**UNITY HOLDINGS, INC.SELECTED FINANCIAL DATA**

| ** **

** **

**UNITY HOLDINGS, INC.** |                   |                   |                   |                   |                   |
|--------------------------------------------------|-------------------|-------------------|-------------------|-------------------|-------------------|
| **SELECTED FINANCIAL DATA**                      |                   |                   |                   |                   |                   |
| **(Dollars in 000s)**                            |                   | **2008**          | **2007**          | **2006**          | **2005**          | **2004** |
| **STATEMENT OF CONDITION**                       |                   |                   |                   |                   |                   |
| **Assets:**                                      | ** **        |                   |                   |                   |                   |  |
| Cash & Due From Banks                        | 4,197        | 6,312        | 4,972        | 3,765        | 2,817        |
| Federal Funds Sold \ Int. Earning Deps           | 12,078       | 4,054        | 248          | 857          | 3,800        |
| Investment Securities                            | 21,148       | 28,808       | 22,355       | 21,145       | 15,488       |
| Gross Loans                                      |                   | 249,636      | 243,030      | 224,117      | 195,599      | 167,333  |
| Loan Loss Provision                              | 5,388        | 3,281        | 2,791        | 2,445        | 2,259        |
|  Net Loans                                  |                   | 244,248      | 239,749      | 221,326      | 193,154      | 165,074  |
| Fixed Assets                                     |                   | 10,990       | 11,417       | 11,813       | 9,402        | 8,091  |
| Other Assets                                     |                   | 20,369       | 11,662       | 5,859        | 5,011        | 4,191  |
| **TOTAL ASSETS**                                 | ** **        | **313,030 ** | **302,002 ** | **266,573 ** | **233,334 ** | **199,461 ** |
| **Liabilities & Capital:**                   |                   |                   |                   |                   |                   |
| Non-maturity Deposits                            | 103,025      | 132,822      | 128,348      | 113,668      | 77,340       |
| Time Dep's                                       |                   | 146,058      | 121,562      | 81,136       | 69,651       | 84,070  |
| Total Deposits                                   |                   | 249,083      | 254,384      | 209,484      | 183,319      | 161,410  |
| FHLB & Other Borrowings                      | 38,900       | 22,250       | 33,850       | 29,250       | 19,150       |
| Guaranteed subordinated debentures               | 3,093        | 3,093        | 3,093        | 3,093        | 3,093        |
| Borrowings                                       |                   | 41,993       | 25,343       | 36,943       | 32,343       | 22,243  |
| Other Liabilties                                 |                   | 1,668        | 1,469        | 2,042        | 974          | 843  |
| TOTAL LIABILITIES                                | 292,744      | 281,196      | 248,469      | 216,636      | 184,496      |
| Redeemable KSOP shares                           | 552          | 662          | 506          | 106          | 82           |
| Capital                                          |                   | 19,734       | 20,144       | 17,598       | 16,592       | 14,883  |
| **TOTAL LIAB. & CAPITAL**                    | **313,030 ** | **302,002 ** | **266,573 ** | **233,334 ** | **199,461 ** |

| 32 |
|----|

----

**UNITY HOLDINGS, INC.SELECTED FINANCIAL DATA**

|                                               |                  |                   |                   |                   |                   |                  |
|-----------------------------------------------|------------------|-------------------|-------------------|-------------------|-------------------|------------------|
| **INCOME STATEMENT**                          | ** **       | ** **        | ** **        | ** **        |                   |
| Interest Income                               |                  | 19,017       | 22,829       | 18,942       | 14,435       | 10,949      |
| Interest Expense                              |                  | 10,403       | 11,808       | 8,967        | 6,114        | 3,930       |
| Net Interest Income                           | 8,614       | 11,021       | 9,975        | 8,321        | 7,019        |
|    Provision for Loan Losses        | 4,433       | 738          | 461          | 221          | 732          |
| Net Int Income after LL Prov                  | 4,181       | 10,283       | 9,514        | 8,100        | 6,287        |
| Noninterest Income                            | 2,031       | 2,116        | 1,598        | 1,296        | 1,090        |
| Noninterest Expense                           | 9,979       | 8,460        | 8,104        | 6,479        | 4,993        |
| Income (Loss) Before Taxes                    | (3,767)          | 3,939        | 3,008        | 2,917        | 2,384        |
| Income Tax Expense (Benefit)                  | (1,603)          | 1,330        | 1,010        | 954          | 773          |
| **DIRECT NET INCOME (LOSS)**                  | **(2,164)**      | **2,609 **   | **1,998 **   | **1,963 **   | **1,611 **   |
|                                               |                  |                   |                   |                   |                   |                  |
| **AVERAGE BALANCES**                          |                  |                   |                   |                   |                   |
| Gross Loans                                   |                  | 257,085      | 241,083      | 207,771      | 178,667      | 150,704     |
| Earning Assets                                |                  | 287,721      | 272,599      | 231,127      | 202,736      | 166,420     |
| Assets                                        |                  | 312,986      | 295,135      | 248,627      | 217,312      | 175,840     |
| Deposits                                      |                  | 250,673      | 238,648      | 199,600      | 175,995      | 141,075     |
| Borrowings & guaranteed subordinated debt | 37,439      | 35,772       | 30,452       | 23,848       | 19,284       |
| Stockholders Equity                           | 19,939      | 18,807       | 17,095       | 15,738       | 14,235       |
|                                               |                  |                   |                   |                   |                   |                  |
| Shares outstanding at year end                | 1,148,513   | 987,557      | 990,030      | 1,014,510    | 1,013,510    |
| Weighted Avg Shares  (undiluted)         | 1,041,313   | 989,820      | 993,036      | 1,014,154    | 1,013,510    |
|                                               |                  |                   |                   |                   |                   |                  |
| **KEY RATIOS**                                |                  |                   |                   |                   |                   |                  |
| Return on Average Assets                      | (0.69)           | 0.88    | 0.80    | 0.90    | 0.92    |
| Return on Average Equity                      | (10.85)          | 13.87   | 11.69   | 12.47   | 11.32   |
| Dividend Payout Ratio                         | 0.00   | 0.00    | 0.00    | 0.00    | 0.00    |
| Net Interest Margin                           | 2.99   | 4.04    | 4.32    | 4.10    | 4.22    |
| Equity To Assets                              |                  | 6.30    | 6.67    | 6.60    | 7.11    | 7.46   |
| Earnings Per Share (undiluted)                | (2.08)           | 2.64    | 2.01    | 1.94    | 1.59    |
| Average Book Value per Share                  | 17.36       | 19.04        | 17.27        | 15.51        | 14.05        |

| 33 |
|----|

----

**Management's Discussion and Analysis**

**Of Financial Condition and Results ofOperations**

The following is a discussion of our financialcondition and the financial condition of our bank subsidiary, Unity NationalBank, at December 31, 2008 and 2007 and the results of operations for the yearsthen ended. The purpose of this discussion is to focus on information about ourfinancial condition and results of operations that are not otherwise apparentfrom our audited consolidated financial statements.  Reference should be madeto those statements and the selected financial data presented elsewhere in thisreport for an understanding of the following discussion and analysis.

**Forward-Looking Statements**

We may from time to time make written or oralforward-looking statements, including statements contained in filings with theSecurities and Exchange Commission and our reports to stockholders.  Statementsmade in this report, other than those concerning historical information, shouldbe considered forward-looking and subject to various risks and uncertainties. Forward-looking statements are made based upon management's belief as well asassumptions made by, and information currently available to, managementpursuant to "safe harbor" provisions of the Private Securities Litigation ReformAct of 1995.  Our actual results may differ materially from the resultsanticipated in forward-looking statements due to a variety of factors,including governmental monetary and fiscal policies, deposit levels, loandemand, loan collateral values, securities portfolio values, interest rate riskmanagement, the effects of competition in the banking business from othercommercial banks, thrifts, mortgage banking firms, consumer finance companies,credit unions, securities brokerage firms, insurance companies, money marketfunds and other financial institutions operating in our market area andelsewhere, including institutions operating through the Internet, changes in governmentalregulation relating to the banking industry, including regulations relating tobranching and acquisitions, failure of assumptions underlying the establishmentof reserves for loan losses, including the value of collateral underlyingdelinquent loans and other factors.  We caution that these factors are notexclusive.  We do not undertake to update any forward-looking statement thatmay be made from time to time by us, or on our behalf.

**Critical Accounting Policies**

We have adopted various accountingpolicies which govern the application of accounting principles generally acceptedin the United States of America in the preparation of our financialstatements.  Our significant accounting policies are described in the footnotesto the consolidated financial statements at December 31, 2008.

Certain accounting policies involvesignificant judgments and assumptions by us which have a material impact on thecarrying value of certain assets and liabilities.  We consider these accountingpolicies to be critical accounting policies.  The judgments and assumptions weuse are based on historical experience and other factors, which we believe tobe reasonable under the circumstances.  Because of the nature of the judgmentsand assumptions we make, actual results could differ from these judgments andestimates which could have a material impact on our carrying values of assetsand liabilities and our results of operations.

We believe the allowance for loan losses is acritical accounting policy that requires the most significant judgments and estimates used in preparation of ourconsolidated financial statements.  Refer to the portion of this discussionthat addresses our allowance for loan losses for a description of our processesand methodology for determining our allowance for loan losses.

34

----

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Overview**

The Company incurred a loss of approximately$2.2 million for 2008.  As the economic environment deteriorated, the Companysaw the credit quality of the loan portfolio weaken.  Increased losses in theloan portfolio resulted in larger than normal loan loss provisions fromearnings.  The Company experienced substantial growth for the first six monthsof the year before deleveraging the balance sheet. 

**Outlook**

As the economic environment worsened, the loanportfolio viability has worsened.  Nonperforming assets and foreclosed realestate have increased substantially over historical levels.  The subsidiarybank has entered into a written formal agreement with its primary regulatorwhich outlines specific steps needed to improve loan portfolio strength,preserve liquidity, and increase capital levels to absorb losses.  For much ofthe third and fourth quarter of 2008, the Bank was addressing these issues somany of the processes prescribed by the OCC are already in place.  We have seena slow-down in the amount of loans going on non-accrual, an indicator that weare seeing an end to the accelerated problem loan pace.  While a prolongedperiod of economic downturn could continue to erode credit quality, Managementbelieves it has adequately assessed the risk in the portfolio and has put stepsin place to strengthen the Bank.

**Financial Condition at December 31, 2008 and 2007**

As of December 31, 2008, we had total assets of$313 million, an increase of 3.6% over assets of $302.0 million at December 31,2007.  Total interest-earning assets were $282.9 million at December 31,2008 or 90.4% of total assets, compared to 91.4% for 2007.  Our primaryinterest-earning assets at December 31, 2008 were loans, which made up 88.2% oftotal interest-earning assets, the same ratio reported for December 31, 2007. Other real estate owned increased $6.8 million for the year ended December 31,2008 when compared to 2007 levels.  We have been aggressive in dealing withproblem loans and look to move problem assets off our books to maintain capitalstrength.  Deposit balances shrank $5.3 million during 2008, and externalborrowings increased $16.7 million.  While prime lending rates began falling inthe first quarter of 2008, local market deposit pricing did not reactaccordingly until late in the 3rd quarter.  FHLB borrowings andbrokered CDs allowed us to maintain our margins better than the local marketdid.

Fed funds grew $7.3 million over 2007 balancesin an effort to maintain strong liquidity during uncertain times.  Theinvestment portfolio decreased $7.7 million through maturities, calls, and bondsales.  The cash generated from these activities allowed us to increase ourcash on hand.  Some of these funds offset the attrition of high ratedeposits.   The Company injected approximately $2.7 million into the subsidiaryto maintain acceptable capital levels.

**Liquidity and Capital Resources**

The purpose of liquidity management is to ensurethat there are sufficient cash flows to satisfy demands for credit, depositwithdrawals, and other needs.  Traditional sources of liquidity include assetmaturities and growth in core deposits.  A company may achieve its desiredliquidity objectives from the management of assets and liabilities and throughfunds provided by operations.  Funds invested in short-term marketableinstruments and the continuous maturing of other earning assets are sources ofliquidity from the asset perspective.  The liability base provides sources ofliquidity through deposit growth, the maturity structure of liabilities, andaccessibility to external sources of funds.

35

----

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

External funding sources allowed us to balanceour interest rate risk as loan yields began to decline.  Federal Home Loan Bank("FHLB") advances were $37.4 million at December 31, 2008 compared to $22.3million at December 31, 2007.  In-market CDs did not go below 3.00% untilaround the third quarter.  Secondary market CDs grew from $17.2 million in 2007to $31.7 million at December 31, 2008.  These funding levels carried a rate ofapproximately 3.94%.  However, many of these had terms greater than one year,for which in-market CDs cost approximately 4.25% or more through the year. Both of these portfolios prove to be more stable than local CDs.  With ratecompetition high in our market between institutions, it is not uncommon to seea time deposit cashed in early and moved to other banks.  We have also been onthe receiving end of such transactions.  We closely monitor our exposure inthese resources.  At December 31, 2008, approximately 24.0% of the Bank'sfunding base (deposits and FHLB advances) was made up of external sources.

Scheduled loan payments are a relatively stablesource of funds, but loan payoffs and deposit flows fluctuate significantly,being influenced by interest rates and general economic conditions andcompetition.   We attempt to price our deposits to meet our asset/liabilityobjectives consistent with local market conditions. 

Our liquidity and capital resources aremonitored on a periodic basis by management and Federal regulatoryauthorities.  As determined under guidelines established by the Asset/LiabilityCommittee and acceptable current banking practices, our core liquidity ratio was9.08% at December 31, 2008.  The Company's liquidity position was strong atDecember 31, 2008.  The bank had 61.8% of its external funding lines availableto meet significant liquidity demands on short notice.   

At December 31, 2008, we had loan commitmentsoutstanding of approximately $18.1 million.  Because these commitmentsgenerally have fixed expiration dates and many will expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  If needed, we have the ability to borrow and purchase federalfunds from other financial institutions.  At December 31, 2008, we had arrangementswith three correspondent commercial banks for short-term unsecured advances totaling$13.5 million, of which none was outstanding. Also in place with acorrespondent commercial bank is a security repurchase agreement utilizingsecurities available for sale as the underlying collateral with a line ofsecured credit of approximately $4 million.   At December 31, 2008, we also hadover $41.9 million available (subject to adequate collateral) at the FederalHome Loan Bank.  We also have assets pledged to the Fed discount window, whichgives us the ability to borrow up to approximately $29 million at December 31,2008.  By having this readily available credit, our secondary liquidity ratiowas 61.8%, substantially higher than our 20% minimum directive.

At December 31, 2008, our capital levels were compliantwith regulatory minimum capital requirements, despite experiencing a loss fromoperations of approximately $2.2 million.  The parent company injected approximately$2.7 million to the subsidiary for capital strength.  For regulatory purposes,the net unrealized gains on securities available for sale are excluded in thecomputation of the capital ratios.

In the future, our primary source of fundsavailable to Unity Holdings, Inc. will be the payment of dividends by the Bank.Banking regulations limit the amount of the dividends that may be paid withoutprior approval of the bank's regulatory agency.  Currently, the Bank mustreceive regulatory approval for any dividends paid to shareholders.

The minimum capital requirements to beconsidered "well capitalized" under prompt corrective action provisions and theactual capital ratios for us and the Bank as of December 31, 2008 are asfollows:

|                            | **Actual**       | ** ** | **Regulatory** |
|----------------------------|------------------|------------|----------------|
|                            | **Consolidated** | ** ** | **Bank**       | ** ** | **Requirements** |
| Leverage capital ratio     | 7.22 %      |            | 7.34 %    |  | 5.00 % |
| Risk-based capital ratios: |                  |            |                |  |  |
|    Core capital  | 8.61 %      |            | 8.76 %    |  | 6.00 % |
|    Total capital | 9.87 %      |            | 10.02 %   |  | 10.00 % |

36

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

These ratios may decline depending on furtherlosses on problem loans, but are expected to exceed the regulatory minimum requirements.  We currently are at the minimum capital limits to remain well-capitalized.  Ifwe drop to the "adequately capitalized" tier, our ability to use externalfunding sources may be impaired.  Therefore, we will be increasing our capitalbase to give us more strength to absorb losses during 2009.  We are alsoshrinking the balance sheet to a size more commensurate with today's capitalexpectations.

Effects of Inflation

The impact of inflation on banks differs fromits impact on non-financial institutions.  Banks, as financial intermediaries,have assets which are primarily monetary in nature and that tend to fluctuatein concert with inflation.  A bank can reduce the impact of inflation if it canmanage its rate sensitivity gap.  This gap represents the difference betweenrate sensitive assets and rate sensitive liabilities.  We, through ourasset/liability committee, attempt to structure the assets and liabilities andmanage the rate sensitivity gap, thereby seeking to minimize the potentialeffects of inflation.  For information on the management of our interest ratesensitive assets and liabilities, see "Asset/Liability Management".

** **

**Results of Operations****For The Years EndedDecember 31, 2008 and 2007**

Net Interest Income

Our results of operations are determined by ourability to manage interest income and expense effectively, to minimize loan andinvestment losses, to generate non-interest income, and to control operatingexpenses.  Because interest rates are determined by market forces and economicconditions, our ability to generate net interest income depends on our abilityto obtain an adequate net interest spread between the rate we pay oninterest-bearing liabilities and the rate we earn on interest-earning assets.

Our tax equivalent net yield on average interestearning assets was 3.04% in 2008 as compared to 4.09% in 2007.  The primarymarket rates used to price loans dropped dramatically beginning in the firstquarter.  The rate earned on average interest-earning assets decreased to 6.61%in 2008 from 8.37% in 2007.  The rate paid on average interest-bearing liabilitiesdecreased to 3.80% in 2008 from 4.61% in 2007.  In other words, the yields onassets decreased 176 basis points while the cost of funds decreased  81 basispoints.  Average interest bearing assets grew $15.1 million, with average loansgrowing $16.0 million.  Average interest-bearing liabilities increased by $17.7million with average time deposits and FHLB advances accounting for the majorityof this increase.  The growth came primarily from outside funding sources,which carried more favorable yields.  Available FHLB borrowings were at muchlower yields than in-market CDs.  The wholesale CDs added during 2008 mostlyhave terms longer than 12 months to lock in favorable rates over a longerperiod.  During the year, we decreased the rates on our transaction-baseddeposit products, a strategy rarely undertaken for the Company.  If Fedmovements slow down or stop during 2009, margins should be stable and perhapsimprove as funding reprices to lower levels.

Provision for Loan Losses

37

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

The provision for loan loses was $4,433,000 in2008, compared to $738,000 for 2007.  The provision reflects the increasedinstability of the loan portfolio.  The Bank adopted an aggressive stance indealing with problem loans during 2008.  Each impaired loan was analyzed andreviewed for the amount of impairment.  Then we established appropriatereserves to cover the impairment.  The allowance for loan losses as apercentage of total loans was 2.16% at December 31, 2008 and 1.35% at December31, 2007.  We have been aggressive in charging off full loans or portions ofloans and foreclosed real estate balances.  Our charge offs represent 0.9% ofour average loan portfolio, compared to 0.10% for 2007.  The increase in theratio was out of an abundance of caution during the economic downturn.  TheBank does not have as large a concentration in construction lending as some ofits peers.

Other Income

Other income consists of service charges ondeposit accounts, mortgage loan origination fees, investment services, andother miscellaneous revenues and fees.  Other income was $2,031,000 in 2008 ascompared to $2,116,000 for 2007.  The Bank realized $224,000 in gains on the saleof real estate in 2007 versus a net loss on the sale of real estate in 2008 of$443,000.  Bank owned life insurance ("BOLI) contributed an additional $94,000over 2007 levels.  The investment in BOLI performed well.  These proceeds areused to offset the expense of certain employee benefits.  Trust and brokerageincome increased $71,000 for the year ended December 31, 2008 when compared tothe year ended December 31, 2007.  The Bank was successful in its referralefforts regarding its investment business.  As CD rates decreased, we were ableto move some customers who were less risk averse into investment products,therefore earning a commission rather than losing the relationship.  Servicecharge income saw an increase of $66,000 in 2008 over 2007's performance.  Thedecrease in deposit balances resulted in a lower growth in service charges;2007 levels were $249,000 higher than 2006 levels.  However, we saw slightincreases in NSF fee income and ATM network income throughout 2008.  Mortgagefee income decreased $68,000 in 2008 when compared to 2007.

Other Expenses

Other expense consists primarily of salary,occupancy, and other fixed overhead costs associated with the business.  Otherexpenses were $9,979,000 for the year ended December 31, 2008 and $8,459,000for the year ended December 31, 2007.  Personnel expenses decreased $121,000for 2008 when compared to 2007.  The Company did not accrue a bonus given theloss position of the year's earnings.  Several vacated jobs were not re-staffedas well.  The Bank experienced a loss of $443,000 on the sale of foreclosedreal estate.  The Bank has remained prudent in pricing its property.  The goalis to offer a price for quick sale without significantly undervaluing theproperty.  Expenses associated with the maintenance and management offoreclosed real estate were $335,000 higher than 2007 levels, and other loanrelated expense increased $92,000.  In 2007, the Bank was able to recoup someexpenses at the sale of foreclosed property.  The ability to recover suchexpenses is not available in today's real estate market.  FDIC DepositInsurance increased $114,000 with the agency's new methodology for calculatingpremiums and the current risk profile of the Bank.  Data processing expenseincreased $99,000 over the year as new technology initiatives became fullyintegrated in the cost structure.  We have signed a new contract with our coreprocessing provider that should garner us some savings in our data processingexpenses.  Equipment and occupancy expense increased $67,000.  The Bankrefurbished its two oldest buildings with larger than normal maintenanceprojects that began in late 2007.  These were nonrecurring projects that werecompleted during 2008.  The Bank incurred a loss of $16,000 on the sale ofcertain bonds.  The loss on the sale of the selected bonds was an acceptableloss given the increased liquidity the sale provided.

Income Tax

The bank recorded an income tax benefit of $1.6million in 2008 as compared to tax expense of $1.3 million in 2007.  The rateof income tax benefits or expenses compared to pretax income was 42.6% in 2008and 34% in 2007.  The rate for 2008 exemplifies the performance of our tax-freeearning vehicles, particularly our municipal bond portfolio and our BOLI.

Asset/Liability Management

Our objective is to manage assets andliabilities to provide a satisfactory, consistent level of profitability withinthe framework of established cash, loan, investment, borrowing, and capitalpolicies.  Specific officers are charged with the responsibility for monitoringpolicies and procedures designed to ensure acceptable composition of theasset/liability mix. Management's overall philosophy is to support asset growthprimarily through growth of core deposits of all categories made by localindividuals, partnerships, and corporations.

38

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

Our asset/liability mix is monitored on aregular basis with a report reflecting the interest rate-sensitive assets andinterest rate-sensitive liabilities being prepared and presented to the Bank'sBoard of Directors on a quarterly basis.  The objective of this policy is tomonitor interest rate-sensitive assets and liabilities so as to minimize theimpact of substantial movements in interest rates on earnings.  An asset orliability is considered to be interest rate-sensitive if it will reprice ormature within the time period analyzed, usually one year or less. The interestrate-sensitivity gap is the difference between the interest-earning assets andinterest-bearing liabilities scheduled to mature or reprice within such timeperiod.  A gap is considered "asset-sensitive" when the amount of interestrate-sensitive assets exceeds the amount of interest rate-sensitiveliabilities.  A gap is considered "liability-sensitive" when the amount ofinterest rate-sensitive liabilities exceeds the interest rate-sensitiveassets.  During a period of rising interest rates, a liability-sensitive gapwould tend to affect net interest income adversely, while an asset-sensitivegap would tend to result in an increase in net interest income. Conversely,during a period of falling interest rates, a liability-sensitive gap would tendto result in an increase in net interest income, while an asset-sensitive gapwould tend to affect net interest income adversely.  If our assets andliabilities were equally flexible and moved concurrently, the impact of anyincrease or decrease in interest rates on net interest income would be minimal.

A simple interest rate "gap" analysisby itself may not be an accurate indicator of how net interest income will beaffected by changes in interest rates.  Accordingly, we also evaluate how therepayment of particular assets and liabilities is impacted by changes ininterest rates.  Income associated with interest-earning assets and costsassociated with interest-bearing liabilities may not be affected uniformly bychanges in interest rates.  In addition, the magnitude and duration of changesin interest rates may have a significant impact on net interest income.  Forexample, although certain assets and liabilities may have similar maturities orperiods of repricing, they may react in different degrees to changes in marketinterest rates.  Interest rates on certain types of assets and liabilitiesfluctuate in advance of changes in general market rates, while interest rateson other types may lag behind changes in general market rates.  In addition,certain assets, such as adjustable rate mortgage loans, have features(generally referred to as "interest rate caps and floors") that limitchanges in interest rates.  Prepayment and early withdrawal levels also coulddeviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease duringperiods of rising interest rates.

Changes in interest rates also affect ourliquidity position.  We currently price deposits in response to market ratesand it is management's intention to continue this policy.  If deposits are notpriced in response to market rates, a loss of deposits could occur that wouldnegatively affect our liquidity position.

39

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**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

The following table sets forth the distributionof the repricing of our interest-earning assets and interest-bearingliabilities as of December 31, 2008, the interest rate-sensitivity gap, the cumulative interest rate-sensitivity gap, the interest rate-sensitivity gap ratio and the cumulative interest rate-sensitivity gap ratio.  The table also sets forth the time periods inwhich interest-earning assets and interest-bearing liabilities will mature ormay reprice in accordance with their contractual terms.  However, the tabledoes not necessarily indicate the impact of general interest rate movements onthe net interest margin as the repricing of various categories of assets andliabilities is subject to competitive pressures and the needs of ourcustomers.  The non-maturity deposit portfolio, for example, can reprice in itsentirety at any time.  However, rate changes on several types of these depositshappen rarely.  In addition, various assets and liabilities indicated asrepricing within the same period may in fact, reprice at different times withinsuch period and at different rates.

|                                                 |                                      |                    |                           | **Within**                  | **Over Three**            | **Over One**              | **After**              |                   |
|-------------------------------------------------|--------------------------------------|--------------------|---------------------------|-----------------------------|---------------------------|---------------------------|------------------------|-------------------|
|                                                 |                                      |                    |                           | **Three**                   | **Months To**             | **Year to**               | **Three**              |                   |
|                                                 |                                      |                    |                           | **Months**                  | **One Year**              | **Three Years**           | **Years**              | **Total**         |
|                                                 |                                      |                    |                           | **( Dollars in Thousands)** |
| **Interest-earning assets:**                    |                                      |                    |                           |                             |                           |                           |
|                                                 | Interest-bearing deposits in  banks  | 906      | -     | -       | -     | 906                  |
|                                                 | Fed funds sold                       |                    | 11,172          | -       | -     | -     | 11,172            |
|                                                 | Securities                           |                    |                           | -       | 2,882           | 462             | 17,804       | 21,148       |
|                                                 | Loans                                |                    |                           | 68,979            | 54,918          | 83,813          | 42,146       | 249,856      |
|                                                 | **   Total**               | ** **         | ** **                | **81,057  **      | **57,800  **    | **84,275  **    | **59,950  ** | **283,082 ** |
|                                                 |                                      |                    |                           |                             |                           |                           |                        |                   |
| **Interest-bearing  liabilities:**              |                                      |                    |                           |                             |                           |
|                                                 | Interest-bearing demand  deposits    | 14,645   | -     | -       | -     | 14,645               |
|                                                 | Savings & Money Market  Deposits | 75,049   | -     | -       | -     | 75,049               |
|                                                 | Time Deposits                        |                    | 29,930          | 68,604            | 36,283          | 11,241          | 146,058           |
|                                                 | Other Borrowings                     |                    | 7,500           | 5,000             | 13,000          | 13,400          | 38,900            |
|                                                 | Subordinated Debentures              |                    | 3,093           | -       | -     | -     | 3,093             |
|                                                 |    Total                   |                    |                           | **130,217  **     | **73,604  **    | **49,283  **    | **24,641  ** | **277,745 ** |
|                                                 |                                      |                    |                           |                             |                           |                           |                        |                   |
| Interest rate sensitivity  gap                  |                                      | (49,160)           | (15,804)                  | 34,992            | 35,309          | 5,337                |
| Cumulative interest rate  sensitivity gap       | (49,160)                             | (64,964)           | (29,972)                  | 5,337             |                           |
| Interest rate sensitivity  gap ratio            | 0.62                       | 0.79     | 1.71            | 2.43              |                           |
| Cumulative interest rate  sensitivity gap ratio | 0.62                       | 0.68     | 0.88            | 1.02              |                           |
|                                                 |                                      |                    |                           |                             |                           |                           |                        |                   |
|                                                 |                                      |                    |                           |                             |                           |                           |                        |                   |

40

----

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**SELECTED FINANCIAL INFORMATION AND STATISTICALDATA**

The following tables and schedules set forthcertain significant financial information and statistical data with respect to:the distribution of assets, liabilities and stockholders' equity, the interestrates we experience; our investment portfolio; our loan portfolio, includingtypes of loans, maturities, and sensitivities of loans to changes in interestrates and information on nonperforming loans; summary of the loan lossexperience and allowance for loan losses; and types of deposits.

**INTEREST RATES AND INTEREST DIFFERENTIALS**

**Average Balance Sheets, Interest and Rates**

The table below shows the year-to-date averagebalance for each category of interest earning assets and interest-bearingliabilities for the indicated periods and the average rate of interest earnedor paid thereon. 

41

----

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

|                                                                | **For the Years Ended December 31,**      |
|----------------------------------------------------------------|-------------------------------------------|
| ** **                                                     | ** **                                | ** ** | **2008** |  |  |  |  |  | **2007** |  |  |
|                                                                | ** **                                | ** ** | **Interest** |  | **Weighted** |  | ** ** | ** ** | **Interest** |  | **Weighted** |
|                                                                | **Average**                               |  | **Income/** |  | **Average** |  | **Average** |  | **Income/** |  | **Average** |
|                                                                | **Balance**                               |  | **Expense** |  | **Rate** |  | **Balance** |  | **Expense** |  | **Rate** |
| (Dollars in Thousands)                                         |                                           |  |  |  |  |  |  |  |  |  |  |
|                                                                |                                           |  |  |  |  |  |  |  |  |  |  |
| **ASSETS**                                                     |                                           |  |  |  |  |  |  |  |  |  |  |
| Interest earning assets:                                       | ** **                                |  |  |  |  |  | ** ** |  |  |  |  |
| Interest bearing deposits in  banks                            | ** $**                               | **317   ** |  | ** $** | **5   ** |  | **1.58    %** |  |  $ | 810    |  |  $ | 47    |  | 5.80    % |
| Federal funds sold                                             | **2,449    **         |  | **39    ** |  | **1.59    %** |  | 4,778     |  | 239    |  | 5.00    % |
| Taxable Investments,  amortized cost                           | **22,186    **        |  | **1,064    ** |  | **4.80    %** |  | 19,860     |  | 1,017    |  | 5.12    % |
| Non-taxable investments,  amortized cost                       | **5,684    **         |  | **244    ** |  | **4.29    %** |  | 6,068     |  | 258    |  | 4.25    % |
| Loans                                                          | **257,085    **       |  | **17,665    ** |  | **6.87    %** |  | 241,083     |  | 21,268    |  | 8.82    % |
|     Total interest earning  assets              | **287,721     ** |  | ** $** | **19,017   ** |  | **6.61    %** |  | 272,599     |  |  $ | 22,829    |  | 8.37    % |
| Allowance for Loan losses                                      | **(3,632)     **           |  | ** ** |  |  |  | (3,008)     |  |  |  |  |
| Other assets                                                   | **28,897     **  |  | ** ** |  |  |  | 25,544     |  |  |  |  |
|     Total assets                                | ** $**                               | **312,986   ** |  | ** ** |  |  |  |  $ | 295,135   |  |  |  |  |
|                                                                |                                           |  |  |  |  |  |  |  |  |  |  |
|                                                                |                                           |  |  |  |  |  |  |  |  |  |  |
| **LIABILITIES AND  STOCKHOLDERS' EQUITY**            |                                           |  |  |  |  |  |  |  |  |  |  |
| Interest bearing  liabilities:                                 |                                           |  |  |  |  |  |  |  |  |  |  |
| Deposits:                                                      |                                           |  |  |  |  |  |  |  |  |  |  |
| Demand, including MMDA                                         | ** $**                               | **99,568    ** |  | ** $** | **2,742    ** |  | **2.75    %** |  |  $ | 110,416     |  |  $ | 4,533    |  | 4.11     % |
| Savings                                                        | **6,082    **         |  | **99    ** |  | **1.63    %** |  | 6,402     |  | 141    |  | 2.20     % |
| Time                                                           | **128,141    **       |  | **5,762    ** |  | **4.50    %** |  | 103,273     |  | 5,318    |  | 5.15     % |
| Federal funds purchased                                        | **677    **           |  | **18    ** |  | **2.66    %** |  | 323     |  | 19    |  | 5.88     % |
| FHLB advances & other  borrowings                          | **35,973    **        |  | **1,588    ** |  | **4.41    %** |  | 32,356     |  | 1,534    |  | 4.74     % |
| Guaranteed subordinated  debentures                            | **3,093   **               |  | **194   ** |  | **6.27   %** |  | 3,093    |  | 263    |  | 8.50    % |
|     Total interest bearing  liabilities         | **273,534   **             |  | ** $** | **10,403   ** |  | **3.80   %** |  | 255,863    |  |  $ | 11,808    |  | 4.61    % |
|                                                                |                                           |  |  |  |  |  |  |  |  |  |  |
| Non-interest bearing demand  deposits                          | **16,882   **              |  |  |  |  |  | 18,557    |  |  |  |  |
| Other liabilities                                              | **2,631   **               |  |  |  |  |  | 1,908    |  |  |  |  |
| Stockholders' equity                                           | **19,939   **              |  |  |  |  |  | 18,807    |  |  |  |  |
|     Total liabilities and  stockholders' equity | ** $**                               | **312,986  ** |  |  |  |  |  |  $ | 295,135   |  |  |  |  |
|                                                                |                                           |  |  |  |  |  |  |  |  |  |  |
| Net interest income                                            |                                           |  | ** $** | **8,614  ** |  |  |  |  |  |  $ | 11,021   |  |  |
|                                                                |                                           |  |  |  |  |  |  |  |  |  |  |
| Net interest spread                                            |                                           |  |  |  | **2.81%** |  |  |  |  |  | 3.76% |
| Net interest margin (TE)                                       |                                           |  |  |  | **3.04%** |  |  |  |  |  | 4.09% |
|                                                                |                                           |  |  |  |  |  |  |  |  |  |  |
|                                                                |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

Non-accrual loans and the interest income whichwas recorded on these loans, if any, are included in the yield calculation forloans in all periods reported.  

(TE) -Tax Equivalent.  Loan fees of $915,000 and $1,121,000 are included in theyields for 2008 and 2007, respectively.

42

----

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Rate and Volume Analysis**

The following table shows a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates for each major category of interest earning assets and interest-bearingliabilities for 2008 over 2007.  The changes in interest income and interestexpense attributable to both volume and rate have been allocatedproportionately on a consistent basis to the change due to volume and the change due to rate.

|  | **2008 vs. 2007** |  
**Rate**

**Volume**

**Net**

 
(Dollars in  Thousands)

 
*Income  from interest-earning assets:*

 
Interest  bearing deposits in banks

 $

(23)

 $

(19)

 $

(42)

Federal  funds sold

(117)

(83)

(200)

 
Taxable  Investments, amortized cost

(67)

114   

47   

 
Non-taxable  investments, amortized cost

2   

(16)

(14)

 
Loans

(4,942)

1,339   

(3,603)

 
Total  interest income

 $

(5,147)

 $

1,335   

 $

(3,812)

 
 
*Expense  from interest-bearing liabilities:*

 
Demand,  including MMDA

 $

(1,381)

 $

(410)

 $

(1,791)

 
Savings

(35)

(7)

(42)

 
Time

(728)

1,172   

444   

 
Federal  funds purchased

(14)

13   

(1)

 
FHLB  advances & other borrowings

(111)

165   

54   

 
Guaranteed  subordinated debentures

(69)

-   

(69)

 
     Total interest bearing liabilities

 $

(2,338)

** **

 $

933   

** **

 $

(1,405)

 
 
NET  INTEREST INCOME

 $

(2,809)

 $

402   

 $

(2,407)

 
 
43

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**INVESTMENT PORTFOLIO**

** **

**Types of Investments**

Our securities portfolio, consisting of U.S. Governmentsponsored agencies, municipal securities, and restricted equity investments,amounted to $21.1 million at December 31, 2008, compared to $28.8 million atDecember 31, 2007.  In 2008, we sold off our portfolio of mortgage-backedsecurities, which was approximately $4.7 million at the time of the sale.  Wehave used the investment portfolio as a source of excess liquidity in 2008 byselling some bonds and not replacing maturities or calls.  We have notspecifically identified any securities for sale in future periods that, if sodesignated, would require a charge to operations if the market value would notbe reasonably expected to recover prior to the time of sale.  The portfolio hada net unrealized gain of $92,000 at December 31, 2008 and $72,000 at December31, 2007.

The carrying amounts of securities and thecorresponding interest yield, which are all classified as available for sale,are summarized as follows:

** **

**December 31,  2008**

** **

** **

** **

**Weighted**

** **

**Amortized**

** **

**Fair**

**Average**

** **

**Cost**

** **

**Value**

**Yield**

** **

**(Dollars in  Thousands)**

** **

** **

U.S. Government sponsored agency securities

** $**

**13,022 **

** **

** $**

**13,259 **

**4.95  **

**%**

Mortgage-backed securities

**-  **

** **

**-  **

**4.69 **

** **

Municipal securities

**5,152  **

** **

**5,007  **

**6.51 **

** **

Restricted equity securities

**2,882  **

** **

**2,882  **

**4.08 **

** **

** $**

**21,056 **

** **

** $**

**21,148 **

**5.15  **

**%**

December 31, 2007

**Weighted**

Amortized

Fair

**Average**

Cost

Value

**Yield**

(Dollars in  Thousands)

** **

U.S. Government sponsored agency securities

 $

15,744   

 $

15,787   

5.03 

%

Mortgage-backed securities

4,843   

4,814   

4.61 

Municipal securities

6,011   

6,069   

6.44 

Restricted equity securities

2,138   

2,138   

5.95 

 $

28,736   

 $

28,808   

5.38 

%

** **

** **

44

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

** **

**Maturities**

The amounts of debt securities are shown in thefollowing table according to contractual maturity classifications (1) one yearor less, (2) after one through three years, (3) after three through five years,(4) after five through ten years, and (5) after ten years.  Restricted equitysecurities are not included in the table because they have no contractualmaturity.  

** **

**December 31,  2008**

** **

** **

** **

**Weighted**

** **

**Amortized**

** **

**Fair**

**Average**

** **

**Cost**

** **

**Value**

**Yield**

** **

**(Dollars in  Thousands)**

** **

** **

One  to Three Years

** $**

**454 **

** $**

**462 **

**3.66 **

**%**

Three  to Five Years

**1,851 **

**1,870 **

**3.77 **

** **

Five  to Ten Years

**4,150 **

**4,172 **

**4.91 **

** **

Over  Ten Years

**11,719 **

**11,762 **

**4.97 **

** **

** $**

**18,174 **

** $**

**18,266 **

**5.15 **

**%**

** **

** **

** **

** **

**LOAN PORTFOLIO**

We generally require that loans collateralizedby real estate not exceed the collateral values by the following percentagesfor each type of real estate loan as follows:

One- to four-family residential properties

85%

Construction loans on one- to four-family  residential properties

80%

Nonresidential property

80%

For commercial, consumer, and other non-realestate loans, we require collateral commensurate with the repayment ability andcreditworthiness of the borrower.

The specific economic and credit risksassociated with our loan portfolio, especially the real estate portfolio,include, but are not limited to, a general downturn in the economy which couldaffect unemployment rates in our market area, general real estate marketdeterioration, interest rate fluctuations, deteriorated or non-existingcollateral, title defects, inaccurate appraisals, financial deterioration ofborrowers, fraud, and any violation of banking protection laws.  Constructionlending can also present other specific risks to the lender such as whetherdevelopers can find builders to buy lots for home construction, whether thebuilders can obtain financing for the construction, whether the builders cansell the home to a buyer, and whether the buyer can obtain permanentfinancing.  The above factors are now factors in our local economy.  Thedownturn happened quickly during 2008, and we are still dealing with thoseafter effects.  We have tightened our lending criteria to conserve our capitalfor dealing with problem loans.

We attempt to reduce these economic and creditrisks not only by adhering to loan to value guidelines, but also byinvestigating the creditworthiness of the borrower and monitoring the borrower'sfinancial position.  Also, we establish and periodically review our lendingpolicies and procedures.  National banking regulations limit exposure byprohibiting loan relationships that exceed 15% of the Bank's statutory capital. 

45

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Types of Loans**

The amounts of loans outstanding at theindicated dates are shown in the following table according to the type of loan.

**2008**

**2008**

2007

2007

**Total**

**%**

Total

%

(Dollars in Thousands)

Commercial, financial and agricultural

** $**

**17,432 **

7.0 %

 $

19,599   

8.1 %

Real estate - construction

**47,998  **

19.2 %

47,529   

19.5 %

Real estate - mortgage

**177,924  **

71.2 %

168,880   

69.4 %

Consumer, installment and other

**6,502  **

2.6 %

7,288   

3.0 %

**249,856  **

100.0 %

243,296   

100.0 %

Unearned income

**(220)**

(266)

Allowance for loan losses

**(5,388)**

(3,281)

**Loans, net**

** $**

**244,248 **

** **

** **

 $

239,749   

**Maturities and Sensitivities of Loans to Changesin Interest Rates**

Total loans as of December 31, 2008 are shown inthe following table according to contractual maturity.  

**Commercial**

**Construction**

**Other**

**Total**

 
**(Dollars in  Thousands)**

 
Within Three Months

 $

5,503      

 $

25,236      

 $

38,240      

 $

68,979       

Over Three Months to One Year

5,173      

17,004      

32,741      

54,918     

Over One Year to Three Years

3,570      

2,849      

77,394      

83,813       

Over Three Years

3,236      

2,909      

36,001      

42,146       

 $

17,482      

 $

47,998      

 $

184,376      

 $

249,856       

The following table summarizes loans at December31, 2008 with due dates after one year that have predetermined and floating oradjustable interest rates.

**(Dollars**

**in Thousands)**

Predetermined  interest rates

 $            97,508 

Floating  or adjustable interest rates

               28,451 

 $          125,959 

46

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Risk Elements**

Information with respect to nonaccrual, pastdue, restructured and other problem loans at December 31, 2008 and 2007 isas follows:

**December 31,**

**2008**

2007 

**Nonperforming loans:**

** **

Nonaccrual loans

**19,980 **

3,145   

Restructured loans

**0 **

0   

Other real estate owned

**9,135 **

2,338   

**  Total nonperforming loans**

** **

**29,115 **

5,483   

** **

**Potential problem loans:**

** **

** **

Loans 90 days or more past due and still accruing

**1,499 **

791   

**Total nonperforming and potential problem loans**

**30,614 **

6,274   

** **

** **

Nonperforming assets to total loans and other real estate

**11.83 %**

** **

2.56 %

Reserve for loan losses to nonperforming loans

**17.60 %**

** **

52.29 %

** **

Interest at contracted rates (a)

**418 **

41   

Interest recorded as income

0   

0   

Reduction of interest income for period

**418 **

41   

(a)  Interest income on nonaccruals that would have beeen  recorded, if the loans

      remained current and in accordance with original  terms.

It is our policy to discontinue the accrual ofinterest income when, in the opinion of management, collection of interestbecomes doubtful due to factors such as (1) a significant deterioration in thefinancial condition of the borrower and full repayment of principal andinterest is not expected, and (2) the principal or interest is more than ninetydays past due, unless the loan is both well-secured and in the process ofcollection.

The Bank has assigned an experienced banker ashead of our Special Assets Department, which handles all our non-performingassets ("NPAs"), which are defined as loans past due 90 days or more,nonaccrual loans, and foreclosed real estate ("OREO").  The Bank has a largerthan normal inventory of OREO that is currently working through the balancesheet.  We have assigned another experienced banker to work with the head ofthe Special Assets Department.  This officer's duties include managing theforeclosed real estate portfolio, assessing potential losses and gains, andmarketing the property for a quick sale at an acceptable loss.  Managementconsiders its approach to the problem assets on the balance sheet as aggressiveand will continue to get more aggressive as circumstances dictate.

Nonaccrual loans at December 31, 2008 were $19,980,000,compared to $3,145,000 at December 31, 2007.  Credit quality has continued todeteriorate concurrently with the economic environment.  The Bank worksdiligently with its past due customers to assist them in solutions to theircredit problems, many of which are the result of a slow-down in the customers'business activities.  These loans are spread out among various lending types. The Bank does not carry heavy concentrations in construction lending.  Afteridentification of problem loans in the portfolio, construction and developmentloans comprised only 19.2% of the total portfolio at December 31, 2008 and 19.5%at December 31, 2007.

47

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

Loans classified for regulatory purposes as loss, doubtful,substandard, or special mention that have not been included in the table do notrepresent or result from trends or uncertainties which management reasonablyexpects will materially impact future operating results, liquidity or capitalresources. These classified loans do not represent material credits about whichmanagement is aware of any information which causes management to have seriousdoubts as to the ability of such borrowers to comply with the loan repaymentterms.

48

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**SUMMARY OF LOAN LOSS EXPERIENCE**

The following table summarizes average loanbalances for the year determined using the daily average balances during theyear; changes in the allowance for loan losses arising from loans charged off;recoveries on loans previously charged off; additions to the allowance whichhave been charged to operating expense; and the ratio of net charge-offs duringthe year to average loans.

**Year Ended  December 31,**

**2008**

**2007**

**(Dollars in  Thousands)**

Average amount of loans outstanding

** $**

**257,085 **

 $

241,083   

** **

Balance of allowance for loan losses at beginning of year

**3,280  **

2,791    

** **

Loans charged off:

** **

Installment loans

**246  **

123    

Real estate-mortgage

**1,860  **

118    

Commercial

**281  **

97    

**2,387  **

338    

** **

Loans recovered:

** **

** **

Installment loans

**42  **

46    

Real estate mortgage

**15  **

26    

Commercial

**5  **

17    

**62  **

89    

** **

Net charge-offs

**2,325  **

249    

** **

Additions to allowance charged to operating expense during  year

**4,433  **

738    

Balance of allowance for loan losses at end of year

** $**

**5,388 **

** **

** **

Ratio of net loans charged off during the year to average loans  outstanding

**0.90%**

0.10%

49

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Allowance for Loan Losses**

Management continually evaluates its loan lossreserve for adequacy.  Our evaluation considers significant factors relative tothe credit risk and loss exposure in the loan portfolio, including past due andclassified loans, historical experience, underlying collateral values, andcurrent economic conditions that may affect the borrower's ability to repay. The allowance for loan losses is evaluated by allocating a reserve based on 13month historical average of charge offs.  This reserve is applied by loan type,excluding highly graded loans and those for which a specific reserve ismaintained.  Classified and impaired loans may require a specific reserve basedon the facts surrounding the loan, including but not limited to inadequatecollateral coverage, insufficient cash flow or other credit quality issues.  Ageneral reserve is established for the entire loan portfolio, less specificreserves, based on the current economic and interest rate environments, loanportfolio volumes and concentrations, industry standards, recent credit qualityexperience, and management experience.  This evaluation is inherentlysubjective, as it requires estimates that are susceptible to significantchange.  The general reserve allows for conditions that may arise that do notoccur frequently or for which a specific reserve is not present.

In addition to theanalysis procedures above, the credit administration department has continuallymonitored the performance of the loan portfolio.  Some additional provisions tothe reserve were made on rated assets that may be more likely to cause lossesgiven the current environment.  The current reserve as a percentage of the loanportfolio is 2.16% compared to 1.35% at December 31, 2007.  The current reservereflects the potential of losses in the portfolio at December 31, 2008 givenmore aggressive impairment testing and after some identified losses haveoccurred.  Losses may vary from current estimates and future additions to theallowance may be necessary.  Thus, there can be no assurance that charge-offsin future periods will not exceed the allowance for loan losses as estimated atany point in time.  Management believes the loan loss reserve is adequate atthis time.

**December 31,  2008**

**December 31,  2007**

**Amount**

**Percent of Loans  in each category to total loans**

**Amount**

**Percent of Loans  in each category to total loans**

**(Dollars in  Thousands)**

** **

**(Dollars in  Thousands)**

Commercial, financial and agricultural

 $

131   

6.98%

 $

273   

8.06%

Real estate - construction

 $

469   

19.21%

 $

395   

19.54%

Real estate - mortgage

 $

1,442   

71.21%

 $

1,401   

69.40%

Consumer, installment and other

 $

48   

2.60%

 $

232   

3.00%

Specific allocation for impaired  loans

 $

3,268   

N/A

 $

912   

N/A

Unallocated

 $

30   

N/A

 $

67   

N/A

** $**

**5,388 **

** **

**100%**

** **

** **

** $**

**3,280 **

** **

**100%**

** **

The following table represents our best estimatefor the allocation of the allowance for loan losses to types of loans, as ofthe indicated dates.  The unallocated portion represents excess reserves overour regular reserve calculations.

50

**MANAGEMENT'SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**DEPOSITS**

Average amount of deposits and average ratespaid thereon, classified as to noninterest-bearing demand deposits,interest-bearing demand deposits, savings deposits, and time deposits, for theyear is presented below. 

** **

**December 31,  2008**

** **

**December 31,  2007**

**Average**

** **

**Average**

** **

**Balance (1)**

**Percent**

**Balance (1)**

**Percent**

**(Dollars in  Thousands)**

**(Dollars in  Thousands)**

Noninterest-bearing demand deposits

** $**

**16,882 **

**N/A   **

 $

18,557   

**N/A   **

Interest-bearing demand deposits & MMDA

**99,568 **

**2.75%**

110,416   

4.11%

Savings Deposits

**6,082 **

**1.63%**

6,402   

2.20%

Time Deposits

**128,141 **

**4.50%**

103,273   

5.15%

** $**

**250,673 **

**3.43%**

 $

4.19%

 (1)   Averagebalances were determined using the daily average balances during the year.

**(Dollars in  Thousands)**

** **

Three months or less

 $

19,685   

Over three months through six months

7,061   

Over six months through twelve months

21,166   

Over twelve months

24,581   

 $

72,493   

The amounts of time certificates of depositissued in amounts of $100,000 or more as of December 31, 2008 are shown belowby category, which is based on time remaining until maturity of (1) threemonths or less, (2) over three through six months, (3) over six through twelvemonths, and (4) over twelve months.

51 |
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