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  **U.S. SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549** **FORM 10-KSB****(Mark One)**   þ **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934****For the fiscal year ended December 31, 2005**   o **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934****For the transition period from                     to                     ****Commission File Number ____________****THE PB FINANCIAL SERVICES CORPORATION**(Name of small business issuer in its charter)   **Georgia** **58-2466560**   (State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification Number)   9570 Medlock Bridge Road, Duluth, Georgia 30097   (Address of principal executive offices) (Zip Code)Issuer’s telephone number (770) 814-8100Securities registered pursuant to Section 12(b) of the Exchange Act: NoneSecurities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, ParValue$5 Per ShareCheck whether the issuer is not required to file reports pursuant to Section 13 of 15(d) of theExchange Act. oCheck whether the issuer: (1) has filed all reports required to be filed by Section 13 or Section15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrantwas required to file such reports) and (2) has been subject to such filing requirement for the past90 days.     Yes þ           No oCheck if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not containedin this form, and no disclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. þIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of theExchange Act.     Yes o           No þState issuer’s revenues for its most recent fiscal year. $29,227,003Aggregate market value of the voting stock held by non-affiliates computed by reference to theprice at which the stock was sold, or the average bid and asked prices of such stock, as of aspecified date within the past 60 days: There is no public trading market for the Company’s commonstock. The aggregate market value of the Company’s common stock held by non-affiliates isapproximately $30,388,280, based on the last sale of the Company’s common stock known tomanagement, which occurred on December 15, 2005 at $32.50 per share.APPLICABLE ONLY TO CORPORATE REGISTRANTSState the number of shares outstanding of each of the issuer’s classes of common equity, as of thelast practicable date. 1,766,517 as of March 31, 2006Transitional Small Business Disclosure format (check one): Yes o No þDOCUMENTS INCORPORATED BY REFERENCEPortions of the Annual Report to Shareholders for the fiscal year ended December 31, 2005, areincorporated by reference into Part II. Portions of the Proxy Statement for the Annual Meeting ofShareholders, scheduled to be held May 16, 2006, are incorporated by reference into Part III.  
 

 
TABLE OF CONTENTS           PAGE PART I.             ITEM 1. DESCRIPTION OF BUSINESS  3-16        ITEM 2. DESCRIPTION OF PROPERTY  16-17        ITEM 3. LEGAL PROCEEDINGS  18        ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS  18        PART II.             ITEM 5. MARKET ANDREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS  19        ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  19-43        ITEM 7. FINANCIAL STATEMENTS  44        ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  45        ITEM 8A. CONTROLS AND PROCEDURES  45        ITEM 8B. OTHER INFORMATION  45        PART III.             ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT  45        ITEM 10. EXECUTIVE COMPENSATION  45        ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  46        ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  46        ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K  46-47        ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES  47  EX-31.1 SECTION 302, CERTIFICATION OF THE CEO EX-31.2 SECTION 302, CERTIFICATION OF THE CFO EX-32.1 SECTION 906, CERTIFICATION OF THE CEO AND CFO
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A WARNING ABOUT FORWARD-LOOKING STATEMENTSCertain statements in this Annual Report on Form 10-KSB contain “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995, which statements generally canbe identified by the use of forward-looking terminology such as “may”, “will”, “expect”,“estimate”, “anticipate”, “believe”, “target”, “plan”, “project”, or “continue” or the negativeshereof or other variations thereon or similar terminology and are subject to risks anduncertainties, including, but not limited to, economic conditions, competition, interest ratesensitivity and exposure to regulatory and legislative changes. The above factors, in some cases,have affected, and in the future could affect, the Company’s financial performance and could causeactual results for fiscal 2005 and beyond to differ materially from those expressed or implied insuch forward-looking statements. The Company does not undertake to publicly update or revise itsforward-looking statements even if experience or future changes make it clear that any projectedresults expressed or implied therein will not be realized.An investment in our common stock involves risks. If any of the following risks or other risks,which have not been identified or which we may believe are immaterial or unlikely, actually occur,our business, financial condition and results of operations could be harmed. In such a case, thetrading price of our common stock could decline, and shareholders may lose all or part of theirinvestment. The risk discussed below includes forward-looking statements, and our actual resultsmay differ substantially from those discussed in these forward-looking statements.***Our profitability is vulnerable to interest rate fluctuations.***Our profitability depends substantially upon our net interest income. Net interest income is thedifference between the interest earned on assets, such as loans and investment securities, and theinterest paid for liabilities, such as savings and time deposits and out-of-market certificates ofdeposit. Market interest rates for loans, investments and deposits are highly sensitive to manyfactors beyond our control. In addition, we cannot predict whether interest rates will continue toremain at present levels. Changes in interest rates may cause significant changes, up or down, inour net interest income. Depending on our portfolio of loans and investments, our results ofoperations may be adversely affected by changes in interest rates .**PART I****ITEM 1. DESCRIPTION OF BUSINESS****The Company**In July 1999, The PB Financial Services Corporation (the “Company”) became the holding company forThe Peachtree Bank (the “Bank”) upon regulatory and shareholder approvals. The Company is the soleshareholder of The Peachtree Bank. The holding company structure provides flexibility forexpansion of the Company’s banking business through the possible acquisition of other financialinstitutions and the provision of additional banking-related services that a traditional commercialbank may not provide under present laws. In addition, the holding
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company structure makes it easier to raise capital for the Bank. For example, banking regulationsrequire the Bank to maintain a minimum ratio of capital to assets. In the event that the Bank’sgrowth prevents it from maintaining this minimum ratio, the Company may borrow funds, subject tocapital adequacy guidelines of the Federal Reserve, and contribute them to the capital of the Bankand otherwise raise capital in a manner unavailable to the Bank under the existing bankingregulations.The Company has no present plans to acquire any additional operating subsidiaries. The Companymay, however, make additional acquisitions in the future in the event that the acquisitions aredeemed to be in the best interests of the Company and its shareholders. Any future acquisitionswould be subject to certain regulatory approvals and requirements. See “Business – Bank HoldingCompany Regulation.”**The Bank****General**In January 1998, the Georgia Department of Banking and Finance and the FDIC granted final approvalto the organizers of The Peachtree Bank to organize the Bank as a state-chartered commercial bankand for FDIC insurance of the Bank’s deposits. The Bank began its banking operations on October 5,1998. During the fourth quarter of 2002, the Bank became a member of the Federal Reserve Systemand consequently, the Federal Reserve replaced the FDIC as the Bank’s primary federal regulator.The Bank is a full-service commercial bank, specializing in the banking needs of individuals andsmall to medium sized businesses and professional affiliations. The Bank offers personal andbusiness checking accounts, money market accounts, interest-bearing accounts, savings accounts, andvarious types of certificates of deposit. The Bank also offers installment loans, real estateloans, construction loans, second mortgage loans, commercial loans and home equity lines of credit.It also acts as an issuing agent for U.S. Savings Bonds, travelers checks, and cashier’s checks.It offers ATM cards, debit cards, official bank checks, telephone banking, bank by mail, directdeposit of payroll and social security checks and wire transfer facilities. The Bank has adrive-in teller facility, and automatic teller machine offering 24-hour transactions, safe depositboxes and night depository facilities.**Market Area and Competition**The Bank competes with other commercial banks, savings and loan associations, credit unions, andmoney market mutual funds operating in the Bank’s market area. Currently, there are severalfinancial institutions with branch locations or main offices in the Bank’s primary market area ofnortheast Fulton County, western Gwinnett County, and northern Dekalb County, Georgia. Several ofthe financial institutions located in the Bank’s market area are large regional banks, such asWachovia, SunTrust, SouthTrust, First Union and Bank of America. The larger regional banks’presence in the area is through branch offices, with many of the customer service functions, aswell as authority for loan approval, being located outside of the Bank’s primary market area. TheBank competes with the larger regional banks as well as other financial institutions in its marketarea by emphasizing its local management and ownership and by focusing on personal service to itscustomers and strong community involvement.
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**Deposits**The bank offers a wide range of commercial and consumer deposit accounts, including checkingaccounts, money market accounts, a variety of certificates of deposit, and IRA accounts. The Bankattracts deposits with an aggressive marketing plan, a broad product line, and competitive productsand services. The Bank pays competitive interest rates on money market accounts and certificatesof deposit and has implemented a service charge fee schedule competitive with other financialinstitutions in the Bank’s market area. The primary sources of deposits are northeast FultonCounty, Georgia, western Gwinnett County, Georgia and northern Dekalb County, Georgia residents andbusinesses and their employees.**Loan Portfolio****General**. The Bank engages in a broad range of lending activities, including real estate-relatedloans, construction loans for residential and commercial properties, consumer/installment loans andhome equity lines of credit to individuals, and commercial loans with particular emphasis on smalland medium sized businesses and professional concerns. The principal economic risk associated witheach category of loans is the creditworthiness of the borrower. General economic conditions andthe strength of the services and retail market segments affect borrower creditworthiness. Risksassociated with real estate loans also include fluctuations in the value of real estate, new jobcreation trends, tenant vacancy rates and, in the case of commercial borrowers, the quality of theborrower’s management. In addition, a commercial borrower’s ability to properly evaluate changesin the supply and demand characteristics affecting its markets for products and services, and torespond effectively to these changes, are significant factors in determining risks associated withthe creditworthiness of a commercial borrower. Other economic factors affecting a commercialborrower’s ability to repay a loan include interest, inflation, employment rates, customers,suppliers and employees.**Loan Categories**. The Bank makes commercial real estate loans, construction and development loans,residential real estate and consumer loans in and around its primary market area. The Bank alsomakes commercial loans where the Bank takes a security interest in real estate out of an abundanceof caution, but not as the principal collateral for the loan.**Commercial Real Estate Loans**. Commercial real estate loan terms are generally limited to fiveyears or less, although payments may be structured on a longer amortization basis. Interest ratesmay be fixed or adjustable, although rates generally will not be fixed for a period exceeding 60months. The Bank generally charges an origination fee on this type of loan. Credit risk oncommercial real estate loans is managed by: 1) emphasizing loans on owner-occupied office andretail buildings; 2) limiting the ratio of the principal amount of the loan to the value of thecollateral, as established by an independent appraisal, to generally no more than 80%, and 3)requiring that the net projected cash flow available for debt service comfortably exceeds the debtservice requirement.In addition, the Bank may require personal guarantees from the property owners supported by theBank’s review of the owners’ personal financial statements. Risks associated with commercial realestate loans include fluctuations in the value of real estate, new job creation trends, tenant
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vacancy rates and the quality of the borrower’s management. The Bank tries to limit its risk byanalyzing borrowers’ cash flow and collateral value on an ongoing basis.**Construction and Development Loans**. Construction and development loans are made both on a pre-soldand speculative basis. If the borrower has entered into an agreement to sell the property prior tobeginning construction, the loan is considered to be made on a pre-sold basis. If the borrower hasnot entered into an agreement to sell the property prior to beginning construction, then the loanis considered to be made on a speculative basis. Construction and development loans made on apre-sold basis are generally made with a term of nine months and interest is paid monthly.Typically the ratio of the principal amount of the loan to the discounted cash flow value of thecollateral, as established by independent appraisal, generally does not exceed 75%. Speculativeloans are based on the borrower’s financial strength and cash flow position. The ratio of theprincipal amount of the loan to the discounted cash flow value of the collateral generally does notexceed 75% on speculative loans. Loan proceeds are disbursed as the project is completed and onlyafter the project has been inspected by an experienced construction lender or board approvedappraiser. Risks associated with construction loans include fluctuations in the value of realestate and new job creation trends.**Commercial Loans.**The Bank makes commercial loans to small-and medium-sized businesses andprofessional concerns. The terms of these loans vary by their purpose and underlying collateral.The Bank typically makes equipment loans for a term of seven years or less at fixed or variablerates, with the loan being fully amortized over the term. Equipment loans are generally secured bythe equipment, and normally the ratio of the loan amount to the value of the financed equipment (orother collateral) is 75% or less. Loans to support working capital typically have terms of oneyear or less and usually are secured by accounts receivable, inventory and/or personal guaranteesof the principals of the business. For loans secured by accounts receivable or inventory, theprincipal is typically repaid as the assets securing the loan are converted into cash, and forloans secured with other types of collateral, principal is typically due at maturity. The qualityof the commercial borrower’s management, its ability to properly evaluate changes in the supply anddemand characteristics affecting its markets for products and services, and its ability to respondeffectively to such changes are significant factors in a commercial borrower’s continuedcreditworthiness.**Consumer Loans**. The Bank makes a variety of loans to individuals for personal, family andhousehold purposes, including secured and unsecured lines of credit. Consumer loan repaymentsfollow standard banking practices for repayment considering local area market conditions andcompetition. Because depreciable assets such as boats, cars and trailers secure many consumerloans, the Bank amortizes these loans over the useful life of the asset. The loan officer reviewsthe borrower’s past credit history, past income level, debt history and, when applicable, cash flowto determine the impact of all of these factors on the borrower’s ability to make future paymentsas agreed.**Investments**Company invests primarily in obligations of the United States, corporate bonds, state and countymunicipals, Federal Home Loan Bank stock, Federal Reserve Bank stock and Community FinancialServices Inc stock. The Company also engages in Federal funds transactions with its
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principal correspondent banks and acts as a net seller of such funds. The sale of federal fundsamounts to a short-term loan from the Bank to another bank.**Asset/Liability Management**The Bank’s objective is to manage its assets and liabilities to provide a satisfactory andconsistent level of profitability within the framework of established cash, loan, investment,borrowing, and capital policies. Certain Bank officers are responsible for developing andmonitoring policies and procedures that ensure acceptable composition of the asset/liability mix.Management’s overall philosophy is to support asset growth primarily through the growth of coredeposits, which include deposits of all categories made by individuals, partnerships, andcorporations. Management seeks to invest the largest portion of the Bank’s assets in commercial,construction, and consumer loans.The Bank’s asset/liability mix is monitored daily, and a report reflecting interest-sensitiveassets and interest-sensitive liabilities is prepared and presented to the Bank’s Board ofDirectors monthly. The objective of this regular review is to control interest-sensitive assetsand liabilities so as to minimize the impact of substantial movements in interest rates on theBank’s earnings.**Employees**At December 31, 2005, the Company employed 67 full time employees and 4 part-time employees throughits subsidiary, the Bank. The Company considers its relationship with its employees to beexcellent.**SUPERVISION AND REGULATION**Both the Company and the Bank are subject to extensive state and federal banking regulations thatimpose restrictions on and provide for general regulatory oversight of their operations. Theselaws are generally intended to protect depositors and not shareholders. The following discussiondescribes the material elements of the regulatory framework that applies to us.**The Company**Since the Company owns all of the capital stock of the Bank, it is a bank holding company under thefederal Bank Holding Company Act of 1956. As a result, the Company is primarily subject to thesupervision, examination, and reporting requirements of the Bank Holding Company Act and theregulations of the Federal Reserve.***Acquisitions of Banks****.*The Bank Holding Company Act requires every bank holding company to obtainthe Federal Reserve’s prior approval before: **•** Acquiring direct or indirect ownership or control of any voting shares of any bankif, after the acquisition, the bank holding company will directly or indirectly own orcontrol more than 5% of the bank’s voting shares;  **•** Acquiring all or substantially all of the assets of any bank; or
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 **•** Merging or consolidating with any other bank holding company.Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any ofthese transactions if it would result in or tend to create a monopoly or, substantially lessencompetition or otherwise function as a restraint of trade, unless the anticompetitive effects ofthe proposed transaction are clearly outweighed by the public interest in meeting the convenienceand needs of the community to be served. The Federal Reserve is also required to consider thefinancial and managerial resources and future prospects of the bank holding companies and banksconcerned and the convenience and needs of the community to be served. The Federal Reserve’sconsideration of financial resources generally focuses on capital adequacy, which is discussedbelow.Under the Bank Holding Company Act, if adequately capitalized and adequately managed, the Companyor any other bank holding company located in Georgia may purchase a bank located outside ofGeorgia. Conversely, an adequately capitalized and adequately managed bank holding company locatedoutside of Georgia may purchase a bank located inside Georgia. In each case, however, restrictionsmay be placed on the acquisition of a bank that has only been in existence for a limited amount oftime or will result in specified concentrations of deposits. For example, Georgia law prohibits abank holding company from acquiring control of a financial institution until the target financialinstitution has been incorporated for three years. Because the Bank has been incorporated for morethan three years, this limitation does not apply to the Bank or the Company.***Change in Bank Control****.*Subject to various exceptions, the Bank Holding Company Act and the Changein Bank Control Act, together with related regulations, require Federal Reserve approval prior toany person or company acquiring “control” of a bank holding company. Control is conclusivelypresumed to exist if an individual or company acquires 25% or more of any class of votingsecurities of the bank holding company. Control is rebuttably presumed to exist if a person orcompany acquires 10% or more, but less than 25%, of any class of voting securities and either: **•** the bank holding company has registered securities under Section 12 of theSecurities Act of 1934; or  **•** no other person owns a greater percentage of that class of voting securitiesimmediately after the transaction.Our common stock is registered under the Securities Exchange Act of 1934. The regulations providea procedure for challenge of the rebuttable control presumption.***Permitted Activities***. A bank holding company is generally permitted under the Bank Holding CompanyAct to engage in or acquire direct or indirect control of more than 5% of the voting shares of anycompany engaged in the following activities: **•** Banking or managing or controlling banks; and  **•** Any activity that the Federal Reserve determines to be so closely related to bankingas to be a proper incident to the business of banking.
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Activities that the Federal Reserve has found to be so closely related to banking as to be a properincident to the business of banking include: **•** Factoring accounts receivable;  **•** Making, acquiring, brokering or servicing loans and usual related activities;  **•** Leasing personal or real property;  **•** Operating a non-bank depository institution, such as a savings association;  **•** Trust company functions;  **•** Financial and investment advisory activities;  **•** Conducting discount securities brokerage activities;  **•** Underwriting and dealing in government obligations and money market instruments;  **•** Providing specified management consulting and counseling activities;  **•** Performing selected data processing services and support services;  **•** Acting as agent or broker in selling credit life insurance and other types ofinsurance in connection with credit transactions; and  **•** Performing selected insurance underwriting activities.Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries toterminate any of these activities or to terminate its ownership or control of any subsidiary whenit has reasonable cause to believe that the bank holding company’s continued ownership, activity orcontrol constitutes a serious risk to the financial safety, soundness, or stability of it or any ofits bank subsidiaries.In addition to the permissible bank holding company activities listed above, a bank holding companymay qualify and elect to become a financial holding company, permitting the bank holding company toengage in activities that are financial in nature or incidental or complementary to financialactivity. The Bank Holding Company Act expressly lists the following activities as financial innature: **•** Lending, trust and other banking activities;  **•** Insuring, guaranteeing, or indemnifying against loss or harm, or providing andissuing annuities, and acting as principal, agent, or broker for these purposes, in anystate;  **•** Providing financial, investment, or advisory services;
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 **•** Issuing or selling instruments representing interests in pools of assets permissiblefor a bank to hold directly;  **•** Underwriting, dealing in or making a market in securities;  **•** Other activities that the Federal Reserve may determine to be so closely related tobanking or managing or controlling banks as to be a proper incident to managing orcontrolling banks;  **•** Foreign activities permitted outside of the United States if the Federal Reserve hasdetermined them to be usual in connection with banking operations abroad;  **•** Merchant banking through securities or insurance affiliates; and  **•** Insurance company portfolio investments.To qualify to become a financial holding company, the Bank and any other depository institutionsubsidiary of the Company must be well capitalized and well managed and must have a CommunityReinvestment Act rating of at least “satisfactory.” Additionally, the Company must file anelection with the Federal Reserve to become a financial holding company and must provide theFederal Reserve with 30 days’ written notice prior to engaging in a permitted financial activity.While the Company meets the qualification standards applicable to financial holding companies, theCompany has not elected to and has no plans to elect to become a financial holding company at thistime.***Support of Subsidiary Institutions*****.**Under Federal Reserve policy, the Company is expected to actas a source of financial strength for the Bank and to commit resources to support the Bank. Thissupport may be required at times when, without this Federal Reserve policy, the Company might notbe inclined to provide it. In addition, any capital loans made by the Company to the Bank will berepaid only after its deposits and various other obligations are repaid in full. In the unlikelyevent of the Company’s bankruptcy, any commitment by it to a federal bank regulatory agency tomaintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to apriority of payment.**The Bank**Since the Bank is a commercial bank chartered under the laws of the State of Georgia and is aFederal Reserve member bank, it is primarily subject to the supervision, examination and reportingrequirements of the Georgia Department of Banking and Finance and the Federal Reserve Bank ofAtlanta. The Federal Reserve and the Georgia Department of Banking and Finance regularly examinethe Bank’s operations and have the authority to approve or disapprove mergers, the establishment ofbranches and similar corporate actions. Both regulatory agencies have the power to prevent thecontinuance or development of unsafe or unsound banking practices or other violations of law.Additionally, the Bank’s deposits are insured by the FDIC to the maximum extent provided by law.The Bank is also subject to numerous state and federal statutes and regulations that affect itsbusiness, activities and operations.
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***Branching****.*Under current Georgia law, the Bank may open branch offices throughout Georgia with theprior approval of the Georgia Department of Banking and Finance. In addition, with priorregulatory approval, the Bank may acquire branches of existing banks located in Georgia. The Bankand any other national or state-chartered bank generally may branch across state lines by mergingwith banks in other states if allowed by the applicable states’ laws. Georgia law, with limitedexceptions, currently permits branching across state lines through interstate mergers.Under the Federal Deposit Insurance Act, states may “opt-in” and allow out-of-state banks to branchinto their state by establishing a new start-up branch in the state. Currently, Georgia has notopted-in to this provision. Therefore, interstate merger is the only method through which a banklocated outside of Georgia may branch into Georgia. This provides a limited barrier of entry intothe Georgia banking market, which protects us from an important segment of potential competition.However, because Georgia has elected not to opt-in, our ability to establish a new start-up branchin another state may be limited. Many states that have elected to opt-in have done so on areciprocal basis, meaning that an out-of-state bank may establish a new start-up branch only iftheir home state has also elected to opt-in. Consequently, until Georgia changes its election, theonly way we will be able to branch into states that have elected to opt-in on a reciprocal basiswill be through interstate merger.***Prompt Corrective Action****.*The Federal Deposit Insurance Corporation Improvement Act of 1991establishes a system of prompt corrective action to resolve the problems of undercapitalizedfinancial institutions. Under this system, the federal banking regulators have established fivecapital categories: well capitalized, adequately capitalized, undercapitalized, significantlyundercapitalized and critically undercapitalized, in which all institutions are placed. The federalbanking agencies have also specified by regulation the relevant capital levels for each of theother categories. At December 31, 2005, we qualified for the well-capitalized category.Federal banking regulators are required to take some mandatory supervisory actions and areauthorized to take other discretionary actions with respect to institutions in the threeundercapitalized categories. The severity of the action depends upon the capital category in whichthe institution is placed. Generally, subject to a narrow exception, the banking regulator mustappoint a receiver or conservator for an institution that is critically undercapitalized.An institution in any of the undercapitalized categories is required to submit an acceptablecapital restoration plan to its appropriate federal banking agency. A bank holding company mustguarantee that a subsidiary depository institution meets its capital restoration plan, subject tovarious limitations. The controlling holding company’s obligation to fund a capital restorationplan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the time itbecame undercapitalized or the amount required to meet regulatory capital requirements. Anundercapitalized institution is also generally prohibited from increasing its average total assets,making acquisitions, establishing any branches or engaging in any new line of business, exceptunder an accepted capital restoration plan or with FDIC approval. The regulations also establishprocedures for downgrading an institution to a lower capital category based on supervisory factorsother than capital.***FDIC Insurance Assessments****.*The FDIC has adopted a risk-based assessment system for insureddepository institutions’ that takes into account the risks attributable to different categories andconcentrations of assets and liabilities. The system assigns an institution to one of
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three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized.These three categories are substantially similar to the prompt corrective action categoriesdescribed above, with the “undercapitalized” category including institutions that areundercapitalized, significantly undercapitalized, and critically undercapitalized for promptcorrective action purposes. The FDIC also assigns an institution to one of three supervisorysubgroups based on a supervisory evaluation that the institution’s primary federal regulatorprovides to the FDIC and information that the FDIC determines to be relevant to the institution’sfinancial condition and the risk posed to the deposit insurance funds. Assessments range from 0 to27 cents per $100 of deposits, depending on the institution’s capital group and supervisorysubgroup. In addition, the FDIC imposes assessments to help pay off the $780 million in annualinterest payments on the $8 billion Financing Corporation bonds issued in the late 1980s as part ofthe government rescue of the thrift industry. This assessment rate is adjusted annual and is setat 1.32 cents per $100 of deposits for the first quarter of 2006.The FDIC may terminate its insurance of deposits if it finds that the institution has engaged inunsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or hasviolated any applicable law, regulation, rule, order or condition imposed by the FDIC.***Community Reinvestment Act****.*The Community Reinvestment Act requires that, in connection withexaminations of financial institutions within their respective jurisdictions, the Federal Reserveor the FDIC shall evaluate the record of each financial institution in meeting the credit needs ofits local community, including low and moderate-income neighborhoods. These facts are alsoconsidered in evaluating mergers, acquisitions, and applications to open a branch or facility.Failure to adequately meet these criteria could impose additional requirements and limitations onthe Bank and the Company as a financial holding company. Additionally, we must publicly disclosethe terms of various Community Reinvestment Act-related agreements.***Other Regulations****.*Interest and other charges collected or contracted for by the Bank are subjectto state usury laws and federal laws concerning interest rates. For example, under the Soldiers’and Sailors’ Civil Relief Act of 1940, a lender is generally prohibited from charging an annualinterest rate of more than 6% on any obligation for which the borrower is a person on active dutywith the United States Military. The Bank’s loan operations are also subject to federal lawsapplicable to credit transactions, such as: **•** The federal Truth-In-Lending Act, governing disclosures of credit terms to consumerborrowers;  **•** The Home Mortgage Disclosure Act of 1975, requiring financial institutions toprovide information to enable the public and public officials to determine whether afinancial institution is fulfilling its obligation to help meet the housing needs ofthe community it serves;  **•** The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race,creed or other prohibited factors in extending credit;  **•** The Fair Credit Reporting Act of 1978, as amended by the Fair and AccurateTransactions Act, governing the use and provision of information to credit reportingagencies, certain identity thefts protections and certain other disclosures;
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 **•** The Fair Debt Collection Act, governing the manner in which consumer debts may becollected by collection agencies;  **•** The rules and regulations of the various federal agencies charged with theresponsibility of implementing these federal laws.The deposit operations of the Bank are subject to: **•** The Right to Financial Privacy Act, which imposes a duty to maintain confidentialityof consumer financial records and prescribes procedures for complying withadministrative subpoenas of financial records; and  **•** The Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve toimplement that act, which govern automatic deposits to and withdrawals from depositaccounts and customers’ rights and liabilities arising from the use of automated tellermachines and other electronic banking services.**Capital Adequacy**The Company and the Bank are required to comply with the capital adequacy standards established bythe Federal Reserve, in the case of the Company, and the FDIC and Georgia Department of Banking andFinance, in the case of the Bank. The Federal Reserve has established a risk-based and a leveragemeasure of capital adequacy for bank holding companies. The Bank is also subject to risk-based andleverage capital requirements adopted by the FDIC, which are substantially similar to those adoptedby the Federal Reserve for bank holding companies.The risk-based capital standards are designed to make regulatory capital requirements moresensitive to differences in risk profiles among banks and bank holding companies, to account foroff-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets andoff-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned tobroad risk categories, each with appropriate risk weights. The resulting capital ratios representcapital as a percentage of total risk-weighted assets and off-balance-sheet items.The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capitalconsists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consistsof common shareholders’ equity, minority interests in the equity accounts of consolidatedsubsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount ofqualifying cumulative perpetual preferred stock, less goodwill and other specified intangibleassets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generallyconsists of subordinated debt, other preferred stock and hybrid capital and a limited amount ofloan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. AtDecember 31, 2005, the Bank’s ratio of total capital to risk-weighted assets was 11.18% and theBank’s ratio of Tier 1 Capital to risk-weighted assets was 10.27%.In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holdingcompanies. These guidelines provide for a minimum ratio of Tier 1 Capital to average
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assets, less goodwill and other specified intangible assets, of 3% for bank holding companies thatmeet specified criteria, including having the highest regulatory rating and implementing theFederal Reserve’s risk-based capital measure for market risk. All other bank holding companiesgenerally are required to maintain a leverage ratio of at least 4%. At December 31, 2005, theCompany’s leverage ratio was 9.21%. The guidelines also provide that bank holding companiesexperiencing internal growth or making acquisitions will be expected to maintain strong capitalpositions substantially above the minimum supervisory levels without reliance on intangible assets.The Federal Reserve considers the leverage ratio and other indicators of capital strength inevaluating proposals for expansion or new activities.The Bank and the Company are also both subject to leverage capital guidelines issued by the GeorgiaDepartment of Banking and Finance, which provide for minimum ratios of Tier 1 capital to totalassets.Failure to meet capital guidelines could subject a bank or bank holding company to a variety ofenforcement remedies, including issuance of a capital directive, the termination of depositinsurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictionson its business. As described above, significant additional restrictions can be imposed onFDIC-insured depository institutions that fail to meet applicable capital requirements. See“—Prompt Corrective Action.”**Payment of Dividends**The Company is a legal entity separate and distinct from the Bank. The principal source of theCompany’s cash flow, including cash flow to pay dividends to its shareholders, is dividends thatthe Bank pays to it. Statutory and regulatory limitations apply to the Bank’s payment of dividendsto the Company as well as to the Company’s payment of dividends to its shareholders.If, in the opinion of the federal banking regulator, the Bank were engaged in or about to engage inan unsafe or unsound practice, the federal banking regulator could require, after notice and ahearing, that it cease and desist from its practice. The federal banking agencies have indicatedthat paying dividends that deplete a depository institution’s capital base to an inadequate levelwould be an unsafe and unsound banking practice. Under the Federal Deposit Insurance CorporationImprovement Act of 1991, a depository institution may not pay any dividend if payment would causeit to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencieshave issued policy statements that provide that bank holding companies and insured banks shouldgenerally only pay dividends out of current operating earnings. See “—Prompt Corrective Action”above.The Georgia Department of Banking and Finance also regulates the Bank’s dividend payments and mustapprove dividend payments that would exceed 50% of the Bank’s net income for the prior year. Ourpayment of dividends may also be affected or limited by other factors, such as the requirement tomaintain adequate capital above regulatory guidelines.**Restrictions on Transactions with Affiliates**The Company and the Bank are subject to the provisions of Section 23A of the Federal Reserve Act.Section 23A places limits on the amount of:
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 **•** loans or extensions of credit to affiliates;  **•** investment in affiliates;  **•** the purchase of assets from affiliates, except for real and personal propertyexempted by the Federal Reserve;  **•** loans or extensions of credit to third parties collateralized by the securities orobligations of affiliates; and  **•** any guarantee, acceptance or letter of credit issued on behalf of an affiliate.The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% ofa bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital andsurplus. In addition to the limitation on the amount of these transactions, each of the abovetransactions must also meet specified collateral requirements. The Bank must also comply withother provisions designed to avoid the taking of low-quality assets.The Company and the Bank are also subject to the provisions of Section 23B of the Federal ReserveAct which, among other things, prohibit an institution from engaging in the above transactions withaffiliates unless the transactions are on terms substantially the same, or at least as favorable tothe institution or its subsidiaries, as those prevailing at the time for comparable transactionswith nonaffiliated companies.The Bank is also subject to restrictions on extensions of credit to its executive officers,directors, principal shareholders and their related interests. These extensions of credit (1) mustbe made on substantially the same terms, including interest rates and collateral, as thoseprevailing at the time for comparable transactions with third parties, and (2) must not involvemore than the normal risk of repayment or present other unfavorable features.**Privacy**Financial institutions are required to disclose their policies for collecting and protectingconfidential information. Customers generally may prevent financial institutions from sharingnonpublic personal financial information with nonaffiliated third parties except under narrowcircumstances, such as the processing of transactions requested by the consumer. Additionally,financial institutions generally may not disclose consumer account numbers to any nonaffiliatedthird party for use in telemarketing, direct mail marketing or other marketing to consumers.**Anti-Terrorism and Money Laundering Legislation**The Bank is subject to the Uniting and Strengthening America by Providing Appropriate ToolsRequired to Intercept and Obstruct Terrorism (the “USA PATRIOT Act”), the Bank Secrecy Act, andrules and regulations of the Office of Foreign Assets Control (the “OFAC”). These statutes andrelated rules and regulations impose requirements and limitations on specified financialtransactions and account relationships, intended to guard against money laundering and terrorismfinancing. The Bank has established a customer identification program pursuant toSection 326
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of the USA PATRIOT Act and the Bank Secrecy Act, and otherwise have implementedpolicies and procedures to comply with the foregoing rules.**Federal Deposit Insurance Reform**On February 8, 2006, President Bush signed the Federal Deposit Insurance Reform Act of 2005(FDIRA). The FDIC must adopt rules implementing the various provisions of FDIRA by November 5,2006.Among other things, FDIRA changes the Federal deposit insurance system by: **•** raising the coverage level for retirement accounts to $250,000;  **•** indexing deposit insurance coverage levels for inflation beginning in 2012;  **•** prohibiting undercapitalized financial institutions from accepting employee benefit plandeposits;  **•** merging the Bank Insurance Fund and Savings Association Insurance Fund into a newDeposit Insurance Fund (the DIF); and  **•** providing credits to financial institutions that capitalized the FDIC prior to 1996 tooffset future assessment premiums.FDIRA also authorizes the FDIC to revise the current risk-based assessment system, subject tonotice and comment and caps the amount of the DIF at 1.50% of domestic deposits. The FDIC mustissue cash dividends, awarded on a historical basis, for the amount of the DIF over the 1.50%ratio. Additionally, if the DIF exceeds 1.35% of domestic deposits at year-end, the FDIC mustissue cash dividends, awarded on a historical basis, for half of the amount of the excess.**Proposed Legislation and Regulatory Action**New regulations and statutes are regularly proposed that contain wide-ranging proposals foraltering the structures, regulations and competitive relationships of financial institutionsoperating or doing business in the United States. We cannot predict whether or in what form anyproposed regulation or statute will be adopted or the extent to which our business may be affectedby any new regulation or statute.**Effect of Governmental Monetary Polices**Our earnings are affected by domestic economic conditions and the monetary and fiscal policies ofthe United States government and its agencies. The Federal Reserve Bank’s monetary policies havehad, and are likely to continue to have, an important impact on the operating results of commercialbanks through its power to implement national monetary policy in order, among other things, to curbinflation or combat a recession. The monetary policies of the Federal Reserve affect the levels ofbank loans, investments and deposits through its control over the issuance of United Statesgovernment securities, its regulation of the discount rate applicable to
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memberbanks and its influence over reserve requirements to which member banks are subject. We cannotpredict the nature or impact of future changes in monetary and fiscal policies.**RISK FACTORS**An investment in our common stock involves risks. If any of the following risks or other risks,which have not been identified or which we may believe are immaterial or unlikely, actually occur,our business, financial condition and results of operations could be harmed. In such a case, thetrading price of our common stock could decline, and shareholders may lose all or part of theirinvestment. The risk discussed below includes forward-looking statements, and our actual resultsmay differ substantially from those discussed in these forward-looking statements.***Our profitability is vulnerable to interest rate fluctuations.***Our profitability depends substantially upon our net interest income. Net interest income is thedifference between the interest earned on assets, such as loans and investment securities, and theinterest paid for liabilities, such as savings and time deposits and out-of-market certificates ofdeposit. Market interest rates for loans, investments and deposits are highly sensitive to manyfactors beyond our control. Recently, interest rate spreads have generally narrowed due tochanging market conditions, policies of various government and regulatory authorities andcompetitive pricing pressures, and we cannot predict whether these rate spreads will narrow evenfurther. This narrowing of interest rate spreads could adversely affect our financial conditionand results of operations. In addition, we cannot predict whether interest rates will continue toremain at present levels. Changes in interest rates may cause significant changes, up or down, inour net interest income. Depending on our portfolio of loans and investments, our results ofoperations may be adversely affected by changes in interest rates.**ITEM 2. DESCRIPTION OF PROPERTY**The main office of The Peachtree Bank is located on a 1.2-acre tract of land in northeast FultonCounty, Georgia, which was purchased at a price of approximately $610,000. The Bank’s operationsare conducted through its main office, which is located at this site. The Bank operates itsbusiness in a building of approximately 16,000 square feet in size which was constructed andfurnished at cost, including all furnishings, site preparation, landscaping, paving, securityequipment and automatic teller machine, of approximately $3,297,000. Currently, the Bank utilizesapproximately 11,400 square feet of the space in the building. Additional space over and abovethat required to operate the Bank is leased and generates lease income for the Bank. The Bank willcontinue to lease this space until such time as the Bank requires use of the space. The buildingis of brick construction and has six inside teller windows, four drive-in lanes and one drive-upATM.The Bank also leases and operates three full-service banking offices and one limited servicebanking offices.     (1) The Peachtree Bank of DunwoodyThe full service banking office is located at 1725 Mount Vernon Road, Dunwoody, GA 30338 innorthern Dekalb County, Georgia and is 3,037 square feet. The lease expense is approximately
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$4,000 per month, increasing 3% each year of the lease term. The lease expires on May 31, 2011.     (2) The Peachtree Bank of GwinnettThe full service banking office is located at 185 Gwinnett Drive, Lawrenceville, GA 30045 inwestern Gwinnett County, Georgia and is 5,200 square feet. The lease expense is approximately$5,200 per month, increasing 4% each year of the lease term. The lease expires on June 30, 2008.     (3) The Peachtree Bank of North FultonThe full service banking office is located at 695 Mansell Road, Roswell, GA 30076 in northwesternFulton County, Georgia. The space is approximately 5,600 square feet and the lease expense is$5,800 per month, increasing 3% per each year of the lease term. The lease expires on October 30,2013.     (4) The Peachtree Bank of ForsythThe limited service loan production office was closed in 2005, and the space is currently beingsub-let. It is located at 2450 Atlanta Highway Suite 500, Cumming, GA 30040 in south ForysthCounty, Georgia. The space is approximately 2,300 square feet and the lease expense is $2,000 permonth, increasing 5% per each year of the lease term. The lease expires on July 15, 2006, in theperiod from the closing of the office to the end of the lease, the Bank has sub-let the space forsame amount as our lease expense.Other than normal real estate commercial lending activities of the Bank, the Company generally doesnot invest in real estate, interests in real estate, real estate mortgages, or securities of orinterests in persons primarily engaged in real estate activities.In the opinion of management, all properties are adequately covered by insurance.**ITEM 3. LEGAL PROCEEDINGS**There are no material pending legal proceedings to which the Company is a party or of which any ofits properties is subject; nor are there material proceedings known to the Company to becontemplated by any governmental authority; nor are there material proceedings known to theCompany, pending or contemplated, in which any director, officer, or affiliate or any principalsecurity holder of the Company or any associate of any of the foregoing, is a party or has aninterest adverse to the Company.**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**None.
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**PART II****ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**The Company’s common stock is not traded on an established trading market. As a result, salesprices known to the Company do not necessarily reflect the price that would be paid for the commonstock in an active market. A Determination of the Fair Market Value of the Common Stock of PBFinancial Service Corp. was conducted in the third quarter of 2005, valuing the price of The PBFinancial Services Corporation common stock at $32.50 per share. The sales price of all stocksales since this date have been $32.50 per share.           High LowFiscal year ended December 31, 2005        First Quarter  18.25   18.25 Second Quarter  18.25   18.25 Third Quarter  32.50   18.25 Fourth Quarter  32.50   32.50 Fiscal year ended December 31, 2004        First Quarter  18.25   18.25 Second Quarter  18.25   18.25 Third Quarter  18.25   18.25 Fourth Quarter  18.25   18.25 As of March 31, 2006, the number of holders of record of the Company’s common stock was 578.It is the policy of the Board of Directors of the Company to reinvest earnings for such period oftime as is necessary to ensure the success of the operations of the Company. There are no currentplans to initiate payment of cash dividends, and future dividend policy will depend on theCompany’s earnings, capital requirements, financial condition and other factors considered relevantby the Board of Directors. The Company declared no dividends in 2005 and 2004.The Company did not repurchase any of its shares of common stock during the forth quarter of 2005.In the last quarter of 2005, the Company issued 282,050 shares of unregistered stock in connectionwith the exercise of warrants and employee stock options at prices ranging from $10.00 to $18.25per share.**ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS****Overview**The following discussion of the Company’s financial condition and results of operations should beread in conjunction with the Company’s financial statements, related notes and statisticalinformation included herein.
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The Bank’s main office is located in Duluth, Georgia in North Fulton County. The Bank currently hasthree full service branch locations in the following areas: **•** Lawrenceville, Georgia operating under the trade name of “The Peachtree Bank ofGwinnett”  **•** Dunwoody, Georgia operating under the trade name of “The Peachtree Bank of Dunwoody”  **•** Roswell, Georgia operating under the trade name of “The Peachtree Bank of North Fulton”In addition, the Bank had one loan production office in Cumming, Georgia. This office was closedduring the fourth quarter of 2005. All loans at this office were absorbed by our Main Office.The Bank does have a Trust and Financial Services Division, however, at the March 2004, meeting ofthe Board of Directors it was decided that the Bank would discontinue offering Trust services atthis time. Trust powers granted by the Georgia Department of Banking and Finance and FDIC stillremain but are currently inactive.The Company was formed on July 15, 1999, for the purpose of becoming a bank holding company byacquiring and owning the capital stock of the Bank. Because the primary activity of the Company isthe ownership and operation of the Bank, the Company’s financial performance has been determinedprimarily by the operation of the Bank. Accordingly, the discussion below relates principally tothe operations of the Bank.**Significant Accounting Policies**The Company’s accounting policies are fundamental to understanding management’s discussion andanalysis of results of operations and financial condition. Many of the Company’s accountingpolicies require significant judgment regarding valuation of assets and liabilities and/orsignificant interpretation of the specific accounting guidance. A description of the Company’ssignificant accounting policies can be found in Note 1 of the Notes to Consolidated FinancialStatements in the Company’s 2005 Annual Report to Shareholders. The following is a summary of themore judgmental and complex accounting policies of the Company.Many of the Company’s assets and liabilities are recorded using various valuation techniques thatrequire significant judgment as to recoverability. The collectibility of loans is reflectedthrough the Company’s estimate of the allowance for loan losses. The Company performs periodic andsystematic detailed reviews of its lending portfolio to assess overall collectability. Inaddition, certain assets and liabilities are reflected at their estimated fair value in theconsolidated financial statements. Such amounts are based on either quoted market prices orestimated values derived by the Company utilizing dealer quotes or market comparisons .**Use of Estimates**Management of the Company has made a number of estimates and assumptions relating to reporting ofassets and liabilities and the disclosure of contingent assets and liabilities to prepare
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these consolidated financial statements in conformity with generally accepted accountingprinciples. Actual results could differ from those estimates.**RESULTS OF OPERATIONS**The Company’s results of operations are impacted by its ability to effectively manage interestincome and expense, to minimize loan and investment losses, to generate noninterest income and tocontrol noninterest expense. Because interest rates are determined by market forces and economicconditions beyond the control of the Company, the ability to generate net interest income dependson the Company’s ability to maintain an adequate spread between the rate earned on interest-earningassets and the rate paid on interest-bearing liabilities, such as deposits and borrowings. Thus,net interest income is the key performance measure of income.**Net interest income**The Company reported net interest income of approximately $16,130,000 for the year ended December31, 2005, compared to $11,926,000 as of December 31, 2004. The increase in interest income wasattributed to both the increase in volume of average earning assets and the increase in the yieldsfor average earning assets.Average interest-earning assets increased $99.4 million from 2004 and average total assets for 2005grew $102.1 million. Both of these increases are due primarily to an increase of $77.0 million inaverage loans outstanding, an increase of $11.8 million in average investment securities, and a$9.9 million increase in average federal funds sold. As of December 31, 2005 the yield on averageearning assets was 6.94% compared to 5.85% as of December 31, 2004. The increase in the yield onaverage-earning assets can be attributed to the increases in the prime rate during 2005, combinedwith the increases in volumes in interest bearing assets.Average interest-bearing liabilities increased by $83.8 million in 2005, while averagenoninterest-bearing deposits grew by $12.0 million and average total liabilities grew by $13.3million during the same period. The Bank’s cost of funds for December 31, 2005 was 3.34% comparedto 2.09% for the same period in 2004. Again, the increase in the costs of interest bearingliabilities can be attributed to the increase in prime rate, as this rate increases the Bankreprices it liabilities.Overall, the Company’s net interest margin was 4.13% for the year ended December 31, 2005 comparedto 4.08% as of December 31, 2004.The Company reported net interest income of approximately $11,926,000 for the year ended December31, 2004, compared to approximately $7,467,000 as of December 31, 2003. The increase can beattributed to a greater volume of interest-earning assets that earn a higher interest rate than therate paid on interest-bearing liabilities. The increase in interest income was attributed to boththe increase in volume of average earning assets and the increase in the yields for average earningassets. Average interest-earning assets increased $94.0 million from 2003 and average assets for2004 grew $97.3 million. Both of these increases are due primarily to an increase of $92.9 millionin average loans outstanding. As of December 31, 2004 the yield on average earning assets was 5.85%compared to 5.73% as of December 31, 2003. The increase in the yield on average-earning assets canbe attributed to the slight increases in the prime rate
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during the fourth quarter of 2004. Averageinterest-bearing liabilities increased by $72.6 million in 2004, whileaverage noninterest-bearing deposits grew by $14.7 million during the same period. The Bank’s costof funds for December 31, 2004 was 2.09% compared to 2.19% for the same period in 2003.**Average balance sheets and net interest analysis**The tables below show the year-end average balances for each category of interest-earning assetsand interest-bearing liabilities for the years ended December 31, 2005, 2004, and 2003 and theaverage rate of interest earned or paid thereon. The data is presented using daily averagebalances.
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December 31, 2005