**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D. C. 20549**
 
 
 **FORM
        10-KSB**
 
 **xANNUAL
        REPORT PURSUANT
        TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
 
 **For
        the Fiscal Year Ended December 31, 2006**
 
 **OR**
 
 **oTRANSITION
        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 $18,761,000.
 
 The
        estimated aggregate market value of the voting stock held by non-affiliates
        of
        Issuer (281,003  shares)
        at February  28,
        2007
        was $12,645,000. 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, 2007 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 2007 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 
        oNo  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, 2006, 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, 2006 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
              
              $
              254.9
              
              
              28.2BB&T
              
              
              217.2
              
              
              24.0Farmers
                  & Merchants Bank
              
              
              158.4
              
              
              17.5First
                  Southern National Bank
              
              
              102.4
              
              
              11.3Park
                  Avenue Bank
              
              
              67.2
              
              
              7.4Wachovia
                  Bank, National Association
              
              
              58.7
              
              
              6.5Core
                  Credit Union
              
              
              24.8
              
              
              2.8Queensborough
                  National Bank
              
              
              19.0
              
              
              2.1The
                  Heritage Bank
              
              
              1.3
              
              
              0.2
 
 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,
        2006,
        real estate loans comprised 80.2% 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 mortgage loans which have 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, 2006,
        commercial loans comprised 8.9% 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, 2006, 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, 2006, agribusiness loans comprised 5.1%
        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, 2006 was $2,550,000 plus an additional $1,700,000 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, 2006, loans comprised approximately 83.7% of the Company's assets
        and investment securities comprised approximately 4.7% 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,
        2006,
        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, 2006, the Bank had 75 total employees, comprised of 67 full-time
        employees and 8 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 2006.
  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, 2006, was 489. Limited 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 $41 per share to $45
        per share during 2006 and ranged from $36 per share to $41 per share during
        2005. 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 $340,800 and $239,300, or $0.94 and $0.66 per
        share for 2006 and 2005, 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 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, 2006. 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 10 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, 2006, the Company
        recorded on its consolidated balance sheet net deferred tax assets of
        $990,000.
 
 **Performance
        Overvie** ***w***
 
 The
        Company reported net income of $2,910,000, or $7.94 per diluted common share
        in
        2006, compared to $2,512,000, or $6.86 per diluted common share in 2005.
        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 1.31% in 2006 compared
        to
        1.37% in 2005, while the return on average common shareholders’ equity was
        17.13% in 2006 compared to 17.18% in 2005.
  16
  
 Total
        assets at December 31, 2006 were $251,761,000, an increase of $57,938,000,
        or
        29.9%, from December 31, 2005. Total deposits at December 31, 2006 were
        $207,021,000, up 29.0% from $160,501,000 at December 31, 2005.
 
 ***Results
        of Operations***
 The
        Company reported earnings of $2,910,000 for 2006 representing an increase
        of
        $398,000, or 15.8%, compared to earnings of $2,512,000 for 2005. Diluted
        earnings per common share were $7.94 in 2006 compared to $6.86 per diluted
        common share in 2005.
 
 *Net
        Interest Income*
 
 Net
        interest income totaled $8,588,000 in 2006, **** representing
        an increase of $1,378,000, or 19.1%, compared to net interest income of
        $7,210,000 in 2005. The increase in net interest income in 2006 was primarily
        attributable to the growth of the loan portfolio of the Bank.
 
 The
        taxable equivalent net interest margin decreased four basis points to 4.08%
        in
        2006 from 4.12% in 2005. This decrease in the net interest margin is a result
        of
        the local market competition for loans and deposits during 2006. 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 2006
        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 $3,651,000
        to
        $16,868,000 in 2006 from $13,217,000 in 2005.
 
 Average
        earning assets increased $35,531,000, or 20.2%, to $211,131,000 in 2006 compared
        to $175,600,000 in 2005. Average loans increased $35,394,000, or 23.5%, to
        $186,326,000 in 2006 compared to $150,932,000 in 2005. 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 $734,000, or 5.9% during
        2006. Average investment securities represented 5.3% of total average assets
        in
        2006 and 6.8% of total average assets in 2005. 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 95.0%
        for
        2006 and 95.5% for 2005.
 
 Average
        interest-bearing liabilities increased $33,076,000, or 23.2%, in 2006. Average
        interest-bearing deposits increased $26,945,000, or 21.1%, in 2006 and is
        reflected in the growth in all categories of interest-bearing deposits.
        Approximately 15% of total average deposits were noninterest-bearing in 2006
        compared to 17% for 2005. Total interest expense on interest-bearing liabilities
        was $7,410,000 for the year ended December 31, 2006 compared to $4,022,000
        for
        2005. Although total interest bearing liabilities increased 23.2%, total
        interest expense increased 84.2% as a result of an increase in the average
        rate
        paid from 2.82% in 2005 to 4.22% in 2006. In August 2005, the Company issued
        junior subordinated debentures in the amount of $4,124,000 that are included
        in
        interest-bearing liabilities.
  17
  
 *Noninterest
        Income*
 
 Noninterest
        income totaled $2,763,000 in 2006 compared to $2,269,000 in 2005, representing
        an increase of $494,000 or 21.8%. The $494,000 increase is the result of
        a
        $259,000 increase in service charges on deposit accounts, an $80,000 increase
        in
        other service charges, commissions and fees, and a $158,000 increase in mortgage
        origination fees, offset by a $3,000 decrease in other operating
        income.
 
 The
        $259,000 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 $21,000 and $26,000 during 2006 and 2005,
        respectively, in the level of charge-offs related to overdrafts. The results
        for
        2006 reflect a full year effect of this service being in place.
 
 The
        $80,000 increase in other service charges, commissions and fees is attributable
        primarily to an increase of $58,000 in fees earned in relation to debit card
        usage and $22,000 in fees from a payment services vendor. The increases in
        fees
        related to debit card usage are from the electronic payment network through
        which the Bank issues debit cards to its customers. These fees are a percentage
        of the dollar amount of the transactions paid by debit card and are an
        indication of expanded and more frequent useage of debit cards by customers.
        The
        fees earned from the payment services vendor are based on the float of uncleared
        payments.
 
 The
        $158,000 increase in mortgage origination fees is attributable to an increase
        in
        the number and dollar volume of mortgage loans closed during 2006 as compared
        to
        2005.
 
 Following
        is a comparison of noninterest income for 2006 and 2005:
 
 **Year
                  Ended December 31,****2006**
              
              **2005****(Dollars
                  in Thousands)**
 
 Service
                  charges on deposit accounts
              **$**
              **1,743**
              
              $
              1,484Mortgage
                  origination fees
              
              **681**
              
              
              523Other
                  service charges, commissions and fees
              
              **319**
              
              
              239Other
                  operating income
              
              **20**
              
              
              23**$**
              **2,763**
              
              $
              2,269
 
 *Noninterest
        Expense*
 
 Noninterest
        expense increased $1,240,000 to $6,310,000 in 2006 as compared to $5,070,000
        in
        2005. Salaries and employee benefits increased $585,000; equipment and occupancy
        expense increased $139,000; and all other expense increased $516,000. Total
        full-time employees were approximately 67 for both 2006 and
        2005.
  18
  
 Equipment
        and occupancy expense increased $139,000 to $671,000 in 2006 compared to
        $532,000 in 2005. Depreciation expense increased $87,000, or 31.4%, from
        2005 to
        2006 and is attributable to a new branch facility placed in operation in
        January
        2006. During 2006, utilities increased $19,000, property tax expense increased
        $15,000, and other miscellaneous occupancy expense increased $15,000. All
        these
        increases are attributable primarily to the operations of the new branch
        facility.
 
 Office
        supplies increased $19,000, or 13.4%, to $161,000 in 2006 from $142,000 in
        2005,
        attributable primarily to the overall general growth in the operations of
        the
        Bank as well as price increases from major suppliers and vendors.
 
 Data
        processing fees increased $51,000, or 15.2%, to $386,000 in 2006 compared
        to
        $335,000 in 2005. This
        increase in fees was attributable to a 4% increase effective June 1, 2006
        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 this
        fee
        increase, the Bank continued to add loan and deposit accounts, which added
        to
        the Bank’s total cost.
 
 Professional
        fees increased $64,000, or 35.4%, to $245,000 in 2006 from $181,000 in 2005.
        The
        increase in professional fees is attributable primarily to an increase in
        legal
        fees incurred. This increase in legal fees is the result of the bank absorbing
        the closing costs associated with obtaining certain new loan relationships
        brought to the Bank by a new commercial lender in addition to expenses incurred
        in collection efforts and bankruptcy proceedings on existing loans.
 
 Consulting
        fees increased $60,000 or 38.2% to $217,000 in 2006 from $157,000 in 2005.
        This
        increase is attributable to a full year’s effect of consultation services
        relating to the overdraft privilege service previously discussed, as well
        as
        independent reviews of other operational areas of the Bank.
  Advertising
        and public relations increased $60,000, or 24.5%, to $305,000 in 2006 from
        $245,000 in 2005. 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 $262,000, or 28.8%, in 2006 to $1,172,000
        from $910,000 in 2005. The larger increases are reflected in increases in
        director fees of $74,000, in ATM expenses of $36,000 and in appraisal fees
        of
        $31,000. The increase in director fees is the result of an increase in the
        monthly fee paid to directors effective in the fourth quarter of 2005. The
        increase in ATM expense is the result of an increase in the volume of ATM
        and
        debit card transactions processed. The increase in appraisal fees is the
        result
        of absorbing costs associated with obtaining new loan relationships brought
        to
        the bank by a new commercial lender.
  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 $435,000 of salaries to loan costs in 2006 and
        $423,000 in 2005. After adjusting salaries and benefits for amounts allocated
        to
        loan costs, total salaries and benefits increased $585,000, or 22.8%, to
        $3,153,000 in 2006 compared to $2,568,000 in 2005. There are several reasons
        for
        the increase. In addition to routine annual salary increases for existing
        staff,
        the results for 2006 reflect a full year’s impact of increasing staff in late
        2005 in preparation for a new branch facility. Also, mortgage originators
        are
        paid a commission calculated as a percentage of the income each individual
        generates, and therefore mortgage commissions increased as a result of the
        increase in mortgage origination income. Along with the increase in salary
        expense, FICA taxes and 401-(k) contributions increased as well, since they
        generally are a percentage of salaries. 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 2006 and 2005.
 
 **Year
                  Ended December 31,****2006**
              
              **2005****(Dollars
                  in Thousands)**
 
 Salaries
                  and employee benefits
              **$**
              **3,153**
              
              $
              2,568Equipment

                  and occupancy
              
              **671**
              
              
              532Office
                  supplies
              
              **161**
              
              
              142Data
                  processing fees
              
              **386**
              
              
              335Professional
                  fees
              
              **245**
              
              
              181Consulting
                  fees
              **217**
              157Advertising
                  & Public Relations
              **305**
              245Other
                  expense
              **1,172**
              910**$**
              **6,310**
              
              $
              5,070
 
 **Income
        Taxes**
 
 Income
        taxes totaled $1,699,000 in 2006 and $1,397,000 in 2005. The effective tax
        rate
        was 37% for 2006 and 36% for 2005.
 
 **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,
        2006, the Bank's short-term investments were adequate to cover any reasonable
        anticipated immediate need for funds. During 2006, the Company increased
        its
        capital by retaining net earnings of $2,570,000 after payment of dividends.
        After recording an increase in capital of $27,000 for unrealized gains on
        securities available for sale, net of taxes, total capital increased $2,597,000
        during 2006. At December 31, 2006, total capital of the Company amounted
        to
        $18,091,000. 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, 2006.
 
 **Actual**
              
              **Required**
              
              **Excess****Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent****(Dollars
                  in Thousands)**Leverage
                  capital
              $
              21,460
              
              8.8
              %
              
              $
              9,752
              
              4.00
              %
              
              $
              11,708
              
              4.8
              %Risk-based
                  capital:Core
                  capital
              
              21,460
              
              10.3
              
              
              
              8,365
              
              4.00
              
              
              
              13,095
              
              6.3Total
                  capital
              
              24,077
              
              11.5
              
              
              
              16,729
              
              8.00
              
              
              
              7,348
              
              3.5
 
 **Short-Term
        Borrowings**
 
 There
        were no short-term borrowings during 2006 and 2005, respectively.
 
 **Contractual
        Obligations**
 
 The
        following table sets forth certain information about contractual cash
        obligations as of December 31, 2006 (dollars in thousands):
 
 **Payments
                  Due After December 31, 2006****Total**
              
              **1
                  Year**
                **Or
                  Less**
              
              **1
                  -3**
                **Years**
              
              **4
                  -5**
                **Years**
              
              **After
                  5**
                **Years**
 
 Time
                  certificates of deposit
              
              $
              133,279
              
              $
              112,449
              
              $
              20,830
              
              $
              -
              
              $
              -Other
                  borrowings
              
              
              20,756
              
              
              8,000
              
              
              8,381
              
              
              -
              
              
              4,375Operating
                  leases
              
              
              13
              
              
              7
              
              
              6
              
              
              -
              
              
              -Junior
                  subordinated debentures
              
              
              4,124
              
              
              -
              
              
              -
              
              
              -
              
              
              4,124Total
                  contractual cash obligations
              
              $
              158,172
              
              $
              120,456
              
              $
              29,217
              
              $
              -
              
              $
              8,499
  At
        December 31, 2006, neither the Company nor the Bank had any binding contractual
        commitments for capital expenditures.
  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, 2006 and
        2005.
 
 **2006**
              
              **2005****(Dollars
                  in Thousands)**
 
 Commitments
                  to extend credit
              **$**
              **41,359**
              
              $
              23,462Standby
                  letters of credit
              
              **606**
              
              
              599**$**
              **41,965**
              
              $
              24,061
 
 **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,****2006**
              **2005**
              **2004****Interest**
              **Ave**
              
              **Interest**
              **Ave**
              
              **Interest**
              **Ave****Ave**
              **Income/**
              **Yield/**
              **Ave**
              **Income/**
              **Yield/**
              **Ave**
              **Income/**
              **Yield/****Balance**
              **Expense**
              **Rate**
              **Balance**
              **Expense**
              **Rate**
              **Balance**
              **Expense**
              **Rate****(Dollars
                  in Thousands)**AssetsInterest-earning
                  assets:Loans,
                  net of unearned interest
              $186,326
              $14,885
              7.99%
              $150,932
              $10,338
              6.85%
              $127,948
              $7,732
              6.04%Investment
                  Securities:Taxable
              10,696
              432
              4.04%
              11,399
              443
              3.89%
              11,460
              441
              3.85%Nontaxable
              1,079
              67
              6.18%
              1,110
              67
              6.04%
              1,146
              68
              5.93%Interest-bearing
                  deposit in banks
              2,531
              130
              5.13%
              542
              16
              2.95%
              89
              1
              1.41%Federal
                  funds sold
              10,499
              507
              4.83%
              11,617
              391
              3.37%
              6,922
              100
              1.44%Total
                  interest-earning assts
              $211,131
              $16,021
              7.59%
              $175,600
              $11,255
              6.41%
              $147,565
              8,342
              5.65%Noninterest-earning
                  Assets:Cash
              $  
                  5,125
              
              
              $  
                  4,456
              
              
              $   
                  4,081Allowance
                  for loan losses
              (2,780)
              
              
              (2,404)
              
              
              (1,991)Other
                  assets
              8,805
              
              
              6,257
              
              
              4,802Total
                  noninterest-earning assets
              11,150
              
              
              8,309
              
              
              6,892Total
                  assets
              $222,281
              
              
              $183,909
              
              
              $154,457
  23
  
 **Average
        Balances and Net Income Analysis (Continued)**
  
 **Year
                  Ended December 31,****2006**
              
              
              **2005**
              
              
              **2004******
              
              **Average**
              
              
              
              
              ****
              
              **Average**
              
              
              
              
              
              
              **Average******
              
              **Interest**
              
              **Yield/**
              
              
              ****
              
              **Interest**
              
              **Yield/**
              
              
              
              
              **Interest**
              
              **Yield/****Average**
              
              **Income/**
              
              **Rate**
              
              
              **Average**
              
              **Income/**
              
              **Rate**
              
              
              **Average**
              
              **Income/**
              
              **Rate****Balance**
              
              **Expense**
              
              **Paid**
              
              
              **Balance**
              
              **Expense**
              
              **Paid**
              
              
              **Balance**
              
              **Expense**
              
              **Paid****(Dollars
                  in Thousands)****LIABILITIES
                  AND****STOCKHOLDERS’
                  EQUITY**Interest-bearing
                  liabilities:Savings
                  and interest-bearingdemand
                  deposits
              $
              45,347
              
              $
              1,114
              
              2.46
              %
              
              $
              42,234
              
              $
              637
              
              1.51
              %
              
              $
              37,356
              
              $
              267
              
              0.71
              %Time
                  deposits
              
              109,297
              
              
              5,195
              
              4.75
              
              
              
              85,465
              
              
              2,864
              
              3.35
              
              
              
              72,390
              
              
              1,643
              
              2.27
              %Other
                  borrowings
              
              16,868
              
              
              851
              
              5.04
              
              
              
              13,217
              
              
              419
              
              3.17
              
              
              
              7,548
              
              
              151
              
              1.99
              %Junior
                  subordinated debentures
              
              4,124
              
              
              250
              
              6.06
              
              
              
              1,644
              
              
              102
              
              6.20
              
              
              
              -
              
              
              -
              
              -
              %Total
                  interest-bearingLiabilities
              
              175,636
              
              
              7,410
              
              4.22
              
              
              
              142,560
              
              
              4,022
              
              2.82
              
              
              
              117,294
              
              
              2,061
              
              1.76
              %Noninterest-bearing
                  liabilities andstockholders’
                  equity:Demand
                  deposits
              
              28,213
              
              
              
              
              
              
              
              
              25,704
              
              
              
              
              
              
              
              
              23,849Other
                  liabilities
              
              1,439
              
              
              
              
              
              
              
              
              1,019
              
              
              
              
              
              
              
              
              666Stockholders’
                  equity
              
              16,993
              
              
              
              
              
              
              
              
              14,626
              
              
              
              
              
              
              
              
              12,648Total
                  noninterest-bearing liabilitiesand
                  stockholders’ equity
              
              46,645
              
              
              
              
              
              
              
              
              41,349
              
              
              
              
              
              
              
              
              37,163Total
                  liabilities andstockholders’
                  equity
              **$**
              222,281
              
              
              
              
              
              
              
              **$**
              183,909
              
              
              
              
              
              
              
              **$**
              154,457Interest
                  rate spread
              
              
              
              
              
              
              3.37
              %
              
              
              
              
              
              
              
              3.59
              %
              
              
              
              
              
              
              
              3.89
              %Net
                  interest income
              
              
              
              $
              8,611
              
              
              
              
              
              
              
              $
              7,233
              
              
              
              
              
              
              
              $
              6,281Net
                  interest margin
              
              
              
              
              
              
              4.08
              %
              
              
              
              
              
              
              
              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,**
              
              **Year
                  Ended December 31,****2006
                  vs. 2005**
              
              **2005
                  vs. 2004****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
              
              $
              4,547
              
              $
              2,123
              
              $
              2,424
              
              $
              2,606
              
              $
              1,217
              
              $
              1,389Interest
                  on securities:Taxable
              
              
              (11
              )
              
              16
              
              
              (27
              )
              
              2
              
              
              4
              
              
              (2
              )Tax
                  exempt
              
              
              -
              
              
              2
              
              
              (2
              )
              
              (1
              )
              
              1
              
              
              (2
              )Interest-bearing
                  deposits in banks
              
              
              114
              
              
              55
              
              
              59
              
              
              15
              
              
              10
              
              
              5Interest
                  on federal funds sold
              
              
              116
              
              
              154
              
              
              (38
              )
              
              291
              
              
              223
              
              
              68Total
                  interest income
              
              
              4,766
              
              
              2,350
              
              
              2,416
              
              
              2,913
              
              
              1,455
              
              
              1,458Expense
                  from interest-bearing liabilities:Interest
                  on savings and interest-bearing
                  demand deposits
              
              
              477
              
              
              430
              
              
              47
              
              
              370
              
              
              335
              
              
              35Interest
                  on time deposits
              
              
              2,331
              
              
              1,532
              
              
              799
              
              
              1,221
              
              
              924
              
              
              297Interest
                  on other borrowings
              
              
              432
              
              
              316
              
              
              116
              
              
              268
              
              
              155
              
              
              113Interest
                  on junior subordinated
                debentures
              
              
              148
              
              
              (6
              )
              
              154
              
              
              102
              
              
              102
              
              
              -Total
                  interest expense
              
              
              3,388
              
              
              2,272
              
              
              1,116
              
              
              1,961
              
              
              1,516
              
              
              445Net
                  interest income
              
              $
              1,378
              
              $
              78
              
              $
              1,300
              
              $
              952
              
              $
              (61
              )
              $
              1,013
 
 
 
  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, 2006,
        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, 2006****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 banksand
                  federal funds sold
              
              $
              15,378
              
              $
              
              
              $
              
              
              $
              
              
              $
              $15,378Restricted
                  stock
              
              
              1,371
              
              
              
              
              
              
              
              
              
              
              
              1,371Investment
                  securities
              
              
              597
              
              
              3,089
              
              
              6,565
              
              
              153
              
              
              10,404Loans
              
              
              91,004
              
              
              60,905
              
              
              55,162
              
              
              3,535
              
              
              210,606108,350
              
              
              63,994
              
              
              61,727
              
              
              3,688
              
              
              237,759**Interest-bearing
                  liabilities:**Interest-bearing
                  demand deposits (1)
              
              
              
              
              
              37,177
              
              
              -
              
              
              -
              
              
              37,177Savings
                  (1)
              
              
              
              
              
              6,324
              
              
              -
              
              
              -
              
              
              6,324Certificates
                  less than $100,000
              
              
              22,244
              
              
              44,435
              
              
              14,078
              
              
              -
              
              
              80,757Certificates,
                  $100,000 and over
              
              
              13,514
              
              
              32,256
              
              
              6,751
              
              
              -
              
              
              52,521Other
                  borrowings
              
              
              17,000
              
              
              1,000
              
              
              375
              
              
              2,375
              
              
              20,750Junior
                  subordinated debentures
              
              
              -
              
              
              -
              
              
              4,124
              
              
              -
              
              
              4,12452,758
              
              
              121,192
              
              
              25,328
              
              
              2,375
              
              
              201,653**Interest
                  rate sensitivity gap**
              
              $
              55,592
              
              $
              (57,198
              )
              $
              36,399
              
              $
              1,313
              
              $
              36,106**Cumulative
                  interest rate sensitivity gap**
              
              $
              55,592
              
              $
              (1,606
              )
              $
              34,793
              
              $
              36,106**Interest
                  rate sensitivity gap ratio**
              
              
              2.05
              
              
              0.53
              
              
              2.44
              
              
              1.55**Cumulative
                  interest rate sensitivity gap ratio**
              
              
              2.05
              
              
              0.99
              
              
              1.17
              
              
              1.18
 
 (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 72% **** 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, 35% 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,****2006**
              
              
              **2005**
              
              
              **2004****(Dollars
                  in Thousands)**U.
                  S. Treasury securities
              **$**
              **298**
              
              **$**
              296
              
              $
              297U.
                  S. Government sponsored agency securities
              
              **7,846**
              
              
              7,809
              
              
              6,940State
                  and municipal securities
              **1,076**
              1,091
              1,131Corporate
                  debt securities
              
              **506**
              
              
              1,021
              
              
              2,082Mortgage-backed
                  securities
              
              **678**
              
              
              996
              
              
              1,609Restricted
                  stock
              
              **1,371**
              
              
              1,031
              
              
              844**$**
              **11,775**
              
              **$**
              12,244
              
              $
              12,903
 
 ***Maturities***
 
 The
        amounts of securities available for sale in each category as of December
        31,
        2006 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
                  sponsored Agencies,****Corporations
                  and Restricted Stock**
              
              **State
                  and Political Subdivisions****Yield**
              
              
              
              
              **Yield****Amount**
              ****
              **(1)******
              ****
              **Amount**
              ****
              **(1)(2)****(Dollars
                  in Thousands)****Maturity:**One
                  year or less
              $
              3,089
              
              3.57
              %
              
              $
              405
              
              5.6
              %After
                  one year through five years
              
              6,046
              
              4.38
              
              
              
              518
              
              5.98After
                  five years through ten years
              
              -
              
              -
              
              
              
              -After
                  ten years
              
              1,564
              
              6.09
              
              
              
              153
              
              6.34$
              10,699
              
              4.15
              %
              
              $
              1,076
              
              5.88
              %
 
 (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 55% of
        the
        Bank’s loan portfolio as of December 31, 2006. The amount of loans outstanding
        at the indicated dates is shown in the following table according to type
        of
        loans.
 
 **December
                  31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(Dollars
                  in Thousands)**
 
 Commercial,
                  financial and agricultural
              **$**
              **29,497**
              
              **$**
              19,052
              
              **$**
              16,104
              
              **$**
              16,156
              
              $
              18,580Real
                  estate - construction
              
              **52,502**
              
              
              28,937
              
              
              26,135
              
              
              14,828
              
              
              5,341Real
                  estate - mortgage
              
              **116,374**
              
              
              94,596
              
              
              86,110
              
              
              74,925
              
              
              64,881Consumer
              
              **12,020**
              
              
              8,447
              
              
              9,875
              
              
              10,887
              
              
              11,035Overdrafts
              
              **213**
              
              
              240
              
              
              53
              
              
              38
              
              
              145**210,606**
              
              
              151,272
              
              
              138,277
              
              
              116,834
              
              
              99,982Less
                  reserve for possible loan losses
              
              **(2,849)**
              
              
              (2,621)
              
              
              (2,058)
              
              
              (1,758)
              
              
              (1,426)Loans,
                  net
              **$**
              **207,757**
              
              **$**
              148,651
              
              **$**
              136,219
              
              **$**
              115,076
              
              $
              98,556
 
 **Maturities
        and Sensitivity to Changes in Interest Rates**
 
 The
        maturities of the indicated loans at December 31, 2006 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**
                **y****ear**
                **t****hrough**
                **five
                  years**
              
              
              **After
                  five**
                **years**
              
              **Total****(Dollars
                  in Thousands)**Commercial,
                  financial and agricultural
              $
              22,983
              $
              6,252
              $
              262
              $
              29,497Real
                  estate - construction
              
              43,381
              
              
              9,091
              
              
              30
              
              
              52,502
 
 The
        following table summarizes the loans presented in the table above at December
        31, 2006 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
              $
              7,313Floating
                  or adjustable interest rates
              
              8,322$
              15,635
   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,****2006**
              
              
              **2004**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002****(Dollars
                  in Thousands)**Loans
                  accounted for on a nonaccrual basis
              
              $
              586
              
              $
              877
              
              $
              631
              
              $
              596
              
              $
              496Installment
                  loans and term loans contractually past due ninety days or more
                  as to
                  interest or principal payments and still accruing.**-**
              
              
              22
              
              
              54
              
              
              102
              
              
              235
 
 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 $8,000 in 2006 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
        2006 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
        $432,000 **** in
        2006 and $500,000 in 2005. The decrease in the provision for loan losses
        in 2006
        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 $2,849,000 **** at
        December 31, 2006, representing 1.35% of year end total loans outstanding
        compared to $2,621,000 at December 31, 2005, which represented 1.73% 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,****2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002****Amount**
                
                **Percent
                    of**
                  **Loans
                    in Category**
                  **to
                    Total**
                  **Loans**
                
                **Amount**
                
                **Percent
                    of**
                  **Loans
                    in Category**
                  **to
                    Total**
                  **Loans**
                
                **Amount**
                
                **Percent
                    of**
                  **Loans
                    in Category**
                  **to
                    Total**
                  **Loans**
                
                **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
                
                **$**
                **855**
                ****
                ****
                **14**
                **%**
                $
                786
                
                
                13
                %
                $
                720
                
                
                12
                %
                $
                439
                
                
                14
                %
                $
                285
                
                
                19
                %Real
                    estate - construction
                
                
                **712**
                
                
                **25**
                
                
                656
                
                
                19
                
                
                412
                
                
                19
                
                
                527
                
                
                13
                
                
                428
                
                
                5Real
                    estate - mortgage
                
                
                **427**
                
                
                **55**
                
                
                393
                
                
                63
                
                
                308
                
                
                62
                
                
                440
                
                
                64
                
                
                471
                
                
                65Consumer
                
                
                **855**
                
                
                **6**
                
                
                786
                
                
                5
                
                
                618
                
                
                7
                
                
                352
                
                
                9
                
                
                242
                
                
                11**$**
                **2,849**
                ****
                ****
                **100**
                **%**
                $
                2,621
                
                
                100
                %
                $
                2,058
                
                
                100
                %
                $
                1,758
                
                
                100
                %
                $
                1,426
                
                
                100
                %
  31
  
 The
        following table presents an analysis of the Bank’s loan loss experience for the
        periods indicated:
 
 **December
                  31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(Dollars
                  in Thousands)**Average
                  amount of loans outstanding
              
              $
              186,326
              
              $
              150,932
              
              $
              127,948
              
              $
              111,166
              
              $
              96,252Balance
                  of reserve for possible loan losses at beginning of period
              
              $
              2,621
              
              $
              2,058
              
              $
              1,758
              
              $
              1,426
              
              $
              1,073Charge-offs:Commercial,
                  financial and agricultural
              
              
              **10**
              
              
              -
              
              
              135
              
              
              238
              
              
              345Real
                  estate - construction
              
              
              **8**
              
              
              17
              
              
              1
              
              
              -
              
              
              -Real
                  estate - mortgage
              
              
              **78**
              
              
              6
              
              
              57
              
              
              162
              
              
              221Consumer
              
              
              **192**
              
              
              78
              
              
              127
              
              
              86
              
              
              91Recoveries:Commercial,
                  financial and agricultural
              
              
              **2**
              
              
              16
              
              
              24
              
              
              73
              
              
              225Real
                  estate - construction
              
              
              **8**
              
              
              -
              
              
              -
              
              
              -
              
              
              -Real
                  estate - mortgage
              
              
              **27**
              
              
              107
              
              
              27
              
              
              124
              
              
              21Consumer
              
              
              **47**
              
              
              41
              
              
              29
              
              
              21
              
              
              44Net
                  (recoveries) charge-offs
              
              
              **204**
              
              
              (63
              )
              
              240
              
              
              268
              
              
              367Additions
                  to reserve charged to operating expenses
              
              
              **432**
              
              
              500
              
              
              540
              
              
              600
              
              
              720Balance
                  of reserve for possible loan losses at end of period
              
              $
              2,849
              
              $
              2,621
              
              $
              2,058
              
              $
              1,758
              
              $
              1,426Ratio
                  of net loan (recoveries) charge-offs to average loans
              
              
              **0.11**
              **%**
              
              (0.04
              )%
              
              0.19
              %
              
              0.24
              %
              
              0.38
              %
 
 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,****2006**
              
              **2005**
              
              **2004****Amount**
              
              **Rate**
              
              **Amount**
              
              **Rate**
              
              **Amount**
              
              **Rate****(Dollars
                  in Thousands)**Noninterest-bearing
                  demand deposits
              
              **$**
              **28,213**
              
              
              **-**
              **%**
              $
              25,704
              
              
              -
              %
              $
              23,849
              
              
              -
              %Interest-bearing
                  demand and savings deposits
              
              
              **45,347**
              
              
              **2.46**
              
              
              42,234
              
              
              1.51
              
              
              37,356
              
              
              0.71Time
                  deposits
              
              
              **109,297**
              
              
              **4.75**
              
              
              85,465
              
              
              3.35
              
              
              72,390
              
              
              2.27Total
                  deposits
              
              **$**
              **182,857**
              
              
              
              
              $
              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, 2006, 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
                
                $
                13,514Over
                    three months through six months
                
                
                9,181Over
                    six months through twelve months
                
                
                23,075Over
                    twelve months
                
                
                6,751Total
                
                $
                52,521
  **Return
        on Assets and Shareholders’ Equity**
 
 The
        following rate of return information for the periods indicated is presented
        below.
 
 **Year
                      Ended December 31,****2006**
                  
                  **2005**
                  
                  **2004**Return
                      on assets (1)
                  
                  
                  **1.31**
                  **%**
                  
                  1.37
                  %
                  
                  1.27
                  %Return
                      on equity (2)
                  
                  
                  **17.13**
                  
                  
                  17.18
                  
                  
                  15.52Dividends
                      payout ratio (3)
                  
                  
                  **11.71**
                  
                  
                  9.52
                  
                  
                  9.24Equity
                      to assets ratio (4)
                  
                  
                  **7.64**
                  
                  
                  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, 2006, 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, CONTROL PERSONS AND CORPORATE GOVERNANCE;
                  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT**
 
 The
        information appearing under the headings “Election of Directors,” “Executive
        Officers,” “Meetings of the Board of Directors and Committees,” and “Section
        16(a), Beneficial Ownership Reporting Compliance” in the Proxy Statement (the
“2007 Proxy Statement”) relating to the annual meeting of shareholders of the
        Company, scheduled to be held on May 17, 2007, 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 principal executive officer and principal financial
        officer, a copy of which is filed as Exhibit 14.1 to this Report.
 
 **ITEM
                10.**
              **EXECUTIVE
                  COMPENSATION**
  The
        information appearing under the heading “Executive Compensation” in the 2007
        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 heading “Beneficial Owners and Management” in
        the 2007 Proxy Statement is incorporated herein by reference.
 
 **ITEM
                12.**
              **CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE**
 
 The
        information appearing under the headings “Meetings of the Board of Directors and
        Committees” and “Certain Relationships and Transactions” in the 2007 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, 2006 and 2005 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-27
 
  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).4.1
              
              See
                  Exhibits 3.1 and 3.2 for provisions in the Articles of Incorporation
                  and
                  Bylaws of the Company, defining the rights of holders of the common
                  stock.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 Ethics21.1
              
              Subsidiaries
                  of the Registrant (Incorporated by reference to Exhibit 21.1 of
                  the
                  Company’s Annual Report on Form 10-KSB for the year ended December 31,
                  2005).31.1
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Executive
                  Officer31.2
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Principal Financial
                  Officer
 
  36
  
 **Exhibit
                  No.**
              
              **Description**32.1
              
              Section
                  1350 Certification by the Chief Executive Officer32.2
              
              Section
                  1350 Certification by the Principal 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 2007 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,
                  2007
              
              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,
                  2007/s/
                  Dwayne E. Rocker
                
                Dwayne
                  E. Rocker
              
              Secretary
                (principal
                  financial and
                accounting
                  officer)
              
              March27,
                  2007/s/
                  R. Earl Dabbs
              
              Chairman
                  of the Board of Directors
              
              March27,
                  2007R.
                  Earl Dabbs/s/
                  Leonard H. Blount
                
                Leonard
                  H. Blount
              
              Director
              
              March27,
                  2007/s/
                  F. Wendell Brannen
              
              Director
              
              March27,
                  2007F.
                  Wendell Brannen/s/
                  Frank C. Rozier
                
                Frank
                  C. Rozier
              
              Director
              
              March27,
                  2007/s/
                  Gerald M. Edenfield
              
              Director
              
              March27,
                  2007Gerald
                  M. Edenfield/s/
                  William Hatcher
              
              Director
              
              March27,
                  2007William
                  Hatcher/s/
                  William B. Nessmith
              
              Director
              
              March27,
                  2007William
                  B. Nessmith/s/
                  Andrew C. Oliver
              
              Director
              
              March27,
                  2007Andrew
                  C. Oliver/s/
                  Billy G. Tyson
              
              Director
              
              March27,
                  2007Billy
                  G. Tyson
 
 
  38
  
 
 
 
 **EXHIBIT
        INDEX**
 
 
 The
        following exhibits are filed as part of this report (in addition to those
        exhibits listed in Item 13 which are filed as a part of this report and
        incorporated by reference):
 
 
 **Exhibit
                  No.**
              **Description**14.1
              Code
                  of Ethics31.1
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Executive
                  Officer31.2
              Rule
                  13a-14(a)/15d-14(a) Certification of Principal Financial
                  Officer32.1
              Section
                  1350 Certification by the Chief Executive Officer32.2
              Section
                  1350 Certification by the Principal Financial Officer








39







**FMB
      EQUIBANC, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      FINANCIAL REPORT**


**DECEMBER
      31, 2006**








**TABLE
      OF CONTENTS**








**Page****REPORT
                OF INDEPENDENT REGISTERED**
            **F-1****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-8-28**


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, 2006 and 2005, 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, 2006. 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 audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits 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, 2006 and 2005, and the results of their
      operations and their cash flows for each of the two years in the period ended
      December 31, 2006, in conformity with accounting principles generally accepted
      in the United States of America.




















Albany,
      Georgia


March
      8,
      2007


F-2





**FMB
                EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
                BALANCE SHEETS****DECEMBER
                31, 2006 AND 2005****(Dollars
                in Thousands)**






**Assets**
            
            **2006**
            
            **2005**Cash
                and due from banks
            
            **$**
            **6,868**
            
            $
            4,192Interest-bearing
                deposits at other financial institutions
            
            
            **3,225**
            
            
            759Federal
                funds sold
            
            
            **12,153**
            
            
            20,367Securities
                available for sale
            
            
            **10,404**
            
            
            11,213Restricted
                equity securities, at cost
            
            
            **1,371**
            
            
            1,031Loans
            
            
            **210,606**
            
            
            151,272Less
                allowance for loan losses
            
            
            **2,849**
            
            
            2,621Loans,
                net
            
            
            **207,757**
            
            
            148,651Premises
                and equipment, net
            
            
            **4,628**
            
            
            4,390Other
                assets
            
            
            **5,355**
            
            
            3,220Total
                assets
            
            **$**
            **251,761**
            
            $
            193,823**Liabilities
                and Stockholders' Equity**LiabilitiesDepositsNoninterest-bearing
            
            **$**
            **30,242**
            
            $
            27,055Interest-bearing
            
            
            **176,779**
            
            
            133,446Total
                deposits
            
            
            **207,021**
            
            
            160,501Other
                borrowings
            
            
            **20,756**
            
            
            12,402Guaranteed
                preferred beneficial interests injunior
                subordinated debentures
            
            
            **4,124**
            
            
            4,124Other
                liabilities
            
            
            **1,769**
            
            
            1,302Total
                liabilities
            
            
            **233,670**
            
            
            178,329Commitments
                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
            
            
            **14,702**
            
            
            12,132Accumulated
                other comprehensive loss
            
            
            **(49**
            **)**
            
            (76
            )Total
                stockholders' equity
            
            
            **18,091**
            
            
            15,494Total
                liabilities and stockholders' equity
            
            **$**
            **251,761**
            
            $
            193,823**See
                Notes to Consolidated Financial Statements.**


F-3





**FMB
                EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF INCOME****YEARS
                ENDED DECEMBER 31, 2006 AND 2005****(Dollars
                in Thousands, Except Per Share
                Amounts)**








**2006**
            
            **2005**Interest
                incomeLoans,
                including fees
            
            **$**
            **14,885**
            
            $
            10,338SecuritiesTaxable
            
            
            **432**
            
            
            443Nontaxable
            
            
            **44**
            
            
            44Federal
                funds sold
            
            
            **507**
            
            
            391Interest-bearing
                deposits at other financial institutions
            
            
            **130**
            
            
            16Total
                interest income
            
            
            **15,998**
            
            
            11,232Interest
                expenseDeposits
            
            
            **6,309**
            
            
            3,501Other
                borrowings
            
            
            **1,101**
            
            
            521Total
                interest expense
            
            
            **7,410**
            
            
            4,022Net
                interest income
            
            
            **8,588**
            
            
            7,210Provision
                for loan losses
            
            
            **432**
            
            
            500Net
                interest income after provision for loan losses
            
            
            **8,156**
            
            
            6,710Other
                incomeService
                charges on deposit accounts
            
            
            **1,743**
            
            
            1,484Other
                service charges, commissions and fees
            
            
            **319**
            
            
            239Mortgage
                origination fees
            
            
            **681**
            
            
            523Other
                operating income
            
            
            **20**
            
            
            23Total
                other income
            
            
            **2,763**
            
            
            2,269Other
                expensesSalaries
                and employee benefits
            
            
            **3,153**
            
            
            2,568Occupancy
                and equipment expense
            
            
            **671**
            
            
            532Office
                supplies
            
            
            **161**
            
            
            142Data
                processing fees
            
            
            **386**
            
            
            335Professional
                fees
            
            
            **245**
            
            
            181Advertising
                and public relations
            
            
            **305**
            
            
            245Consulting
                fees
            
            
            **217**
            
            
            157Other
                operating expenses
            
            
            **1,172**
            
            
            910Total
                other expenses
            
            
            **6,310**
            
            
            5,070Income
                before income tax
            
            
            **4,609**
            
            
            3,909Income
                tax
            
            
            **1,699**
            
            
            1,397Net
                income
            
            **$**
            **2,910**
            
            $
            2,512Basic
                earnings per share
            
            **$**
            **8.03**
            
            $
            6.93Diluted
                earnings per share
            
            **$**
            **7.94**
            
            $
            6.86**See
                Notes to Consolidated Financial Statements.**





F-4





**FMB
                EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF COMPREHENSIVE INCOME****YEARS
                ENDED DECEMBER 31, 2006 AND 2005****(Dollars
                in Thousands)**








**2006**
            
            **2005**Net
                income
            
            **$**
            **2,910**
            
            $
            2,512Other
                comprehensive income (loss)Unrealized
                holding gains (losses) arising during the period,net
                of tax (benefit) of $19 and ($100), respectively
            
            
            **27**
            
            
            (148
            )Other
                comprehensive income (loss)
            
            
            **27**
            
            
            (148
            )Comprehensive
                income
            
            **$**
            **2,937**
            
            $
            2,364**See
                Notes to Consolidated Financial Statements.**





F-5





**FMB
                EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS' EQUITY****YEARS
                ENDED DECEMBER 31, 2006 AND 2005****(Dollars
                in Thousands)****Accumulated****Other**
            
            **Total****Common
                Stock**
            
            
            
            
            **Retained**
            
            **Comprehensive**
            
            **Stockholders'****Shares**
            
            **Par
                Value**
            
            **Surplus**
            
            **Earnings**
            
            **Income
                (Loss)**
            
            **Equity****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)
            
            
            15,494Net
                income
            -
            
            
            -
            
            
            -
            
            
            2,910
            
            
            -
            
            
            2,910Dividends
                declared,$0.94
                per share
            -
            
            
            -
            
            
            -
            
            
            (340)
            
            
            -
            
            
            (340)Other
                comprehensive income
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            27
            
            
            27**Balance,
                December 31, 2006**
            362,600
            
            $
            362
            
            $
            3,076
            
            $
            14,702
            
            $
            (49)
            
            $
            18,091**See
                Notes to Consolidated Financial Statements.**








F-6





**FMB
                EQUIBANC, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****YEARS
                ENDED DECEMBER 31, 2006 AND 2005****(Dollars
                in Thousands)**








**2006**
            
            **2005****OPERATING
                ACTIVITIES**Net
                income
            
            **$**
            **2,910**
            
            $
            2,512Adjustments
                to reconcile net income to net cashprovided
                by operating activitiesDepreciation
            
            
            **364**
            
            
            277Provision
                for loan losses
            
            
            **432**
            
            
            500Deferred
                income taxes
            
            
            **(123**
            **)**
            
            (232
            )Increase
                in interest receivable
            
            
            **(1,580**
            **)**
            
            (399
            )Increase
                in interest payable
            
            
            **470**
            
            
            321Other
                operating activities, net
            
            
            **(88**
            **)**
            
            127Net
                cash provided by operating activities
            
            
            **2,385**
            
            
            3,106**INVESTING
                ACTIVITIES**Increase
                in interest-bearing deposits at other financial
                institutions
            
            
            **(2,466**
            **)**
            
            (726
            )Purchases
                of securities available for sale
            
            
            **(2,249**
            **)**
            
            (981
            )Net
                change in restricted equity securities
            
            
            **(340**
            **)**
            
            (187
            )Proceeds
                from maturities of securities available for sale
            
            
            **3,118**
            
            
            1,078Proceeds
                from sale of securities available for sale
            
            
            **-**
            
            
            501Net
                decrease (increase) in federal funds sold
            
            
            **8,214**
            
            
            (11,100
            )Net
                increase in loans
            
            
            **(59,918**
            **)**
            
            (12,713
            )Purchase
                of premises and equipment
            
            
            **(602**
            **)**
            
            (1,908
            )Proceeds
                from sale of repossessed assets
            
            
            **-**
            
            
            56Net
                cash used in investing activities
            
            
            **(54,243**
            **)**
            
            (25,980
            )**FINANCING
                ACTIVITIES**Net
                increase in deposits
            
            
            **46,520**
            
            
            19,092Principal
                repayments on other borrowings
            
            
            **(9,021**
            **)**
            
            (3,021
            )Proceeds
                from other borrowings
            
            
            **17,375**
            
            
            4,000Proceeds
                from issuance of guaranteed preferred beneficialinterest
                in junior subordinated debentures
            
            
            **-**
            
            
            4,000Dividends
                paid
            
            
            **(340**
            **)**
            
            (240
            )Net
                cash provided by financing activities
            
            
            **54,534**
            
            
            23,831Net
                increase in cash and due from banks
            
            
            **2,676**
            
            
            957Cash
                and due from banks at beginning of year
            
            
            **4,192**
            
            
            3,235Cash
                and due from banks at end of year
            
            **$**
            **6,868**
            
            $
            4,192**SUPPLEMENTAL
                DISCLOSURES**Cash
                paid forInterest
            
            **$**
            **6,940**
            
            $
            3,701Income
                taxes
            
            **$**
            **1,795**
            
            $
            1,629**NONCASH
                TRANSACTIONS**Other
                real estate acquired in settlement of loans
            
            **$**
            **475**
            
            $
            83Financed
                sales of other real estate owned
            
            **$**
            **94**
            
            $
            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 $992,000 and $868,000 at December 31, 2006 and 2005,
      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 $465,000 and $83,000 in other real estate owned at December 31, 2006
      and
      2005, 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 9.





Prior
      to
      January 1, 2006, the Company accounted for its stock option plans under the
      recognition and measurement provision of Accounting Principles Board ("APB")
      Opinion No. 25, Accounting for Stock Issued to Employees, and related
      Interpretations, as permitted by FASB No. 123, Accounting for Stock Based
      Compensation. Effective January 1, 2006, the Company adopted FASB No. 123R,
      Share-Based Payment, utilizing the "modified prospective" method as described
      in
      FASB No. 123R. In the "modified prospective" method, compensation cost is
      recognized for all stock-based payments granted after the effective date and
      for
      all unvested awards granted prior to the effective date. In accordance with
      FASB
      No. 123R, prior period amounts were not restated. Since all the Company's stock
      options had vested prior to Janaury 1, 2006 and no new options were granted,
      no
      compensation cost was recognized in 2006.





The
      following table illustrates the effect on net income and earnings per share
      for
      the year ended December 31, 2005 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.





**Year
                Ended****December
                31,****2005****(Dollars
                in****Thousands,****Except
                Per****Share
                Amounts**Net
                income, as reported
            
            
            
            $
            2,512Deduct:
                Total stock-based employee compensationexpense
                determined under fair value basedmethod
                for all awards, net of related tax effects
            
            
            
            
            -Pro
                forma net income
            
            
            
            $
            2,512Earnings
                per share:Basic
                - as reported
            
            
            
            $
            6.93Basic
                - pro forma
            
            
            
            $
            6.93Diluted
                - as reported
            
            
            
            $
            6.86Diluted
                - pro forma
            
            
            
            $
            6.86





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
      July
      2006, the Financial Accounting Standards Board ("FASB") issued FASB
      Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes
      -
      an Interpretation of FASB Statement No. 109." FIN 48 prescribes a comprehensive
      model for how a company should recognize, measure, present and disclose in
      its
      financial statements uncertain tax positions that it has taken or expects to
      take on a tax return. FIN 48 is effective beginning in the first quarter of
      fiscal year 2007. Management does not expect that the provisions of FIN-48
      will
      materially impact the Company's results of operations or financial
      condition.





In
      September 2006, the FASB issued SFAS 157, " *Fair
      Value Measurements".* This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles, and expands disclosures about
      fair
      value measurements. This statement applies under other accounting pronouncements
      that require or permit fair value measurements. This statement will be effective
      for financial statements issued by the Company for the year ended December
      31,
      2008. Management is currently evaluating the impact of this interpretation
      on
      the Company.








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):





**Gross**
            
            **Gross****Amortized**
            
            **Unrealized**
            
            **Unrealized**
            
            **Fair****Cost**
            
            **Gains**
            
            **Losses**
            
            **Value****December
                31, 2006:****U.
                S. Treasury securities**
            
            **$**
            **299**
            
            **$**
            **-**
            
            **$**
            **(1**
            **)**
            **$**
            **298****U.
                S. Government sponsored agencies**
            
            
            **7,930**
            
            
            **-**
            
            
            **(84**
            **)**
            
            **7,846****Mortgage-backed
                securities**
            
            
            **686**
            
            
            **1**
            
            
            **(9**
            **)**
            
            **678****State
                and municipal securities**
            
            
            **1,069**
            
            
            **7**
            
            
            **-**
            
            
            **1,076****Corporate
                bonds**
            
            
            **500**
            
            
            **6**
            
            
            **-**
            
            
            **506****$**
            **10,484**
            
            **$**
            **14**
            
            **$**
            **(94**
            **)**
            **$**
            **10,404**December
                31, 2005:U.
                S. Treasury securities
            
            $
            300
            
            $
            -
            
            $
            (4
            )
            $
            296U.
                S. Government sponsored agencies
            
            
            7,952
            
            
            -
            
            
            (143
            )
            
            7,809Mortgage-backed
                securities
            
            
            1,009
            
            
            3
            
            
            (16
            )
            
            996State
                and municipal securities
            
            
            1,078
            
            
            13
            
            
            -
            
            
            1,091Corporate
                bonds
            
            
            1,002
            
            
            19
            
            
            -
            
            
            1,021$
            11,341
            
            $
            35
            
            $
            (163
            )
            $
            11,213





The
      amortized cost and fair value of securities available for sale as of December
      31, 2006 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
            
            $
            3,395
            
            $
            3,364Due
                from one to five years
            
            
            6,251
            
            
            6,209Due
                from five to ten years
            
            
            -
            
            
            -Due
                after ten years
            
            
            152
            
            
            153Mortgage-backed
                securities
            
            
            686
            
            
            678$
            10,484
            
            $
            10,404





Securities
      with a carrying value of $7,604,000 and $9,222,000 at December 31, 2006 and
      2005, 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)**





There
      were no gains or losses on sales of securities available for sale for the years
      ended December 31, 2006 and 2005.





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, 2006 and 2005 (dollars
      in
      thousands).


**Less
                  Than 12 Months**
              
              **12
                  Months or More**
              
              **Total****Description
                  of Securities**
              
              **Fair**
                **Value**
              
              **Unrealized**
                **Losses**
              
              **Fair**
                **Value**
              
              **Unrealized**
                **Losses**
              
              **Fair**
                **Value**
              
              **Unrealized**
                **Losses****December
                  31, 2006:****U.
                  S. Treasury securities**
              
              **$**
              **298**
              
              **$**
              **1**
              
              **$**
              **-**
              
              **$**
              **-**
              
              **$**
              **298**
              
              **$**
              **1****U.
                  S. Government sponsored****agencies**
              
              
              **1,951**
              
              
              **1**
              
              
              **5,895**
              
              
              **83**
              
              
              **7,846**
              
              
              **84****Mortgage-backed
                  securities**
              
              
              **152**
              
              
              **1**
              
              
              **390**
              
              
              **8**
              
              
              **542**
              
              
              **9****Total
                  temporarily**
                **impaired
                  securities**
              
              **$**
              **2,401**
              
              **$**
              **3**
              
              **$**
              **6,285**
              
              **$**
              **91**
              
              **$**
              **8,686**
              
              **$**
              **94**






December
                  31, 2005:U.
                  S. Treasury securities
              
              $
              -
              
              $
              -
              
              $
              296
              
              $
              4
              
              $
              296
              
              $
              4U.
                  S. Government sponsoredagencies
              
              
              3,900
              
              
              67
              
              
              3,909
              
              
              76
              
              
              7,809
              
              
              143Mortgage-backed
                  securities
              
              
              -
              
              
              -
              
              
              533
              
              
              16
              
              
              533
              
              
              16Total
                  temporarily
                impaired
                  securities
              
              $
              3,900
              
              $
              67
              
              $
              4,738
              
              $
              96
              
              $
              8,638
              
              $
              163





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. In analyzing an issuer's financial condition, management considers
      whether the securities are issued by the federal government or its agencies,
      whether downgrades by bond rating agencies have occurred and industry analysts'
      reports. As management has the intent and ability to hold the securities until
      maturity, or for the foreseeable future and due to the fact that the unrealized
      losses relate primarily to changes in interest rates and do not affect the
      expected cash flows of the underlying collateral or issuer, no declines are
      deemed to be other than temporary.





F-14





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








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





The
      composition of loans is summarized as follows (dollars in
      thousands)




**December
                31,****2006**
            
            **2005**Commercial,
                financial and agricultural
            
            **$**
            **29,497**
            
            $
            19,052Real
                estate - construction
            
            
            **52,502**
            
            
            28,937Real
                estate - mortgage
            
            
            **116,374**
            
            
            94,596Consumer
            
            
            **12,020**
            
            
            8,447Overdrafts
            
            
            **213**
            
            
            240Total
                loans
            
            
            **210,606**
            
            
            151,272Allowance
                for loan losses
            
            
            **(2,849**
            **)**
            
            (2,621
            )Loans,
                net
            
            **$**
            **207,757**
            
            $
            148,651





Changes
      in the allowance for loan losses are as follows (dollars in
      thousands):




**Years
                Ended December 31,****2006**
            
            **2005**Balance,
                beginning of year
            
            **$**
            **2,621**
            
            $
            2,058Provision
                for loan losses
            
            
            **432**
            
            
            500Loans
                charged off
            
            
            **(288**
            **)**
            
            (101
            )Recoveries
                of loans previously charged off
            
            
            **84**
            
            
            164Balance,
                end of year
            
            **$**
            **2,849**
            
            $
            2,621





The
      following is a summary of information pertaining to impaired loans (dollars
      in
      thousands):







**As
                of and for the Years Ended**
              **December
                31,****2006**
            
            **2005**Impaired
                loans without a valuation allowance
            
            $
            -
            
            $
            -Impaired
                loans with a valuation allowance
            
            
            **586**
            
            
            877Total
                impaired loans
            
            **$**
            **586**
            
            $
            877Valuation
                allowance related to impaired loans
            
            **$**
            **90**
            
            $
            132Average
                investment in impaired loans
            
            **$**
            **797**
            
            $
            780Interest
                income recognized on impaired loans
            
            **$**
            **9**
            
            $
            3Foregone
                interest income on impaired loans
            
            **$**
            **8**
            
            $
            33





F-15





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
              3.**
            **LOANS
                (Continued)**





Loans
      on
      nonaccrual status amounted to approximately $586,000 and $877,000 at
      December 31, 2006 and 2005, respectively. Loans past due ninety days or
      more and still accruing interest amounted to $22,000 at December 31, 2005.
      At
      December 31, 2006, there were no loans past due ninety days or more and still
      accruing interest.





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, 2006 are
      as
      follows (dollars in thousands):





Balance,
                beginning of year
            
            $
            1,288Advances
            
            
            11,191Repayments
            
            
            (6,249
            )Balance,
                end of year
            
            $
            6,230











**NOTE
              4.**
            **PREMISES
                AND EQUIPMENT**





Premises
      and equipment are summarized as follows (dollars in thousands):





**December
                  31,****2006**
              
              **2005**Land
              
              **$**
              **1,163**
              
              $
              953Buildings
              
              
              **4,031**
              
              
              2,573Furniture
                  and equipment
              
              
              **2,271**
              
              
              1,878Construction
                  in progress; estimated cost to complete,$313
                  in 2006 and $110 in 2005
              
              
              **47**
              
              
              1,509Total
                  cost
              
              
              **7,512**
              
              
              6,913Accumulated
                  depreciation
              
              
              **(2,884**
              **)**
              
              (2,523
              )Net
                  book value
              
              **$**
              **4,628**
              
              $
              4,390





**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, 2006 and
      2005.





Future
      minimum lease payments on noncancelable operating leases are summarized as
      follows:





2007
            
            $
            7,2002008
            
            
            6,000$
            13,200


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, 2006 and 2005 was $52,521,000 and $43,336,000, respectively. The
      scheduled maturities of time deposits at December 31, 2006 are as follows
      (dollars in thousands):





2007
            
            $
            112,4492008
            
            
            19,2382009
            
            
            1,592$
            133,279





At
      December 31, 2006 and 2005, the Company held brokered time deposits in the
      amount of $36,147,000 and $10,486,000, respectively.








**NOTE
              6.**
            **OTHER
                BORROWINGS**





Other
      borrowings consist of the following (dollars in thousands):







**December
                31,****2006**
            
            **2005**Federal
                Home Loan Bank advance with interest payablemonthly
                at a fixed rate of 2.65%, maturing April 2006.
            
            $
            -
            
            $
            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.
            
            
            **-**
            
            
            4,000Federal
                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.
            
            
            **-**
            
            
            3,000Federal
                Home Loan Bank advance with interest payable every threemonths
                at a variable interest rate of 50 basis points below 3 monthLIBOR
                (4.86% and 3.98% at December 31, 2006 and 2005,respectively),
                callable March 2007 without penalty, maturingMarch
                2012.
            
            
            **2,000**
            
            
            2,000Federal
                Home Loan Bank advance with interest payable monthly at avariable
                interest rate of 280 basis points below New York primerate
                (5.45% at December 31, 2006), maturing April 2007
            
            
            **7,000**
            
            
            -Federal
                Home Loan Bank advance with interest payable monthly at afixed
                rate of 4.12%, maturing June 2007
            
            
            **1,000**
            
            
            1,000Federal
                Home Loan Bank advance with interest payable monthly at avariable
                interest rate of 285 basis points below New York primerate
                (5.40% at December 31, 2006), maturing June 2008
            
            
            **3,000**
            
            
            -Federal
                Home Loan Bank advance with interest payable monthly at avariable
                interest rate of 283 basis points below New York primerate
                (5.42% at December 31, 2006), maturing September 2008
            
            
            **5,000**
            
            
            -





F-17





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
              6.**
            **OTHER
                BORROWINGS (Continued)**




**December
                31,****2006**
            
            **2005**Federal
                Home Loan Bank advance with interest andprincipal
                payable monthly through December 2008at
                a fixed interest rate of 5.48%.
            
            **$**
            **375**
            
            $
            392Federal
                Home Loan Bank advance with interest payable monthly at afixed
                rate of 5.187% and principal payable quarterly based on a 15year
                amortization, maturing November 2021.
            
            
            **2,375**Note
                payable to Ford Motor Credit with principal payablethrough
                May 2008, 0% interest rate, secured by abank-owned
                vehicle.
            
            
            **6**
            
            
            10**$**
            **2**0,756
            
            $
            12,402





Contractual
      maturities of other borrowings as of December 31, 2006 are as follows (dollars
      in thousands):





2007
            
            $
            8,0002008
            
            
            8,3812009
            
            
            -2010
                and beyond
            
            
            4,375$
            20,756





Advances
      from the Federal Home Loan Bank are secured by certain qualifying loans with
      a
      lendable collateral value of $23,537,890.





The
      Company and the Bank have available unused lines of credit with various
      financial institutions totaling $8,490,000 at December 31, 2006. There were
      no
      other advances outstanding at December  31,
      2006
      or 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 $57,000 and $41,000 for the years
      ended December 31, 2006 and 2005, 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 $292,000 and $243,000 is included in other
      liabilities as of December 31, 2006 and 2005, respectively. Cash surrender
      value
      of $294,000 and $246,000 on the insurance policies is included in other assets
      at December 31, 2006 and 2005, respectively.








**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.











F-19





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
              9.**
            **STOCK-BASED
                COMPENSATION (Continued)**





A
      summary
      of the status of the plan at December 31, 2006 and 2005 and changes during
      the
      years ended on those dates follows.







**2006**
            
            **2005****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
            
            $
            15.27Aggregate
                intrinsic value of optionscurrently
                vested and exercisable
            
            
            
            
            **$**
            **178,380**
            
            
            
            
            $
            160,380Weighted-average
                fair value of optionsgranted
                during the year
            
            
            
            
            **$**
            -
            
            
            
            
            $
            -








Information
      pertaining to options outstanding at December 31, 2006 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
            
            1.0
                years
            
            $15.27
            
            6,000
            
            $15.27










F-20





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
              10.**
            **INCOME
                TAXES**





The
      components of income tax expense are as follows (dollars in
      thousands):




**Years
                Ended December 31,****2006**
            
            **2005**Current
            
            **$**
            **1,822**
            
            $
            1,629Deferred
            
            
            **(123**
            **)**
            
            (232
            )**$**
            **1,699**
            
            $
            1,397





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,****2006**
            
            **2005**Tax
                provision at statutory federal rate
            
            **$**
            **1,567**
            
            $
            1,329Tax-exempt
                income
            
            
            **(13**
            **)**
            
            (13
            )State
                income taxes
            
            
            **135**
            
            
            127Other
            
            
            **10**
            
            
            (46
            )Income
                tax expense
            
            **$**
            **1,699**
            
            $
            1,397








The
      components of deferred income taxes are as follows (dollars in
      thousands):




**Years
                Ended December 31,****2006**
            
            **2005**Deferred
                tax assets:Loan
                loss reserves
            
            **$**
            **989**
            
            $
            873Deferred
                compensation
            
            
            **97**
            
            
            100Nonaccrual
                interest
            
            
            **3**
            
            
            21Securities
                available for sale
            
            
            **32**
            
            
            51**1,121**
            
            
            1,045Deferred
                tax liability, depreciation
            
            
            **131**
            
            
            159Net
                deferred tax assets
            
            **$**
            **990**
            
            $
            886





F-21




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**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,****2006**
            
            **2005**Net
                income
            
            **$**
            **2,910,000**
            
            $
            2,512,000Weighted
                average number of common shares outstanding
            
            
            **362,600**
            
            
            362,600Effect
                of dilutive options
            
            
            **3,964**
            
            
            3,819Weighted
                average number of common shares outstandingused
                to calculate dilutive earnings per share
            
            
            **366,564**
            
            
            366,419








**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,****2006**
            
            **2005**Commitments
                to extend credit
            
            **$**
            **41,359**
            
            $
            23,462Financial
                standby letters of credit
            
            
            **606**
            
            
            599**$**
            **41,965**
            
            $
            24,061





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.




F-22





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
              12.**
            **COMMITMENTS
                AND CONTINGENCIES
                (Continued)**





**Loan
      Commitments (Continued)**





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, 2006 and 2005, 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, 2006 and
      2005.





At
      December 31, 2006 and 2005, the Company had guaranteed the debt of certain
      customers’ liabilities at another financial institution totaling $26,400 and
      $29,000, 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, 2006 and 2005. Credit
      card commitments are unsecured.





**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.





80.2%
      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 $4,250,000.





The
      Bank
      has a concentration of funds on deposit at or sold through The Bankers Bank
      at
      December 31, 2006 and 2005 as follows (dollars in thousands).


F-23





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
              13.**
            **CONCENTRATIONS
                OF CREDIT (Continued)**





Concentration
      over insured limits (dollars in thousands):




**2006**
            
            **2005**Noninterest-bearing
                accounts
            
            **$**
            **4,201**
            
            $
            2,062Federal
                funds sold
            
            
            **12,153**
            
            
            20,367**$**
            **16,354**
            
            $
            22,429








**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, 2006, approximately
      $1,567,000 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.





Quantitative
      measures established by regulation to ensure capital adequacy require 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, 2006, the Bank met all capital adequacy
      requirements to which it was subject.





As
      of
      December 31, 2006, 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.


F-24





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
              14.**
            **REGULATORY
                MATTERS (Continued)**





The
      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, 2006:****Total
                Capital to Risk Weighted Assets:****Farmers
                & Merchants Bank**
            **$**
            **24,077**
            
            **11.5%**
            
            **$**
            **16,729**
            
            **8.0%**
            
            **$**
            **20,912**
            
            **10.0%****Tier
                I Capital to Risk Weighted Assets:****Farmers
                & Merchants Bank**
            **$**
            **21,460**
            
            **10.3%**
            
            **$**
            **8,365**
            
            **4.0%**
            
            **$**
            **12,547**
            
            **6.0%****Tier
                I Capital to Average Assets:****Farmers
                & Merchants Bank**
            **$**
            **21,460**
            
            **8.8%**
            
            **$**
            **9,752**
            
            **4.0%**
            
            **$**
            **12,190**
            
            **5.0%**As
                of December 31, 2005:Total
                Capital to Risk Weighted Assets:Farmers
                & Merchants Bank
            $
            20,972
            
            14.2%
            
            $
            11,802
            
            8.0%
            
            $
            14,752
            
            10.0%Tier
                I Capital to Risk Weighted Assets:Farmers
                & Merchants Bank
            $
            19,118
            
            13.0%
            
            $
            5,901
            
            4.0%
            
            $
            8,851
            
            6.0%Tier
                I Capital to Average Assets:Farmers
                & Merchants Bank
            $
            19,118
            
            9.9%
            
            $
            7,716
            
            4.0%
            
            $
            9,645
            
            5.0%











**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.


F-25





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
              15.**
            **FAIR
                VALUE OF FINANCIAL INSTRUMENTS
                (Continued)**





**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.





**Junior-Subordinated
      Debentures** :
      The
      fair value of fixed rate junior-subordinated debentures are estimated based
      on
      discounted contractual cash flows using the current rate for similar type
      instruments.





**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.





The
      carrying amount and estimated fair value of the Company's financial instruments
      were as follows:





**December
                31, 2006**
            
            **December
                31, 2005****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
            **$**
            **22,246**
            
            **$**
            **22,246**
            
            $
            25,318
            
            $
            25,318Securities
            
            **11,775**
            
            
            **11,775**
            
            
            12,244
            
            
            12,244Loans,
                net
            
            **207,757**
            
            
            **206,935**
            
            
            148,651
            
            
            147,505Accrued
                interest receivable
            
            **3,208**
            
            
            **3,208**
            
            
            1,628
            
            
            1,628Financial
                liabilities:Deposits
            
            **207,021**
            
            
            **206,199**
            
            
            160,501
            
            
            159,804Other
                borrowings
            
            **20,756**
            
            
            **20,745**
            
            
            12,402
            
            
            12,347Guaranteed
                preferred beneficialinterests
                in junior subordinateddebentures
            
            **4,124**
            
            
            **3,680**
            
            
            4,124
            
            
            3,928Accrued
                interest payable
            
            **1,079**
            
            
            **1,079**
            
            
            609
            
            
            609





F-26





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
              16.**
            **PARENT
                COMPANY FINANCIAL
                INFORMATION**





The
      following information presents the condensed balance sheets as of December
      31,
      2006 and 2005 and statements of income and cash flows of FMB Equibanc, Inc.
      for
      the periods ended December 31, 2006 and 2005 (dollars in thousands).





**CONDENSED
                BALANCE SHEETS****2006**
            
            **2005****Assets**Cash
            **$**
            **73**
            
            $
            89Investment
                in subsidiaries
            
            **22,030**
            
            
            19,478Other
                assets
            
            **122**
            
            
            62Total
                assets
            **$**
            **22,225**
            
            $
            19,629**Liabilities**Guaranteed
                preferred beneficial interests in juniorsubordinated
                debentures
            **$**
            **4,124**
            
            $
            4,124Other
                liabilities
            
            **10**
            
            
            11**4,134**
            
            
            4,135**Stockholders’
                equity**
            
            **18,091**
            
            
            15,494Total
                liabilities and stockholders’ equity
            **$**
            **22,225**
            
            $
            19,629





**CONDENSED
                STATEMENTS OF INCOME****2006**
            
            **2005****Income,**dividends
                from subsidiaries
            **$**
            **799**
            
            $
            377**Expenses**Interest
                expense
            
            **250**
            
            
            103Other
            
            **74**
            
            
            64Total
                expenses
            
            **324**
            
            
            167Income
                before income tax benefit and equityin
                undistributed income of subsidiaries
            
            **475**
            
            
            210**Income
                tax benefit**
            
            **111**
            
            
            62Income
                before equity in undistributed income of subsidiaries
            
            **586**
            
            
            272**Equity
                in undistributed income of subsidiaries**
            
            **2,324**
            
            
            2,240Net
                income
            **$**
            **2,910**
            
            $
            2,512





F-27





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
              16.**
            **PARENT
                COMPANY FINANCIAL INFORMATION
                (Continued)**







**CONDENSED
                STATEMENTS OF CASH FLOWS****2006**
            
            **2005****OPERATING
                ACTIVITIES**Net
                income
            
            **$**
            **2,910**
            
            $
            2,512Adjustments
                to reconcile net income to netcash
                provided by operating activities:Undistributed
                income of subsidiaries
            
            
            **(2,324**
            **)**
            
            (2,240
            )Other
                operating activities
            
            
            **(62**
            **)**
            
            24Net
                cash provided by operating activities
            
            
            **524**
            
            
            296**INVESTING
                ACTIVITIES**Capital
                injection in non-bank subsidiary
            
            
            **(200**
            **)**
            
            -Capital
                injection in subsidiary bank
            
            
            **-**
            
            
            (4,000
            )Net
                cash used in investing activities
            
            
            **(200**
            **)**
            
            (4,000
            )**FINANCING
                ACTIVITIES**Dividends
                paid
            
            
            **(340**
            **)**
            
            (240
            )Proceeds
                from issuance of guaranteed preferred beneficialinterests
                in junior subordinated debentures
            
            
            **-**
            
            
            4,000Net
                cash provided by (used in) financing activities
            
            
            **(340**
            **)**
            
            3,760Net
                increase (decrease) in cash
            
            
            **(16**
            **)**
            
            56Cash
                at beginning of period
            
            
            **89**
            
            
            33Cash
                at end of year
            
            **$**
            **73**
            
            $
            89







F-28