##### 



Exhibit 13 National Bancshares Corporation
Annual Report to Security Holders
for the
fiscal year ended
December 31, 2005 (See Attached)




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Sarbanes-Oxley Act




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FINANCIAL HIGHLIGHTS




Financial Position


|                      |  |      |             |  |      |            |             |        |  |  |       |   
|--------------------- |  | ---- | ----------- |  | ---- | ---------- | ----------- | ------ |  |  | ----- | --
|                      |  |      |             |  |      | Percentage |            
|(Year End Balances)   |  | 2005 |             |  | 2004 |            |             | Change | 
|                      |  |      |             |  |      |            |             |        | 
|Total Assets          |  | $    | 306,881,008 |  |      | $          | 308,424,929 |        |  |  | (0.50 | )%
|Deposits              |  |      | 249,487,821 |  |      |            | 248,522,476 |        |  |  | 0.39  | % 
|Loans  Net           |  |      | 191,538,419 |  |      |            | 196,724,596 |        |  |  | (2.64 | )%
|Investment Securities |  |      | 77,009,046  |  |      |            | 76,327,029  |        |  |  | 0.89  | % 
|Shareholders Equity  |  |      | 34,653,425  |  |      |            | 35,319,321  |        |  |  | (1.89 | )%

|                         |  |   |            |  |  |   |            |  |  |  |        |   
|------------------------ |  | - | ---------- |  |  | - | ---------- |  |  |  | ------ | --
|Summary of Operations    |  |   |            |  |  |  
|Net Interest Income      |  | $ | 11,946,806 |  |  | $ | 11,965,677 |  |  |  | (0.16  | )%
|Net Income               |  |   | 2,099,810  |  |  |   | 2,910,740  |  |  |  | (27.86 | )%
|Regular Cash Dividends   |  |   | 1,430,072  |  |  |   | 1,363,038  |  |  |  | 4.92   | % 
|Net Income Per Share     |  |   | 0.94       |  |  |   | 1.30       |  |  |  | (27.69 | )%
|Cash Dividends Per Share |  |   | 0.64       |  |  |   | 0.61       |  |  |  | 4.92   | % 
|Book Value Per Share     |  |   | 15.51      |  |  |   | 15.81      |  |  |  | (1.90  | )%

Our Mission Statement




Our Vision Statement






| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Identifying and exceeding customer service expectations by
    delivering quality products and financial services to the
    markets we serve.           
|
| |  | Assisting in generating economic stability, growth and
    employment throughout the market area by managing and prudently
    investing local resources.
|
| |  | Providing an ongoing program to develop and recognize our
    associates as valuable assets of the organization.                                         








1



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##### 



SELECTED FINANCIAL DATA




|                                                    |  |                                           |             |  |      |   |             |      |  |   |             |  |  |      |             |  |  |   |             | 
|--------------------------------------------------- |  | ----------------------------------------- | ----------- |  | ---- | - | ----------- | ---- |  | - | ----------- |  |  | ---- | ----------- |  |  | - | ----------- | 
|                                                    |  | As of or For the Years Ended December 31, |            
|                                                    |  |                                           |            
|                                                    |  | 2005                                      |             |  | 2004 |   |             | 2003 |  |   | 2002        |  |  | 2001 |            
|                                                    |  |                                           |             |  |      |   |             |      |  |   |             |  |  |      |            
|Income Statement Data:                              |  |                                           |             |  |      |   |             |      |  |   |             |  |  |      |             |  |  |   |             | 
|Interest Income                                     |  | $                                         | 16,075,195  |  |      | $ | 15,311,999  |      |  | $ | 15,043,809  |  |  | $    | 15,941,153  |  |  | $ | 13,556,747  | 
|Interest Expense                                    |  |                                           | 4,128,389   |  |      |   | 3,346,322   |      |  |   | 3,740,016   |  |  |      | 4,927,774   |  |  |   | 4,954,357   | 
|                                                    |  |                                           |             |  |      |   |             |      |  |   |             |  |  |      |            
|Net Interest Income                                 |  |                                           | 11,946,806  |  |      |   | 11,965,677  |      |  |   | 11,303,793  |  |  |      | 11,013,379  |  |  |   | 8,602,390   | 
|Provision for Loan Losses                           |  |                                           | 159,233     |  |      |   | 177,500     |      |  |   | 245,000     |  |  |      | 1,569,402   |  |  |   | 40,000      | 
|                                                    |  |                                           |             |  |      |   |             |      |  |   |             |  |  |      |            
|Net Interest Income After Provision For Loan Losses |  |                                           | 11,787,573  |  |      |   | 11,788,177  |      |  |   | 11,058,793  |  |  |      | 9,443,977   |  |  |   | 8,562,390   | 
|Noninterest Income                                  |  |                                           | 1,801,200   |  |      |   | 1,895,313   |      |  |   | 1,532,020   |  |  |      | 1,458,031   |  |  |   | 1,145,238   | 
|Noninterest Expense                                 |  |                                           | 10,985,615  |  |      |   | 9,897,462   |      |  |   | 9,140,516   |  |  |      | 7,998,774   |  |  |   | 6,403,105   | 
|                                                    |  |                                           |             |  |      |   |             |      |  |   |             |  |  |      |            
|Income Before Income Taxes                          |  |                                           | 2,603,158   |  |      |   | 3,786,028   |      |  |   | 3,450,297   |  |  |      | 2,903,234   |  |  |   | 3,304,523   | 
|Income Taxes                                        |  |                                           | 503,348     |  |      |   | 875,288     |      |  |   | 806,746     |  |  |      | 648,460     |  |  |   | 777,320     | 
|                                                    |  |                                           |             |  |      |   |             |      |  |   |             |  |  |      |            
|Net Income                                          |  | $                                         | 2,099,810   |  |      | $ | 2,910,740   |      |  | $ | 2,643,551   |  |  | $    | 2,254,774   |  |  | $ | 2,527,203   | 
|                                                    |  |                                           |             |  |      |   |             |      |  |   |             |  |  |      |            
|Balance Sheet Data:                                 |  |                                           |             |  |      |   |             |      |  |   |             |  |  |      |             |  |  |   |             | 
|Cash and Due from Banks                             |  | $                                         | 10,985,160  |  |      | $ | 11,756,454  |      |  | $ | 11,506,999  |  |  | $    | 10,010,654  |  |  | $ | 6,935,082   | 
|Investment securities                               |  |                                           | 77,009,046  |  |      |   | 76,327,029  |      |  |   | 83,793,119  |  |  |      | 70,806,397  |  |  |   | 60,843,655  | 
|Loans, net                                          |  |                                           | 191,538,419 |  |      |   | 196,724,596 |      |  |   | 187,056,241 |  |  |      | 190,559,663 |  |  |   | 116,880,804 | 
|Deposits                                            |  |                                           | 249,487,821 |  |      |   | 248,522,476 |      |  |   | 242,847,291 |  |  |      | 239,297,227 |  |  |   | 159,519,295 | 
|Borrowings                                          |  |                                           | 19,952,284  |  |      |   | 21,679,242  |      |  |   | 20,140,702  |  |  |      | 21,211,964  |  |  |   | 5,741,697   | 
|Shareholders Equity                                |  |                                           | 34,653,425  |  |      |   | 35,319,321  |      |  |   | 34,804,735  |  |  |      | 33,190,050  |  |  |   | 30,922,188  | 
|Total Assets                                        |  |                                           | 306,881,008 |  |      |   | 308,424,929 |      |  |   | 301,249,375 |  |  |      | 296,502,555 |  |  |   | 197,763,446 | 
|Per Common Share Data:                              |  |                                           |             |  |      |   |             |      |  |   |             |  |  |      |             | 
|Net Income                                          |  | $                                         | 0.94        |  |      | $ | 1.30        |      |  | $ | 1.18        |  |  | $    | 1.01        |  |  | $ | 1.13        | 
|Cash Dividends                                      |  |                                           | 0.64        |  |      |   | 0.61        |      |  |   | 0.58        |  |  |      | 0.54        |  |  |   | 0.52        | 
|Book Value                                          |  |                                           | 15.51       |  |      |   | 15.81       |      |  |   | 15.58       |  |  |      | 14.85       |  |  |   | 13.93       | 
|Weighted Average Number of Shares Outstanding       |  |                                           | 2,234,488   |  |      |   | 2,234,488   |      |  |   | 2,234,488   |  |  |      | 2,228,510   |  |  |   | 2,230,013   | 




2



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SELECTED FINANCIAL DATA


|                                                   |  |                                           |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|-------------------------------------------------- |  | ----------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                   |  | As of or For the Years Ended December 31, |          
|                                                   |  |                                           |          
|                                                   |  | 2005                                      |           |   | 2004 |   |           | 2003 |  |   | 2002      |   |  | 2001 |          
|                                                   |  |                                           |           |   |      |   |           |      |  |   |           |   |  |      |          
|Selected Data:                                     |  |                                           |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Return on Average Equity                           |  |                                           | 5.90      | % |      |   | 8.29      | %    |  |   | 7.58      | % |  |      | 7.01      | % |  |   | 8.17      | %
|Return on Average Assets                           |  |                                           | 0.70      | % |      |   | 0.97      | %    |  |   | 0.90      | % |  |      | 0.85      | % |  |   | 1.27      | %
|Dividend Payout Percentage                         |  |                                           | 68.10     | % |      |   | 46.83     | %    |  |   | 49.03     | % |  |      | 53.40     | % |  |   | 45.85     | %
|Efficiency Ratio(1)                                |  |                                           | 79.91     | % |      |   | 71.41     | %    |  |   | 71.21     | % |  |      | 64.14     | % |  |   | 65.69     | %
|Full Time Equivalent Staff                         |  |                                           | 135       |   |      |   | 136       |      |  |   | 133       |   |  |      | 122       |   |  |   | 103       |  
|Average Total Assets to Full Time Equivalent Staff |  | $                                         | 2,233,711 |   |      | $ | 2,214,226 |      |  | $ | 2,209,383 |   |  | $    | 2,166,827 |   |  | $ | 1,938,835 |  
|Asset Quality Ratios:                              |  |                                           |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance for Loan Losses to Ending Total Loans    |  |                                           | 0.98      | % |      |   | 0.89      | %    |  |   | 0.85      | % |  |      | 0.83      | % |  |   | 1.12      | %
|Net Loan Charge-offs to Average Loans              |  |                                           | 0.01      | % |      |   | 0.01      | %    |  |   | 0.13      | % |  |      | 0.89      | % |  |   | 0.06      | %
|Capital Ratios:                                    |  |                                           |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Average Equity to Average Assets                   |  |                                           | 11.81     | % |      |   | 11.65     | %    |  |   | 11.86     | % |  |      | 12.17     | % |  |   | 15.49     | %
|Leverage Ratio(2)                                  |  |                                           | 9.76      | % |      |   | 9.41      | %    |  |   | 9.04      | % |  |      | 8.61      | % |  |   | 14.98     | %
|Total Risk-Based Capital Ratio(2)                  |  |                                           | 14.45     | % |      |   | 13.73     | %    |  |   | 13.59     | % |  |      | 13.58     | % |  |   | 22.71     | %






|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | The efficiency ratio is calculated by dividing noninterest
    expenses by the sum of net interest income and non-interest
    income.
|   
|(2) | Computed in accordance with Comptroller of the Currency and FDIC
    guidelines.                                                      



|               |  |          |           |  |              |           |           |        |        |   |          |   |  |           |           |  |           |   |         |  |  |   |      | 
|-------------- |  | -------- | --------- |  | ------------ | --------- | --------- | ------ | ------ | - | -------- | - |  | --------- | --------- |  | --------- | - | ------- |  |  | - | ---- | 
|               |  |          |           |  |              | Provision |           |        | Income |   |          |   |  | Basic and |          
|               |  |          |           |  |              | for       |           |        | Before |   |          |   |  | Diluted   |          
|               |  | Interest |           |  | Net Interest |           |           | Loan   |        |   | Income   |   |  | Net       |           |  | Earnings  |  
|               |  | Income   |           |  | Income       |           |           | Losses |        |   | Taxes    |   |  | Income    |           |  | Per Share |  
|               |  |          |           |  |              |           |           |        |        |   |          |   |  |           |           |  |           |  
|2005           |  |          |           |  |              |           |           |        |        |   |          |   |  |           |           |  |           |   |         |  |  |   |      | 
|First quarter  |  | $        | 3,828,291 |  |              | $         | 2,964,022 |        |        | $ | 80,000   |   |  | $         | 644,796   |  |           | $ | 520,799 |  |  | $ | 0.23 | 
|Second quarter |  |          | 3,975,548 |  |              |           | 3,012,758 |        |        |   | 212,500  |   |  |           | 509,134   |  |           |   | 431,939 |  |  |   | 0.19 | 
|Third quarter  |  |          | 4,035,644 |  |              |           | 2,958,723 |        |        |   | 44,000   |   |  |           | 537,116   |  |           |   | 447,916 |  |  |   | 0.20 | 
|Fourth quarter |  |          | 4,235,712 |  |              |           | 3,011,303 |        |        |   | (177,267 | ) |  |           | 912,112   |  |           |   | 699,156 |  |  |   | 0.31 | 
|2004           |  |          |           |  |              |           |           |        |        |   |          |   |  |           |           |  |           |   |         |  |  |   |      | 
|First quarter  |  | $        | 3,776,566 |  |              | $         | 3,005,542 |        |        | $ | 47,500   |   |  | $         | 1,131,312 |  |           | $ | 829,998 |  |  | $ | 0.37 | 
|Second quarter |  |          | 3,786,272 |  |              |           | 2,925,382 |        |        |   | 85,000   |   |  |           | 861,227   |  |           |   | 656,179 |  |  |   | 0.29 | 
|Third quarter  |  |          | 3,813,203 |  |              |           | 2,951,300 |        |        |   | 45,000   |   |  |           | 764,954   |  |           |   | 593,893 |  |  |   | 0.27 | 
|Fourth quarter |  |          | 3,935,958 |  |              |           | 3,083,453 |        |        |   |         |   |  |           | 1,028,535 |  |           |   | 830,670 |  |  |   | 0.37 | 






3



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FINANCIAL REVIEW




Forward Looking Statement






Financial Condition


Loans.











4



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##### 



FINANCIAL REVIEW




|                                       |  |                                            |             |   |      |  |     |      |  |   |             |   |  |      |     |   |   |   |             |   |  |  |     |   |  |   |             |   |   |  |     |   |  |   |             |   |  |  |     |  
|-------------------------------------- |  | ------------------------------------------ | ----------- | - | ---- |  | --- | ---- |  | - | ----------- | - |  | ---- | --- | - | - | - | ----------- | - |  |  | --- | - |  | - | ----------- | - | - |  | --- | - |  | - | ----------- | - |  |  | --- | -
|                                       |  | Loan Portfolio Composition at December 31, |            
|                                       |  |                                            |            
|                                       |  | 2005                                       |             |   | 2004 |  |     | 2003 |  |   | 2002        |   |  | 2001 |    
|                                       |  |                                            |             |   |      |  |     |      |  |   |             |   |  |      |    
|                                       |  | $                                          |             |   | %    |  |     | $    |  |   | %           |   |  | $    |     |   | % |   |             | $ |  |  | %   |   |  | $ |             |   | % | 
|                                       |  |                                            |             |   |      |  |     |      |  |   |             |   |  |      |     |   |   |   |             |   |  |  |     |   |  |   |             |   |   | 
|Type of Loan:                          |  |                                            |             |   |      |  |     |      |  |   |             |   |  |      |     |   |   |   |             |   |  |  |     |   |  |   |             |   |   |  |     |   |  |   |             |   |  |  |     |  
|Collateralized by real estate:         |  |                                            |             |   |      |  |     |      |  |   |             |   |  |      |     |   |   |   |             |   |  |  |     |   |  |   |             |   |   |  |     |   |  |   |             |   |  |  |     |  
|Commercial                             |  | $                                          | 47,638,035  |   |      |  | 25  | %    |  | $ | 47,080,983  |   |  |      | 24  | % |   | $ | 39,349,045  |   |  |  | 21  | % |  | $ | 28,747,949  |   |   |  | 15  | % |  | $ | 23,933,475  |   |  |  | 20  | %
|Residential                            |  |                                            | 91,591,798  |   |      |  | 47  | %    |  |   | 97,694,011  |   |  |      | 49  | % |   |   | 101,291,447 |   |  |  | 54  | % |  |   | 118,834,883 |   |   |  | 62  | % |  |   | 53,522,228  |   |  |  | 45  | %
|Home equity                            |  |                                            | 19,044,581  |   |      |  | 10  | %    |  |   | 18,272,212  |   |  |      | 9   | % |   |   | 14,008,018  |   |  |  | 7   | % |  |   | 12,555,738  |   |   |  | 6   | % |  |   | 9,426,924   |   |  |  | 8   | %
|Construction                           |  |                                            | 6,440,000   |   |      |  | 3   | %    |  |   | 6,326,884   |   |  |      | 3   | % |   |   | 5,131,685   |   |  |  | 3   | % |  |   | 2,065,964   |   |   |  | 1   | % |  |   | 4,769,337   |   |  |  | 4   | %
|                                       |  |                                            |             |   |      |  |     |      |  |   |             |   |  |      |     |   |   |   |             |   |  |  |     |   |  |   |             |   |   | 
|                                       |  |                                            | 164,714,414 |   |      |  | 85  | %    |  |   | 169,374,090 |   |  |      | 85  | % |   |   | 159,780,195 |   |  |  | 85  | % |  |   | 162,204,534 |   |   |  | 84  | % |  |   | 91,651,964  |   |  |  | 77  | %
|Other:                                 |  |                                            |             |   |      |  |     |      |  |   |             |   |  |      |     |   |   |   |             |   |  |  |     |   |  |   |             |   |   |  |     |   |  |   |             |   |  |  |     |  
|Consumer                               |  |                                            | 6,205,096   |   |      |  | 3   | %    |  |   | 5,385,953   |   |  |      | 3   | % |   |   | 4,828,644   |   |  |  | 3   | % |  |   | 4,847,264   |   |   |  | 3   | % |  |   | 5,224,468   |   |  |  | 5   | %
|Commercial                             |  |                                            | 20,045,739  |   |      |  | 10  | %    |  |   | 21,196,523  |   |  |      | 10  | % |   |   | 21,374,911  |   |  |  | 11  | % |  |   | 21,631,567  |   |   |  | 11  | % |  |   | 18,050,801  |   |  |  | 15  | %
|Credit Cards  unsecured               |  |                                            | 1,405,708   |   |      |  | 1   | %    |  |   | 1,361,726   |   |  |      | 1   | % |   |   | 1,263,565   |   |  |  | 0   | % |  |   | 1,276,587   |   |   |  | 1   | % |  |   | 1,227,172   |   |  |  | 1   | %
|Other                                  |  |                                            | 1,565,995   |   |      |  | 1   | %    |  |   | 1,675,030   |   |  |      | 1   | % |   |   | 1,821,016   |   |  |  | 1   | % |  |   | 2,570,767   |   |   |  | 1   | % |  |   | 2,249,271   |   |  |  | 2   | %
|                                       |  |                                            |             |   |      |  |     |      |  |   |             |   |  |      |     |   |   |   |             |   |  |  |     |   |  |   |             |   |   | 
|Total Loans                            |  | $                                          | 193,936,952 |   |      |  | 100 | %    |  | $ | 198,993,322 |   |  |      | 100 | % |   | $ | 189,068,331 |   |  |  | 100 | % |  | $ | 192,530,719 |   |   |  | 100 | % |  | $ | 118,403,676 |   |  |  | 100 | %
|Less:                                  |  |                                            |             |   |      |  |     |      |  |   |             |   |  |      |     |   |   |   |             |   |  |  |     |   |  |   |             |   |   |  |     |   |  |   |             |   |  |  |     |  
|Unearned and deferred income           |  |                                            | (495,705    | ) |      |  |     |      |  |   | (505,428    | ) |  |      |     |   |   |   | (408,522    | ) |  |  |     |   |  |   | (366,856    | ) |   |  |     |   |  |   | (201,720    | ) |  |  |     |  
|Allowance for loan losses              |  |                                            | (1,902,828  | ) |      |  |     |      |  |   | (1,763,298  | ) |  |      |     |   |   |   | (1,603,568  | ) |  |  |     |   |  |   | (1,604,200  | ) |   |  |     |   |  |   | (1,321,152  | ) |  |  |     |  
|                                       |  |                                            |             |   |      |  |     |      |  |   |             |   |  |      |     |   |   |   |             |   |  |  |     |   |  |   |             |   |   | 
|Net loans                              |  | $                                          | 191,538,419 |   |      |  |     |      |  | $ | 196,724,596 |   |  |      |     |   |   | $ | 187,056,241 |   |  |  |     |   |  | $ | 190,559,663 |   |   |  |     |   |  | $ | 116,880,804 |   |  |  |     |  
|                                       |  |                                            |             |   |      |  |     |      |  |   |             |   |  |      |     |   |   |   |             |   |  |  |     |   |  |   |             |   |   | 
|Net loans as a percent of total assets |  |                                            | 62.41       | % |      |  |     |      |  |   | 63.78       | % |  |      |     |   |   |   | 62.09       | % |  |  |     |   |  |   | 64.22       | % |   |  |     |   |  |   | 59.10       | % |  |  |     |  








5



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##### 



FINANCIAL REVIEW






|                               |              |                                              |            |            |              |   |            |            |  |   |            |            |  |   |             |            | 
|------------------------------ | ------------ | -------------------------------------------- | ---------- | ---------- | ------------ | - | ---------- | ---------- |  | - | ---------- | ---------- |  | - | ----------- | ---------- | 
|                               |              | Loan Portfolio Maturity at December 31, 2005 |           
|                               |              |                                              |           
|                               |              |                                              |            | 5 years or |              |   |           
|                               |              | 0 to 1 year*                                 |            |            | 1 to 5 years |   |            | more       |  |   | Total      |           
|                               |              |                                              |            |            |              |   |            |            |  |   |            |           
|Amount due:                    |              |                                              |            |            |              |   |            |            |  |   |            |            |  |   |             |           
|Collateralized by real estate: |              |                                              |            |            |              |   |            |            |  |   |            |            |  |   |             |           
|                               | Commercial   |                                              | $          | 5,719,120  |              |   | $          | 22,766,298 |  |   | $          | 19,152,617 |  |   | $           | 47,638,035 | 
|                               | Residential  |                                              |            | 10,276,962 |              |   |            | 34,988,303 |  |   |            | 46,326,533 |  |   |             | 91,591,798 | 
|                               | Home equity  |                                              |            |           |              |   |            | 61,817     |  |   |            | 18,982,764 |  |   |             | 19,044,581 | 
|                               | Construction |                                              |            | 1,723,432  |              |   |            | 1,926,813  |  |   |            | 2,789,755  |  |   |             | 6,440,000  | 
|Consumer loans                 |              |                                              | 2,430,827  |            |              |   | 3,771,846  |            |  |   | 2,423      |            |  |   | 6,205,096   |           
|Commercial                     |              |                                              | 7,687,722  |            |              |   | 6,342,719  |            |  |   | 6,015,298  |            |  |   | 20,045,739  |           
|Credit cards                   |              |                                              | 1,405,708  |            |              |   |           |            |  |   |           |            |  |   | 1,405,708   |           
|Other                          |              |                                              | 614,547    |            |              |   | 703,271    |            |  |   | 248,177    |            |  |   | 1,565,995   |           
|                               |              |                                              |            |            |              |   |            |            |  |   |            |           
|Total                          |              | $                                            | 29,858,318 |            |              | $ | 70,561,067 |            |  | $ | 93,517,567 |            |  | $ | 193,936,952 |           
|                               |              |                                              |            |            |              |   |            |            |  |   |            |           






|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
|* | Loans due on demand and overdrafts are included in the amount
    due in one year or less.

|                               |              |            |            |            |                 |   |             |            |  |   |             |            | 
|------------------------------ | ------------ | ---------- | ---------- | ---------- | --------------- | - | ----------- | ---------- |  | - | ----------- | ---------- | 
|                               |              | Fixed Rate |            |            | Adjustable Rate |   |             | Total      | 
|                               |              |            |            |            |                 |   |             |            | 
|Collateralized by real estate: |              |            |            |            |                 |   |             |            |  |   |             |           
|                               | Commercial   |            |            | 4,597,668  |                 |   |             | 43,040,367 |  |   |             | 47,638,035 | 
|                               | Residential  |            |            | 48,724,056 |                 |   |             | 42,867,742 |  |   |             | 91,591,798 | 
|                               | Home equity  |            |            |           |                 |   |             | 19,044,581 |  |   |             | 19,044,581 | 
|                               | Construction |            |            | 535,334    |                 |   |             | 5,904,666  |  |   |             | 6,440,000  | 
|Consumer loans                 |              |            | 6,017,587  |            |                 |   | 187,509     |            |  |   | 6,205,096   |           
|Commercial                     |              |            | 4,693,533  |            |                 |   | 15,352,206  |            |  |   | 20,045,739  |           
|Credit cards                   |              |            | 1,076,924  |            |                 |   | 328,784     |            |  |   | 1,405,708   |           
|Other                          |              |            | 1,220,790  |            |                 |   | 345,205     |            |  |   | 1,565,995   |           
|                               |              |            |            |            |                 |   |             |            | 
|Total                          |              | $          | 66,865,892 |            |                 | $ | 127,071,060 |            |  | $ | 193,936,952 |           
|                               |              |            |            |            |                 |   |             |            | 

Allowance for Loan Losses.





6



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FINANCIAL REVIEW




Loans Analyzed Individually.





|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Pass (Pass I, II and III)loans are loans that are
    considered satisfactory, with lower than average risk and low
    probability of serious financial deterioration on the
    borrowers part                                                                                                                                                                                                                                                                                     |  | Watch (Pass IV)loans are loans that are performing
    according to the terms of the loan agreement but that
    nevertheless require enhanced management supervision because of
    factors such as an unusual payment history or a weakened
    financial condition on the borrowers part                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Special-Mentionloans have more than average risk, with
    identified potential weaknesses that deserve managements
    close attention. Left uncorrected, the potential weaknesses
    could result in deterioration of repayment prospects. In the
    case of a commercial borrower for example, potential weaknesses
    could include adverse trends in the borrowers operations
    or adverse economic or market conditions that could affect the
    borrower in the future |  | Substandardloans are inadequately protected by the
    current financial condition and paying capacity of the borrower
    or by any collateral securing the loan. Substandard loans have a
    well-defined weakness or weaknesses jeopardizing collection of
    the debt in full, with a distinct possibility of loss if the
    weakness or weaknesses are not corrected. Although a loan may be
    classified substandard even if payments are not 90 days or
    more past due, if payments are 90 days or more past due the
    loan will be classified as substandard if not adequately
    collateralized, if not ranked even lower
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Doubtfulloans have all the weaknesses inherent in those
    classified as substandard, with the added characteristic that
    existing facts, conditions, and values make collection or
    liquidation in full highly questionable and improbable. The
    possibility of loss is extremely high, but because of factors
    that could work to the borrowers advantage classification
    of the doubtful loan as loss is deferred                                             |  | Loans classified as Lossare those considered
    uncollectible and of such little value that their continuance as
    assets without the establishment of a specific loss reserve is
    not warranted. When a bank classifies an asset as
    loss, the bank is required either to establish an
    allowance for losses equal to 100% of that portion of the asset
    so classified or to charge off that amount                                                                                                                                                                                                                        









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FINANCIAL REVIEW








|                        |                 |                                   |   |            |             |  |     |        |            |   |             |           |            |            |     |     |             |   |   |           |           |  |     |     |     |  
|----------------------- | --------------- | --------------------------------- | - | ---------- | ----------- |  | --- | ------ | ---------- | - | ----------- | --------- | ---------- | ---------- | --- | --- | ----------- | - | - | --------- | --------- |  | --- | --- | --- | -
|                        |                 | Classified assets at December 31, |  
|                        |                 |                                   |  
|                        |                 | 2005                              |   |            | 2004        |  |     | 2003   |           
|                        |                 |                                   |   |            |             |  |     |        |           
|                        |                 |                                   |   | Percent of |             |  |     |        | Percent of |   |             |           |            | Percent of |    
|                        |                 | Amount                            |   |            | total loans |  |     | Amount |            |   | total loans |           |            | Amount     |     |     | total loans |  
|                        |                 |                                   |   |            |             |  |     |        |            |   |             |           |            |            |     |     |             |  
|Classified loans:       |                 |                                   |   |            |             |  |     |        |            |   |             |           |            |            |     |     |             |   |   |           |           |  |     |    
|                        | Special mention |                                   | $ | 5,421,909  |             |  |     | 2.8    | %          |   | $           | 6,189,953 |            |            |     | 3.1 | %           |   | $ | 3,126,131 |           |  |     | 1.7 | %  
|                        | Substandard     |                                   |   | 4,838,160  |             |  |     | 2.5    | %          |   |             | 3,340,416 |            |            |     | 1.7 | %           |   |   | 3,994,474 |           |  |     | 2.1 | %  
|                        | Doubtful        |                                   |   | 1,185,504  |             |  |     | 0.6    | %          |   |             | 731,900   |            |            |     | 0.4 | %           |   |   | 383,495   |           |  |     | 0.2 | %  
|                        | Loss            |                                   |   |           |             |  |     | 0.0    | %          |   |             |          |            |            |     | 0.0 | %           |   |   |          |           |  |     | 0.0 | %  
|                        |                 |                                   |   |            |             |  |     |        |            |   |             |           |            |            |     |     |             |  
|                        |                 | Total classified loans            |   | $          | 11,445,573  |  |     |        | 5.9        | % |             | $         | 10,262,269 |            |     |     | 5.2         | % |   | $         | 7,504,100 |  |     |     | 4.0 | %
|Other classified assets |                 |                                   |  |            |             |  | 0.0 | %      |            |   |            |           |            |            | 0.0 | %   |             |   |  |           |           |  | 0.0 | %  
|                        |                 |                                   |   |            |             |  |     |        |            |   |             |           |            |            |     |     |             |  
|                        |                 | Total classified assets           |   | $          | 11,445,573  |  |     |        | 5.9        | % |             | $         | 10,262,269 |            |     |     | 5.2         | % |   | $         | 7,504,100 |  |     |     | 4.0 | %
|                        |                 |                                   |   |            |             |  |     |        |            |   |             |           |            |            |     |     |             |  

Pools of Homogenous Loans Analyzed under SFAS 5.







8



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FINANCIAL REVIEW




Changes in the Allowance for Loan Losses and Classified
Assets.









9



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FINANCIAL REVIEW




|                                                                                   |                                |                         |           |             |        |   |           |             |        |   |           |             |         |      |            |             |           |   |           |             |        | 
|---------------------------------------------------------------------------------- | ------------------------------ | ----------------------- | --------- | ----------- | ------ | - | --------- | ----------- | ------ | - | --------- | ----------- | ------- | ---- | ---------- | ----------- | --------- | - | --------- | ----------- | ------ | 
|                                                                                   |                                | Year Ended December 31, |          
|                                                                                   |                                |                         |          
|                                                                                   |                                | 2005                    |           |             | 2004   |   |           | 2003        |        |   | 2002      |             |         | 2001 |           
|                                                                                   |                                |                         |           |             |        |   |           |             |        |   |           |             |         |      |           
|Loan loss allowance, beginning of period                                           |                                | $                       | 1,763,298 |             |        | $ | 1,603,568 |             |        | $ | 1,604,200 |             |         | $    | 1,321,152  |             |           | $ | 1,343,124 |            
|Loans charged off:                                                                 |                                |                         |           |             |        |   |           |             |        |   |           |             |         |      |            |             |           |   |           |            
|                                                                                   | Collateralized by real estate: |                         |           |             |        |   |           |             |        |   |           |             |         |      |            |             |           |   |           |             |       
|                                                                                   |                                | Commercial              |           |             |       |   |           |             |       |   |           |             |        |      |            |             |          |   |           |             | 20,007 | 
|                                                                                   |                                | Residential             |           |             |       |   |           |             | 24,003 |   |           |             |        |      |            |             |          |   |           |             |       | 
|                                                                                   |                                | Home equity             |           |             |       |   |           |             |       |   |           |             |        |      |            |             |          |   |           |             |       | 
|                                                                                   |                                | Construction            |           |             |       |   |           |             |       |   |           |             |        |      |            |             | 1,475,906 |   |           |             |       | 
|                                                                                   | Consumer                       |                         |           | 7,928       |        |   |           | 24,605      |        |   |           | 9,923       |         |      |            | 21,943      |           |   |           | 21,006      |       
|                                                                                   | Commercial                     |                         |           | 33,608      |        |   |           |            |        |   |           | 237,526     |         |      |            | 23,431      |           |   |           | 38,730      |       
|                                                                                   | Credit cards                   |                         |           | 16,058      |        |   |           | 20,154      |        |   |           | 20,036      |         |      |            | 24,706      |           |   |           | 6,439       |       
|                                                                                   | Other                          |                         |           |            |        |   |           |            |        |   |           |            |         |      |            |            |           |   |           |            |       
|                                                                                   |                                |                         |           |             |        |   |           |             |        |   |           |             |         |      |           
|                                                                                   |                                | Total loans charged off |           |             | 57,594 |   |           |             | 68,762 |   |           |             | 267,485 |      |            |             | 1,545,986 |   |           |             | 86,182 | 
|                                                                                   |                                |                         |           |             |        |   |           |             |        |   |           |             |         |      |           
|Recoveries of loans previously charged off:                                        |                                |                         |           |             |        |   |           |             |        |   |           |             |         |      |            |             |           |   |           |            
|                                                                                   | Collateralized by real estate: |                         |           |             |        |   |           |             |        |   |           |             |         |      |            |             |           |   |           |             |       
|                                                                                   |                                | Commercial              |           |             |       |   |           |             |       |   |           |             |        |      |            |             |          |   |           |             |       | 
|                                                                                   |                                | Residential             |           |             | 326    |   |           |             |       |   |           |             |        |      |            |             |          |   |           |             | 1,451  | 
|                                                                                   |                                | Home equity             |           |             |       |   |           |             |       |   |           |             |        |      |            |             |          |   |           |             |       | 
|                                                                                   |                                | Construction            |           |             | 31,555 |   |           |             |       |   |           |             |        |      |            |             |          |   |           |             |       | 
|                                                                                   | Consumer                       |                         |           | 5,144       |        |   |           | 1,772       |        |   |           | 8,840       |         |      |            | 12,151      |           |   |           | 20,937      |       
|                                                                                   | Commercial                     |                         |           | 600         |        |   |           | 41,230      |        |   |           | 7,320       |         |      |            | 2,300       |           |   |           | 1,218       |       
|                                                                                   | Credit cards                   |                         |           | 266         |        |   |           | 7,990       |        |   |           | 5,693       |         |      |            | 652         |           |   |           | 604         |       
|                                                                                   | Other                          |                         |           |            |        |   |           |            |        |   |           |            |         |      |            |            |           |   |           |            |       
|                                                                                   |                                |                         |           |             |        |   |           |             |        |   |           |             |         |      |           
|                                                                                   |                                | Total recoveries        |           |             | 37,891 |   |           |             | 50,992 |   |           |             | 21,853  |      |            |             | 15,103    |   |           |             | 24,210 | 
|                                                                                   |                                |                         |           |             |        |   |           |             |        |   |           |             |         |      |           
|Net loans recovered (charged off)                                                  |                                |                         | (19,703   | )           |        |   | (17,770   | )           |        |   | (245,632  | )           |         |      | (1,530,883 | )           |           |   | (61,972   | )          
|Provision charged to operations                                                    |                                |                         | 159,233   |             |        |   | 177,500   |             |        |   | 245,000   |             |         |      | 1,569,402  |             |           |   | 40,000    |            
|Allowance of acquired institution                                                  |                                |                         |          |             |        |   |          |             |        |   |          |             |         |      | 244,529    |             |           |   |          |            
|                                                                                   |                                |                         |           |             |        |   |           |             |        |   |           |             |         |      |           
|Loan loss allowance, end of period                                                 |                                | $                       | 1,902,828 |             |        | $ | 1,763,298 |             |        | $ | 1,603,568 |             |         | $    | 1,604,200  |             |           | $ | 1,321,152 |            
|                                                                                   |                                |                         |           |             |        |   |           |             |        |   |           |             |         |      |           
|Loans outstanding:                                                                 |                                |                         |           |             |        |   |           |             |        |   |           |             |         |      |            |             |           |   |           |            
|                                                                                   | Average                        |                         |           | 197,064,000 |        |   |           | 194,032,000 |        |   |           | 187,180,000 |         |      |            | 172,159,000 |           |   |           | 110,418,000 |       
|                                                                                   | End of period                  |                         |           | 193,936,952 |        |   |           | 198,993,322 |        |   |           | 189,068,331 |         |      |            | 192,530,719 |           |   |           | 118,403,676 |       
|Ratio of allowance for loan losses to total loans outstanding at
    end of period |                                |                         | 0.98      | %           |        |   | 0.89      | %           |        |   | 0.85      | %           |         |      | 0.83       | %           |           |   | 1.12      | %          
|Net recoveries (charge offs) to average loans                                      |                                |                         | (0.01     | )%          |        |   | (0.01     | )%          |        |   | (0.13     | )%          |         |      | (0.89      | )%          |           |   | (0.06     | )%         




10



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FINANCIAL REVIEW







|                               |              |                                                             |         |             |             |  |     |        |             |  |             |         |           |             |     |     |             |  |             |         |           |  |             |             |      |        |         |         |             |  |     |     |      |  |         |         |           |  |     |     |      | 
|------------------------------ | ------------ | ----------------------------------------------------------- | ------- | ----------- | ----------- |  | --- | ------ | ----------- |  | ----------- | ------- | --------- | ----------- | --- | --- | ----------- |  | ----------- | ------- | --------- |  | ----------- | ----------- | ---- | ------ | ------- | ------- | ----------- |  | --- | --- | ---- |  | ------- | ------- | --------- |  | --- | --- | ---- | 
|                               |              | Allocation of the Allowance for Loan Losses at December 31, |        
|                               |              |                                                             |        
|                               |              | 2005                                                        |         |             | 2004        |  |     | 2003   |             |  | 2002        |         |           | 2001        |    
|                               |              |                                                             |         |             |             |  |     |        |             |  |             |         |           |             |    
|                               |              |                                                             |         | Percent of  |             |  |     |        | Percent of  |  |             |         |           | Percent of  |     |     |             |  | Percent of  |         |           |  |             | Percent of  |     
|                               |              |                                                             |         | loans in    |             |  |     |        | loans in    |  |             |         |           | loans in    |     |     |             |  | loans in    |         |           |  |             | loans in    |     
|                               |              |                                                             |         | each        |             |  |     |        | each        |  |             |         |           | each        |     |     |             |  | each        |         |           |  |             | each        |     
|                               |              |                                                             |         | category to |             |  |     |        | category to |  |             |         |           | category to |     |     |             |  | category to |         |           |  |             | category to |     
|                               |              | Amount                                                      |         |             | total loans |  |     | Amount |             |  | total loans |         |           | Amount      |     |     | total loans |  |             | Amount  |           |  | total loans |             |      | Amount |         |         | total loans | 
|                               |              |                                                             |         |             |             |  |     |        |             |  |             |         |           |             |     |     |             |  |             |         |           |  |             |             |      |        |         |         |             | 
|Collateralized by real estate: |              |                                                             |         |             |             |  |     |        |             |  |             |         |           |             |     |     |             |  |             |         |           |  |             |             |      |        |         |         |             |  |     |     |      |  |         |         |           |  |     |    
|                               | Commercial   |                                                             | $       | 719,888     |             |  |     | 25%    |             |  | $           | 372,597 |           |             |     | 24% |             |  | $           | 462,667 |           |  |             | 21%         |      |        | $       | 277,776 |             |  |     | 15% |      |  | $       | 171,388 |           |  |     | 20% |     
|                               | Residential  |                                                             |         | 185,805     |             |  |     | 47%    |             |  |             | 114,364 |           |             |     | 49% |             |  |             | 56,624  |           |  |             | 54%         |      |        |         | 258,377 |             |  |     | 62% |      |  |         | 74,396  |           |  |     | 45% |     
|                               | Home equity  |                                                             |         | 8,340       |             |  |     | 10%    |             |  |             | 12,755  |           |             |     | 9%  |             |  |             | 5,592   |           |  |             | 7%          |      |        |         | 14,623  |             |  |     | 6%  |      |  |         | 13,103  |           |  |     | 8%  |     
|                               | Construction |                                                             |         |            |             |  |     | 3%     |             |  |             |        |           |             |     | 3%  |             |  |             |        |           |  |             | 3%          |      |        |         | 40,789  |             |  |     | 1%  |      |  |         | 763,783 |           |  |     | 4%  |     
|Consumer                       |              |                                                             | 40,201  |             |             |  | 3%  |        |             |  | 16,293      |         |           |             | 3%  |     |             |  | 7,976       |         |           |  | 3%          |             |      |        | 20,497  |         |             |  | 3%  |     |      |  | 58,732  |         |           |  | 5%  |    
|Commercial                     |              |                                                             | 825,709 |             |             |  | 10% |        |             |  | 1,226,638   |         |           |             | 10% |     |             |  | 964,121     |         |           |  | 11%         |             |      |        | 967,182 |         |             |  | 11% |     |      |  | 177,538 |         |           |  | 15% |    
|Credit cards                   |              |                                                             | 46,980  |             |             |  | 1%  |        |             |  | 20,651      |         |           |             | 1%  |     |             |  | 21,760      |         |           |  | 0%          |             |      |        | 24,956  |         |             |  | 1%  |     |      |  | 51,691  |         |           |  | 1%  |    
|Other                          |              |                                                             | 75,904  |             |             |  | 1%  |        |             |  |            |         |           |             | 1%  |     |             |  |            |         |           |  | 1%          |             |      |        |        |         |             |  | 1%  |     |      |  |        |         |           |  | 2%  |    
|Unallocated                    |              |                                                             |        |             |             |  | N/A |        |             |  |            |         |           |             | N/A |     |             |  | 84,828      |         |           |  | N/A         |             |      |        |        |         |             |  | N/A |     |      |  | 10,521  |         |           |  | N/A |    
|                               |              |                                                             |         |             |             |  |     |        |             |  |             |         |           |             |     |     |             |  |             |         |           |  |             |             |      |        |         |         |             | 
|                               |              | Total                                                       |         | $           | 1,902,828   |  |     |        | 100%        |  |             | $       | 1,763,298 |             |     |     | 100%        |  |             | $       | 1,603,568 |  |             |             | 100% |        |         | $       | 1,604,200   |  |     |     | 100% |  |         | $       | 1,321,152 |  |     |     | 100% | 
|                               |              |                                                             |         |             |             |  |     |        |             |  |             |         |           |             |     |     |             |  |             |         |           |  |             |             |      |        |         |         |             | 









11



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FINANCIAL REVIEW


|                                                  |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |             |           |           |   |             |         |         | 
|------------------------------------------------- | ------------------------ | ------------------------------------ | ----------- | --------- | --------- | - | ----------- | ------- | --------- | - | ----------- | ------- | --------- | ---- | ----------- | --------- | --------- | - | ----------- | ------- | ------- | 
|                                                  |                          | Nonperforming Assets at December 31, |            
|                                                  |                          |                                      |            
|                                                  |                          | 2005                                 |             |           | 2004      |   |             | 2003    |           |   | 2002        |         |           | 2001 |            
|                                                  |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |            
|Collateralized by real estate:                    |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |             |           |           |   |             |        
|Commercial:                                       |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |             |           |           |   |             |        
|                                                  | Non-accrual              |                                      | $           |          |           |   | $           |        |           |   | $           |        |           |      | $           |          |           |   | $           | 142,803 |        
|                                                  | Past due 90 days or more |                                      |             |          |           |   |             |        |           |   |             |        |           |      |             |          |           |   |             |        |        
|Residential:                                      |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |             |           |           |   |             |        
|                                                  | Non-accrual              |                                      |             | 598,905   |           |   |             | 394,970 |           |   |             | 567,590 |           |      |             | 171,482   |           |   |             | 103,152 |        
|                                                  | Past due 90 days or more |                                      |             | 197,831   |           |   |             | 51,549  |           |   |             | 28,577  |           |      |             | 76,752    |           |   |             | 71,942  |        
|Home equity:                                      |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |             |           |           |   |             |        
|                                                  | Non-accrual              |                                      |             | 4,680     |           |   |             |        |           |   |             |        |           |      |             |          |           |   |             | 12,823  |        
|                                                  | Past due 90 days or more |                                      |             |          |           |   |             |        |           |   |             | 23,172  |           |      |             |          |           |   |             |        |        
|Construction:                                     |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |             |           |           |   |             |        
|                                                  | Non-accrual              |                                      |             |          |           |   |             | 125,502 |           |   |             | 125,502 |           |      |             | 140,000   |           |   |             |        |        
|                                                  | Past due 90 days or more |                                      |             |          |           |   |             |        |           |   |             |        |           |      |             |          |           |   |             |        |        
|Not collateralized by real estate:                |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |             |           |           |   |             |        
|Consumer:                                         |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |             |           |           |   |             |        
|                                                  | Non-accrual              |                                      |             | 3,854     |           |   |             | 8,041   |           |   |             |        |           |      |             | 4,964     |           |   |             |        |        
|                                                  | Past due 90 days or more |                                      |             | 5,116     |           |   |             | 4,099   |           |   |             |        |           |      |             |          |           |   |             | 13,232  |        
|Commercial:                                       |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |             |           |           |   |             |        
|                                                  | Non-accrual              |                                      |             | 1,471,934 |           |   |             | 899,082 |           |   |             | 677,777 |           |      |             | 1,841,922 |           |   |             |        |        
|                                                  | Past due 90 days or more |                                      |             | 35,809    |           |   |             |        |           |   |             |        |           |      |             | 252,331   |           |   |             | 58,749  |        
|Credit cards:                                     |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |             |           |           |   |             |        
|                                                  | Non-accrual              |                                      |             |          |           |   |             |        |           |   |             | 8,988   |           |      |             |          |           |   |             |        |        
|                                                  | Past due 90 days or more |                                      |             | 6,355     |           |   |             |        |           |   |             |        |           |      |             | 5,690     |           |   |             | 4,012   |        
|                                                  |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |            
|                                                  |                          | Total nonperforming assets           |             |           | 2,324,484 |   |             |         | 1,483,243 |   |             |         | 1,431,606 |      |             |           | 2,493,141 |   |             |         | 406,713 | 
|Other real estate owned                           |                          |                                      | 103,334     |           |           |   | 46,000      |         |           |   |            |         |           |      |            |           |           |   |            |        
|                                                  |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |            
|Total nonperforming assets                        |                          | $                                    | 2,427,818   |           |           | $ | 1,529,243   |         |           | $ | 1,431,606   |         |           | $    | 2,493,141   |           |           | $ | 406,713     |        
|                                                  |                          |                                      |             |           |           |   |             |         |           |   |             |         |           |      |            
|Loans outstanding, net                            |                          | $                                    | 191,538,419 |           |           | $ | 196,724,596 |         |           | $ | 187,056,241 |         |           | $    | 190,559,663 |           |           | $ | 116,880,804 |        
|Nonperforming assets to total net loans           |                          |                                      | 1.21        | %         |           |   | 0.75        | %       |           |   | 0.77        | %       |           |      | 1.31        | %         |           |   | 0.35        | %      
|Nonperforming assets to total assets              |                          |                                      | 0.76        | %         |           |   | 0.48        | %       |           |   | 0.48        | %       |           |      | 0.84        | %         |           |   | 0.21        | %      
|Allowance for loan losses to total loans          |                          |                                      | 0.98        | %         |           |   | 0.89        | %       |           |   | 0.85        | %       |           |      | 0.83        | %         |           |   | 1.12        | %      
|Allowance for loan losses to nonperforming assets |                          |                                      | 81.86       | %         |           |   | 118.88      | %       |           |   | 112.01      | %       |           |      | 64.34       | %         |           |   | 324.84      | %      

Securities.





12



---



##### 



FINANCIAL REVIEW




|                                   |                          |           |            |            |            |   |           |            |  |   |            |          |   |   |            |            | 
|---------------------------------- | ------------------------ | --------- | ---------- | ---------- | ---------- | - | --------- | ---------- |  | - | ---------- | -------- | - | - | ---------- | ---------- | 
|                                   |                          |           |            | Gross      |            |   | Gross     |            |  |  
|                                   |                          | Amortized |            |            | unrealized |   |           | unrealized |  |   |           
|                                   |                          | Cost      |            |            | gains      |   |           | losses     |  |   | Fair Value |         
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|December 31, 2005                  |                          |           |            |            |            |   |           |            |  |   |            |          |   |   |            |           
|Available for Sale:                |                          |           |            |            |            |   |           |            |  |   |            |          |   |   |            |           
|U.S. Government and federal agency |                          | $         | 22,397,882 |            |            | $ | 26,624    |            |  | $ | (282,131   | )        |   | $ | 22,142,375 |           
|State and municipal                |                          |           | 2,040,585  |            |            |   | 36,699    |            |  |   | (1,929     | )        |   |   | 2,075,355  |           
|Corporate bonds and notes          |                          |           | 30,992,806 |            |            |   | 192,861   |            |  |   | (462,748   | )        |   |   | 30,722,919 |           
|Mortgage Backed                    |                          |           | 4,968,661  |            |            |   | 4,599     |            |  |   | (75,230    | )        |   |   | 4,898,030  |           
|Equity securities                  |                          |           | 240,253    |            |            |   | 13,285    |            |  |   | (304       | )        |   |   | 253,234    |           
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|                                   | Total available for sale |           |            | 60,640,187 |            |   |           | 274,068    |  |   |            | (822,342 | ) |   |            | 60,091,913 | 
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|Held to Maturity:                  |                          |           |            |            |            |   |           |            |  |   |            |          |   |   |            |           
|State and municipal                |                          |           | 16,917,133 |            |            |   | 283,969   |            |  |   | (86,082    | )        |   |   | 17,115,020 |           
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|Total Investment Securities        |                          | $         | 77,557,320 |            |            | $ | 558,037   |            |  | $ | (908,424   | )        |   | $ | 77,206,933 |           
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|December 31, 2004                  |                          |           |            |            |            |   |           |            |  |   |            |          |   |   |            |           
|Available for Sale:                |                          |           |            |            |            |   |           |            |  |   |            |          |   |   |            |           
|U.S. Government and federal agency |                          | $         | 17,561,943 |            |            | $ | 227,251   |            |  | $ | (30,080    | )        |   | $ | 17,759,114 |           
|State and municipal                |                          |           | 2,861,927  |            |            |   | 129,113   |            |  |   |           |          |   |   | 2,991,040  |           
|Corporate bonds and notes          |                          |           | 37,146,122 |            |            |   | 1,157,837 |            |  |   | (86,103    | )        |   |   | 38,217,856 |           
|Mortgage Backed                    |                          |           | 630,679    |            |            |   | 11,196    |            |  |   | (222       | )        |   |   | 641,653    |           
|Equity securities                  |                          |           | 785,897    |            |            |   | 66,422    |            |  |   |           |          |   |   | 852,319    |           
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|                                   | Total available for sale |           |            | 58,986,568 |            |   |           | 1,591,819  |  |   |            | (116,405 | ) |   |            | 60,461,982 | 
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|Held to Maturity:                  |                          |           |            |            |            |   |           |            |  |   |            |          |   |   |            |           
|State and municipal                |                          |           | 15,865,047 |            |            |   | 580,268   |            |  |   | (546       | )        |   |   | 16,444,769 |           
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|Total Investment Securities        |                          | $         | 74,851,615 |            |            | $ | 2,172,087 |            |  | $ | (116,951   | )        |   | $ | 76,906,751 |           
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|December 31, 2003                  |                          |           |            |            |            |   |           |            |  |   |            |          |   |   |            |           
|Available for Sale:                |                          |           |            |            |            |   |           |            |  |   |            |          |   |   |            |           
|U.S. Government and federal agency |                          | $         | 24,241,317 |            |            | $ | 730,120   |            |  | $ | (19,375    | )        |   | $ | 24,952,062 |           
|State and municipal                |                          |           | 2,261,802  |            |            |   | 175,194   |            |  |   |           |          |   |   | 2,436,996  |           
|Corporate bonds and notes          |                          |           | 34,981,032 |            |            |   | 1,924,041 |            |  |   | (79,437    | )        |   |   | 36,825,636 |           
|Mortgage Backed                    |                          |           | 1,804,731  |            |            |   | 317,735   |            |  |   |           |          |   |   | 2,122,466  |           
|Equity securities                  |                          |           | 859,940    |            |            |   | 26,013    |            |  |   | (33,550    | )        |   |   | 852,403    |           
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|                                   | Total available for sale |           |            | 64,148,822 |            |   |           | 3,173,103  |  |   |            | (132,362 | ) |   |            | 67,189,563 | 
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|Held to Maturity:                  |                          |           |            |            |            |   |           |            |  |   |            |          |   |   |            |           
|State and municipal                |                          |           | 16,603,556 |            |            |   | 712,328   |            |  |   | (15,800    | )        |   |   | 17,300,084 |           
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         
|Total Investment Securities        |                          | $         | 80,752,378 |            |            | $ | 3,885,431 |            |  | $ | (148,162   | )        |   | $ | 84,489,647 |           
|                                   |                          |           |            |            |            |   |           |            |  |   |            |         




13



---



##### 



FINANCIAL REVIEW




|                                   |                          |                       |           |           |                |   |            |                |            |   |                |            |            |                             |            |           |           |   |            |            |            |   |            |            |            | 
|---------------------------------- | ------------------------ | --------------------- | --------- | --------- | -------------- | - | ---------- | -------------- | ---------- | - | -------------- | ---------- | ---------- | --------------------------- | ---------- | --------- | --------- | - | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                   |                          | December 31, 2005     |          
|                                   |                          |                       |          
|                                   |                          | One year or           |           |           | More than one  |   |            | More than five |            |   | More than ten  |            |            |                            
|                                   |                          | less                  |           |           | to five years  |   |            | to ten years   |            |   | years          |            |            | Total investment securities |           
|                                   |                          |                       |           |           |                |   |            |                |            |   |                |            |            |                             |           
|                                   |                          | Carrying Value        |           |           | Carrying Value |   |            | Carrying Value |            |   | Carrying Value |            |            | Carrying Value              |            |           | Market    |  
|                                   |                          | Average Yield         |           |           | Average Yield  |   |            | Average Yield  |            |   | Average Yield  |            |            | Average Yield               |            |           | Value     |  
|                                   |                          |                       |           |           |                |   |            |                |            |   |                |            |            |                             |            |           |           |  
|Available for Sale:                |                          |                       |           |           |                |   |            |                |            |   |                |            |            |                             |            |           |           |   |            |            |            |   |            |           
|U.S. Government and federal agency |                          | $                     |          |           |                | $ | 8,807,230  |                |            | $ | 13,335,145     |            |            | $                           |           |           |           | $ | 22,142,375 |            |            | $ | 22,142,375 |           
|                                   |                          |                       |           |           |                |   | 4.28       | %              |            |   | 5.46           | %          |            |                             |            |           |           |   | 4.93       | %          |            |   |            |           
|State and municipal                |                          |                       |          |           |                |   | 257,816    |                |            |   | 207,552        |            |            |                             | 1,609,987  |           |           |   | 2,075,355  |            |            |   | 2,075,355  |           
|                                   |                          |                       |           |           |                |   | 3.00       | %              |            |   | 4.95           | %          |            |                             | 5.23       | %         |           |   | 4.81       | %          |            |   |            |           
|Corporate bonds and notes          |                          |                       | 3,245,264 |           |                |   | 17,192,279 |                |            |   | 10,285,375     |            |            |                             |           |           |           |   | 30,722,919 |            |            |   | 30,722,919 |           
|                                   |                          |                       | 5.47      | %         |                |   | 5.21       | %              |            |   | 4.82           | %          |            |                             |            |           |           |   | 5.14       | %          |            |   |            |           
|Mortgage-backed                    |                          |                       |          |           |                |   | 39,519     |                |            |   |               |            |            |                             | 4,858,511  |           |           |   | 4,898,030  |            |            |   | 4,898,030  |           
|                                   |                          |                       |           |           |                |   | 9.35       | %              |            |   |                |            |            |                             | 5.74       | %         |           |   | 6.14       | %          |            |   |            |           
|                                   |                          |                       |           |           |                |   |            |                |            |   |                |            |            |                             |            |           |           |  
|                                   |                          | Total debt securities |           |           | 3,245,264      |   |            |                | 26,296,844 |   |                |            | 23,828,072 |                             |            |           | 6,468,498 |   |            | $          | 59,838,679 |   |            |            | 59,838,679 | 
|                                   |                          |                       | 5.47      | %         |                |   | 5.15       | %              |            |   | 4.99           | %          |            |                             | 5.37       | %         |           |   | 5.13       | %          |            |   |            |           
|Equity securities                  |                          |                       |          |           |                |   |           |                |            |   |               |            |            |                             | 253,235    |           |           |   | 253,235    |            |            |   | 253,235    |           
|                                   |                          |                       |           |           |                |   |            |                |            |   |                |            |            |                             | 0.00       | %         |           |   | 0.00       | %          |            |   |            |           
|                                   |                          |                       |           |           |                |   |            |                |            |   |                |            |            |                             |            |           |           |  
|                                   | Total available for sale |                       |           | 3,245,264 |                |   |            | 26,296,844     |            |   |                | 23,828,072 |            |                             |            | 6,721,733 |           |   |            | 60,091,913 |            |   |            | 60,091,913 |           
|                                   |                          |                       | 5.47      | %         |                |   | 5.15       | %              |            |   | 4.99           | %          |            |                             | 5.17       | %         |           |   | 5.11       | %          |            |   |            |           
|                                   |                          |                       |           |           |                |   |            |                |            |   |                |            |            |                             |            |           |           |  
|Held to Maturity:                  |                          |                       |           |           |                |   |            |                |            |   |                |            |            |                             |            |           |           |   |            |            |            |   |            |           
|State and municipal                |                          |                       | 439,467   |           |                |   | 2,589,674  |                |            |   | 8,534,455      |            |            |                             | 5,353,537  |           |           |   | 16,917,133 |            |            |   | 17,115,020 |           
|                                   |                          |                       | 5.07      | %         |                |   | 5.02       | %              |            |   | 4.45           | %          |            |                             | 4.89       | %         |           |   | 4.80       | %          |            |   |            |           
|                                   |                          |                       |           |           |                |   |            |                |            |   |                |            |            |                             |            |           |           |  
|Total investment securities        |                          | $                     | 3,684,731 |           |                | $ | 28,886,518 |                |            | $ | 32,362,527     |            |            | $                           | 12,075,270 |           |           | $ | 77,009,046 |            |            | $ | 77,206,934 |           
|                                   |                          |                       | 5.42      | %         |                |   | 5.14       | %              |            |   | 4.85           | %          |            |                             | 5.04       | %         |           |   | 5.04       | %          |            |   |            |           
|                                   |                          |                       |           |           |                |   |            |                |            |   |                |            |            |                             |            |           |           |  

Federal Bank Stock.


Deposits.





14



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##### 



FINANCIAL REVIEW


|                              |       |                           |           |            |       |  |      |       |  
|----------------------------- | ----- | ------------------------- | --------- | ---------- | ----- |  | ---- | ----- | -
|                              |       | Maturity of Time Deposits |          
|                              |       | of $100,000 or More at    |          
|                              |       | December 31, 2005         |          
|                              |       |                           |          
|                              |       |                           |           | Percent of |      
|Time Remaining to Maturity    |       | Amount                    |           |            | total | 
|                              |       |                           |           |            |       | 
|Three months or less          |       | $                         | 2,280,418 |            |       |  | 18.4 | %    
|Over three through 12 months  |       |                           | 5,919,817 |            |       |  | 47.7 | %    
|Over one year through 3 years |       |                           | 3,932,866 |            |       |  | 31.7 | %    
|Over 3 years                  |       |                           | 270,526   |            |       |  | 2.2  | %    
|                              |       |                           |           |            |       | 
|                              | Total |                           | $         | 12,403,627 |       |  |      | 100.0 | %
|                              |       |                           |           |            |       | 





Liquidity and Capital Resources.







15



---



##### 



FINANCIAL REVIEW




|                               |              |      |           |            |      |  |           |            |  |  |           |            | 
|------------------------------ | ------------ | ---- | --------- | ---------- | ---- |  | --------- | ---------- |  |  | --------- | ---------- | 
|                               |              | 2005 |           |            | 2004 |  |           | 2003       | 
|                               |              |      |           |            |      |  |           |            | 
|Collateralized by real estate: |              |      |           |            |      |  |           |            |  |  |           |           
|                               | Commercial   |      | $         | 15,163,415 |      |  | $         | 11,228,923 |  |  | $         | 11,406,806 | 
|                               | Residential  |      |           | 18,242,996 |      |  |           | 21,340,723 |  |  |           | 40,472,446 | 
|                               | Home equity  |      |           | 2,847,510  |      |  |           | 2,349,374  |  |  |           | 2,288,240  | 
|                               | Construction |      |           | 6,779,521  |      |  |           | 2,412,419  |  |  |           | 2,567,017  | 
|Consumer                       |              |      | 4,499,803 |            |      |  | 3,734,831 |            |  |  | 3,447,668 |           
|Commercial                     |              |      | 9,105,734 |            |      |  | 8,643,897 |            |  |  | 9,478,041 |           
|Credit cards                   |              |      | 236,400   |            |      |  | 389,700   |            |  |  | 504,700   |           
|Other                          |              |      | 578,675   |            |      |  | 333,052   |            |  |  | 317,891   |           
|                               |              |      |           |            |      |  |           |            | 
|                               | Total        |      | $         | 57,454,054 |      |  | $         | 50,432,919 |  |  | $         | 70,482,809 | 
|                               |              |      |           |            |      |  |           |            | 





|                                      |  |                         |           |   |      |   |           |      |  |   |           |  
|------------------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                      |  | Year Ended December 31, |          
|                                      |  |                         |          
|                                      |  | 2005                    |           |   | 2004 |   |           | 2003 | 
|                                      |  |                         |           |   |      |   |           |      | 
|Balance at year end                   |  | $                       | 2,359,521 |   |      | $ | 3,888,235 |      |  | $ | 2,786,848 |  
|Average balance outstanding           |  |                         | 4,100,383 |   |      |   | 3,140,013 |      |  |   | 2,845,520 |  
|Maximum month-end balance             |  |                         | 8,918,122 |   |      |   | 4,847,337 |      |  |   | 3,385,869 |  
|Weighted-average rate at year end     |  |                         | 2.54      | % |      |   | 0.69      | %    |  |   | 0.10      | %
|Weighted-average rate during the year |  |                         | 1.72      | % |      |   | 0.36      | %    |  |   | 0.13      | %






16



---



##### 



FINANCIAL REVIEW


Contractual Obligations.


|                                        |       |                       |            |            |        |   |            |             |           |   |             |            |  |         |            |            |  |   |           |           | 
|--------------------------------------- | ----- | --------------------- | ---------- | ---------- | ------ | - | ---------- | ----------- | --------- | - | ----------- | ---------- |  | ------- | ---------- | ---------- |  | - | --------- | --------- | 
|                                        |       | Payment due by period |           
|                                        |       |                       |           
|                                        |       |                       |            | Less than  |        |   |            |             | More than |  
|Contractual Obligations                 |       | Total                 |            |            | 1 year |   |            | 1 - 3 years |           |   | 3 - 5 years |            |  | 5 years |           
|                                        |       |                       |            |            |        |   |            |             |           |   |             |            |  |         |           
|Time Deposits                           |       | $                     | 78,271,968 |            |        | $ | 49,122,067 |             |           | $ | 27,572,691  |            |  | $       | 1,577,210  |            |  | $ |          |          
|Long-term obligations                   |       |                       | 17,000,000 |            |        |   |           |             |           |   |            |            |  |         | 11,000,000 |            |  |   | 6,000,000 |          
|Information system contract obligations |       |                       | 2,535,000  |            |        |   | 780,000    |             |           |   | 1,560,000   |            |  |         | 195,000    |            |  |   |          |          
|Operating lease obligations             |       |                       | 92,524     |            |        |   | 36,624     |             |           |   | 31,200      |            |  |         | 24,700     |            |  |   |          |          
|                                        |       |                       |            |            |        |   |            |             |           |   |             |            |  |         |           
|                                        | Total |                       | $          | 97,899,492 |        |   | $          | 49,938,691  |           |   | $           | 29,163,891 |  |         | $          | 12,796,910 |  |   | $         | 6,000,000 | 
|                                        |       |                       |            |            |        |   |            |             |           |   |             |            |  |         |           

Off-Balance Sheet and Contingent Liabilities.


|                        |       |                                   |            |            |          |   |            |            |  |   |            |            | 
|----------------------- | ----- | --------------------------------- | ---------- | ---------- | -------- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                        |       | Expiration of Funding Commitments |           
|                        |       |                                   |           
|                        |       | One year                          |            |            | Over one |   |            |           
|                        |       | and less                          |            |            | year     |   |            | Total      | 
|                        |       |                                   |            |            |          |   |            |            | 
|Unused loan commitments |       | $                                 | 24,989,698 |            |          | $ | 26,165,602 |            |  | $ | 51,155,300 |           
|Letters of credit       |       |                                   | 499,400    |            |          |   |           |            |  |   | 499,400    |           
|                        |       |                                   |            |            |          |   |            |            | 
|                        | Total |                                   | $          | 25,489,098 |          |   | $          | 26,165,602 |  |   | $          | 51,654,700 | 
|                        |       |                                   |            |            |          |   |            |            | 







Shareholders Equity.







17



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FINANCIAL REVIEW




Interest-Rate Sensitivity.









18



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##### 



FINANCIAL REVIEW









|                                                                 |                         |                                    |             |            |             |   |             |            |            |   |            |            |             |       |            |            |            |   |            |            |             | 
|---------------------------------------------------------------- | ----------------------- | ---------------------------------- | ----------- | ---------- | ----------- | - | ----------- | ---------- | ---------- | - | ---------- | ---------- | ----------- | ----- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ----------- | 
|                                                                 |                         | Maturing or Repricing Periods      |            
|                                                                 |                         |                                    |            
|                                                                 |                         | Within                             |             |            | 4 - 12      |   |             | 1 - 5      |            |   | Over 5     |            |             |      
|                                                                 |                         | 3 months                           |             |            | months      |   |             | years      |            |   | years      |            |             | Total |           
|                                                                 |                         |                                    |             |            |             |   |             |            |            |   |            |            |             |       |           
|Interest-earning assets:                                         |                         |                                    |             |            |             |   |             |            |            |   |            |            |             |       |            |            |            |   |            |           
|Federal funds sold                                               |                         | $                                  | 8,780,000   |            |             | $ |            |            |            | $ |           |            |             | $     |           |            |            | $ | 8,780,000  |           
|Investment securities                                            |                         |                                    | 3,793,268   |            |             |   | 13,376,044  |            |            |   | 32,434,201 |            |             |       | 27,405,533 |            |            |   | 77,009,046 |           
|Federal bank stock                                               |                         |                                    |            |            |             |   |            |            |            |   |           |            |             |       | 2,987,050  |            |            |   | 2,987,050  |           
|Loans held for sale                                              |                         |                                    |            |            |             |   |            |            |            |   |           |            |             |       |           |            |            |   |           |           
|Loans collateralized by real estate:                             |                         |                                    |             |            |             |   |             |            |            |   |            |            |             |       |            |            |            |   |            |           
|                                                                 | Commercial (1)          |                                    |             | 8,842,497  |             |   |             | 7,986,281  |            |   |            | 30,252,826 |             |       |            | 556,431    |            |   |            | 47,638,035 |            
|                                                                 | Residential (1)         |                                    |             | 8,941,825  |             |   |             | 17,824,064 |            |   |            | 42,437,916 |             |       |            | 22,387,993 |            |   |            | 91,591,798 |            
|                                                                 | Home equity (1)         |                                    |             | 19,008,680 |             |   |             | 35,901     |            |   |            |           |             |       |            |           |            |   |            | 19,044,581 |            
|                                                                 | Construction (1)        |                                    |             | 3,917,944  |             |   |             | 422,523    |            |   |            | 1,689,506  |             |       |            | 410,027    |            |   |            | 6,440,000  |            
|Consumer loans (1)                                               |                         |                                    | 739,235     |            |             |   | 1,765,753   |            |            |   | 3,700,108  |            |             |       |           |            |            |   | 6,205,096  |           
|Commercial (1)                                                   |                         |                                    | 14,350,782  |            |             |   | 2,563,029   |            |            |   | 3,131,928  |            |             |       |           |            |            |   | 20,045,739 |           
|Credit cards (1)                                                 |                         |                                    | 345,373     |            |             |   | 1,060,335   |            |            |   |           |            |             |       |           |            |            |   | 1,405,708  |           
|Other (1)                                                        |                         |                                    | 423,966     |            |             |   | 299,225     |            |            |   | 652,797    |            |             |       | 190,007    |            |            |   | 1,565,995  |           
|                                                                 |                         |                                    |             |            |             |   |             |            |            |   |            |            |             |       |           
|                                                                 |                         | Total interest-earning assets      |             | $          | 69,143,570  |   |             | $          | 45,333,155 |   |            | $          | 114,299,282 |       |            | $          | 53,937,041 |   |            | $          | 282,713,048 | 
|                                                                 |                         |                                    |             |            |             |   |             |            |            |   |            |            |             |       |           
|Interest-bearing liabilities:                                    |                         |                                    |             |            |             |   |             |            |            |   |            |            |             |       |            |            |            |   |            |           
|                                                                 | Interest-bearing demand |                                    | $           | 32,283,940 |             |   | $           |           |            |   | $          |           |             |       | $          |           |            |   | $          | 32,283,940 |            
|                                                                 | Money market            |                                    |             | 17,739,977 |             |   |             |           |            |   |            |           |             |       |            |           |            |   |            | 17,739,977 |            
|                                                                 | Savings                 |                                    |             | 74,048,596 |             |   |             |           |            |   |            |           |             |       |            |           |            |   |            | 74,048,596 |            
|                                                                 | Time                    |                                    |             | 11,991,697 |             |   |             | 37,121,673 |            |   |            | 29,158,598 |             |       |            |           |            |   |            | 78,271,968 |            
|                                                                 | Repurchase agreements   |                                    |             | 2,359,521  |             |   |             |           |            |   |            |           |             |       |            |           |            |   |            | 2,359,521  |            
|                                                                 | Other borrowings        |                                    |             | 592,763    |             |   |             |           |            |   |            | 11,000,000 |             |       |            | 6,000,000  |            |   |            | 17,592,763 |            
|                                                                 |                         |                                    |             |            |             |   |             |            |            |   |            |            |             |       |           
|                                                                 |                         | Total interest-bearing liabilities |             | $          | 139,016,494 |   |             | $          | 37,121,673 |   |            | $          | 40,158,598  |       |            | $          | 6,000,000  |   |            | $          | 222,296,765 | 
|                                                                 |                         |                                    |             |            |             |   |             |            |            |   |            |            |             |       |           
|Interest-sensitivity gap                                         |                         | $                                  | (69,872,925 | )          |             | $ | 8,211,482   |            |            | $ | 74,140,684 |            |             | $     | 47,937,041 |            |            | $ | 60,416,281 |           
|                                                                 |                         |                                    |             |            |             |   |             |            |            |   |            |            |             |       |           
|Cumulative interest sensitivity gap                              |                         | $                                  | (69,872,925 | )          |             | $ | (61,661,443 | )          |            | $ | 12,479,241 |            |             | $     | 60,416,281 |            |            |   |            |           
|                                                                 |                         |                                    |             |            |             |   |             |            |            |   |            |            |             |       |           
|Cumulative interest sensitivity gap as a percent of total equity |                         |                                    | -201.63     | %          |             |   | -177.94     | %          |            |   | 36.01      | %          |             |       | 174.34     | %          |            |   |            |           
|Cumulative interest sensitivity gap as a percent of total assets |                         |                                    | -22.77      | %          |             |   | -20.09      | %          |            |   | 4.07       | %          |             |       | 19.69      | %          |            |   |            |           






|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For purposes of the gap analysis, loans are not reduced by the
    allowance for loan losses.                                                                                 
|   
|(2) | Federal Home Loan Bank advances included in other borrowings are
    convertible variable rate instruments that could reprice in
    earlier periods should market rates rise.




19



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FINANCIAL REVIEW















20



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##### 



FINANCIAL REVIEW




|                       |  |                              |     |  |      |  |      |   |  |   |     |   |  |  |      |   
|---------------------- |  | ---------------------------- | --- |  | ---- |  | ---- | - |  | - | --- | - |  |  | ---- | --
|                       |  | Effect of a Change in        |    
|                       |  | Interest Rates on Net Income |    
|                       |  | Over a 12-Month Period       |    
|                       |  |                              |    
|(Dollars in thousands) |  | 2005                         |     |  | 2004 | 
|                       |  |                              |     |  |      | 
|+ 200 basis points     |  | $                            | 234 |  |      |  | 10.6 | % |  | $ | 42  |   |  |  | 1.4  | % 
|+ 100 basis points     |  | $                            | 17  |  |      |  | 0.8  | % |  | $ | 5   |   |  |  | 0.2  | % 
|- 100 basis points     |  | $                            | 63  |  |      |  | 2.8  | % |  | $ | (18 | ) |  |  | (0.6 | )%



Results of Operations











21



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FINANCIAL REVIEW







22



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##### 



FINANCIAL REVIEW


Average Balances, Interest Rates and Yields.


|                                                                                     |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |         |        |  |   |        |       |  |  |        |      |  
|------------------------------------------------------------------------------------ | ------------------------- | ----------------------- | ------- | ------ | -------- | - | ------- | -------------- |  | ------- | ------- | ----- | - | -------- | ------- | ------ | -------------- | ------- | ------ | ------- |  |  | -------- | ---- | - | -------------- | ------- | ------ |  | - | ------ | ----- |  |  | ------ | ---- | -
|                                                                                     |                           | Year Ended December 31, |        
|                                                                                     |                           |                         |        
|                                                                                     |                           | 2005                    |         |        | 2004     |   |         | 2003           | 
|                                                                                     |                           |                         |         |        |          |   |         |                | 
|                                                                                     |                           | Daily                   |         |        |          |   | Daily   |                |  |         |         | Daily |   |          |        
|                                                                                     |                           | Average                 |         |        |          |   | Average |                |  | Average |         |       |   |          | Average |        |                | Average |        |         |  |  | Average  |     
|(Dollars in Thousands)                                                               |                           | Balance                 |         |        | Interest |   |         | Yield/cost (3) |  |         | Balance |       |   | Interest |         |        | Yield/cost (3) |         |        | Balance |  |  | Interest |      |   | Yield/cost (3) |        
|                                                                                     |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |        
|Assets                                                                               |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |         |        |  |   |        |       |  |  |        |     
|Interest earning assets:                                                             |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |         |        |  |   |        |       |  |  |        |     
|Investment securities:                                                               |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |         |        |  |   |        |       |  |  |        |     
|                                                                                     | Taxable                   |                         | $       | 54,089 |          |   | $       | 2,727          |  |         |         | 5.06  | % |          | $       | 59,265 |                |         | $      | 3,186   |  |  |          | 5.56 | % |                | $       | 55,445 |  |   | $      | 3,124 |  |  |        | 5.94 | %
|                                                                                     | Nontaxable                |                         |         | 19,545 |          |   |         | 1,307          |  |         |         | 6.71  | % |          |         | 19,807 |                |         |        | 1,401   |  |  |          | 7.13 | % |                |         | 19,742 |  |   |        | 1,421 |  |  |        | 7.26 | %
|                                                                                     | (tax equivalent basis)    |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |         |        |  |   |        |       |  |  |        |      |  
|Federal Funds Sold                                                                   |                           |                         | 6,823   |        |          |   | 242     |                |  |         | 3.55    | %     |   |          | 4,983   |        |                |         | 75     |         |  |  | 1.51     | %    |   |                | 8,233   |        |  |   | 86     |       |  |  | 1.04   | %   
|Interest bearing deposits                                                            |                           |                         |        |        |          |   |        |                |  |         | 0.00    | %     |   |          | 437     |        |                |         | 27     |         |  |  | 6.18     | %    |   |                | 998     |        |  |   | 62     |       |  |  | 6.21   | %   
|Net loans (including nonaccrual loans)                                               |                           |                         | 197,064 |        |          |   | 12,243  |                |  |         | 6.21    | %     |   |          | 194,032 |        |                |         | 11,099 |         |  |  | 5.72     | %    |   |                | 187,180 |        |  |   | 10,834 |       |  |  | 5.79   | %   
|                                                                                     |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |        
|Total interest-earning assets                                                        |                           |                         | 277,521 |        |          |   | 16,520  |                |  |         | 5.81    | %     |   |          | 278,524 |        |                |         | 15,788 |         |  |  | 5.67     | %    |   |                | 271,598 |        |  |   | 15,527 |       |  |  | 5.72   | %   
|                                                                                     |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |        
|All other assets                                                                     |                           |                         | 24,030  |        |          |   |         |                |  |         |         |       |   |          | 22,611  |        |                |         |        |         |  |  |          |      |   |                | 22,250  |        |  |   |        |       |  |  |        |     
|                                                                                     |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |        
|Total assets                                                                         |                           | $                       | 301,551 |        |          |   |         |                |  |         |         |       |   | $        | 301,135 |        |                |         |        |         |  |  |          |      |   | $              | 293,848 |        |  |   |        |       |  |  |        |     
|                                                                                     |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |        
|Liabilities and Shareholders Equity                                                 |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |         |        |  |   |        |       |  |  |        |     
|Interest-bearing liabilities:                                                        |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |         |        |  |   |        |       |  |  |        |     
|                                                                                     | Interest-bearing checking |                         | $       | 42,683 |          |   |         | 421            |  |         |         | 0.99  | % |          | $       | 37,743 |                |         |        | 114     |  |  |          | 0.30 | % |                | $       | 35,072 |  |   |        | 207   |  |  |        | 0.59 | %
|                                                                                     | Savings                   |                         |         | 80,746 |          |   |         | 614            |  |         |         | 0.76  | % |          |         | 89,428 |                |         |        | 650     |  |  |          | 0.73 | % |                |         | 84,620 |  |   |        | 844   |  |  |        | 1.00 | %
|                                                                                     | Time, $100,000 and over   |                         |         | 10,420 |          |   |         | 312            |  |         |         | 2.99  | % |          |         | 11,991 |                |         |        | 282     |  |  |          | 2.35 | % |                |         | 11,286 |  |   |        | 362   |  |  |        | 3.21 | %
|                                                                                     | Time, other               |                         |         | 63,034 |          |   |         | 1,799          |  |         |         | 2.85  | % |          |         | 64,427 |                |         |        | 1,427   |  |  |          | 2.21 | % |                |         | 70,699 |  |   |        | 1,603 |  |  |        | 2.27 | %
|Other funds purchased                                                                |                           |                         | 22,072  |        |          |   | 983     |                |  |         | 4.45    | %     |   |          | 20,737  |        |                |         | 873    |         |  |  | 4.21     | %    |   |                | 20,342  |        |  |   | 724    |       |  |  | 3.56   | %   
|                                                                                     |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |        
|Total interest-bearing liabilities                                                   |                           |                         | 218,955 |        |          |   | 4,128   |                |  |         | 1.89    | %     |   |          | 224,326 |        |                |         | 3,346  |         |  |  | 1.49     | %    |   |                | 222,019 |        |  |   | 3,740  |       |  |  | 1.68   | %   
|                                                                                     |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |        
|Demand deposits                                                                      |                           |                         | 44,655  |        |          |   |         |                |  |         |         |       |   |          | 38,749  |        |                |         |        |         |  |  |          |      |   |                | 33,807  |        |  |   |        |       |  |  |        |     
|Other liabilities                                                                    |                           |                         | 2,321   |        |          |   |         |                |  |         |         |       |   |          | 2,966   |        |                |         |        |         |  |  |          |      |   |                | 3,165   |        |  |   |        |       |  |  |        |     
|Shareholders equity                                                                 |                           |                         | 35,620  |        |          |   |         |                |  |         |         |       |   |          | 35,094  |        |                |         |        |         |  |  |          |      |   |                | 34,857  |        |  |   |        |       |  |  |        |     
|                                                                                     |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |        
|Total Liabilities and Shareholders Equity                                           |                           | $                       | 301,551 |        |          |   |         |                |  |         |         |       |   | $        | 301,135 |        |                |         |        |         |  |  |          |      |   | $              | 293,848 |        |  |   |        |       |  |  |        |     
|                                                                                     |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |        
|Net interest income (tax equivalent basis)                                           |                           |                         |         |        |          | $ | 12,391  |                |  |         |         |       |   |          |         |        |                | $       | 12,442 |         |  |  |          |      |   |                |         |        |  | $ | 11,787 |       |  |  |        |     
|                                                                                     |                           |                         |         |        |          |   |         |                |  |         |         |       |   |          |         |        |                |         |        |         |  |  |          |      |   |                |        
|Interest rate spread(1)                                                              |                           |                         |         |        |          |   |         |                |  |         | 3.92    | %     |   |          |         |        |                |         |        |         |  |  | 4.18     | %    |   |                |         |        |  |   |        |       |  |  | 4.04   | %   
|Net yield on interest-earning assets(2)                                              |                           |                         |         |        |          |   |         |                |  |         | 4.55    | %     |   |          |         |        |                |         |        |         |  |  | 4.47     | %    |   |                |         |        |  |   |        |       |  |  | 4.34   | %   
|Ratio of average interest-earning assets to average
    interest-bearing liabilities |                           |                         |         |        |          |   |         |                |  |         | 126.75  | %     |   |          |         |        |                |         |        |         |  |  | 124.16   | %    |   |                |         |        |  |   |        |       |  |  | 122.33 | %   






|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Interest rate spread represents the difference between the
    average yield on interest-earning assets and the average cost of
    interest-bearing liabilities.
|   
|(2) | Net yield on interest-earning assets represents net interest
    income as a percentage of average interest-earning assets.                                      
|   
|(3) | Average yields are computed using annualized interest income and
    expense for the periods.                                                                    




23



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##### 



FINANCIAL REVIEW


Rate/ Volume Analysis.


|                                                          |                           |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |   |      |      |      |   |     |      |      |  
|--------------------------------------------------------- | ------------------------- | -------------------------------------------- | --- | ---- | ---------------------------- | - | --- | ------ | --- | - | ------ | ---- | --- | ---- | --- | ---- | ------ | - | ---- | ---- | ---- | - | --- | ---- | ---- | -
|                                                          |                           | Changes in net interest                      |     |      | Changes in net interest      |  
|                                                          |                           | income for the year ended                    |     |      | income for the year ended    |  
|                                                          |                           | December 31, 2005                            |     |      | December 31, 2004            |  
|                                                          |                           |                                              |     |      |                              |  
|                                                          |                           | 2005 versus 2004 Increase                    |     |      | 2004 versus 2003 Increase    |  
|                                                          |                           | (Decrease) Due to Changes In                 |     |      | (Decrease) Due to Changes In |  
|                                                          |                           |                                              |     |      |                              |  
|                                                          |                           |                                              |     | Net  |                              |   |     |        | Net |  
|(Dollars in thousands)                                    |                           | Volume                                       |     |      | Rate                         |   |     | Change |     |   | Volume |      |     | Rate |     |      | Change |  
|                                                          |                           |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |  
|Interest Income                                           |                           |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |   |      |      |      |   |     |     
|Investment securities:                                    |                           |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |   |      |      |      |   |     |     
|                                                          | Taxable                   |                                              | $   | (268 | )                            |   | $   | (191   | )   |   | $      | (459 | )   |      | $   | 215  |        |   | $    | (153 | )    |   | $   | 62   |     
|                                                          | Non taxable               |                                              |     | (18  | )                            |   |     | (76    | )   |   |        | (94  | )   |      |     | 5    |        |   |      | (25  | )    |   |     | (20  | )   
|                                                          | (tax equivalent basis)*   |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |   |      |      |      |   |     |      |     
|Federal funds sold                                        |                           |                                              | 36  |      |                              |   | 131 |        |     |   | 167    |      |     |      | (34 | )    |        |   | 23   |      |      |   | (11 | )   
|Interest bearing deposits                                 |                           |                                              | (27 | )    |                              |   |    |        |     |   | (27    | )    |     |      | (35 | )    |        |   |     |      |      |   | (35 | )   
|Loans (including nonaccrual loans)                        |                           |                                              | 176 |      |                              |   | 968 |        |     |   | 1,144  |      |     |      | 397 |      |        |   | (132 | )    |      |   | 265 |     
|                                                          |                           |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |  
|                                                          |                           | Total interest income (tax equivalent basis) |     | $    | (101                         | ) |     | $      | 832 |   |        | $    | 731 |      |     | $    | 548    |   |      | $    | (287 | ) |     | $    | 261  |  
|                                                          |                           |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |  
|Interest Expense                                          |                           |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |   |      |      |      |   |     |     
|Deposits                                                  |                           |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |   |      |      |      |   |     |     
|                                                          | Interest bearing checking |                                              | $   | 17   |                              |   | $   | 290    |     |   | $      | 307  |     |      | $   | 16   |        |   | $    | (109 | )    |   | $   | (93  | )   
|                                                          | Savings                   |                                              |     | (65  | )                            |   |     | 28     |     |   |        | (37  | )   |      |     | 48   |        |   |      | (242 | )    |   |     | (194 | )   
|                                                          | Time, $100,000 and over   |                                              |     | (40  | )                            |   |     | 70     |     |   |        | 30   |     |      |     | 23   |        |   |      | (103 | )    |   |     | (80  | )   
|                                                          | Time, other               |                                              |     | (31  | )                            |   |     | 403    |     |   |        | 372  |     |      |     | (142 | )      |   |      | (34  | )    |   |     | (176 | )   
|Other funds purchased                                     |                           |                                              | 58  |      |                              |   | 52  |        |     |   | 110    |      |     |      | 14  |      |        |   | 135  |      |      |   | 149 |     
|                                                          |                           |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |  
|                                                          |                           | Total interest expense                       |     | $    | (61                          | ) |     | $      | 843 |   |        | $    | 782 |      |     | $    | (41    | ) |      | $    | (353 | ) |     | $    | (394 | )
|                                                          |                           |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |  
|Change in net interest income (tax equivalent
    basis)* |                           | $                                            | (40 | )    |                              | $ | (11 | )      |     | $ | (51    | )    |     | $    | 589 |      |        | $ | 66   |      |      | $ | 655 |     
|                                                          |                           |                                              |     |      |                              |   |     |        |     |   |        |      |     |      |     |      |        |  






|  |                                                             
|- | ------------------------------------------------------------
|* | Tax equivalence based on highest statutory tax rates of 34%.








24



---



##### 



FINANCIAL REVIEW




Critical Accounting Policies




Allowance for Loan Losses.





25



---



##### 



FINANCIAL REVIEW




Valuation of Securities.


Goodwill and Other Intangible Assets.


New Accounting Pronouncements


Effect of Newly Issued But Not Yet Effective Accounting
Standards:







26



---



##### 



CONSOLIDATED BALANCE SHEETS


December 31, 2005 and 2004


|                                                                                                              |                                               |                                 |             |             |             |   |             |             |             | 
|------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------------- | ----------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | 
|                                                                                                              |                                               | 2005                            |             |             | 2004        |  
|                                                                                                              |                                               |                                 |             |             |             |  
|ASSETS                                                                                                        |                                               |                                 |             |             |             |   |             |            
|Cash and due from banks                                                                                       |                                               | $                               | 10,985,160  |             |             | $ | 11,756,454  |            
|Federal funds sold                                                                                            |                                               |                                 | 8,780,000   |             |             |   | 6,070,000   |            
|                                                                                                              |                                               |                                 |             |             |             |  
|                                                                                                              |                                               | Total cash and cash equivalents |             |             | 19,765,160  |   |             |             | 17,826,454  | 
|Securities available for sale                                                                                 |                                               |                                 | 60,091,913  |             |             |   | 60,461,982  |            
|Securities held to maturity (fair value: 2005 
    $17,115,020;
    2004  $16,444,769)                      |                                               |                                 | 16,917,133  |             |             |   | 15,865,047  |            
|Federal bank stock                                                                                            |                                               |                                 | 2,987,050   |             |             |   | 2,877,850   |            
|Loans held for sale                                                                                           |                                               |                                 |            |             |             |   | 57,000      |            
|Loans, net of allowance for loan losses: 2005 
    $1,902,828;
    2004  $1,763,298                         |                                               |                                 | 191,538,419 |             |             |   | 196,724,596 |            
|Premises and equipment, net                                                                                   |                                               |                                 | 5,201,211   |             |             |   | 4,366,780   |            
|Other real estate owned                                                                                       |                                               |                                 | 103,334     |             |             |   | 46,000      |            
|Goodwill                                                                                                      |                                               |                                 | 4,722,775   |             |             |   | 4,722,775   |            
|Identified intangible assets                                                                                  |                                               |                                 | 1,136,613   |             |             |   | 1,386,577   |            
|Accrued interest receivable                                                                                   |                                               |                                 | 1,621,306   |             |             |   | 1,615,798   |            
|Cash surrender value of life insurance                                                                        |                                               |                                 | 2,415,910   |             |             |   | 2,337,779   |            
|Other assets                                                                                                  |                                               |                                 | 380,184     |             |             |   | 136,291     |            
|                                                                                                              |                                               |                                 |             |             |             |  
|                                                                                                              |                                               | $                               | 306,881,008 |             |             | $ | 308,424,929 |            
|                                                                                                              |                                               |                                 |             |             |             |  
|                                                                                                             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                          |                                               |                                 |             |             |             |   |             |            
|Deposits                                                                                                      |                                               |                                 |             |             |             |   |             |            
|                                                                                                              | Noninterest-bearing                           |                                 | $           | 47,143,340  |             |   | $           | 47,569,690  |            
|                                                                                                              | Interest-bearing                              |                                 |             | 202,344,481 |             |   |             | 200,952,786 |            
|                                                                                                              |                                               |                                 |             |             |             |  
|                                                                                                              |                                               | Total deposits                  |             |             | 249,487,821 |   |             |             | 248,522,476 | 
|Repurchase agreements                                                                                         |                                               |                                 | 2,359,521   |             |             |   | 3,888,235   |            
|Federal Reserve note account                                                                                  |                                               |                                 | 592,763     |             |             |   | 791,007     |            
|Federal Home Loan Bank advances                                                                               |                                               |                                 | 17,000,000  |             |             |   | 17,000,000  |            
|Accrued expenses and other liabilities                                                                        |                                               |                                 | 2,787,478   |             |             |   | 2,903,890   |            
|                                                                                                              |                                               |                                 |             |             |             |  
|                                                                                                              |                                               | Total liabilities               |             |             | 272,227,583 |   |             |             | 273,105,608 | 
|Shareholders equity
    Common stock, no par value; 6,000,000 shares authorized;
    2,289,528 shares issued |                                               |                                 | 11,447,640  |             |             |   | 11,447,640  |            
|                                                                                                              | Additional paid-in capital                    |                                 |             | 4,689,800   |             |   |             | 4,689,800   |            
|                                                                                                              | Retained earnings                             |                                 |             | 20,067,339  |             |   |             | 19,397,601  |            
|                                                                                                              | Treasury stock, at cost (55,040 shares)       |                                 |             | (1,189,493  | )           |   |             | (1,189,493  | )          
|                                                                                                              | Accumulated other comprehensive income (loss) |                                 |             | (361,861    | )           |   |             | 973,773     |            
|                                                                                                              |                                               |                                 |             |             |             |  
|                                                                                                              |                                               | Total shareholders equity      |             |             | 34,653,425  |   |             |             | 35,319,321  | 
|                                                                                                              |                                               |                                 |             |             |             |  
|                                                                                                              |                                               | $                               | 306,881,008 |             |             | $ | 308,424,929 |            
|                                                                                                              |                                               |                                 |             |             |             |  






27



---



##### 



CONSOLIDATED STATEMENTS OF INCOME


Years ended December 31, 2005, 2004 and 2003


|                                                    |                                          |            |                                    |            |           |            |            |            |           |            |            |            |           |            | 
|--------------------------------------------------- | ---------------------------------------- | ---------- | ---------------------------------- | ---------- | --------- | ---------- | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | --------- | ---------- | 
|                                                    |                                          | 2005       |                                    |            | 2004      |            |            | 2003       |          
|                                                    |                                          |            |                                    |            |           |            |            |            |          
|Interest and dividend income                        |                                          |            |                                    |            |           |            |            |            |           |            |            |           
|                                                    | Loans, including fees                    |            | $                                  | 12,243,402 |           |            | $          | 11,098,476 |           |            | $          | 10,833,688 |          
|                                                    | Federal funds sold                       |            |                                    | 242,047    |           |            |            | 75,138     |           |            |            | 85,635     |          
|                                                    | Securities:                              |            |                                    |            |           |            |            |            |           |            |            |            |          
|                                                    |                                          | Taxable    |                                    |            | 2,727,098 |            |            |            | 3,213,539 |            |            |            | 3,186,618 |           
|                                                    |                                          | Nontaxable |                                    |            | 862,648   |            |            |            | 924,846   |            |            |            | 937,868   |           
|                                                    |                                          |            |                                    |            |           |            |            |            |          
|                                                    |                                          |            | Total interest and dividend income |            |           | 16,075,195 |            |            |           | 15,311,999 |            |            |           | 15,043,809 | 
|Interest expense                                    |                                          |            |                                    |            |           |            |            |            |           |            |            |           
|                                                    | Deposits                                 |            |                                    | 3,145,320  |           |            |            | 2,473,832  |           |            |            | 3,016,172  |          
|                                                    | Short-term borrowings                    |            |                                    | 87,712     |           |            |            | 15,037     |           |            |            | 6,996      |          
|                                                    | Federal Home Loan Bank advances          |            |                                    | 895,357    |           |            |            | 857,453    |           |            |            | 716,848    |          
|                                                    |                                          |            |                                    |            |           |            |            |            |          
|                                                    |                                          |            | Total interest expense             |            |           | 4,128,389  |            |            |           | 3,346,322  |            |            |           | 3,740,016  | 
|                                                    |                                          |            |                                    |            |           |            |            |            |          
|Net interest income                                 |                                          |            | 11,946,806                         |            |           |            | 11,965,677 |            |           |            | 11,303,793 |           
|Provision for loan losses                           |                                          |            | 159,233                            |            |           |            | 177,500    |            |           |            | 245,000    |           
|                                                    |                                          |            |                                    |            |           |            |            |            |          
|Net interest income after provision for loan losses |                                          |            | 11,787,573                         |            |           |            | 11,788,177 |            |           |            | 11,058,793 |           
|Noninterest income                                  |                                          |            |                                    |            |           |            |            |            |           |            |            |           
|                                                    | Checking account fees                    |            |                                    | 970,329    |           |            |            | 790,928    |           |            |            | 752,833    |          
|                                                    | Gain on sale of loans                    |            |                                    | 43,548     |           |            |            | 67,379     |           |            |            | 115,982    |          
|                                                    | Gain on sale of other real estate owned  |            |                                    | 19,603     |           |            |            |           |           |            |            |           |          
|                                                    | Deposit and miscellaneous service fees   |            |                                    | 197,825    |           |            |            | 153,646    |           |            |            | 149,425    |          
|                                                    | Securities gains, net                    |            |                                    | 109,035    |           |            |            | 432,915    |           |            |            | 72,290     |          
|                                                    | Other                                    |            |                                    | 460,860    |           |            |            | 450,445    |           |            |            | 441,490    |          
|                                                    |                                          |            |                                    |            |           |            |            |            |          
|                                                    |                                          |            | Total noninterest income           |            |           | 1,801,200  |            |            |           | 1,895,313  |            |            |           | 1,532,020  | 
|Noninterest expense                                 |                                          |            |                                    |            |           |            |            |            |           |            |            |           
|                                                    | Salaries and employee benefits           |            |                                    | 5,764,959  |           |            |            | 5,351,230  |           |            |            | 4,844,909  |          
|                                                    | Data processing                          |            |                                    | 1,036,874  |           |            |            | 970,492    |           |            |            | 794,932    |          
|                                                    | Net occupancy                            |            |                                    | 458,758    |           |            |            | 410,276    |           |            |            | 404,489    |          
|                                                    | Dues, subscriptions and fees             |            |                                    | 387,958    |           |            |            | 262,079    |           |            |            | 213,721    |          
|                                                    | Maintenance and repairs                  |            |                                    | 382,250    |           |            |            | 262,777    |           |            |            | 267,261    |          
|                                                    | Franchise tax                            |            |                                    | 372,388    |           |            |            | 355,469    |           |            |            | 321,824    |          
|                                                    | Depreciation  furniture and fixtures    |            |                                    | 330,996    |           |            |            | 363,391    |           |            |            | 353,601    |          
|                                                    | Marketing                                |            |                                    | 301,154    |           |            |            | 181,526    |           |            |            | 199,242    |          
|                                                    | Amortization of intangibles              |            |                                    | 249,964    |           |            |            | 267,509    |           |            |            | 275,647    |          
|                                                    | Stationary, printing and office supplies |            |                                    | 197,280    |           |            |            | 214,327    |           |            |            | 251,275    |          
|                                                    | Other                                    |            |                                    | 1,503,034  |           |            |            | 1,258,386  |           |            |            | 1,213,615  |          
|                                                    |                                          |            |                                    |            |           |            |            |            |          
|                                                    |                                          |            | Total noninterest expense          |            |           | 10,985,615 |            |            |           | 9,897,462  |            |            |           | 9,140,516  | 
|                                                    |                                          |            |                                    |            |           |            |            |            |          
|Income before income taxes                          |                                          |            | 2,603,158                          |            |           |            | 3,786,028  |            |           |            | 3,450,297  |           
|Income tax expense                                  |                                          |            | 503,348                            |            |           |            | 875,288    |            |           |            | 806,746    |           
|                                                    |                                          |            |                                    |            |           |            |            |            |          
|Net income                                          |                                          | $          | 2,099,810                          |            |           | $          | 2,910,740  |            |           | $          | 2,643,551  |           
|                                                    |                                          |            |                                    |            |           |            |            |            |          
|Weighted average common shares outstanding          |                                          |            | 2,234,488                          |            |           |            | 2,234,488  |            |           |            | 2,234,488  |           
|                                                    |                                          |            |                                    |            |           |            |            |            |          
|Basic and diluted earnings per common share         |                                          | $          | 0.94                               |            |           | $          | 1.30       |            |           | $          | 1.18       |           
|                                                    |                                          |            |                                    |            |           |            |            |            |          






28



---



##### 



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY


Years ended December 31, 2005, 2004 and 2003


|                                         |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |   |           |            |   |   |            |            |           | 
|---------------------------------------- | --------------------------------- | -------------------------- | ---------- | ---------- | ------- | - | --------- | -------- |  | ----------- | ---------- | --------- |  | ------------- | ---------- | - | ------------- | - | --------- | ---------- | - | - | ---------- | ---------- | --------- | 
|                                         |                                   |                            |            |            |         |   |           |          |  | Accumulated |            |           | 
|                                         |                                   |                            |            | Additional |         |   |           |          |  |             | Other      |           |  | Total         |           
|                                         |                                   | Common                     |            |            | Paid-In |   |           | Retained |  |             | Treasury   |           |  | Comprehensive |            |   | Shareholders |  
|                                         |                                   | Stock                      |            |            | Capital |   |           | Earnings |  |             | Stock      |           |  | Income (Loss) |            |   | Equity        |  
|                                         |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |  
|Balance at January 1, 2003               |                                   | $                          | 11,447,640 |            |         | $ | 4,689,800 |          |  | $           | 16,502,352 |           |  | $             | (1,189,493 | ) |               | $ | 1,739,751 |            |   | $ | 33,190,050 |           
|Comprehensive income:                    |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |   |           |            |   |   |            |           
|                                         | Net income                        |                            |            |            |         |   |           |          |  |             |            | 2,643,551 |  |               |            |   |               |   |           |            |   |   |            | 2,643,551  |          
|                                         | Other comprehensive income        |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |   |           | 267,138    |   |   |            | 267,138    |          
|                                         |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |  
|                                         |                                   | Total comprehensive income |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |   |           |            |   |   |            |            | 2,910,689 | 
|Cash dividends declared ($.58 per share) |                                   |                            |            |            |         |   |           |          |  |             | (1,296,004 | )         |  |               |            |   |               |   |           |            |   |   | (1,296,004 | )         
|                                         |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |  
|Balance at December 31, 2003             |                                   |                            | 11,447,640 |            |         |   | 4,689,800 |          |  |             | 17,849,899 |           |  |               | (1,189,493 | ) |               |   | 2,006,889 |            |   |   | 34,804,735 |           
|Comprehensive income:                    |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |   |           |            |   |   |            |           
|                                         | Net income                        |                            |            |            |         |   |           |          |  |             |            | 2,910,740 |  |               |            |   |               |   |           |            |   |   |            | 2,910,740  |          
|                                         | Other comprehensive income (loss) |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |   |           | (1,033,116 | ) |   |            | (1,033,116 | )        
|                                         |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |  
|                                         |                                   | Total comprehensive income |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |   |           |            |   |   |            |            | 1,877,624 | 
|Cash dividends declared ($.61 per share) |                                   |                            |            |            |         |   |           |          |  |             | (1,363,038 | )         |  |               |            |   |               |   |           |            |   |   | (1,363,038 | )         
|                                         |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |  
|Balance at December 31, 2004             |                                   |                            | 11,447,640 |            |         |   | 4,689,800 |          |  |             | 19,397,601 |           |  |               | (1,189,493 | ) |               |   | 973,773   |            |   |   | 35,319,321 |           
|Comprehensive income:                    |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |   |           |            |   |   |            |           
|                                         | Net income                        |                            |            |            |         |   |           |          |  |             |            | 2,099,810 |  |               |            |   |               |   |           |            |   |   |            | 2,099,810  |          
|                                         | Other comprehensive income (loss) |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |   |           | (1,335,634 | ) |   |            | (1,335,634 | )        
|                                         |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |  
|                                         |                                   | Total comprehensive income |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |   |           |            |   |   |            |            | 764,177   | 
|Cash dividends declared ($.64 per share) |                                   |                            |            |            |         |   |           |          |  |             | (1,430,072 | )         |  |               |            |   |               |   |           |            |   |   | (1,430,072 | )         
|                                         |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |  
|Balance at December 31, 2005             |                                   | $                          | 11,447,640 |            |         | $ | 4,689,800 |          |  | $           | 20,067,339 |           |  | $             | (1,189,493 | ) |               | $ | (361,861  | )          |   | $ | 34,653,425 |           
|                                         |                                   |                            |            |            |         |   |           |          |  |             |            |           |  |               |            |   |               |  






29



---



##### 



CONSOLIDATED STATEMENTS OF CASH FLOWS


Years ended December 31, 2005, 2004 and 2003


|                                        |                                                                               |                                                     |            |            |             |   |            |            |             |   |            |            |             |  
|--------------------------------------- | ----------------------------------------------------------------------------- | --------------------------------------------------- | ---------- | ---------- | ----------- | - | ---------- | ---------- | ----------- | - | ---------- | ---------- | ----------- | -
|                                        |                                                                               | 2005                                                |            |            | 2004        |   |            | 2003       |            
|                                        |                                                                               |                                                     |            |            |             |   |            |            |            
|Cash flows from operating activities    |                                                                               |                                                     |            |            |             |   |            |            |             |   |            |           
|                                        | Net income                                                                    |                                                     | $          | 2,099,810  |             |   | $          | 2,910,740  |             |   | $          | 2,643,551  |            
|                                        | Adjustments to reconcile net income to net cash from operating
    activities |                                                     |            |            |             |   |            |            |             |   |            |            |            
|                                        |                                                                               | Provision for loan losses                           |            |            | 159,233     |   |            |            | 177,500     |   |            |            | 245,000     |  
|                                        |                                                                               | Deferred income taxes                               |            |            | (239,499    | ) |            |            | (126,348    | ) |            |            | (154,585    | )
|                                        |                                                                               | Depreciation, amortization and accretion            |            |            | 1,025,207   |   |            |            | 810,553     |   |            |            | 514,317     |  
|                                        |                                                                               | Earnings on Bank owned life insurance               |            |            | (78,131     | ) |            |            | (80,132     | ) |            |            | (88,611     | )
|                                        |                                                                               | Federal Home Loan Bank stock dividend               |            |            | (109,200    | ) |            |            | (106,500    | ) |            |            | (81,900     | )
|                                        |                                                                               | Origination of mortgage loans held for sale         |            |            | (7,397,614  | ) |            |            | (3,030,007  | ) |            |            |            |  
|                                        |                                                                               | Proceeds from sales of mortgage loans held for sale |            |            | 7,421,122   |   |            |            | 3,014,578   |   |            |            |            |  
|                                        |                                                                               | Gain on sale of loans                               |            |            | (43,548     | ) |            |            | (67,379     | ) |            |            | (115,982    | )
|                                        |                                                                               | Net security gains                                  |            |            | (109,035    | ) |            |            | (432,915    | ) |            |            | (72,290     | )
|                                        |                                                                               | Net gain on sale of other real estate owned         |            |            | (19,603     | ) |            |            |            |   |            |            |            |  
|                                        |                                                                               | Change in other assets and liabilities              |            |            | 621,032     |   |            |            | 108,268     |   |            |            | 383,274     |  
|                                        |                                                                               |                                                     |            |            |             |   |            |            |            
|                                        |                                                                               | Net cash from operating activities                  |            |            | 3,329,774   |   |            |            | 3,178,358   |   |            |            | 3,272,774   |  
|Cash flows from investing activities    |                                                                               |                                                     |            |            |             |   |            |            |             |   |            |           
|                                        | Net change in interest-bearing deposits with other banks                      |                                                     |            |           |             |   |            | 999,048    |             |   |            | (1,863     | )          
|                                        | Securities held to maturity                                                   |                                                     |            |            |             |   |            |            |             |   |            |            |            
|                                        |                                                                               | Proceeds from maturities and repayments             |            |            | 1,002,995   |   |            |            | 2,752,943   |   |            |            | 2,412,599   |  
|                                        |                                                                               | Purchases                                           |            |            | (2,034,579  | ) |            |            | (2,076,438  | ) |            |            | (636,911    | )
|                                        | Securities available for sale                                                 |                                                     |            |            |             |   |            |            |             |   |            |            |            
|                                        |                                                                               | Proceeds from maturities and repayments             |            |            | 7,717,705   |   |            |            | 14,335,787  |   |            |            | 8,442,092   |  
|                                        |                                                                               | Proceeds from sales                                 |            |            | 18,664,328  |   |            |            | 4,615,918   |   |            |            | 2,071,143   |  
|                                        |                                                                               | Purchases                                           |            |            | (28,094,375 | ) |            |            | (13,322,070 | ) |            |            | (24,668,182 | )
|                                        | Capital expenditures                                                          |                                                     |            | (1,332,783 | )           |   |            | (179,559   | )           |   |            | (461,306   | )          
|                                        | Proceeds from sale of loans                                                   |                                                     |            |           |             |   |            |           |             |   |            | 5,432,154  |            
|                                        | Proceeds from sale of other real estate owned                                 |                                                     |            | 65,603     |             |   |            |           |             |   |            |           |            
|                                        | Net change in loans to customers                                              |                                                     |            | 4,811,723  |             |   |            | (9,891,855 | )           |   |            | (2,057,750 | )          
|                                        |                                                                               |                                                     |            |            |             |   |            |            |            
|                                        |                                                                               | Net cash from investing activities                  |            |            | 800,617     |   |            |            | (2,766,226  | ) |            |            | (9,468,024  | )
|Cash flow from financing activities     |                                                                               |                                                     |            |            |             |   |            |            |             |   |            |           
|                                        | Net change in deposits                                                        |                                                     |            | 965,345    |             |   |            | 5,675,185  |             |   |            | 3,550,064  |            
|                                        | Net change in short-term borrowings                                           |                                                     |            | (1,726,958 | )           |   |            | 1,572,831  |             |   |            | (899,810   | )          
|                                        | Dividends paid                                                                |                                                     |            | (1,430,072 | )           |   |            | (1,340,693 | )           |   |            | (1,273,659 | )          
|                                        |                                                                               |                                                     |            |            |             |   |            |            |            
|                                        |                                                                               | Net cash from financing activities                  |            |            | (2,191,685  | ) |            |            | 5,907,323   |   |            |            | 1,376,595   |  
|                                        |                                                                               |                                                     |            |            |             |   |            |            |            
|Net change in cash and cash equivalents |                                                                               |                                                     | 1,938,706  |            |             |   | 6,319,455  |            |             |   | (4,818,655 | )         
|Beginning cash and cash equivalents     |                                                                               |                                                     | 17,826,454 |            |             |   | 11,506,999 |            |             |   | 16,325,654 |           
|                                        |                                                                               |                                                     |            |            |             |   |            |            |            
|Ending cash and cash equivalents        |                                                                               | $                                                   | 19,765,160 |            |             | $ | 17,826,454 |            |             | $ | 11,506,999 |           
|                                        |                                                                               |                                                     |            |            |             |   |            |            |            
|Supplemental cash flow information:     |                                                                               |                                                     |            |            |             |   |            |            |             |   |            |           
|                                        | Interest paid                                                                 |                                                     | $          | 3,869,119  |             |   | $          | 3,356,077  |             |   | $          | 3,817,233  |            
|                                        | Income taxes paid                                                             |                                                     |            | 795,000    |             |   |            | 1,035,000  |             |   |            | 940,000    |            
|Supplemental non-cash disclosures:      |                                                                               |                                                     |            |            |             |   |            |            |             |   |            |           
|                                        | Transfer from loans to other real estate owned                                |                                                     | $          | 103,334    |             |   | $          | 46,000     |             |   | $          |           |            






30



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003


NOTE 1  SUMMARY OF SIGNIFICANT 
 ACCOUNTING POLICIES


Nature of Operations and Principles of Consolidation:




Segments:


Use of Estimates:


Cash Flows:


Securities:















31



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003




NOTE 1  SUMMARY OF SIGNIFICANT 
 ACCOUNTING POLICIES (Continued)


Loans Held for Sale:




Loans:






Allowance for Loan Losses:






Servicing Rights:









32



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003




NOTE 1  SUMMARY OF SIGNIFICANT 
 ACCOUNTING POLICIES (Continued)




Other Real Estate Owned:


Premises and Equipment:


Bank Owned Life Insurance:


Goodwill and Other Intangible Assets:






Long-term Assets:


Repurchase Agreements:


Benefit Plans:


Income Taxes:


Loan Commitments and Related Financial Instruments:


Earnings Per Common Share:









33



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003




NOTE 1  SUMMARY OF SIGNIFICANT 
 ACCOUNTING POLICIES (Continued)


Comprehensive Income:


Loss Contingencies:


Restrictions on Cash:


Dividend Restriction:


Fair Value of Financial Instruments:


Reclassifications:


NOTE 2  SECURITIES




|     |                                    |                       |   |            |            |  |            |           |           |  |   |          |          |  
|---- | ---------------------------------- | --------------------- | - | ---------- | ---------- |  | ---------- | --------- | --------- |  | - | -------- | -------- | -
|     |                                    |                       |   | Gross      |            |  | Gross      |          
|     |                                    |                       |   | Unrealized |            |  | Unrealized |          
|     |                                    | Fair Value            |   |            | Gains      |  |            | Losses    |          
|     |                                    |                       |   |            |            |  |            |           |          
|2005 |                                    |                       |   |            |            |  |            |           |           |  |   |         
|     | U.S. Government and federal agency |                       | $ | 22,142,375 |            |  | $          | 26,624    |           |  | $ | (282,131 | )       
|     | State and municipal                |                       |   | 2,075,355  |            |  |            | 36,699    |           |  |   | (1,929   | )       
|     | Corporate bond and notes           |                       |   | 30,722,919 |            |  |            | 192,861   |           |  |   | (462,748 | )       
|     | Mortgage backed                    |                       |   | 4,898,030  |            |  |            | 4,599     |           |  |   | (75,230  | )       
|     |                                    |                       |   |            |            |  |            |           |          
|     |                                    | Total debt securities |   |            | 59,838,679 |  |            |           | 260,783   |  |   |          | (822,038 | )
|     | Equity securities                  |                       |   | 253,234    |            |  |            | 13,285    |           |  |   | (304     | )       
|     |                                    |                       |   |            |            |  |            |           |          
|     |                                    | Total                 |   | $          | 60,091,913 |  |            | $         | 274,068   |  |   | $        | (822,342 | )
|     |                                    |                       |   |            |            |  |            |           |          
|2004 |                                    |                       |   |            |            |  |            |           |           |  |   |         
|     | U.S. Government and federal agency |                       | $ | 17,759,114 |            |  | $          | 227,251   |           |  | $ | (30,080  | )       
|     | State and municipal                |                       |   | 2,991,040  |            |  |            | 129,113   |           |  |   |         |         
|     | Corporate bond and notes           |                       |   | 38,217,856 |            |  |            | 1,157,837 |           |  |   | (86,103  | )       
|     | Mortgage backed                    |                       |   | 641,653    |            |  |            | 11,196    |           |  |   | (222     | )       
|     |                                    |                       |   |            |            |  |            |           |          
|     |                                    | Total debt securities |   |            | 59,609,663 |  |            |           | 1,525,397 |  |   |          | (116,405 | )
|     | Equity securities                  |                       |   | 852,319    |            |  |            | 66,422    |           |  |   |         |         
|     |                                    |                       |   |            |            |  |            |           |          
|     |                                    | Total                 |   | $          | 60,461,982 |  |            | $         | 1,591,819 |  |   | $        | (116,405 | )
|     |                                    |                       |   |            |            |  |            |           |          








34



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003




NOTE 2  SECURITIES (Continued)




|     |                     |          |   |            |              |  |       |              |  |  |            |         |   |  |   |            | 
|---- | ------------------- | -------- | - | ---------- | ------------ |  | ----- | ------------ |  |  | ---------- | ------- | - |  | - | ---------- | 
|     |                     |          |   | Gross      |              |  | Gross |              |  | 
|     |                     | Carrying |   |            | Unrecognized |  |       | Unrecognized |  |  |           
|     |                     | Amount   |   |            | Gains        |  |       | Losses       |  |  | Fair Value |        
|     |                     |          |   |            |              |  |       |              |  |  |            |        
|2005 |                     |          |   |            |              |  |       |              |  |  |            |         |   |  |   |           
|     | State and municipal |          | $ | 16,917,133 |              |  | $     | 283,969      |  |  | $          | (86,082 | ) |  | $ | 17,115,020 | 
|     |                     |          |   |            |              |  |       |              |  |  |            |        
|2004 |                     |          |   |            |              |  |       |              |  |  |            |         |   |  |   |           
|     | State and municipal |          | $ | 15,865,047 |              |  | $     | 580,268      |  |  | $          | (546    | ) |  | $ | 16,444,769 | 
|     |                     |          |   |            |              |  |       |              |  |  |            |        



|                       |  |      |            |  |      |   |           |      |  |   |           | 
|---------------------- |  | ---- | ---------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                       |  | 2005 |            |  | 2004 |   |           | 2003 | 
|                       |  |      |            |  |      |   |           |      | 
|Proceeds               |  | $    | 18,664,328 |  |      | $ | 4,615,918 |      |  | $ | 2,071,143 | 
|Gross gains            |  |      | 355,169    |  |      |   | 459,992   |      |  |   | 234,331   | 
|Gross losses           |  |      | 254,268    |  |      |   | 27,077    |      |  |   | 162,041   | 
|Gross gains from calls |  |      | 8,134      |  |      |   |          |      |  |   |          | 





|                           |       |                    |            |            |                  |   |           |            |  |   |           |            | 
|-------------------------- | ----- | ------------------ | ---------- | ---------- | ---------------- | - | --------- | ---------- |  | - | --------- | ---------- | 
|                           |       | Available for Sale |            |            | Held to Maturity |  
|                           |       |                    |            |            |                  |  
|                           |       |                    |            | Carrying   |                  |   |          
|                           |       | Fair Value         |            |            | Amount           |   |           | Fair Value | 
|                           |       |                    |            |            |                  |   |           |            | 
|Due in one year or less    |       | $                  | 3,245,264  |            |                  | $ | 439,467   |            |  | $ | 442,829   |           
|Due from one to five years |       |                    | 26,296,844 |            |                  |   | 2,589,674 |            |  |   | 2,646,447 |           
|Due from five to ten years |       |                    | 23,828,072 |            |                  |   | 8,534,455 |            |  |   | 8,541,947 |           
|Due after ten years        |       |                    | 6,468,498  |            |                  |   | 5,353,537 |            |  |   | 5,483,797 |           
|                           |       |                    |            |            |                  |   |           |            | 
|                           | Total |                    | $          | 59,838,679 |                  |   | $         | 16,917,133 |  |   | $         | 17,115,020 | 
|                           |       |                    |            |            |                  |   |           |            | 








35



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003




NOTE 2  SECURITIES (Continued)




|                                    |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |   |            |  |  |   |          |  
|----------------------------------- |  | ------------------- | ---------- | ---------- | ----------------- | - | -------- | ---------- | ---------- | - | --------- |  |  | ---------- | -------- | - | ---- | - | ---------- |  |  | - | -------- | -
|                                    |  | Less than 12 Months |            |            | 12 Months or More |   |          | Total      |           
|                                    |  |                     |            |            |                   |   |          |            |           
|                                    |  |                     |            | Unrealized |                   |   |          |            | Unrealized |   |           |  |  | Unrealized |         
|Description of Securities           |  | Fair Value          |            |            | Loss              |   |          | Fair Value |            |   | Loss      |  |  | Fair Value |          |   | Loss |  
|                                    |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |  
|2005                                |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |   |            |  |  |   |          |  
|Available for sale:                 |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |   |            |  |  |   |          |  
|U. S. government and federal agency |  | $                   | 14,248,615 |            |                   | $ | (161,125 | )          |            | $ | 3,870,640 |  |  | $          | (121,006 | ) |      | $ | 18,119,255 |  |  | $ | (282,131 | )
|State and municipal                 |  |                     | 257,816    |            |                   |   | (1,929   | )          |            |   |          |  |  |            |         |   |      |   | 257,816    |  |  |   | (1,929   | )
|Corporate bonds and notes           |  |                     | 17,490,220 |            |                   |   | (342,931 | )          |            |   | 4,091,557 |  |  |            | (119,817 | ) |      |   | 21,581,777 |  |  |   | (462,748 | )
|Mortgage backed                     |  |                     | 4,503,875  |            |                   |   | (75,230  | )          |            |   |          |  |  |            |         |   |      |   | 4,503,875  |  |  |   | (75,230  | )
|Equity Securities                   |  |                     | 216,546    |            |                   |   | (304     | )          |            |   |          |  |  |            |         |   |      |   | 216,546    |  |  |   | (304     | )
|                                    |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |  
|Total temporarily impaired          |  | $                   | 36,717,072 |            |                   | $ | (581,519 | )          |            | $ | 7,962,197 |  |  | $          | (240,823 | ) |      | $ | 44,679,269 |  |  | $ | (822,342 | )
|                                    |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |  
|Held to maturity:                   |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |   |            |  |  |   |          |  
|State and municipal                 |  | $                   | 6,505,193  |            |                   | $ | (82,865  | )          |            | $ | 312,918   |  |  | $          | (3,217   | ) |      | $ | 6,818,111  |  |  | $ | (86,082  | )
|                                    |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |  
|2004                                |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |   |            |  |  |   |          |  
|Available for sale:                 |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |   |            |  |  |   |          |  
|U. S. government and federal agency |  | $                   | 4,980,313  |            |                   | $ | (30,080  | )          |            | $ |          |  |  | $          |         |   |      | $ | 4,980,313  |  |  | $ | (30,080  | )
|Corporate bonds and notes           |  |                     | 9,094,417  |            |                   |   | (77,876  | )          |            |   | 494,063   |  |  |            | (8,227   | ) |      |   | 9,588,480  |  |  |   | (86,103  | )
|Mortgage backed                     |  |                     | 82,007     |            |                   |   | (222     | )          |            |   |          |  |  |            |         |   |      |   | 82,007     |  |  |   | (222     | )
|                                    |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |  
|Total temporarily impaired          |  | $                   | 14,156,737 |            |                   | $ | (108,178 | )          |            | $ | 494,063   |  |  | $          | (8,227   | ) |      | $ | 14,650,800 |  |  | $ | (116,405 | )
|                                    |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |  
|Held to maturity:                   |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |   |            |  |  |   |          |  
|State and municipal                 |  | $                   | 315,051    |            |                   | $ | (546     | )          |            | $ |          |  |  | $          |         |   |      | $ | 315,051    |  |  | $ | (546     | )
|                                    |  |                     |            |            |                   |   |          |            |            |   |           |  |  |            |          |   |      |  












36



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003


NOTE 3  LOANS




|                               |                              |       |             |            |             |  |             |            |             | 
|------------------------------ | ---------------------------- | ----- | ----------- | ---------- | ----------- |  | ----------- | ---------- | ----------- | 
|                               |                              | 2005  |             |            | 2004        | 
|                               |                              |       |             |            |             | 
|Collateralized by real estate: |                              |       |             |            |             |  |             |           
|                               | Commercial                   |       | $           | 47,638,035 |             |  | $           | 47,080,983 |            
|                               | Residential                  |       |             | 91,591,798 |             |  |             | 97,694,011 |            
|                               | Home equity                  |       |             | 19,044,581 |             |  |             | 18,272,212 |            
|                               | Construction                 |       |             | 6,440,000  |             |  |             | 6,326,884  |            
|                               |                              |       |             |            |             | 
|                               |                              |       | 164,714,414 |            |             |  | 169,374,090 |           
|Other:                         |                              |       |             |            |             |  |             |           
|                               | Consumer                     |       |             | 6,205,096  |             |  |             | 5,385,953  |            
|                               | Commercial                   |       |             | 20,045,739 |             |  |             | 21,196,523 |            
|                               | Credit cards                 |       |             | 1,405,708  |             |  |             | 1,361,726  |            
|                               | Other                        |       |             | 1,565,995  |             |  |             | 1,675,030  |            
|                               |                              |       |             |            |             | 
|                               |                              |       | 193,936,952 |            |             |  | 198,993,322 |           
|                               | Unearned and deferred income |       |             | (495,705   | )           |  |             | (505,428   | )          
|                               | Allowance for loan losses    |       |             | (1,902,828 | )           |  |             | (1,763,298 | )          
|                               |                              |       |             |            |             | 
|                               |                              | Total |             | $          | 191,538,419 |  |             | $          | 196,724,596 | 
|                               |                              |       |             |            |             | 



|                          |  |      |           |   |      |   |           |      |  |   |           |  
|------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                          |  | 2005 |           |   | 2004 |   |           | 2003 | 
|                          |  |      |           |   |      |   |           |      | 
|Beginning balance         |  | $    | 1,763,298 |   |      | $ | 1,603,568 |      |  | $ | 1,604,200 |  
|Provision for loan losses |  |      | 159,233   |   |      |   | 177,500   |      |  |   | 245,000   |  
|Loans charged-off         |  |      | (57,594   | ) |      |   | (68,762   | )    |  |   | (267,485  | )
|Recoveries                |  |      | 37,891    |   |      |   | 50,992    |      |  |   | 21,853    |  
|                          |  |      |           |   |      |   |           |      | 
|Ending balance            |  | $    | 1,902,828 |   |      | $ | 1,763,298 |      |  | $ | 1,603,568 |  
|                          |  |      |           |   |      |   |           |      | 



|                                                           |  |      |           |  |      |   |         | 
|---------------------------------------------------------- |  | ---- | --------- |  | ---- | - | ------- | 
|                                                           |  | 2005 |           |  | 2004 |  
|                                                           |  |      |           |  |      |  
|Year-end loans with no allocated allowance for loan losses |  | $    |          |  |      | $ | 125,502 | 
|Year-end loans with allocated allowance for loan losses    |  |      | 1,177,688 |  |      |   | 597,615 | 
|Amount of the allowance for loan losses allocated          |  |      | 273,438   |  |      |   | 256,060 | 

|                                             |  |      |         |  |      |   |         |      |  |   |         | 
|-------------------------------------------- |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                                             |  | 2005 |         |  | 2004 |   |         | 2003 | 
|                                             |  |      |         |  |      |   |         |      | 
|Average of impaired loans during the year    |  | $    | 366,164 |  |      | $ | 395,646 |      |  | $ | 837,670 | 
|Interest income recognized during impairment |  |      |        |  |      |   | 190     |      |  |   | 362     | 
|Cash-basis interest income recognized        |  |      |        |  |      |   | 190     |      |  |   | 362     | 










37



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003


NOTE 4  PREMISES AND EQUIPMENT




|                                  |  |      |            |   |      |   |            |  
|--------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                  |  | 2005 |            |   | 2004 |  
|                                  |  |      |            |   |      |  
|Land                              |  | $    | 1,666,971  |   |      | $ | 1,114,306  |  
|Buildings                         |  |      | 5,687,712  |   |      |   | 5,448,017  |  
|Furniture, fixtures and equipment |  |      | 4,731,095  |   |      |   | 4,598,765  |  
|                                  |  |      |            |   |      |  
|                                  |  |      | 12,085,778 |   |      |   | 11,161,088 |  
|Less: Accumulated depreciation    |  |      | (6,884,567 | ) |      |   | (6,794,308 | )
|                                  |  |      |            |   |      |  
|                                  |  | $    | 5,201,211  |   |      | $ | 4,366,780  |  
|                                  |  |      |            |   |      |  








NOTE 5  INTANGIBLE ASSETS






|                             |                                   |          |   |           |              |  |       |          |           |  |              |           |           |  |   |         |           | 
|---------------------------- | --------------------------------- | -------- | - | --------- | ------------ |  | ----- | -------- | --------- |  | ------------ | --------- | --------- |  | - | ------- | --------- | 
|                             |                                   | 2005     |   |           | 2004         | 
|                             |                                   |          |   |           |              | 
|                             |                                   | Gross    |   |           |              |  | Gross |          |           | 
|                             |                                   | Carrying |   |           | Accumulated  |  |       | Carrying |           |  | Accumulated  |          
|                             |                                   | Amount   |   |           | Amortization |  |       | Amount   |           |  | Amortization |          
|                             |                                   |          |   |           |              |  |       |          |           |  |              |          
|Amortized intangible assets: |                                   |          |   |           |              |  |       |          |           |  |              |           |           |  |   |        
|                             | Core deposit intangibles          |          | $ | 1,063,104 |              |  | $     | 457,466  |           |  | $            | 1,063,104 |           |  | $ | 340,857 |          
|                             | Customer relationship intangibles |          |   | 728,266   |              |  |       | 312,114  |           |  |              | 728,266   |           |  |   | 208,076 |          
|                             | Branch acquisition intangible     |          |   | 759,338   |              |  |       | 644,515  |           |  |              | 759,338   |           |  |   | 615,198 |          
|                             |                                   |          |   |           |              |  |       |          |           |  |              |          
|                             |                                   | Total    |   | $         | 2,550,708    |  |       | $        | 1,414,095 |  |              | $         | 2,550,708 |  |   | $       | 1,164,131 | 
|                             |                                   |          |   |           |              |  |       |          |           |  |              |          





|     |  |   |         | 
|---- |  | - | ------- | 
|2006 |  | $ | 245,978 | 
|2007 |  |   | 237,008 | 
|2008 |  |   | 231,360 | 
|2009 |  |   | 224,928 | 
|2010 |  |   | 90,032  | 








38



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003


NOTE 6  DEPOSITS




|                            |  |      |             |  |      |   |             | 
|--------------------------- |  | ---- | ----------- |  | ---- | - | ----------- | 
|                            |  | 2005 |             |  | 2004 |  
|                            |  |      |             |  |      |  
|Demand, noninterest-bearing |  | $    | 47,143,340  |  |      | $ | 47,569,690  | 
|Demand, interest-bearing    |  |      | 50,023,917  |  |      |   | 40,775,013  | 
|Savings                     |  |      | 74,048,596  |  |      |   | 88,543,284  | 
|Time, $100,000 and over     |  |      | 12,403,627  |  |      |   | 10,395,125  | 
|Time, other                 |  |      | 65,868,341  |  |      |   | 61,239,364  | 
|                            |  |      |             |  |      |  
|                            |  | $    | 249,487,821 |  |      | $ | 248,522,476 | 
|                            |  |      |             |  |      |  



|                    |  |   |            | 
|------------------- |  | - | ---------- | 
|2006                |  | $ | 49,122,067 | 
|2007                |  |   | 20,403,215 | 
|2008                |  |   | 7,169,476  | 
|2009                |  |   | 1,396,075  | 
|2010 and thereafter |  |   | 181,135    | 
|                    |  |   |           
|                    |  | $ | 78,271,968 | 
|                    |  |   |           

NOTE 7  FEDERAL HOME LOAN BANK ADVANCES




|                                                                                                                                                |       |      |            |            |      |   |            |            | 
|----------------------------------------------------------------------------------------------------------------------------------------------- | ----- | ---- | ---------- | ---------- | ---- | - | ---------- | ---------- | 
|                                                                                                                                                |       | 2005 |            |            | 2004 |  
|                                                                                                                                                |       |      |            |            |      |  
|Maturity in 2010, fixed rate at 6.26%, convertible to variable
    rate if 3-month LIBOR is at or above predetermined conversion
    rate level |       | $    | 1,000,000  |            |      | $ | 1,000,000  |           
|Maturities in 2010 and 2011, fixed rate at 4.60% to 5.79%,
    convertible to variable if 1-month LIBOR is at or above fixed
    rate           |       |      | 16,000,000 |            |      |   | 16,000,000 |           
|                                                                                                                                                |       |      |            |            |      |  
|                                                                                                                                                | Total |      | $          | 17,000,000 |      |   | $          | 17,000,000 | 
|                                                                                                                                                |       |      |            |            |      |  





|     |  |               |  |   |            | 
|---- |  | ------------- |  | - | ---------- | 
|     |  | Rate          |  |  
|     |  |               |  |  
|2010 |  | 5.00 to 6.26% |  | $ | 11,000,000 | 
|2011 |  | 4.60 to 5.12% |  |   | 6,000,000  | 
|     |  |               |  |   |           
|     |  |               |  | $ | 17,000,000 | 
|     |  |               |  |   |           








39



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003


NOTE 8  REPURCHASE AGREEMENTS




|                                          |  |      |           |   |      |   |           |  
|----------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                          |  | 2005 |           |   | 2004 |  
|                                          |  |      |           |   |      |  
|Average balance during the year           |  | $    | 4,100,383 |   |      | $ | 3,140,013 |  
|Average interest rate during the year     |  |      | 1.88      | % |      |   | 0.36      | %
|Maximum month-end balance during the year |  |      | 8,918,122 |   |      |   | 4,847,337 |  
|Weighted average rate at year-end         |  |      | 2.54      | % |      |   | 0.69      | %

NOTE 9  BENEFIT PLANS








NOTE 10  INCOME TAXES




|                     |                                    |       |   |         |           |  |   |         |         | 
|-------------------- | ---------------------------------- | ----- | - | ------- | --------- |  | - | ------- | ------- | 
|                     |                                    | 2005  |   |         | 2004      | 
|                     |                                    |       |   |         |           | 
|Deferred tax assets: |                                    |       |   |         |           |  |   |        
|                     | Bad debts                          |       | $ | 486,832 |           |  | $ | 439,392 |        
|                     | Deferred loan fees                 |       |   | 168,540 |           |  |   | 169,132 |        
|                     | Core deposit intangibles           |       |   | 28,372  |           |  |   | 35,616  |        
|                     | Deferred compensation              |       |   | 319,066 |           |  |   | 248,315 |        
|                     | Investment in financial stock fund |       |   |        |           |  |   | 2,591   |        
|                     | Non-accrual loan interest income   |       |   | 46,586  |           |  |   |        |        
|                     | Unrealized security losses, net    |       |   | 186,413 |           |  |   |        |        
|                     | Other                              |       |   | 261     |           |  |   | 37      |        
|                     |                                    |       |   |         |           | 
|                     |                                    | Total |   |         | 1,236,070 |  |   |         | 895,083 | 
|                     |                                    |       |   |         |           | 








40



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003




NOTE 10  INCOME TAXES (Continued)


|                             |                                        |       |         |         |           |   |            |         |           | 
|---------------------------- | -------------------------------------- | ----- | ------- | ------- | --------- | - | ---------- | ------- | --------- | 
|                             |                                        | 2005  |         |         | 2004      |  
|                             |                                        |       |         |         |           |  
|Deferred tax liabilities:    |                                        |       |         |         |           |   |            |        
|                             | Securities accretion                   |       |         | 47,255  |           |   |            | 51,227  |          
|                             | Depreciation                           |       |         | 224,735 |           |   |            | 246,889 |          
|                             | Federal Home Loan Bank stock dividends |       |         | 463,658 |           |   |            | 426,530 |          
|                             | Prepaid expenses                       |       |         | 21,100  |           |   |            | 32,069  |          
|                             | Mortgage servicing rights              |       |         | 28,757  |           |   |            | 8,598   |          
|                             | Partnership income                     |       |         | 1,659   |           |   |            |        |          
|                             | Purchase accounting adjustments        |       |         | 539,450 |           |   |            | 646,226 |          
|                             | Unrealized securities gains, net       |       |         |        |           |   |            | 501,640 |          
|                             |                                        |       |         |         |           |  
|                             |                                        | Total |         |         | 1,326,614 |   |            |         | 1,913,179 | 
|                             |                                        |       |         |         |           |  
|Net deferred tax (liability) |                                        | $     | (90,544 | )       |           | $ | (1,018,096 | )      
|                             |                                        |       |         |         |           |  





|                  |       |      |          |         |      |   |           |         |  |   |          |         | 
|----------------- | ----- | ---- | -------- | ------- | ---- | - | --------- | ------- |  | - | -------- | ------- | 
|                  |       | 2005 |          |         | 2004 |   |           | 2003    | 
|                  |       |      |          |         |      |   |           |         | 
|Currently payable |       | $    | 742,847  |         |      | $ | 1,001,636 |         |  | $ | 961,331  |        
|Deferred          |       |      | (239,499 | )       |      |   | (126,348  | )       |  |   | (154,585 | )      
|                  |       |      |          |         |      |   |           |         | 
|                  | Total |      | $        | 503,348 |      |   | $         | 875,288 |  |   | $        | 806,746 | 
|                  |       |      |          |         |      |   |           |         | 



|                              |  |                          |     |   |        |   |          |      |  |  |        |   |  |      |           |   |        |  |     |   |  |   |           |  
|----------------------------- |  | ------------------------ | --- | - | ------ | - | -------- | ---- |  |  | ------ | - |  | ---- | --------- | - | ------ |  | --- | - |  | - | --------- | -
|                              |  | Years Ended December 31, |    
|                              |  |                          |    
|                              |  | 2005                     |     |   | 2004   |   |          | 2003 | 
|                              |  |                          |     |   |        |   |          |      | 
|                              |  | Rate                     |     |   | Amount |   |          | Rate |  |  | Amount |   |  | Rate |           |   | Amount | 
|                              |  |                          |     |   |        |   |          |      |  |  |        |   |  |      |           |   |        | 
|Tax at federal statutory rate |  |                          | 34  | % |        | $ | 885,074  |      |  |  | 34     | % |  | $    | 1,287,250 |   |        |  | 34  | % |  | $ | 1,173,101 |  
|Tax-exempt income             |  |                          | (11 | ) |        |   | (294,635 | )    |  |  | (9     | ) |  |      | (319,108  | ) |        |  | (10 | ) |  |   | (331,423  | )
|Other                         |  |                          | (3  | ) |        |   | (87,091  | )    |  |  | (2     | ) |  |      | (92,854   | ) |        |  | (1  | ) |  |   | (34,932   | )
|                              |  |                          |     |   |        |   |          |      |  |  |        |   |  |      |           |   |        | 
|Income tax expense            |  |                          | 20  | % |        | $ | 503,348  |      |  |  | 23     | % |  | $    | 875,288   |   |        |  | 23  | % |  | $ | 806,746   |  
|                              |  |                          |     |   |        |   |          |      |  |  |        |   |  |      |           |   |        | 








41



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003


NOTE 11  RELATED PARTY TRANSACTIONS




|                  |  |   |            |  
|----------------- |  | - | ---------- | -
|Beginning balance |  | $ | 4,359,337  |  
|New loans         |  |   | 847,094    |  
|Repayments        |  |   | (1,477,139 | )
|                  |  |   |           
|Ending balance    |  | $ | 3,729,292  |  
|                  |  |   |           





NOTE 12  REGULATORY MATTERS








|                                       |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       |  |   |        |  |  |  |       |  
|-------------------------------------- | ------------ | ---------------------- | - | -------- | -------- | ----------- | ----------------- | ----------------- | ----------------- |  | ----- | ------ |  | ------ |  | ---- | ----- |  | - | ------ |  |  |  | ----- | -
|                                       |              |                        |   |          |          |             |                   | To Be Well        |                  
|                                       |              |                        |   |          |          | For Capital |                   |                   | Capitalized Under | 
|                                       |              |                        |   | Adequacy |          |             | Prompt Corrective |                  
|                                       |              | Actual                 |   |          | Purposes |             |                   | Action Provisions |                  
|                                       |              |                        |   |          |          |             |                   |                   |                  
|                                       |              | Amount                 |   |          | Ratio    |             |                   | Amount            |                   |  | Ratio |        |  | Amount |  |      | Ratio | 
|                                       |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       | 
|                                       |              | (Dollars in thousands) |  
|2005                                   |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|Total capital to risk-weighted assets  |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                       | Consolidated |                        | $ | 31,051   |          |             |                   | 14.45             | %                 |  | $     | 17,187 |  |        |  | 8.00 | %     |  | $ | 21,483 |  |  |  | N/A   |  
|                                       | Bank         |                        |   | 29,261   |          |             |                   | 13.62             |                   |  |       | 17,184 |  |        |  | 8.00 |       |  |   | 21,480 |  |  |  | 10.00 | %
|Tier 1 capital to risk-weighted assets |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                       | Consolidated |                        |   | 29,148   |          |             |                   | 13.57             |                   |  |       | 8,593  |  |        |  | 4.00 |       |  |   | 12,890 |  |  |  | N/A   |  
|                                       | Bank         |                        |   | 27,358   |          |             |                   | 12.74             |                   |  |       | 8,592  |  |        |  | 4.00 |       |  |   | 12,888 |  |  |  | 6.00  |  
|Tier 1 capital to average assets       |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                       | Consolidated |                        |   | 29,148   |          |             |                   | 9.76              |                   |  |       | 11,943 |  |        |  | 4.00 |       |  |   | 14,929 |  |  |  | N/A   |  
|                                       | Bank         |                        |   | 27,358   |          |             |                   | 9.16              |                   |  |       | 11,941 |  |        |  | 4.00 |       |  |   | 14,927 |  |  |  | 5.00  |  








42



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003






NOTE 12  REGULATORY MATTERS (Continued)


|                                       |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       |  |   |        |  |  |  |       |  
|-------------------------------------- | ------------ | ---------------------- | - | -------- | -------- | ----------- | ----------------- | ----------------- | ----------------- |  | ----- | ------ |  | ------ |  | ---- | ----- |  | - | ------ |  |  |  | ----- | -
|                                       |              |                        |   |          |          |             |                   | To Be Well        |                  
|                                       |              |                        |   |          |          | For Capital |                   |                   | Capitalized Under | 
|                                       |              |                        |   | Adequacy |          |             | Prompt Corrective |                  
|                                       |              | Actual                 |   |          | Purposes |             |                   | Action Provisions |                  
|                                       |              |                        |   |          |          |             |                   |                   |                  
|                                       |              | Amount                 |   |          | Ratio    |             |                   | Amount            |                   |  | Ratio |        |  | Amount |  |      | Ratio | 
|                                       |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       | 
|                                       |              | (Dollars in thousands) |  
|2004                                   |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|Total capital to risk-weighted assets  |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                       | Consolidated |                        | $ | 30,029   |          |             |                   | 13.73             | %                 |  | $     | 17,496 |  |        |  | 8.00 | %     |  | $ | 21,870 |  |  |  | N/A   |  
|                                       | Bank         |                        |   | 28,776   |          |             |                   | 13.19             |                   |  |       | 17,452 |  |        |  | 8.00 |       |  |   | 21,815 |  |  |  | 10.00 | %
|Tier 1 capital to risk-weighted assets |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                       | Consolidated |                        |   | 28,236   |          |             |                   | 12.91             |                   |  |       | 8,748  |  |        |  | 4.00 |       |  |   | 13,122 |  |  |  | N/A   |  
|                                       | Bank         |                        |   | 27,001   |          |             |                   | 12.38             |                   |  |       | 8,726  |  |        |  | 4.00 |       |  |   | 13,089 |  |  |  | 6.00  |  
|Tier 1 capital to average assets       |              |                        |   |          |          |             |                   |                   |                   |  |       |        |  |        |  |      |       |  |   |        |  |  |  |      
|                                       | Consolidated |                        |   | 28,236   |          |             |                   | 9.41              |                   |  |       | 12,008 |  |        |  | 4.00 |       |  |   | 15,010 |  |  |  | N/A   |  
|                                       | Bank         |                        |   | 27,001   |          |             |                   | 9.01              |                   |  |       | 11,984 |  |        |  | 4.00 |       |  |   | 14,981 |  |  |  | 5.00  |  

Dividend Restrictions


NOTE 13  LOAN COMMITMENTS AND RELATED
ACTIVITIES






|                       |  |      |            |  |      |   |            | 
|---------------------- |  | ---- | ---------- |  | ---- | - | ---------- | 
|                       |  | 2005 |            |  | 2004 |  
|                       |  |      |            |  |      |  
|Unused lines of credit |  | $    | 51,155,300 |  |      | $ | 46,062,900 | 
|Letters of credit      |  |      | 499,400    |  |      |   | 436,000    | 










43



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003


NOTE 14  FAIR VALUES OF FINANCIAL INSTRUMENTS




|                      |                                 |          |   |              |       |  |   |              |   |  |       |              |   |  |   |              |  
|--------------------- | ------------------------------- | -------- | - | ------------ | ----- |  | - | ------------ | - |  | ----- | ------------ | - |  | - | ------------ | -
|                      |                                 | 2005     |   |              | 2004  | 
|                      |                                 |          |   |              |       | 
|                      |                                 | Carrying |   |              | Fair  |  |   | Carrying     |   |  | Fair  |             
|                      |                                 | Amount   |   |              | Value |  |   | Amount       |   |  | Value |             
|                      |                                 |          |   |              |       |  |   |              |   |  |       |             
|Financial assets      |                                 |          |   |              |       |  |   |              |   |  |       |              |   |  |   |             
|                      | Cash and cash equivalents       |          | $ | 19,765,160   |       |  | $ | 19,765,000   |   |  | $     | 17,826,454   |   |  | $ | 17,826,000   |  
|                      | Securities available for sale   |          |   | 60,091,913   |       |  |   | 60,092,000   |   |  |       | 60,461,982   |   |  |   | 60,462,000   |  
|                      | Securities held to maturity     |          |   | 16,917,133   |       |  |   | 17,115,000   |   |  |       | 15,865,047   |   |  |   | 16,445,000   |  
|                      | Federal bank stock              |          |   | 2,987,050    |       |  |   | 2,987,000    |   |  |       | 2,877,850    |   |  |   | 2,878,000    |  
|                      | Loans, net                      |          |   | 191,538,419  |       |  |   | 191,599,000  |   |  |       | 196,724,596  |   |  |   | 197,410,000  |  
|                      | Loans held for sale             |          |   |             |       |  |   |             |   |  |       | 57,000       |   |  |   | 57,000       |  
|                      | Accrued interest receivable     |          |   | 1,621,306    |       |  |   | 1,621,000    |   |  |       | 1,615,798    |   |  |   | 1,616,000    |  
|Financial liabilities |                                 |          |   |              |       |  |   |              |   |  |       |              |   |  |   |             
|                      | Deposit                         |          |   | (249,487,821 | )     |  |   | (248,655,000 | ) |  |       | (248,522,476 | ) |  |   | (248,184,000 | )
|                      | Short-term borrowings           |          |   | (2,952,284   | )     |  |   | (2,952,000   | ) |  |       | (4,679,242   | ) |  |   | (4,679,000   | )
|                      | Federal Home Loan Bank advances |          |   | (17,000,000  | )     |  |   | (17,531,000  | ) |  |       | (17,000,000  | ) |  |   | (18,153,000  | )
|                      | Accrued interest payable        |          |   | (704,306     | )     |  |   | (704,000     | ) |  |       | (445,036     | ) |  |   | (445,000     | )







|          |                                  
|--------- | ---------------------------------
|NOTE 15  | OTHER COMPREHENSIVE INCOME (LOSS)



|                                                                     |  |      |            |   |      |   |            |      |  |   |          |  
|-------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                                     |  | 2005 |            |   | 2004 |   |            | 2003 | 
|                                                                     |  |      |            |   |      |   |            |      | 
|Unrealized holding gains (loss) on available-for-sale
    securities |  | $    | (1,914,653 | ) |      | $ | (1,132,412 | )    |  | $ | 477,045  |  
|Reclassification adjustment for gains later recognized in income     |  |      | (109,035   | ) |      |   | (432,915   | )    |  |   | (72,290  | )
|                                                                     |  |      |            |   |      |   |            |      | 
|Net unrealized gains (loss)                                          |  |      | (2,023,688 | ) |      |   | (1,565,327 | )    |  |   | 404,755  |  
|Tax effect                                                           |  |      | 688,054    |   |      |   | 532,211    |      |  |   | (137,617 | )
|                                                                     |  |      |            |   |      |   |            |      | 
|Other comprehensive income (loss)                                    |  | $    | (1,335,634 | ) |      | $ | (1,033,116 | )    |  | $ | 267,138  |  
|                                                                     |  |      |            |   |      |   |            |      | 








44



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003


NOTE 16  PARENT COMPANY ONLY CONDENSED FINANCIAL
INFORMATION




BALANCE SHEETS


|                                     |                               |                                            |   |            |            |  |   |            |            | 
|------------------------------------ | ----------------------------- | ------------------------------------------ | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                     |                               | December 31,                               |  
|                                     |                               |                                            |  
|                                     |                               | 2005                                       |   |            | 2004       | 
|                                     |                               |                                            |   |            |            | 
|Assets                              
|                                     | Cash                          |                                            | $ | 2,118,481  |            |  | $ | 1,023,529  |           
|                                     | Investment in Bank subsidiary |                                            |   | 32,855,390 |            |  |   | 34,057,410 |           
|                                     | Securities available for sale |                                            |   | 36,689     |            |  |   | 608,233    |           
|                                     | Other assets                  |                                            |   | 383        |            |  |   |           |           
|                                     |                               |                                            |   |            |            | 
|                                     |                               | Total assets                               |   | $          | 35,010,943 |  |   | $          | 35,689,172 | 
|                                     |                               |                                            |   |            |            | 
|Liabilities and shareholders equity
|                                     | Dividends payable             |                                            | $ | 357,518    |            |  | $ | 357,518    |           
|                                     | Other liabilities             |                                            |   |           |            |  |   | 12,333     |           
|                                     | Shareholders equity          |                                            |   | 34,653,425 |            |  |   | 35,319,321 |           
|                                     |                               |                                            |   |            |            | 
|                                     |                               | Total liabilities and shareholders equity |   | $          | 35,010,943 |  |   | $          | 35,689,172 | 
|                                     |                               |                                            |   |            |            | 

STATEMENTS OF INCOME


|                                                      |                                |                          |         |           |           |  |           |           |           |  |           |           |         | 
|----------------------------------------------------- | ------------------------------ | ------------------------ | ------- | --------- | --------- |  | --------- | --------- | --------- |  | --------- | --------- | ------- | 
|                                                      |                                | Years ended December 31, |        
|                                                      |                                |                          |        
|                                                      |                                | 2005                     |         |           | 2004      |  |           | 2003      |          
|                                                      |                                |                          |         |           |           |  |           |           |          
|Income                                                |                                |                          |         |           |           |  |           |           |           |  |           |          
|                                                      | Dividends from Bank subsidiary |                          | $       | 2,000,000 |           |  | $         | 1,500,000 |           |  | $         |          |        
|                                                      | Other dividends                |                          |         |          |           |  |           | 24,046    |           |  |           | 25,210    |        
|                                                      | Securities gains (loss), net   |                          |         | (768      | )         |  |           | 19,909    |           |  |           | 110,607   |        
|                                                      |                                |                          |         |           |           |  |           |           |          
|                                                      |                                | Total income             |         |           | 1,999,232 |  |           |           | 1,543,955 |  |           |           | 135,817 | 
|Expenses                                              |                                |                          |         |           |           |  |           |           |           |  |           |          
|                                                      | Miscellaneous expense          |                          |         | (16,119   | )         |  |           | (33,965   | )         |  |           | (30,049   | )      
|Undistributed equity in net income of Bank subsidiary |                                |                          | 116,697 |           |           |  | 1,400,750 |           |           |  | 2,537,783 |          
|                                                      |                                |                          |         |           |           |  |           |           |          
|                                                      | Net income                     |                          | $       | 2,099,810 |           |  | $         | 2,910,740 |           |  | $         | 2,643,551 |        
|                                                      |                                |                          |         |           |           |  |           |           |          








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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004 and 2003




NOTE 16  PARENT COMPANY ONLY CONDENSED
FINANCIAL INFORMATION (Continued)


STATEMENTS OF CASH FLOWS


|                                     |                                                                                |                                                       |                                    |            |            |           |           |            |            |           |         |            |            |        |  
|------------------------------------ | ------------------------------------------------------------------------------ | ----------------------------------------------------- | ---------------------------------- | ---------- | ---------- | --------- | --------- | ---------- | ---------- | --------- | ------- | ---------- | ---------- | ------ | -
|                                     |                                                                                | Years ended December 31,                              |                                   
|                                     |                                                                                |                                                       |                                   
|                                     |                                                                                | 2005                                                  |                                    |            | 2004       |           |           | 2003       |           
|                                     |                                                                                |                                                       |                                    |            |            |           |           |            |           
|Cash flows from operating activities |                                                                                |                                                       |                                    |            |            |           |           |            |            |           |         |           
|                                     | Net income                                                                     |                                                       | $                                  | 2,099,810  |            |           | $         | 2,910,740  |            |           | $       | 2,643,551  |           
|                                     | Adjustments to reconcile net income to net cash from operating
    activities: |                                                       |                                    |            |            |           |           |            |            |           |         |            |           
|                                     |                                                                                | Equity in undistributed net income of Bank subsidiary |                                    |            | (116,697   | )         |           |            | (1,400,750 | )         |         |            | (2,537,783 | )     
|                                     |                                                                                | Net security (gains) loss                             |                                    |            | 768        |           |           |            | (19,909    | )         |         |            | (110,607   | )     
|                                     |                                                                                | Change in other assets and liabilities                |                                    |            | (4,003     | )         |           |            | (899       | )         |         |            |           |       
|                                     |                                                                                |                                                       |                                    |            |            |           |           |            |           
|                                     |                                                                                |                                                       | Net cash from operating activities |            |            | 1,979,878 |           |            |            | 1,489,182 |         |            |            | (4,839 | )
|Cash flows from investing activities |                                                                                |                                                       |                                    |            |            |           |           |            |            |           |         |           
|                                     | Sales of securities                                                            |                                                       |                                    | 537,982    |            |           |           | 93,953     |            |           |         | 1,459,269  |           
|                                     | Return of capital on investment security                                       |                                                       |                                    | 7,164      |            |           |           |           |            |           |         |           |           
|                                     |                                                                                |                                                       |                                    |            |            |           |           |            |           
|                                     |                                                                                | Net cash from investing activities                    |                                    |            | 545,146    |           |           |            | 93,953     |           |         |            | 1,459,269  |       
|Cash flows from financing activities |                                                                                |                                                       |                                    |            |            |           |           |            |            |           |         |           
|                                     | Dividends paid                                                                 |                                                       |                                    | (1,430,072 | )          |           |           | (1,340,693 | )          |           |         | (1,273,659 | )         
|                                     |                                                                                |                                                       |                                    |            |            |           |           |            |           
|                                     |                                                                                | Net cash from financing activities                    |                                    |            | (1,430,072 | )         |           |            | (1,340,693 | )         |         |            | (1,273,659 | )     
|                                     |                                                                                |                                                       |                                    |            |            |           |           |            |           
|Net increase (decrease) in cash      |                                                                                |                                                       | 1,094,952                          |            |            |           | 242,442   |            |            |           | 180,771 |           
|Cash, beginning of year              |                                                                                |                                                       | 1,023,529                          |            |            |           | 781,087   |            |            |           | 600,316 |           
|                                     |                                                                                |                                                       |                                    |            |            |           |           |            |           
|Cash, end of year                    |                                                                                | $                                                     | 2,118,481                          |            |            | $         | 1,023,529 |            |            | $         | 781,087 |           
|                                     |                                                                                |                                                       |                                    |            |            |           |           |            |           

NOTE 17  QUARTERLY FINANCIAL DATA (UNAUDITED)


|     |                |          |   |           |              |  |   |           |  |  |                    |         |  |  |   |      | 
|---- | -------------- | -------- | - | --------- | ------------ |  | - | --------- |  |  | ------------------ | ------- |  |  | - | ---- | 
|     |                | Interest |   |           | Net Interest |  |   | Net       |  |  | Basic and Diluted  |        
|     |                | Income   |   |           | Income       |  |   | Income    |  |  | Earnings per share |        
|     |                |          |   |           |              |  |   |           |  |  |                    |        
|2005 |                |          |   |           |              |  |   |           |  |  |                    |         |  |  |   |     
|     | First quarter  |          | $ | 3,828,291 |              |  | $ | 2,964,022 |  |  | $                  | 520,799 |  |  | $ | 0.23 | 
|     | Second quarter |          |   | 3,975,548 |              |  |   | 3,012,758 |  |  |                    | 431,939 |  |  |   | 0.19 | 
|     | Third quarter  |          |   | 4,035,644 |              |  |   | 2,958,723 |  |  |                    | 447,916 |  |  |   | 0.20 | 
|     | Fourth quarter |          |   | 4,235,712 |              |  |   | 3,011,303 |  |  |                    | 699,156 |  |  |   | 0.31 | 
|2004 |                |          |   |           |              |  |   |           |  |  |                    |         |  |  |   |     
|     | First quarter  |          | $ | 3,776,566 |              |  | $ | 3,005,542 |  |  | $                  | 829,998 |  |  | $ | 0.37 | 
|     | Second quarter |          |   | 3,786,272 |              |  |   | 2,925,382 |  |  |                    | 656,179 |  |  |   | 0.29 | 
|     | Third quarter  |          |   | 3,813,203 |              |  |   | 2,951,300 |  |  |                    | 593,893 |  |  |   | 0.27 | 
|     | Fourth quarter |          |   | 3,935,958 |              |  |   | 3,083,453 |  |  |                    | 830,670 |  |  |   | 0.37 | 










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REPORT OF INDEPENDENT REGISTERED


PUBLIC ACCOUNTING FIRM




























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PRICE RANGE OF COMMON STOCK




|               |  |      |       |  |     |   |       |                     |  |  |     | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | ------------------- |  |  | --- | 
|2005           |  | High |       |  | Low |   |       | Dividends Per Share | 
|               |  |      |       |  |     |   |       |                     | 
|First Quarter  |  | $    | 29.50 |  |     | $ | 27.30 |                     |  |  | .16 | 
|Second Quarter |  |      | 28.50 |  |     |   | 25.05 |                     |  |  | .16 | 
|Third Quarter  |  |      | 27.45 |  |     |   | 24.35 |                     |  |  | .16 | 
|Fourth Quarter |  |      | 24.50 |  |     |   | 22.25 |                     |  |  | .16 | 

|               |  |      |       |  |     |   |       |                     |  |  |     | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | ------------------- |  |  | --- | 
|2004           |  | High |       |  | Low |   |       | Dividends Per Share | 
|               |  |      |       |  |     |   |       |                     | 
|First Quarter  |  | $    | 24.60 |  |     | $ | 23.80 |                     |  |  | .15 | 
|Second Quarter |  |      | 26.40 |  |     |   | 24.25 |                     |  |  | .15 | 
|Third Quarter  |  |      | 26.40 |  |     |   | 24.07 |                     |  |  | .15 | 
|Fourth Quarter |  |      | 28.00 |  |     |   | 24.80 |                     |  |  | .16 | 

SHAREHOLDER INFORMATION


Corporate Office


National Bancshares Corporation


112 West Market Street, PO Box 57


Orrville, OH 44667


Stock Trading Information






Form 10-K




Shareholder Assistance










Transfer Agent












National Bancshares Corporation has a Dividend
Reinvestment Plan and a Dividend Direct Deposit Plan available
at no cost. Please contact Registrar and Transfer Company for
enrollment.







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OFFICERS


National Bancshares Corporation








First National Bank








CONTROL


OPERATIONS


HUMAN RESOURCES      INTERNAL AUDIT     RISK MANAGEMENT


LENDING                              SALES & BUSINESS 
 DEVELOPMENT                   OFFICE ADMINISTRATION





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