**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D. C. 20549**








**FORM
      10-KSB**





**[X]
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934**





**For
      the Fiscal Year Ended December 31, 2005**





**OR**





**[ 
       ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934**





Commission
      File Number: 000-32399











**FMB
      EQUIBANC, INC.**


(Name
      of
      small business issuer in its charter)




**Georgia**
            **58-2582553**(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification No.)**201
                North Main Street , Statesboro, Georgia**
            **30458**(Address
                of principal executive office)
            (Zip
                Code)**(912)
                489-2600**(Issuer's
                telephone number, including area code)





SECURITIES
      REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: None





SECURITIES
      REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:


**Common
      Stock, par value $1.00 per share**





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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.




Yes   x No    
      o





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





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




Yes  o  
No
x


The
      issuer’s revenues for its most recent fiscal year were $13,501,000.





The
      estimated aggregate market value of the voting stock held by non-affiliates
      of
      Issuer (305,137  shares)
      at February  28,
      2006
      was $12,205,000. No shares of non-voting stock were outstanding. As of such
      date, no organized trading market existed for the common stock of the issuer.
      The aggregate market value was computed by reference to the estimated fair
      market value of the common stock of the issuer based on recent sales of the
      common stock of which management is aware prior to this date. For the purposes
      of this response, directors, officers and holders of 5% or more of the issuer’s
      common stock are considered the affiliates of the issuer at that
      date.





The
      number of shares outstanding of issuer’s common stock at February 28, 2006 was
      362,600 shares.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Certain
      of the information required by Part III, Items 9 through 12, and 14, of this
      Annual Report on Form 10-KSB will be contained in the issuer’s definitive Proxy
      Statement for the 2006 Annual Meeting of Shareholders filed with the Securities
      and Exchange Commission pursuant to Regulation 14A, or in an amendment to this
      Annual Report on Form 10-KSB filed with the Commission, within 120 days of
      the
      issuer’s fiscal year end.





Transitional
      Small Business Disclosure Format (Check one): Yes  o   No x





**PART
      I**





**Cautionary
      Statement Regarding Forward-Looking Statements**





This
      Report contains “forward-looking statements” within the meaning of the Private
      Securities Litigation Reform Act of 1995, such as statements relating to future
      plans and expectations, and are thus prospective. These statements are based
      on
      many assumptions and estimates and are not guarantees of future performance.
      Our
      actual results may differ materially from those projected in any forward-looking
      statements, as they will depend on many factors about which we are unsure,
      including potential risks and uncertainties which are beyond our control. The
      words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,”
“intend,” “plan,” and “estimate,” as well as similar expressions, are meant to
      identify such forward-looking statements.





**Potential
      Risks and Uncertainties**





Potential
      risks and uncertainties include, but are not limited to:





·
            significant
                increases in competitive pressure in the banking and financial services
                industries;


·
            changes
                in political conditions or the legislative or regulatory environment;


·
            potential
                business strategies, including acquisitions or dispositions of assets
                or
                internal restructuring, that we may pursue or be required under state
                and
                federal banking regulations;


·
            changes
                in the interest rate environment which could reduce anticipated or
                actual
                margins;


·
            general
                economic conditions, either nationally or regionally, and especially
                in
                our market area, becoming less favorable than expected, resulting
                in,
                among other things, a deterioration in credit
                quality;


·
            adverse
                changes in asset quality and resulting credit risk-related losses
                and
                expenses;


·
            changes
                in commodity prices;


·
            weather,
                natural disasters and other catastrophic events;
                and


·
            other
                factors discussed in our filings with the Securities and Exchange
                Commission.





Readers,
      therefore, are cautioned not to place undue reliance on any forward-looking
      statements made by or on behalf of the Company. Any such statement speaks only
      as of the date the statement was made. The Company undertakes no obligation
      to
      update or revise any forward-looking statements. Additional information with
      respect to factors that may cause results to differ materially from those
      contemplated by such forward-looking statements is included in the Company’s
      current and subsequent filings with the Securities and Exchange
      Commission.





**ITEM
      1.`** **DESCRIPTION
      OF BUSINESS**





**General
      Overview**





FMB
      Equibanc, Inc. (the "Company") was incorporated as a Georgia corporation on
      April 25, 2000, to serve as a bank holding company for Farmers & Merchants
      Bank (the "Bank"). On November 1, 2000, the Company acquired all of the
      outstanding shares of the Bank.. At December 31, 2005, the assets of the Company
      consisted primarily of its ownership of the capital stock of the Bank and FMB
      2005 Capital Trust I (the “Trust”). The Bank is primarily engaged in the
      business of accepting demand deposits and savings deposits insured by the
      Federal Deposit Insurance Corporation (the “FDIC”), and providing commercial,
      consumer and mortgage loans to the general public. The Trust is a special
      purpose subsidiary organized for the sole purpose of issuing trust preferred
      securities.





On
      August
      4, 2005, the Trust offered and sold $4,000,000 of trust preferred securities.
      The Company received the proceeds from the issuance of these securities and
      has
      reflected the obligation resulting from the receipt of the proceeds as junior
      subordinate debentures in the balance sheets.





The
      Company's executive offices are located at the Bank's main office, 201 North
      Main Street, Statesboro, Georgia 30458. The Company's telephone number at such
      location is (912) 489-2600. See "Item 2. Description of Properties. "


2





**The
      Bank**




The
      Bank
      was incorporated as a Georgia banking corporation on February 4, 1948 for the
      purpose of conducting a commercial banking business from Bulloch County,
      Georgia. The Bank originally conducted its business from a main office located
      in Brooklet, Bulloch County, Georgia. In 1991, the Bank relocated its main
      office to Statesboro, Bulloch County, Georgia. The Bank retained its former
      main
      office as a branch office. The Bank also maintains two branch offices in
      Statesboro, Georgia.




**Market
      Area and Competition** ****





The
      primary service area of the Bank is Bulloch County, Georgia. The Bank encounters
      competition in its primary service area and in surrounding areas from eight
      other financial institutions. These competitors offer a full range of banking
      services and vigorously compete for all types of services, especially
      deposits.





The
      following table illustrates the June 30, 2005 deposit base and market share
      of
      the financial institutions located in Bulloch County, as reported by the FDIC,
      and adjusted for reported out-of-market brokered deposits (dollars in
      millions).





**Bulloch
                  County**
              
              **Deposits**
              
              ******Percent**
                **of
                  Market********Financial
                  Institutions**Sea
                  Island Bank
              
              $
              211.7
              
              
              26.8BB&T
              
              
              200.6
              
              
              25.4Farmers
                  & Merchants Bank
              
              
              144.8
              
              
              18.3First
                  Southern National Bank
              
              
              82.9
              
              
              10.5Park
                  Avenue Bank
              
              
              57.9
              
              
              7.3Wachovia
                  Bank, National Association
              
              
              51.5
              
              
              6.5Core
                  Credit Union
              
              
              24.9
              
              
              3.2The
                  First National Bank & Trust Company
              
              
              14.5
              
              
              1.8The
                  Heritage Bank
              
              
              0.6
              
              
              0.1





While
      the
      Bank experiences competition from financial institutions headquartered in
      Bulloch County, some competition also comes from banks outside of Bulloch County
      seeking to make loans in the Bank's primary service area. In certain aspects
      of
      its banking business, the Bank also competes with credit unions, small loan
      companies, consumer finance companies, brokerage houses, insurance companies,
      money market funds and other financial institutions that have recently entered
      the traditional banking markets.





The
      extent to which other types of financial institutions compete with commercial
      banks has increased significantly within the past few years as a result of
      federal and state legislation which has, in several respects, deregulated
      financial institutions. See "Supervision and Regulation." The full impact of
      this legislation and subsequent laws that will continue to further deregulate
      the financial services industry cannot be fully assessed or
      predicted.





**Deposits**




The
      Bank
      offers a wide range of commercial and consumer interest bearing and non-interest
      bearing deposit accounts, including checking accounts, money market accounts,
      negotiable order of withdrawal accounts, individual retirement accounts,
      certificates of deposit and regular savings accounts. The sources of deposits
      are the residents, businesses and employees of the businesses within the Bank's
      primary service area, obtained through the personal solicitation of the Bank's
      officers and directors, direct mail solicitation and advertisements published
      in
      the local media. The Bank pays competitive interest rates on time and savings
      deposits. In addition, the Bank has implemented a service charge fee schedule
      competitive with other financial institutions in the Bank's primary service
      area, covering such matters as maintenance fees on checking accounts, per item
      processing fees on checking accounts, returned check charges and other similar
      fees and charges.


3





**Lending
      Services**





*Lending
      Policy.*  **** The
      Bank
      engages in a full complement of lending activities, including real estate loans,
      commercial loans, consumer loans and agribusiness loans. Lending is directed
      principally towards individuals and businesses whose demands fall within the
      Bank's legal lending limits and who are potential deposit customers of the
      Bank.
      This includes loans made to individual, partnership or corporate borrowers
      and
      obtained for a variety of business purposes.





The
      Bank
      may either originate loans or, where loans exceed the Bank's lending limits,
      participate with other banks. Management of the Bank does not believe that
      loan
      participations necessarily pose any greater risk of loss than loans that the
      Bank originates.





To
      address the risks inherent in making loans, the Bank maintains an allowance
      for
      loan losses based on, among other things, an evaluation of the Bank's loan
      loss
      experience, the amount of past due and nonperforming loans, current and
      anticipated economic changes and the values of certain loan collateral. Based
      upon such factors, the Bank's management makes various assumptions and judgments
      about the ultimate collectibility of the loan portfolio and provides an
      allowance for potential loan losses based upon a percentage of the outstanding
      balances and for specific loans. However, because there are certain risks that
      cannot be precisely quantified, management's judgment of the allowance is
      necessarily an approximation and imprecise. The adequacy and methodology of
      the
      allowance for loan losses is subject to regulatory examination and compared
      to a
      peer group of financial institutions identified by the bank's regulatory
      agencies.





*Loan
      Portfolio.* The
      following is a description of each of the major categories of the Bank's loan
      portfolio:





*Real
      Estate Loans.* ****** The
      Bank
      makes a variety of commercial real estate, construction and development loans
      and residential real estate loans. These loans include some commercial loans
      where the Bank takes a security interest in real estate out of an abundance
      of
      caution and not as the principal collateral for the loan, but excludes home
      equity loans, which are classified as consumer loans. As of December 31, 2005,
      real estate loans comprised 76.1% of the Bank's loan portfolio.





·
            *Commercial
                Real Estate Loans.*Commercial real estate loan terms generally are limited to five years
                or
                less, although payments may be structured on a longer amortization
                basis.
                Interest rates may be fixed or adjustable. The Bank generally charges
                an
                origination fee. The Bank attempts to reduce credit risk on its commercial
                real estate loans by emphasizing loans on owner-occupied office and
                retail
                buildings where the ratio of the loan principal to the value of the
                collateral as established by independent appraisal does not exceed
                80% and
                net projected cash flow available for debt service equals 120% of
                the debt
                service requirement. In addition, the Bank may require personal guarantees
                from the principal owners of the property supported by a review by
                the
                Bank's management of the principal owners' personal financial statements.
                Risks associated with commercial real estate loans include fluctuations
                in
                the value of real estate, new job creation trends, tenant vacancy
                rates
                and the quality of the borrower's management. The Bank limits its
                risk by
                analyzing borrowers' cash flow and collateral value on an ongoing
                basis.
                The Bank competes for commercial real estate loans with competitors
                that
                are well established in its primary service
                area.





·
            *Construction
                and Development Loans.*Construction and development loans are made both on a pre-sold and
                speculative basis. If the borrower has entered into an agreement
                to sell
                the property prior to beginning construction, then the loan is considered
                to be on a pre-sold basis. If the borrower has not entered into an
                agreement to sell the property prior to beginning construction, then
                the
                loan is considered to be on a speculative basis. Construction and
                development loans are generally made with a term of six months and
                interest is paid periodically. The ratio of the loan principal to
                the
                value of the collateral as established by independent appraisal generally
                does not exceed 90%. Speculative loans are based on the borrower's
                financial strength and cash flow position. Loan proceeds are disbursed
                based on the percentage of completion and only after the project
                has been
                inspected by an experienced construction lender or appraiser. Risks
                associated with construction loans include fluctuations in the value
                of
                real estate and new job creation trends.


4





·
            *Residential
                Real Estate Loans.*The Bank's residential real estate loans consist of residential first
                and
                second mortgage loans and residential construction loans. The Bank
                offers
                fixed and variable rates on its mortgages with the amortization of
                first
                mortgages with maturity dates of three years and beyond. These loans
                are
                made consistent with the Bank's appraisal policy and with the ratio
                of the
                loan principal to the value of collateral as established by independent
                appraisal generally not to exceed 90%. The Bank believes these
                loan-to-value ratios will be sufficient to compensate for fluctuations
                in
                real estate market value and to minimize losses that could result
                from a
                downturn in the residential real estate market. The Bank limits interest
                rate risk and credit risk on these loans by locking in the interest
                rate
                for each loan with the secondary market investor and receiving the
                investor's underwriting approval before funding the loan.





*Commercial
      Loans.* The
      Bank
      makes a variety of loans for commercial purposes other than real estate in
      various lines of businesses. The terms of these loans vary by purpose and by
      type of underlying collateral, if any. The Bank typically makes equipment loans
      for a term of five years or less at fixed or variable rates, with the loan
      fully
      amortized over the term. Equipment loans generally are secured by the financed
      equipment, and the ratio of the loan principal to the value of the financed
      equipment or other collateral is generally 80% or less. Loans to support working
      capital typically have terms not exceeding one year and are usually secured
      by
      accounts receivable, inventory, or other collateral, as well as personal
      guarantees of the principals of the business. For loans secured by accounts
      receivable or inventory, principal is typically repaid as the assets securing
      the loan are converted into cash, and for loans secured with other types of
      collateral, principal is typically due at maturity. The quality of the
      commercial borrower's management and its ability both to evaluate properly
      changes in the supply and demand characteristics affecting its markets for
      products and services and to respond effectively to such changes are significant
      factors in a commercial borrower's creditworthiness. As of December 31, 2005,
      commercial loans comprised 9.8% of the Bank's loan portfolio.




*Consumer
      Loans.* The
      Bank
      makes a variety of loans to individuals for personal, family and household
      purposes, including secured and unsecured installment and term loans, home
      equity loans and home equity lines of credit. Consumer loan repayments depend
      upon the borrower's financial stability and are more likely to be adversely
      affected by divorce, job loss, illness and personal hardships. Because many
      consumer loans are secured by depreciable assets such as boats, cars and
      trailers, the loan should be amortized over the useful life of the asset. The
      loan officers of the Bank review the borrower's past credit history, past income
      level, debt history and, when applicable, cash flow to determine the impact
      of
      all of these factors on the borrower's ability to make future payments as
      agreed. As of December 31, 2005, consumer loans comprised 5.7% of the Bank's
      loan portfolio.





*Agribusiness
      Loans.* ****** The
      Bank
      makes a variety of agribusiness loans, including real estate-based loans, crop
      loans and equipment loans. Real estate-based agribusiness loans are made
      consistent with the Bank's appraisal policy and with the ratio of loan principal
      to value of the collateral as established by independent appraisal generally
      not
      to exceed 90%. Loans secured by agricultural equipment typically have terms
      of
      up to five years. As of December 31, 2005, agribusiness loans comprised 8.4%
      of
      the Bank's loan portfolio.





*Credit
      Risks.* ** The
      principal economic risk associated with each category of loans that the Bank
      makes is the creditworthiness of the borrower. Borrower creditworthiness is
      affected by general economic conditions and the strength of the relevant
      business market segment. General economic factors affecting a borrower's ability
      to repay include interest, inflation and employment rates, as well as other
      factors affecting a borrower's customers, suppliers and employees.


5





The
      Bank's loan portfolio is heavily concentrated with real estate loans. With
      respect to real estate loans generally, the ability of a borrower to repay
      a
      real estate loan will depend upon a number of economic factors, including
      employment levels and fluctuations in the value of real estate. In the case
      of a
      real estate purchase loan, the borrower may be unable to repay the loans at
      the
      end of the loan term and may thus be forced to refinance the loan at a higher
      interest rate, or, in certain cases, the borrower may default as a result of
      its
      inability to refinance the loan. In either case, the risk of nonpayment by
      the
      borrower is increased. In the case of a real estate construction loan, there
      is
      generally no income from the underlying property during the construction period,
      and the developer's personal obligations under the loan are typically limited.
      Each of these factors increases the risk of nonpayment by the borrower. The
      Bank
      also faces additional credit risks to the extent that it engages in adjustable
      rate mortgage loans. In the case of an adjustable rate mortgage loan, as
      interest rates increase, the borrower's required payments increase, thus
      increasing the potential for default. The marketability of all real estate
      loans, including adjustable rate mortgage loans, is also generally affected
      by
      the prevailing level of interest rates.





With
      respect to commercial loans, larger financial institutions are likely to make
      proportionately more loans to medium- to large-sized businesses than the Bank
      makes. Many of the commercial loans of the Bank are made to small- to
      medium-sized businesses that may be less able to withstand competitive, economic
      and financial pressures than large borrowers. The commercial loan portfolio
      of
      the Bank consists of loans to individual, partnership and corporate borrowers
      that are primarily located in the Bulloch County area. Accordingly, the Bank’s
      commercial borrowers reflect the diversified businesses of this area, and
      include services, retail trade and manufacturing firms. The risks associated
      with commercial loans depend to a large extent upon various economic factors,
      including the strength of the economy in the Bulloch County area and the ability
      of the Bank's commercial borrowers to properly evaluate and respond to a
      changing marketplace. In addition, the commercial borrowers of the Bank face
      risks related specifically to the unique nature of their business. For example,
      services and retail trade firms may incur risks associated with labor shortages
      and consumer preference changes, and manufacturing firms may incur risks
      associated with raw material and labor shortages, as well as currency
      fluctuations.





Consumer
      loans generally involve more credit risks than other loans because of the type
      and nature of the underlying collateral or because of the absence of any
      collateral. Consumer loan repayments are dependent on the borrower's continuing
      financial stability and are likely to be adversely affected by job loss, divorce
      and illness. Furthermore, the application of various federal and state laws,
      including federal and state bankruptcy and insolvency laws, may limit the amount
      which can be recovered on such loans in the case of default. In most cases,
      any
      repossessed collateral will not provide an adequate source of repayment of
      the
      outstanding loan balance. Although the underwriting process for consumer loans
      includes a comparison of the value of the security, if any, to the proposed
      loan
      amount, the Bank cannot predict the extent to which the borrower's ability
      to
      pay, and the value of the security, will be affected by prevailing economic
      and
      other conditions.





Agribusiness
      loans, including real estate-based loans, crop loans and equipment loans
      generally involve more credit risk than residential real estate loans, because
      of the typically larger loan amount. In addition, payments on loans are
      dependent upon the successful operation or management of the farm property
      securing the loan. The success of the loan may also be affected by many factors
      outside the control of the farm borrower, such as weather, government farm
      policy, domestic and international demand for agricultural products and changing
      consumer preferences. Weather presents one of the greatest risks, as hail,
      drought, floods, or other conditions can severely limit crop yields and thus
      impair loan repayments and the value of the underlying collateral. This risk
      can
      be reduced by the farm borrower with crop insurance which can guarantee set
      yields to provide certainty of repayment. Unless the circumstances of the
      borrower merit otherwise, the Bank generally will require its borrowers to
      obtain crop insurance. Another risk is the uncertainty of government support
      programs, where support payments are made with the requirement that a farmer
      leave idle from production certain amounts of farm land. Some farmers rely
      on
      the income from support programs to make loan payments, and if these programs
      were discontinued or significantly changed, cash flow problems or defaults
      could
      result. Finally, many farmers are dependent upon a limited number of key
      individuals whose injury or death may result in an inability to operate the
      farm.




6





*Loan
      Approval and Review.* ****** The
      loan
      approval policies of the Bank provide for various levels of officer lending
      authority. When the amount of aggregate loans to a single borrower exceeds
      that
      individual officer's lending authority, the loan request is considered and
      approved by an officer with a higher lending limit or by the Loan Committee
      of
      the board of directors. The Bank does not make any loans to directors or
      executive officers of the Bank unless the loan is approved by the board of
      directors and is made on terms not more favorable to such person than would
      be
      available to a person not affiliated with the Bank.




*Lending
      Limits.* ****** The
      lending activities of the Bank are subject to a variety of lending limits
      imposed by Georgia law. While differing limits apply in certain circumstances
      based on the type of loan or the nature of the borrower (including the
      borrower's relationship to the Bank), in general, the Bank is subject to a
      loan-to-one-borrower limit of an amount equal to 15% of the Bank's unimpaired
      capital and surplus or 25% of the unimpaired capital and surplus if the excess
      over 15% is within the guidelines of the Georgia Department of Banking and
      Finance as an exception to the 15% limit. The Bank's lending limit at December
      31, 2005 was $2,250,000 plus an additional $1,500,000 for loans which meet
      the
      guidelines of the Georgia Department of Banking and Finance. These limits will
      increase or decrease as the Bank's capital increases or decreases as a result
      of
      the Bank's earnings or losses, among other reasons.




**Investments**




As
      of
      December 31, 2005, loans comprised approximately 76.7% of the Company's assets
      and investment securities comprised approximately 6.3% of the Company's assets.
      The Bank invests primarily in direct obligations of the United States,
      obligations guaranteed as to principal and interest by the United States and
      obligations of agencies of the United States. In addition, the Bank enters
      into
      federal funds transactions with its principal correspondent banks, and primarily
      acts as a net seller of such funds. The sale of federal funds amounts to a
      short
      term loan from the Bank to another bank.





**Asset
      and Liability Management**




It
      is the
      objective of the Bank to manage assets and liabilities to provide a
      satisfactory, consistent level of profitability within the framework of
      established cash, loan, investment, borrowing and capital policies. Certain
      officers of the Bank are responsible for monitoring policies and procedures
      that
      are designed to ensure an acceptable composition of asset/liability mix,
      stability and leverage of all sources of funds while adhering to prudent banking
      practices. It is the overall philosophy of management to support asset growth
      primarily through growth of core deposits, which include deposits of all
      categories made by individuals, partnerships and corporations. Management of
      the
      Bank seeks to invest the largest portion of the Bank's assets in real estate,
      commercial, consumer and agribusiness loans.




The
      Bank
      regards certificates of deposit of $100,000 or more as volatile deposits. The
      Bank has maintained sufficient liquidity to repay these deposits on maturity.
      While the Bank does not generally pursue these types of deposits, at times
      it is
      profitable to do so, and this option is exercised when deemed prudent by
      management. These large certificates of deposit account for the volatility
      in
      this liability category.





The
      Bank
      has available an overnight federal funds purchase line in the amount of
      $3,700,000 which may be used to meet liquidity needs. As of December 31, 2005,
      the Bank had no balances outstanding under this line. The Bank also has advances
      available with the Federal Home Loan Bank where the Bank can purchase funds
      up
      to 13% of total assets.





The
      Bank’s asset/liability mix is monitored on a daily basis with a quarterly report
      reflecting interest sensitive assets and interest sensitive liabilities being
      prepared and presented to the Bank's board of directors. The objective of this
      policy is to control interest-sensitive assets and liabilities so as to minimize
      the impact of substantial movements in interest rates on the earnings of the
      Bank.




7





**Correspondent
      Banking**




Correspondent
      banking involves the providing of services by one bank to another bank, which
      cannot provide that service for itself from an economic or practical standpoint.
      The Bank is required to purchase correspondent services offered by larger banks,
      including checking collections, purchase of federal funds, security safekeeping,
      investment services, coin and currency supplies, overline and liquidity loan
      participations and sales of loans to or participations with correspondent banks.




**Employees**




As
      of
      December 31, 2005, the Bank had 72 total employees, comprised of 67 full-time
      employees and 5 part-time employees. The Company does not have any employees
      who
      are not also employees of the Bank.





**Supervisions
      and Regulation**





Both
      the
      Company and the Bank are subject to extensive state and federal banking
      regulations that impose restrictions on and provide for general regulatory
      oversight of their operations. These laws generally are intended to protect
      depositors and not shareholders. The following discussion describes some of
      the
      material elements of the regulatory framework applicable to bank holding
      companies and their bank subsidiaries and provides some specific information
      that applies to the Company. To the extent that the following information
      describes statutory and regulatory provisions, it is qualified in its entirety
      by reference to the particular statutory and regulatory provisions.





**The
      Company**





*General* .
      Since
      the Company owns all of the capital stock of the Bank, the Company is a bank
      holding company under the Bank Holding Company Act of 1956 (the “BHC Act”). As a
      result, the Company **** is
      primarily subject to the supervision, examination and reporting requirements
      of
      the Bank Holding Company Act and the regulations of the Federal Reserve. As
      a
      bank holding company located in Georgia, the Georgia Department of Banking
      and
      Finance also regulates and monitors all significant aspects of the operations
      of
      the Company.





*Bank
      Holding Company Regulation.* In
      general, the BHC Act limits bank holding company business to owning or
      controlling banks and engaging in other banking-related activities. Bank holding
      companies must obtain the Federal Reserve Board’s approval before
      they:





·
            acquire
                direct or indirect ownership or control of any voting shares of any
                bank
                that results in total ownership or control, directly or indirectly,
                of
                more than 5% of the voting shares of such
                bank;





·
            merge
                or consolidate with another bank holding company;
                or





·
            acquire
                substantially all of the assets of any additional
                banks.





Subject
      to certain state laws, a bank holding company that is adequately capitalized
      and
      adequately managed may acquire the assets of both in-state and out-of-state
      banks. With certain exceptions, the BHC Act prohibits bank holding companies
      from acquiring direct or indirect ownership or control of voting shares in
      any
      company that is not a bank or a bank holding company unless the Federal Reserve
      Board determines such activities are incidental or closely related to the
      business of banking.





*Change
      in Bank Control.* Subject
      to various exceptions, the Change in Bank Control Act of 1978, together with
      related regulations, requires Federal Reserve Board approval prior to any person
      or company acquiring “control” of a bank holding company. Control is
      conclusively presumed to exist if a company acquires 25% (5% if the “company” is
      a bank holding company) or more of any class of voting securities of the bank
      holding company.


8





*Financial
      Services Modernization* .
      Under **** the
      Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “Modernization
      Act”), which amended the BHC Act, a bank holding company may qualify and elect
      to become a financial holding company, permitting the bank holding company
      to
      engage in a broader range of activities that are financial in nature or
      incidental or complementary thereto than was permitted under prior law. The
      Modernization Act allows insurers and other financial services companies to
      acquire banks, and removes various restrictions that applied to bank holding
      company ownership of securities firms and mutual fund advising companies. The
      Modernization Act also establishes the overall regulatory structure applicable
      to bank holding companies that engage in insurance and securities
      operations.





To
      qualify to become a financial holding company, the Company and any of its
      banking subsidiaries must be “well capitalized” and “well managed” under the
      applicable regulatory standards, and must have a rating of at least
“satisfactory” under the Community Reinvestment Act of 1977. If the Company or
      any of its banking subsidiaries fails to meet any such regulatory standards,
      the
      Federal Reserve Board could, among other things, place limitations on the
      Company’s ability to conduct these broader financial activities or, if the
      deficiencies persisted, require the Company to divest the banking subsidiary.
      The broader range of activities that financial holding companies are eligible
      to
      engage in includes those that are determined to be “financial in nature”,
      including insurance underwriting, securities underwriting and dealing, and
      making merchant banking investments in commercial and financial companies.





*Source
      of Strength.* **** Under
      Federal Reserve Board policy, the Company **** is
      expected to act as a source of financial strength for the Bank and to commit
      resources to support the Bank. This support may be required at times when,
      without this Federal Reserve Board policy, the Company **** might
      not
      find itself able to provide it. In addition, any capital loans made by the
      Company to the Bank will be repaid only after its deposits and various other
      obligations are repaid in full. In the event of the Company’s bankruptcy, any
      commitment by it to a federal bank regulatory agency to maintain the capital
      of
      the Bank will be assumed by the bankruptcy trustee and entitled to a priority
      of
      payment. ******





*Transactions
      with Affiliates* .
      The
      Company and the Bank are deemed to be affiliates within the meaning of the
      Federal Reserve Act, and transactions between affiliates are subject to certain
      restrictions. Generally, the Federal Reserve Act limits the extent to which
      a
      financial institution or its subsidiaries may engage in “covered transactions”
with an affiliate. It also requires all transactions with an affiliate, whether
      or not “covered transactions,” to be on terms substantially the same, or at
      least as favorable to the institution or subsidiary, as those provided to a
      non-affiliate. The term “covered transaction” includes the making of loans,
      purchase of assets, issuance of a guarantee and other similar types of
      transactions.





*Tie-In
      Arrangements* .
      The
      Company and the Bank cannot engage in certain tie-in arrangements in connection
      with any extension of credit, sale or lease of property or furnishing of
      services. For example, with certain exceptions, neither the Company nor the
      Bank
      may condition an extension of credit on either a requirement that the customer
      obtain additional services provided by either the Company or the Bank, or an
      agreement by the customer to refrain from obtaining other services from a
      competitor. The Federal Reserve Board has adopted exceptions to its anti-tying
      rules that allow banks greater flexibility to package products with their
      affiliates. These exceptions were designed to enhance competition in banking
      and
      non-banking products and to allow banks and their affiliates to provide more
      efficient, lower cost service to their customers.





*State
      Law Restrictions* . **** As
      a
      Georgia business corporation, the Company may be subject to certain limitations
      and restrictions under applicable Georgia corporate law.


9





**The
      Bank**





*General* .
      The
      Bank, as a commercial bank chartered under the laws of the State of Georgia,
      is
      subject to the supervision, examination and reporting requirements of the FDIC
      and the Georgia Department of Banking and Finance (the “DBF”). The FDIC and the
      DBF regularly examine the Bank’s operations and have the authority to approve or
      disapprove mergers, the establishment of branches and similar corporate actions.
      Both regulatory agencies have the power to prevent the continuance or
      development of unsafe or unsound banking practices or other violations of law.
      The Bank’s deposits are insured by the FDIC to the maximum extent provided by
      law. Additionally, Georgia state laws regulate, among other things, the scope
      of
      the Bank’s business, its investments, its payment of dividends to the Company,
      its required legal reserves and the nature, lending limit, maximum interest
      charged and amount of and collateral for loans. These laws are generally
      intended to protect depositors and not shareholders. Following is a description
      of some of the federal and state law requirements that apply to the
      Bank.





*Community
      Reinvestment Act.* The
      Community Reinvestment Act of 1977 requires that, in connection with
      examinations of financial institutions within their respective jurisdictions,
      the FDIC evaluate the record of each financial institution in meeting the credit
      needs of its local community, including low and moderate-income neighborhoods.
      These factors are also considered in evaluating mergers, acquisitions and
      applications to open a branch or facility.





*Insider
      Credit Transactions.* The Bank
      is also subject to restrictions imposed by the Federal Reserve Act on extensions
      of credit to its executive officers, directors, principal shareholders and
      their
      related interests. These extensions of credit must be made on substantially
      the
      same terms, including interest rates and collateral, as those prevailing at
      the
      time for comparable transactions with third parties, and must not involve more
      than the normal risk of repayment or present other unfavorable
      features.





*Federal
      Deposit Insurance Corporation Improvement Act* .
      Under
      the Federal Deposit Insurance Corporation Improvement Act of 1991 (the
“FDICIA”), each federal banking agency has prescribed, by regulation, noncapital
      safety and soundness standards for institutions under its authority. These
      standards cover internal controls, information systems, and internal audit
      systems, loan documentation, credit underwriting, interest rate exposure, asset
      growth, compensation, fees and benefits, such other operational and managerial
      standards as the agency determines to be appropriate, and standards for asset
      quality, earnings and stock valuation.





*Interstate
      Banking and Branching* .
      The
      Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
“IBBEA”) permits nationwide interstate banking and branching under certain
      circumstances. This legislation generally authorizes interstate branching and
      relaxes federal law restrictions on interstate banking. Currently, bank holding
      companies may purchase banks in any state, and states may not prohibit such
      purchases. Additionally, banks are permitted to merge with banks in other states
      as long as the home state of neither merging bank has “opted out.” The IBBEA
      requires regulators to consult with community organizations before permitting
      an
      interstate institution to close a branch in a low-income area. The IBBEA also
      prohibits the interstate acquisition of a bank if, as a result, the bank holding
      company would control more than ten percent of the total United States insured
      depository deposits or more than thirty percent, or the applicable state law
      limit, of deposits in the acquired bank’s state. Under recent FDIC regulations,
      banks are prohibited from using their interstate branches primarily for deposit
      production. The FDIC has accordingly implemented a loan-to-deposit ratio screen
      to ensure compliance with this prohibition.





Georgia
      has “opted in” to the IBBEA and allows in-state banks to merge with out-of-state
      banks subject to certain requirements. Georgia law generally authorizes the
      acquisition of an in-state bank by an out-of-state bank by merger with a Georgia
      financial institution that has been in existence for at least 3 years prior
      to
      the acquisition. With regard to interstate bank branching, out-of-state banks
      that do not already operate a branch in Georgia may not establish de novo
      branches in Georgia.


10





*Deposit
      Insurance* .
      The
      deposits of the Bank are currently insured to a maximum of $100,000 per
      depositor through a fund administered by the FDIC. All insured banks are
      required to pay semi-annual deposit insurance premium assessments to the FDIC. In
      February 2006, the Federal Deposit Insurance Reform Act of 2005 was enacted,
      which made certain changes to the Federal deposit insurance program. These
      changes include increasing retirement account coverage to $250,000 and providing
      for inflationary adjustments to general coverage beginning in 2010, providing
      the FDIC with authority to set the fund’s reserve ratio within a specified
      range, and requiring dividends to banks if the reserve ratio exceeds certain
      levels.





*State
      and Federal Usury Laws.* Interest
      and other charges collected or contracted for by the Bank are subject to state
      usury laws and federal laws concerning interest rates. Under the Servicemembers
      Civil Relief Act, a lender is generally prohibited from charging an annual
      interest rate in excess of 6% on any obligation for which the borrower is a
      person on active duty with the United States military.





**Capital
      Adequacy**





The
      Company and the Bank are required to comply with the capital adequacy standards
      established by the Federal Reserve Board and the FDIC. The Federal Reserve
      Board
      has established a risk-based and a leverage measure of capital adequacy for
      bank
      holding companies. The Bank is also subject to risk-based and leverage capital
      requirements adopted by the FDIC, which are substantially similar to those
      adopted by the Federal Reserve Board for bank holding companies. If capital
      falls below minimum guideline levels, the Company or the Bank may be denied
      approval to acquire or establish additional banks or nonbank businesses or
      to
      open new facilities.





The
      risk-based capital standards used by the Federal Reserve Board and the FDIC
      are
      designed to make regulatory capital requirements more sensitive to differences
      in risk profiles among banks and bank holding companies, to account for
      off-balance-sheet exposure and to minimize disincentives for holding liquid
      assets. Assets and off-balance-sheet items, such as letters of credit and
      unfunded loan commitments, are assigned to broad risk categories, each with
      appropriate risk weights. The resulting capital ratios represent capital as
      a
      percentage of total risk-weighted assets and off-balance-sheet items. The
      guidelines are minimums, and the Federal Reserve Board has noted that bank
      holding companies contemplating significant expansion programs should not allow
      expansion to diminish their capital ratios and should maintain ratios well
      in
      excess of the minimum. Total capital consists of two components, Tier 1 Capital
      and Tier 2 Capital. The current guidelines require all bank holding companies
      and federally-regulated banks to maintain a minimum risk-based total capital
      ratio equal to 8%, of which at least 4% must be Tier 1 Capital. Tier 1 Capital
      generally consists of common stock, minority interests in the equity accounts
      of
      consolidated subsidiaries, noncumulative perpetual preferred stock and a limited
      amount of qualifying cumulative perpetual preferred stock, less goodwill and
      other specified intangible assets. Tier 2 Capital generally consists of
      subordinated debt, other preferred stock and a limited amount of loan loss
      reserves.





The
      FDIC
      and Federal Reserve Board also employ a leverage ratio, which is Tier 1 capital
      as a percentage of total assets less intangibles, to be used as a supplement
      to
      risk-based guidelines. The principal objective of the leverage ratio is to
      constrain the maximum degree to which a bank holding company or bank may
      leverage its equity capital base. A minimum leverage ratio of 3% is required
      for
      the most highly-rated bank holding companies and banks. However, other bank
      holding companies, banks, and bank holding companies that are seeking to expand,
      are required to maintain minimum leverage ratios of at least 4% to
      5%.





The
      FDICIA created a statutory framework of supervisory actions indexed to the
      capital level of the individual institution. Under regulations adopted by the
      FDIC and the Federal Reserve Board, an institution is assigned to one of five
      capital categories depending on its total risk-based capital ratio, Tier 1
      risk-based capital ratio, and leverage ratio, together with certain subjective
      factors. Institutions which are deemed to be “undercapitalized” depending on the
      category to which they are assigned are subject to certain mandatory supervisory
      corrective actions. Failure to meet capital guidelines could subject a bank
      or
      bank holding company to a variety of enforcement remedies, including issuance
      of
      a capital directive, the termination of deposit insurance by the FDIC, a
      prohibition on accepting brokered deposits, and certain other restrictions
      on
      its business. As described above, significant additional restrictions can be
      imposed on FDIC-insured depository institutions that fail to meet applicable
      capital requirements.


11





**Payment
      of Dividends**





The
      Company **** is
      a
      legal entity separate and distinct from the Bank. The principal sources of
      cash
      flow of the Company, including cash flow to pay dividends to its shareholders,
      are dividends that the Bank pays to its sole shareholder, the Company. Statutory
      and regulatory limitations apply to the Bank’s payment of dividends. If, in the
      opinion of the federal banking regulator, the Bank were engaged in or about
      to
      engage in an unsafe or unsound practice, the federal banking regulator could
      require, after notice and a hearing, that it stop or refrain from engaging
      in
      the questioned practice. The federal banking agencies have indicated that paying
      dividends that deplete a depository institution’s capital base to an inadequate
      level would be an unsafe and unsound banking practice. Federal regulatory
      authorities have indicated that a bank may not pay any dividend if payment
      would
      cause it to become undercapitalized or if it is already undercapitalized.
      Moreover, federal agencies have issued policy statements that provide that
      bank
      holding companies and insured banks should generally only pay dividends out
      of
      current operating earnings.





In
      addition, the DBF’s approval must be obtained before the Bank may pay cash
      dividends out of retained earnings if: (i) the total classified assets at the
      most recent examination of the Bank exceeded 80% of the equity capital; (ii)
      the
      aggregate amount of dividends declared or anticipated to be declared in the
      calendar year exceeds 50% of the net profits, after taxes but before dividends
      for the previous calendar year; or (iii) the ratio of equity capital to adjusted
      assets is less than 6%.





**Privacy**





Under
      the
      Modernization Act, banks and other financial institutions are required to
      disclose their policies for collecting and protecting confidential information.
      Customers generally may prevent banks and other financial institutions from
      sharing nonpublic personal financial information with nonaffiliated third
      parties except under narrow circumstances, such as the processing of
      transactions requested by the consumer or when the financial institution is
      jointly sponsoring a product or service with a nonaffiliated third party.
      Additionally, banks and other financial institutions generally may not disclose
      consumer account numbers to any nonaffiliated third party for use in
      telemarketing, direct mail marketing or other marketing to
      consumers. ****





**Other
      Laws and Regulations**





*International
      Money Laundering Abatement and Anti-Terrorist Financing Act of
      2001* . **** On
      October 26, 2001, the USA PATRIOT Act was enacted. It includes the International
      Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the
“IMLAFA”) and strong measures to prevent, detect and prosecute terrorism and
      international money laundering. As required by the IMLAFA, the federal banking
      agencies, in cooperation with the U.S. Treasury Department, established rules
      that generally apply to insured depository institutions and U.S. branches and
      agencies of foreign banks.





Among
      other things, the new rules require that financial institutions implement
      reasonable procedures to: (i) verify the identity of any person opening an
      account; (ii) maintain records of the information used to verify the person’s
      identity; and (iii) determine whether the person appears on any list of known
      or
      suspected terrorists or terrorist organizations. The rules also prohibit banks
      from establishing correspondent accounts with foreign shell banks with no
      physical presence and encourage cooperation among financial institutions, their
      regulators and law enforcement to share information regarding individuals,
      entities and organizations engaged in terrorist acts or money laundering
      activities. The rules also limit a financial institution’s liability for
      submitting a report of suspicious activity and for voluntarily disclosing a
      possible violation of law to law enforcement.


12





*Sarbanes-Oxley
      Act of 2002* .
      The
      Sarbanes-Oxley Act of 2002 (the “SOA”) was enacted to address corporate and
      accounting fraud. It established a new accounting oversight board that enforces
      auditing standards and restricts the scope of services that accounting firms
      may
      provide to their public company audit clients. Among other things, it also
      (i)
      requires chief executive officers and chief financial officers to certify to
      the
      accuracy of periodic reports filed with the Securities and Exchange Commission
      (the “SEC”); (ii) imposes new disclosure requirements regarding internal
      controls, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures;
      (iii) accelerates the time frame for reporting of insider transactions and
      periodic disclosures by certain public companies; and (iv) requires companies
      to
      disclose whether or not they have adopted a code of ethics for senior financial
      officers and whether the audit committee includes at least one “audit committee
      financial expert.”





The
      SOA
      requires the SEC, based on certain enumerated factors, to regularly and
      systematically review corporate filings. To deter wrongdoing, it (i) subjects
      bonuses issued to top executives to disgorgement if a restatement of a company’s
      financial statements was due to corporate misconduct; (ii) prohibits an officer
      or director from misleading or coercing an auditor; (iii) prohibits insider
      trades during pension fund “blackout periods”; (iv) imposes new criminal
      penalties for fraud and other wrongful acts; and (v) extends the period during
      which certain securities fraud lawsuits can be brought against a company or
      its
      officers.





**Future
      Legislation and Regulatory Action**




New
      regulations and statutes are regularly proposed that contain wide-ranging
      proposals for altering the structures, regulations and competitive relationships
      of banks and other financial institutions operating or doing business in the
      United States. The Company cannot predict whether or in what form any proposed
      regulation or statute will be adopted or the extent to which the Company may
      be
      affected by any new regulation or statute.





**Effect
      of Governmental Monetary Polices**





The
      Company’s earnings are affected by domestic economic conditions and the monetary
      and fiscal policies of the United States government and its agencies. The
      Federal Reserve Board’s monetary policies have had, and are likely to continue
      to have, an important impact on the operating results of commercial banks
      through its power to implement national monetary policy in order, among other
      things, to curb inflation or combat a recession. The monetary policies of the
      Federal Reserve affect the levels of bank loans, investments and deposits
      through its control over the issuance of United States government securities,
      its regulation of the discount rate applicable to member banks and its influence
      over reserve requirements to which member banks are subject. The Company cannot
      predict the nature or impact of future changes in monetary and fiscal policies
      on the Company’s financial condition or results of operation.





**ITEM
      2.** **DESCRIPTION
      OF PROPERTY**





The
      Company's executive office is located at the Bank’s main office, 201 North Main
      Street, Statesboro, Georgia 30458. The Bank’s main office was constructed in
      1991 and contains approximately 16,000 square feet. All of the executive
      officers of the Company and the Bank are located at this facility as are all
      bookkeeping and computer operations.





The
      Bank
      also has three branches, located at 620 Zetterower Avenue, Statesboro, Georgia,
      777 Brannen Street, Statesboro, Georgia and 29 North Parker Avenue, Brooklet,
      Georgia. The Bank’s main office and all branches are owned by the
      Company.





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





As
      of the
      date of this Report, there are no material legal proceedings to which the
      Company or any of its properties were subject.





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





No
      matters were submitted for a vote of the Company’s shareholders during the
      fourth quarter of 2005.


13





**PART
      II**





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





**Market
      for Common Stock**





There
      is
      no established trading market for the Company's common stock, and an active
      public trading market is not expected to develop in the near future. The
      approximate number of holders of record of the Company's common stock, as of
      December 31, 2005, was 498. L imited
      information is available as to the ranges at which the Company’s common stock
      has been sold. To the best of management’s knowledge, sales of the Company’s
      common stock ranged from $36 per share to $41 per share during 2005 and ranged
      from $36 per share to $40 per share during 2004. The per share price information
      regarding the common stock is provided for information purposes only and should
      not be viewed as indicative of the actual or market value of the common
      stock.





**Dividends**





The
      Company declared dividends of $239,300 and $181,300, or $0.66 and $0.50 per
      share for 2005 and 2004, respectively.





The
      Bank
      is subject to restrictions on the payment of dividends under Georgia law and
      the
      regulations of the DBF. The Company is also subject to limits on payment of
      dividends by the rules, regulations and policies of federal banking authorities.
      The primary source of funds available for the payment of cash dividends by
      the
      Company are dividends from the Bank. There are various statutory and regulatory
      limitations on the payment of dividends by the Bank, as well as by the Company
      to its shareholders. No assurance can be given that any dividends will be
      declared by the Company in the future, or if declared, what amounts would be
      declared or whether such dividends would continue.





Future
      dividends will be determined by the board of directors of the Company in light
      of circumstances existing from time to time, including the Company’s growth,
      financial condition and results of operations, the continued existence of
      statutory and regulatory restrictions on the Bank’s ability to pay dividends and
      other factors that the board of directors of the Company considers relevant.
      Further, the Company's ability to pay dividends is subject to the financial
      performance of the Bank, which is dependent upon, among other things, the local
      economy, the success of the bank's lending activities, compliance of the bank
      with applicable regulations, investment performance and the ability to generate
      fee income.




See
      Item
      11 of this Form 10-KSB for certain information on the Company’s equity
      compensation plans.





**ITEM
      6.** **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





The
      following Management’s Discussion and Analysis (the “MD&A”) is intended to
      address information relating to the financial condition and results of
      operations of the Company and those of its subsidiaries that may not be readily
      apparent from a review of the consolidated financial statements and notes
      thereto. Therefore, the MD&A should be read in conjunction with information
      provided in the Company’s consolidated financial statements and notes the
      related notes and the other statistical information included in this Report.


14





**General**





The
      Company’s principal asset is the Bank. Accordingly, the Company’s results of
      operations are primarily dependent upon the results of operations of the Bank.
      The Bank conducts a commercial banking business which consists of attracting
      deposits from the general public and applying those funds to the origination
      of
      commercial, consumer and real estate loans (including commercial loans
      collateralized by real estate). The Bank’s profitability depends primarily on
      net interest income, which is the difference between interest income generated
      from interest-earning assets, such as loans and investments, and the interest
      expense incurred on interest-bearing liabilities, such as customer deposits
      and
      borrowed funds. Net interest income is affected by the relative amounts of
      interest-earning assets and interest-bearing liabilities, and the interest
      rate
      paid and earned on these balances. Net interest income is dependent upon the
      Bank’s interest rate spread, which is the difference between the average yield
      earned on its interest-earning assets and the average rate paid on its
      interest-bearing liabilities. When interest-earning assets approximate or exceed
      interest-bearing liabilities, any positive interest rate spread will generate
      interest income. The interest rate spread is impacted by interest rates, deposit
      flows and loan demand. Additionally, and to a lesser extent, the profitability
      of the Bank is affected by such factors as the level of noninterest income
      and
      expenses, the provision for loan losses and the effective tax rate. Noninterest
      income consists primarily of service charges on deposit accounts, other fees
      and
      origination of mortgage loans. Noninterest expenses consist of compensation
      and
      benefits, occupancy-related expenses and other operating expenses.





**Critical
      Accounting Policies**





The
      Company has established certain accounting and financial reporting policies
      to
      govern the application of accounting principles generally accepted in the United
      States in the preparation of its financial statements. Certain accounting
      policies involve significant judgments and assumptions by management which
      have
      a material impact on the carrying value of certain assets and liabilities;
      management considers these accounting policies to be critical accounting
      policies. The judgments and assumptions used by management are based on
      historical experience and other factors which are believed to be reasonable
      under the circumstances. Because of the nature of the judgments and assumptions
      made by management, actual results could differ from the judgments and estimates
      adopted by management which could have a material impact on the carrying values
      of assets and liabilities and the results of the Company’s operations. The
      Company’s significant accounting policies are described in the Notes to the
      consolidated financial statements for the year ended December 31, 2005. In
      addition, the Company believes the following accounting policies are the most
      critical accounting policies applied by the Company.





***A*** ***llowance
      for Loan Losses***





The
      Company believes the allowance for loan losses is a critical accounting policy
      that requires the most significant judgments and estimates used in the
      preparation of its consolidated financial statements. The allowance for loan
      losses represents management’s estimate of probable loan losses inherent in the
      loan portfolio. Calculation of the allowance for loan losses represents a
      critical accounting estimate due to the significant judgment, assumptions and
      estimates related to the amount and timing of estimated losses, consideration
      of
      current and historical trends and the amount and timing of cash flows related
      to
      impaired loans.





Management
      believes that the allowance for loan losses is adequate. While management uses
      available information to recognize losses on loans, future additions to the
      allowance for loan losses may be necessary based on changes in economic
      conditions. In addition, various regulatory agencies, as an integral part of
      their examination process, periodically review the Bank's allowance for loan
      losses. Such agencies may require the Bank to recognize additions to the
      allowance for loan losses based on their judgments about information available
      to them at the time of their examination.


15





Considering
      current information and events regarding a borrower’s ability to repay its
      obligations, management considers a loan to be impaired when the ultimate
      collectibility of all amounts due, according to the contractual terms of the
      loan agreement, is in doubt. When a loan is considered to be impaired, the
      amount of impairment is measured based on the present value of expected future
      cash flows discounted at the loan's effective interest rate. If the loan is
      collateral-dependent, the fair value of the collateral is used to determine
      the
      amount of impairment. Impairment losses are included in the allowance for loan
      losses through a charge to the provision for losses on loans.





Subsequent
      recoveries are credited to the allowance for loan losses. Cash receipts for
      accruing loans are applied to principal and interest under the contractual
      terms
      of the loan agreement. Cash receipts on impaired loans for which the accrual
      of
      interest has been discontinued are applied first to principal and then to
      interest income.





The
      accounting for impaired loans described above applies to all loans, except
      for
      large pools of smaller-balance, homogeneous loans that are collectively
      evaluated for impairment, loans that are measured at fair value or at the lower
      of cost or fair value, and debt securities. The allowance for loan losses for
      large pools of smaller-balance, homogeneous loans is established through
      consideration of such factors as changes in the nature and volume of the
      portfolio, overall portfolio quality, adequacy of the underlying collateral,
      loan concentrations, historical charge-off trends, and economic conditions
      that
      may affect the borrowers' ability to pay.





A
      substantial portion of the Bank’s loan portfolio is in the commercial real
      estate and residential real estate sectors, including real estate construction
      lending. Those loans are secured by real estate in the Company’s primary market
      area. Therefore, the ultimate collectibility of a substantial portion of the
      Bank’s loan portfolio is susceptible to changes to market conditions in the
      Company’s primary market area.





***Income
      Taxes***





Statement
      of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for Income
      Taxes,” requires the asset and liability approach for financial accounting and
      reporting for deferred income taxes. The Company uses the asset and liability
      method of accounting for deferred income taxes and provides deferred income
      taxes for all significant income tax temporary differences. See Note 9 to the
      Notes to consolidated financial statements for additional details.





As
      part
      of the process of preparing the consolidated financial statements, the Company
      is required to estimate its income taxes in each of the jurisdictions in which
      it operates. This process involves estimating the Company’s actual current tax
      exposure together with assessing temporary differences resulting from differing
      treatment of items, such as depreciation and the provision for loan losses,
      for
      tax and financial reporting purposes. These differences result in deferred
      tax
      assets and liabilities that are included in the Company’s consolidated balance
      sheet.





The
      Company must also assess the likelihood that its deferred tax assets will be
      recovered from future taxable income, and to the extent that the Company
      believes that recovery is not likely, the Company must establish a valuation
      allowance. Significant management judgment is required in determining the
      Company’s provision for income taxes, its deferred tax assets and liabilities,
      and any valuation allowance recorded against the Company’s net deferred tax
      assets. To the extent the Company establishes a valuation allowance or adjusts
      this allowance in a period, the Company must include an expense within the
      tax
      provisions in the statement of income. At December 31, 2005, the Company
      recorded on its consolidated balance sheet net deferred tax assets of
      $886,000.





**Performance
      Overvie** ***w***





The
      Company reported net income of $2,512,000, or $6.86 per diluted common share
      in
      2005, compared to $1,963,000, or $5.36 per diluted common share in 2004. The
      increase in the Company’s net income was primarily due to an increase in net
      interest income and noninterest income partially offset by an increase in
      noninterest expenses. The return on average assets was 1.37% in 2005 compared
      to
      1.27% in 2004, while the return on average common shareholders’ equity was
      17.18% in 2005 compared to 15.52% in 2004.


16





Total
      assets at December 31, 2005 were $193,823,000, an increase of $26,823,000,
      or
      16.1%, for December 31, 2004. Total deposits at December 31, 2005 were
      $160,501,000, up 13.5% from $141,409,000 at December 31, 2004.





***Results
      of Operations***


The
      Company reported earnings of $2,512,000 for 2005 representing an increase of
      $549,000, or 28.0%, compared to earnings of $1,963,000 for 2004. Diluted
      earnings per common share were $6.86 in 2005 compared to $5.36 per diluted
      common share in 2004.





*Net
      Interest Income*





Net
      interest income totaled $7,210,000 in 2005, **** representing
      an increase of $952,000, or 15.2%, compared to net interest income of $6,258,000
      in 2004. The increase in net interest income in 2005 was primarily attributable
      to the growth of the loan portfolio of the Bank.





The
      taxable equivalent net interest margin decreased 14 basis points to 4.12% in
      2005 from 4.26% in 2004. This decrease in the net interest margin is a result
      of
      the local market competition for loans and deposits during 2005. In spite of
      increases in the overall rate environment, the local market required narrower
      spreads to the prime rate in order to grow and retain loan relationships.
      Deposit rates have tended to increase at a faster rate. The result was the
      Bank’s cost of funds increased faster than overall asset yields. The Bank
      experienced a steady narrowing of the interest rate spread throughout 2005
      and
      the net interest margin declined.





As
      a tool
      to manage cost of funds, the Bank began to rely on alternative funding sources
      in 2004 that were cheaper in cost when compared to local market rates for time
      deposits. Advances from the Federal Home Loan Bank were obtained either at
      fixed
      rate maturities of up to 24 months or priced at variable rates tied to an index
      other than the prime rate. Average borrowings increased $5,669,000 to
      $13,217,000 in 2005 from $7,548,000 in 2004. This increase is a reflection
      of a
      full year effect of the use of alternative funding.





Average
      earning assets increased $28,035,000, or 19.0%, to $175,600,000 in 2005 compared
      to $147,565,000 in 2004. Average loans increased $22,984,000, or 18.0%, to
      $150,932,000 in 2005 compared to $127,948,000 in 2004. Loan growth has remained
      strong in the Bank’s market, and the Bank has continued to focus on quality loan
      relationships secured by residential or commercial real estate. The average
      balance of the Bank’s securities portfolio decreased $97,000, or 0.8% during
      2005. Average investment securities represented 6.8% of total average assets
      in
      2005 and 8.2% of total average assets in 2004. This percentage has decreased
      because the growth in the Bank’s loan portfolio has been funded in part by
      maturities and principal payments received from our investment securities.
      All
      of the Bank’s investment securities are classified as available for sale.
      Average earning assets as a percentage of total average assets was 95.5% for
      both 2005 and 2004.





Average
      interest-bearing liabilities increased $25,266,000, or 21.5%, in 2005. Average
      interest-bearing deposits increased $17,953,000, or 16.4%, in 2005 and is
      reflected in the growth in all categories of interest-bearing deposits.
      Approximately 17% of total average deposits were noninterest-bearing in 2005
      compared to 18% for 2004. Total interest expense on interest-bearing liabilities
      was $4,022,000 for the year ended December 31, 2005 compared to $2,061,000
      for
      2004. Although total interest bearing liabilities increased 21.5%, total
      interest expense also increased as a result of an increase in the average rate
      paid from 1.76% in 2004 to 2.82% in 2005. In August 2005, the Company issued
      trust preferred securities in the amount of $4,000,000 that are included in
      interest-bearing liabilities.


17





*Noninterest
      Income*





Noninterest
      income totaled $2,269,000 in 2005 compared to $1,839,000 in 2004, representing
      an increase of $430,000 or 23.2%. The $430,000 increase is the result of a
      $449,000 increase in service charges on deposit accounts, a $48,000 increase
      in
      other service charges, commissions and fees, and a $2,000 increase in other
      operating income, offset by an $81,000 decrease in mortgage origination fees.
      The 2004 total also reflected a $12,000 loss on securities. In 2005, there
      was
      no loss on securities.





The
      $449,000 increase in service charges on deposit accounts is the result of an
      increase in the volume of insufficient fund service charges, which are charges
      assessed for checks presented for payment against insufficient funds. In May
      2005, the Bank implemented an overdraft privilege service, in which eligible
      transaction account holders are pre-approved for the payment of overdrafts
      up to
      a specific dollar limit determined by the Bank. This service is discretionary
      and may be terminated by the Bank at any time, and customers also have the
      option of not participating in the program. Participating customers, however,
      are charged an insufficient fund fee for each item presented for payment on
      their account if there are not adequate funds in the account to pay the item.
      The service has been well accepted by these customers, as evidenced by the
      increase in insufficient fund fee income, as well as the increase in the dollar
      amount of overdrafts. Overdrafts are considered an extension of credit, and
      the
      Bank experienced an increase of $26,000 during 2005 in the level of charge-offs
      related to overdrafts.





The
      $48,000 increase in other service charges, commissions and fees is attributable
      primarily to an increase of $25,000 in fees earned in relation to debit card
      usage and $9,000 in fees earned in relation to ATM activity. Fees related to
      debit card usage increased as a result of the volume of transactions completed
      with debit cards. The increase in ATM fees is attributable to a full year effect
      of a change made during 2004 in the recording of income and expenses on ATM
      and
“point of sale” transactions with ATM cards. During 2004, the Bank’s third party
      processor changed the method of recording these items by remitting gross
      revenues and drafting for total expenses, whereas it previously would remit
      a
      net amount of income or expense, and only the net transaction was recorded
      by
      the Bank. Therefore, this change affected other expense as well.





The
      $81,000 decrease in mortgage origination fees is attributable to a decline
      in
      the number of mortgage loans closed.





Following
      is a comparison of noninterest income for 2005 and 2004:




**Year
                Ended December 31,****2005**
            
            **2004****(Dollars
                in Thousands)**Service
                charges on deposit accounts
            
            **$**
            **1,484**
            
            $
            1,035Mortgage
                origination fees
            
            
            **523**
            
            
            604Other
                service charges, commissions and fees
            
            
            **239**
            
            
            191Securities
                losses, net
            
            
            **-**
            
            
            (12
            )Other
                operating income
            
            
            **23**
            
            
            21**$**
            **2,269**
            
            $
            1,839


*Noninterest
      Expense*





Noninterest
      expense increased $584,000 to $5,070,000 in 2005 as compared to $4,486,000
      in
      2004. Salaries and employee benefits increased $245,000; equipment and occupancy
      expense increased $45,000; and all other expense increased $294,000. Total
      full-time employees were approximately 67 for 2005 and approximately 51 for
      2004.


18





Equipment
      and occupancy expense increased $45,000 to $532,000 in 2005 compared to $487,000
      in 2004. Depreciation expense increased $20,000, or 7.9%, from 2004 to 2005
      as a
      result of a full year effect of three ATMs and one vehicle purchased in mid
      2004. During 2005, utilities increased $8,000, repairs and maintenance expense
      increased $7,000, and net rental expense increased $7,000. In early 2005, the
      Bank terminated a rental agreement with a tenant who occupied a building on
      the
      grounds of the Bank’s main office in order to use the building for bank purposes
      and, therefore, no rent was recorded on the property for most of 2005.





Office
      supplies increased $20,000, or 16.4%, to $142,000 in 2005 from $122,000 in
      2004,
      attributable primarily to the setup of a new branch facility in late 2005,
      the
      replacement of some bankwide forms associated with a new component of the Bank’s
      check processing system that was upgraded in late 2005, and overall general
      growth in the operations of the Bank.





Data
      processing fees increased $29,000, or 9.5%, to $335,000 in 2005 compared to
      $306,000 in 2004. This increase in fees was attributable to a 5% increase
      effective July 1, 2004 in the base fees from the Bank’s primary data processing
      vendor, whose charges are based on the number of accounts maintained by the
      Bank. In addition to experiencing a full-year effect of this price increase
      for
      2005, the Bank continued to add loan and deposit accounts, which added to the
      Bank’s total cost.





Professional
      fees increased $33,000, or 22.3%, to $181,000 in 2005 from $148,000 in 2004.
      The
      increase in professional fees is attributable to an increase in legal fees
      incurred. The increase is attributable in part to the bank absorbing the legal
      expenses associated with certain loan products and relationships in addition
      to
      expenses incurred in collection efforts.





Consulting
      fees increased $101,000 or 180.4% to $157,000 in 2005 from $56,000 in 2004.
      This
      increase is attributable to the implementation of the overdraft privilege
      service previously discussed, as well as independent reviews of other
      operational areas of the Bank.




Advertising
      and public relations increased $11,000, or 4.7%, to $245,000 in 2005 from
      $234,000 in 2004. Additional expenses were incurred for advertising for new
      products and services during the year and more aggressive efforts to build
      goodwill within the community through various public relations efforts.





All
      other
      noninterest expense increased $100,000, or 12.4%, in 2005 to $910,000 from
      $810,000 in 2004. The increase is reflected in most line items as a result
      of
      the overall growth of the operations of the Bank. The larger increases are
      reflected in increases in travel and entertainment expenses of $18,000, in
      ATM
      expenses of $17,000 and armored car expense of $9,000. Travel and entertainment
      expense increased as a result of business development efforts. ATM expenses
      increased as a result of the full-year effect of the change in recording of
      ATM
      income and expenses made during 2004 and previously discussed in “Noninterest
      Income.” Armored car expense increased as a result of additional services
      associated with the additional ATMs purchased in 2004 previously discussed.




In
      compliance with the requirements of Financial Accounting Standards Board
      (“FASB”) Statement No. 91, “Accounting for Nonrefundable Fees and Costs
      Associated with Originating or Acquiring Loans and Initial Direct Costs of
      Leases”, the Company allocated $423,000 of salaries to loan costs in 2005 and
      $317,000 in 2004. After adjusting salaries and benefits for amounts allocated
      to
      loan costs, total salaries and benefits increased $245,000, or 10.6%, to
      $2,568,000 in 2005 compared to $2,323,000 in 2004. There are several reasons
      for
      the increase. In addition to routine annual salary increases for existing staff,
      the number of total full-time equivalent employees increased from 55 to 67
      from
      December 31, 2004 to December 31, 2005. Along with these increases in salary
      expense, FICA taxes increased as well. The Bank also expensed approximately
      $100,000 more in 2005 from 2004 for estimated annual cash incentive payout
      for
      officers and staff. Finally, the Bank experienced an increase in the cost of
      medical insurance premiums paid for its employees as a result of the increase
      in
      staff as well as an increase in the cost of premiums.


19





Following
      is a comparison of noninterest expense for 2005 and 2004.




**Year
                  Ended December 31,****2005**
              
              **2004****(Dollars
                  in
                  Thousands)**Salaries
                  and employee benefits
              **$**
              **2,568**
              
              $
              2,323Equipment
                  and occupancy
              
              **532**
              
              
              487Office
                  Supplies
              
              **142**
              
              
              122Data
                  processing fees
              
              **335**
              
              
              306Professional
                  fees
              
              **181**
              
              
              148Consulting
                  fees
              
              **157**
              
              
              56Advertising
                  & Public Relations
              
              **245**
              
              
              234Other
                  expense
              
              **910**
              
              
              810**$**
              **5,070**
              
              $
              4,486





**Income
      Taxes**





Income
      taxes totaled $1,397,000 in 2005 and $1,108,000 in 2004. The effective tax
      rate
      was 36% for both 2005 and 2004.





**Liquidity
      and Capital Resources**





Liquidity
      management involves the matching of the cash flow requirements of customers,
      who
      may be either depositors desiring to withdraw funds or borrowers needing
      assurance that sufficient funds will be available to meet their credit needs,
      and the ability of the Company and the Bank to meet those needs. As such, the
      Company and the Bank seek to meet liquidity requirements primarily through
      management of short-term investments (principally federal funds sold) and
      monthly amortizing loans. Another source of liquidity is the repayment of
      maturing single payment loans. In addition, the Bank maintains relationships
      with correspondent banks which could provide funds to it on short notice, if
      needed.





The
      liquidity and capital resources of the Company and the Bank are monitored on
      a
      periodic basis by state and federal regulatory authorities. At December 31,
      2005, the Bank's short-term investments were adequate to cover any reasonable
      anticipated immediate need for funds. During 2005, the Company increased its
      capital by retaining net earnings of $2,272,000 after payment of dividends.
      After recording a decrease in capital of $148,000 for unrealized losses on
      securities available for sale, net of taxes, total capital increased $2,124,000
      during 2005. At December 31, 2005, total capital of the Company amounted to
      $15,494,000. The Company is aware of no events or trends likely to result in
      a
      material change in liquidity of the Company or the Bank.





In
      accordance with risk capital guidelines issued by the Federal Reserve Board,
      the
      Bank is required to maintain a minimum standard of total capital to
      risk-weighted assets of 8%. Additionally, all member banks must maintain “core”
or “Tier 1” capital of at least 4% of total assets (“leverage ratio”). Member
      banks operating at or near the 4% capital level are expected to have
      well-diversified risks, including no undue interest rate risk exposure,
      excellent control systems, good earnings, high asset quality, and well managed
      on- and off-balance sheet activities; and, in general, be considered strong
      banking organizations with a composite 1 rating under the CAMEL rating system
      of
      banks. For all but the most highly rated banks meeting the above conditions,
      the
      minimum leverage ratio is to be 4% plus an additional 100 to 200 basis
      points.


20





**Capital
      Resources**





The
      following table summarizes the regulatory capital levels of the Bank at December
      31, 2005.





**Actual**
            
            **Required**
            
            **Excess****Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent****(Dollars
                in Thousands)**Leverage
                capital
            $
            19,118
            
            9.9
            %
            
            $
            7,716
            
            4.00
            %
            
            $
            11,402
            
            5.9
            %Risk-based
                capital:Core
                capital
            
            19,118
            
            13.0
            
            
            
            5,901
            
            4.00
            
            
            
            13,217
            
            9.0Total
                capital
            
            20,972
            
            14.2
            
            
            
            11,802
            
            8.00
            
            
            
            9,170
            
            6.2





**Short-Term
      Borrowings**





The
      following table summarizes short-term borrowings for the periods indicated
      (dollars in thousands):





**Years
                Ended December 31,****2005**
            
            **2004****Average**
              **Balance**
            
            **Average**
              **Rate**
            
            **Average**
              **Balance**
            
            **Average**
              **Rate**Federal
                funds purchased
            **$**
            **-**
            
            **-**
            **%**
            
            $
            8
            
            1.12
            %**Total**
              **Balance**
            
            
            
            
            **Total**
              **Balance**Total
                maximum short-term borrowingsoutstanding
                at any month-end during the year
            **$**
            **-**
            
            
            
            
            $
            -





**Contractual
      Obligations**





The
      following table sets forth certain information about contractual cash
      obligations as of December 31, 2005 (dollars in thousands):





**Payments
                Due After December 31, 2005****Total**
            
            **1
                Year**
              **Or
                Less**
            
            **1
                -3**
              **Years**
            
            **4
                -5**
              **Years**
            
            **After
                5**
              **Years**Time
                certificates of deposit
            
            $
            90,545
            
            $
            64,030
            
            $
            26,515
            
            $
            -
            
            $
            -Other
                borrowings
            
            
            12,402
            
            
            9,022
            
            
            1,380
            
            
            -
            
            
            2,000Operating
                leases
            
            
            20,400
            
            
            7,200
            
            
            13,200
            
            
            -
            
            
            -Subordinated
                deferrable debentures
            
            
            4,000
            
            
            -
            
            
            -
            
            
            -
            
            
            4,000Total
                contractual cash obligations
            
            $
            127,347
            
            $
            80,252
            
            $
            41,095
            
            $
            -
            
            $
            6,000




At
      December 31, 2005 the Company and the Bank had $110,000 in binding commitments
      for capital expenditures. These expenditures represent amounts for the
      completion of a new branch office.


21





**Commitments
      and Lines of Credit (Off-Balance Sheet Arrangements)**




In
      the
      ordinary course of business, the Bank has granted commitments to extend credit
      to approved customers. Generally, these commitments to extend credit have been
      granted on a temporary basis for seasonal or inventory requirements and have
      been approved by the Bank's Board of Directors. The Bank has also granted
      commitments to approved customers for standby letters of credit. These
      commitments are recorded in the financial statements when funds are disbursed
      or
      the financial instruments become payable. The Bank uses the same credit policies
      for these off balance sheet commitments as it does for financial instruments
      that are recorded in the consolidated financial statements. Commitments
      generally have fixed expiration dates or other termination clauses and may
      require payment of a fee. Since many of the commitment amounts expire without
      being drawn upon, the total commitment amounts do not necessarily represent
      future cash requirements.





Following
      is a summary of the commitments outstanding at December 31, 2005 and
      2004.





**2005**
            
            **2004****(Dollars
                in Thousands)**





Commitments
                to extend credit
            **$**
            **23,462**
            
            $
            22,835Standby
                letters of credit
            
            **599**
            
            
            651**$**
            **24,061**
            
            $
            23,486





**Impact
      of Inflation**





The
      consolidated financial statements and related consolidated financial data
      presented herein have been prepared in accordance with generally accepted
      accounting principles and practices within the banking industry which require
      the measurement of financial position and operating results in terms of
      historical dollars without considering the changes in the relative purchasing
      power of money over time due to inflation. Unlike most industrial companies,
      virtually all the assets and liabilities of a financial institution are monetary
      in nature. As a result, interest rates have a more significant impact on a
      financial institution’s performance than the effects of general levels of
      inflation.


22





**Selected
      Statistical Information of the Company**





The
      following statistical information should be read in conjunction with the
      MD&A and the consolidated financial statements and related notes included
      elsewhere in this Annual Report and in the documents incorporated herein by
      reference.





**Average
      Balances and Net Income Analysis**





The
      following tables set forth the amount of the Bank’s interest income or interest
      expense for each category of interest-earning assets and interest-bearing
      liabilities and the average interest rate for total interest-earning assets
      and
      total interest-bearing liabilities, net interest spread and net yield on average
      interest-earning assets. Federally tax-exempt income is presented on a
      taxable-equivalent basis assuming a 34% federal tax rate.





**Year
                Ended December 31,****2005**
            
            
            **2004****Average****Balance**
            ****
            **Interest****Income/****Expense**
            ****
            ****
            **Average****Yield/****Rate
                Paid**
            ****
            ****
            **Average****Balance**
            ****
            ****
            **Interest****Income/****Expense**
            ****
            ****
            **Average****Yield/****Rate
                Paid****(Dollars
                in Thousands)****ASSETS**Interest-earning
                assets:Loans,
                net of unearned interest
            
            **$**
            **150,932**
            
            **$**
            **10,338**
            
            
            **6.85**
            **%**
            $
            127,948
            
            $
            7,732
            
            
            6.04
            %Investment
                securities:Taxable
            
            
            **11,399**
            
            
            **443**
            
            
            **3.89**
            
            
            11,460
            
            
            441
            
            
            3.85Nontaxable
            
            
            **1,110**
            
            
            **67**
            
            
            **6.04**
            
            
            1,146
            
            
            68
            
            
            5.93Interest-bearing
                deposits in banks
            
            
            **542**
            
            
            **16**
            
            
            **2.95**
            
            
            89
            
            
            1
            
            
            1.41Federal
                funds sold
            
            
            **11,617**
            
            
            **391**
            
            
            **3.37**
            
            
            6,922
            
            
            100
            
            
            1.44Total
                interest-earning assets
            
            
            **175,600**
            
            
            **11,255**
            
            
            **6.41**
            
            
            147,565
            
            
            8,342
            
            
            5.65Noninterest-earning
                assets:Cash
            
            
            **4,456**
            
            
            
            
            
            
            
            
            4,081Allowance
                for loan losses
            
            
            **(2,404**
            **)**
            
            
            
            
            
            
            
            (1,991
            )Other
                assets
            
            
            **6,257**
            
            
            
            
            
            
            
            
            4,802Total
                noninterest-earning assets
            
            
            **8,309**
            
            
            
            
            
            
            
            
            6,892Total
                assets
            
            **$**
            **183,909**
            
            
            
            
            
            
            
            $
            154,457


23





**Average
      Balances and Net Income Analysis (Continued)**





**Year
                Ended December 31,****2005**
            
            **2004****Average****Balance**
            ****
            **Interest****Income/****Expense**
            ****
            ****
              **Average****Yield/****Rate
                Paid**
            ****
            ****
              **Average****Balance**
            ****
            ****
              **Interest****Income/****Expense**
            ****
            **Average****Yield/****Rate
                Paid****(Dollars
                in Thousands)****LIABILITIES
                AND****STOCKHOLDERS’
                EQUITY**Interest-bearing
                liabilities:Savings
                  and interest-bearing demand deposits
            
            **$**
            **42,234**
            
            **$**
            **637**
            
            
            **1.51**
            **%**
            $
            37,356
            
            $
            267
            
            
            0.71
            %Time
                deposits
            
            
            **85,465**
            
            
            **2,864**
            
            
            **3.35**
            
            
            72,390
            
            
            1,643
            
            
            2.27Other
                borrowings
            
            
            **13,217**
            
            
            **419**
            
            
            **3.17**
            
            
            7,548
            
            
            151
            
            
            1.99Trust
                Preferred Securities
            
            
            **1,644**
            
            
            **102**
            
            
            **6.20**
            
            
            -
            
            
            -
            
            
            -Total
                  interest-bearingliabilities
            
            
            **142,560**
            
            
            **4,022**
            
            
            **2.82**
            
            
            117,294
            
            
            2,061
            
            
            1.76Noninterest-bearing
                  liabilities andstockholders’
                  equity:Demand
                deposits
            
            
            **25,704**
            
            
            
            
            
            
            
            
            23,849Other
                liabilities
            
            
            **1,019**
            
            
            
            
            
            
            
            
            666Stockholders’
                equity
            
            
            **14,626**
            
            
            
            
            
            
            
            
            12,648Total
                  noninterest-bearing liabilitiesand
                  stockholders’ equity
            
            
            **41,349**
            
            
            
            
            
            
            
            
            37,163Total
                  liabilities andstockholders’
                  equity
            
            **$**
            **183,909**
            
            
            
            
            
            
            
            **$**
            154,457Interest
                rate spread
            
            
            
            
            
            
            
            
            **3.59**
            **%**
            
            
            
            
            
            
            
            3.89
            %Net
                interest income
            
            
            
            
            **$**
            **7,233**
            
            
            
            
            
            
            
            $
            6,281Net
                interest margin
            
            
            
            
            
            
            
            
            **4.12**
            **%**
            
            
            
            
            
            
            
            4.26
            %


24





**Rate
      and Volume Analysis**





The
      following table reflects the changes in net interest income resulting from
      changes in interest rates and from asset and liability volume. Federally
      tax-exempt interest is presented on a taxable-equivalent basis assuming a 34%
      federal tax rate. The change in interest attributable to rate has been
      determined by applying the change in rate between years to average balances
      outstanding in the later year. The change in interest due to volume has been
      determined by applying the rate from the earlier year to the change in average
      balances outstanding between years. Thus, changes that are not solely due to
      volume have been consistently attributed to rate.


**Year
                  Ended December 31,**
                **2005
                  vs. 2004**
              
              **Year
                    Ended December 31,****2004
                  vs. 2003****Increase**
              
              **Changes
                  Due To**
              
              **Increase**
              
              **Changes
                  Due To****(Decrease)**
              
              **Rate**
              
              **Volume**
              
              **(Decrease)**
              
              **Rate**
              
              **Volume****(In
                  Thousands)**
              
              **(In
                  Thousands)**Increase
                  (decrease) in:Income
                  from earning assets:Interest
                  and fees on loans
              
              $
              2,606
              
              $
              1,217
              
              $
              1,389
              
              $
              692
              
              $
              (371
              )
              $
              1,063Interest
                  on securities:Taxable
              
              
              2
              
              
              4
              
              
              (2
              )
              
              (231
              )
              
              (19
              )
              
              (212
              )Tax
                  exempt
              
              
              (1
              )
              
              1
              
              
              (2
              )
              
              -
              
              
              -
              
              
              -Interest-bearing
                  deposits in banks
              
              
              15
              
              
              10
              
              
              5
              
              
              (25
              )
              
              1
              
              
              (26
              )Interest
                  on federal funds sold
              
              
              291
              
              
              223
              
              
              68
              
              
              58
              
              
              21
              
              
              37Total
                  interest income
              
              
              2,913
              
              
              1,455
              
              
              1,458
              
              
              494
              
              
              (368
              )
              
              862Expense
                  from interest-bearing liabilities:Interest
                  on savings and interest-bearing
                  demand deposits
              
              
              370
              
              
              335
              
              
              35
              
              
              22
              
              
              (14
              )
              
              36Interest
                  on time deposits
              
              
              1,221
              
              
              924
              
              
              297
              
              
              (524
              )
              
              (443
              )
              
              (81
              )Interest
                  on other borrowings
              
              
              268
              
              
              155
              
              
              113
              
              
              125
              
              
              (174
              )
              
              299Interest
                  on Trust Preferred Securities
              
              
              102
              
              
              102
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  interest expense
              
              
              1,961
              
              
              1,516
              
              
              445
              
              
              (377
              )
              
              (631
              )
              
              254Net
                  interest income
              
              $
              952
              
              $
              (61
              )
              $
              1,013
              
              $
              871
              
              $
              263
              
              $
              608











25


**Asset/Liability
      Management**





A
      principal objective of the Company’s asset/liability management strategy is to
      minimize its exposure to changes in interest rates by matching the maturity
      and
      repricing horizons of interest-earning assets and interest-bearing liabilities.
      This strategy is overseen in part through the direction of the Company’s Asset
      and Liability Committee (the “ALCO Committee”) which establishes policies and
      monitors results to control interest rate sensitivity.





As
      part
      of the Company’s interest rate risk management policy, the ALCO Committee
      examines the extent to which its assets and liabilities are “interest
      rate-sensitive” and monitors its interest rate-sensitivity “gap”. An asset or
      liability is considered to be interest rate sensitive if it will reprice or
      mature within the time period analyzed, usually one year or less. The interest
      rate-sensitivity gap is the difference between the interest-earning assets
      and
      interest-bearing liabilities scheduled to mature or reprice within such time
      period. A gap is considered positive when the amount of interest rate-sensitive
      assets exceeds the amount of interest rate-sensitive liabilities. A gap is
      considered negative when the amount of interest rate-sensitive liabilities
      exceeds the interest rate-sensitive assets. During a period of rising interest
      rates, a negative gap would tend to adversely affect net interest income, while
      a positive gap would tend to result in an increase in net interest income.
      During a period of falling interest rates, a negative gap would tend to result
      in an increase in net interest income, while a positive gap would tend to
      adversely affect net interest income. If the Company’s assets and liabilities
      were equally flexible and moved concurrently, the impact of any increase or
      decrease in interest rates on net interest income would be minimal.





A
      simple
      interest rate “gap” analysis by itself may not be an accurate indicator of how
      net interest income will be affected by changes in interest rates. Accordingly,
      the ALCO Committee also evaluates how the repayment of particular assets and
      liabilities is impacted by changes in interest rates. Income associated with
      interest-earning assets and costs associated with interest-bearing liabilities
      may not be affected uniformly by changes in interest rates. In addition, the
      magnitude and duration of changes in interest rates may have a significant
      impact on net interest income. For example, although certain assets and
      liabilities may have similar maturities or periods of repricing, they may not
      react identically to changes in market interest rates. Interest rates on certain
      types of assets and liabilities fluctuate in advance of changes in general
      market interest rates, while interest rates on other types may lag behind
      changes in general market rates. In addition, certain assets, such as adjustable
      rate mortgage loans, have features (generally referred to as “interest rate
      caps”) which limit changes in interest rates on a short-term basis and over the
      life of the asset. In the event of a change in interest rates, prepayment and
      early withdrawal levels also could deviate significantly from those assumed
      in
      calculating the interest-rate gap. The ability of many borrowers to service
      their debts also may decrease in the event of an interest-rate
      increase.





26


The
      following table sets forth the distribution of the repricing of the Bank’s
      earning assets and interest-bearing liabilities as of December 31, 2005, the
      interest rate sensitivity gap (i.e., interest rate sensitive assets divided
      by
      interest rate sensitivity liabilities), the cumulative interest rate sensitivity
      gap ratio (i.e., interest rate sensitive assets divided by interest rate
      sensitive liabilities) and the cumulative sensitivity gap ratio. The table
      also
      sets forth the time periods in which earning assets and liabilities will mature
      or may reprice in accordance with their contractual terms. However, the table
      does not necessarily indicate the impact of general interest rate movements
      on
      the net interest margin since the repricing of various categories of assets
      and
      liabilities is subject to competitive pressures and the needs of the Bank’s
      customers. In addition, various assets and liabilities indicated as repricing
      within the same period may in fact reprice at different times within such period
      and at different rates.




**At
                December 31, 2005****Maturing
                or Repricing Within****Zero
                to**
            
            **Three**
            
            **One
                to**
            
            **Over****Three**
            
            **Months
                to**
            
            **Five**
            
            **Five****Months**
            
            **One
                Year**
            
            **Years**
            
            **Years**
            
            **Total****(Dollars
                in Thousands)****Earning
                assets:**Interest-bearing
                  deposits in banks and federal funds sold
            $
            21,126
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            21,126Restricted
                stock
            
            1,031
            
            
            -
            
            
            -
            
            
            -
            
            
            1,031Investment
                securities
            
            519
            
            
            2,591
            
            
            7,948
            
            $
            155
            
            
            11,213Loans
            
            59,281
            
            
            43,247
            
            
            46,065
            
            
            2,679
            
            
            151,27281,957
            
            
            45,838
            
            
            54,013
            
            
            2,834
            
            
            184,642**Interest-bearing
                liabilities:**Interest-bearing
                demand deposits (1)
            
            -
            
            
            35,507
            
            
            -
            
            
            -
            
            
            35,507Savings
                (1)
            
            -
            
            
            7,388
            
            
            -
            
            
            -
            
            
            7,388Certificates
                less than $100,000
            
            8,094
            
            
            19,839
            
            
            8,796
            
            
            -
            
            
            36,729Certificates,
                $100,000 and over
            
            11,368
            
            
            24,729
            
            
            17,725
            
            
            -
            
            
            53,822Other
                borrowings
            
            9,000
            
            
            2,000
            
            
            1,402
            
            
            -
            
            
            12,402Trust
                preferred security
            
            -
            
            
            -
            
            
            -
            
            
            4,124
            
            
            4,12428,462
            
            
            89,463
            
            
            27,923
            
            
            4,124
            
            
            149,972**Interest
                rate sensitivity gap**
            $
            53,495
            
            $
            (43,625)
            
            $
            26,090
            
            $
            (1,290)
            
            $
            34,670**Cumulative
                interest rate sensitivity gap**
            $
            53,495
            
            $
            9,870
            
            $
            35,960
            
            $
            34,670**Interest
                rate sensitivity gap ratio**
            
            2.88
            
            
            0.51
            
            
            1.93
            
            
            0.69**Cumulative
                interest rate sensitivity gap ratio**
            
            2.88
            
            
            1.08
            
            
            1.25
            
            
            1.23





(1)
            In
                recent years, the Bank has found that NOW and money-market checking
                deposits and savings deposits reprice on average between three months
                and
                one year, depending on the competition in the Bank’s market area and the
                general interest rate environment. Therefore, the Bank has placed
                these
                deposits in the three months to one year horizon.





27


**Investment
      Portfolio**





The
      Bank
      manages the mix of asset and liability maturities in an effort to control the
      effects of changes in the general level of interest rates on net interest
      income. See “Asset/Liability Management.” Except for its effect on the general
      level of interest rates, inflation does not have a material impact on the
      portfolio due to the rate variability and short-term maturities of its earning
      assets. In particular, approximately 68% of the loan portfolio is comprised
      of
      loans which mature or reprice within one year or less. Mortgage loans, primarily
      with five to fifteen year maturities, are also made on a variable rate basis
      with rates being adjusted every one to five years. Additionally, 28% of the
      investment portfolio matures or reprices within one year or less. All of the
      Bank’s investment securities are classified as available for sale.





**Types
      of Investments**





**Securities**





Following
      is a summary of the carrying value of investments, including restricted equity
      securities, as of the end of each reported period:





**December
                31,****2005**
            
            **2004****(Dollars
                in Thousands)**U.
                S. Government and agency securities
            **$**
            **8,105**
            
            $
            7,237State
                and municipal securities
            
            **1,091**
            
            
            1,131Corporate
                debt securities
            
            **1,021**
            
            
            2,082Mortgage-backed
                securities
            
            **996**
            
            
            1,609Restricted
                stock
            
            **1,031**
            
            
            844**$**
            **12,244**
            
            $
            12,903





***Maturities***





The
      amounts of securities available for sale in each category as of December 31,
      2005 are shown in the following table according to contractual maturity
      classifications (1) one year or less, (2) after one year through five years,
      (3)
      after five years through ten years, and (4) after ten years. Restricted stock
      is
      included in the classification “after ten years.”







**U.
                S. Treasury****And
                Other U. S.****Government
                Agencies,****Corporations
                and Restricted Stock**
            
            
            **State
                and Political Subdivisions****Yield**
            
            
            
            
            
            **Yield****Amount**
            
            **(1)**
            
            
            **Amount**
            
            **(1)
                (2)****(Dollars
                in Thousands)****Maturity:**One
                year or less
            $
            2,766
            
            3.61
            %
            
            $
            -
            
            -
            %After
                one year through five years
            
            6,360
            
            3.93
            
            
            
            936
            
            5.81After
                five years through ten years
            
            -
            
            -
            
            
            
            -
            
            -After
                ten years
            
            1,031
            
            -
            
            
            
            155
            
            6.34$
            10,157
            
            3.83
            %
            
            $
            1,091
            
            5.89
            %





(1)
            Yields
                were computed using coupon interest, adding discount accretion or
                subtracting premium amortization, as appropriate, on a ratable basis
                over
                the life of each security. The weighted average yield for each maturity
                range was computed using the acquisition price of each security in
                that
                range.





(2)
            Yields
                on securities of state and political subdivisions are stated on a
                taxable-equivalent basis, using a tax rate of
                34%.


28





***Loan
      Portfolio***





**Types
      of Loans**





Management
      believes that the Bank’s loan portfolio is adequately diversified. The loan
      portfolio contains no foreign or energy-related loans or significant
      concentrations in any one industry, with the exception of residential and
      commercial real estate mortgages, which constituted approximately 62.5% of
      the
      Bank’s loan portfolio as of December 31, 2005. The amount of loans outstanding
      at the indicated dates is shown in the following table according to type of
      loans.


**December
                  31,****2005**
              
              **2004****(Dollars
                  in Thousands)**Commercial,
                  financial and agricultural
              
              **$**
              **19,052**
              
              $
              16,104Real
                  estate - construction
              
              
              **28,937**
              
              
              26,135Real
                  estate - mortgage
              
              
              **94,596**
              
              
              86,110Consumer
              
              
              **8,447**
              
              
              9,875Overdrafts
              
              
              **240**
              
              
              53**151,272**
              
              
              138,277Less
                  reserve for possible loan losses
              
              
              **(2,621**
              **)**
              
              (2,058
              )Loans,
                  net
              
              **$**
              **148,651**
              
              $
              136,219


**Maturities
      and Sensitivity to Changes in Interest Rates**





The
      maturities of the indicated loans at December 31, 2005 are shown in the
      following table according to maturities of (1) one year or less, (2) after
      one
      year through five years, and (3) after five years.





**Maturing****One
                    year**
                  **or
                    less**
                
                **After
                    one**
                  **year**
                  **through**
                  **five
                    years**
                
                **After
                    five**
                  **years**
                
                **Total****(Dollars
                    in Thousands)**Commercial,
                    financial and agricultural
                
                $
                13,487
                
                $
                5,179
                
                $
                386
                
                $
                19,052Real
                    estate - construction
                
                
                20,368
                
                
                8,386
                
                
                183
                
                
                28,937





The
      following table summarizes the loans presented in the table above at December
      31, 2005 that mature after one year which (1) have predetermined interest rates
      and (2) have floating or adjustable interest rates.





**(Dollars
                in****Thousands)**Predetermined
                interest rates
            $
            8,172Floating
                or adjustable interest rates
            
            5,962$
            14,134




29


**Nonperforming
      Loans**





A
      loan is
      placed on nonaccrual status when, in management’s judgment, the collection of
      the interest income appears doubtful. Interest receivable that has been accrued
      in prior years and is subsequently determined to have doubtful collectibility
      is
      charged to the allowance for possible loan losses. Interest on loans that are
      classified as nonaccrual is recognized when received. Past due loans are loans
      whose principal or interest is past due 90 days or more. In some cases, where
      borrowers are experiencing financial difficulties, loans may be restructured
      to
      provide terms significantly different from the original contractual
      terms.





**December
                31,****2005**
            
            **2004****(Dollars
                in Thousands)**Loans
                accounted for on a nonaccrual basis
            **$**
            **877**
            
            $
            631Installment
                loans and term loans contractually past due ninety days or
                moreas
                to interest or principal payments and still accruing
            
            **22**
            
            
            54





In
      the
      opinion of management, any loans classified by regulatory authorities as
      doubtful, substandard or special mention that have not been disclosed above
      do
      not (i) represent or result from trends or uncertainties which management
      reasonably expects will materially impact future operating results, liquidity
      or
      capital resources, or (ii) represent material credits about which management
      is
      aware of any information which causes management to have serious doubts as
      to
      the ability of such borrowers to comply with the loan repayment terms. Any
      loans
      classified by regulatory authorities as loss have been charged off.





Additional
      interest income of $53,000 in 2005 would have been recorded if all loans
      accounted for on a non-accrual basis in the table above had been current in
      accordance with their original terms. No interest income has been recognized
      in
      2005 on loans accounted for on a non-accrual basis.







**Summary
      of Loan Loss Experience**





The
      allowance for loan losses represents a reserve for potential losses in the
      Bank’s loan portfolio. The adequacy of the allowance for loan losses is
      evaluated periodically based on a review of all significant loans, with a
      particular emphasis on nonaccruing, past due and other loans that management
      believes require attention. The Bank segregates its loan portfolio by type
      of
      loan and utilizes this segregation in evaluating exposure to risks within the
      portfolio. In addition, based on internal reviews and external reviews performed
      by independent auditors and regulatory authorities, the Bank further segregates
      its loan portfolio by loan classifications within each type of loan based on
      an
      assessment of risk for a particular loan or group of loans. Certain reviewed
      loans require specific allowances. Allowances are provided for other types
      and
      classifications of loans based on anticipated loss rates. Allowances are also
      provided for loans that are reviewed by management and considered creditworthy
      and loans for which management determines no review is required. In establishing
      allowances, management considers historical loan loss experience with an
      emphasis on current loan quality trends, current economic conditions and other
      factors in the Bank’s market. Factors considered include among others,
      unemployment rates, effect of weather on agriculture and significant local
      economic events, such as major plant closings.


30





The
      Bank
      has developed a methodology for determining the adequacy of the loan loss
      reserve, which is reviewed monthly by the Board of Directors. Procedures provide
      for the assignment of a risk rating for every loan included in the Bank’s total
      loan portfolio, with the exception of home equity and personal lines of credit.
      The risk rating schedule provides eight ratings of which four ratings are
      classified as pass ratings and four ratings are classified as criticized
      ratings. Each risk rating is assigned a percent factor to be applied to the
      loan
      balance to determine the adequate amount of reserve. Many of the larger loans
      require an annual review by an independent loan officer. As a result of loan
      reviews certain loans may be assigned specific reserve allocations. Other loans
      that surface as problem loans may also be assigned specific reserves. Past
      due
      loans are assigned risk ratings based on the number of days past due.





The
      provision for loan losses is a charge to earnings in the current period to
      replenish the allowance and maintain it at a level management has determined
      to
      be adequate. The provision for loan losses charged to earnings amounted to
      $500,000 in 2005 and $540,000 in 2004. The decrease in the provision for loan
      losses in 2005 resulted from a decrease in net charge-offs in 2005 and an
      improvement in the quality of the loan portfolio.





The
      Bank’s allowance for loan losses was $2,621,000 at December 31, 2005,
      representing 1.73% of year end total loans outstanding compared to $2,058,000
      at
      December 31, 2004, which represented 1.49% of year end total loans outstanding.
      Management considers the allowance for loan losses adequate to cover anticipated
      loan losses.





**Allocation
      of the Allowance for Loan Losses**





The
      following table sets forth the breakdown of the allowance for loan losses by
      loan category for the periods indicated. Management believes the allowance
      can
      be allocated only on an approximate basis. The allocation of the allowance
      to
      each category is not necessarily indicative of future losses and does not
      restrict the use of the allowance to absorb losses in any other
      category.


**At
                  December 31,****2005**
              
              **2004****Amount**
              
              **Percent
                  of**
                **Loans
                  in Category**
                **to
                  Total**
                **Loans**
              
              **Amount**
              
              **Percent
                  of**
                **Loans
                  in Category**
                **to
                  Total**
                **Loans****(Dollars
                  in Thousands)**Commercial,
                  financial and agricultural
              
              **$**
              **786**
              
              
              **30**
              **%**
              $
              720
              
              
              35
              %Real
                  estate - construction
              
              
              **656**
              
              
              **25**
              
              
              412
              
              
              20Real
                  estate - mortgage
              
              
              **393**
              
              
              **15**
              
              
              308
              
              
              15Consumer
              
              
              **786**
              
              
              **30**
              
              
              618
              
              
              30**$**
              **2,621**
              
              
              **100**
              **%**
              $
              2,058
              
              
              100
              %


31





The
      following table presents an analysis of the Bank’s loan loss experience for the
      periods indicated:


**December
                  31,****2005**
              
              **2004****(Dollars
                  in Thousands)**Average
                  amount of loans outstanding
              
              **$**
              **150,932**
              
              $
              127,948Balance
                  of reserve for possible loan losses at beginning of period
              
              **$**
              **2,058**
              
              $
              1,758Charge-offs:Commercial,
                  financial and agricultural
              
              
              **-**
              
              
              135Real
                  estate - construction
              
              
              **17**
              
              
              1Real
                  estate - mortgage
              
              
              **6**
              
              
              57Consumer
              
              
              **78**
              
              
              127Recoveries:Commercial,
                  financial and agricultural
              
              
              **16**
              
              
              24Real
                  estate - mortgage
              
              
              **107**
              
              
              27Consumer
              
              
              **41**
              
              
              29Net
                  (recoveries) charge-offs
              
              
              **(63**
              **)**
              
              240Additions
                  to reserve charged to operating expenses
              
              
              **500**
              
              
              540Balance
                  of reserve for possible loan losses at end of period
              
              **$**
              **2,621**
              
              $
              2,058Ratio
                  of net loan (recoveries) charge-offs to average loans
              
              
              **(0.04**
              **)%**
              
              0.19
              %




A
      substantial portion of the Bank’s loan portfolio is in the commercial real
      estate lending and residential real estate sectors, including real estate
      construction lending. Those loans are secured by real estate in the Company’s
      primary market area. Therefore, the ultimate collectibility of a substantial
      portion of the Bank’s loan portfolio is susceptible to changes to market
      conditions in the Company’s primary market area.





The
      Company also is closely monitoring certain portions of its loan portfolio that
      the Company believes have a higher credit risk profile, based solely upon their
      industry classification, which includes agricultural and agribusiness loans.
      Based on current information, the Company has not identified any problem credits
      included in these categories, which are not already classified as nonperforming
      or impaired loans.




**Deposits**





Average
      amount of deposits and average rate paid thereon, classified as to
      noninterest-bearing demand deposits, interest-bearing demand and savings
      deposits and time deposits, for the periods indicated are presented
      below.





**Year
                Ended December 31,****2005**
            
            **2004****Amount**
            
            **Rate**
            
            **Amount**
            
            **Rate****(Dollars
                in Thousands)**Noninterest-bearing
                demand deposits
            
            **$**
            **25,704**
            
            
            **-**
            **%**
            $
            23,849
            
            
            -
            %Interest-bearing
                demand and savings deposits
            
            
            **42,234**
            
            
            **1.51**
            
            
            37,356
            
            
            0.71Time
                deposits
            
            
            **85,465**
            
            
            **3.35**
            
            
            72,390
            
            
            2.27Total
                deposits
            
            **$**
            **153,403**
            
            
            
            
            $
            133,595


32





The
      time
      deposits are principally certificates of deposit and individual retirement
      accounts obtained for individual customers.




The
      amounts of time certificates of deposit issued in amounts of $100,000 or more
      as
      of December 31, 2005, are shown below by category, which is based on time
      remaining until maturity of (1) three months or less, (2) over three through
      six
      months (3) over six through twelve months and (3) over twelve
      months.





**(Dollars
                  in**
                **Thousands)**Three
                  months or less
              $
              11,367Over
                  three months through six months
              
              7,293Over
                  six months through twelve months
              
              17,437Over
                  twelve months
              
              17,725Total
              $
              53,822




**Return
      on Assets and Shareholders’ Equity**





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





**Year
                Ended December 31,****2005**
            
            **2004**Return
                on assets (1)
            
            
            **1.37**
            **%**
            
            1.27
            %Return
                on equity (2)
            
            
            **17.18**
            
            
            15.52Dividends
                payout ratio (3)
            
            
            **9.52**
            
            
            9.24Equity
                to assets ratio (4)
            
            
            **7.95**
            
            
            8.19





(1)
            Net
                income divided by average total
                assets.


(2)
            Net
                income divided by average equity.


(3)
            Dividends
                declared per share divided by net income per
                share.


(4)
            Average
                equity divided by average total
                assets.


33





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





The
      audited consolidated financial statements of the Company, including the notes
      thereto, and the report of Mauldin & Jenkins LLC are included in this Report
      beginning at page F-1.





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





Not
      Applicable.





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





The
      Chief
      Executive Officer and Chief Financial Officer of the Company have concluded,
      based on their evaluation as of December 31, 2005, that the Company’s disclosure
      controls and procedures are effective to ensure that information required to
      be
      disclosed by the Company in the reports filed or submitted by it under the
      Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
      and reported within the time periods specified in the rules and forms of the
      Securities and Exchange Commission, and include controls and procedures designed
      to ensure that information required to be disclosed by the Company in such
      reports is accumulated and communicated to the Company's management, including
      the Company's Chief Executive Officer and Chief Financial Officer, as
      appropriate to allow timely decisions regarding required disclosure.





The
      Company made no significant changes in its internal controls or in other factors
      that could significantly affect these controls subsequent to the date of the
      evaluation of those controls by the Chief Executive Officer and the Chief
      Financial Officer.





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





Not
      Applicable.





34


**PART
      III**




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





The
      information appearing under the headings “Election of Directors,” “Executive
      Officers” and “Section 16(a), Beneficial Ownership Reporting Compliance” in the
      Proxy Statement (the “2006 Proxy Statement”) relating to the annual meeting of
      shareholders of the Company, scheduled to be held on May 18, 2006, is
      incorporated herein by reference. In addition, the Company has adopted a code
      of
      ethics, which is entitled “Code of Conduct for Senior Executive and Financial
      Officers,” that applies to the Company’s chief executive officer and chief
      financial officer, a copy of which is filed as Appendix A to the Company’s 2004
      Proxy Statement and incorporated herein by reference.





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




The
      information appearing under the heading “Executive Compensation” in the 2006
      Proxy Statement is incorporated herein by reference.








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





The
      information appearing under the headings “Equity Compensation Plan Information”
and “Principal Shareholders” in the 2006 Proxy Statement is incorporated herein
      by reference.





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





The
      information appearing under the caption “Certain Relationships and Transactions”
in the 2005 Proxy Statement is incorporated herein by reference.





**ITEM
              13.**
            **EXHIBITS**




1. The
      following financial statements of the Company as of and for the years ended
      December 31, 2005 and 2004 are filed and incorporated herein by reference as
      part of this Report:





PageReport
                  of Independent Registered Public Accounting Firm
              F-1Consolidated
                  Balance Sheets
              F-2Consolidated
                  Statements of Income
              F-3Consolidated
                  Statements of Comprehensive Income
              F-4Consolidated
                  Statements of Stockholder's Equity
              F-5Consolidated
                  Statements of Cash Flows
              F-6Notes
                  to Consolidated Financial Statements
              F-7
                  to F-26


35





2. The
      following exhibits are filed or incorporated by reference as part of this
      Report:





**Exhibit
                  No.**
              **Description**2.1
              Plan
                  of Reorganization and Agreement to Merge, dated as of April 25, 2000,
                  by and among the Company, FMB Interim Corp. and Farmers & Merchants
                  Bank (Incorporated herein by reference to Exhibit 2.1 of the Company's
                  Report on Form 8-K filed on February 27, 2001). (With regard to
                  applicable
                  cross references in this Report on Form 10-KSB, the Company’s Proxy
                  Statements, Current, Quarterly, and Annual Reports, unless otherwise
                  noted, are filed with the Commission under File No. 000-32399 and
                  incorporated herein by reference).3.1
              Articles
                  of Incorporation of FMB Equibanc, Inc. (Incorporated herein by
                  reference
                  to Exhibit 3.1 of the Company's Report on Form 8-K filed on February
                  27,
                  2001).3.2
              Bylaws
                  of FMB Equibanc, Inc. (Incorporated herein by reference to Exhibit
                  3.2 of
                  the Company's Report on Form 8-K filed on February 27,
                  2001).10.1*
              1998
                  Nonqualified Stock Option Plan. (Incorporated by reference to Exhibit
                  10.1
                  of the Company’s Annual Report on Form 10-KSB for the year ended December
                  31, 2000).10.2*
              Form
                  of Director Deferred Compensation Agreement. (Incorporated by reference
                  to
                  Exhibit 10.2 of the Company’s Annual Report on Form 10-KSB for the year
                  ended December 31, 2000).10.3*
              Employment
                  Agreement by and between Farmers & Merchants Bank and Charles R.
                  Nessmith. (Incorporated by reference to Exhibit 10.3 of the Company’s
                  Annual Report on Form 10-KSB for the year ended December 31,
                  2002).10.4*
              Deferred
                  Compensation Agreement by and between Farmers & Merchants Bank and
                  Frank C. Rozier III. (Incorporated by reference to Exhibit 10.4
                  of the
                  Company’s Annual Report on Form 10-KSB for the year ended December 31,
                  2003.10.5*
              Deferred
                  Compensation Agreement by and between Farmers & Merchants Bank and
                  Gerald M. Edenfield. (Incorporated by reference to Exhibit 10.5
                  of the
                  Company’s Annual Report on Form 10-KSB for the year ended December 31,
                  2003).10.6*
              Deferred
                  Compensation Agreement by and between Farmers & Merchants Bank and
                  Leonard H. Blount. (Incorporated by reference to Exhibit 10.6 of
                  the
                  Company’s Annual Report on Form 10-KSB for the year ended December 31,
                  2003).14.1
              Code
                  of Conduct (Incorporated by reference to Appendix A of the Company’s 2004
                  Proxy Statement on Form Def 14A filed on April 29,
                  2004).21.1
              Subsidiaries
                  of the Registrant.31.1
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Executive
                  Officer31.2
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Financial
                  Officer





36


**Exhibit
                  No.**
              **Description**32.1
              Section
                  1350 Certification by the Chief Executive Officer32.2
              Section
                  1350 Certification by the Chief Financial
                  Officer




*Compensation
      Plan or arrangement required to be listed as an Exhibit to Form
      10-KSB.








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





The
      information appearing under the heading “Fees Paid to Independent Accounting
      Firms” in the 2006 Proxy Statement is incorporated herein by
      reference.


37





**SIGNATURES**





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





Dated:
                March27,
                2006
            
            FMB
                EQUIBANC, INC.
              
              By:/s/
                Charles R. Nessmith
              Charles
                R. Nessmith
              President
                and Chief Executive Officer
              (Principal
                Executive Officer)





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





**Signature**
            
            **Title**
            
            **Date**/s/
                Charles R. Nessmith
              
              Charles
                R. Nessmith
            
            Director,
                President and
              Chief
                Executive Officer
              (principal
                executive officer)
            
            March27,
                2006/s/
                Dwayne E. Rocker
              
              Dwayne
                E. Rocker
            
            Secretary
              (principal
                financial and
              accounting
                officer)
            
            March27,
                2006/s/
                R. Earl Dabbs
            
            Chairman
                of the Board of Directors
            
            March27,
                2006R.
                Earl Dabbs/s/
                Leonard H. Blount
              
              Leonard
                H. Blount
            
            Director
            
            March27,
                2006/s/
                F. Wendell Brannen
            
            Director
            
            March27,
                2006F.
                Wendell Brannen/s/
                Frank C. Rozier
              
              Frank
                C. Rozier
            
            Director
            
            March27,
                2006/s/
                Gerald M. Edenfield
            
            Director
            
            March27,
                2006Gerald
                M. Edenfield/s/
                William Hatcher
            
            Director
            
            March27,
                2006William
                Hatcher/s/
                William B. Nessmith
            
            Director
            
            March27,
                2006William
                B. Nessmith/s/
                Andrew C. Oliver
            
            Director
            
            March27,
                2006Andrew
                C. Oliver/s/
                Billy G. Tyson
            
            Director
            
            March27,
                2006Billy
                G. Tyson








38











**FMB
        EQUIBANC, INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
        FINANCIAL REPORT**
 **DECEMBER
        31, 2005**
 
 
 **TABLE
        OF CONTENTS**
 
 
 **Page****REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
              **F-2****CONSOLIDATED
                  FINANCIAL STATEMENTS****Consolidated
                  balance sheets**
              **F-3****Consolidated
                  statements of income**
              **F-4****Consolidated
                  statements of comprehensive income**
              **F-5****Consolidated
                  statements of stockholders' equity**
              **F-6****Consolidated
                  statements of cash flows**
              **F-7****Notes
                  to consolidated financial statements**
              **F-8-27**
         
  F-1
  
 
 
 **REPORT
        OF INDEPENDENT REGISTERED**
 **PUBLIC
        ACCOUNTING FIRM**
 
 **To
        the Board of Directors**
 **FMB
        Equibanc, Inc.**
 **Statesboro,
        Georgia**
 
 
 We
        have
        audited the accompanying consolidated balance sheets of **FMB
        Equibanc, Inc. and Subsidiaries** as of
        December 31, 2005 and 2004, and the related consolidated statements of income,
        comprehensive income, stockholders' equity and cash flows for each of the
        two
        years in the period ended December 31, 2005. These financial statements are
        the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these financial statements based on our audits.
 
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of FMB Equibanc, Inc. and
        Subsidiaries, as of December 31, 2005 and 2004, and the results of their
        operations and their cash flows for the each of the two years in the period
        ended December 31, 2005, in conformity with accounting principles generally
        accepted in the United States of America.
 
 
 */s/
        Mauldin & Jenkins, LLC*
 Albany,
        Georgia
 January
        26, 2006
 
 
  F-2
  
 **FMB
                  EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
                  BALANCE SHEETS****DECEMBER
                  31, 2005 AND 2004****(Dollars
                  in Thousands)**
  **Assets**
              
              **2005**
              
              **2004**Cash
                  and due from banks
              
              **$**
              **4,192**
              
              $
              3,235Interest-bearing
                  deposits at other financial institutions
              
              
              **759**
              
              
              33Federal
                  funds sold
              
              
              **20,367**
              
              
              9,267Securities
                  available for sale
              
              
              **11,213**
              
              
              12,059Restricted
                  equity securities, at cost
              
              
              **1,031**
              
              
              844Loans
              
              
              **151,272**
              
              
              138,277Less
                  allowance for loan losses
              
              
              **2,621**
              
              
              2,058Loans,
                  net
              
              
              **148,651**
              
              
              136,219Premises
                  and equipment, net
              
              
              **4,390**
              
              
              2,759Other
                  assets
              
              
              **3,220**
              
              
              2,584Total
                  assets
              
              **$**
              **193,823**
              
              $
              167,000**Liabilities
                  and Stockholders' Equity**Liabilities:Deposits:Noninterest-bearing
              
              **$**
              **27,055**
              
              $
              26,132Interest-bearing
              
              
              **133,446**
              
              
              115,277Total
                  deposits
              
              
              **160,501**
              
              
              141,409Other
                  borrowings
              
              
              **12,402**
              
              
              11,423Guaranteed
                    preferred beneficial interests injunior
                    subordinated debentures
              
              
              **4,124**
              
              
              -Other
                  liabilities
              
              
              **1,302**
              
              
              798Total
                  liabilities
              
              
              **178,329**
              
              
              153,630Commitments
                  and contingent liabilitiesStockholders'
                  equityCommon
                    stock, $1 par value; 10,000,000 sharesauthorized;
                    362,600 shares issued and outstanding
              
              
              **362**
              
              
              362Surplus
              
              
              **3,076**
              
              
              3,076Retained
                  earnings
              
              
              **12,132**
              
              
              9,860Accumulated
                  other comprehensive income (loss)
              
              
              **(76**
              **)**
              
              72Total
                  stockholders' equity
              
              
              **15,494**
              
              
              13,370Total
                  liabilities and stockholders' equity
              
              **$**
              **193,823**
              
              $
              167,000**See
                  Notes to Consolidated Financial Statements.**
  F-3
  
 **FMB
                  EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF INCOME****YEARS
                  ENDED DECEMBER 31, 2005 AND 2004****(Dollars
                  in Thousands, Except Per Share Amounts)****2005**
              
              **2004**Interest
                  income:Loans,
                  including fees
              **$**
              **10,338**
              
              $
              7,732Securities:Taxable
              
              **443**
              
              
              441Nontaxable
              
              **44**
              
              
              45Federal
                  funds sold
              
              **391**
              
              
              100Interest-bearing
                  deposits at other financial institutions
              
              **16**
              
              
              1Total
                  interest income
              
              **11,232**
              
              
              8,319Interest
                  expense:Deposits
              
              **3,501**
              
              
              1,910Other
                  borrowings
              
              **521**
              
              
              151Total
                  interest expense
              
              **4,022**
              
              
              2,061Net
                  interest income
              
              **7,210**
              
              
              6,258Provision
                  for loan losses
              
              **500**
              
              
              540Net
                  interest income after provision for loan losses
              
              **6,710**
              
              
              5,718Other
                  income:Service
                  charges on deposit accounts
              
              **1,484**
              
              
              1,035Other
                  service charges, commissions and fees
              
              **239**
              
              
              191Securities
                  losses, net
              
              **-**
              
              
              (12)Mortgage
                  origination fees
              
              **523**
              
              
              604Other
                  operating income
              
              **23**
              
              
              21Total
                  other income
              
              **2,269**
              
              
              1,839Other
                  expenses:Salaries
                  and employee benefits
              
              **2,568**
              
              
              2,323Occupancy
                  and equipment expense
              
              **532**
              
              
              487Office
                  supplies
              
              **142**
              
              
              122Data
                  processing fees
              
              **335**
              
              
              306Professional
                  fees
              
              **181**
              
              
              148Consulting
                  fees
              
              **157**
              
              
              56Advertising
                  and public relations
              
              **245**
              
              
              234Other
                  operating expenses
              
              **910**
              
              
              810Total
                  other expenses
              
              **5,070**
              
              
              4,486Income
                  before income taxes
              
              **3,909**
              
              
              3,071Income
                  tax expense
              
              **1,397**
              
              
              1,108Net
                  income
              **$**
              **2,512**
              
              $
              1,963Basic
                  earnings per share
              **$**
              **6.93**
              
              $
              5.41Diluted
                  earnings per share
              **$**
              **6.86**
              
              $
              5.36**See
                  Notes to Consolidated Financial Statements.**
  F-4
  
 **FMB
                  EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF COMPREHENSIVE INCOME****YEARS
                  ENDED DECEMBER 31, 2005 AND 2004****(Dollars
                  in Thousands)**
   **2005**
              
              **2004**Net
                  income
              
              **$**
              **2,512**
              
              $
              1,963Other
                  comprehensive income (loss):Unrealized
                    holding losses arising during the period,net
                    of tax benefits of $100 and $95, respectively
              
              
              **(148**
              **)**
              
              (143
              )Reclassification
                    adjustment for losses realized in net income,net
                    of tax benefit of $5 in 2004
              
              
              **-**
              
              
              7Other
                  comprehensive loss
              
              
              **(148**
              **)**
              
              (136
              )Comprehensive
                  income
              
              **$**
              **2,364**
              
              $
              1,827**See
                  Notes to Consolidated Financial Statements.**
 
  F-5
  
 **FMB
                  EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS' EQUITY****YEARS
                  ENDED DECEMBER 31, 2005 AND 2004****(Dollars
                  in Thousands)****Accumulated****Other**
              
              **Total****Common
                  Stock**
              
              
              
              
              **Retained**
              
              **Comprehensive**
              
              **Stockholders'****Shares**
              
              **Par
                  Value**
              
              **Surplus**
              
              **Earnings**
              
              **Income
                  (Loss)**
              
              **Equity****Balance,
                  December 31, 2003**
              362,600
              
              $
              362
              
              $
              3,076
              
              $
              8,078
              
              $
              208
              
              $
              11,724Net
                  income
              -
              
              
              -
              
              
              -
              
              
              1,963
              
              
              -
              
              
              1,963Dividends
                    declared,$0.50
                    per share
              -
              
              
              -
              
              
              -
              
              
              (181)
              
              
              -
              
              
              (181)Other
                  comprehensive loss
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (136)
              
              
              (136)**Balance,
                  December 31, 2004**
              362,600
              
              
              362
              
              
              3,076
              
              
              9,860
              
              
              72
              
              
              13,370Net
                  income
              -
              
              
              -
              
              
              -
              
              
              2,512
              
              
              -
              
              
              2,512Dividends
                    declared,$0.66
                    per share
              -
              
              
              -
              
              
              -
              
              
              (240)
              
              
              -
              
              
              (240)Other
                  comprehensive loss
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (148)
              
              
              (148)**Balance,
                  December 31, 2005**
              362,600
              
              $
              362
              
              $
              3,076
              
              $
              12,132
              
              $
              (76)
              
              $
              15,494**See
                  Notes to Consolidated Financial Statements.**
 
 
  F-6
 **FMB
          EQUIBANC, INC. AND SUBSIDIARIES**
  **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **YEARS
            ENDED DECEMBER 31, 2005 AND 2004**
 **(Dollars
              in Thousands)**
  **2005**
              
              **2004****OPERATING
                  ACTIVITIES**Net
                  income
              
              **$**
              **2,512**
              
              $
              1,963Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities:Depreciation
              
              
              **277**
              
              
              256Provision
                  for loan losses
              
              
              **500**
              
              
              540Loss
                  on sales of securities
              
              
              **-**
              
              
              12Deferred
                  income taxes
              
              
              **(232**
              **)**
              
              (96
              )Increase
                  in interest receivable
              
              
              **(399**
              **)**
              
              (191
              )Increase
                  in interest payable
              
              
              **321**
              
              
              101Other
                  operating activities, net
              
              
              **127**
              
              
              157Net
                  cash provided by operating activities
              
              
              **3,106**
              
              
              2,742**INVESTING
                  ACTIVITIES**Increase
                  in interest-bearing deposits at other financial
                  institutions
              
              
              **(726**
              **)**
              
              (6
              )Purchases
                  of securities available for sale
              
              
              **(1,168**
              **)**
              
              (8,789
              )Proceeds
                  from maturities of securities available for sale
              
              
              **1,078**
              
              
              7,199Proceeds
                  from sale of securities available for sale
              
              
              **501**
              
              
              4,071Net
                  increase in federal funds sold
              
              
              **(11,100**
              **)**
              
              (9,209
              )Net
                  increase in loans
              
              
              **(12,713**
              **)**
              
              (22,065
              )Purchase
                  of premises and equipment
              
              
              **(1,908**
              **)**
              
              (316
              )Proceeds
                  from sale of repossessed assets
              
              
              **56**
              
              
              -Net
                  cash used in investing activities
              
              
              **(25,980**
              **)**
              
              (29,115
              )**FINANCING
                  ACTIVITIES**Net
                  increase in deposits
              
              
              **19,092**
              
              
              13,587Principal
                  repayments on other borrowings
              
              
              **(3,021**
              **)**
              
              (3,519
              )Proceeds
                  from other borrowings
              
              
              **4,000**
              
              
              14,500Proceeds
                  from issuance of guaranteed preferred beneficialinterest
                  in junior subordinated debentures
              
              
              **4,000**
              
              
              -Dividends
                  paid
              
              
              **(240**
              **)**
              
              (181
              )Net
                  cash provided by financing activities
              
              
              **23,831**
              
              
              24,387Net
                  increase (decrease) in cash and due from banks
              
              
              **957**
              
              
              (1,986
              )Cash
                  and due from banks at beginning of year
              
              
              **3,235**
              
              
              5,221Cash
                  and due from banks at end of year
              
              **$**
              **4,192**
              
              $
              3,235**SUPPLEMENTAL
                  DISCLOSURES**Cash
                  paid for:Interest
              
              **$**
              **3,701**
              
              $
              1,960Income
                  taxes
              
              **$**
              **1,629**
              
              $
              1,138**NONCASH
                  TRANSACTIONS**Other
                  real estate acquired in settlement of loans
              
              **$**
              **83**
              
              $
              322Financed
                  sales of other real estate owned
              
              **$**
              **320**
              
              $
              -**See
                  Notes to Consolidated Financial Statements.**
  F-7
  **FMB
        EQUIBANC, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                1.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES**
 
 **Nature
        of Operations**
 
 FMB
        Equibanc, Inc. (the “Company”) is a one-bank holding company whose principal
        activity is the ownership and management of its wholly-owned commercial bank
        subsidiary, Farmers & Merchants Bank (the “Bank”). The Bank is located in
        Statesboro, Bulloch County, Georgia with the main office and two
        branches, located in Statesboro and one branch located in Brooklet,
        Georgia. The Bank provides a full range of banking services to individual
        and
        corporate customers in its primary market area of Bulloch County, Georgia
        and
        surrounding counties. In 2004, the Company formed a wholly-owned real-estate
        subsidiary, FMB Properties, Inc., to handle all purchases and sales of
        foreclosed assets.
  **Basis
        of Presentation and Accounting Estimates**
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        two subsidiaries. Significant intercompany transactions and balances have
        been
        eliminated in consolidation.
 
 In
        preparing the consolidated financial statements in accordance with accounting
        principles generally accepted in the United States of America, management
        is
        required to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and disclosure of contingent assets and liabilities
        as of
        the balance sheet date and the reported amounts of revenues and expenses
        during
        the reporting period. Actual results could differ from those
        estimates.
 
 Material
        estimates that are particularly susceptible to significant change in the
        near-term relate to the determination of the allowance for loan losses, the
        valuation of foreclosed real estate and contingent assets and liabilities.
        The
        determination of the adequacy of the allowance for loan losses is based on
        estimates that are susceptible to significant changes in the economic
        environment and market conditions. In connection with the determination of
        the
        estimated losses on loans and the valuation of foreclosed real estate,
        management obtains independent appraisals for significant
        collateral.
 
 **Cash,
        Due from Banks and Cash Flows**
 
 For
        purposes of reporting cash flows, cash and due from banks include cash on
        hand,
        cash items in process of collection and amounts due from banks. Cash flows
        from
        interest-bearing deposits at other financial institutions, loans, federal
        funds
        sold and deposits are reported net.
 
 The
        Bank
        is required to maintain reserve balances in cash or on deposit with the Federal
        Reserve Bank, based on a percentage of deposits. The total of those reserve
        balances was approximately $868,000 and $896,000 at December 31, 2005 and
        2004,
        respectively.
 
 **Securities**
 
 Debt
        securities that management has the positive intent and ability to hold to
        maturity are classified as held to maturity and recorded at amortized cost.
        Securities not classified as held to maturity, including equity securities
        with
        readily determinable fair values, are classified as available for sale and
        recorded at fair value with unrealized gains and losses excluded from earnings
        and reported in accumulated other comprehensive income, net of the related
        deferred tax effect. Equity securities, including restricted equity securities,
        without a readily determinable fair value are classified as available for
        sale
        and recorded at cost.
  F-8
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                1.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (Continued)**
 
 **Securities
        (Continued)**
 
 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 specific securities below their cost that are
        deemed to be other than temporary are reflected in earnings as realized
        losses.
 
 In
        estimating other-than-temporary impairment losses, management considers (1)
        the
        length of time and the extent to which the fair value has been less than
        cost,
        (2) the financial condition and near-term prospects of the issuer and (3)
        the
        intent and ability of the Company to retain its investment in the issuer
        for a
        period of time sufficient to allow for any anticipated recovery in fair
        value.
 
 **Loans**
 
 Loans
        are
        reported at their outstanding principal balances less unearned income and
        the
        allowance for loan losses. Interest income is accrued on the outstanding
        principal balance.
 
 The
        accrual of interest on loans is discontinued when, in management’s opinion, the
        borrower may be unable to meet payments as they become due, unless the loan
        is
        well-secured. Past due status is based on contractual terms of the loan.
        In all
        cases, loans are placed on nonaccrual or charged off at an earlier date if
        collection of principal or interest is considered doubtful. All interest
        accrued
        but not collected for loans that are placed on nonaccrual or charged off
        is
        reversed against interest income, unless management believes that the accrued
        interest is recoverable through the liquidation of collateral. Interest income
        on nonaccrual loans is recognized on the cash-basis or cost-recovery method
        until the loans are returned to accrual status. Loans are returned to accrual
        status when all the principal and interest amounts are brought current and
        future payments are reasonably assured.
 
 A
        loan is
        considered impaired when it is probable, based on current information and
        events, the Company will be unable to collect all principal and interest
        payments due in accordance with the contractual terms of the loan agreement.
        Factors considered by management in determining impairment include payment
        status, collateral value and the probability of collecting scheduled principal
        and interest payments when due. Loans that experience insignificant payment
        delays and payment shortfalls generally are not classified as impaired. Impaired
        loans are measured by either the present value of expected future cash flows
        discounted at the loan’s effective interest rate, the loan’s obtainable market
        price, or the fair value of the collateral if the loan is collateral dependent.
        The amount of impairment, if any, and any subsequent changes are included
        in the
        allowance for loan losses. Interest on accruing impaired loans is recognized
        as
        long as such loans do not meet the criteria for nonaccrual status.
 
 **Allowance
        for Loan Losses**
 
 The
        allowance for loan losses is established through a provision for loan losses
        charged to expense. Loan losses are charged against the allowance when
        management believes the collectibility of the principal is unlikely. Subsequent
        recoveries, if any, are credited to the allowance.
 
  F-9
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                1.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (Continued)**
 
 **Allowance
        for Loan Losses (Continued)**
 
 The
        allowance is an amount that management believes will be adequate to absorb
        estimated losses relating to specifically identified loans, as well as probable
        credit losses inherent in the balance of the loan portfolio, based on an
        evaluation of the collectibility of existing loans and prior loss experience.
        The allowance for loan losses is evaluated on a regular basis by management
        and
        is based upon management's periodic review of the collectibility of loans
        in
        light of historical experience, the nature and volume of the loan portfolio,
        overall portfolio quality, review of specific problem loans, current economic
        conditions that may affect the borrower's ability to pay, estimated value
        of any
        underlying collateral and prevailing economic conditions. This evaluation
        is
        inherently subjective as it requires estimates that are susceptible to
        significant revision as more information becomes available.
 
 The
        evaluation does not include the effects of expected losses on specific loans
        or
        groups of loans that are related to future events or expected changes in
        economic conditions. While management uses the best information available
        to
        make its evaluation, future adjustments to the allowance may be necessary
        if
        there are significant changes in economic conditions. In addition, regulatory
        agencies, as an integral part of their examination process, periodically
        review
        the Bank’s allowance for loan losses, and may require the Bank to make additions
        to the allowance based on their judgment about information available to them
        at
        the time of their examinations.
 
 The
        allowance consists of specific, general and unallocated components. The specific
        component relates to loans that are classified as either doubtful, substandard
        or special mention. For such loans that are also classified as impaired,
        an
        allowance is established when the discounted cash flows, or collateral value
        or
        observable market price of the impaired loan is lower than the carrying value
        of
        that loan. The general component covers non-classified loans and is based
        on
        historical loss experience adjusted for qualitative factors. An unallocated
        component is maintained to cover uncertainties that could affect management’s
        estimate of probable losses. The unallocated component of the allowance reflects
        the margin of imprecision inherent in the underlying assumptions used in
        the
        methodologies for estimating specific and general losses in the
        portfolio.
 
 **Premises
        and Equipment**
 
 Land
        is
        carried at cost. Premises and equipment are stated at cost less accumulated
        depreciation computed principally by the straight-line method over the estimated
        useful lives of the assets.
  Building
                39.5
                    yearsFurniture
                    and equipment
                3
                    to 7 years
 
 **Other
        Real Estate Owned**
 
 Other
        real estate owned represents properties acquired through or in lieu of loan
        foreclosure and is initially recorded at the lower of cost or fair value
        less
        estimated costs to sell. Any write-down to fair value at the time of transfer
        to
        other real estate owned is charged to the allowance for loan losses. Costs
        of
        improvements are capitalized, whereas costs relating to holding other real
        estate owned and subsequent adjustments to the value are expensed. The Company
        carried $83,000 and $322,000 in other real estate owned at December 31, 2005
        and
        2004, respectively.
  F-10
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                1.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (Continued)**
  **Income
        Taxes**
 
 Deferred
        income tax assets and liabilities are determined using the balance sheet
        method.
        Under this method, the net deferred tax asset or liability is determined
        based
        on the tax effects of the temporary differences between the book and tax
        bases
        of the various balance sheet assets and liabilities and gives current
        recognition to changes in tax rates and laws.
 
 **Stock-Based
          Compensation**
  The
        Company has a stock-based employee compensation plan, which is described
        more
        fully in Note 8. The Company accounts for this plan under the recognition
        and
        measurement principles of APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        related Interpretations. No stock-based employee compensation cost is reflected
        in net income, as all options granted under those plans had an exercise price
        equal to the market value of the underlying stock on the date of grant.
 
 The
        following table illustrates the effect on net income and earnings per share
        if
        the Company had applied the fair value recognition provisions of FASB Statement
        No. 123, *Accounting
        for Stock-Based Compensation* ,
        to
        stock-based employee compensation.
  **Years
                    Ended December 31,****2005**
                
                **2004****(Dollars
                    in Thousands,**
                  **Except
                    Per Share Amounts)**Net
                    income, as reported
                **$**
                **2,512**
                
                $
                1,963Deduct:
                    Total stock-based employee compensationexpense
                    determined under fair value basedmethod
                    for all awards, net of related tax effects
                
                **-**
                
                
                -Pro
                    forma net income
                **$**
                **2,512**
                
                $
                1,963Earnings
                    per share:Basic
                    - as reported
                **$**
                **6.93**
                
                $
                5.41Basic
                    - pro forma
                **$**
                **6.93**
                
                $
                5.41Diluted
                    - as reported
                **$**
                **6.86**
                
                $
                5.36Diluted
                    - pro forma
                **$**
                **6.86**
                
                $
                5.36
  
 
 
  F-11
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                1.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (Continued)**
 
 **Earnings
        Per Share**
 
 Basic
        earnings per share are computed by dividing net income by the weighted-average
        number of shares of common stock outstanding. Diluted earnings per share
        are
        computed by dividing net income by the sum of the weighted-average number
        of
        shares of common stock outstanding and potential common shares. Potential
        common
        shares consist of only stock options.
 
 **Comprehensive
        Income**
 
 Accounting
        principles generally require that recognized revenue, expenses, gains and
        losses
        be included in net income. Although certain changes in assets and liabilities,
        such as unrealized gains and losses on available for sale securities, are
        reported as a separate component of the equity section of the balance sheet,
        such items, along with net income, are components of comprehensive
        income.
 
 **Recent
        Accounting Standards**
 
 In
        December 2004, the Financial Accounting Standards Board (FASB) issued Statement
        No. 123R, *Share-Based
        Payment* ,
        a
        revision of FASB Statement No. 123, *Accounting
        for Stock-Based Compensation.* This
        Statement supersedes APB Opinion No. 25, *Accounting
        for Stock Issued to Employees,* and
        its
        related implementation guidance. This Statement establishes standards for
        accounting for transactions in which an ** entity
        exchanges its equity instruments for goods or services. It also
        addresses ** transactions
        in which an entity incurs liabilities in exchange for goods or services
        that ** are
        based
        on the fair value of the entity’s equity instruments or that may be settled
        by ** the
        issuance of those equity instruments. This Statement focuses primarily
        on ** accounting
        for transactions in which an entity obtains employee services in
        share-based ** payment
        transactions such as the issuance of stock options in exchange for employee
        services. This Statement requires a public entity to measure the cost of
        employee services ** received
        in exchange for an award of equity instruments based on the grant-date
        fair ** value
        of
        the award (with limited exceptions). That cost will be recognized over
        the ** period
        during which an employee is required to provide service in exchange for
        the ** award—the
        requisite service period (usually the vesting period). The grant-date fair
        value
        of employee share options and similar instruments will be estimated using
        option-pricing models adjusted for the unique characteristics of those
        instruments (unless observable market prices for the same or similar instruments
        are available). This Statement is effective for public entities that file
        as
        small business issuers - as of the beginning of the first interim or annual
        reporting period that begins after December 15, 2005. This Statement applies
        to
        all awards granted or vesting after the required effective date and to awards
        modified, repurchased or cancelled after that date.
 
 
  F-12
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                2.**
              **SECURITIES**
 
 The
        amortized cost and fair value of securities available for sale are summarized
        as
        follows (dollars in thousands):
 
 **Amortized**
                **Cost**
              
              **Gross**
                **Unrealized**
                **Gains**
              
              **Gross**
                  **Unrealized**
                  **Losses**
              
              **Fair**
                **Value****December
                  31, 2005:****U.
                  S. Treasury and U. S.****Government
                  agencies**
              **$**
              **8,252**
              
              **$**
              **-**
              
              **$**
              **(147)**
              
              **$**
              **8,105****Mortgage-backed
                  securities**
              
              **1,009**
              
              
              **3**
              
              
              **(16)**
              
              
              **996****State
                  and municipal securities**
              
              **1,078**
              
              
              **13**
              
              
              **-**
              
              
              **1,091****Corporate
                  bonds**
              
              **1,002**
              
              
              **19**
              
              
              **-**
              
              
              **1,021****$**
              **11,341**
              
              **$**
              **35**
              
              **$**
              **(163)**
              
              **$**
              **11,213**December
                  31, 2004:U.
                  S. Treasury and U. S.Government
                  agencies
              $
              7,246
              
              $
              10
              
              $
              (19)
              
              $
              7,237Mortgage-backed
                  securities
              
              1,601
              
              
              17
              
              
              (9)
              
              
              1,609State
                  and municipal securities
              
              1,087
              
              
              44
              
              
              -
              
              
              1,131Corporate
                  bonds
              
              2,005
              
              
              77
              
              
              -
              
              
              2,082$
              11,939
              
              $
              148
              
              $
              (28)
              
              $
              12,059
 
 The
        amortized cost and fair value of securities available for sale as of December
        31, 2005 by contractual maturity are shown below. Actual maturities may differ
        from contractual maturities because issuers may have the right to call or
        prepay
        obligations with or without call or prepayment penalties (dollars in
        thousands):
 **Amortized**
                  
                  **Fair****Cost**
                  
                  **Value**Due
                      within one year
                  $
                  2,795
                  
                  $
                  2,766Due
                      from one to five years
                  
                  7,383
                  
                  
                  7,296Due
                      from five to ten years
                  
                  -
                  
                  
                  -Due
                      after ten years
                  
                  154
                  
                  
                  155Mortgage-backed
                      securities
                  
                  1,009
                  
                  
                  996$
                  11,341
                  
                  $
                  11,213
 
  
 Securities
        with a carrying value of $9,222,000 and $7,192,000 at December 31, 2005 and
        2004, respectively, were pledged to secure public deposits and for other
        purposes required or permitted by law.
 
  F-13
  
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                2.**
              **SECURITIES
                  (Continued)**
 
 Gains
        and
        losses on sales of securities available for sale consist of the following
        (dollars in thousands):
  **Years
                  Ended December 31,****2005**
              
              **2004**Gross
                  gains
              **$**
              **-******
              
              $
              26Gross
                  losses
              
              **-******
              
              
              (38)Net
                  realized losses
              **$**
              **-******
              
              $
              (12)
  
 The
        following table shows the gross unrealized losses and fair value of securities,
        aggregated by category and length of time that securities have been in a
        continuous unrealized loss position at December 31, 2005 and 2004 (dollars
        in
        thousands).
  **Less
                  Than 12 Month**
              
              **12
                  Months or More**
              
              **Total****Description
                  of Securities**
              
              **Fair**
                **Value**
              
              **UnrealizedLosses**
              
              **Fair**
                **Value**
              
              **Unrealized**
                **Losses**
              
              **Fair**
                **Value**
              
              **Unrealized**
                **Losses****December
                  31, 2005:****U.
                  S. Treasury and****U.
                  S. Government agencies**
              
              **$**
              **3,900**
              
              **$**
              **67**
              
              **$**
              **4,205**
              
              **$**
              **80**
              
              **$**
              **8,105**
              
              **$**
              **147****Mortgage-backed
                  securities**
              
              
              **-**
              
              
              **-**
              
              
              **533**
              
              
              **16**
              
              
              **533**
              
              
              **16****Total
                  temporarily****impaired
                  securities**
              
              **$**
              **3,900**
              
              **$**
              **67**
              
              **$**
              **4,738**
              
              **$**
              **96**
              
              **$**
              **8,638**
              
              **$**
              **163**December
                  31, 2004:U.
                  S. Treasury andU.
                  S. Government agencies
              
              $
              4,253
              
              $
              19
              
              $
              -
              
              $
              -
              
              $
              4,253
              
              $
              19
              ****Mortgage-backed
                  securities
              
              
              822
              
              
              9
              
              
              -
              
              
              -
              
              
              822
              
              
              9Total
                  temporarilyimpaired
                  securities
              ****
              $
              5,075
              
              $
              28
              
              $
              -
              
              $
              -
              
              $
              5,075
              
              $
              28
 
 Management
        evaluates securities for other-than-temporary impairment at least on a quarterly
        basis, and more frequently when economic or market concerns warrant such
        evaluation. The unrealized losses in the table above are considered temporary
        because each security carries an acceptable investment grade and the repayment
        sources of principal and interest are government backed.
 
  F-14
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                3.**
              **LOANS**
 
 The
        composition of loans is summarized as follows (dollars in
        thousands)
  **December
                  31,****2005**
              
              **2004**Commercial,
                  financial and agricultural
              
              **$**
              **19,052**
              
              $
              16,104Real
                  estate - construction
              
              
              **28,937**
              
              
              26,135Real
                  estate - mortgage
              
              
              **94,596**
              
              
              86,110Consumer
              
              
              **8,447**
              
              
              9,875Overdrafts
              
              
              **240**
              
              
              53Total
                  loans
              
              
              **151,272**
              
              
              138,277Allowance
                  for loan losses
              
              
              **(2,621**
              **)**
              
              (2,058
              )Loans,
                  net
              
              **$**
              **148,651**
              
              $
              136,219
 
 Changes
        in the allowance for loan losses are as follows (dollars in
        thousands):
  **Years
                  Ended December 31,****2005**
              
              **2004**Balance,
                  beginning of year
              
              **$**
              **2,058**
              
              $
              1,758Provision
                  for loan losses
              
              
              **500**
              
              
              540Loans
                  charged off
              
              
              **(101**
              **)**
              
              (320
              )Recoveries
                  of loans previously charged off
              
              
              **164**
              
              
              80Balance,
                  end of year
              
              **$**
              **2,621**
              
              $
              2,058
 
 The
        following is a summary of information pertaining to impaired loans (dollars
        in
        thousands):
  **As
                  of and for the Years Ended**
                **December
                  31,****2005**
              
              **2004**Impaired
                  loans without a valuation allowance
              
              **$**
              **-**
              
              $
              -Impaired
                  loans with a valuation allowance
              
              
              **877**
              
              
              631Total
                  impaired loans
              
              **$**
              **877**
              
              $
              631Valuation
                  allowance related to impaired loans
              
              **$**
              **132**
              
              $
              99Average
                  investment in impaired loans
              
              **$**
              **780**
              
              $
              809Interest
                  income recognized on impaired loans
              
              **$**
              **3**
              
              $
              3
   F-15
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                3.**
              **LOANS
                  (Continued)**
 
 Loans
        on
        nonaccrual status amounted to approximately $877,000 and $631,000 at
        December 31, 2005 and 2004, respectively. Loans past due ninety days or
        more and still accruing interest amounted to $22,000 and $54,000 at December
        31,
        2005 and 2004, respectively.
 
 In
        the
        ordinary course of business, the Company has granted loans to certain related
        parties, including executive officers, directors and their affiliates. The
        interest rates on these loans were substantially the same as rates prevailing
        at
        the time of the transaction and repayment terms are customary for the type
        of
        loan. Changes in related party loans for the year ended December 31, 2005
        are as
        follows (dollars in thousands):
 
 Balance,
                  beginning of year
              
              $
              1,224Advances
              
              
              2,770Repayments
              
              
              (2,706
              )Balance,
                  end of year
              
              $
              1,288
 
 
 **NOTE
                4.**
              **PREMISES
                  AND EQUIPMENT**
 
 Premises
        and equipment are summarized as follows (dollars in thousands):
  **December
                  31****2005**
              
              **2004**Land
              
              **$**
              **953**
              
              $
              953Buildings
              
              
              **2,573**
              
              
              2,356Furniture
                  and equipment
              
              
              **1,878**
              
              
              1,667Construction
                  in progress; estimated cost to complete, $110
              
              
              **1,509**
              
              
              30Total
                  cost
              
              
              **6,913**
              
              
              5,006Accumulated
                  depreciation
              
              
              **(2,523**
              **)**
              
              (2,247
              )Net
                  book value
              
              **$**
              **4,390**
              
              $
              2,759
 
  
 **Leases**
 
 During
        2003, the Company entered into two noncancelable operating lease agreements
        for
        purposes of erecting two drive-up ATMs. Each lease has an initial lease term
        of
        five years with one five year renewal option. Aggregate rental expense under
        the
        leases amounted to $7,200 for each of the years ended December 31, 2005 and
        2004.
 
 Future
        minimum lease payments on noncancelable operating leases are summarized as
        follows:
 
 2006
              
              $
              7,2002007
              
              
              7,2002008
              
              
              6,0002009
              
              
              -$
              20,400
  F-16
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                5.**
              **DEPOSITS**
 
 The
        aggregate amount of time deposits in denominations of $100,000 or more at
        December 31, 2005 and 2004 was $53,822,000 and $44,339,000, respectively.
        The
        scheduled maturities of time deposits at December 31, 2005 are as follows
        (dollars in thousands):
  2006
              
              $
              64,0302007
              
              
              18,2822008
              
              
              8,233$
              90,545
 
  
 At
        December 31, 2005 and 2004, the Company held brokered time deposits in the
        amount of $10,486,000 and $6,837,000, respectively.
 
 **NOTE
                6.**
              **OTHER
                  BORROWINGS**
 
 Other
        borrowings consist of the following (dollars in thousands):
 **December
                    31,****2005**
                
                **2004**Federal
                    Home Loan Bank advance with interest payablemonthly
                    at a fixed rate of 2.17% maturing October 2005.
                **$**
                **-**
                
                $
                2,000Federal
                    Home Loan Bank advance with interest payablemonthly
                    at a fixed rate of 2.65% maturing April 2006.
                
                **2,000**
                
                
                2,000Federal
                    Home Loan Bank advance with interest payable everythree
                    months at a variable interest rate of 2 basis points above3
                    month LIBOR (4.35% at December 31, 2005), maturing May
                    2006.
                
                **4,000**
                
                
                4,000Federal
                    Home Loan Bank advance with interest payable everythree
                    months at a variable interest rate of 2 basis points above3
                    month LIBOR (4.15% at December 31, 2005), maturing July 2006.
                
                **3,000**
                
                
                3,000Federal
                    Home Loan Bank advance with interest payable every threemonths
                    at a variable interest rate of 50 basis points below 3 monthLIBOR
                    (3.98% at December 31, 2005), callable March 2007 withoutpenalty,
                    maturing March 2012.
                
                **2,000**
                
                
                -Federal
                    Home Loan Bank advance with interest payable monthly at afixed
                    rate of 4.12%, maturing June 2007
                
                **1,000**
                
                
                -Federal
                    Home Loan Bank advance with interest andprincipal
                    payable monthly through December 2008at
                    a fixed interest rate of 5.48%.
                
                **392**
                
                
                409Note
                    payable to Ford Motor Credit with principal payablethrough
                    May 2008, 0% interest rate, secured by abank-owned
                    vehicle.
                
                **10**
                
                
                14**$**
                **12,402**
                
                $
                11,423
 
   F-17
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                6.**
              **OTHER
                  BORROWINGS (Continued)**
 
 Contractual
        maturities of other borrowings as of December 31, 2005 are as follows (dollars
        in thousands):
 
 2006
              
              $
              9,0222007
              
              
              1,0232008
              
              
              3572009
                  and beyond
              
              
              2,000$
              12,402
 
 Advances
        from the Federal Home Loan Bank are secured by certain qualifying loans of
        approximately $38,273,000.
 
 The
        Company and the Bank have available unused lines of credit with various
        financial institutions totaling $18,477,000 at December 31, 2005.
 
 
 **NOTE
                7.**
              **GUARANTEED
                  PREFERRED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED
                  DEBENTURES**
  In
        August
        2005, the Company formed a wholly-owned Delaware statutory business trust,
        FMB
        2005 Capital Trust I (“Trust I”), which issued $4,000,000 of guaranteed
        preferred beneficial interests in the Company’s junior subordinated deferrable
        interest debentures (the “Trust Preferred Securities”). These debentures qualify
        as Tier I capital under Federal Reserve Board guidelines. All of the common
        securities of Trust I are owned by the Company. The proceeds from the issuance
        of the common securities and the Trust Preferred Securities were used by
        FMB
        2005 Capital Trust I to purchase $4,124,000 of junior subordinated debentures
        of
        the Company, which carry a fixed rate of 6.09% for the first five years and
        then
        converts to a floating rate based on a three-month LIBOR plus 157 basis points.
        The debentures represent the sole asset of Trust I. The Trust Preferred
        Securities accrue and pay distributions at a fixed rate of 6.09% for the
        first
        five years and then converts to a floating rate of three-month LIBOR plus
        157
        basis points per annum of the stated liquidation value of $1,000 per capital
        security. The Company has entered into contractual arrangements which, taken
        collectively, fully and unconditionally guarantee payment of: (i) accrued
        and
        unpaid distributions required to be paid on the Trust Preferred Securities,
        (ii)
        the redemption price with respect to any Trust Preferred Securities called
        for
        redemption by Trust I and (iii) payments due upon a voluntary or involuntary
        dissolution, winding up or liquidation of Trust I. The Trust Preferred
        Securities are mandatorily redeemable upon maturity of the debentures in
        August
        2035, or upon earlier redemption as provided in the indenture. The Company
        has
        the right to redeem the debentures purchased by Trust I in whole or in
        part, on or after August 4, 2010. As specified in the indenture, if the
        debentures are redeemed prior to maturity, the redemption price will be the
        principal amount, plus any unpaid accrued interest.
  F-18
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                8.**
              **EMPLOYEE
                  BENEFIT PLANS**
 
 **Profit
        Sharing Plan**
 
 The
        Company has a 401(k) Employee Profit-Sharing Plan available to all eligible
        employees, subject to certain minimum age and service requirements. The
        contributions expensed were approximately $41,000 and $43,000 for the years
        ended December 31, 2005 and 2004, respectively.
 
 **Deferred
        Compensation Plan**
 
 The
        Company has a deferred compensation plan providing for death and retirement
        benefits for certain directors. The estimated amounts to be paid under the
        compensation plan have been partially funded through the purchase of either
        life
        insurance policies or annuities contracts on the participating directors.
        Accrued deferred compensation of $243,000 and $242,000 is included in other
        liabilities as of December 31, 2005 and 2004, respectively. Cash surrender
        value
        of $246,000 on the insurance policies is included in other assets at
        December 31, 2005 and 2004.
 
 
 **NOTE
                9.**
              **STOCK-BASED
                  COMPENSATION**
 
 The
        Company has a nonqualified stock option plan reserving 18,000 shares of common
        stock for the granting of options to officers and key employees. Option prices
        reflect the fair market value of the Company’s common stock on the dates the
        options are granted. The options may be exercised over a period of ten years
        in
        accordance with vesting schedules determined by the Board of
        Directors.
 
 Other
        pertinent information related to the options is as follows:
  **2005**
                
                **2004****Shares**
                
                **Weighted-**
                  **Average**
                  **Exercise**
                  **Price**
                
                **Shares**
                
                **Weighted-**
                  **Average**
                  **Exercise**
                  **Price**Outstanding
                    at beginning of year
                
                
                **6,000**
                
                **$**
                **15.27**
                
                
                6,000
                
                $
                15.27Granted
                
                
                **-**
                
                
                **-**
                
                
                -
                
                
                -Exercised
                
                
                **-**
                
                
                **-**
                
                
                -
                
                
                -Terminated
                
                
                **-**
                
                
                **-**
                
                
                -
                
                
                -Outstanding
                    at end of year
                
                
                **6,000**
                
                **$**
                **15.27**
                
                
                6,000
                
                $
                15.27Options
                    exercisable at year-end
                
                
                **6,000**
                
                **$**
                **15.27**
                
                
                6,000
                
                $
                15.27Weighted-average
                    fair value of optionsgranted
                    during the year
                
                
                
                
                **$**
                -
                
                
                
                
                $
                -
 
  
  F-19
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                9.**
              **STOCK-BASED
                  COMPENSATION (Continued)**
 
 Information
        pertaining to options outstanding at December 31, 2005 is as
        follows:
 
 
 **Options
                  Outstanding**
              
              **Options
                  Exercisable****Exercise
                  Price**
              
              **Number**
                **Outstanding**
              
              
              **Weighted-**
                **Average**
                **Remaining**
                **Contractual**
                **Life**
              
              
              **Weighted-**
                **Average**
                **Exercise
                  Price**
              
              **Number**
                **Exercisable**
              
              
              **Weighted-**
                **Average**
                **Exercise**
                **Price**$15.27
              
              6,000
              
              
              2.0
                  years
              
              
              $15.27
              
              6,000
              
              
              $15.27
 
 
 **NOTE
                  10.**
                **INCOME
                    TAXES**
 
 The
        components of income tax expense are as follows (dollars in
        thousands):
 
 **Years
                    Ended December 31,****2005**
                
                **2004**Current
                
                **$**
                **1,629**
                
                $
                1,204Deferred
                
                
                **(232**
                **)**
                
                (96
                )$
                **1,397**
                
                **$**
                1,108
 
 The
        Company's income tax expense differs from the amounts computed by applying
        the
        federal income tax statutory rates to income before income taxes. A
        reconciliation of the differences is as follows (dollars in
        thousands):
 
 **Years
                    Ended December 31,****2005**
                
                **2004**Tax
                    provision at statutory federal rate
                
                **$**
                **1,329**
                
                $
                1,044Tax-exempt
                    income
                
                
                **(13**
                **)**
                
                (14
                )State
                    income taxes
                
                
                **127**
                
                
                89Other
                
                
                **(46**
                **)**
                
                (11
                )Income
                    tax expense
                
                **$**
                **1,397**
                
                $
                1,108
 
  F-20
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                10.**
              **INCOME
                  TAXES (Continued)**
 
 The
        components of deferred income taxes are as follows (dollars in
        thousands):
 
 **Years
                  Ended December 31,****2005**
              
              **2004**Deferred
                  tax assets:Loan
                  loss reserves
              
              **$**
              **873**
              
              $
              673Deferred
                  compensation
              
              
              **100**
              
              
              92Nonaccrual
                  interest
              
              
              **21**
              
              
              18Securities
                  available for sale
              
              
              **51**
              
              
              -**1,045**
              
              
              783Deferred
                  tax liabilities:Depreciation
              
              
              **159**
              
              
              180Securities
                  available for sale
              
              
              **-**
              
              
              48**159**
              
              
              228Net
                  deferred tax assets
              
              **$**
              **886**
              
              $
              555
 
 
 **NOTE
                11.**
              **EARNINGS
                  PER SHARE**
 
 Presented
        below is a summary of the components used to calculate basic and diluted
        earnings per share:
 **Years
                    Ended December 31,**2005
                
                2004Net
                    income
                
                **$**
                **2,512,000**
                
                $
                1,963,000Weighted
                    average number of common shares outstanding
                
                
                **362,600**
                
                
                362,600Effect
                    of dilutive options
                
                
                **3,819**
                
                
                3,455Weighted
                    average number of common shares outstandingused
                    to calculate dilutive earnings per share**366,419**
                
                
                366,055
 
  
  F-21
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                12.**
              **COMMITMENTS
                  AND CONTINGENCIES**
 
 **Loan
        Commitments**
  The
        Company is a party to financial instruments with off-balance-sheet risk in
        the normal course of business to meet the financing needs of its customers.
        These financial instruments include commitments to extend credit and standby
        letters of credit. They involve, to varying degrees, elements of credit risk
        and
        interest rate risk in excess of the amount recognized in the balance sheets.
        The
        majority of all commitments to extend credit and standby letters of credit
        are
        variable rate instruments.
 
 The
        Company's exposure to credit loss in the event of nonperformance by the other
        party to the financial instrument for commitments to extend credit and standby
        letters of credit is represented by the contractual amount of those instruments. The
        Company uses the same credit policies in making commitments as it does for
        on-balance-sheet instruments. A
        summary of the Company's commitments is as follows (dollars in
        thousands):
 
 **December
                  31,****2005**
              
              **2004**Commitments
                  to extend credit
              
              **$**
              **23,462**
              
              $
              22,835Financial
                  standby letters of credit
              
              
              **599**
              
              
              651**$**
              **24,061**
              
              $
              23,486
 Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Commitments generally
        have fixed expiration dates or other termination clauses and may require
        payment
        of a fee. Since many of the commitments are expected to expire without being
        drawn upon, the total commitment amounts do not necessarily represent future
        cash requirements. The amount of collateral obtained, if deemed necessary
        by the
        Company upon extension of credit, is based on management’s credit evaluation of
        the party. Collateral held varies, but may include accounts receivable, crops,
        livestock, inventory, property and equipment, residential real estate and
        income-producing commercial properties.
  Standby
        letters of credit are conditional commitments issued by the Company to guarantee
        the performance of a customer to a third party. Those guarantees are primarily
        issued to support public and private borrowing arrangements. The credit risk
        involved in issuing letters of credit is essentially the same as that involved
        in extending loans to customers. Collateral held varies as specified above
        and
        is required in instances which the Company deems necessary.
 
 At
        December 31, 2005 and 2004, the carrying amount of liabilities related to
        the
        Company’s obligation to perform under standby letters of credit was
        insignificant. The Company has not been required to perform on any standby
        letters of credit, and the Company has not incurred any losses on financial
        standby letters of credit for the years ended December 31, 2005 and
        2004.
 
 At
        December 31, 2005 and 2004, the Company had guaranteed the debt of certain
        customers’ liabilities at another financial institution totaling $29,000 and
        $35,000, respectively. These guarantees represent the available credit line
        of
        those certain Bank customers. The Company has not been required to perform
        on
        any of these guarantees for the years ended December 31, 2005 and 2004. Credit
        card commitments are unsecured.
  F-22
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                12.**
              **COMMITMENTS
                  AND CONTINGENCIES
                  (Continued)**
 
 **Contingencies**
 
 In
        the
        normal course of business, the Company is involved in various legal proceedings.
        In the opinion of management, any liability resulting from such proceedings
        would not have a material adverse effect on the Company's financial
        statements.
 
 
 **NOTE
                13.**
              **CONCENTRATIONS
                  OF CREDIT**
 
 The
        Company originates primarily commercial, commercial real estate, residential
        real estate, construction and development and consumer loans to customers
        in
        Bulloch and surrounding counties. The ability of the majority of the Company’s
        customers to honor their contractual obligations is dependent on the local
        economy.
 
 81.7%
        percent of the Company's loan portfolio is concentrated in loans secured
        by real
        estate primarily in the Company's market area. Accordingly, the ultimate
        collectibility of the Company's loan portfolio is susceptible to changes
        in
        market conditions in the Company's market areas. The other significant
        concentrations of credit by type of loan are set forth in Note 3.
 
 The
        Company, as a matter of policy, does not extend credit to any single borrower
        or
        group of related borrowers in excess of 25% of the Bank’s statutory capital, or
        approximately $3,750,000.
 
 The
        Bank
        has a concentration of funds on deposit at The Bankers Bank at December 31,
        2005
        and 2004 as follows (dollars in thousands).
 
 Concentration
        over insured limits (dollars in thousands):
 
 **2005**
              
              **2004**Noninterest-bearing
                  accounts
              **$**
              **2,062**
              
              $
              1,270Federal
                  funds sold
              
              **20,367**
              
              
              9,267**$**
              **22,429**
              
              $
              10,537
 
 
 **NOTE
                14.**
              **REGULATORY
                  MATTERS**
 
 The
        Bank
        is subject to certain restrictions on the amount of dividends that may be
        declared without prior regulatory approval. At December 31, 2005, approximately
        $1,311,000 of retained earnings were available for dividend declaration without
        regulatory approval.
 
 The
        Company and the Bank are subject to various regulatory capital requirements
        administered by the federal banking agencies. Failure to meet minimum capital
        requirements can initiate certain mandatory, and possibly additional
        discretionary actions by regulators that, if undertaken, could have a direct
        material effect on the consolidated financial statements. Under capital adequacy
        guidelines and the regulatory framework for prompt corrective action, the
        Company and the Bank must meet specific capital guidelines that involve
        quantitative measures of the Company’s and the Bank’s assets, liabilities and
        certain off-balance-sheet items as
        calculated under regulatory accounting practices. Capital amounts and
        classification are also subject to qualitative judgments by the regulators
        about
        components, risk weightings and other factors.
  F-23
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                14.**
              **REGULATORY
                  MATTERS (Continued)**
 
 Quantitative
        measures established by regulation to ensure capital adequacy require the
        Company and the Bank to maintain minimum amounts and ratios of total and
        Tier I
        capital to risk-weighted assets, as defined and of Tier I capital to average
        assets. Management believes, as of December 31, 2005, the Company and the
        Bank
        met all capital adequacy requirements to which they are subject.
 
 As
        of
        December 31, 2005, the most recent notification from the Federal Deposit
        Insurance Corporation categorized Farmers & Merchants Bank as well
        capitalized under the regulatory framework for prompt corrective action.
        To be
        categorized as well capitalized, the Bank must maintain minimum total
        risk-based, Tier I risk-based and Tier I leverage ratios as set forth in
        the
        following table. There are no conditions or events since that notification
        that
        management believes have changed the Bank’s categories. Prompt corrective action
        provisions are not applicable to bank holding companies.
 
 The
        Company and Bank’s actual capital amounts and 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, 2005:****Total
                  Capital to Risk Weighted Assets:****Consolidated**
              **$**
              **21,426**
              
              **14.5%**
              
              **$**
              **11,808**
              
              **8.0%**
              
              
              **N/A**
              
              **N/A****Farmers
                  & Merchants Bank**
              **$**
              **20,972**
              
              **14.2%**
              
              **$**
              **11,802**
              
              **8.0%**
              
              **$**
              **14,752**
              
              **10.0%****Tier
                  I Capital to Risk Weighted Assets:****Consolidated**
              **$**
              **19,571**
              
              **13.3%**
              
              **$**
              **5,904**
              
              **4.0%**
              
              
              **N/A**
              
              **N/A****Farmers
                  & Merchants Bank**
              **$**
              **19,118**
              
              **13.0%**
              
              **$**
              **5,901**
              
              **4.0%**
              
              **$**
              **8,851**
              
              **6.0%****Tier
                  I Capital to Average Assets:****Consolidated**
              **$**
              **19,571**
              
              **10.1%**
              
              **$**
              **7,727**
              
              **4.0%**
              
              
              **N/A**
              
              **N/A****Farmers
                  & Merchants Bank**
              **$**
              **19,118**
              
              **9.9%**
              
              **$**
              **7,716**
              
              **4.0%**
              
              **$**
              **9,645**
              
              **5.0%**As
                  of December 31, 2004:Total
                  Capital to Risk Weighted Assets:Consolidated
              $
              14,962
              
              11.3%
              
              $
              10,620
              
              8.0%
              
              
              N/A
              
              N/AFarmers
                  & Merchants Bank
              $
              14,530
              
              11.0%
              
              $
              10,594
              
              8.0%
              
              $
              13,243
              
              10.0%Tier
                  I Capital to Risk Weighted Assets:Consolidated
              $
              13,298
              
              10.0%
              
              $
              5,310
              
              4.0%
              
              
              N/A
              
              N/AFarmers
                  & Merchants Bank
              $
              12,870
              
              9.7%
              
              $
              5,297
              
              4.0%
              
              $
              7,946
              
              6.0%Tier
                  I Capital to Average Assets:Consolidated
              $
              13,298
              
              8.1%
              
              $
              6,565
              
              4.0%
              
              
              N/A
              
              N/AFarmers
                  & Merchants Bank
              $
              12,870
              
              7.8%
              
              $
              6,558
              
              4.0%
              
              $
              8,197
              
              5.0%
 
  F-24
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                15.**
              **FAIR
                  VALUE OF FINANCIAL
                  INSTRUMENTS**
 
 The
        fair value of a financial instrument is the current amount that would be
        exchanged between willing parties, other than in a forced liquidation. Fair
        value is best determined based upon quoted market prices. However, in many
        instances, there are no quoted market prices for the Company’s various financial
        instruments. In cases where quoted market prices are not available, fair
        value
        is based on discounted cash flows or other valuation techniques. These
        techniques are significantly affected by the assumptions used, including
        the
        discount rate and estimates of future cash flows. Accordingly, the fair value
        estimates may not be realized in an immediate settlement of the instrument.
        SFAS
        No. 107, *Disclosures
        about Fair Value of Financial Instruments,* excludes certain financial instruments and all nonfinancial instruments from
        its
        disclosure requirements. Accordingly, the aggregate fair value amounts presented
        may not necessarily represent the underlying fair value of the
        Company.
 
 The
        following methods and assumptions were used by the Company in estimating
        the
        fair value of its financial instruments:
 
 **Cash,
        Due From Banks, Interest-Bearing Deposits at Other Financial Institutions
        and
        Federal Funds Sold:** The
        carrying amount of cash, due from banks, interest-bearing deposits at other
        financial institutions and federal funds sold approximates fair
        value.
 
 **Securities:** Fair
        value of securities is based on available quoted market prices. The carrying
        amount of equity securities with no readily determinable fair value approximates
        fair value.
 
 **Loans:** The
        carrying amount of variable-rate loans that reprice frequently and have no
        significant change in credit risk approximates fair value. The fair value
        of
        fixed-rate loans is estimated based on discounted contractual cash flows,
        using
        interest rates currently being offered for loans with similar terms to borrowers
        with similar credit quality. The fair value of impaired loans is estimated
        based
        on discounted contractual cash flows or underlying collateral values, where
        applicable.
 
 **Deposits:** The
        carrying amount of demand deposits, savings deposits, and variable-rate
        certificates of deposit approximates fair value. The fair value of
        fixed- rate certificates of deposit is estimated based on discounted contractual cash
        flows
        using interest rates currently being offered for certificates of similar
        maturities.
 
 **Other
        Borrowings:** The
        carrying amount of variable rate borrowings approximate fair value. **** The
        fair
        value of fixed rate other borrowings are estimated based on discounted
        contractual cash flows using the current incremental borrowing rates for
        similar
        type borrowing arrangements.
 
 **Accrued
        Interest:** The
        carrying amount of accrued interest approximates their fair value.
 
 **Off-Balance-Sheet** **Instruments:** The
        carrying amount of commitments to extend credit and standby letters of credit
        approximates fair value. The carrying amount of the off-balance-sheet financial instruments is based on fees charged to enter into such agreements.
  F-25
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                15.**
              **FAIR
                  VALUE OF FINANCIAL INSTRUMENTS
                  (Continued)**
 
 The
        carrying amount and estimated fair value of the Company's financial instruments
        were as follows:
 
 **December
                  31, 2005**
              
              **December
                  31, 2004****Carrying**
                **Amount**
              
              **Fair**
                **Value**
              
              **Carrying**
                **Amount**
              
              **Fair**
                **Value****(Dollars
                  in Thousands)**Financial
                  assets:Cash,
                  due from banks, interest-bearing
                  deposits at other financialinstitutions
                  andfederalfunds sold
              **$**
              **25,318**
              
              **$**
              **25,318**
              
              $
              12,535
              
              $
              12,535Securities
              
              **12,244**
              
              
              **12,244**
              
              
              12,903
              
              
              12,903Loans,
                  net
              
              **148,651**
              
              
              **147,505**
              
              
              136,219
              
              
              136,305Accrued
                  interest receivable
              
              **1,628**
              
              
              **1,628**
              
              
              1,229
              
              
              1,229Financial
                  liabilities:Deposits
              
              **160,501**
              
              
              **159,804**
              
              
              141,409
              
              
              141,349Other
                  borrowings
              
              **12,402**
              
              
              **12,347**
              
              
              11,423
              
              
              11,412Guaranteed
                  preferred beneficialinterests
                  in junior subordinateddebentures
              
              **4,124**
              
              
              **3,928**
              
              
              -
              
              
              -Accrued
                  interest payable
              
              **609**
              
              
              **609**
              
              
              289
              
              
              289
 
 
 **NOTE
                16.**
              **PARENT
                  COMPANY FINANCIAL
                  INFORMATION**
 
 The
        following information presents the condensed balance sheets as of December
        31,
        2005 and 2004 and statements of income and cash flows of FMB Equibanc, Inc.
        for
        the periods ended December 31, 2005 and 2004 (dollars in thousands).
 
 **CONDENSED
                  BALANCE SHEETS****2005**
              
              **2004****Assets**Cash
              **$**
              **89**
              
              $
              33Investment
                  in subsidiaries
              
              **19,478**
              
              
              13,263Other
                  assets
              
              **62**
              
              
              76Total
                  assets
              **$**
              **19,629**
              
              $
              13,372**Liabilities**Guaranteed
                  preferred beneficial interests in juniorsubordinated
                  debentures
              **$**
              **4,124**
              
              $
              -Other
                  liabilities
              
              **11**
              
              
              2**4,135**
              
              
              2**Stockholders’
                  equity**
              
              **15,494**
              
              
              13,370Total
                  liabilities and stockholders’ equity
              **$**
              **19,629**
              
              $
              13,372
 
  F-26
  
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
                16.**
              **PARENT
                  COMPANY FINANCIAL INFORMATION
                  (Continued)**
 
 **CONDENSED
                  STATEMENTS OF INCOME****2005**
              
              **2004****Income,**dividends
                  from subsidiaries
              **$**
              **377**
              
              $
              563**Expenses**Interest
                  expense
              
              **103**
              
              
              -Other
              
              **64**
              
              
              42Total
                  expenses
              
              **167**
              
              
              42Income
                  before income tax benefit and equityin
                  undistributed income of subsidiaries
              
              **210**
              
              
              521**Income
                  tax benefit**
              
              **62**
              
              
              16Income
                  before equity in undistributed income of subsidiaries
              
              **272**
              
              
              537**Equity
                  in undistributed income of subsidiaries**
              
              **2,240**
              
              
              1,426Net
                  income
              **$**
              **2,512**
              
              $
              1,963
 
   **CONDENSED
                  STATEMENTS OF CASH FLOWS****2005**
              
              **2004****OPERATING
                  ACTIVITIES**Net
                  income
              **$**
              **2,512**
              
              $
              1,963Adjustments
                  to reconcile net income to netcash
                  provided by operating activities:Undistributed
                  income of subsidiaries
              
              **(2,240)**
              
              
              (1,426)Other
                  operating activities
              
              **24**
              
              
              (38)Net
                  cash provided by operating activities
              
              **296**
              
              
              499**INVESTING
                  ACTIVITIES**Capital
                  injection in non-bank subsidiary
              
              **-**
              
              
              (322)Capital
                  injection in subsidiary bank
              
              **(4,000)**
              
              
              -Net
                  cash used in investing activities
              
              **(4,000)**
              
              
              (322)**FINANCING
                  ACTIVITIES**Dividends
                  paid
              
              **(240)**
              
              
              (181)Proceeds
                  from issuance of guaranteed preferred beneficialinterests
                  in junior subordinated debentures
              
              **4,000**
              
              
              -Net
                  cash provided by (used in) financing activities
              
              **3,760**
              
              
              (181)Net
                  increase (decrease) in cash
              
              **56**
              
              
              (4)Cash
                  at beginning of period
              
              **33**
              
              
              37Cash
                  at end of year
              **$**
              **89**
              
              $
              33
  F-27