| UNITY HOLDINGS, INC.

AND SUBSIDIARY

CONSOLIDATED FINANCIAL REPORT

DECEMBER 31, 2008 |
|----------------------------------------------------------------------------------------|

----

March 31, 2009

Dear Valued Shareholder:

The tenth year of our existence brought with itmany challenges.  Our economy and our customers areexperiencing difficult times and that impacts the Company as well.  We'resuffering because our customers are hurting. Recent problems in the loanportfolio are larger than at any point in the history of the Bank.  Thetrickle-down effect of the problems on Wall Street and of a handful ofunmanageable big banks has touched the lives of nearly everyone in thecountry.  As a result, we are seeing our fair share of problem loans, likemost all other banks.  Given time, the normal self-correcting nature ofthe market should help resolve these issues.  The Bank has entered intoa written formal agreement with its primary regulator which outlines specificsteps needed to improve loan portfolio strength, preserve liquidity, andincrease capital levels to absorb losses.  Many of the processes prescribed bythe OCC were put in place months before the agreement was signed.  We believethe agreement echoes our ongoing mission to add value to your investment inUnity.

We are moving forward in serving ourcustomers from a position of fiscal integrity and soundness; and we are notoperating as a statistic ratio on a chart.  We simply are working with ourcustomers through their problems and protecting the viability of the Company tothe best of our abilities.  While we are dealing with our issues, we werecautious in our construction lending when the building boom was on.  Ourconcentration of loans in this now failing industry was substantially lowerthan other banks in the metro Atlanta area.  We continue to operate in a safeand sound manner as we have done over the history of the Company.

We have not experienced substantialdecreases in deposit accounts.  In other words, our deposit customers continueto see the Bank's strength and hold a great deal of trust in us.  In the firstquarter of 2009, we have seen growth in our checking account balances, ascustomers have seen us as a safe haven from the stock market and other problembanks.  We believe this trend will continue and will maintain our liquid assetresources.

As we work through 2009, we believe we are building afoundation of strength and security on which to grow as the economicenvironment improves.  The banking industry will undoubtedly see changes as aresult of this recession.  The Bank and its staff stand ready to work throughthe challenges ahead.  The Board is committed to working through this tougheconomic environment and preparing for a return to prosperity in our North Georgia markets.  When you come by one of our five locations, you will be greeted byknowledgeable folks that will help you with your financial decisions withadvice you can trust.  I urge you to review the annual report carefully for athorough explanation of the Company's performance during 2008.

Sincerely,

Michael L. McPherson,

President & CEO

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| **LOCATIONS**                                                         |
|-----------------------------------------------------------------------|
| MAIN OFFICE    950 Joe Frank Harris Parkway    Cartersville, GA 30121 | ADAIRSVILLE    7450 Adairsville Highway, NW    Adairsville, GA 30103 | ROME  42 Three Rivers Drive    Rome, GA 30161 |
|                                                                       |  |  |
| HENDERSON DRIVE    601 Henderson Drive    Cartersville, GA 30120      | CALHOUN  150 W.C. Bryant Parkway  Calhoun, GA 30701 | OPERATIONS CENTER    34 Center Road    Cartersville, GA 30121 |
|                                                                       |  |  |

|  |
|--|

| **DIRECTORS**             |
|---------------------------|
| JERRY W. BRADEN  Chairman | KENNETH R. BISHOP | DONALD D. GEORGE | JOHN S. LEWIS |
|                           |  |  |  |
| SAM R. McCLESKEY          | MICHAEL L. MCPHERSON | STEPHEN A. TAYLOR | B. DON TEMPLES |

|  |
|--|

| **EXECUTIVE OFFICERS**                                           |
|------------------------------------------------------------------|
|                                                                  | MICHAEL L. MCPHERSON  President and Chief Executive Officer |  |
|                                                                  |  |  |
| W. STEWART GRIGGS  Executive Vice President  Senior Loan Officer |  | ELI D. MULLIS  Senior Vice President  Chief Financial Officer |

----

| **MAIN OFFICE - CARTERSVILLE**                       |
|------------------------------------------------------|
| KIMBERLY ABERNATHY  Vice President  Human Resources  | CONNIE MITCHELL-WHITE  Vice President  Retail Division Officer |
| RICK HUGHES  Vice President  Lending Manager         | DONA WISNOM  Vice President  Lending Officer |
| FRANK FELKER

Vice President

Special Assets Manager | TERESA BROWN

Retail Banking Officer |
| MARIE HARPER

Business Solutions  Officer            |  |
|                                                      |  |
| **HENDERSON DRIVE****- CARTERSVILLE**                |
| RICK KOLLHOFF  Vice President  Senior Officer        | APRIL HARBIN  Retail Banking Officer |
|                                                      |  |
| **ADAIRSVILLE**                                      |
| MICHAEL SMITH  Vice President

Senior Officer        |  |
|                                                      |  |
| **ROME**                                             |
| JOHN GRAHAM  Vice President  Senior Officer          | MIKE STOVER  Vice President  Lending Officer |
|                                                      |  |
| **CALHOUN**                                          |
| STANLEY TAYLOR  Vice President

Senior Officer       |  |
|                                                      |  |
| **OPERATIONS**                                       |
|                                                      |  |
| MICHELLE BAILEY  Vice President  Loan Operations     | CHRISTIE McLAUGHLIN  Vice President  Deposit Operations |
| BRANDON ADAMS  Accounting Officer                    | JEFF STARKE

Vice President  Technology Officer |
| HAZEL D. TEMPLES  BSA Officer                        |  |
|                                                      |  |

----

**UNITY HOLDINGS, INC.**

**AND SUBSIDIARY**

** **

**CONSOLIDATED FINANCIAL REPORT**

**DECEMBER 31, 2008**

**Table of Contents**

** **

|                                                              |                                                                                            | **Page**

** ** |
|--------------------------------------------------------------|--------------------------------------------------------------------------------------------|----------------------|
| **REPORT OF INDEPENDENT REGISTERED PUBLIC  ACCOUNTING FIRM** | **1**                                                                                      |
| ** **                                                   | ** **                                                                                 | ** **           |
| **FINANCIAL STATEMENTS**                                     | ** **                                                                                 |
| ** **                                                   | ** **                                                                                 | ** **           |
| ** **                                                   | **Consolidated balance sheets**                                                            | **2**                |
| ** **                                                   | **Consolidated statements of operations**                                                  | **3**                |
| ** **                                                   | **Consolidated statements of comprehensive  income (loss)**                                | **4**                |
| ** **                                                   | **Consolidated statements of  stockholders' equity**                                       | **5**                |
| ** **                                                   | **Consolidated statements of cash flows**                                                  | **6**                |
| ** **                                                   | **Notes to consolidated financial  statements**                                            | **7-31**             |
| ** **                                                   | **Selected Financial Data**                                                                | **32**               |
| ** **                                                   | **Management's Discussion and Analysis of  Financial Condition and Results of Operations** | **33-49**            |

** **

----

** **

MAULDIN& JENKINS

CertifiedPublic Accountants, LLC

| ** **

**       REPORT OF  INDEPENDENT REGISTERED**

** PUBLIC ACCOUNTING  FIRM** |
|---------------------------------------------------------------------------------------------------------------------------|

**To the Board of Directors**

**Unity Holdings, Inc.**

**Cartersville****, Georgia**

We have audited theaccompanying consolidated balance sheets of **Unity Holdings, Inc. andsubsidiary** as of December 31, 2008 and 2007, and the related consolidatedstatements of operations, comprehensive income (loss), stockholders' equity andcash flows for the years then ended.  These financial statements are theresponsibility of the Company's management.  Our responsibility is to expressan opinion on these financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, ona test basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in all materialrespects, the financial position of Unity Holdings, Inc. and subsidiary****asof December 31, 2008 and 2007, and the results of their operations and theircash flows for the years then ended, in conformity with U.S. generally acceptedaccounting principles.

MAULDIN & JENKINS,LLC

Atlanta, Georgia

March 25, 2009

----

2

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** **

| **UNITY HOLDINGS, INC.**                                                                                     |
|--------------------------------------------------------------------------------------------------------------|
| **AND SUBSIDIARY**                                                                                           |
| **CONSOLIDATED BALANCE SHEETS**                                                                              |
| **DECEMBER 31, 2008 AND 2007**                                                                               |
|                                                                                                              | **2008** | ** ** | 2007 |
| **Assets**                                                                                                   |  |  |  |
| Cash and due from banks                                                                                      | ** $** | **4,196,837 ** |  |  $ | 6,311,833  |
| Interest-bearing deposits in banks                                                                           | **905,830 ** |  | 155,862  |
| Federal funds sold                                                                                           | **11,172,000 ** |  | 3,898,000  |
| Securities available for sale                                                                                | **18,265,634 ** |  | 26,669,876  |
| Restricted equity securities, at cost                                                                        | **2,881,678 ** |  | 2,138,278  |
| Loans                                                                                                        | **249,636,747 ** |  | 243,029,718  |
| Less allowance for loan losses                                                                               | **5,388,430 ** |  | 3,280,508  |
|           Loans, net                                            | **244,248,317 ** |  | 239,749,210  |
| Premises and equipment                                                                                       | **10,989,657 ** |  | 11,416,651  |
| Foreclosed assets                                                                                            | **9,136,196 ** |  | 2,358,998  |
| Other assets                                                                                                 | **11,234,044 ** |  | 9,302,811  |
| **          TOTAL ASSETS**                                      | ** $** | **313,030,193 ** |  |  $ | 302,001,519  |
|                                                                                                              | ** ** |  |  |
| **Liabilities, Redeemable Common Stock and Stockholders'  Equity**                                           | ** ** |  |  |
| Deposits                                                                                                     | ** ** |  |  |
|     Noninterest-bearing                                                                       | ** $** | **13,329,798 ** |  |  $ | 17,587,778  |
|     Interest-bearing                                                                          | **235,752,907 ** |  | 236,795,724  |
|          Total deposits                                              | **249,082,705 ** |  | 254,383,502  |
| Other borrowings                                                                                             | **38,900,000 ** |  | 22,250,000  |
| Guaranteed subordinated debentures                                                                           | **3,093,000 ** |  | 3,093,000  |
| Other liabilities                                                                                            | **1,669,278 ** |  | 1,468,872  |
| **         TOTAL LIABILITIES**                                       | **292,744,983 ** | ** ** | 281,195,374  |
|                                                                                                              | ** ** |  |  |
| Commitments and contingencies  (Note 13)                                                                | ** ** |  |  |
|                                                                                                              | ** ** |  |  |
| Redeemable common stock held by KSOP                                                                         | **551,512 ** |  | 662,490  |
| ** **                                                                                                   | ** ** |  |  |
| **Stockholders' equity**                                                                                     | ** ** |  |  |
|     Preferred stock, par value $.01; 10,000,000 shares                                        | ** ** |  |  |
|         authorized; none issued                                           | **- ** |  | -  |
|     Common stock, par value $.01; 10,000,000 shares  authorized;                              | ** ** |  |  |
|          1,148,513 and 987,557 issued and outstanding,  respectively | **11,485 ** |  | 9,876  |
|     Capital surplus                                                                           | **11,785,163 ** |  | 10,137,494  |
|     Retained earnings                                                                         | **7,876,572 ** |  | 9,948,751  |
|     Accumulated other comprehensive income                                                    | **60,478 ** |  | 47,534  |
|           Total stockholders' equity                            | **19,733,698 ** |  | 20,143,655  |
| **          TOTAL LIABILITIES, REDEEMABLE COMMON STOCK**        | ** ** |  |  |
| **             AND STOCKHOLDERS' EQUITY**        | ** $** | **313,030,193 ** |  |  $ | 302,001,519  |
|                                                                                                              |  |  |  |
| **See Notes to Consolidated Financial Statements.**                                                          |  |  |  |

3

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** **

| **UNITY HOLDINGS , INC.**                                                                                   |
|-------------------------------------------------------------------------------------------------------------|
| **AND SUBSIDIARY**                                                                                          |
|                                                                                                             |  | ** ** |  |
| **CONSOLIDATED STATEMENTS OF OPERATIONS**                                                                   |
| **YEARS ENDED DECEMBER 31, 2008 AND 2007**                                                                  |
| ** **                                                                                                  |  | ** ** |  |
|                                                                                                             | **2008** |  | **2007** |
| **Interest income**                                                                                         |  | ** ** |  |
|     Loans                                                                                    | ** $** | **17,664,776 ** |  | ** $** | **21,268,477 ** |
|     Taxable securities                                                                       | **1,064,256 ** |  | **1,017,237 ** |
|     Nontaxable securities                                                                    | **244,139 ** |  | **257,792 ** |
|     Federal funds sold                                                                       | **38,811 ** |  | **239,419 ** |
|     Interest-bearing deposits in banks                                                       | **4,935 ** |  | **46,586 ** |
|           Total interest income                                | **19,016,917 ** |  | **22,829,511 ** |
| **Interest expense**                                                                                        |  |  |  |
|     Deposits                                                                                 | **8,603,111 ** |  | **9,992,481 ** |
|     Borrowings                                                                               | **1,799,631 ** |  | **1,815,949 ** |
|           Total interest expense                               | **10,402,742 ** |  | **11,808,430 ** |
| Net interest income                                                                                         | **8,614,175 ** |  | **11,021,081 ** |
| **Provision for loan losses**                                                                               | **4,433,000 ** |  | **737,776 ** |
|           Net interest income after provision for loan  losses | **4,181,175 ** |  | **10,283,305 ** |
|                                                                                                             | ** ** |  | ** ** |
| **Other income**                                                                                            | ** ** |  | ** ** |
|     Service charges on deposit accounts                                                      | **1,210,660 ** |  | **1,145,051 ** |
|     Mortgage loan fees                                                                       | **321,016 ** |  | **388,704 ** |
|     Gain on sale of foreclosed real estate                                                   | **- ** |  | **223,757 ** |
|     Other operating income                                                                   | **499,750 ** |  | **358,329 ** |
|           Total other income                                   | **2,031,426 ** | ** ** | **2,115,841 ** |
| **Other expenses**                                                                                          | ** ** | ** ** | ** ** |
|     Salaries and employee benefits                                                           | **4,851,245 ** |  | **4,972,229 ** |
|     Equipment and occupancy expenses                                                         | **1,192,398 ** |  | **1,124,954 ** |
|     Loss on sale of securities available for sale                                            | **16,048 ** |  | **- ** |
|     Loss on sale of foreclosed real estate                                                   | **443,498 ** |  | **- ** |
|     Other operating expenses                                                                 | **3,475,428 ** |  | **2,362,423 ** |
|           Total other expenses                                 | **9,978,617 ** |  | **8,459,606 ** |
| ** **                                                                                                  | ** ** |  | ** ** |
| Income (loss)  before income taxes (benefits)                                                          | **(3,766,016)** |  | **3,939,540 ** |
| Income tax expense (benefit)                                                                                | **(1,602,547)** | ** ** | **1,330,378 ** |
| **NET INCOME (LOSS)**                                                                                       | ** $** | **(2,163,469)** |  | ** $** | **2,609,162 ** |
| ** **                                                                                                  |  |  |  |
| **Basic earnings (losses) per share**                                                                       | ** $** | **(2.08)** |  |  $ | 2.64  |
| **Diluted earnings (losses) per share**                                                                     | ** $** | **(2.08)** |  |  $ | 2.32  |
|                                                                                                             |  |  |  |
| **See Notes to Consolidated Financial Statements.**                                                         |  |  |  |
|                                                                                                             |  |  |  |
|                                                                                                             |  |  |  |  |  |  |  |

4

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** **

|                                                                                                                   |                  |                 |               |
|-------------------------------------------------------------------------------------------------------------------|------------------|-----------------|---------------|
| **UNITY HOLDINGS, INC.**                                                                                          |
| **AND SUBSIDIARY**                                                                                                |
| **CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  (LOSS)**                                                       |
| **YEARS ENDED DECEMBER 31, 2008 AND 2007**                                                                        |
|                                                                                                                   |                  |                 |               |
|                                                                                                                   | **2008**         |                 | 2007          |
|                                                                                                                   |                  |                 |               |
| **Net income (loss)**                                                                                             | ** $**      | **(2,163,469)** |               |  $ | 2,609,162  |
|                                                                                                                   | ** **       |                 |               |
| **Other comprehensive income:**                                                                                   | ** **       | ** **      |               |
|     Unrealized holding gains on securities available for  sale:                                    | ** **       | ** **      |               |
|                                                                                                                   | ** **       | ** **      |               |
|         Unrealized holding gains on securities arising  during period,         | ** **       | ** **      |               |
|             net of tax of $1,212 and $62,725, respectively | **2,352 **  | ** **      | 121,758  |
|                                                                                                                   | ** **       | ** **      |               |
|        Reclassification adjustment for losses realized in  net income,         | ** **       | ** **      |               |
|             net of benefit of $5,456 and $0, respectively. | **10,592 ** | ** **      | -        |
|                                                                                                                   | ** **       | ** **      |               |
| **Other comprehensive income**                                                                                    | **12,944 ** | ** **      | 121,758  |
|                                                                                                                   | ** **       | ** **      |               |
| **Comprehensive income (loss)**                                                                                   | ** $**      | **(2,150,525)** | ** **    |  $ | 2,730,920  |
|                                                                                                                   | ** **       | ** **      |               |
| ** **                                                                                                        |                  |                 |               |
| **See Notes to Consolidated Financial Statements.**                                                               | ** **       |                 |               |
|                                                                                                                   |                  |                 |               |

** **

** **

5

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** **

| **UNITY HOLDINGS,  INC.**                                  |
|------------------------------------------------------------|
| **AND SUBSIDIARY**                                         |
| **CONSOLIDATED  STATEMENTS OF STOCKHOLDERS' EQUITY**       |
| **YEARS ENDED  DECEMBER 31, 2008 AND 2007**                |
|                                                            |  |  |  |  |  |  |  |  |  |  |  |  |
|                                                            |  |  |  |  |  |  |  |  | **Accumulated** |  |  |
|                                                            |  | ** ** | ** ** | ** ** | ** ** | ** ** |  |  | **Other** | **Total** |
|                                                            |  | **Common Stock** | **Capital** | **Retained** | **Comprehensive** | **Stockholders'** |
|                                                            |  | **Shares** | **Par Value** | **Surplus** | **Earnings** | **Income (Loss)** | **Equity** |
|                                                            |  |  |  | ** ** |  | ** ** |  |  |  |  |  |  |
| **Balance, December 31,  2006**                            |  | 990,030  |  | 9,900  |  | 10,166,421  |  | 7,496,033  |  | (74,224) |  | 17,598,130  |
|     Net income                              |  | -  |  | -  |  | -  |  | 2,609,162  |  | -  |  | 2,609,162  |
|     Adjustment for shares  owned            |  |  |  |  |  |  |  |  |  |  |  |  |
|         by KSOP         |  | -  |  | -  |  | -  |  | (156,444) |  | -  |  | (156,444) |
|     Retirement of common  stock             |  | (2,473) |  | (24) |  | (74,165) |  | -  |  | -  |  | (74,189) |
|     Stock compensation                      |  | -  |  | -  |  | 45,238  |  | -  |  | -  |  | 45,238  |
|     Other comprehensive  income             |  | -  |  | -  |  | -  |  | -  |  | 121,758  |  | 121,758  |
| **Balance, December 31,  2007**                            |  | 987,557  |  | 9,876  |  | 10,137,494  |  | 9,948,751  |  | 47,534  |  | 20,143,655  |
|     Net loss                                |  | -  |  | -  |  | -  |  | (2,163,469) |  | -  |  | (2,163,469) |
|     Exercise of stock  options and warrants |  | 163,460  |  | 1,634  |  | 1,634,961  |  | -  |  | -  |  | 1,636,595  |
|     Adjustment for shares  owned            |  |  |  |  |  |  |  |  |  |  |  |  |
|         by KSOP         |  | -  |  | -  |  | -  |  | 91,290  |  | -  |  | 91,290  |
|     Retirement of common  stock             |  | (2,504) |  | (25) |  | -  |  | -  |  | -  |  | (25) |
|     Stock compensation                      |  | -  |  | -  |  | 12,708  |  | -  |  | -  |  | 12,708  |
|     Other comprehensive  income             |  | -  |  | -  |  | -  |  | -  |  | 12,944  |  | 12,944  |
| **Balance, December 31,  2008**                            |  | 1,148,513  | $ | 11,485  | $ | 11,785,163  | $ | 7,876,572  | $ | 60,478  | $ | 19,733,698  |
|                                                            |  |  |  |  |  |  |  |  |  |  |  |  |
| **See Notes to Consolidated  Financial Statements.**       |  |  |  |  |  |  |  |  |  |  |
|                                                            |  |  |  |  |  |  |  |  |  |  |  |  |
|                                                            |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

** **

6

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7

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** **

|                                                                                                                              |                      |                      |                  |
|------------------------------------------------------------------------------------------------------------------------------|----------------------|----------------------|------------------|
| **UNITY HOLDINGS, INC. AND SUBSIDIARY**                                                                                      |
| **CONSOLIDATED  STATEMENTS OF CASH FLOWS**                                                                                   |
| **YEARS ENDED  DECEMBER 31, 2008 AND 2007**                                                                                  |
|                                                                                                                              | **2008**             |                      | 2007             |
| **OPERATING ACTIVITIES**                                                                                                     | ** **           |                      |                  |
|     Net income (loss)                                                                                         | ** $**          | **(2,163,469)**      |                  |  $ | 2,609,162  |
|     Adjustments to reconcile net income (loss) to net                                                         | ** **           |                      |                  |
|         cash provided by operating activities:                                            | ** **           |                      |                  |
|         Depreciation                                                                      | **578,050 **    |                      | 598,451     |
|         Provision for loan losses                                                         | **4,433,000 **  |                      | 737,776     |
|         Other real estate valuation reserve                                               | **125,380 **    |                      | -           |
|         Deferred income taxes                                                             | **(796,533)**        |                      | (163,892)        |
|         Loss on sale of securities available for sale                                     | **16,048 **     |                      | -           |
|         Loss on disposal of fixed assets                                                  | **431 **        |                      | 847         |
|        Write down of other real estate                                                         | **207,061 **    |                      | -           |
|         Loss (gain) on sale of other real estate                                          | **443,498 **    |                      | (224,110)        |
|         Decrease (increase) in interest receivable                                        | **520,404 **    |                      | (241,436)        |
|         (Decrease) increase in interest payable                                           | **(7,592)**          |                      | 73,188      |
|         Increase in taxes receivable                                                      | **(1,097,890)**      |                      | (63,730)         |
|         Stock compensation expense                                                        | **12,708 **     |                      | 45,238      |
|         Net other operating activities                                                    | **(355,780)**        |                      | (272,211)        |
| **              Net cash provided by operating activities** | **1,915,316 **  |                      | 3,099,283   |
|                                                                                                                              | ** **           |                      |                  |
| **INVESTING ACTIVITIES**                                                                                                     | ** **           |                      |                  |
|     Net (increase) decrease in interest-bearing deposits  in banks                                            | **(749,968)**        |                      | 91,925      |
|     Purchases of securities available for sale                                                                | **(16,488,820)**     |                      | (7,974,204)      |
|     Proceeds from sales of securities available for sale                                                      | **6,918,634 **  |                      | -           |
|     Proceeds from maturities\calls of securities available  for sale                                          | **17,977,992 ** |                      | 1,290,892   |
|     (Purchase) redemption of restricted equity securities                                                     | **(743,400)**        |                      | 401,500     |
|     Net increase in federal funds sold                                                                        | **(7,274,000)**      |                      | (3,898,000)      |
|     Net increase in loans                                                                                     | **(18,060,506)**     |                      | (21,664,911)     |
|     Purchase of cash surrender value life insurance                                                           | **- **          |                      | (3,200,000)      |
|    Capital improvements on other real estate owned                                                                 | **(193,113)**        |                      | -           |
|     Proceeds from sale of other real estate owned                                                             | **1,748,558 **  |                      | 508,246     |
|     Purchase of premises and equipment                                                                        | **(151,487)**        |                      | (202,788)        |
| **          Net cash used in investing activities**                             | **(17,016,110)**     |                      | (34,647,340)     |
|                                                                                                                              | ** **           |                      |                  |
| **FINANCING ACTIVITIES**                                                                                                     | ** **           |                      |                  |
|     Net increase (decrease) in deposits                                                                       | **(5,300,797)**      |                      | 44,899,972  |
|     Net decrease in federal funds purchased                                                                   | **- **          |                      | (338,000)        |
|     Proceeds from other borrowings                                                                            | **26,750,000 ** |                      | 19,350,000  |
|     Repayments of other borrowings                                                                            | **(10,100,000)**     |                      | (30,950,000)     |
|     Purchase of common stock                                                                                  | **- **          |                      | (74,189)         |
|     Proceeds from exercise of stock options and warrants                                                      | **1,636,595 **  |                      | -           |
| **          Net cash provided by financing activities**                         | **12,985,798 ** |                      | 32,887,783  |
|                                                                                                                              | ** **           |                      |                  |
| Net increase (decrease)  in cash and due from banks                                                                     | **(2,114,996)**      |                      | 1,339,726   |
| Cash and due from banks at beginning of year                                                                                 | **6,311,833 **  |                      | 4,972,107   |
| **Cash and due from banks at end of year**                                                                                   | ** $**          | **4,196,837 **  |                  |  $ | 6,311,833  |
|                                                                                                                              | ** **           |                      |                  |
| **SUPPLEMENTAL DISCLOSURES**                                                                                                 | ** **           |                      |                  |
|     Cash paid during the period for:                                                                          | ** **           |                      |                  |
|         Interest                                                                          | ** $**          | **10,410,334 ** |                  |  $ | 11,735,242  |
|         Income taxes                                                                      | ** $**          | **291,876 **    |                  |  $ | 1,513,234  |
|                                                                                                                              | ** **           |                      |                  |
| **NONCASH TRANSACTIONS**                                                                                                     | ** **           |                      |                  |
|         Loans transferred to other real estate owned                                      | ** $**          | **9,191,899 **  |                  |  $ | 4,290,624  |
|         Financed sales of other real estate owned                                         | ** $**          | **63,500 **     |                  |  $ | 1,786,696  |
|                                                                                                                              | ** **           |                      |                  |
| **See Notes to Consolidated Financial Statements.**                                                                          | ** **           |                      |                  |
|                                                                                                                              | ** **           |                      |                  |

** **

8

----

**UNITY HOLDINGS, INC.**

**AND SUBSIDIARY**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

** **

**NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

**Nature of Business**

** **

Unity Holdings, Inc. (the "Company") is a bankholding company whose business is conducted by Unity National Bank, itswholly-owned subsidiary.  Unity National Bank (the "Bank") is a commercial bankheadquartered in Cartersville, Bartow County, Georgia.  The Bank operates twooffices in Cartersville and additional offices in Adairsville (Bartow County),  Rome (Floyd County), and Calhoun (Gordon County), Georgia.  Each officeprovides a full range of banking services in its primary market areas.

**Basis of Presentation and Accounting Estimates**

The consolidatedfinancial statements include the accounts of the Company and its subsidiary.Significant intercompany transactions and balances have been eliminated inconsolidation.

In preparing the consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America,management is required to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities as of the balance sheet date and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differfrom those estimates.

Material estimates that are particularly susceptible to significant change inthe near term relate to the determination of the allowance for loan losses,deferred tax assets, valuation of foreclosed assets and contingent assets andliabilities.  The determination of the adequacy of the allowance for loanlosses is based on estimates that are susceptible to significant changes in theeconomic environment and market conditions.  In connection with thedetermination of the estimated losses on loans and foreclosed assets,management obtains independent appraisals for significant collateral.

**Cash, Due From Banks and Cash Flows**

For purposes ofreporting cash flows, cash and due from banks includes cash on hand, cash itemsin process of collection and amounts due from banks.  Cash flows from loans,federal funds sold, interest-bearing deposits in banks, deposits, and federalfunds purchased are reported net.

The Bank is required tomaintain reserve balances in cash or on deposit with the Federal Reserve Bank,based on a percentage of deposits.  The total of those reserve balances wasapproximately $635,000 and $655,000 at December 31, 2008 and 2007,respectively.

**Securities**

Debt securities that managementhas the positive intent and ability to hold to maturity are classified asheld-to-maturity and recorded at amortized cost.  Debt securities notclassified as held-to-maturity are classified as available-for-sale andrecorded at fair value with unrealized gains and losses excluded from earningsand reported in accumulated other comprehensive income net of the relateddeferred tax effect.  Equity securities without a readily determinable fairvalue are classified as available for sale and are recorded at cost. Restricted equity securities without a readily determinable fair value arerecorded at cost.

7

----

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)**

**Securities (Continued)**

Purchasedpremiums and discounts are recognized in interest income using the interestmethod over the terms of the securities.  Gains and losses on the sale ofsecurities are determined using the specific identification method.  Declinesin the fair value of held-to-maturity and available-for-sale securities below theircost that are deemed to be other than temporary are reflected in earnings asrealized losses.  In estimating other-than-temporary impairment losses,management considers (1) the length of time and the extent to which the fairvalue has been less than cost, (2) the financial condition and near-termprospects of the issuer, and (3) the intent and ability of the Company toretain its investment in the issuer for a period of time sufficient to allowfor any anticipated recovery in fair value.

**Loans**

Loans are reported attheir outstanding principal balances less net deferred loan fees and theallowance for loan losses.  Interest income is accrued on the outstandingprincipal balance.  Nonrefundable loan fees, net of direct loan originationcosts, are deferred with the net amount recognized into interest income overthe life of the loans.

The accrual of intereston loans is discontinued when, in management's opinion, the borrower may be unableto meet payments as they become due, unless the loan is well-secured and inprocess of collection.  All interest accrued but not collected for loans thatare placed on nonaccrual or charged off is reversed against interest income,unless management believes that the accrued interest is recoverable through theliquidation of collateral.  Interest income on nonaccrual loans is recognizedon the cost-recovery method, until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interestamounts are brought current and future payments are reasonably assured.

A loan is consideredimpaired when it is probable, based on current information and events, theCompany will be unable to collect all principal and interest payments due inaccordance with the contractual terms of the loan agreement.  Impaired loansare measured by either the present value of expected future cash flowsdiscounted at the loan's effective interest rate, the loan's obtainable marketprice, or the fair value of the collateral if the loan is collateraldependent.  The amount of impairment, if any, and any subsequent changes areincluded in the allowance for loan losses.  Interest on accruing impaired loansis recognized as long as such loans do not meet the criteria for nonaccrualstatus.  Large groups of smaller balance homogeneous loans are collectivelyevaluated for impairments.  

**Allowance for Loan Losses**

The allowance for loanlosses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes thecollectibility of the principal is unlikely.  Subsequent recoveries arecredited to the allowance.

The allowance is anamount that management believes will be adequate to absorb estimated lossesrelating to specifically identified loans, as well as probable credit lossesinherent in the balance of the loan portfolio, based on an evaluation of thecollectibility of existing loans and prior loss experience.  This evaluationalso takes into consideration such factors as changes in the nature and volume ofthe loan portfolio, overall portfolio quality, review of specific problemloans, concentrations and current economic conditions that may affect theborrower's ability to pay.  This evaluation does not include the effects ofexpected losses on specific loans or groups of loans that are related to futureevents or expected changes in economic conditions.  While management uses thebest information available to make its evaluation, future adjustments to theallowance may be necessary if there are any significant changes in economicconditions.  In addition, regulatory agencies, as an integral part of theirexamination process, periodically review the Company's allowance for loanlosses, and may require the Company to make additions to the allowance based ontheir judgment about information available to them at the time of theirexaminations.

**Premises and Equipment**

Land is carried atcost.  Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over theestimated useful lives of the assets.  Estimated useful lives for premises andequipment are three years to forty years.  

8

----

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1.  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)**

** **

**Other Real Estate Owned**

Other real estate ownedrepresents properties acquired through foreclosure.  Other real estate owned isheld for sale and is carried at the lower of cost or fair value less estimatedcosts to sell.  Any write-down to fair value at the time of transfer to otherreal estate owned is charged to the allowance for loan losses.  Revenue andexpenses from operations and changes in the valuation allowance are included innet expenses from foreclosed assets.  The Company had $9,135,107 and $2,338,092of other real estate owned at December 31, 2008 and 2007, respectively.

**Income Taxes**

** **

Deferred income taxassets and liabilities are determined using the balance sheet method.  Underthis method, the net deferred tax asset or liability is determined based on thetax effects of the temporary differences between the book and tax bases of thevarious balance sheet assets and liabilities and gives current recognition tochanges in tax rates and laws.  Management's determination of the realization ofdeferred tax assets is based upon management's judgment of various futureevents and uncertainties, including the timing, nature and amount of futureincome earned by the bank and the implementation of various  plans to maximizerealization of deferred tax assets.  Management believes that the Company willgenerate sufficient operating earnings to realize the deferred tax benefits. 

**Stock Compensation Plans**

At December 31, 2008, the Company has two stock-basedemployee compensation plans, which are described more fully in Note 9.  Grant-datefair value is measured on the date of grant using option-pricing models withmarket assumptions. The grant-date fair value is amortized into expense on astraight-line basis over the vesting period.  Option pricing models require theuse of highly subjective assumptions, including but not limited to, expectedstock price volatility, forfeiture rates, and interest rates, which if changedcan materially affect fair value estimates. Accordingly the model does notnecessarily provide a reliable single measure of the fair value of our stockoptions.   Under SFAS No. 123(R), stock-based compensation expense was $12,708 and$45,238 for the years ended December 31, 2008 and 2007, respectively.  

**Earnings (Losses) Per Share**

Basic earnings (losses)per share are computed by dividing net income (loss) by the weighted averagenumber of shares of common stock outstanding.  Diluted earnings (losses) pershare are computed by dividing net income (loss) by the sum of the weightedaverage number of shares of common stock outstanding and potential commonshares.  Potential common shares consist of stock options and stock warrants.

**Comprehensive Income (Loss)**

Accounting principlesgenerally require that recognized revenue, expenses, gains and losses beincluded in net income (loss).  Although certain changes in assets andliabilities, such as unrealized gains and losses on available for salesecurities, are reported as a separate component of the equity section of thebalance sheet, such items, along with net income (loss), are components ofcomprehensive income (loss).

9

----

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 2.  MANAGEMENT'S PLAN OF ACTION**

On February 3, 2009, Unity Holdings, Inc. andits subsidiary bank, Unity National Bank, executed a written agreement with theOffice of the Comptroller of the Currency ("OCC").  The Company and its Boardof Directors have taken an active role in working with the OCC to improve thecondition of the Company and the Bank. All strategies implemented are designedto accomplish three primary goals:  (1) increase capital, (2) reduce the assetsize of the Bank, and (3) reduce nonperforming assets.

**Increasing Capital**

The Company plans to improve the capital ratiosof the subsidiary.  While we are currently well-capitalized per regulatorystandards, the Company understands that additional capital may be necessary toabsorb future losses.  In September 2008, the Board and Management injectedover $1.6 million into the capital reserves by exercising founder warrants andvested options.  Approximately $650,000 has been used at the subsidiary levelfor capital replenishment.  We maintain a credit line at the holding companyfor capital injection that is still available.

Since the fourth quarter of 2008, we have contacted an everexpanding list of potential capital investor candidates.  These potentialinvestors include current shareholders, individual investors (or a pool ofindividuals), and investment bankers.  We have spoken with groups originallyconvened to get a bank charter that were denied and also merger partners.   Wecontinue to keep all avenues open to potential capital investors.

Improving earnings has also been a key strategy.  We havemade drastic cuts to our noninterest expense.  We have gone through two roundsof staff cuts, from 86 employees in September 2008 to 74 in February 2009, adecrease of 14%.  We have implemented high floors on our loan renewal rates. This plan serves a dual purpose.  Higher loan rates will encourage the customerto move the business.  If the loan stays, the higher rate helps to shore up thenet interest margin.

** **

**Decreasing Asset Size**

** **

During the third quarter of 2008, we began slowing ourgrowth, and quickly changed to a strategy of downsizing the assets of the Banklater in the same quarter.  From September 2008 to January 2009, we shrank theassets by $11.8 million, with a decrease of $15 million in the loan portfolio. We have sold approximately $7.6 million in investments.  We do not intend toreplace maturities or calls from the investment portfolio during 2009.  Our planis to decrease in size by $20 - $25 million during 2009.

At January 31, 2009, our holdings in liquid assets (cash andFed funds sold) stood at $11.6 million, an increase of approximately $5 millionfrom September 2008 levels.  This cash reserve will be worked down as much asour liquidity needs will allow.  We paid off $6 million in FHLB advances inJanuary and will pay off another $5.4 million during 2009.  Deposits saw anelevated rate of decrease beginning in the third quarter of 2008 as concerns ofbank failures and potential loss of deposits swept through the public.  Afterthe introduction of $250,000 in FDIC insurance, the deposit run-off hasabated.  We have let some high cost CD money run off when rates remained high. In December and January, our competitive markets saw a break in CD rates, so wehave retained more overall local deposits during 2009.

Non-accrual loans saw a $3 million decrease in January 2009when compared to September 2008 levels.  Most of these moved into OREO, whichincreased $5.9 million.  However, the net decrease in non-accrual activityindicates fewer (or smaller) balances being put into nonaccrual status.  In thefirst quarter of 2009, we have seen more contracts on our foreclosed houses andmore interest from prospects in our holdings.  

We have reviewed several other shrinking strategies, such asaggressively participating loans, cashing out or converting our bank owned lifeinsurance, and entering into a sale\leaseback agreement on our facilities. These and any other strategies are continually reviewed for possibleimplementation.

10

----

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 2.  MANAGEMENT'S PLAN OF ACTION********(Continued)**

**Reducing NonperformingAssets**

The optimum solution to reaching the proposed risk-basedcapital ratios is to decrease our portfolio of non-performing assets ("NPAs")with as little loss as possible.  In October 2008, our board appointed aSpecial Assets Committee composed of outside directors to review our NPA levelsand determine a course of action.  Soon after, Management appointed a lenderfrom our Rome Office, to oversee the disposition of foreclosed real estate.  InDecember 2008, the Bank hired a banker experienced in problem loan resolution toact as our Special Assets Department Manager, charged primarily with workingout our rated assets and managing the entire NPA portfolio process.  We haverounded out the team with clerical help to allow them to address problemsquickly and decisively.

We have taken an aggressive stance in working with ourproblem assets.  Nonaccruals are being worked earlier.  Where applicable, theyare moving through the foreclosure process as fast as possible.  Nonaccrualshave dropped $3 million since September 2008.  Most of that was moved to OREO,which increased $6 million over the same period.  Once we have control of theproperty, it is a quicker process for us to clear the NPA off the books.  Wecurrently have contracts for four of our OREO properties at pricing better thaninitial estimates.  Several other properties are generating interest frompotential purchasers.  

Executive management has reviewed the formalagreement's various reporting dates and has begun to implement itsrequirements.  The management team is driving the process of compliance withthe formal agreement, which addresses the three main goals mentioned above. The Board receives monthly reporting on our progress and has been involved inassisting Management, particularly in the areas of problem asset management. The specific areas cited in the written agreement are summarized below.  Thefull reporting to the board and the OCC mentioned below will begin using thedata for the first quarter ended March 31, 2009.

**Compliance Committee**.  The Board mustappoint a committee to oversee the implementation of the requirements of thewritten agreement.  The entire board will serve as the compliance committee.

**Criticized Assets**.  The Bank must takeimmediate action to eliminate assets criticized during the exam, includingspecific courses of action for each asset over $500,000, board review of theseassets, and full board approval for renewals of these problem loans.  TheSpecial Assets Committee has identified these loans, prepared workout plans,and have put in place the reporting mechanism to the Board.

**Loan Concentrations**.  The OCC instructedthe Bank to develop a program to ensure with the loan concentration guidelinesput forth in OCC Bulletin 2006-46.  The Bank is implementing various analysesto quantify the risk within its concentrations and to determine the best courseof action to reduce and maintain lower concentrations.  Loan policies are beingadjusted to ensure clear guidance on acceptable concentration levels, as arevarious credit underwriting standards.

**Loan Portfolio Management**.  The Bank must adoptmore stringent underwriting policies, ensuring that adequate collateral andcash flow secure the loan portfolio.  The Bank must monitor the loan portfolioto provide early identification of problem loans and to provide additionalreporting to the Board.  Management has begun to address the underwritingchanges with additions to the loan portfolio.  Board reporting has beenincreased.

**Allowance for Loan Loss Reserve**.  The loan loss reservemust be adequately calculated using several factors such as specific reservesfor problem assets, historical losses, and subjective factors.  The Board mustreview this on a quarterly basis, and any deficiencies must be remedies in thequarter in which they occur.  We have historically followed this procedure, andour process has been validated by the OCC.

**Other Real Estate Owned ("OREO").**  OREO reporting to theBoard must become more detailed.  Marketing strategies for each piece must bedefined.  The opportunity cost of holding the property must be analyzed.  TheBank has to target time frames for disposal of the property and/or time framesfor future write downs.  The Bank, through the Special Asset Committee, hasbegun this project.

**Liquidity**.  The Board must ensure that the liquidity ofthe Bank is maintained at adequate levels.  Management has added to its liquidityreporting and now tracks all areas of liquidity risk.

11

----

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Strategic Plan**.  The Board must adopt a new strategicplan that incorporates the requirements of the formal agreement and isappropriate for the risk profile of the Bank.  Management is in the process ofdrafting a plan for Board approval.

**NOTE 3.  SECURITIES**

The amortized cost and fair value of securitiesare summarized as follows:

|  |  |  |  | **Gross** |  | **Gross** | ** ** | ** ** |  
**Amortized**

**Unrealized**

**Unrealized**

** **

**Fair**

**Cost**

**Gains**

**Losses**

** **

**Value**

 
**Securities Available for Sale**

 
**December 31, 2008:**

** **

 
**U.S.****Government sponsored agency securities**

** **

** $**

**13,022,371  **

** **

** $**

**236,135  **

** **

** $**

**-  **

** **

** $**

**13,258,506  **

 
**Municipal securities**

** **

**5,151,630  **

** **

**31,311  **

** **

**(175,813)**

** **

**5,007,128  **

 
** **

** $**

**18,174,001  **

** **

** $**

**267,446  **

** **

** $**

**(175,813)**

** **

** $**

**18,265,634  **

 
 
December 31, 2007:

 
U.S. Government sponsored agency  securities

 $

15,744,312     

 $

47,452     

 $

(4,661)

 $

15,787,103     

 
Municipal securities

6,010,459     

83,943     

(25,840)

6,068,562     

 
Mortgage-backed securities

4,843,084     

12,482     

(41,355)

4,814,211     

 
 $

26,597,855     

 $

143,877     

 $

(71,856)

 $

26,669,876     

 
 
Securities with acarrying value of $15,746,599 and $15,889,501 at December 31, 2008 and 2007,respectively, were pledged to secure public deposits and for other purposesrequired or permitted by law.  

Gross losses of $16,048 wererealized in sales of securities available for sale for the year ended December31, 2008.  There were no realized gains or losses on sales of securitiesavailable for sale during 2007.  

The amortized cost andfair value of debt securities as of December 31, 2008 by contractual maturityare shown below.  Maturities may differ from contractual maturities ofmortgage-backed securities because the mortgages underlying the securities maybe called or repaid without penalty.  Therefore, these securities are notincluded in the maturity categories in the following summary.

** **

**Securities  Available for Sale**

** **

**Amortized**

** **

**Fair**

** **

**Cost**

** **

**Value**

Due in less than one year

$

-   

** **

 $

-   

Due from one to five years

2,304,980 

** **

2,331,674 

Due from five to ten years

4,149,996 

** **

4,171,948 

Due after ten years

** **

11,719,025 

** **

11,762,012 

** **

$

**18,174,001 **

** **

** $**

**18,265,634 **

** **

** **

** **

** **

12

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 3.  SECURITIES (Continued)**

Restricted equity securities consist of thefollowing:

** **

**2008**

2007

Federal Home Loan Bank stock

** **

** $**

**2,292,000 **

 $

1,557,500   

Federal Reserve Bank stock

**373,500 **

364,600   

Other correspondent bank stock

** **

**123,178 **

123,178   

Trust preferred securities

** **

**93,000 **

93,000   

** **

** **

** $**

**2,881,678 **

 $

2,138,278   

Managementevaluates securities for other-than-temporary impairment at least on a quarterlybasis, and more frequently when economic or market concerns warrant suchevaluation.  Consideration is given to (1) the length of time and the extent towhich the fair value has been less than cost, (2) the financial condition andnear-term prospects of the issuer, and (3) the intent and ability of theCompany to retain its investment in the issuer for a period of time sufficientto allow for any anticipated recovery in fair value.

AtDecember 31, 2008 twelve debt securities have unrealized losses totaling $175,813,which represents a 5.65% aggregate depreciation from the Company's amortizedcost basis.  At December 31, 2007 no debt securities had unrealized losses withaggregate depreciation of 5% or more from the Company's amortized cost basis.  Inanalyzing an issuer's financial condition, management considers whether thesecurities are issued by the federal government or its agencies, whetherdowngrades by bond rating agencies has occurred, and industry analysts'reports.  As management has the ability to hold debt securities until maturity,or for the foreseeable future if classified as available for sale, no declinesare deemed to be other than temporary.

The following table shows the gross unrealizedlosses and fair value of securities, aggregated by category and length of timethat securities have been in a continuous unrealized loss position at December31, 2008 and 2007.

**Less Than Twelve  Months**

**Twelve Months or  More**

**Gross**

** **

** **

**Gross**

** **

**Unrealized**

**Fair**

** **

**Unrealized**

**Fair**

**Losses**

**Value**

** **

**Losses**

**Value**

**December 31, 2008:**

State and municipal securities

** $**

**124,344 **

** **

** $**

**2,583,716 **

** **

** $**

**51,469 **

** **

** $**

**352,192 **

 Temporarily impaired debt  securities

** **

** $**

**124,344 **

** **

** $**

**2,583,716 **

** **

** $**

**51,469 **

** **

** $**

**352,192 **

December 31, 2007:

U.S. Government sponsored  federal agencies

 $

3,137   

 $

1,000,835   

 $

1,524   

 $

995,000   

State and municipal securities

-   

-   

25,840   

789,632   

Mortgage-backed securities

7,236   

971,225   

34,119   

2,074,152   

 Temporarily impaired debt  securities

 $

10,373   

 $

1,972,060   

 $

61,483   

 $

3,858,784   

13

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 4.  LOANS**

** **

The composition of loans is summarized asfollows:

**December 31,**

**2008**

2007

Commercial, financial and agricultural

** $**

**17,431,524 **

 $

19,599,346   

Real estate - construction

**47,997,692 **

47,528,638   

Real estate - mortgage

**177,923,539 **

168,879,644   

Consumer, installment and other

**6,503,284 **

7,287,901   

**249,856,039 **

243,295,529   

Net deferred loan fees

**(219,292)**

(265,811)

Allowance for loan losses

**(5,388,430)**

(3,280,508)

**Loans, net**

** $**

**244,248,317 **

 $

239,749,210   

** **

Changes in the allowance for loan losses are asfollows:

**Years Ended  December 31,**

**2008**

2007

** **

Balance, beginning of year

** $**

**3,280,508 **

 $

2,791,343   

   Provision for loan losses

**4,433,000 **

737,776   

   Loans charged off

**(2,387,274)**

(337,579)

   Recoveries of loans previously charged off

**62,196 **

88,968   

Balance, end of year

** $**

**5,388,430 **

 $

3,280,508   

14

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 4.  LOANS (Continued)**

The following is asummary of information pertaining to impaired loans:

**As of and for  the Years Ended**

**December 31,**

**2008**

2007

Impaired loans without a valuation allowance

** $**

**13,635,258 **

 $

791,451   

Impaired loans with a valuation allowance

**13,627,494 **

7,570,376   

Total Impaired loans

**27,262,752 **

8,361,827   

Valuation allowance related to impaired loans

**3,268,575 **

912,095   

Average investment in impaired loans

** $**

**13,057,950 **

 $

2,446,514   

Interest incomerecognized on impaired loans for cash payments received was not material forthe years ended December 31, 2008 and 2007.  Loans on nonaccrual statusamounted to approximately $19,980,000 and $3,145,000 at December 31, 2008 and2007, respectively.  Loans past due ninety days or more and still accruinginterest were approximately $1,499,249 and $791,000 at December 31, 2008 and2007, respectively.

In the ordinary courseof business, the Company has granted loans to certain related parties includingdirectors, executive officers and their affiliates.  The interest rates onthese loans were substantially the same as rates prevailing at the time of thetransaction and repayment terms are customary for the type of loan.  Changes inrelated party loans for the year ended December 31, 2008 are as follows:

Balance, beginning of year

 $

1,288,480   

   Advances

1,885,022   

   Less repayments

1,749,584   

Balance, end of year

 $

1,423,918   

** **

** **

15

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 5.  PREMISES AND EQUIPMENT**

Premises and equipment are summarized asfollows:

**December 31,**

**2008**

** **

2007

Land and land improvements

** $**

**3,715,730 **

 $

3,715,730   

Buildings

**7,730,930 **

7,721,615   

Equipment

**2,489,647 **

2,386,265   

**13,936,307 **

13,823,610   

Accumulated depreciation

**(2,946,650)**

(2,406,959)

** $**

**10,989,657 **

 $

11,416,651   

** **

16

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 6.  DEPOSITS**

The aggregate amount oftime deposits in denominations of $100,000 or more at December 31, 2008 and 2007was $72,493,809 and $62,773,157 respectively.  The scheduled maturities of totaltime deposits at December 31, 2008 are as follows:

2009 

 $

98,534,010   

2010 

25,440,929   

2011 

10,842,084   

2012 

5,421,437   

2013 

5,819,296   

 $

146,057,756   

Total overdraftsreclassified to loans at December 31, 2008 and 2007 were $50,794 and $110,990,respectively.

The Company had brokeredcertificates of deposit at December 31, 2008 and 2007 of $23,322,323 and $17,250,170,respectively.  

** **

**NOTE 7.  OTHER BORROWINGS**

Other borrowings consist of the following:

**December 31,**

**2008**

** **

2007

FTN, Financial Line of Credit with interest payable  quarterly at 2.75%, due April 2009.    

** $**

**1,500,000 **

 $

-   

Federal Home Loan Bank advances with interest payable at  various intervals at interest rates ranging from 2.90% to 5.32%, due at  various maturity dates between January 22, 2009 and June 29, 2012.

** $**

**37,400,000 **

 $

22,250,000   

** $**

**38,900,000 **

 $

22,250,000   

** **

** **

Contractual maturitiesof other borrowings as of December 31, 2008 are as follows:

2009

$

12,500,000 

2010

6,000,000 

2011

7,000,000 

2012

13,400,000 

$

38,900,000 

17

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The FTN, Financial line of credit iscollateralized by the bank's common stock.  There are currently no debtcovenants in place.  The FHLB advance line is collateralized by a blanket lienon the Company's 1-4 family mortgage, home equity loans, multifamily and commercialreal estate and $397,012 in cash held at the FHLB.  The loans pledged ascollateral had an approximate carrying amount of $77,693,201 as of December 31,2008.

**NOTE 8.  GUARANTEED SUBORDINATED DEBENTURES**

In 2003, the Company formed a wholly-owned grantor trust to issuecumulative trust preferred securities.  The grantor trust has invested theproceeds of the trust preferred securities in junior subordinated debentures ofthe Company.  The trust preferred securities can be redeemed prior to maturityat the option of the Company on or after December 17, 2008.  The sole assets of the guarantor trust are the Junior Subordinated Deferrable InterestDebentures of the Company (the "Debentures") held by the grantor trust.  Thedebentures have the same interest rate (three month LIBOR plus 2.95%, floating)as the trust preferred securities.  The Company has the right to defer interestpayments on the Debentures at any time or from time to time for a period notexceeding 20 consecutive quarters provided that no extension period may extendbeyond the stated maturity of the related Debentures.  During any suchextension period, distributions on the trust preferred certificates would alsobe deferred.

Payment of periodic cash distributions and payment upon liquidation orredemption with respect to the trust preferred securities are guaranteed by theCompany to the extent of funds held by the grantor trust (the "PreferredSecurities Guarantee").  The Preferred Securities Guarantee, when takentogether with the Company's other obligations under the Debentures, constitutea full and unconditional guarantee, on a subordinated basis, by the Company ofpayments due on the trust preferred securities.

The trust preferred securities and the related debentures were issuedon December 18, 2003.  Distributions on the trust preferred securities are paidquarterly.  Interest on the Debentures is paid on the corresponding dates.  Theaggregate principal amount of Debentures outstanding at December 31, 2008 and2007 were $3,093,000.  Certain issue costs have been deferred and recorded inother assets in the accompanying balance sheet.  The issue costs are beingamortized over the initial five year period until the first call date.  Therewas no remaining outstanding balance of the unamortized issue costs at December31, 2008 and at December 31, 2007 the balance was $15,987, and was included inother assets.

18

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 9.   STOCK COMPENSATION PLANS**

**Years Ended  December 31,**

**2008**

** **

2007

** **

** **

**Weighted Average**

** **

Weighted Average

**Number**

** **

**Exercise Price**

** **

Number

Exercise Price

Under option, beginning of year

**82,960 **

** $**

**13.60 **

82,960   

 $

13.60   

Granted

**- **

**-   **

-   

-     

Exercised

**(40,960)**

**10.05 **

-   

-     

Terminated

**- **

**-   **

-   

-     

Under option, end of year

**42,000 **

**17.07 **

82,960   

13.60   

** **

** **

Exercisable, end of year

**40,000 **

** $**

**16.90 **

78,960   

 $

13.25   

** **

Total intrinsic value of exercised shares

** **

** $**

**489,520 **

 $

-     

** **

Weighted average remaining contractual term of exercisable  options (in years)

** **

**4.4 **

3.1 

** **

Aggregate intrinsic value of total outstanding options

** **

** $**

**333,000 **

 $

1,360,200   

** **

** **

Aggregate intrinsic value of exercisable options

** **

** $**

**204,000 **

 $

1,322,200   

The Company has an incentivestock option plan that allows for an annual increase in shares available foroptions up to a total of 150,000 shares.  At December 31, 2008, the Company hasavailable 134,351 shares of common stock for issuance to key employees anddirectors.  Options are granted at the fair value of the Company's common stockon the date of grant and expire ten years from the effective date of thegrant.  The options vest at a rate of 20% per year.

Other pertinentinformation related to the options is as follows:

19

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 9.   STOCK COMPENSATION PLANS (Continued)**

Additional information pertaining to optionsoutstanding at December 31, 2008 is as follows:

** **

**Options Outstanding**

** **

**Options Exercisable**

** **

** **

**Weighted Average Remaining Contractual Life**

** **

**Weighted Average Exercise Price**

** **

** **

** **

**Weighted Average Exercise Price**

**Range****of Exercise****Price**

**Number Outstanding**

** **

** **

**Number Exercisable**

** **

$16

32,000 

4 years

 $

16.00  

32,000 

 $

16.00  

$19

5,000 

6 years

 $

19.00  

4,000 

 $

19.00  

$22

5,000 

6 years

 $

22.00  

4,000 

 $

22.00  

In 1998, the Company granted 140,000 commonstock warrants to its initial directors.  In 2008, the warrants were exercisedat a price of $10 per share.  There were no remaining warrants outstanding atDecember 31, 2008.

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model.  No options were granted in 2008 or 2007.  At December31, 2008, there was $6,352 in unrecognized compensation expense related tostock-based payments, which is expected to be recognized during 2009 in total.

**NOTE 10.   OTHER EMPLOYEE AND DIRECTORBENEFIT PLANS**

** **

**Employee Stock Ownership Plan**

In 2002, the Companyestablished a leveraged Employee Stock Ownership Plan with 401-k provisions(KSOP) for the benefit of employees who meet certain eligibility requirements,subject to IRS limits.  Contributions to the KSOP are determined by the Boardof Directors of the Company taking into consideration the financial conditionand fiscal requirements of the Company and such other factors as the Board ofDirectors may deem pertinent and applicable under the circumstances.  TheCompany made no matching contributions in 2008 and $70,757 in 2007,respectively.  The KSOP has no debt as of December 31, 2008 and December 31,2007.  The match for 2007 was paid in Company stock at approximately $30 pershare.  The KSOP owned 21,212 and 22,083 shares of the Company's common stockas of December 31, 2008 and 2007, respectively, which were purchased solelyfrom employee contributions to the KSOP.  During 2008, 871 shares wereliquidated by plan participants.  These shares were retired.  During 2007, theKSOP purchased 4,327 shares from outside shareholders at prevailing marketprices.  

In accordance with theKSOP, the Company is expected to honor the rights of certain participants todiversify their account balances or to liquidate their ownership of the commonstock in the event of termination.  The purchase price of the common stockwould be based on the fair market value of the Company's common stock as of theannual valuation date, which precedes the date the put option is exercised. However, since the redemption of common stock is outside the control of theCompany, the Company's maximum cash obligation based on the approximate marketprices of common stock as of the reporting date has been presented outsidestockholders' equity.  The amount presented as redeemable common stock held bythe KSOP in the consolidated balance sheet represents the Company's maximumcash obligation and has been reflected as a reduction of retained earnings.

20

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 10.   OTHER EMPLOYEE AND DIRECTORBENEFIT PLANS (Continued)**

** **

**Deferred Compensation Plan**

In 2002, the Companyestablished a deferred compensation plan providing for death and retirementbenefits for its directors.  The balance of deferred compensation included inother liabilities at December 31, 2008 and December 31, 2007 amounted to $752,357and $545,436, respectively.  Deferred compensation and other associated expensesamounted to $206,921 and $96,313 for the years ended December 31, 2008 and 2007,respectively.  Original expense accruals accounted for the present value offuture cash flows from the plan.  The current accruals account for the actualdeferred amounts plus any applicable interest earned in the deferred feeaccounts at the present time.

In December 2004, theCompany established a deferred compensation plan providing for death andretirement benefits for certain officers.  The balance of deferred compensationincluded in other liabilities amounted to $265,593 and $187,437 at December 31,2008 and 2007.  Expense recognized for deferred compensation amounted to $78,156and $62,772 for the years ended December 31, 2008 and 2007.

The estimated amounts tobe paid under these compensation plans are being offset by the earnings of lifeinsurance policies on the participants.  The balance of policy surrender valuesincluded in other assets amounted to $6,127,408 and $5,811,938 at December 31,2008 and 2007, respectively.  During 2007, the Bank purchased approximately$3,200,000 in additional life insurance on the participants.  The offset toexpenses from the earnings on these policies amounted to $315,470 and $161,899for the year ended December 31, 2008 and 2007, respectively.

**NOTE 11.  INCOME TAXES (BENEFITS)**

Income tax expense (benefit) consists of thefollowing:

**Years Ended  December 31,**

**2008**

2007 

** **

Current

** $**

**(806,014)**

 $

1,494,270   

Deferred

**(796,533)**

(163,892)

**Income tax expense (benefit)**

** $**

**(1,602,547)**

 $

1,330,378   

** **

** **

The Company's income taxexpense (benefit) differs from the amounts computed by applying the federalincome tax statutory rates to income (loss) before income taxes (benefits).  Areconciliation of the differences is as follows:

**Years Ended  December 31,**

**2008**

2007 

** **

Income taxes (benefits) at statutory rate

** $**

**(1,280,446)**

** **

 $

1,339,444   

Tax-free income

**(82,717)**

** **

(87,359)

State tax expense

**(159,052)**

** **

103,263   

Other items

**(80,332)**

** **

(24,970)

**Income tax expense (benefit)**

** $**

**(1,602,547)**

** **

 $

1,330,378   

** **

** **

** **

21

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 11.  INCOME TAXES (BENEFITS)(Continued)**

Thecomponents of deferred income taxes are as follows:

** **

**December 31,**

**2008**

2007 

Deferred tax assets:

** **

 Loan loss reserves

** $**

**1,782,021 **

 $

1,144,034   

 Reserves on foreclosures

**47,313 **

-   

 Loan fees

**82,962 **

100,306   

 Deferred compensation

**384,132 **

276,556   

 Nonaccrual loan interest

**- **

15,698   

 Contributions

**5,831 **

-   

**2,302,259 **

1,536,594   

Deferred tax liabilities:

** **

 Depreciation 

**169,641 **

200,509   

 Securities available for sale

**31,156 **

24,488   

**200,797 **

224,997   

** **

Net deferred tax assets

** $**

**2,101,462 **

 $

1,311,597   

** **

22

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 12.  EARNINGS (LOSSES) PER SHARE**

** **

Presented below is a summary of the componentsused to calculate basic and diluted earnings (lossess) per common share. 

**Years Ended  December 31,**

**2008**

** **

2007

Basic Earnings (losses) Per Share:

** **

** **

Weighted average common shares outstanding

**1,041,313 **

989,820   

Net income (loss)

** $**

**(2,163,469)**

 $

2,609,162   

Basic earnings (losses) per share

** $**

**(2.08)**

 $

2.64   

** **

Diluted Earnings (Losses) Per Share:

** **

Weighted average common shares outstanding

**1,041,313 **

989,820   

Net effect of the assumed exercise of stock options and  warrants based on the treasury stock method using average market prices for  the year

**- **

132,913   

Total weighted average common shares and common stock  equivalents outstanding

**1,041,313 **

1,122,733   

Net income (loss)

** $**

**(2,163,469)**

 $

2,609,162   

Diluted earnings (losses) per share

** $**

**(2.08)**

 $

2.32   

** **

**NOTE 13.  COMMITMENTS AND CONTINGENCIES**

**Loan Commitments**

The Company is a partyto financial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financialinstruments include commitments to extend credit and letters of credit.  Suchcommitments involve, to varying degrees, elements of credit risk and interestrate risk in excess of the amount recognized in the balance sheets.

The Company's exposureto credit loss in the event of nonperformance by the other party to thefinancial instrument for commitments to extend credit and letters of credit isrepresented by the contractual amount of those instruments.  The Company usesthe same credit policies in making commitments and conditional obligations asit does for on-balance sheet instruments.  A summary of the Company'scommitments is as follows:

**December 31,**

**2008**

2007 

** **

Commitments to extend credit

** $**

**17,493,000 **

 $

36,625,000   

Letters of credit

**586,000 **

841,000   

** $**

**18,079,000 **

 $

37,466,000   

** **

23

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract.  Since many of the commitments areexpected to expire without being drawn upon, the total commitment amounts donot necessarily represent future cash requirements.

Letters of credit areconditional commitments issued by the Company to guarantee the performance of acustomer to a third party.  Those letters of credit are primarily issued tosupport public and private borrowing arrangements.  The credit risk involved inissuing letters of credit is essentially the same as that involved in extendingloans to customers.  Collateral is required in instances which the Companydeems necessary.

At December 31, 2008 and2007, the carrying amount of liabilities related to the Company's obligation toperform under financial standby letters of credit was insignificant.  TheCompany has not been required to perform on any financial standby letters ofcredit, and the Company has not incurred any losses on financial standbyletters of credit for the years ended December 31, 2008 and 2007.

**Contingencies**

In the normal course ofbusiness, the Company is involved in various legal proceedings.  The Company isalso involved in other non-recurring legal matters, the ultimate outcome ofwhich has not been determined.  In the opinion of management, any liabilityresulting from such proceedings would not have a material effect on theCompany's financial statements.

**NOTE 14.   CONCENTRATIONS OF CREDIT**

The Company originatesprimarily commercial, residential, and consumer loans to customers in Bartow County and surrounding counties.  The ability of the majority of the Company's customersto honor their contractual loan obligations is dependent on the economy inthese areas.

Approximately 90%percent of the Company's loan portfolio is concentrated in loans secured byreal estate, of which a substantial portion is secured by real estate in theCompany's primary market area.  Accordingly, the ultimate collectibility of theloan portfolio is susceptible to changes in market conditions in the Company'sprimary market area.  The other significant concentrations of credit by type ofloan are set forth in Note 4.

The Company, as a matterof policy, does not generally extend credit to any single borrower or group ofrelated borrowers in excess of 15% of the Bank's capital and surplus as definedby the Office of the Comptroller of the Currency (the "OCC"), or approximately$4,275,000

**NOTE 15.  REGULATORY MATTERS**

** **

On February 3, 2009, the Company's subsidiarybank, Unity National Bank, executed a written agreement with the Office of theComptroller of the Currency ("OCC").  The Company and its Board of Directorshave taken an active role in working with the OCC to improve the condition ofthe Company and the Bank. The OCC will publish a copy of the Agreementavailable on its website which is located at www.occ.treas.gov.  A copy of theagreement was filed under a Form 8-K in February 2009 and incorporated hereinby reference.

The Agreement is based on the findings of theOCC during a 2008 on-site examination.  Since the completion of theexamination, the Board of Directors has aggressively taken steps to address thefindings of the exam and the Company has plans to raise new capital to improveits overall capital position and ensure sufficient capital for the Bank. TheCompany and the Bank are aggressively working to comply with the requirementsof the Agreement. 

Under the terms of the Agreement, the Companyand the Bank are required, within 60 days of entering into the Agreement, tosubmit written plans to the regulators that address the following items:eliminating the basis of criticism of criticized assets; continuing to improvecommercial real estate concentration risk management; on-going review andgrading of the Bank's loan portfolio; improving the Bank's position regardingclassified loans and other real estate owned; revising the Bank's allowance forloan and lease losses policy; maintaining sufficient liquidity at the Bank; andpreparing a financial forecast and strategic plan for a three-year perioddesigned to improve the condition of the Bank. 

24

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

The Board of Directors of the Bank is alsorequired to appoint a Compliance Committee to submit, on a quarterly basis, areport setting forth a description of the action needed to achieve full compliancewith the formal agreement, actions taken to comply, and the results and statusof these actions.

The Bank will continue to conduct its bankingbusiness with customers in a normal fashion. Banking products and services andhours of business will remain the same, and the Bank's deposits will remaininsured by the FDIC to the maximum limits allowed by law. 

The Company and the Bankare subject to various regulatory capital requirements administered by thefederal banking agencies.  Failure to meet minimum capital requirements caninitiate certain mandatory, and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effect on thefinancial statements.  Under capital adequacy guidelines and the regulatory frameworkfor prompt corrective action, the Company and Bank must meet specific capitalguidelines that involve quantitative measures of the assets, liabilities, andcertain off-balance sheet items as calculated under regulatory accountingpractices.  Capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings, and otherfactors.  Prompt corrective actions are not applicable to bank holdingcompanies.

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company andBank to maintain minimum amounts and ratios of Total and Tier I capital torisk-weighted assets, as defined, and of Tier I capital to average assets, asdefined.  Management believes, as of December 31, 2008 and 2007, the Companyand the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2008,the most recent notification from the Federal Deposit Insurance Corporationcategorized the Bank as well capitalized under the regulatory framework forprompt corrective action.  To be categorized as well capitalized, the Bank mustmaintain minimum Total risk-based, Tier I risk-based, and Tier I leverageratios as set forth in the following table.  

25

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 15.  REGULATORY MATTERS (Continued)**

The Company and Bank'sactual capital amounts and ratios are presented in the following table:

** **

** **

** **

**For**

** **

**To Be Well  Capitalized**

** **

** **

** **

** **

**Capital Adequacy**

** **

**Under Prompt  Corrective**

**Actual**

** **

**Purposes**

** **

**Action  Provisions**

**December 31, 2008: (Dollars in '000s)**

**Amount**

**Ratio**

**Amount**

**Ratio**

** **

**Amount**

**Ratio**

**Total Risk-Based Capital to Risk Weighted Assets:**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**   Consolidated**

** $**

**25,990 **

** **

**9.87  %**

** **

** $**

**21,063 **

** **

**8.00  %**

** **

**N/A**

** **

**N/A**

**   Bank**

** $**

**26,367 **

** **

**10.02  %**

** **

** $**

**21,052 **

** **

**8.00  %**

** **

** $**

**26,315 **

** **

**10.00  %**

**Tier I Capital to Risk Weighted Assets:**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**   Consolidated**

** $**

**22,673 **

** **

**8.61  %**

** **

** $**

**10,531 **

** **

**4.00  %**

** **

** N/A**

** **

**N/A**

**   Bank**

** $**

**23,052 **

** **

**8.76  %**

** **

** $**

**10,526 **

** **

**4.00  %**

** **

** $**

**15,789 **

** **

**6.00  %**

**Tier I Capital to Average Assets:**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**   Consolidated**

** $**

**22,673 **

** **

**7.22  %**

** **

** $**

**12,558 **

** **

**4.00  %**

** **

** N/A**

** **

**N/A**

**   Bank**

** $**

**23,052 **

** **

**7.34  %**

** **

** $**

**12,562 **

** **

**4.00  %**

** **

** $**

**15,703 **

** **

**5.00  %**

** **

December 31, 2007: (Dollars in '000s)

Total Risk-Based Capital to Risk Weighted Assets:

   Consolidated

 $

29,700   

11.86 %

 $

20,038   

8.00 %

N/A

N/A

   Bank 

 $

26,703   

10.65 %

 $

20,050   

8.00 %

 $

25,062   

10.00 %

Tier I Capital to Risk Weighted Assets:

   Consolidated

 $

26,567   

10.61 %

 $

10,019   

4.00 %

 N/A 

N/A

   Bank 

 $

23,568   

9.40 %

 $

10,025   

4.00 %

 $

15,037   

6.00 %

Tier I Capital to Average Assets:

   Consolidated

 $

26,567   

9.07 %

 $

11,712   

4.00 %

 N/A 

N/A

   Bank 

 $

23,568   

7.73 %

 $

9,943   

4.00 %

 $

15,245   

5.00 %

** **

** **

**NOTE 16.   FAIR VALUE OF FINANCIAL INSTRUMENTS**

** **

**FairValue Measurements**

On January 1, 2008, the Company adoptedStatement of Financial Accounting Standards No. 157, *Fair ValueMeasurements*("SFAS No. 157").** SFAS No. 157 defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements.  SFAS No. 157 applies to reported balances that arerequired or permitted to be measured at fair value under existing accountingpronouncements; accordingly, the standard does not require any new fair valuemeasurements of reported balances.  On February 12, 2008, the FASB issuedStaff Position 157-2 which defers the effective date of Statement 157 forcertain nonfinancial assets and liabilities to fiscal years beginning afterNovember 15, 2008. All other provisions of Statement 157 are effective forfiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years.

26

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)**

On October 10, 2008, the FASBissued FSP FAS 157-3, *"Determining the Fair Value of a Financial Asset Whenthe Market for that Asset Is Not Active." *This FSP clarified theapplication of SFAS No. 157 in a market that is not active and reiterated thatthe results of distressed sales or forced liquidations are not determinativewhen measuring fair value.  It emphasized that when determining fair value, theuse of management's internal assumptions concerning future cash flowsdiscounted at an appropriate risk-adjusted interest rate is acceptable whenrelevant observable market data do not exist.  In some situations, multipleinputs from a variety of sources may provide the best evidence of fair value. The FSP also described how the use of broker quotes should be considered whenassessing the relevance of observable and unobservable inputs. The impact ofthis statement is minimal, as this FSP provides clarification to existingguidance.

Asdefined in SFAS No. 157, fair value is the price that would be received to sellan asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date.  In determining fair value, theBank uses various methods including market, income and cost approaches.  Basedon these approaches, the Bank often utilizes certain assumptions that marketparticipants would use in pricing the asset or liability, including assumptionsabout risk and or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generallyunobservable inputs.  The Bank utilizes valuation techniques that maximize theuse of observable inputs and minimize the use of unobservable inputs.  Based onthe observability of the inputs used in the valuation techniques the Bank isrequired to provide the following information according to the fair valuehierarchy.  The fair value hierarchy ranks the quality and reliability of theinformation used to determine fair values.  Financial assets and liabilitiescarried at fair value will be classified and disclosed in one of the followingthree categories:

**Level 1**

Quoted prices in active markets  for identical assets or liabilities. Level 1 assets and liabilities include  debt and equity securities that are traded in an active exchange market, as  well as certain U.S. Treasury and U.S. Government-sponsored enterprise debt  securities that are highly liquid and are actively traded in over-the-counter  markets.

**Level 2**

Observable inputs other than  Level 1 prices such as quoted prices for similar assets or liabilities;  quoted prices in markets that are not active; or other inputs that are  observable or can be corroborated by observable market data for substantially  the full term of the assets or liabilities. Level 2 assets and liabilities  include debt securities with quoted prices that are traded less frequently  than exchange-traded instruments and derivative contracts whose value is  determined using a pricing model with inputs that are observable in the  market or can be derived principally from or corroborated by observable  market data.

**Level 3**

Unobservable inputs that are  supported by little or no market activity and that are significant to the  fair value of the assets or liabilities. Level 3 assets and liabilities  include financial instruments whose value is determined using pricing models,  discounted cash flow methodologies, or similar techniques, as well as  instruments for which the determination of fair value requires significant  management judgment or estimation.

**NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)**

** **

**Assets Measured at Fair Valueon a Recurring Basis**

Followingis a description of the valuation methodologies used for instruments measuredat fair value on a recurring basis and recognized in the accompanying balancesheet, as well as the general classification of such instruments pursuant tothe valuation hierarchy.
* *
*Available for Sale Securities*

Where quoted market prices are available in an activemarket, securities are classified within Level 1 of the valuation hierarchy.Level 1 securities would include highly liquid government bonds, mortgageproducts and exchange traded equities. If quoted market prices are notavailable, then fair values are estimated by using pricing models, quotedprices of securities with similar characteristics or discounted cash flows.Level 2 securities include U.S. agency securities, mortgage-backed agencysecurities, obligations of states and political subdivisions and certaincorporate, asset backed and other securities. In certain cases where Level 1 orLevel 2 inputs are not available, securities are classified within Level 3 ofthe hierarchy.
  
27

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)**
 
The following table presents financial assets measured atfair value on a recurring basis:
 
** **

**Fair  Value Measurements at December 31, 2008 Using**

** **

**Quoted  Prices**

**Significant**

**Assets/Liabilities**

**In  Active**

**Other**

**Significant**

**Measured at**

**Markets  for**

**Observable**

**Unobservable**

* *

**Fair Value**

**Identical  Assets**

**Inputs**

**Inputs**

* *

**December 31, 2008**

**(Level  1)**

**(Level  2)**

**(Level  3)**

* *

** **

Available for sale securities

$

18,265,634 

$

- 

$

18,265,634 

$

- 
 
Following is a description of the valuation methodologiesused for instruments measured at fair value on a non-recurring basis andrecognized in the accompanying balance sheet, as well as the general classificationof such instruments pursuant to the valuation hierarchy*.*

* *

* *

*Impaired Loans*

Loan impairment is reported when full payment under the loanterms is not expected. Impaired loans are carried at the present value ofestimated future cash flows using the loan's existing rate, or the fair valueof collateral if the loan is collateral dependent. A portion of the allowancefor loan losses is allocated to impaired loans if the value of such loans isdeemed to be less than the unpaid balance. If these allocations cause theallowance for loan losses to require increase, such increase is reported as acomponent of the provision for loan losses. Loan losses are charged against theallowance when Management believes the uncollectibility of a loan is confirmed. During 2008, certain impaired loans were partially charged-off or re-evaluatedfor impairment resulting in a remaining balance for these loans, net ofspecific allowances, of $23,994,177 as of December 31, 2008.  When the fairvalue of the collateral is based on an observable market price or a currentappraised value, the Company records the loan impairment as nonrecurring Level2. When an appraised value is not available or management determines the fairvalue of the collateral is further impaired below the appraised value and thereis no observable market price, the Company records the loan impairment asnonrecurring Level 3.

** **

28

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)**

* *

*Foreclosed Assets*

Foreclosed assets are adjusted tofair value upon transfer of the loans to foreclosed assets. Subsequently,foreclosed assets are carried at the lower of carrying value or fair value.Fair value is based upon independent market prices, appraised values of thecollateral or management's estimation of the value of the collateral. When thefair value of the collateral is based on an observable market price or acurrent appraised value, the Company records the foreclosed assets asnonrecurring Level 2. When an appraised value is not available or management determinesthe fair value of the collateral is further impaired below the appraised valueand there is no observable market price, the Company records the foreclosedasset as nonrecurring Level 3.

Thefollowing table presents the assets and liabilities carried on the balancesheet by caption and by level within the FAS No. 157 valuation hierarchy (asdescribed above) as of December 31, 2008, for which a nonrecurring change infair value has been recorded during the year ended December 31, 2008.

Carrying value at December  31, 2008

Year ended December 31,  2008

*(In Thousands)*

Total

Level 1

Level 2

Level 3

Total gains (losses)

** **

Impaired loans

$

23,994,177 

$

- 

$

- 

$

23,994,177 

$

(5,655,849)

Foreclosed assets

$

9,136,196 

$

- 

$

- 

$

9,136,196 

(775,939)

** **

$

(6,431,788)

**Fair Value Option**

In February, 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities, including anamendment of FASB Statement No. 115*.  SFAS No. 159 allows companies toreport selected financial assets and liabilities at fair value. The changes infair value are recognized in earnings and the assets and liabilities measuredunder this methodology are required to be displayed separately on the balancesheet. While SFAS No. 159 became effective for the Company beginning January 1,2008, the Company has not elected the fair value option that is offered by thisstatement.

**Fair Value Disclosures**

The fair value of a financial instrument is the currentamount that would be exchanged between willing parties, other than in a forcedliquidation.  Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company'svarious financial instruments.  In cases where quoted market prices are notavailable, fair values are based on estimates using present value or othervaluation techniques.  Those techniques are significantly affected by theassumptions used, including the discount rate and estimates of future cashflows.  Accordingly, the fair value estimates may not be realized in animmediate settlement of the instrument.  SFAS No. 107, *Disclosures aboutFair Values of Financial Instruments,*excludes certain financialinstruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarilyrepresent the underlying fair value of the Company.

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

**Securities: **Fair values forsecurities are based on available quoted market prices.  The carrying values ofrestricted equity securities with no readily determinable fair valueapproximate fair values.

** **

**Loans: **For variable-rate loansthat reprice frequently and have no significant change in credit risk, fairvalues are based on carrying values.  For other loans, the fair values areestimated using discounted cash flow analyses, using interest rates currentlybeing offered for loans with similar terms to borrowers with similar creditquality.  Fair values for impaired loans are estimated using discounted cash flowanalyses or underlying collateral values, where applicable.

** **

**BankOwned Life Insurance: **The carrying amounts of bank owned life insuranceapproximates their fair values.

** **

29

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 16.   FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)**

** **

**Deposits: **The carrying amounts ofdemand deposits, savings deposits, and variable-rate certificates of deposit approximatetheir fair values.  Fair values for fixed-rate certificates of deposit areestimated using a discounted cash flow calculation that 

applies interest ratescurrently being offered on certificates to a schedule of aggregated expectedmonthly maturities on time deposits.

**Other Borrowings and GuaranteedSubordinated Debentures: **The carrying amounts of variable-rate other borrowings, guaranteedsubordinated debentures and federal funds purchased approximate their fairvalues.  Fair values for fixed-rate other borrowings are estimated using adiscounted cash flow calculation that applies interest rates currently beingoffered on other borrowings with similar terms.

**Accrued Interest: **The carrying amounts ofaccrued interest approximate their fair values.

**Off-Balance SheetInstruments: **Fairvalues of the Company's off-balance sheet financial instruments are based onfees currently charged to enter into similar agreements.  Since the majority ofthe Company's off-balance sheet instruments consist of nonfee-producing,variable-rate commitments, the Company has determined they do not have adistinguishable fair value.

The carrying amounts andestimated fair values of the Company's financial instruments were as follows:

**December 31, 2008**

December 31, 2007

**Carrying**

**Fair**

Carrying

Fair

**Value**

**Value**

Value

Value

(Dollars in Thousands)

**Financial assets:**

Cash, due from banks,  interest-bearing deposits in banks, and federal funds sold

** $**

**16,275 **

** **

** $**

**16,275 **

 $

10,366   

 $

10,366   

Securities available for  sale

**18,266 **

**18,266 **

26,670   

26,670   

Restricted equity securities

**2,882 **

**2,882 **

2,138   

2,138   

Loans, net

**244,248 **

**243,154 **

239,749   

242,031   

Bank owned life insurance

**6,127 **

**6,127 **

5,812   

5,812   

Accrued interest receivable

**1,490 **

**1,490 **

2,010   

2,010   

** **

** **

**Financial liabilities:**

** **

** **

Deposits

**249,083 **

**255,235 **

254,384   

255,738   

Borrowings

**38,900 **

**41,498 **

22,250   

19,618   

Guaranteed subordinated  debentures

**3,093 **

**3,093 **

3,093   

3,093   

Accrued interest payable

**502 **

**502 **

510   

510   

30

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 17.  SUPPLEMENTAL FINANCIAL DATA**

Components of other operating expenses in excessof 1% of total revenue are as follows:

**Years  Ended December 31,**

**2008**

** **

2007 

Data  Processing

** $**

**768,068 **

 $

669,136   

Marketing

**234,393 **

302,652   

Expenses  related to foreclosed properties and repossessed assets.

** $**

**273,326 **

 $

16,034   

** **

**NOTE 18.  PARENT COMPANY FINANCIAL INFORMATION**

The followinginformation presents the condensed balance sheets, statements of operations andcash flows of Unity Holdings, Inc. as of and for the years ended December 31,2008 and 2007:

**CONDENSED  BALANCE SHEETS**

**2008**

** **

2007 

**Assets**

** **

Cash

** $**

**920,692 **

 $

90,435   

Investment in subsidiary

**23,787,978 **

23,615,300   

Restricted equity securities, at cost

**93,000 **

93,000   

Other assets

**97,092 **

110,503   

**      Total assets**

** $**

**24,898,762 **

 $

23,909,238   

** **

**Liabilities, Redeemable Common Stock and Stockholders'  Equity**

** **

Miscellaneous liabilities

** $**

**20,552 **

 $

10,093   

Redeemable common stock held by KSOP

**551,512 **

662,490   

Other borrowings

**1,500,000 **

-   

Subordinated debentures

**3,093,000 **

3,093,000   

Stockholders' equity 

**19,733,698 **

20,143,655   

**Total redeemable common stock and stockholders' equity**

** $**

**24,898,762 **

 $

23,909,238   

31

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 18.  PARENT COMPANY FINANCIAL INFORMATION (Continued)**

**CONDENSED  STATEMENTS OF OPERATIONS**

** **

** **

** **

** **

**2008**

** **

2007 

**Income**

** **

** **

Dividends from subsidiary

** $**

**500,000 **

** **

 $

300,000   

Interest income on investments

**5,959 **

** **

7,890   

    Total Income

**505,959 **

** **

307,890   

** **

** **

**Expenses**

** **

** **

Interest expense on bank notes

**36,892 **

** **

3,229   

Interest expense on subordinated debentures

**193,800 **

** **

263,364   

Noninterest expense

**32,562 **

** **

37,007   

    Total Expenses

**263,254 **

** **

303,600   

** **

** **

** **

Income before income tax benefits and equity in  undistributed income (loss) of subsidiary 

**242,705 **

** **

4,290   

       Income tax benefits 

**(97,092)**

** **

(94,517)

Income before equity in undistributed income (loss) of  subsidiary

**339,797 **

** **

98,807   

**Equity in undistributed income (loss) of subsidiary**

**(2,503,266)**

** **

2,510,355   

        **Net income (loss)**

** $**

**(2,163,469)**

** **

 $

2,609,162   

32

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 18.  PARENT COMPANY FINANCIAL INFORMATION (Continued)**

**CONDENSED  STATEMENTS OF CASH FLOWS**

** **

** **

** **

** **

**2008**

** **

2007 

**OPERATING ACTIVITIES**

 Net income (loss) 

** $**

**(2,163,469)**

** **

 $

2,609,162   

 Adjustments to reconcile net income (loss) to net cash

** **

** **

    provided by operating activities:

** **

** **

Equity in undistributed  (income) loss of subsidiary 

**2,503,266 **

** **

(2,510,355)

Net other operating activities

**5,865 **

** **

27,510   

          Net cash provided by operating activities

**345,662 **

** **

126,317   

** **

** **

**INVESTING ACTIVITIES**

** **

** **

 Investment in subsidiary

**(2,650,000)**

** **

(1,296,500)

          Net cash used in investing activities

**(2,650,000)**

** **

(1,296,500)

** **

** **

**FINANCING ACTIVITIES**

** **

** **

   Proceeds from other borrowings

**2,000,000 **

** **

250,000   

   Repayments of other borrowings

**(500,000)**

** **

(250,000)

   Purchase of common stock

**- **

** **

(74,189)

   Proceeds from exercise of stock options and warrants

**1,634,595 **

** **

-   

          Net cash provided by (used in) financing  activities

**3,134,595 **

** **

(74,189)

** **

** **

Net increase (decrease) in cash

**830,257 **

** **

(1,244,372)

Cash at beginning of year

**90,435 **

** **

1,334,807   

Cash at end of year

** $**

**920,692 **

** **

 $

90,435   

33 |
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