral, title defects,inaccurate appraisals, financial deterioration of borrowers, fraud, and anyviolation of banking protection laws. Construction lending can also present other specific risks to the lendersuch as whether developers can find builders to buy lots for home construction,whether the builders can obtain financing for the construction, whether thebuilders can sell the home to a buyer, and whether the buyer can obtainpermanent financing.  Currently, realestate values and employment trends in our market area are showing some signsof downward pressure as a result of a slowdown in the general economy.

We attempt to reduce these economic and credit risks not only byadhering to loan to value guidelines, but also by investigating thecreditworthiness of the borrower and monitoring the borrower’s financialposition.  Also, we establish andperiodically review our lending policies and procedures.  Banking regulations limit exposure byprohibiting loan relationships that exceed 25% of the Bank’s statutory capital,as defined by the State of Georgia.

**Liquidityand Capital Resources**

The purpose of liquidity management is to ensure that there aresufficient cash flows to satisfy demands for credit, deposit withdrawals, andour other needs.  Traditional sources ofliquidity include asset maturities and growth in core deposits.  A company may achieve its desired liquidityobjectives from the management of assets and liabilities and through fundsprovided by operations.  Funds investedin short-term marketable instruments and the continuous maturing of otherearning assets are sources of liquidity from the asset perspective.  The liability base provides sources of liquiditythrough deposit growth, the maturity structure of liabilities, andaccessibility to market sources of funds.

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

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

At December 31, 2006 we had loan commitments outstanding of $50.5million.  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 theability on a short-term basis to borrow and purchase Federal funds from otherfinancial institutions.  At December 31,2006, we had arrangements with two commercial banks for short-term advances of$9,500,000.00

At December 31, 2006, our capital ratios were considered adequate basedon regulatory minimum capital requirements. Our shareholders’ equity increased due to earnings of $2.6 million.  Banking regulations limit the amount of thedividends that may be paid without prior approval of the Bank’s regulatoryagency.  Currently, $1,339,000 could bepaid in dividends by the Bank to the Company.

The minimum capital requirements to be considered well capitalizedunder prompt corrective action provisions and the actual capital ratios for theCompany as of December 31, 2006 are as follows:
|                             | ** ** | **Company** | ** ** | **Bank**   | ** ** | **Regulatory**   | ** ** |
|-----------------------------|------------|-------------|------------|------------|------------|------------------|------------|
| ** **                  | ** ** | **Actual**  | ** ** | **Actual** | ** ** | **Requirements** | ** ** |
|                        |       |        |       |       |       |             |       |
| Leverage capital ratio      |       | 13.16       | %          | 10.26      | %          | 5.00             | %          |
| Risk-based capital  ratios: |       |        |       |       |       |             |       |
| Core capital                |       | 15.31       | %          | 11.94      | %          | 6.00             | %          |
| Total capital               |       | 16.32       | %          | 12.95      | %          | 10.00            | %          |

 

These ratios will decline as asset growth continues, but are expectedto exceed the regulatory minimum requirements. Anticipated future earnings should assist in keeping these ratios atsatisfactory levels.  In addition, theCompany has the ability to inject additional capital into the Bank ifconsidered necessary.  During 2006, theCompany issued $8,248,000 of trust preferred securities which were invested insubordinated debentures issued by the Company. See Note 7 to the Notes to Consolidated Financial Statements foradditional details.

*ContractualObligations*

Summarizedbelow are our contractual obligations as of December 31, 2006.
|                                      | ** ** | ** ** | ** ** | **Less than** | ** ** | **1 to 3** | ** ** | **3 to 5** | ** ** | **More than** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------|------------|----------------------|------------|----------------------|------------|--------------------|------------|
| **Contractual Obligations**     | ** ** | **Total**  | ** ** | **1 year**    | ** ** | **years**            | ** ** | **years**            | ** ** | **5 years**   | ** ** |
| **(Dollars in Thousands)** | ** ** | ** ** | ** ** | ** **         | ** ** | ** **           | ** ** | ** **           | ** ** | ** **         | ** ** |
| FHLB advances                        |       | $          | 22,000     |               | $          | 6,000                |       | $                    | —     |               | $          | 5,000 |   | $ | 11,000 |   |
| Lease  commitments                   |       | 140        |       | 70                 |       | 70                   |       | —               |       | —             |       |
| Purchase  obligations                |       | 823        |       | 823                |       | —               |       | —               |       | —             |       |
| Subordinated  debentures             |       | 8,248      |       | —             |       | —               |       | —               |       | 8,248              |       |
|                                 |       |       |       |               |       |                 |       |                 |       |               |       |
|                                 |       | $          | 31,211     |               | $          | 6,893                |       | $                    | 70         |               | $          | 5,000 |   | $ | 19,248 |   |

 

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*Off-Balance-Sheet Financing*

Our financial statements do not reflect various commitments andcontingent liabilities that arise in the normal course of business.  These off-balance-sheet financial instrumentsinclude commitments to extend credit and standby letters of credit.  These financial instruments are included inthe financial statements when funds are distributed or the instruments becomepayable.  We use the same credit policiesin making commitments as we do for on-balance-sheet instruments.  Our exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitments toextend credit and standby letters of credit is represented by the contractualamount of those instruments.  At December31, 2006, we had outstanding commitments to extend credit through open lines of$48.8 million and outstanding standby letters of credit of approximately$1.7 million.

At December 31, 2006, we had commitments for capital expenditures ofapproximately $823,000 to purchase our Morrow branch facility at 6145 N. MainStreet, Morrow, Georgia.  We alsoanticipate estimated renovation costs of approximately $500,000.

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

Management is not aware of any known trends, events or uncertaintiesother than those discussed above that will have or that are reasonably likelyto have a material effect on our liquidity, capital resources 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 from its impact onnon-financial institutions.  Banks, asfinancial intermediaries, have assets that are primarily monetary in nature andthat tend to fluctuate in concert with inflation.  A bank can reduce the impact of inflation ifit can manage its rate sensitivity gap. This gap represents the difference between rate sensitive assets andrate sensitive liabilities.  We, throughour asset-liability committee, attempt to structure the assets and liabilitiesand manage the rate sensitivity gap, thereby seeking to minimize the potentialeffects of inflation.  For information onthe management of our interest rate sensitive assets and liabilities, see “Asset/LiabilityManagement.”

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

The following is a summary of our operations for the periods indicated.
| ** **                  | ** ** | **Years Ended**                 | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
|                        |       |                                 |       |   |   |
| Interest income             |       | $                                    | 18,881     |   | $ | 13,340 |   |
|                        |       |                                 |       |   |   |
| Interest expense            |       | (9,272                               | )          | (5,360 | ) |
|                        |       |                                 |       |   |   |
| Net interest income         |       | 9,609                                |       | 7,980 |   |
|                        |       |                                 |       |   |   |
| Provision for loan  losses  |       | (480                                 | )          | (740 | ) |
|                        |       |                                 |       |   |   |
| Other income                |       | 315                                  |       | 541 |   |
|                        |       |                                 |       |   |   |
| Other expenses              |       | (5,385                               | )          | (3,803 | ) |
|                        |       |                                 |       |   |   |
| Income before income  taxes |       | 4,059                                |       | 3,978 |   |
|                        |       |                                 |       |   |   |
| Income tax expense          |       | (1,497                               | )          | (1,434 | ) |
|                        |       |                                 |       |   |   |
| Net income                  |       | $                                    | 2,562      |   | $ | 2,544 |   |

 

Net Interest Income

Our results of operations are determined by our ability to manageinterest income and expense effectively, to minimize loan and investmentlosses, to generate non-interest income, and to control operatingexpenses.  Because interest rates aredetermined by market forces and economic conditions beyond our control, ourability to generate net interest income is dependent upon our ability to obtainan adequate net interest spread between the rate we pay on interest-bearingliabilities and the rate we earn on interest-earning assets.

Our net interest income increased by $1.6 million in 2006 as comparedto the same period in 2005.  Our netinterest margin was 4.00% for the year ended 2006 as compared to 4.01% in 2005.Our cost of funds increased to 4.46% for 2006 as compared to 3.19% in2005.  Average loans were $186.7 million,average securities were $38.4 million, and average federal funds sold were $14million.  Average interest-bearingliabilities were $207.7 million.  Therate earned on average interest-earning assets was 7.86% in 2006 compared to6.71% in 2005.

Provision for Loan Losses

The provision for loan losses was $480,000 in 2006 as compared to$739,615 in 2005.  The amount providedwas due primarily to the growth of the portfolio and a decrease in netcharge-offs of $5,000 for the year ended 2006 as compared to $294,000 in2005.  Based upon our evaluation of theloan portfolio, we believe the allowance for loan losses is adequate to absorbpossible losses on existing loans that may become uncollectible.  Our evaluation considers past due andclassified loans, underlying collateral values, and current economic conditionsthat may affect the borrower’s ability to repay.

As of December 31, 2006, we had $1,021,811 in nonperforming loans andassets as compared to $178,882 in 2005. The nonperforming loans were related to one borrower. The propertiessecuring these loans were subsequently foreclosed upon in January 2007.  We believe that there is sufficientcollateral to cover the outstanding loan balances and do not anticipate anyloss as a result of the disposition of the properties.  The

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allowance for loan losses as a percentage of total loans was 1.14% atDecember 31, 2006 and December 31, 2005.

Other Income

Other income consists of service charges on deposit accounts and othermiscellaneous revenues and fees.  Otheroperating income was $314,663 in 2006 as compared to $541,263 in 2005. Inaddition to the decrease in service charges on deposit accounts due to therollout of a free business checking product, a gain on repayment of debt in2005 in the amount of $257,767 accounted for the year-to-date decrease in otherincome.

Non-interest Expense

Other expenses for the year ended December 31, 2006 consists ofsalaries and employee benefits ($3,052,128), equipment and occupancy expenses($715,602), and other operating expenses ($1,616,875).  Other expenses increased by $1,581,000 for2006 as compared to 2005.  Salaries andemployee benefits have increased by $988,000 due to an increase in the numberof full time equivalent employees to 48 at December 31, 2006 from 39 atDecember 31, 2005, other annual salary increases and the recognition of stockcompensation expense of $321,082 as required by FAS 123(R). Bonuses paid toexecutive officers under employment agreements for 2006 and 2005 were $227,666and $185,850, respectively.  Equipmentand occupancy expenses have increased by $321,000 due to increased depreciationand occupancy expense for the two branches that opened during 2006, additionalequipment needs for employees, main office renovations and other occupancyexpenses related to the operations center. The Company leases it operations center facilities under an operatinglease agreement for approximately $70,000 a year in rental expense.  Other operating expenses have increased by$273,000 due primarily to our overall growth.

Income Tax

Income tax expense was $1,496,899 for 2006 as compared to $1,433,502 in2005.  The increase in our income taxprovision was $63,397 as compared to 2005. The effective tax rate for the year ended December 31, 2006 was 36.9% ascompared to 36% to 2005.  The increase inour effective tax rate is due primarily to the permanent non-deductibility ofincentive stock options that have been expensed in the amount of $143,849.  We have also increased our municipal bondportfolio in an effort to offset the Company’s tax liability.

Asset/Liability Management

Our objective is to manage assets and liabilities to provide asatisfactory, consistent level of profitability within the framework ofestablished cash, loan, investment, borrowing, and capital policies.  Certain officers are charged with theresponsibility for monitoring policies and procedures that are designed toensure acceptable composition of the asset/liability mix.  Our management’s overall philosophy is tosupport asset growth primarily through growth of core deposits of allcategories made by local individuals, partnerships, and corporations.

Our asset/liability mix is monitored on a regular basis with a reportreflecting the interest rate-sensitive assets and interest rate-sensitiveliabilities being prepared and presented to the Board of Directors on aperiodic basis.  The objective of thispolicy is to monitor interest rate-sensitive assets and liabilities so as tominimize the impact of substantial movements in interest rates onearnings.  An asset or liability isconsidered to be interest rate-sensitive if it will reprice or mature withinthe time period analyzed, usually one year or less. The interest rate-sensitivitygap is the difference between the interest-earning assets and interest-bearingliabilities scheduled to mature or reprice within such time period.  A gap is considered positive when the amountof interest rate-sensitive assets exceeds the amount of interest rate-sensitiveliabilities.  A gap is considerednegative when the amount of interest rate-sensitive liabilities exceeds theinterest rate-sensitive assets.  During aperiod of rising interest rates, a negative gap would tend to affect netinterest income adversely, while a positive gap would tend to result in anincrease in net interest income. Conversely, during a period of fallinginterest rates, a negative gap

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would tend to result in an increase in net interest income, while apositive gap would tend to affect net interest income adversely.  If our assets and liabilities were equallyflexible and moved concurrently, the impact of any increase or decrease ininterest rates on net interest income would be minimal.

A simple interest rate “gap” analysis by itself may not be an accurateindicator of how net interest income will be affected by changes in interestrates.  Accordingly, we also evaluate howthe repayment of particular assets and liabilities is impacted by changes ininterest rates.  Income associated withinterest-earning assets and costs associated withinterest-bearing liabilities may not be affected uniformly by changes ininterest rates.  In addition, themagnitude and duration of changes in interest rates may have a significantimpact on net interest income.  For example,although certain assets and liabilities may have similar maturities or periodsof repricing, they may react in different degrees to changes in market interestrates.  Interest rates on certain typesof assets and liabilities fluctuate in advance of changes in general marketrates, while interest rates on other types may lag behind changes in generalmarket rates.  In addition, certainassets, such as adjustable rate mortgage loans, have features (generally referredto as “interest rate caps and floors”) that limit changes in interestrates.  Prepayment and early withdrawallevels also could deviate significantly from those assumed in calculating theinterest rate gap.  The ability of manyborrowers to service their debts also may decrease during periods of risinginterest rates.

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

At December 31, 2006, our cumulative one year interest rate-sensitivitygap ratio was 118%.  Our targeted ratiois 90% to 120% in this time horizon. This indicates that our interest-earning assets will reprice during thisperiod at a rate faster than our interest-bearing liabilities.

The following table sets forth the distribution of the repricing of ourinterest-earning assets and interest-bearing liabilities as of December 31,2006, the interest rate-sensitivity gap, the cumulative interestrate-sensitivity gap, the interest rate-sensitivity gap ratio and thecumulative interest rate-sensitivity gap ratio. The table also sets forth the time periods in which interest-earningassets and interest-bearing liabilities will mature or may reprice inaccordance with their contractual terms. However, the table does not necessarily indicate the impact of generalinterest rate movements on the net interest margin as the repricing of variouscategories of assets and liabilities is subject to competitive pressures andthe needs of our customers.  In addition,various assets and liabilities indicated as repricing within the same periodmay in fact, reprice at different times within this period and at differentrates.

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** **
| ** **                                     | ** ** | ** **                 | ** ** | **After**    | ** ** | **After**    | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|--------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | ** **                 | ** ** | **Three**    | ** ** | **One**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **                 | ** ** | **Months**   | ** ** | **Year but** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Within**                 | ** ** | **but**      | ** ** | **Within**   | ** ** | **After**  | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Three**                  | ** ** | **Within**   | ** ** | **Five**     | ** ** | **Five**   | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Months**                 | ** ** | **One Year** | ** ** | **Years**    | ** ** | **Years**  | ** ** | **Total**  | ** ** |
| ** **                                     | ** ** | **(Dollars in Thousands)** | ** ** |
|                                           |       |                       |       |         |       |         |       |       |       |       |       |
|                                           |       |                       |       |         |       |         |       |       |       |       |       |
| Interest-earning assets:                       |       |                       |       |         |       |         |       |       |       |       |       |
| Federal funds sold                             |       | 11,614                     |       | —       |       | —       |       | —     |       | 11,614     |       |
| Interest-bearing due  from                     |       | 1,710                      |       | —       |       | 80           |       | —     |       | 1,790      |       |
| Securities                                     |       | 498                        |       | 1,980        |       | 18,264       |       | 18,817     |       | 39,559     |       |
| Loans                                          |       | 167,492                    |       | 22,158       |       | 19,816       |       | 223        |       | 209,689    |       |
|                                           |       | 181,314                    |       | 24,138       |       | 38,160       |       | 19,040     |       | 262,652    |       |
| Interest-bearing liabilities:                  |       |                       |       |         |       |         |       |       |       |       |       |
| Interest-bearing demand  deposits              |       | 8,013                      |       | —       |       | 15,554       |       | —     |       | 23,567     |       |
| Savings                                        |       | 3,016                      |       | —       |       | 3,015        |       | —     |       | 6,031      |       |
| Certificates, less than  $100,000              |       | 7,777                      |       | 37,111       |       | 3,117        |       | —     |       | 48,005     |       |
| Certificates, $100,000  and over               |       | 32,194                     |       | 74,691       |       | 20,347       |       | —     |       | 127,232    |       |
| Other borrowings                               |       | 10,000                     |       | 2,000        |       | 5,000        |       | 13,248     |       | 30,248     |       |
|                                           |       | 61,000                     |       | 113,802      |       | 47,033       |       | 13,248     |       | 235,083    |       |
| Interest rate sensitivity gap                  |       | 120,314                    |       | (89,664      | )          | (8,873       | )          | 5,792      |       | 27,569     |       |
| Cumulative interest rate sensitivity gap       |       | 120,314                    |       | 30,650       |       | 21,777       |       | 27,569     |       |       |       |
| Interest rate sensitivity gap ratio            |       | 297                        | %          | 21           | %          | 81           | %          | 144        | %          |       |       |
| Cumulative interest rate sensitivity gap ratio |       | 297                        | %          | 118          | %          | 110          | %          | 112        | %          |       |       |

 

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**SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA**

The tables and schedules on the following pages set forth certainsignificant financial information and statistical data with respect to thedistribution of assets, liabilities and shareholders’ equity, the interestrates we experienced; 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; types of deposits and the return onequity and assets.

**DISTRIBUTION OF ASSETS, LIABILITIES, ANDSHAREHOLDERS’ EQUITY:INTEREST RATES AND INTEREST DIFFERENTIALS**

**Average Balances**

The condensed average balance sheet for the period indicated ispresented below. (1)
| ** **                                          | ** ** | **December 31, 2006**      | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **(Dollars in Thousands)** | ** ** |
| ASSETS                                              |       |                                 |       |                            |       |
|                                                |       |                                 |       |                            |       |
| Cash and due from banks                             |       | $                                    | 2,585      |                            | $          | 2,071 |   |
| Interest bearing due  from                          |       | 1,205                                |       | 1,825                           |       |
| Federal funds sold                                  |       | 14,032                               |       | 9,287                           |       |
| Taxable securities  available-for-sale, at cost     |       | 34,968                               |       | 28,480                          |       |
| Tax-free securities  available-for-sale, at cost    |       | 3,416                                |       | 2,604                           |       |
| Unrealized losses on  securities available-for-sale |       | (905                                 | )          | (327                            | )          |
| Loans (2)                                           |       | 186,728                              |       | 156,621                         |       |
| Allowance for loan  losses                          |       | (2,100                               | )          | (1,764                          | )          |
| Other assets                                        |       | 8,821                                |       | 5,601                           |       |
|                                                |       | $                                    | 248,750    |                            | $          | 204,398 |   |
|                                                |       |                                 |       |                            |       |
| Total interest-earning  assets                      |       | $                                    | 240,349    |                            | $          | 198,817 |   |
|                                                |       |                                 |       |                            |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY          |       |                                 |       |                            |       |
|                                                |       |                                 |       |                            |       |
| Deposits:                                           |       |                                 |       |                            |       |
| Noninterest-bearing  demand                         |       | $                                    | 13,038     |                            | $          | 11,428 |   |
| Interest-bearing  demand and savings                |       | 22,635                               |       | 13,180                          |       |
| Time                                                |       | 160,694                              |       | 129,021                         |       |
| Total deposits                                      |       | 196,367                              |       | 153,629                         |       |
|                                                |       |                                 |       |                            |       |
| Other borrowed  funds                               |       | 22,377                               |       | 25,859                          |       |
| Subordinated  debentures                            |       | 2,011                                |       | —                          |       |
| Other  liabilities                                  |       | 1,903                                |       | 1,182                           |       |
| Total  liabilities                                  |       | 222,658                              |       | 180,670                         |       |
| Stockholders’  equity                          |       | 26,092                               |       | 23,728                          |       |
|                                                |       | $                                    | 248,750    |                            | $          | 204,398 |   |
|                                                |       |                                 |       |                            |       |
| Total interest-bearing  liabilities                 |       | $                                    | 207,717    |                            | $          | 168,060 |   |

 

----

(1)           Average balances weredetermined using the daily average balances for the years ended December 31,2006 and 2005.

(2)           There were $305,000 ofnonaccrual loans included in average loans in 2006 and $142,000 in 2005.

31

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**Interest Income and Interest Expense**

The following tables set forth the amount of our interest income andinterest expense for each category of interest-earning assets andinterest-bearing liabilities and the average interest rate for totalinterest-earning assets and total interest-bearing liabilities, net interestspread and net yield on average interest-earning assets.
| ** **                                                | ** ** | **Year Ended**                  | ** ** | **Year Ended**             | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **December 31, 2006**      | ** ** | **December 31, 2005** | ** ** |
| ** **                                                | ** ** | ** **                           | ** ** | **Average**                     | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                | ** ** | **Interest**                         | ** ** | **Yields**                      | ** ** | **Interest** | ** ** | **Yields** | ** ** |
| ** **                                                | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                      |       |                                 |       |                            |       |   |   |   |   |
| INTEREST INCOME:                                          |       |                                 |       |                            |       |   |   |   |   |
| Interest and  fees on loans (1)                           |       | $                                    | 16,487     |                            | 8.83       | % | $ | 11,750 |   | 7.50 | % |
| Interest on  taxable securities                           |       | 1,506                                |       | 4.31                            | %          | 1,128 |   | 3.96 | % |
| Interest on  tax-free securities                          |       | 139                                  |       | 4.07                            | %          | 108 |   | 4.15 | % |
| Interest on  federal funds sold                           |       | 693                                  |       | 4.94                            | %          | 297 |   | 3.20 | % |
| Interest on due  from banks                               |       | 56                                   |       | 4.65                            | %          | 57 |   | 3.12 | % |
| Total interest  income                                    |       | $                                    | 18,881     |                            | 7.86       | % | $ | 13,340 |   | 6.71 | % |
|                                                      |       |                                 |       |                            |       |   |   |   |   |
| INTEREST EXPENSE:                                         |       |                                 |       |                            |       |   |   |   |   |
| Interest on  interest-bearing demand deposits and savings |       | $                                    | 770        |                            | 3.40       | % | $ | 269 |   | 2.04 | % |
| Interest on time  deposits                                |       | 7,450                                |       | 4.64                            | %          | 4,312 |   | 3.34 | % |
| Interest on  other borrowed funds                         |       | 908                                  |       | 4.06                            | %          | 780 |   | 3.02 | % |
| Interest on  subordinated debentures                      |       | 144                                  |       | 7.16                            | %          | — |   | — |   |
| Total interest  expense                                   |       | $                                    | 9,272      |                            | 4.46       | % | $ | 5,361 |   | 3.19 | % |
|                                                      |       |                                 |       |                            |       |   |   |   |   |
| NET INTEREST INCOME                                       |       | $                                    | 9,609      |                            |       |   | $ | 7,979 |   |   |   |
|                                                      |       |                                 |       |                            |       |   |   |   |   |
| Net interest  spread                                      |       |                                 |       | 3.40                            | %          |   |   | 3.52 | % |
| Net yield on average  interest-earning assets             |       |                                 |       | 4.00                            | %          |   |   | 4.01 | % |

 

----

(1)                                  Interestand fees on loans includes $928,853 and $908,578 of loan fee income for theyears ended December 31, 2006 and 2005, respectively.  There was no interest income recognized onnonaccrual loans during 2006 or 2005.

32

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**Rate and Volume Analysis**

Thefollowing table describes the extent to which changes in interest rates andchanges in volume of interest-earning assets and interest-bearing liabilitieshave affected our interest income and expense during the years indicated.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided on changesattributable to (1) change in volume (change in volume multiplied by old rate);(2) change in rate (change in rate multiplied by old volume); and (3) acombination of change in rate and change in volume.  The changes in interest income and interestexpense attributable to both volume and rate have been allocatedproportionately to the change due to volume and the change due to rate.
|                                                 | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **2006 to 2005**                 | ** ** |
| ** **                                      | ** ** | ** **                                 | ** ** | **Increase (decrease)  due to change in** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Rate**                                   | ** ** | **Volume** | ** ** | **Net** | ** ** |
| ** **                                      | ** ** | **(Dollars in Thousands)**       | ** ** |
| Income from  interest-earning assets:           |       |                                       |       |   |   |   |   |
| Interest and  fees on loans                     |       | $                                          | 2,270      |   | $ | 2,467 |   | $ | 4,737 |   |
| Interest on  taxable securities                 |       | 105                                        |       | 273 |   | 378 |   |
| Interest on  tax-free securities                |       | (2                                         | )          | 33 |   | 31 |   |
| Interest on  federal funds sold                 |       | 204                                        |       | 192 |   | 396 |   |
| Interest on  interest-bearing deposits in banks |       | 22                                         |       | (23 | ) | (1 | ) |
| Total interest  income                          |       | 2,599                                      |       | 2,942 |   | 5,541 |   |
|                                            |       |                                       |       |   |   |   |   |
| Expense from  interest-bearing                  |       |                                       |       |   |   |   |   |
| liabilities:                                    |       |                                       |       |   |   |   |   |
| Interest on  interest-bearing demand            |       |                                       |       |   |   |   |   |
| deposits and  savings deposits                  |       | 241                                        |       | 260 |   | 501 |   |
| Interest on time  deposits                      |       | 1,921                                      |       | 1,217 |   | 3,138 |   |
| Interest on  borrowings                         |       | 243                                        |       | (115 | ) | 128 |   |
| Interest on  subordinated debentures            |       | —                                     |       | 144 |   | 144 |   |
| Total interest  expense                         |       | 2,405                                      |       | 1,506 |   | 3,911 |   |
|                                            |       |                                       |       |   |   |   |   |
| Net interest income                             |       | $                                          | 194        |   | $ | 1,436 |   | $ | 1,630 |   |

 

33

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**INVESTMENT PORTFOLIO**

**Types of Investments**

The carrying amounts of securities at the dates indicated, which areall classified as available-for-sale, are summarized as follows:
|                                     | ** ** | **December 31,**                | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(Dollars in Thousands)** | ** ** |
| U.S. Government sponsored  agencies |       | $                                    | 24,141     |   | $ | 18,006 |   |
| Mortgage-backed  securities         |       | 9,354                                |       | 9,612 |   |
| Municipals                          |       | 6,064                                |       | 3,507 |   |
| Restricted  equity securities       |       | 2,014                                |       | 1,584 |   |
|                                |       | $                                    | 41,573     |   | $ | 32,709 |   |

 

**Maturities**

The amounts of debt securities, including the weighted average yield ineach category as of December 31, 2006 are shown in the following tableaccording to contractual maturity classifications (1) one year or less, (2)after one through five years, (3) after five through ten years and (4) afterten years.  Restricted equity securitiesare not included in the table because they have no contractual maturity.
| ** **                                   | ** ** | ** **                          | ** ** | ** **                       | ** ** | **After one year**    | ** ** | **After five years** | ** ** |
|----------------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **One year or less** | ** ** | **through five years** | ** ** | **through ten years** | ** ** |
| ** **                                   | ** ** | **Amount**                          | ** ** | **Yield (1)**               | ** ** | **Amount**                      | ** ** | **Yield (1)**             | ** ** | **Amount** | ** ** | **Yield (1)** | ** ** |
|                                         |       |                                |       |                             |       |                            |       |                           |       |   |   |   |   |
| U.S. Government sponsored  agency securities |       | $                                   | 2,478      |                             | 3.36       | %                               | $          | 15,544                         |       | 4.39 | % | $ | 5,621 |   | 4.98 | % |
| Mortgage-backed  securities                  |       | —                              |       |                             |       | 1,223                           |       | 2.90                           | %          | 2,680 |   | 3.92 | % |
| Municipals                                   |       | —                              |       |                             |       | 880                             |       | 3.88                           | %          | 1,601 |   | 3.45 | % |
|                                         |       | $                                   | 2,478      |                             | 3.36       | %                               | $          | 17,647                         |       | 4.26 | % | $ | 9,902 |   | 4.45 | % |

 
| ** **                                   | ** ** | **After ten years** | ** ** | **Total**          | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|--------------------|------------|
| ** **                                   | ** ** | **Amount**                    | ** ** | **Yield (1)** | ** ** | **Amount** | ** ** | **Yield (1)** | ** ** |
| U.S. Government sponsored  agency securities |       | $                             | 498        |               | 6.01       | % | $ | 24,141 |   | 4.46 | % |
| Mortgage-backed securities                   |       | 5,451                         |       | 4.31               | %          | 9,354 |   | 4.02 | % |
| Municipals                                   |       | 3,583                         |       | 4.56               | %          | 6,064 |   | 4.31 | % |
|                                         |       | $                             | 9,532      |               | 4.49       | % | $ | 39,559 |   | 4.33 | % |

 

----

(1)                                  Theweighted average yields were computed using coupon interest, adding discountaccretion or subtracting premium amortization, as appropriate, on a ratablebasis over the life of each security.

34

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**LOAN PORTFOLIO**

**Types of Loans**

The amount of loans outstanding at the indicated dates are shown in thefollowing table according to the type of loan.
|                                 | ** ** | **December 31,**                | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
|                            |       |                                 |       |   |   |
| Commercial                      |       | $                                    | 17,325     |   | $ | 18,233 |   |
| Real  estate-construction       |       | 145,712                              |       | 107,945 |   |
| Real estate-mortgage            |       | 44,344                               |       | 41,166 |   |
| Consumer installment  and other |       | 3,330                                |       | 1,600 |   |
|                            |       | 210,711                              |       | 168,944 |   |
| Less deferred loan fees         |       | (314                                 | )          | (270 | ) |
| Less allowance for loan  losses |       | (2,392                               | )          | (1,917 | ) |
| Net loans                       |       | $                                    | 208,005    |   | $ | 166,757 |   |

 

**Maturities and Sensitivities of Loans to Changes in Interest Rates**

Total loans as of December 31, 2006 are shown in the following tableaccording to contractual maturity classifications one year or less, after oneyear through five years, and after five years.
|                                    | ** ** | **(Dollars in Thousands)** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|
| Commercial                         |       |                                 |       |
| One year or less                   |       | $                                    | 11,604     |   |
| After one year  through five years |       | 5,709                                |       |
| After five years                   |       | 12                                   |       |
|                               |       | 17,325                               |       |
| Construction                       |       |                                 |       |
| One year or less                   |       | 125,278                              |       |
| After one year  through five years |       | 20,399                               |       |
| After five years                   |       | 35                                   |       |
|                               |       | 145,712                              |       |
| Other                              |       |                                 |       |
| One year or less                   |       | 26,570                               |       |
| After one year  through five years |       | 19,055                               |       |
| After five years                   |       | 2,049                                |       |
|                               |       | 47,674                               |       |
|                               |       |                                 |       |
|                               |       | $                                    | 210,711    |   |

 

35

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The following table summarizes loans at December 31, 2006 with the duedates after one year that have predetermined and floating or adjustableinterest rates.
|                                        | ** ** | **(Dollars in Thousands)** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
|                                   |       |                                 |       |
| Predetermined interest  rates          |       | $                                    | 18,336     |   |
| Floating or adjustable  interest rates |       | 28,923                               |       |
|                                   |       | $                                    | 47,259     |   |

 

**Risk Elements**

Information with respect to nonaccrual, past due, and restructuredloans is as follows:
|                                                                                                                                 | ** ** | **December 31,**                | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                                                                      | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                                                                                            |       |                                 |       |   |   |
| Nonaccrual loans                                                                                                                |       | $                                    | 1,022      |   | $ | 179 |   |
| Loans contractually  past due ninety days or more as to interest or principal payments and still  accruing                      |       | 17                                   |       | 1 |   |
| Restructured  loans                                                                                                             |       | 0                                    |       | 0 |   |
| Loans, now current  about which there are serious doubts as to the ability of the borrower to  comply with loan repayment terms |       | 0                                    |       | 0 |   |
| Interest income that  would have been recorded on nonaccrual and restructured loans under original  terms                       |       | 14                                   |       | 7 |   |
| Interest income that  was recorded on nonaccrual and   restructured loans                                                       |       | 0                                    |       | 0 |   |
|                                                                                                                                 |            |                                      |            |  |  |  |  |

 

It is our policy to discontinue the accrual of interest income when, inthe opinion of management, collection of interest becomes doubtful.  The collection of interest becomes doubtfulwhen there is a significant deterioration in the financial condition of theborrower and full repayment of principal and interest is not expected unlessthe loan is both well-secured and in the process of collection.

Loans classified for regulatory purposes as loss, doubtful,substandard, or special mention that have not been included in the table abovedo not represent or result from trends or uncertainties that managementreasonably expects will materially impact future operating results, liquidity,or capital resources.  These classifiedloans do not represent material credits about which we are aware of anyinformation that causes us to have serious doubts as to the ability of suchborrowers to comply with the loan repayment terms.

36

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**SUMMARY OF LOAN LOSS EXPERIENCE**

The following table summarizes average loan balances for the yeardetermined using the daily average balances during the period of bankingoperations; changes in the allowance for loan losses arising from loans chargedoff and recoveries on loans previously charged off; additions to the allowancewhich have been charged to operating expense; and the ratio of net charge-offsduring the period to average loans.
| ** **                                                                     | ** ** | **2006**                             | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                                                     | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                                           |       |                                 |       |     |       |
| Average amount of loans  outstanding                                           |       | $                                    | 186,728    |     | $          | 156,621 |   |
|                                                                           |       |                                 |       |     |       |
| Balance of allowance  for loan losses at beginning of period                   |       | 1,917                                |       | 1,471    |       |
|                                                                           |       |                                 |       |     |       |
| Loans charged off                                                              |       |                                 |       |     |       |
| Commercial                                                                     |       | —                               |       | (277     | )          |
| Consumer installment  and other                                                |       | (13                                  | )          | (20      | )          |
|                                                                           |       | (13                                  | )          | (297     | )          |
| Loans recovered                                                                |       |                                 |       |     |       |
| Commercial                                                                     |       | 6                                    |       | —   |       |
| Consumer installment and other                                                 |       | 2                                    |       | 3        |       |
|                                                                           |       | 8                                    |       | 3        |       |
|                                                                           |       |                                 |       |     |       |
| Net charge-offs                                                                |       | (5                                   | )          | (294     | )          |
|                                                                           |       |                                 |       |     |       |
| Additions to the  allowance charged to operating expense during period         |       | 480                                  |       | 740      |       |
|                                                                           |       |                                 |       |     |       |
| Balance of allowance  for loan losses at end of period                         |       | $                                    | 2,392      |     | $          | 1,917 |   |
|                                                                           |       |                                 |       |     |       |
| Ratio of net loans  charged off during the period to average loans outstanding |       | .003                                 | %          | .19      | %          |

 

**Allowance for Loan Losses**

The allowance for loan losses is maintained at a level that is deemedappropriate by management to adequately cover all known and inherent risks inthe loan portfolio.  The allowance forloan losses is maintained at a level that is deemed appropriate by managementto adequately cover all known and inherent risks in the loan portfolio.  Management’s evaluation of the loan portfolioincludes a loan classification program. Under the program, as each loan is made, we assign a loan grade.  Each loan grade is assigned an allowancepercentage determined based on our experience specifically and the historicalexperience of the banking industry generally. Loan classifications are then subject to periodic review by theresponsible lending officers and by senior management based upon theirjudgment, our loan loss experience, current economic conditions that may affectthe borrower’s ability to repay, lender requirements, the underlying collateralvalue of the loans and other appropriate information.  Management relies predominantly on thisongoing review of the loan portfolio to assess the risk characteristics of theportfolio in the aggregate and to determine adjustments, if any, to ourallowance for loan losses.   Based uponthis ongoing review, we may identify loans that could be impaired.  A loan is considered impaired when it isprobable that we will be unable to collect all principal and interest due inaccordance with the contractual terms of the loan agreement.  When we identify a loan as impaired, theallowance for loan losses is increased if we determine that the amount of impairmentis in excess of the allowance of the allowance determined under our loanclassification program.  We maintain anallowance for loan losses of no less than 1% of outstanding loans at all times.

37

----

As of December 31, 2006, we had made no allocations of our allowancefor loan losses to specific categories of loans.  Based on our best estimate, the allocation ofthe allowance for loan losses to types of loans, as of the indicated dates, isas follows:
| ** **                      | ** ** | **December 31,**                | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                      | ** ** | ** **                           | ** ** | **Percent of loans in** | ** ** | ** ** | ** ** | **Percent of loans in** | ** ** |
| ** **                      | ** ** | ** **                           | ** ** | **each category** | ** ** | ** ** | ** ** | **each category** | ** ** |
| ** **                      | ** ** | **Amount**                           | ** ** | **to total loans** | ** ** | **Amount** | ** ** | **to total loans** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
|                            |       |                                 |       |   |   |   |   |   |   |
| Commercial                      |       | $                                    | 598        |   | 8 | % | $ | 479 |   | 11 | % |
| Real estate -  construction     |       | 1,076                                |       | 69 | % | 863 |   | 64 | % |
| Real estate -  mortgage         |       | 478                                  |       | 21 | % | 383 |   | 24 | % |
| Consumer  installment and other |       | 240                                  |       | 2 | % | 192 |   | 1 | % |
|                            |       | $                                    | 2,392      |   | 100 | % | $ | 1,917 |   | 100 | % |

 

**DEPOSITS**

Average amount of deposits and average rates paid thereon, classifiedas to noninterest-bearing demand deposits, interest-bearing demand deposits,savings deposits, and time deposits, for the period of operations is presentedbelow.(1)
| ** **                                   | ** ** | **2006**                             | ** ** | **2005**    | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|-------------|------------|
| ** **                                   | ** ** | **Amount**                           | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                                   | ** ** | **(Dollars in Thousands)** | ** ** |
|                                         |       |                                 |       |        |       |   |   |   |   |
| Noninterest-bearing demand deposits          |       | $                                    | 13,038     |        |       |   | $ | 11,428 |   |   |   |
| Interest-bearing demand deposits and savings |       | 22,635                               |       | 3.40        | %          | 13,180 |   | 2.04 | % |
| Time deposits                                |       | 160,694                              |       | 4.64        | %          | 129,021 |   | 3.34 | % |
| Total deposits                               |       | $                                    | 196,367    |        |       |   | $ | 153,629 |   |   |   |

 

----

(1)           Average balances weredetermined using the daily average balances for the years ended December 31,2006 and 2005.

The amounts of time certificates of deposit issued in amounts of$100,000 or more as of December 31, 2006 are shown below by category, which isbased on time remaining until maturity of (1) three months or less, (2) overthree through six months, (3) over six through twelve months, and (4) overtwelve months.
|                                        | ** ** | **(Dollars in Thousands)** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
|                                   |       |                                 |       |
| Three months or  less                  |       | $                                    | 17,453     |   |
| Over three  months through six months  |       | 40,169                               |       |
| Over six months  through twelve months |       | 37,535                               |       |
| Over twelve  months                    |       | 32,075                               |       |
| Total                                  |       | $                                    | 127,232    |   |

 

38

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**RETURN ON ASSETS AND STOCKHOLDERS’ EQUITY**

The following rate of return information for the year indicated ispresented below.
| ** **                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |
| Return on assets  (1)       |       | 1.03     | %          | 1.24     | %          |
| Return on equity  (2)       |       | 9.82     | %          | 10.72    | %          |
| Dividend payout  ratio (3)  |       | n/a      |       | n/a      |       |
| Equity to assets  ratio (4) |       | 10.49    | %          | 11.61    | %          |

 

----

(1)                                  Netincome divided by average total assets.

(2)                                  Netincome divided by average equity.

(3)                                  Dividendsdeclared per share of common stock divided by net income per share.

(4)                                  Averagecommon equity divided by average total assets.

39

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**ITEM 7.****                                                    ****FINANCIAL STATEMENTS**

The consolidated financial statements, notes thereto and independentauditors’ report thereon for year ended December 31, 2006 and attached heretobeginning at page F-1.

The following financial statements are attached on page F-1 of thisReport:

Report ofIndependent Registered Public Accounting Firm

ConsolidatedBalance Sheets

ConsolidatedStatements of Income

ConsolidatedStatements of Comprehensive Income

Consolidated Statementsof Changes in Stockholders’ Equity

ConsolidatedStatements of Cash Flows

Notes to Financial Statements

**ITEM 8.****                                                    ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

Not Applicable.

**ITEM 8A.****                                           ****CONTROLS AND PROCEDURES**

At the end of the period covered by this report, our management,including our Chief Executive Officer and Chief Financial Officer, reviewed theeffectiveness and design of our disclosure controls and procedures under Rule13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that such disclosure controls and procedures areadequate to ensure that material information relating to the Company, includingits consolidated subsidiary, that is required to be included in its periodicfilings with the FDIC is timely made known to them.  During the period covered by this Report,there were no significant changes in internal controls or, to management’sknowledge, in other factors that could significantly affect those internalcontrols subsequent to the date on which management carried out its evaluation,and there has been no corrective action with respect to significantdeficiencies or material weaknesses.

**ITEM 8B.****                                           ****OTHER INFORMATION**

Not applicable.

40

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**PART III**

**ITEM 9.****                ****DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION16(a) OF THE EXCHANGE ACT**

The information required by this Item is included in the Company’sProxy Statement for the Annual Meeting of Shareholders to be held onMay 17, 2007 under the headings “Proposal — Election of Directors —Director Nominees and Continuing Directors,” “Executive Officers,” “Meetingsand Committees of the Board” and “Filings Under Section 16(a)” and isincorporated herein by reference.

**ITEM 10.****                                             ****EXECUTIVE COMPENSATION**

The information required by this Item is included in the Company’sProxy Statement for the Annual Meeting of Shareholders to be held onMay 17, 2007 under the heading “Executive Compensation” and isincorporated herein by reference.

**ITEM 11.****              ****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

The other information required by this item is included in the Company’sProxy Statement for the Annual Meeting of Shareholders to be held onMay 17, 2007 under the heading “Security Ownership of Certain BeneficialOwners and Management Related Matters” and is incorporated herein by reference.

**2000Stock Incentive Plan Information**

The following table sets forth information regardingthe number of shares subject to options issued and reserved for future issuanceunder the 2000 Stock Incentive Plan.  The2000 Stock Incentive Plan was adopted by the Board of Directors onDecember 10, 2001 and approved by the shareholders on June 20,2002.  On May 19, 2005, the shareholdersamended the Plan to increase the number of shares reserved under the Plan from100,000 to 250,000 and to provide that shares issued pursuant to awards underthe Plan would be shares of FirstBank Financial Services, Inc. The number ofshares reserved under the Plan has been adjusted to 330,000 due to the Company’ssubsequent stock dividend and stock split. The Company does not maintain any other equity compensation plan.
| ** **                                              | ** ** | **Number of securities  to be issued upon  exercise of   outstanding options** | ** ** | **Weighted-average  exercise price of   outstanding options** | ** ** | **Number of shares  remaining available  for future issuance  under the Plan  (excludes outstanding  options)** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                    |       |                                                                                                                   |       |                                                                              |       |                                                                                                                                                    |       |
| Equity compensation  plans approved by security holders |       | 217,618                                                                                                                |       | $                                                                                 | 11.73      |                                                                                                                                                    | 112,382    |   |
|                                                         |            |                                                                                                                        |            |                                                                                   |            |                                                                                                                                                         |            |  |

 

41

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**ITEM 12.****                                             ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

The informationrequired by this Item is included in the Company’s Proxy Statement for theAnnual Meeting of Shareholders to be held on May 17, 2007 under the headings “CertainRelationships and Related Transactions with Management” and is incorporatedherein by reference.

**ITEM 13.****                                             ****EXHIBITS**
| 3.1    |   | Articles of Incorporation of FirstBank Financial Services,  Inc. 1/                                                                          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                         |
| 3.2    |   | Bylaws of FirstBank Financial Services, Inc. 1/                                                                                              |
|   |   |                                                                                                                                         |
| 4.1    |   | Instruments Defining the Rights of Security Holders.  See Articles of Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibit 3.2  hereto. |
|   |   |                                                                                                                                         |
| 10.1*  |   | Employment Agreement by and between First Bank of  Henry County and Thaddeus M. Williams.2/                                                  |
|   |   |                                                                                                                                         |
| 10.2*  |   | Addendum to Employment Agreement by and between  First Bank of Henry County and Thaddeus M. Williams. 3/                                |
|   |   |                                                                                                                                         |
| 10.3*  |   | Employment Agreement by and between FirstBank  Financial Services, Inc. and Lisa J. Maxwell. 4/                                         |
|   |   |                                                                                                                                         |
| 10.4*  |   | Employment Agreement by and between First Bank of  Henry County and William M. Waller.                                                       |
|   |   |                                                                                                                                         |
| 10.5*  |   | First Bank of Henry County 2000 Stock Incentive  Plan. 5/                                                                                    |
|   |   |                                                                                                                                         |
| 10.6*  |   | First Amendment to First Bank of Henry County 2000  Stock Incentive Plan. 6/                                                                 |
|   |   |                                                                                                                                         |
| 21.1   |   | Subsidiaries of FirstBank Financial Services, Inc.                                                                                           |
|   |   |                                                                                                                                         |
| 24.1   |   | Power of Attorney (appears on the signature pages to  this Annual Report on 10-KSB).                                                         |
|   |   |                                                                                                                                         |
| 31.1   |   | Certification of Chief Executive Officer.                                                                                                    |
|   |   |                                                                                                                                         |
| 31.1   |   | Certification of Chief Financial Officer.                                                                                                    |
|   |   |                                                                                                                                         |
| 32.1   |   | Certifications pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                    |

 

----

*                                         Compensatoryplan or warrant

(1)                                  Incorporatedherein by reference to Exhibits of same number in the Company’s Form 8-K filedJanuary 23, 2006.

(2)                                  Incorporatedherein by reference to Exhibit 10.3 of the Company’s Form 8-K filed January 23,2006.

(3)                                  Incorporatedherein by reference to Exhibit 10.4 of the Company’s Form 8-K filed January 23,2006.

(4)                                  Incorporatedherein by reference to Exhibit 10.1 of the Company’s Form 8-K filed February28, 2007.

(5)                                  Incorporatedherein by reference to Exhibit 10.7 of the Company’s Form 8-K filed January 23,2006.

(6)                                  Incorporatedherein by reference to Exhibit 10.8 of the Company’s Form 8-K filed January 23,2006.

42

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**ITEM 14.               PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

The informationrequired by this Item is included in the Company’s Proxy Statement for theAnnual Meeting of Shareholders to be held on May 17, 2007 under the heading “Auditand Other Fees Paid to Independent Accountants” and is incorporated herein byreference.

43

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this Report to be signedon its behalf by the undersigned, thereunto duly authorized.
|        | FIRSTBANK FINANCIAL SERVICES, INC. |
|--------|------------------------------------|
|   |                               |   |
|   | By:                                |   | /s/ Thaddeus M. Williams |   |
|   |                               | Thaddeus M. Williams |
|   |                               | President and Chief Executive Officer |
|   |                               |   |
|   | Date:                              | March 15, 2007 |
|        |                                    |  |  |  |

 

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signatureappears on the signature page to this Report constitutes and appoints ThaddeusWilliams his true and lawful attorney-in-fact and agent, with full power ofsubstitution and resubstitution, for him and in his name, place, and stead, inany and all capacities, to sign any and all amendments to this Report, and tofile the same, with all exhibits hereto, and other documents in connectionherewith with the Federal Deposit Insurance Corporation, granting unto saidattorney-in-fact and agent full power and authority to do and perform each andevery act and thing requisite and necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all that said attorney-in-fact andagent or his substitute or substitutes, may lawfully do or cause to be done byvirtue hereof.

44

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Pursuant to the requirements of the Securities Exchange Act of 1934,this Report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.
| Signature                      | ** ** | **Title**                                    | ** ** | **Date**       |
|--------------------------------|------------|----------------------------------------------|------------|----------------|
|                           |       |                                         |       |           |
|                           |       |                                         |       |           |
| /s/ Larry D.  Adams            |       |                                         |       |           |
| Larry D. Adams                 |       | Director                                     |       | March 15, 2007 |
|                           |       |                                         |       |           |
| /s/ Wiley A.  Brown, Jr.       |       |                                         |       |           |
|  Wiley A. Brown, Jr.      |       | Director                                     |       | March 15, 2007 |
|                           |       |                                         |       |           |
| /s/ Don H. Cagle               |       |                                         |       |           |
| Don H. Cagle                   |       | Chairman of the Board                        |       | March 15, 2007 |
|                           |       |                                         |       |           |
| /s/ James Troy  Chafin, III    |       |                                         |       |           |
| James Troy  Chafin, III        |       | Director                                     |       | March 21, 2007 |
|                           |       |                                         |       |           |
| /s/ William Lee  Craddock, Jr. |       |                                         |       |           |
| William Lee  Craddock, Jr.     |       | Director                                     |       | March 15, 2007 |
|                           |       |                                         |       |           |
| /s/ Luther  Martin Denney, III |       |                                         |       |           |
| Luther Martin  Denney, III     |       | Director                                     |       | March 15, 2007 |
|                           |       |                                         |       |           |
| /s/ Milton  Stanley Goggins    |       |                                         |       |           |
| Milton Stanley  Goggins        |       | Director                                     |       | March 15, 2007 |
|                           |       |                                         |       |           |
| /s/ Richard  Allen Grimes      |       |                                         |       |           |
| Richard Allen  Grimes          |       | Director                                     |       | March 15, 2007 |
|                           |       |                                         |       |           |
| /s/ Larry Max  Phillips        |       |                                         |       |           |
| Larry Max  Phillips            |       | Director                                     |       | March 15, 2007 |
|                           |       |                                         |       |           |
| /s/ Thaddeus M.  Williams      |       |                                         |       |           |
| Thaddeus M.  Williams          |       | Director, President, Chief Executive Officer |       | March 15, 2007 |
|                           |       |                                         |       |           |
| /s/ Lisa J.  Maxwell           |       |                                         |       |           |
| Lisa J. Maxwell                |       | Chief Financial Officer                      |       | March 15, 2007 |

 

45

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** **

**FIRSTBANKFINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED FINANCIAL REPORT**

**DECEMBER 31, 2006**

F-1

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**FIRSTBANK FINANCIAL SERVICES,INC.AND SUBSIDIARY**

**CONSOLIDATED FINANCIAL REPORTDECEMBER 31, 2006**

**TABLE OF CONTENTS**
|                                                              | ** ** | ** ** |
|--------------------------------------------------------------|------------|------------|
| ** **                                                   | ** ** | ** ** |
| **REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM** | ** ** | ** ** |
| ** **                                                   | ** ** | ** ** |
| **FINANCIAL STATEMENTS**                                     |       |       |
| ** **                                                   |       |       |
| **Consolidated balance sheets**                              | ** ** | ** ** |
| **Consolidated statements of  income**                       | ** ** | ** ** |
| **Consolidated statements of  comprehensive income**         | ** ** | ** ** |
| **Consolidated statements of  stockholders’ equity**    | ** ** | ** ** |
| **Consolidated statements of  cash flows**                   | ** ** | ** ** |
| **Notes to  consolidated financial statements**              | ** ** | ** ** |

 

F-2

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

**To the Board of Directors**

**FirstBank Financial Services,Inc.**

**McDonough,Georgia**

We have audited the accompanying consolidated balancesheets of **FirstBank Financial Services, Inc. and subsidiary**asof December 31, 2006 and 2005, and the related consolidated statements ofincome, comprehensive income, stockholders’ equity and cash flows for each ofthe two years in the period ended December 31, 2006.  These financial statements are the responsibilityof the Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

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

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of FirstBank Financial Services, Inc. and subsidiary as of December31, 2006 and 2005, and the results of their operations and their cash flows foreach of the two years in the period ended December 31, 2006, in conformity withU.S. generally accepted accounting principles.
|  | /s/ MAULDIN & JENKINS, LLC |   |
|--|--------------------------------|--------|

 

 

Atlanta, GeorgiaMarch 26, 2007

F-3

----

**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2006 AND 2005**
| ** **                                                                                                              | ** ** | **2006**        | ** **      | **2005**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------|-----------------|-------------|------------|
| **Assets**                                                                                                              | ** ** | ** **      | ** **      | ** **  | ** ** |
| Cash  and due from banks                                                                                                | ** ** | **$**           | **4,047,726**   |        | $          | 1,236,443 |   |
| Interest-bearing  deposits in banks                                                                                     | ** ** | **1,790,278**   |            | 789,979     |       |
| Federal  funds sold                                                                                                     | ** ** | **11,614,000**  |            | 13,765,000  |       |
| Securities  available for sale, at fair value                                                                           | ** ** | **39,559,041**  |            | 31,125,111  |       |
| Restricted  equity securities, at cost                                                                                  | ** ** | **2,013,556**   |            | 1,584,256   |       |
|                                                                                                                    |       |            |            |        |       |
| Loans,  net of unearned income                                                                                          | ** ** | **210,397,450** |            | 168,674,463 |       |
| Less  allowance for loan losses                                                                                         | ** ** | **2,392,086**   |            | 1,917,216   |       |
| Loans, net                                                                                                              | ** ** | **208,005,364** |            | 166,757,247 |       |
|                                                                                                                    |       |            |            |        |       |
| Premises  and equipment                                                                                                 | ** ** | **6,013,068**   |            | 4,112,851   |       |
| Other  assets                                                                                                           | ** ** | **4,036,623**   |            | 3,110,034   |       |
|                                                                                                                    |       |            |            |        |       |
| **Total assets**                                                                                                        | ** ** | **$**           | **277,079,656** |        | $          | 222,480,921 |   |
|                                                                                                                    |       |            |            |        |       |
| **Liabilities and Stockholders’ Equity**                                                                           |       |            |            |        |       |
|                                                                                                                    |       |            |            |        |       |
| Deposits                                                                                                                |       |            |            |        |       |
| Noninterest-bearing                                                                                                     | ** ** | **$**           | **11,571,364**  |        | $          | 11,994,193 |   |
| Interest-bearing                                                                                                        | ** ** | **204,840,106** |            | 162,341,815 |       |
| Total deposits                                                                                                          | ** ** | **216,411,470** |            | 174,336,008 |       |
| Other  borrowings                                                                                                       | ** ** | **22,000,000**  |            | 22,000,000  |       |
| Subordinated  debentures                                                                                                | ** ** | **8,248,000**   |            | —      |       |
| Other  liabilities                                                                                                      | ** ** | **2,667,458**   |            | 1,361,448   |       |
| **Total liabilities**                                                                                                   | ** ** | **249,326,928** |            | 197,697,456 |       |
|                                                                                                                    |       |            |            |        |       |
| **Commitments  and contingencies**                                                                                      |       |            |            |        |       |
| ** **                                                                                                              |       |            |            |        |       |
| **Stockholders’  equity**                                                                                          |       |            |            |        |       |
| Preferred stock, no par value per share, 2,000,000 shares authorized; -0- shares issued and  outstanding                |       | **—**      |            | —      |       |
| Common stock, par value $5; 10,000,000 shares authorized; 2,831,676  and 2,359,753 issued and outstanding, respectively |       | **14,158,380**  |            | 10,726,250  |       |
| Surplus                                                                                                                 | ** ** | **11,655,045**  |            | 11,235,374  |       |
| Retained earnings                                                                                                       | ** ** | **2,328,567**   |            | 3,298,408   |       |
| Accumulated other comprehensive loss                                                                                    | ** ** | **(389,264**    | **)**           | (476,567    | )          |
| **Total stockholders’ equity**                                                                                     | ** ** | **27,752,728**  |            | 24,783,465  |       |
| ** **                                                                                                              | ** ** | ** **      | ** **      | ** **  | ** ** |
| **Total  liabilities and stockholders’ equity**                                                                    | ** ** | **$**           | **277,079,656** |        | $          | 222,480,921 |   |

 

**See notes to consolidated financial statements.**

F-4

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**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**YEARS ENDED DECEMBER 31, 2006AND 2005**
| ** **                                              | ** ** | **2006**       | ** **     | **2005**   | ** ** |
|---------------------------------------------------------|------------|----------------|----------------|------------|------------|
| **Interest  income:**                                   | ** ** | ** **     | ** **     | ** ** | ** ** |
| Loans, including fees                                   | ** ** | **$**          | **16,486,625** |       | $          | 11,749,942 |   |
| Taxable securities                                      | ** ** | **1,505,623**  |           | 1,127,673  |       |
| Tax-free securities                                     | ** ** | **138,897**    |           | 108,491    |       |
| Deposits in banks                                       | ** ** | **56,700**     |           | 56,857     |       |
| Federal funds sold                                      | ** ** | **692,918**    |           | 297,147    |       |
| **Total interest income**                               | ** ** | **18,880,763** |           | 13,340,110 |       |
|                                                    | ** ** | ** **     |           |       |       |
| **Interest  expense:**                                  | ** ** | ** **     | ** **     | ** ** | ** ** |
| Deposits                                                | ** ** | **8,220,794**  |           | 4,580,602  |       |
| Other borrowings                                        | ** ** | **1,051,415**  |           | 779,912    |       |
| **Total interest expense**                              | ** ** | **9,272,209**  |           | 5,360,514  |       |
| ** **                                              | ** ** | ** **     | ** **     | ** ** | ** ** |
| **Net interest income**                                 | ** ** | **9,608,554**  |           | 7,979,596  |       |
| **Provision  for loan losses**                          | ** ** | **480,000**    |           | 739,615    |       |
| **Net interest income after provision for loan losses** | ** ** | **9,128,554**  | ** **     | 7,239,981  | ** ** |
|                                                    |       |           |           |       |       |
| **Other  income:**                                      | ** ** | ** **     |           |       |       |
| Service charges on deposit accounts                     | ** ** | **223,169**    |           | 207,337    |       |
| Other operating income                                  | ** ** | **91,494**     |           | 333,926    |       |
| **Total other income**                                  | ** ** | **314,663**    |           | 541,263    |       |
|                                                    |       |           |           |       |       |
| **Other  expenses:**                                    | ** ** | ** **     |           |       |       |
| Salaries and employee benefits                          | ** ** | **3,052,128**  |           | 2,064,271  |       |
| Equipment and occupancy expenses                        | ** ** | **715,602**    |           | 394,955    |       |
| Other operating expenses                                | ** ** | **1,616,875**  |           | 1,344,349  |       |
| **Total other expenses**                                | ** ** | **5,384,605**  |           | 3,803,575  |       |
|                                                    |       |           |           |       |       |
| **Income before income taxes**                          | ** ** | **4,058,612**  |           | 3,977,669  |       |
|                                                    | ** ** | ** **     |           |       |       |
| **Income  tax expense**                                 | ** ** | **1,496,899**  |           | 1,433,502  |       |
|                                                    |       |           |           |       |       |
| **Net income**                                          | ** ** | **$**          | **2,561,713**  |       | $          | 2,544,167 |   |
|                                                    |       |           |           |       |       |
| **Basic  earnings per share**                           | ** ** | **$**          | **0.90**       |       | $          | 0.90 |   |
|                                                    |       |           |           |       |       |
| **Diluted earnings per share**                          | ** ** | **$**          | **0.85**       |       | $          | 0.85 |   |

 

**See notes to consolidated financial statements.**

F-5

----

**FIRSTBANK FINANCIAL SERVICES, INC**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME**

**YEARS ENDED DECEMBER 31, 2006AND 2005**
| ** **                                                                                                                                                    | ** ** | **2006**    | ** **    | **2005**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|---------------|------------|------------|
|                                                                                                                                                          |       |        |          |       |       |
| **Net  income**                                                                                                                                               | ** ** | **$**       | **2,561,713** |       | $          | 2,544,167 |   |
|                                                                                                                                                          | ** ** | ** **  | ** **    | ** ** |       |
| **Other  comprehensive income (loss):**                                                                                                                       | ** ** | ** **  | ** **    | ** ** |       |
| ** **                                                                                                                                                    | ** ** | ** **  | ** **    | ** ** |       |
| Net unrealized holding gains (losses) on securities available for sale  arising during period, net of tax (benefits) of $54,616 and ($239,992),  respectively | ** ** | **164,583** | ** **    | (465,867   | )          |
|                                                                                                                                                          | ** ** | ** **  | ** **    | ** ** |       |
| Net unrealized holding losses on interest rate floor arising during  period, net of tax of $47,692 and $1,721, respectively                                   | ** ** | **(77,280** | **)**         | (3,341     | )          |
|                                                                                                                                                          | ** ** | ** **  | ** **    | ** ** |       |
| **Other  comprehensive income (loss)**                                                                                                                        | ** ** | **87,303**  |          | (469,208   | )          |
|                                                                                                                                                          | ** ** | ** **  | ** **    | ** ** |       |
| **Comprehensive income**                                                                                                                                      | ** ** | **$**       | **2,649,016** |       | $          | 2,074,959 |   |

 

**See notes to consolidatedfinancial statements.**

F-6

----

**FIRSTBANKFINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**YEARSENDED DECEMBER 31, 2006 AND 2005**
| ** **                      | ** ** | ** **            | ** ** | ** **         | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------|------------|-----------------------|------------|--------------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                      | ** ** | ** **            | ** ** | ** **         | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**              | ** ** | **Total**  | ** ** |
| ** **                      | ** ** | **Common Stock** | ** ** | ** **         | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                      | ** ** | **Shares**            | ** ** | **Par Value** | ** ** | **Surplus**  | ** ** | **Earnings**      | ** ** | **Loss**               | ** ** | **Equity** | ** ** |
|                            |       |                  |       |               |       |         |       |              |       |                   |       |       |       |
| **Balance,  December 31, 2004** |       | 2,145,250             |       | $                  | 10,726,250 |         | $          | 11,235,374        |       | $                      | 754,241    |       | $          | (7,359 | ) | $ | 22,708,506 |   |
| Net income                      |       | —                |       | —             |       | —       |       | 2,544,167         |       | —                 |       | 2,544,167  |       |
| Other comprehensive loss        |       | —                |       | —             |       | —       |       | —            |       | (469,208               | )          | (469,208   | )          |
| **Balance,  December 31, 2005** |       | 2,145,250             |       | 10,726,250         |       | 11,235,374   |       | 3,298,408         |       | (476,567               | )          | 24,783,465 |       |
| Net income                      |       | —                |       | —             |       | —       |       | 2,561,713         |       | —                 |       | 2,561,713  |       |
| 10% stock dividend              |       | 214,503               |       | 1,072,515          |       | 2,458,204    |       | (3,531,081        | )          | —                 |       | (362       | )          |
| Six-for-five stock split        |       | 471,923               |       | 2,359,615          |       | (2,359,615   | )          | (473              | )          | —                 |       | (473       | )          |
| Other comprehensive income      |       | —                |       | —             |       | —       |       | —            |       | 87,303                 |       | 87,303     |       |
| Stock-based compensation        |       | —                |       | —             |       | 321,082      |       | —            |       | —                 |       | 321,082    |       |
| **Balance,  December 31, 2006** |       | 2,831,676             |       | $                  | 14,158,380 |         | $          | 11,655,045        |       | $                      | 2,328,567  |       | $          | (389,264 | ) | $ | 27,752,728 |   |

 

**See notesto consolidated financial statements.**

F-7

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**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2006 AND2005**

 
| ** **                                                                           | ** ** | **2006**        | ** **    | **2005**    | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------|---------------|-------------|------------|
| **OPERATING  ACTIVITIES**                                                            | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net income                                                                           | ** ** | **$**           | **2,561,713** |        | $          | 2,544,167 |   |
| Adjustments  to reconcile net income to net   cash provided by operating activities: | ** ** | ** **      |          |        |       |
| Loss on disposal of assets                                                           | ** ** | **6,293**       |          | 5,792       |       |
| Gain on sale of other real estate owned                                              | ** ** | **—**      |          | (4,691      | )          |
| Depreciation and amortization                                                        | ** ** | **363,178**     |          | 207,764     |       |
| Stock-based compensation                                                             | ** ** | **321,082**     |          | —      |       |
| Deferred taxes                                                                       | ** ** | **(216,517**    | **)**         | (145,949    | )          |
| Provision for loan losses                                                            | ** ** | **480,000**     |          | 739,615     |       |
| Increase in interest receivable                                                      | ** ** | **(617,871**    | **)**         | (662,122    | )          |
| Increase in interest payable                                                         | ** ** | **1,140,943**   |          | 503,148     |       |
| Net other operating activities                                                       | ** ** | **201,865**     |          | (13,555     | )          |
|                                                                                 |       |            |          |        |       |
| Net cash provided by operating activities                                            | ** ** | **4,240,686**   |          | 3,174,169   |       |
|                                                                                 |       |            |          |        |       |
| **INVESTING  ACTIVITIES**                                                            | ** ** | ** **      |          |        |       |
| Net (increase) decrease in interest-bearing deposits in banks                        | ** ** | **(1,000,299**  | **)**         | 1,171,814   |       |
| Purchases of securities available for sale                                           | ** ** | **(11,338,842** | **)**         | (11,459,580 | )          |
| Proceeds from maturities of securities available for sale                            | ** ** | **3,124,112**   |          | 5,715,422   |       |
| Purchases of restricted equity securities                                            | ** ** | **(429,300**    | **)**         | (178,700    |       |
| Net (increase) decrease in federal funds sold                                        | ** ** | **2,151,000**   |          | (4,207,000  | )          |
| Net increase in loans                                                                | ** ** | **(41,728,117** | **)**         | (35,091,660 | )          |
| Proceeds from sale of other real estate owned                                        | ** ** | **—**      |          | 8,627       |       |
| Proceeds from sale premises and equipment                                            | ** ** | **3,491**       |          | 39,769      |       |
| Purchase of premises, equipment and software                                         | ** ** | **(2,235,575**  | **)**         | (1,655,510  | )          |
| Purchase of interest rate floor                                                      | ** ** | **(298,500**    | **)**         | (390,000    | )          |
|                                                                                 |       |            |          |        |       |
| Net cash used in investing activities                                                | ** ** | **(51,752,030** | **)**         | (46,046,818 | )          |
| ** **                                                                           | ** ** | ** **      | ** **    | ** **  | ** ** |
| **FINANCING  ACTIVITIES**                                                            | ** ** | ** **      |          |        |       |
| Net increase in deposits                                                             | ** ** | **42,075,462**  |          | 42,972,668  |       |
| Purchase of fractional shares                                                        | ** ** | **(835**        | **)**         | —      |       |
| Proceeds from issuance of subordinated debentures                                    | ** ** | **8,248,000**   |          | —      |       |
|                                                                                 |       |            |          |        |       |
| Net cash provided by financing activities                                            | ** ** | **50,322,627**  |          | 42,972,668  |       |
|                                                                                 |       |            |          |        |       |
| Net  increase in cash and due from banks                                             | ** ** | **2,811,283**   |          | 100,019     |       |
|                                                                                 | ** ** | ** **      |          |        |       |
| Cash  and due from banks at beginning of year                                        | ** ** | **1,236,443**   |          | 1,136,424   |       |
|                                                                                 |       |            |          |        |       |
| Cash  and due from banks at end of year                                              | ** ** | **$**           | **4,047,726** |        | $          | 1,236,443 |   |
|                                                                                 |       |            |          |        |       |
| **SUPPLEMENTAL  DISCLOSURES**                                                        | ** ** | ** **      |          |        |       |
| Cash paid for:                                                                       | ** ** | ** **      |          |        |       |
| Interest                                                                             | ** ** | **$**           | **8,131,266** |        | $          | 4,857,366 |   |
|                                                                                 | ** ** | ** **      |          |        |       |
| Income taxes                                                                         | ** ** | **$**           | **1,871,035** |        | $          | 1,496,323 |   |
|                                                                                 | ** ** | ** **      |          |        |       |
| Financed  sales of other real estate owned                                           | ** ** | **$**           | **—**    |        | $          | 95,760 |   |

 

**See notes to consolidatedfinancial statements.**

F-8

----

**FIRSTBANKFINANCIAL SERVICES, INC.**

**ANDSUBSIDIARY**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1.****                                                ****SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

**Nature ofBusiness**

FirstBankFinancial Services, Inc. (the “Company”) is a bank holding company whosebusiness is conducted by its wholly-owned commercial bank, First Bank of HenryCounty (the “Bank”).  The Bank is locatedin McDonough, Henry County, Georgia with a branch in Stockbridge, Georgia andanother branch also in McDonough known as the Bank’s South Point branch.  The Bank provides a full range of bankingservices in its primary market areas of Henry County and surrounding counties.

The shareholders of the Bank approved an Agreement and Plan of ShareExchange on June 30, 2004, and the holding company formation became effectiveon February 1, 2005.  Pursuant to thePlan, each share of Bank common stock was exchanged on a one-for-one basis forshares of Company common stock.

**Basis ofPresentation**

The consolidatedfinancial statements include the accounts of the Company and itssubsidiary.  Significant intercompanytransactions and balances have been eliminated in consolidation.

In preparing theconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America, management is required tomake estimates and assumptions that affect the reported amounts of assets and liabilitiesand the disclosure of contingent assets and liabilities as of the balance sheetdate and the reported amounts of revenues and expenses during the reportingperiod.  Actual results could differ fromthose estimates.

Material estimatesthat are particularly susceptible to significant change in the near term relateto the determination of the allowance for loan losses, deferred taxes, and contingentassets and liabilities.  The determination of the adequacy of the allowance forloan losses is based on estimates that are susceptible to significant changesin the economic environment and market conditions. In connection with thedetermination of the estimated losses on loans, management obtains independentappraisals for significant collateral.

**Cash, Duefrom Banks and Cash Flows**

For purposes ofreporting cash flows, cash and due from banks includes cash on hand, cash itemsin process of collection and amounts due from banks.  Cash flows from loans, federal funds sold,deposits and other borrowings are reported net.

TheBank is required to maintain reserve balances in cash or on deposit with theFederal Reserve Bank, based on a percentage of deposits.  The total of those reserve balances wasapproximately $939,000 and $265,000 at December 31, 2006 and 2005, respectively.

**Securities**

Debt securitiesthat management has the positive intent and ability to hold to maturity areclassified as held to maturity and recorded at amortized cost.  Securities not classified as held to maturityare classified as available for sale and recorded at fair value with unrealizedgains and losses excluded from earnings and reported in other comprehensiveincome, net of the related deferred tax effect. Restricted equity securities without a readily determinable fair valueare recorded at cost.

F-9

----

The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the life of the securities.  Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings on the settlement date.  Declines in the fair value of securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

**Loans**

Loans are reportedat their outstanding principal balances less unearned income and the allowancefor loan losses.  Interest income isaccrued on the outstanding principal balance.

Nonrefundable loanfees and costs incurred for loans are deferred and recognized in income overthe life of the loans using a method which approximates a level yield.

The accrual ofinterest on loans is discontinued when, in management’s opinion, the borrowermay be unable to meet payments as they become due, unless the loan iswell-secured.  All interest accrued butnot collected for loans that are placed on nonaccrual or charged off isreversed against interest income, unless management believes that the accruedinterest is recoverable through the liquidation of collateral.  Interest income on nonaccrual loans is recognizedon the cost-recovery method, until the loans are returned to accrualstatus.  Loans are returned to accrualstatus when all the principal and interest amounts are brought current andfuture payments are reasonably assured.

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

**Allowance for Loan Losses**

The allowance forloan losses is established through a provision for loan losses charged toexpense.  Loan losses are charged againstthe allowance when management believes the collectibility of the principal isunlikely.  Subsequent recoveries, if any,are credited to the allowance.

F-10

----

The allowance is an amount that management believeswill be adequate to absorb estimated losses relating to specifically identifiedloans, as well as probable credit losses inherent in the balance of the loanportfolio, based on an evaluation of the collectibility of existing loans andprior loss experience.  This evaluationalso takes into consideration such factors as changes in the nature and volumeof the loan portfolio, overall portfolio quality, review of specific problemloans, concentrations and current economic conditions that may affect theborrower’s ability to pay.  Thisevaluation does not include the effects of expected losses on specific loans orgroups of loans that are related to future events or expected changes ineconomic conditions.  While management usesthe best information available to make its evaluation, future adjustments tothe allowance may be necessary if there are any significant changes in economicconditions.  In addition, regulatoryagencies, as an integral part of their examination process, periodically reviewthe Company’s allowance for loan losses, and may require the Company to makeadditions to the allowance based on their judgment about information availableto them at the time of their examinations.

The allowance consists of specific, general andunallocated components.  The specificcomponent relates to loans that are classified as either doubtful, substandardor special mention.  For such loans thatare also classified as impaired, an allowance is established when thediscounted cash flows (or collateral value or observable market price) of theimpaired loan is lower than the carrying value of that loan.  The general component covers non-classifiedloans and is based on historical experience adjusted for qualitativefactors.  An unallocated component ismaintained to cover uncertainties that could affect management’s estimate ofprobable losses.  The unallocatedcomponent of the allowance reflects the margin of imprecision inherent in theunderlying assumptions used in the methodologies for estimating specific andgeneral losses in the portfolio.

**Premisesand Equipment**

Land is carried atcost.  Premises and equipment, includingsoftware costs, are carried at cost less accumulated depreciation andamortization computed principally on the straight-line method over thefollowing estimated useful lives of the assets: buildings, 40 years; equipment,3-7 years; leasehold improvements and software, 3 years.

**OtherReal Estate Owned**

Otherreal estate owned represents properties acquired through or in lieu of loanforeclosure and is initially recorded at the lower of cost or fair valueless estimated costs to sell.  Anywrite-down to fair value at the time of transfer to other real estate owned ischarged to the allowance for loan losses. Costs of improvements are capitalized, whereas costs relating to holdingother real estate owned and subsequent adjustments to the value areexpensed.  The Company had no other realestate owned at December 31, 2006 and 2005.

**IncomeTaxes**

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

F-11

----

**EarningsPer Share**

Basic earnings pershare are computed by dividing net income by the weighted-average number ofshares of common stock outstanding. Diluted earnings per share are computed by dividing net income by thesum of the weighted-average number of shares outstanding and potential commonshares.  Potential common shares consistof stock options and warrants.

**Stock-BasedCompensation**

At December 31,2006, the Company has two stock-based employee compensation plans, which aredescribed more fully in Note 8.  Prior toJanuary 1, 2006, the Company accounted for those plans under the recognitionand measurement provisions of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations, as permitted by FASB Statement No. 123, *Accountingfor Stock-Based Compensation*. No stock-based employee/director compensation cost was reflected in theStatement of Income for the year ended December 31, 2005, as all options andwarrants granted under those plans had an exercise price equal to the marketvalue of the underlying stock on the date of grant.  Effective January 1, 2006, the Companyadopted the fair value recognition provisions of FASB Statement No. 123(R), *Share-Based Payment,*using themodified-prospective-transition method. Under that transition method, compensation cost recognized in the yearended December 31, 2006 includes: (a) compensation cost for all share-basedpayments granted prior to, but not vested as of December 31, 2005, based on thegrant date fair value estimated in accordance with the original provisions ofStatement 123, and (b) compensation cost for all share-based paymentssubsequent to December 31, 2005, based on the grant date fair value estimatedin accordance with the provisions of Statement 123(R).  Results for prior periods have not beenrestated.

As a result ofadopting Statement 123(R) on January 1, 2006, the Company’s income beforeincome taxes for the year ended December 31, 2006 was $321,082 lower than ifthe Company had continued to account for share-based compensation under Opinion25.  The deferred tax benefit recognizedas a result of stock-based compensation was $66,880, resulting in net incomefor the year ended December 31, 2006 being lowered by $254,202.  Basic and diluted earnings per share for theyear ended December 31, 2006 would have been $0.99 and $0.94, respectively, ifthe Company had not adopted Statement 123(R), compared to reported basic anddiluted earnings per share of $0.90 and $0.85, respectively.

Prior to theadoption of Statement 123(R), the Company presented all tax benefits ofdeductions resulting from the exercise of stock options and warrants asoperating cash flows in the Statement of Cash Flows.  Statement 123(R) requires the cash flowsresulting from the tax benefits resulting from tax deductions in excess of thecompensation cost recognized for those options and warrants (excess taxbenefits) to be classified as financing cash flows.  The Company had no cash flows resulting fromexcess tax benefits.

The followingtable illustrates the effect on net income and earnings per share if theCompany had applied the fair value recognition provisions of Statement No. 123,*Accounting for Stock-Based Compensation*,to options and warrants granted under the Company’s stock option and warrantplans for the year ended December 31, 2005.

F-12

----

 
|                                                                                             | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                               | ** ** |
|                                                                                        |       |                                   |       |
| Net income, as  reported                                                                    |       | $                                      | 2,544,167  |   |
| Deduct: Total stock-based employee compensation   expense determined under fair value based |       |                                   |       |
| method for all  awards, net of tax of $47,769                                               |       | (423,642                               | )          |
| Pro forma net  income                                                                       |       | $                                      | 2,120,525  |   |
| Earnings per  share:                                                                        |       |                                   |       |
| Basic - as reported                                                                         |       | $                                      | .90        |   |
| Basic - pro forma                                                                           |       | $                                      | .75        |   |
| Diluted - as reported                                                                       |       | $                                      | .85        |   |
| Diluted - pro  forma                                                                        |       | $                                      | .71        |   |

 

**DerivativeInstruments and Hedging Activities**

In accordance withSFAS No. 133, *Accounting for Derivative Instruments andHedging Activities*, the Company recognizes the fair value ofderivatives as assets or liabilities in the financial statements.  The accounting for the changes in the fairvalue of a derivative depends on the intended use of the derivative instrumentat inception.  The change in fair valueof instruments used as fair value hedges is accounted for in earnings of theperiod simultaneous with accounting for the fair value change of the item beinghedged.  The change in fair value of theeffective portion of cash flow hedges is accounted for in comprehensive incomerather than income.  Changes in fairvalue of derivative instruments that are not intended as a hedge are accountedfor in earnings of the period of the change.

**ComprehensiveIncome**

Accountingprinciples generally require that recognized revenue, expenses, gains andlosses be included in net income. Although certain changes in assets and liabilities, such as unrealizedgains and losses on available for sale securities, are reported as a separatecomponent of the equity section of the balance sheet, such items, along withnet income, are components of comprehensive income.

F-13

----

**Recent Accounting Pronouncements**

In July 2006, the FASBissued Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes - An Interpretation of FASB Statement No. 109*.  This interpretation addresses the accountingfor uncertainty in income taxes recognized in a Company’s financial statementsin accordance with FASB Statement No. 109, *Accounting for IncomeTaxes.*  It prescribes acomprehensive model for recognizing, measuring, presenting and disclosing inthe financial statements tax positions taken or expected to be taken in a taxreturn.  It requires that only benefitsfrom tax positions that are more-likely-than-not of being sustained uponexamination should be recognized in the financial statements.  These benefits would be recorded at amountsconsidered to be the maximum amounts more-likely-than-not of beingsustained.  At the time these positionsbecome more-likely-than-not to be disallowed, their recognition would bereversed.  This interpretation iseffective for fiscal years beginning after December 15, 2006 and is notexpected to have a material impact on the Company’s financial condition orresults of operations.

In September 2006, theFASB issued FAS 157, *Fair Value Measurements.*  The standard provides guidance for using fairvalue to measure assets and liabilities. It defines fair value, establishes a framework for measuring fair valueunder generally accepted accounting principles and expands disclosures aboutfair value measurement.  Under thestandard, fair value refers to the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants in the market in which the reporting equity transacts.  It clarifies the principle that fair valueshould be based on the assumptions market participants would use when pricingthe asset or liability.  In support ofthis principle, the standard establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions.  Under the standard, fair value measurementswould be separately disclosed by level within the fair value hierarchy.  Statement 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The Company is currently evaluating theimpact the adoption of this statement could have on its financial condition,results of operations and cash flows.

**NOTE 2.****                                                 SECURITIESAVAILABLE FOR SALE**

The amortized cost and fair value of securitiesavailable for sale are summarized as follows:
|                                                  | ** ** | **Amortized  Cost** | ** **     | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** **   |
|--------------------------------------------------|------------|---------------------|----------------|------------------------------|------------|-------------------------------|------------|-----------------|--------------|
| **December  31, 2006:**                          |       |                |           |                         |       |                          |       |            |         |
| **U.S.  Government sponsored agency securities** |       | **$**               | **24,340,355** |                         | **$**      | **26,450**                    |       | **$**           | **(225,850** | **)** | **$** | **24,140,955** |   |
| **Mortgage-backed  securities**                  |       | **9,674,230**       |           | **—**                   | ** ** | **(320,495**                  | **)**      | **9,353,735**   | ** **   |
| **Municipal  securities**                        |       | **6,042,265**       |           | **65,791**                   | ** ** | **(43,705**                   | **)**      | **6,064,351**   | ** **   |
| ** **                                       | ** ** | **$**               | **40,056,850** | ** **                   | **$**      | **92,241**                    | ** ** | **$**           | **(590,050** | **)** | **$** | **39,559,041** | ** ** |
| December 31,  2005:                              |       |                |           |                         |       |                          |       |            |         |
| U.S. Government  sponsored agency securities     |       | $                   | 18,342,527     |                         | $          | 366                           |       | $               | (336,648     | ) | $ | 18,006,245 |   |
| Mortgage-backed  securities                      |       | 10,010,592          |           | —                       |       | (398,631                      | )          | 9,611,961       |         |
| Municipal  securities                            |       | 3,489,001           |           | 42,428                       |       | (24,524                       | )          | 3,506,905       |         |
|                                             |       | $                   | 31,842,120     |                         | $          | 42,794                        |       | $               | (759,803     | ) | $ | 31,125,111 |   |

 

F-14

----

Securities with acarrying value of $25,366,000 and $26,353,000 at December 31, 2006 and 2005,respectively, were pledged to secure public deposits and for other purposesrequired or permitted by law.

The market value ofsecurities is based on quoted market values and is significantly affected bythe interest rate environment.  AtDecember 31, 2006, unrealized losses represented 1.47% of the amortizedcost.  These unrealized losses areconsidered temporary because of acceptable investment grades on each security.

The following tables show the gross unrealized lossesand fair value of securities, aggregated by category and length of time thatsecurities have been in a continuous unrealized loss position at December 31,2006 and 2005.
|                                            | ** ** | **December 31, 2006**        | ** **    |
|--------------------------------------------|------------|----------------------------------------|---------------|
| ** **                                 | ** ** | **Less Than 12 Months** | ** **    | **12 Months or More** | ** ** | **Total** | ** ** |
| **Description of Securities:**   | ** ** | **Fair  Value**                        | ** **    | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| **U.S.  Government sponsored agencies**    | ** ** | **$**                                  | **4,931,835** | ** ** | **$** | **(17,244** | **)** | **$** | **14,436,745** | ** ** | **$** | **(208,606** | **)** | **$** | **19,368,580** | ** ** | **$** | **(225,850** | **)** |
| **State  and municipal securities**        | ** ** | **1,245,854**                          | ** **    | **(11,342** | **)** | **1,308,072** | ** ** | **(32,363** | **)** | **2,553,926** | ** ** | **(43,705** | **)** |
| **Mortgage-backed  securities**            | ** ** | **1,051,032**                          | ** **    | **(5,455** | **)** | **8,302,702** | ** ** | **(315,040** | **)** | **9,353,734** | ** ** | **(320,495** | **)** |
| **Total temporarily impaired  securities** | ** ** | **$**                                  | **7,228,721** | ** ** | **$** | **(34,041** | **)** | **$** | **24,047,519** | ** ** | **$** | **(556,009** | **)** | **$** | **31,276,240** | ** ** | **$** | **(590,050** | **)** |

 
|                                          | ** ** | **December 31, 2005**        | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **Less Than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| **Description of Securities:** | ** ** | **Fair  Value**                        | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| U.S. Government  sponsored agencies      |       | $                                      | 13,858,570 |   | $ | (255,799 | ) | $ | 3,653,175 |   | $ | (80,849 | ) | $ | 17,511,745 |   | $ | (336,648 | ) |
| State and  municipal securities          |       | 1,530,550                              |       | (23,848 | ) | 133,622 |   | (676 | ) | 1,664,172 |   | (24,524 | ) |
| Mortgage-backed  securities              |       | 2,263,573                              |       | (55,939 | ) | 7,348,388 |   | (342,692 | ) | 9,611,961 |   | (398,631 | ) |
| Total temporarily  impaired securities   |       | $                                      | 17,652,693 |   | $ | (335,586 | ) | $ | 11,135,185 |   | $ | (424,217 | ) | $ | 28,787,878 |   | $ | (759,803 | ) |

 

The amortized cost and fair value of debt securitiesas of December 31, 2006 by contractual maturity are shown below.  Maturities may differ from contractualmaturities of mortgage-backed securities because the mortgages underlying the securitiesmay be called or repaid without penalty. Therefore, these securities are not included in the maturity categoriesin the following summary.
|                                  | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|----------------------------------|------------|---------------------|------------|-----------------|------------|
| Due in less than  one year       |       | $                   | 2,499,487  | ** **      | $          | 2,478,350 |   |
| Due from one to  five years      |       | 16,557,344          | ** ** | 16,424,119      |       |
| Due from five to  ten years      |       | 7,279,619           | ** ** | 7,222,133       |       |
| Due from greater  than ten years |       | 4,046,170           | ** ** | 4,080,704       |       |
| Mortgage-backed  securities      |       | 9,674,230           | ** ** | 9,353,735       |       |
| ** **                       |       | $                   | 40,056,850 | ** **      | $          | 39,559,041 |   |

 

The Company had no sales of securities available forsale during 2006 or 2005.

F-15

----

**NOTE 3.****                LOANS**

The composition of loans is summarized as follows:
|                                  | ** ** | **December 31,** | ** **      |
|----------------------------------|------------|-----------------------|-----------------|
| ** **                       | ** ** | **2006**              | ** **      | **2005** | ** ** |
|                             | ** ** | ** **            |            |   |   |
| Commercial                       | ** ** | **$**                 | **17,325,000**  |   | $ | 18,233,000 |   |
| Real estate –  construction | ** ** | **145,712,000**       |            | 107,945,000 |   |
| Real estate –  other        | ** ** | **44,344,000**        |            | 41,166,000 |   |
| Consumer                         | ** ** | **3,330,613**         |            | 1,600,526 |   |
|                             | ** ** | **210,711,613**       |            | 168,944,526 |   |
| Unearned income                  | ** ** | **(314,163**          | **)**           | (270,063 | ) |
| Allowance for  loan losses       | ** ** | **(2,392,086**        | **)**           | (1,917,216 | ) |
| Loans, net                       | ** ** | **$**                 | **208,005,364** |   | $ | 166,757,247 |   |

 

Changes in the allowance for loan losses are asfollows:
|                                            | ** ** | **Years Ended December 31,** | ** **    |
|--------------------------------------------|------------|---------------------------------------------|---------------|
| ** **                                 | ** ** | **2006**                                    | ** **    | **2005** | ** ** |
|                                       |       |                                        |          |   |   |
| Balance,  beginning of year                | ** ** | **$**                                       | **1,917,216** |   | $ | 1,471,333 |   |
| Provision for loan losses                  | ** ** | **480,000**                                 |          | 739,615 |   |
| Loans charged off                          | ** ** | **(12,723**                                 | **)**         | (296,299 | ) |
| Recoveries of loans previously charged off | ** ** | **7,593**                                   |          | 2,567 |   |
| Balance, end of year                       | ** ** | **$**                                       | **2,392,086** |   | $ | 1,917,216 |   |

 

The total recordedinvestment in impaired loans, consisting solely of loans on nonaccrual status,was $1,021,811 and $178,882 at December 31, 2006 and 2005, respectively.  There were no impaired loans that had relatedallowances determined in accordance with SFAS No. 114, *Accountingby Creditors for Impairment of a Loan*, at December 31, 2006 and2005.  The average recorded investment inimpaired loans for 2006 and 2005 was $305,065 and $142,161, respectively.  Interest income recognized for cash paymentsreceived on impaired loans was not material for the years ended December 31,2006 and 2005.  Total loans past dueninety days or more and still accruing interest was $17,162 and $1,522 atDecember 31, 2006 and 2005, respectively.

In the ordinary course of business, the Company hasgranted loans to certain related parties, including directors, executiveofficers and their affiliates.  Theinterest rates on these loans were substantially the same as rates prevailingat the time of the transaction and repayment terms are customary for the typeof loan.  Changes in related party loansfor the year ended December 31, 2006 are as follows:
| Balance, beginning of year  |   | $          | 2,237,133 |   |
|-----------------------------|--------|------------|-----------|--------|
| Changes in  related parties |   | (18,171    | )         |
| Advances                    |   | 5,742,335  |      |
| Repayments                  |   | (4,499,197 | )         |
| Balance, end of year        |   | $          | 3,462,100 |   |

 

F-16

----

**NOTE 4.****                PREMISESAND EQUIPMENT**

Premises and equipment are summarized as follows:
|                           | ** ** | **December 31,** | ** **    |
|---------------------------|------------|-----------------------|---------------|
| ** **                | ** ** | **2006**              | ** **    | **2005** | ** ** |
|                      | ** ** | ** **            |          |   |   |
| Land                      | ** ** | **$**                 | **1,494,006** |   | $ | 1,479,006 |   |
| Buildings                 | ** ** | **3,354,009**         |          | 952,378 |   |
| Construction in  progress | ** ** | **—**            |          | 1,094,303 |   |
| Leasehold  improvements   | ** ** | **166,977**           |          | 166,977 |   |
| Equipment                 | ** ** | **1,789,815**         |          | 910,589 |   |
| ** **                | ** ** | **6,804,807**         |          | 4,603,253 |   |
| Accumulated  depreciation | ** ** | **(791,739**          | **)**         | (490,402 | ) |
| ** **                | ** ** | **$**                 | **6,013,068** |   | $ | 4,112,851 |   |

 

The Company leases itsoperations center facilities under an operating lease agreement forapproximately $70,000 a year in rental expense. The initial term of the lease is three years with two renewal options,each being for one year.  Rental expensefor the years ended December 31, 2006 and 2005 was $69,139 and $40,331,respectively.

Software costs of $130,237 and $127,036, net ofaccumulated amortization of $79,465 and $38,660, are included in other assetsas of December 31, 2006 and 2005, respectively.

The Company was under contractual obligation topurchase land with an existing branch building on the property for $837,500 inMorrow, Georgia.  As of December 31,2006, a $15,000 earnest payment had been made. The property was subsequently purchased on January 19, 2007.

**NOTE 5.****                                                 DEPOSITS**

The aggregate amount of time deposits in denominationsof $100,000 or more at December 31, 2006 and 2005 was $127,231,828 and $110,506,059,respectively.  Total brokered timedeposits at December 31, 2006 and 2005 were $85,786,000 and $79,873,000,respectively.  The scheduled maturitiesof time deposits at December 31, 2006 are as follows:

| 2007   |   | $          | 140,045,104 |   |
|--------|--------|------------|-------------|--------|
| 2008   |   | 33,468,515 |        |
| 2009   |   | 602,578    |        |
| 2010   |   | 608,528    |        |
| 2011   |   | 492,288    |        |
|   |   | $          | 175,217,013 |   |

 

Overdraft demand deposits reclassified to loanstotaled $8,438 and $2,961 at December 31, 2006 and 2005, respectively.

F-17

----

**NOTE 6.****                                                 OTHERBORROWINGS**

Other borrowings consist of the following:
|                                                                                                                             | ** ** | **December 31,** | ** **     |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|----------------|
| ** **                                                                                                                  | ** ** | **2006**              | ** **     | **2005** | ** ** |
| Variable rate  credit advances from Federal Home Loan Bank, with a weighted average rate of  5.44% at December 31, 2006.    |       | **$**                 | **2,000,000**  |   | $ | — |   |
|                                                                                                                        |       |                  |           |   |   |
| Fixed rate credit  advances from Federal Home Loan Bank, with a weighted average rate of 2.74%  at December 31, 2006.       |       | **4,000,000**         |           | 9,000,000 |   |
|                                                                                                                        |       |                  |           |   |   |
| Convertible rate  credit advances from Federal Home Loan Bank, with a weighted average rate of 4.40%  at December 31, 2006. |       | **16,000,000**        |           | 13,000,000 |   |
|                                                                                                                        |       | **$**                 | **22,000,000** |   | $ | 22,000,000 |   |

 

The contractual maturities of other borrowings as ofDecember 31, 2006 are as follows:
| 2007   |   | $         | 6,000,000  |   |
|--------|--------|-----------|------------|--------|
| 2011   |   | 5,000,000 |       |
| 2012   |   | 6,000,000 |       |
| 2014   |   | 3,000,000 |       |
| 2015   |   | 2,000,000 |       |
|   |   | $         | 22,000,000 |   |

 

All Federal Home Loan Bank advances are secured byloans with a carrying value of $2,705,304, and securities with a carrying valueof $21,423,837 at December 31, 2006.

During 2005, the Company prepaid a Federal Home LoanBank borrowing and recognized a gain of $257,767 on the prepayment.

**NOTE 7.****                                                 SUBORDINATEDDEBENTURES**

In 2006, theCompany formed a wholly-owned grantor trust to issue floating rate cumulativetrust preferred securities in a private placement offering.  The grantor trust has invested the proceeds ofthe trust securities in subordinated debentures of the Company.  The trust preferred securities can beredeemed, in whole or in part, from time to time, prior to maturity at theoption of the Company on or after October 7, 2011.  The sole assets of the guarantor trust arethe floating rate subordinated debentures of the Company (the debentures).  The Company has the right to defer interestpayments on the debentures up to ten consecutive semi-annual periods (fiveyears), so long as the Company is not in default under the subordinateddebentures.  Interest compounds duringthe deferral period.  No deferral periodmay extend beyond the maturity date.

The preferred securitiesare subject to redemption, in whole or in part, upon repayment of thesubordinated debentures at maturity on October 7, 2036 or their earlierredemption.  The Company has the right toredeem the debentures, in whole or in part, from time to time, on or afterOctober 7, 2011, at a redemption price equal to 100% of the principal amount tobe redeemed plus any accrued and unpaid interest.

F-18

----

The Company hasguaranteed the payment of all distributions the Trust is obligated to make, butonly to the extent the Trust has sufficient funds to satisfy thosepayments.  The Company and the Trustbelieve that, taken together, the obligations of the Company under theguarantee agreement, the trust agreement, the subordinated debentures, and theindenture provide, in aggregate, a full, irrevocable and unconditionalguarantee of all of the obligations of the trust under the preferred securitieson a subordinated basis.

The Company is requiredby the Federal Reserve Board to maintain certain levels of capital for bankregulatory purposes.  The Federal ReserveBoard has determined that certain cumulative preferred securities having thecharacteristics of trust preferred securities qualify as minority interest,which is included in Tier 1 capital for bank and financial holding companies.  In calculating the amount of Tier 1qualifying capital, the trust preferred securities can only be included up tothe amount constituting 25% of total Tier 1 capital elements (including trustpreferred securities).  As of December31, 2006, all of the trust preferred securities qualified as Tier 1capital.  Such Tier 1 capital treatmentprovides the company with a more cost-effective means of obtaining capital forbank regulatory purposes than if the Company were to issue preferred stock.

The trust preferredsecurities and the related debentures were issued on October 4, 2006.  Both financial instruments bear an identicalannual rate of interest of 7.03% at December 31, 2006.  Distributions on the trust preferredsecurities are paid quarterly on March 15, June 15, September 15 and December15 of each year, beginning December 15, 2006. Interest on the debentures is paid on the corresponding dates.  The aggregate principal amount of trustpreferred certificates outstanding at December 31, 2006 was $8,000,000.  The aggregate principal amount of debenturesoutstanding at December 31, 2006 was $8,248,000.

**NOTE 8.****                EMPLOYEEAND DIRECTOR BENEFIT PLANS**

**Stock-Based Compensation Plans**

The Company adopted astock option plan during 2005 which grants key employees options to purchaseshares of common stock of the Company. Option prices and terms are determined by a committee appointed by theBoard of Directors.  The plan providesfor options to purchase a total of 330,000 shares of common stock of theCompany.  As of December 31, 2006,options to purchase 231,286 shares of common stock have been granted under theplan.

Inrecognition of the efforts and financial risks undertaken by the Company’sorganizers, the Company granted each organizer an opportunity to purchase anumber of shares of the Company’s common stock. The warrants vest over a three year period from the date the Companycommenced operations and are exercisable in whole or in part during the tenyear period following the commencement date, at an exercise price equal to$7.58 per share.  The warrants arenontransferable, but shares issued pursuant to the exercise of warrants will betransferable, subject to compliance with applicable securities laws.  At December 31, 2006, there were warrantsoutstanding to purchase a total of 262,416 shares of common stock of theCompany.

F-19

----

A summary of the status of the fixed stock option andwarrant plans is as follows:

|                                         | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                              | ** ** | ** **                                  | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                              | ** ** | ** **                                  | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                              | ** ** | ** **                                  | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                              | ** ** | **Number**                                  | ** ** | **Price** | ** ** | **Number** | ** ** | **Price** | ** ** |
|                                    |       |                                        |       |   |   |   |   |   |   |
| Options  outstanding, beginning of year | ** ** | **428,615**                                 | ** ** | **$** | **8.77** |   | 344,916 |   | $ | 7.58 |   |
| Granted                                 | ** ** | **68,154**                                  | ** ** | **14.84** |   | 83,699 |   | 13.68 |   |
| Exercised                               | ** ** | **—**                                  | ** ** | **—** |   | — |   | — |   |
| Forfeited                               | ** ** | **(3,067**                                  | **)**      | **13.71** |   | — |   | — |   |
| Options  outstanding, end of year       | ** ** | **493,702**                                 | ** ** | **9.58** |   | 428,615 |   | 8.77 |   |
|                                    | ** ** | ** **                                  |       |   |   |   |   |   |   |
| Exercisable, end of  year               | ** ** | **445,022**                                 | ** ** | **9.46** |   | 379,235 |   | 8.52 |   |
|                                         |            |                                             |            |  |  |  |  |  |  |  |  |

 

The fair value ofeach option grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the weighted-average assumptions listed in thefollowing table.  Expected volatility hasbeen determined based upon the historical volatility of the Company’sstock.  The expected term of the optionsgranted is based upon the short-cut method and represents the period of timethat the options granted are expected to be outstanding.  Expected dividends are based on dividendtrends and the market price of the Company’s stock price at grant date.  Historical data is used to estimate optionexercised and employee terminations within the model.  The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curve ineffect at the time of grant.

|                                                                      | ** ** | **Year Ended  December 31,  2006** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------|------------|
|                                                                 |       |                                         |       |
| Expected  dividends (as a percentage of the fair value of the stock) |       | 0%                                           |       |
| Expected life of  the options                                        |       | 5-6  years                                   |       |
| Expected  volatility                                                 |       | 21.00%-21.39%                                |       |
| Weighted average  expected volatility                                |       | 21.20%                                       |       |
| Risk-free  interest rate                                             |       | 4.31%-4.70%                                  |       |
| Weighted-average grant  date fair value                              |       | $4.45                                        |       |

 

At December 31, 2006,there was $91,416 of unrecognized compensation cost related to stock-basedpayments, which is expected to be recognized over a weighted-average period of1.32 years.  At December 31, 2006, theintrinsic value of outstanding options was $3,171,344 and the intrinsic valueof exercisable options was $2,912,310.

F-20

----

A further summaryof the stock options and warrants outstanding at December 31, 2006 follows:
|                          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** **                   | ** ** | **Weighted-**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding**              | ** ** | **Life**                     | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $7.58                    |       | 344,916                      |       | 4.98 years                   |       | $ | 7.58 |   | 320,716 |   | $ | 7.58 |   |
| 13.68                    |       | 80,917                       |       | 8.40 years                   |       | 13.68 |   | 71,109 |   | 13.68 |   |
| 13.75 - 14.38            |       | 33,869                       |       | 8.94 years                   |       | 13.83 |   | 19,197 |   | 13.86 |   |
| 15.21                    |       | 6,000                        |       | 9.33 years                   |       | 15.21 |   | 6,000 |   | 15.21 |   |
| 16.00                    |       | 28,000                       |       | 10.00 years                  |       | 16.00 |   | 28,000 |   | 16.00 |   |
|                     |       | 493,702                      |       | 6.15 years                   |       | 9.58 |   | 445,022 |   | 9.46 |   |
|                          |            |                              |            |                              |            |  |  |  |  |  |  |  |  |

 

**401(k) Profit Sharing Plan**

The Company has a 401(K)Profit Sharing Plan available to all eligible employees, subject to certainminimum age and service requirements. The contributions expensed were $52,538 and $43,124 for the years endedDecember 31, 2006 or 2005, respectively.

**NOTE 9.****                                                 INCOMETAXES**

The components of income tax expense are as follows:
|                     | ** ** | **Years Ended December 31,** | ** **    |
|---------------------|------------|---------------------------------------------|---------------|
| ** **          | ** ** | **2006**                                    | ** **    | **2005** | ** ** |
|                | ** ** | ** **                                  |          |   |   |
| Current             | ** ** | **$**                                       | **1,713,416** |   | $ | 1,579,451 |   |
| Deferred            | ** ** | **(216,517**                                | **)**         | (145,949 | ) |
| Income tax  expense | ** ** | **$**                                       | **1,496,899** |   | $ | 1,433,502 |   |

 

The Company’s income tax expense differs from theamounts computed by applying the federal income tax statutory rates to incomebefore income taxes.  A reconciliation ofthe differences is as follows:
|                                          | ** ** | **Years Ended December 31,** | ** **    |
|------------------------------------------|------------|---------------------------------------------|---------------|
| ** **                               | ** ** | **2006**                                    | ** **    | **2005** | ** ** |
|                                     |       |                                        |          |   |   |
| Tax provision at  statutory federal rate | ** ** | **$**                                       | **1,379,928** |   | $ | 1,352,407 |   |
| State income taxes                       | ** ** | **117,411**                                 |          | 112,668 |   |
| Tax-free interest                        | ** ** | **(38,339**                                 | **)**         | (32,015 | ) |
| Stock based compensation                 | ** ** | **48,909**                                  |          | - |   |
| Other items, net                         | ** ** | **(11,010**                                 | **)**         | 442 |   |
| Income tax expense                       | ** ** | **$**                                       | **1,496,899** |   | $ | 1,433,502 |   |

 

F-21

----

The components of deferred income taxes are asfollows:
|                                    | ** ** | **December 31,** | ** **    |
|------------------------------------|------------|-----------------------|---------------|
| ** **                         | ** ** | **2006**              | ** **    | **2005** | ** ** |
| Deferred tax  assets:              | ** ** | ** **            |          |   |   |
| Loan loss reserves                 | ** ** | **$**                 | **692,744**   |   | $ | 551,174 |   |
| Preopening expenses                | ** ** | **15,729**            |          | 51,423 |   |
| Unearned loan fees                 | ** ** | **118,553**           |          | 101,911 |   |
| Non-qualified stock option expense | ** ** | **66,880**            |          | — |   |
| Securities available for sale      | ** ** | **189,167**           |          | 243,783 |   |
| Interest rate derivatives          | ** ** | **49,413**            |          | 1,721 |   |
| ** **                         | ** ** | **1,132,486**         |          | 950,012 |   |
| Deferred tax  liabilities:         | ** ** | ** **            |          |   |   |
| Depreciation                       | ** ** | **65,816**            |          | 92,935 |   |
| ** **                         | ** ** | ** **            |          |   |   |
| Net deferred tax assets            | ** ** | **$**                 | **1,066,670** |   | $ | 857,077 |   |

 

**NOTE 10.****                                          EARNINGSPER SHARE**

Presented below is a summary of the components used tocalculate basic and diluted earnings per common share:

|                                                                                                                                                | ** ** | **Years Ended December 31,** | ** **    |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|---------------|
| ** **                                                                                                                                     | ** ** | **2006**                                    | ** **    | **2005** | ** ** |
| Basic Earnings  Per Share:                                                                                                                     | ** ** | ** **                                  | ** **    | ** ** | ** ** |
| Weighted average common shares outstanding                                                                                                     | ** ** | **2,831,676**                               |          | 2,831,676 |   |
|                                                                                                                                           |       |                                        |          |   |   |
| Net income                                                                                                                                     | ** ** | **$**                                       | **2,561,713** |   | $ | 2,544,167 |   |
|                                                                                                                                           |       |                                        |          |   |   |
| Basic earnings  per share                                                                                                                      | ** ** | **$**                                       | **.90**       |   | $ | .90 |   |
|                                                                                                                                           |       |                                        |          |   |   |
| Diluted Earnings  Per Share:                                                                                                                   |       |                                        |          |   |   |
| Weighted average common shares outstanding                                                                                                     | ** ** | **2,831,676**                               |          | 2,831,676 |   |
| Net effect of the assumed exercise of stock options  and warrants based on the treasury stock method using average market prices  for the year |       | **175,013**                                 |          | 151,380 |   |
| Total weighted average common shares and common  stock equivalents outstanding                                                                 |       | **3,006,689**                               |          | 2,983,056 |   |
|                                                                                                                                           |       |                                        |          |   |   |
| Net income                                                                                                                                     | ** ** | **$**                                       | **2,561,713** |   | 2,544,167 |   |
|                                                                                                                                           |       |                                        |          |   |   |
| Diluted earnings  per share                                                                                                                    | ** ** | **$**                                       | **.85**       |   | $ | .85 |   |

 

F-22

----

**NOTE 11.****                                          COMMITMENTSAND CONTINGENCIES**

**Loan Commitments**

The Company is a party to financial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments includecommitments to extend credit and standby letters of credit.  They involve, to varying degrees, elements ofcredit risk and interest rate risk in excess of the amount recognized in thebalance sheets.  The majority of allcommitments to extend credit and standby letters of credit are variable rateinstruments.

The Company’s exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit and standby letters of credit is represented by thecontractual amount of those instruments. The Company uses the same credit policies in making commitments andconditional obligations as it does for on-balance sheet instruments.  A summary of the Company’s commitments is asfollows:

|                               | ** ** | **December 31,** | ** **     |
|-------------------------------|------------|-----------------------|----------------|
| ** **                    | ** ** | **2006**              | ** **     | **2005** | ** ** |
|                          |       |                  |           |   |   |
| Commitments to  extend credit | ** ** | **$**                 | **48,844,407** |   | $ | 38,446,388 |   |
| Standby letters  of credit    | ** ** | **1,702,671**         |           | 996,206 |   |
|                          | ** ** | **$**                 | **50,547,078** |   | $ | 39,442,594 |   |

 

Commitments to extend credit areagreements to lend to a customer as long as there is no violation of anycondition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  The amount of collateralobtained, if deemed necessary by the Company upon extension of credit, is basedon management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory,property and equipment, residential real estate and income-producing commercialproperties.

Standby letters of credit are conditional commitmentsissued by the Company to guarantee the performance of a customer to a thirdparty.  Those guarantees are primarilyissued to support public and private borrowing arrangements.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loans tocustomers.  Collateral held varies as specifiedabove and is required in instances which the Company deems necessary.

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

**Interest Rate Derivatives**

The Company maintains an overall interest raterisk-management strategy that incorporates the use of derivative instruments tominimize significant unplanned fluctuations in earnings that are caused byinterest rate volatility.  The goal is tomanage interest rate sensitivity by modifying the repricing characteristics ofcertain assets and liabilities so that certain movements in interest rates donot, on a material basis, adversely affect the net interest margin.  The Company views this strategy as prudentmanagement of interest rate sensitivity, such that earnings are not exposed toundue risk presented by changes in interest rates.  As a matter of policy, the Company does notuse speculative derivative instruments for interest rate risk management.

F-23

----

By using derivativeinstruments, the Company is potentially exposed to credit and market risk.  If the counter-party fails to perform, creditrisk is equal to the extent of the fair value gain in a derivative.  When the fair value of a derivative contractis positive, this generally indicates that the counterparty owes the Company,and, therefore, creates a repayment risk for the Company.  When the fair value of a derivative contractis negative, the Company owes the counterparty and, therefore, has no repaymentrisk.  The Company minimizes the credit(or repayment) risk in derivative instruments by entering into transactionswith high-quality counterparties that are reviewed periodically.

The Company’s derivativeactivities are monitored by its asset/liability management committee as part ofthat committee’s oversight of the Company’s asset/liability management andtreasury functions.  The Company’sasset/liability management committee is responsible for implementing varioushedging strategies that are developed through its analysis of data fromfinancial simulation models and other internal and industry sources.  The resulting hedging strategies are thenincorporated into the overall interest-rate risk management.

All of the Company’sderivative financial instruments are classified as highly effective cash flowhedges.  For the year ended December 31,2006, there were no material amounts recognized which represented theineffective portion of cash flow hedges. All components of each derivative’s gain or loss are included in theassessment of hedge effectiveness, unless otherwise noted.

Interest rate derivativeinstruments that are used as part of the Company’s interest raterisk-management strategy consist of S&P call options and FHLB derivativecontracts related to the issuance of certain certificates of deposit tocustomers.  The Company offers to itscustomers a deposit product called Index Powered Certificates of Deposit (IPCD)with the IPCD’s payoff at maturity consisting of an S&P call option and thedeposited principal.  The Company pays aquarterly interest charge to the FHLB in return for a guarantee that the FHLBwill give the Company the cash equivalent of 90% of the average growth of thelast twelve quarters of the growth in the S&P 500 Index over the term ofthe IPCD (“FHLB Derivative Contract”). The Company remits this cash equivalent and the original depositedprincipal to the customer upon maturity of the IPCD.

Information pertaining tooutstanding interest rate derivatives used to hedge variable-rate deposits isas follows:
|                                                                                         | ** ** | **December 31,** | ** **  |
|-----------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                              | ** ** | **2006**              | ** **  | **2005** | ** ** |
| Notional amount                                                                         | ** ** | **$**                 | **247,951** |   | $ | 250,197 |   |
| Weighted average  maturity in years                                                     | ** ** | **1.66 years**        |        | 2.64 years |   |
|                                                                                    |       |                  |        |   |   |
| Fair value of  S&P call options included in other liabilities                       | ** ** | **$**                 | **84,934**  |   | $ | 68,807 |   |
|                                                                                    |       |                  |        |   |   |
| Fair value of FHLB  derivative contracts included as a reduction of deposit liabilities |       | **$**                 | **10,490**  |   | $ | 17,629 |   |

 

The Company recognizednet expense for the year ended December 31, 2006 as a result of these interestrate derivatives in the amount of $11,709, of which $7,443 is included ininterest expense and $4,266 is included in other operating expenses as comparedto a net expense of $15,226, of which $8,252 is included in interest expenseand $6,974 is included in other operating expenses for the year ended December31, 2005.

F-24

----

Another component of theCompany’s interest rate risk management strategy is the implementation ofinterest rate floors.  In addition to the2005 interest rate floor purchase with a $40 million notional amount and a7.50% strike, the Company purchased an additional interest rate floor in 2006with a $30 million notional amount and an 8.50% strike.  These instruments are being used as a hedgefor the Company’s prime-based loan portfolio.

Information pertaining tothe interest rate floors is as follows:
|                                                                | ** ** | **December 31,** | ** **     |
|----------------------------------------------------------------|------------|-----------------------|----------------|
| ** **                                                     | ** ** | **2006**              | ** **     | **2005** | ** ** |
| Notional amount                                                | ** ** | **$**                 | **70,000,000** |   | $ | 40,000,000 |   |
| Weighted average  maturity in years                            | ** ** | **1.49 years**        |           | 2.42 years |   |
|                                                           |       |                  |           |   |   |
| Fair value of the floor  option value included in other assets | ** ** | **$**                 | **400,000**    |   | $ | 374,000 |   |

 

The Company recognized a net expense for the yearended December 31, 2006 as a result of the interest rate floor in the amount of$96,139 which is included as a reduction of loan interest income as compared toa net expense of $10,937 for the year ended December 31, 2005.

**Contingencies**

In the normal course of business, the Company isinvolved in various legal proceedings. In the opinion of management, any liability resulting from suchproceedings would not have a material adverse effect on the Company’s financialstatements.

**Employment Agreements**

In 2004, the Company entered into employmentagreements with certain officers of the Company with initial terms ranging fromthree to four years requiring annual salaries totaling $645,500.  The agreements are automatically extended foran additional twelve months on the initial term date and each anniversary datethereafter unless proper notification is given. The officers are entitled to receive annual salary increases, and areeligible to receive discretionary bonuses and stock option incentives as may bedetermined by the Company’s Board of Directors. The total annual salaries under these agreements for 2006 and 2005 were$711,664 and $677,775, respectively, and bonuses paid under the employmentagreements for 2006 and 2005 were $227,666 and $185,850, respectively.

F-25

----

**NOTE 12.****                                          CONCENTRATIONSOF CREDIT**

The Company originates primarily commercial,residential and consumer loans to customers in Henry County and surroundingcounties.  The ability of the majority ofthe Company’s customers to honor their contractual loan obligations isdependent on the economy in these areas.

90% of the Company’s loan portfolio is concentrated inloans secured by real estate, of which a substantial portion is secured by realestate in the Company’s primary market area. Accordingly, the ultimate collectibility of the loan portfolio issusceptible to changes in market conditions in the Company’s primary marketarea.  The other significantconcentrations of credit by type of loan are set forth in Note 3.

The Company, as a matter of policy, does not generallyextend credit to any single borrower or group of related borrowers in excess of25% of the Bank’s statutory capital, or approximately $5,570,000.

**NOTE 13.****                                          REGULATORYMATTERS**

The Company is subject to certain restrictions on theamount of dividends that may be declared without prior regulatoryapproval.  At December 31, 2006,approximately $1,339,000 was available for dividend declaration.

The Company and Bank are also subject to variousregulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimumcapital requirements can initiate certain mandatory, and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on the consolidated financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Company and the Bankmust meet specific capital guidelines that involve quantitative measures of theassets, liabilities and certain off-balance-sheet items as calculated underregulatory accounting practices.  Capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings and other factors.

Quantitative measures established by regulation toensure capital adequacy require the Company and the Bank to maintain minimumamounts and ratios of total and Tier 1 capital to risk-weighted assets, asdefined, and of Tier 1 capital to average assets, as defined.  Management believes, as of December 31, 2006,the Company and the Bank met all capital adequacy requirements to which theyare subject.

As of December 31, 2006,the most recent notification from the Federal Deposit Insurance Corporationcategorized the Bank as well capitalized under the regulatory framework forprompt corrective action.  To becategorized as well capitalized, the Bank must maintain minimum totalrisk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in thefollowing table.  There are no conditionsor events since that notification that management believes have changed theBank’s category.  Prompt correctiveaction provisions are not applicable to bank holding companies.

F-26

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The Company’s and the Bank’s actual capital amountsand ratios are presented in the following table.
| ** **                                   | ** ** | ** **                           | ** ** | ** **   | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To Be Well** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|--------------|------------|----------------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                                   | ** ** | ** **                           | ** ** | ** **   | ** ** | **For Capital**       | ** ** | **Capitalized Under** | ** ** |
| ** **                                   | ** ** | ** **                           | ** ** | ** **   | ** ** | **Adequacy**               | ** ** | **Prompt Corrective** | ** ** |
| ** **                                   | ** ** | **Actual**                           | ** ** | **Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                                   | ** ** | **Amount**                           | ** ** | **Ratio**    | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**               | ** ** | **Ratio** | ** ** |
| ** **                                   | ** ** | **(Dollars in Thousands)** | ** ** |
| **As of December 31, 2006:**                 | ** ** | ** **                           | ** ** | ** **   | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **               | ** ** | ** ** | ** ** |
|  Total Capital to Risk Weighted Assets  |       |                                 |       |         |       |                       |       |                       |       |                     |       |   |   |
| Consolidated                                 | ** ** | **$**                                | **38,534** | ** **   | **16.32**  | **%**                      | **$**      | **18,887**                 | ** ** | **8**                    | **%**      | **$** | N/A |   | N/A |   |
| First Bank of  Henry County                  | ** ** | **$**                                | **30,579** | ** **   | **12.95**  | **%**                      | **$**      | **18,886**                 | ** ** | **8**                    | **%**      | **$** | **23,607** | ** ** | **10** | **%** |
|  Tier 1 Capital to Risk Weighted Assets |       |                                 |       |         |       |                       |       |                       |       |                     |       |   |   |
| Consolidated                                 | ** ** | **$**                                | **36,142** | ** **   | **15.31**  | **%**                      | **$**      | **9,443**                  | ** ** | **4**                    | **%**      | **$** | N/A |   | N/A |   |
| First Bank of  Henry County                  | ** ** | **$**                                | **28,187** | ** **   | **11.94**  | **%**                      | **$**      | **9,443**                  | ** ** | **4**                    | **%**      | **$** | **14,164** | ** ** | **6** | **%** |
|  Tier 1 Capital to Average Assets       |       |                                 |       |         |       |                       |       |                       |       |                     |       |   |   |
| Consolidated                                 | ** ** | **$**                                | **36,142** | ** **   | **13.16**  | **%**                      | **$**      | **10,989**                 |       | 4                        | %          | **$** | N/A |   | N/A |   |
| First Bank of  Henry County                  | ** ** | **$**                                | **28,187** | ** **   | **10.26**  | **%**                      | **$**      | **10,988**                 | ** ** | **4**                    | **%**      | **$** | **13,736** | ** ** | **5** | **%** |
| ** **                                   | ** ** | ** **                           | ** ** | ** **   | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **               | ** ** | ** ** | ** ** |
| **As of December 31, 2005:**                 | ** ** | ** **                           | ** ** | ** **   | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **               | ** ** | ** ** | ** ** |
|  Total Capital to Risk Weighted Assets  |       |                                 |       |         |       |                       |       |                       |       |                     |       |   |   |
| Consolidated                                 |       | $                                    | 27,177     |         | 14.38      | %                          | $          | 15,119                     |       | 8                        | %          | $ | N/A |   | N/A |   |
| First Bank of  Henry County                  |       | $                                    | 27,156     |         | 14.37      | %                          | $          | 15,118                     |       | 8                        | %          | $ | 18,898 |   | 10 | % |
|  Tier 1 Capital to Risk Weighted Assets |       |                                 |       |         |       |                       |       |                       |       |                     |       |   |   |
| Consolidated                                 |       | $                                    | 25,260     |         | 13.37      | %                          | $          | 7,559                      |       | 4                        | %          | $ | N/A |   | N/A |   |
| First Bank of  Henry County                  |       | $                                    | 25,239     |         | 13.36      | %                          | $          | 7,557                      |       | 4                        | %          | $ | 11,335 |   | 6 | % |
|  Tier 1 Capital to Average Assets       |       |                                 |       |         |       |                       |       |                       |       |                     |       |   |   |
| Consolidated                                 |       | $                                    | 25,260     |         | 11.80      | %                          | $          | 8,563                      |       | 4                        | %          | $ | N/A |   | N/A |   |
| First Bank of Henry  County                  |       | $                                    | 25,239     |         | 11.79      | %                          | $          | 8,563                      |       | 4                        | %          | $ | 10,704 |   | 5 | % |

 

F-27

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**NOTE 14.****                                          FAIRVALUE OF FINANCIAL INSTRUMENTS**

The fair value ofa financial instrument is the current amount that would be exchanged betweenwilling parties, other than in a forced liquidation.  Fair value is best determined based uponquoted market prices.  However, in manyinstances, there are no quoted market prices for the Company’s variousfinancial instruments.  In cases wherequoted market prices are not available, fair value is based on discounted cashflows or other valuation techniques. Those techniques are significantly affected by the assumptions used,including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may notbe realized in an immediate settlement of the instrument.  SFAS No. 107, *Disclosures about Fair Values of Financial Instruments,*excludes certain financial instruments and all nonfinancial instruments fromits disclosure requirements. Accordingly, the aggregate fair value amounts presented may notnecessarily represent the underlying fair value of the Company.

The followingmethods and assumptions were used by the Company in estimating the fair valueof its financial instruments.

**Cash, DueFrom Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold: **The carrying amounts ofcash, due from banks, interest-bearing deposits in banks and federal funds soldapproximate fair values.

**Securities: **Fair values for securities are based on availablequoted market prices.  The carryingvalues of restricted equity securities with no readily determinable fair valueapproximate fair values.

**Loans: **Thecarrying amount of variable-rate loans that reprice frequently and have nosignificant change in credit risk approximates fair value.  The fair value of fixed-rate loans isestimated based on discounted contractual cash flows, using interest ratescurrently being offered for loans with similar terms to borrowers with similarcredit quality.  The fair value ofimpaired loans is estimated based on discounted contractual cash flows orunderlying collateral values, where applicable.

**Deposits:**  The carryingamount of demand deposits, savings deposits, and variable-rate certificates ofdeposit approximates fair value.  Thefair value of fixed-rate certificates ofdeposit is estimated based on discounted contractual cash flows using interestrates currently being offered for certificates of similar maturities.

**Other Borrowings**:  The carryingamount of adjustable and convertible rate borrowings approximates fairvalue.  The fair value of fixed-rateborrowings is estimated based on discounted contractual cash flows usinginterest rates currently being offered for borrowings of similar maturities.

**Subordinated Debentures: **The fair value of theCompany’s variable rate subordinated debentures approximates the carryingvalue.

**Accrued Interest: **The carrying amount of accrued interest approximatesfair value.

**Interest Rate Derivatives**:  The fair value of interest rate derivativesis based on quoted market prices.

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

F-28

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The carrying amount and estimated fair value of theCompany’s financial instruments were as follows:
|                                                                                  | ** ** | **December 31,** | ** **     |
|----------------------------------------------------------------------------------|------------|-----------------------|----------------|
| ** **                                                                       | ** ** | **2006**              | ** **     | **2005** | ** ** |
| ** **                                                                       | ** ** | **Carrying  Amount**  | ** **     | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Financial  assets:                                                               |       |                  |           |   |   |   |   |   |   |
| Cash, due from banks, interest-bearing deposits in banks  and federal funds sold |       | **$**                 | **17,452,004** |   | **$** | **17,452,004** |   | $ | 15,791,422 |   | $ | 15,791,422 |   |
| Securities available for sale                                                    | ** ** | **39,559,041**        | ** **     | **39,559,041** |   | 31,125,111 |   | 31,125,111 |   |
| Restricted equity securities                                                     | ** ** | **2,013,556**         | ** **     | **2,013,556** |   | 1,584,256 |   | 1,584,256 |   |
| Loans                                                                            | ** ** | **208,005,364**       | ** **     | **209,791,903** |   | 166,757,247 |   | 166,735,659 |   |
| Accrued interest receivable                                                      | ** ** | **2,100,878**         | ** **     | **2,100,878** |   | 1,483,007 |   | 1,483,007 |   |
| Interest rate derivatives                                                        | ** ** | **400,000**           | ** **     | **400,000** |   | 374,000 |   | 374,000 |   |
|                                                                             | ** ** | ** **            |           |   |   |   |   |   |   |
| Financial  liabilities:                                                          | ** ** | ** **            |           |   |   |   |   |   |   |
| Deposits                                                                         | ** ** | **216,411,470**       | ** **     | **202,291,281** |   | 174,336,008 |   | 173,695,813 |   |
| Other borrowings                                                                 | ** ** | **22,000,000**        | ** **     | **21,903,125** |   | 22,000,000 |   | 21,724,281 |   |
| Subordinated debentures                                                          | ** ** | **8,248,000**         | ** **     | **8,248,000** |   | — |   | — |   |
| Accrued interest payable                                                         | ** ** | **2,278,493**         | ** **     | **2,278,493** |   | 1,137,550 |   | 1,137,550 |   |
| Interest rate  derivatives                                                       | ** ** | **74,444**            | ** **     | **74,444** |   | 51,178 |   | 51,178 |   |
|                                                                                  |            |                       |                |  |  |  |  |  |  |  |  |  |  |

 

**NOTE 15.****                                          SUPPLEMENTALFINANCIAL DATA**

Components of other operating income and expenses inexcess of 1% of total revenue are as follows:
| ** **                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| Other operating  income:   |       |                                        |       |   |   |
| Gain on prepayment of debt | ** ** | **$**                                       | **—** |   | $ | 257,767 |   |
|                       |       |                                        |       |   |   |
| Other operating  expenses: |       |                                        |       |   |   |
| Audit and accounting fees  | ** ** | **96,293**                                  |       | 147,781 |   |
| Data processing  expense   | ** ** | **175,047**                                 |       | 132,270 |   |
|                            |            |                                             |            |  |  |  |  |

 

F-29

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**NOTE 16.****                                         ****PARENT COMPANY FINANCIALINFORMATION**

The following informationpresents the condensed balance sheet, statement of income, and cash flows ofFirstBank Financial Services, Inc. as of and for the years ended December 31,2006 and 2005.

**CONDENSEDBALANCE SHEETS**
|                                                      | ** ** | **2006**       | ** **     | **2005**   | ** ** |
|------------------------------------------------------|------------|----------------|----------------|------------|------------|
| **Assets**                                           |       |           |           |       |       |
| Cash                                                 | ** ** | **$**          | **7,897,175**  |       | $          | 2,515 |   |
| Investment in  subsidiary                            | ** ** | **27,798,420** |           | 24,763,031 |       |
| Restricted  equity securities                        | ** ** | **248,000**    |           | —     |       |
| Other assets                                         | ** ** | **84,514**     |           | 17,919     |       |
| **Total assets**                                     | ** ** | **$**          | **36,028,109** |       | $          | 24,783,465 |   |
|                                                 |       |           |           |       |       |
| **Liabilities and Stockholders’ Equity**        |       |           |           |       |       |
| Subordinated  debentures                             | ** ** | **$**          | **8,248,000**  |       | $          | — |   |
| Other  liabilities                                   | ** ** | **27,381**     |           | —     |       |
| **Total liabilities**                                | ** ** | **8,275,381**  |           | —     |       |
|                                                 |       |           |           |       |       |
| **Stockholders’  equity**                       | ** ** | **27,752,728** |           | 24,783,465 |       |
| **Total  liabilities and stockholders’ equity** | ** ** | **$**          | **36,028,109** |       | $          | 24,783,465 |   |

 

**CONDENSED STATEMENTS OF INCOME**
|                                                                                            | ** ** | **2006**      | ** **    | **2005**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------|---------------|------------|------------|
| **Income**                                                                                 | ** ** | ** **    | ** **    | ** ** | ** ** |
| Interest income                                                                            | ** ** | **$**         | **4,315**     |       | $          | — |   |
| Dividends from subsidiary                                                                  | ** ** | **50,000**    |          | 50,000     |       |
| **Total  income**                                                                          | ** ** | **54,315**    |          | 50,000     |       |
|                                                                                       |       |          |          |       |       |
| **Expenses**                                                                               | ** ** | ** **    | ** **    | ** ** | ** ** |
| Interest expense                                                                           | ** ** | **143,513**   |          | —     |       |
| Expenses, other                                                                            | ** ** | **45,965**    |          | 47,485     |       |
| **Total  expenses**                                                                        | ** ** | **189,478**   |          | 47,485     |       |
| Income (loss) before income tax benefits and equity  in undistributed income of subsidiary |       | **(135,163**  | **)**         | 2,515      |       |
|                                                                                       |
| **Income  tax benefits**                                                                   | ** ** | **69,873**    |          | 17,919     |       |
| Income (loss) before equity in undistributed income  of subsidiary                         | ** ** | **(65,290**   | **)**         | 20,434     |       |
| **Equity  in undistributed income of subsidiary**                                          | ** ** | **2,627,003** |          | 2,342,079  |       |
| **Net  income**                                                                            | ** ** | **$**         | **2,561,713** |       | $          | 2,362,513 |   |

 

Earnings of the Bank prior to the acquisition by theCompany amounted to $181,654 and are included in the 2005 consolidatedstatements of income.

F-30

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**CONDENSEDSTATEMENTS OF CASH FLOWS**

 
|                                                                                              | ** ** | **2006**       | ** **    | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------|---------------|------------|------------|
| **OPERATING  ACTIVITIES**                                                                    |       |           |          |       |       |
| Net income                                                                                   | ** ** | **$**          | **2,561,713** |       | $          | 2,362,513 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: | ** ** | ** **     |          |       |       |
| Undistributed income of subsidiary                                                           | ** ** | **(2,627,003** | **)**         | (2,342,079 | )          |
| Other operating activities                                                                   | ** ** | **(39,215**    | **)**         | (17,919    | )          |
|                                                                                         | ** ** | ** **     |          |       |       |
| Net cash provided by (used in) operating activities                                          | ** ** | **(104,505**   | **)**         | 2,515      |       |
| ** **                                                                                   | ** ** | ** **     |          |       |       |
| **INVESTING  ACTIVITIES**                                                                    | ** ** | ** **     |          |       |       |
| Purchase of restricted equity securities                                                     | ** ** | **(248,000**   | **)**         | —     |       |
| ** **                                                                                   | ** ** | ** **     |          |       |       |
| Net cash used in investing activities                                                        | ** ** | **(248,000**   | **)**         | —     |       |
| ** **                                                                                   | ** ** | ** **     |          |       |       |
| **FINANCING  ACTIVITIES**                                                                    | ** ** | ** **     |          |       |       |
| Proceeds from issuance of subordinated debentures                                            | ** ** | **8,248,000**  |          | —     |       |
| Payment for fractional shares                                                                | ** ** | **(835**       | **)**         | —     |       |
|                                                                                         | ** ** | ** **     |          |       |       |
| Net cash provided by financing activities                                                    | ** ** | **8,247,165**  |          | —     |       |
| ** **                                                                                   | ** ** | ** **     |          |       |       |
| Net increase in  cash                                                                        | ** ** | **7,894,660**  |          | 2,515      |       |
| Cash at  beginning of year                                                                   | ** ** | **2,515**      |          | —     |       |
| Cash at end of year                                                                          | ** ** | **$**          | **7,897,175** |       | $          | 2,515 |   |

 

**NOTE 17.****                                         ****STOCK DIVIDEND**

On November 16,2006, the Company declared a six-for-five stock split payable to shareholdersof record on December 1, 2006 which was distributed on December 29, 2006.  Earnings per common share for the year endedDecember 31, 2005 and all stock option and warrant information has beenretroactively adjusted for the dividend as if it occurred on January 1, 2005.

F-31

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