EXHIBIT 13
 Business of DCB Financial Corp
     Common Stock and Shareholder Matters
  24




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##### 



Quarter endedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2008
    
    2008
    
    2008
    
    2008High
    
    $
    17.00
    
    
    $
    16.00
    
    
    $
    15.50
    
    
    $
    14.75Low
    
    
    12.90
    
    
    
    13.55
    
    
    
    12.50
    
    
    
    8.00Dividends per share
    
    
    0.16
    
    
    
    0.16
    
    
    
    0.16
    
    
    
    0.08
 March 31,
    
    June 30,
    
    September 30,
    
    December 31,2007
    
    2007
    
    2007
    
    2007High
    
    $
    29.74
    
    
    $
    26.00
    
    
    $
    23.75
    
    
    $
    24.75Low
    
    
    25.75
    
    
    
    23.00
    
    
    
    19.10
    
    
    
    15.00Dividends per share
    
    
    0.14
    
    
    
    0.15
    
    
    
    0.15
    
    
    
    0.16
   Selected Consolidated Financial Information and Other Data
  Selected consolidated financial condition data:
    
    At December 31,(In thousands)
    
    2008
    
    2007
    
    2006
    
    2005
    
    2004Total assets
    
    $
    712,564
    
    
    $
    680,786
    
    
    $
    684,004
    
    
    $
    690,896
    
    
    $
    611,685Cash and cash equivalents
    
    
    33,632
    
    
    
    32,068
    
    
    
    15,894
    
    
    
    18,069
    
    
    
    11,238Securities available for sale
    
    
    111,360
    
    
    
    89,009
    
    
    
    88,071
    
    
    
    96,580
    
    
    
    96,123Securities held to maturity
    
    
    8,002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loans
    
    
    507,076
    
    
    
    512,195
    
    
    
    547,021
    
    
    
    547,510
    
    
    
    478,487Deposits
    
    
    565,153
    
    
    
    510,874
    
    
    
    524,094
    
    
    
    503,906
    
    
    
    454,574Borrowed funds
    
    
    88,384
    
    
    
    110,082
    
    
    
    95,512
    
    
    
    128,535
    
    
    
    101,028Shareholders equity
    
    
    56,059
    
    
    
    57,068
    
    
    
    61,399
    
    
    
    56,254
    
    
    
    54,261
 25




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##### 



Year ended December 31,Selected Operating Data
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(In thousands, except per share data)Interest income
    
    $
    38,405
    
    
    $
    43,556
    
    
    $
    44,407
    
    
    $
    36,566
    
    
    $
    27,813Interest expense
    
    
    16,743
    
    
    
    22,154
    
    
    
    21,315
    
    
    
    13,750
    
    
    
    7,802Net interest income
    
    
    21,662
    
    
    
    21,402
    
    
    
    23,092
    
    
    
    22,816
    
    
    
    20,011Provision for loan losses
    
    
    8,177
    
    
    
    10,159
    
    
    
    1,808
    
    
    
    2,000
    
    
    
    1,696Net interest income after
provision for loan losses
    
    
    13,485
    
    
    
    11,243
    
    
    
    21,284
    
    
    
    20,816
    
    
    
    18,315Noninterest income
    
    
    5,487
    
    
    
    5,928
    
    
    
    5,619
    
    
    
    5,654
    
    
    
    7,618Noninterest expense
    
    
    20,884
    
    
    
    17,962
    
    
    
    16,452
    
    
    
    15,665
    
    
    
    15,985Income (loss) before income tax
    
    
    (1,912
    )
    
    
    (791
    )
    
    
    10,451
    
    
    
    10,805
    
    
    
    9,948Income tax expense (credit)
    
    
    (2,241
    )
    
    
    (930
    )
    
    
    3,098
    
    
    
    3,249
    
    
    
    2,973Net income
    
    $
    329
    
    
    $
    139
    
    
    $
    7,353
    
    
    $
    7,556
    
    
    $
    6,975Per Share Data:Basic earnings per share
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    1.93
    
    
    $
    1.94
    
    
    $
    1.77Diluted earnings per share
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    1.92
    
    
    $
    1.94
    
    
    $
    1.77Dividends declared per share
    
    $
    0.56
    
    
    $
    0.60
    
    
    $
    0.55
    
    
    $
    0.48
    
    
    $
    0.48
 At or for the year ended December 31,Selected Financial Ratios:
    
    2008
    
    2007
    
    2006
    
    2005
    
    2004Interest rate spread
    
    
    2.97
    %
    
    
    2.90
    %
    
    
    2.85
    %
    
    
    3.37
    %
    
    
    3.55
    %Net interest margin
    
    
    3.29
    
    
    
    3.36
    
    
    
    3.48
    
    
    
    3.66
    
    
    
    3.72Return on average equity
    
    
    0.55
    
    
    
    0.23
    
    
    
    12.55
    
    
    
    13.68
    
    
    
    13.14Return on average assets
    
    
    0.05
    
    
    
    0.02
    
    
    
    1.05
    
    
    
    1.15
    
    
    
    1.13Average equity to average assets
    
    
    8.42
    
    
    
    8.88
    
    
    
    8.39
    
    
    
    8.41
    
    
    
    8.60Dividend payout ratio
    
    
    *
    
    
    
    *
    
    
    
    28.50
    
    
    
    24.74
    
    
    
    27.12Allowance for loan losses as
a percentage of loans past
due over 90 days
    
    
    105.01
    
    
    
    63.34
    
    
    
    64.05
    
    
    
    114.53
    
    
    
    140.75
 
 *
    
    Not meaningful. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
  26




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##### 



Forward-Looking Statements
   Critical Accounting Policies
    27




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##### 



Overview of 2008
    
    
    The Corporations assets totaled $712,564 at December 31, 2008, compared to $680,786 at
December 31, 2007, an increase of $31,778, or 4.7%. The increase in assets was mainly
attributed to investment securities growth coupled with an increase in cash and cash
equivalents.
    
    Net income for 2008 totaled $329, an increase of $190, compared to net income for 2007 of
$139.
    
    The provision for loan losses totaled $8,177 for the year ended December 31, 2008
compared to $10,159 in 2007. DCB maintains an allowance for loan losses at a level to
absorb managements estimate of probable inherent credit losses in its portfolio.
    
    With the flattening of the yield curve during the year, the Corporations net interest
margin decreased from the preceding year. Net interest income increased to $21,662 for 2008
compared to $21,402 for 2007. The $260 increase was mainly attributed to a decline in
credit issues and non-accrual loans compared to the prior year.
    
    The ability to generate earnings is impacted in part by competitive pricing on loans and
deposits, and by changes in the rates on various U.S. Treasury, U. S. Government Agency and
State and political subdivision issues which comprise a significant portion of the Banks
investment portfolio. The Bank is competitive with interest rates and loan fees that it
charges, in pricing and variety of accounts it offers to the depositor. The Corporation
confirms this by completing regular rate shops and comparisons versus competing financial
services companies. The dominant pricing mechanism on loans is the prime interest rate as
published in the Wall Street Journal, on a fixed rate plus spread over funding costs. The
interest spread depends on the overall account relationship and the creditworthiness of the
borrower.
 28




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##### 




    
    Deposit rates are reviewed weekly by management and are generally discussed by the
Asset/Liability Committee on a monthly basis. The Banks primary objective in setting
deposit rates is to remain competitive in the market area, develop funding opportunities
while earning an adequate interest rate margin.
    
    During 2008, the Banks new office locations throughout the Banks geographical market
area were productive. These new offices offer a chance to improve current locations and
fill gaps in our market. For the most part, these branches were developed with a smaller
footprint and more efficient design as The Bank continues to respond to the ever-changing
customer needs.
 Analysis of Financial Condition
    Fair Value Measurements
   29




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##### 



30




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##### 



Comparison of Results of Operations for the Years Ended December 31, 2008 and December 31, 2007
 Net Income.
 Net Interest Income.
   31




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##### 



Provision and Allowance for Loan Losses.
     Noninterest Income.
 32




---



##### 



Noninterest Expense.
 Income Taxes.
 Comparison of Results of Operations for the Years Ended December 31, 2007 and December 31, 2006
 Net Income.
 Net Interest Income.
   33




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##### 



Provision and Allowance for Loan Losses.
    34




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##### 



Noninterest Income.
 Noninterest Expense.
 Income Taxes.
 35




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##### 



Year ended December 31,2008
    
    
    2007
    
    
    2006Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    Interestoutstanding
    
    
    earned/
    
    
    Yield/
    
    
    outstanding
    
    
    earned/
    
    
    Yield/
    
    
    outstanding
    
    
    earned/
    
    
    Yield/balance
    
    
    paid
    
    
    rate
    
    
    balance
    
    
    paid
    
    
    rate
    
    
    balance
    
    
    paid
    
    
    rateInterest-earning assets:Federal funds sold
    
    $
    30,930
    
    
    $
    614
    
    
    
    1.99
    %
    
    $
    4,604
    
    
    $
    298
    
    
    
    6.47
    %
    
    $
    4,499
    
    
    $
    177
    
    
    
    3.93
    %Taxable securities
    
    
    87,169
    
    
    
    3,954
    
    
    
    4.54
    
    
    
    68,588
    
    
    
    3,585
    
    
    
    5.23
    
    
    
    67,384
    
    
    
    3,447
    
    
    
    5.12Tax-exempt securities (1)
    
    
    23,589
    
    
    
    1,010
    
    
    
    4.28
    
    
    
    24,705
    
    
    
    892
    
    
    
    3.61
    
    
    
    29,272
    
    
    
    942
    
    
    
    3.22Loans (2)
    
    
    517,635
    
    
    
    32,827
    
    
    
    6.34
    
    
    
    538,608
    
    
    
    39,781
    
    
    
    7.20
    
    
    
    561,881
    
    
    
    39,841
    
    
    
    7.09Total interest-earning assets
    
    
    659,323
    
    
    
    38,405
    
    
    
    5.82
    
    
    
    636,505
    
    
    
    43,556
    
    
    
    6.84
    
    
    
    663,036
    
    
    
    44,407
    
    
    
    6.70Noninterest-earning assets
    
    
    53,246
    
    
    
    
    
    
    
    
    
    
    
    44,612
    
    
    
    
    
    
    
    
    
    
    
    34,927Total assets
    
    $
    712,569
    
    
    
    
    
    
    
    
    
    
    $
    681,117
    
    
    
    
    
    
    
    
    
    
    $
    697,963Interest-bearing liabilities:Demand and money market deposits
    
    $
    221,018
    
    
    $
    3,128
    
    
    
    1.42
    %
    
    $
    259,051
    
    
    $
    9,618
    
    
    
    3.71
    %
    
    $
    254,134
    
    
    $
    9,749
    
    
    
    3.84
    %Savings deposits
    
    
    29,697
    
    
    
    136
    
    
    
    0.46
    
    
    
    31,343
    
    
    
    151
    
    
    
    0.48
    
    
    
    39,480
    
    
    
    193
    
    
    
    0.49Certificates of deposit
    
    
    251,665
    
    
    
    9,426
    
    
    
    3.75
    
    
    
    173,377
    
    
    
    8,323
    
    
    
    4.80
    
    
    
    163,302
    
    
    
    7,239
    
    
    
    4.43Total deposits
    
    
    502,380
    
    
    
    12,690
    
    
    
    2.53
    
    
    
    463,771
    
    
    
    18,092
    
    
    
    3.90
    
    
    
    456,916
    
    
    
    17,181
    
    
    
    3.76Borrowed funds
    
    
    84,825
    
    
    
    4,053
    
    
    
    4.78
    
    
    
    98,459
    
    
    
    4,062
    
    
    
    4.13
    
    
    
    97,224
    
    
    
    4,134
    
    
    
    4.25Total interest-bearing liabilities
    
    
    587,205
    
    
    
    16,743
    
    
    
    2.85
    
    
    
    562,230
    
    
    
    22,154
    
    
    
    3.94
    
    
    
    554,140
    
    
    
    21,315
    
    
    
    3.85Noninterest-bearing liabilities
    
    
    65,395
    
    
    
    
    
    
    
    
    
    
    
    58,379
    
    
    
    
    
    
    
    
    
    
    
    85,237Total liabilities
    
    
    652,600
    
    
    
    
    
    
    
    
    
    
    
    620,609
    
    
    
    
    
    
    
    
    
    
    
    639,377Shareholders equity
    
    
    59,969
    
    
    
    
    
    
    
    
    
    
    
    60,508
    
    
    
    
    
    
    
    
    
    
    
    58,586Total liabilities and shareholders
equity
    
    $
    712,569
    
    
    
    
    
    
    
    
    
    
    $
    681,117
    
    
    
    
    
    
    
    
    
    
    $
    697,963Net interest income; interest rate spread
    
    
    
    
    
    $
    21,662
    
    
    
    2.97
    %
    
    
    
    
    
    $
    21,402
    
    
    
    2.90
    %
    
    
    
    
    
    $
    23,092
    
    
    
    2.85
    %Net interest margin (net interest income
as a percent of average interest-earning
assets)
    
    
    
    
    
    
    
    
    
    
    3.29
    %
    
    
    
    
    
    
    
    
    
    
    3.36
    %
    
    
    
    
    
    
    
    
    
    
    3.48
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    112.28
    %
    
    
    
    
    
    
    
    
    
    
    113.21
    %
    
    
    
    
    
    
    
    
    
    
    119.65
    %
 
 (1)
    
    Interest on tax-exempt securities is reported on a historical basis without taxequivalent
adjustment. Interest on tax-exempt securities on a tax equivalent basis was $1,546 in 2008,
$1,352 in 2007, and $1,335 in 2006.(2)
    
    Includes nonaccrual loans. 36




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##### 



Year ended December 31,2008 vs. 2007
    
    
    2007 vs. 2006Increase
    
    
    
    
    
    
    Increase(decrease)
    
    
    
    
    
    
    (decrease)due to
    
    
    
    
    
    
    due toVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalInterest income attributable to:Federal funds sold
    
    $
    1,700
    
    
    $
    (1,394
    )
    
    $
    306
    
    
    $
    5
    
    
    $
    116
    
    
    $
    121Taxable securities
    
    
    971
    
    
    
    (603
    )
    
    
    368
    
    
    
    62
    
    
    
    76
    
    
    
    138Tax-exempt securities
    
    
    (40
    )
    
    
    168
    
    
    
    128
    
    
    
    (147
    )
    
    
    97
    
    
    
    (50
    )Loans
    
    
    (1,509
    )
    
    
    (4,444
    )
    
    
    (5,953
    )
    
    
    (1,650
    )
    
    
    590
    
    
    
    (1,060
    )Total interest income
    
    
    1,122
    
    
    
    (6,273
    )
    
    
    (5,151
    )
    
    
    (1,730
    )
    
    
    879
    
    
    
    (851
    )Interest expense attributable to:Demand and money market deposits
    
    
    (1,412
    )
    
    
    (5,078
    )
    
    
    (6,490
    )
    
    
    189
    
    
    
    (320
    )
    
    
    (131
    )Savings deposits
    
    
    (8
    )
    
    
    (6
    )
    
    
    (14
    )
    
    
    (40
    )
    
    
    (2
    )
    
    
    (42
    )Certificates of deposit
    
    
    3,758
    
    
    
    (2,655
    )
    
    
    1,103
    
    
    
    447
    
    
    
    637
    
    
    
    1,084Borrowed funds
    
    
    (563
    )
    
    
    553
    
    
    
    (10
    )
    
    
    52
    
    
    
    (124
    )
    
    
    (72
    )Total interest expense
    
    
    1,775
    
    
    
    (7,186
    )
    
    
    (5,411
    )
    
    
    648
    
    
    
    191
    
    
    
    839Increase (decrease) in net
interest income
    
    $
    (653
    )
    
    $
    913
    
    
    $
    260
    
    
    $
    (2,378
    )
    
    $
    688
    )
    
    $
    (1,690
    )
 Asset and Liability Management and Market Risk
    37




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##### 



Change in
    
    December 31, 2008
    
    December 31, 2007Interest Rate
    
    $ Change
    
    % Change
    
    NPV
    
    $ Change
    
    % Change
    
    NPV(Basis Points)
    
    In NPV
    
    In NPV
    
    Ratio
    
    In NPV
    
    In NPV
    
    Ratio+300
    
    $
    (3,186
    )
    
    
    (5.6
    )%
    
    
    7.8
    %
    
    $
    (5,474
    )
    
    
    (6.5
    )%
    
    
    11.9
    %+200
    
    
    (775
    )
    
    
    (1.4
    )
    
    
    8.1
    
    
    
    (2,834
    )
    
    
    (3.4
    )
    
    
    12.2+100
    
    
    975
    
    
    
    1.7
    
    
    
    8.2
    
    
    
    (640
    )
    
    
    (0.8
    )
    
    
    12.3Base
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -100
    
    
    (3,786
    )
    
    
    (6.7
    )%
    
    
    7.3
    %
    
    
    (1,715
    )
    
    
    (2.0
    )%
    
    
    11.8
    %
  38




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##### 



Liquidity
     Capital Resources
   39




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##### 



Payment due by yearContractual Obligations
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 yearsFHLB advances
    
    $
    83,014
    
    
    $
    2,785
    
    
    $
    16,445
    
    
    $
    34,806
    
    
    $
    28,978Federal funds purchased and
other short-term borrowings
    
    
    5,370
    
    
    
    5,370
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    6,391
    
    
    
    966
    
    
    
    1,588
    
    
    
    1,128
    
    
    
    2,709Loan and line of credit and
other commitments
    
    
    84,997
    
    
    
    84,997
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    179,772
    
    
    $
    94,118
    
    
    $
    18,033
    
    
    $
    35,934
    
    
    $
    31,687
 40




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##### 



2008
    
    
    2007ASSETSCash and due from financial institutions
    
    $
    19,632
    
    
    $
    15,588Interest-bearing deposits
    
    
    10,000
    
    
    
    Federal funds sold
    
    
    4,000
    
    
    
    16,480Total cash and cash equivalents
    
    
    33,632
    
    
    
    32,068Securities available for sale, at fair value
    
    
    111,360
    
    
    
    89,009Securities held to maturity, at amortized cost
    
    
    8,002
    
    
    
    Total securities
    
    
    119,362
    
    
    
    89,009Loans held for sale, at lower of cost or market
    
    
    1,083
    
    
    
    1,078Loans
    
    
    513,213
    
    
    
    520,493Less allowance for loan losses
    
    
    (6,137
    )
    
    
    (8,298
    )Net loans
    
    
    507,076
    
    
    
    512,195Real estate owned
    
    
    5,071
    
    
    
    1,406Investment in FHLB stock
    
    
    3,796
    
    
    
    3,670Premises and equipment, net
    
    
    15,537
    
    
    
    14,178Investment in unconsolidated affiliates
    
    
    1,277
    
    
    
    1,270Bank-owned life insurance
    
    
    15,623
    
    
    
    14,963Accrued interest receivable and other assets
    
    
    10,107
    
    
    
    10,949Total assets
    
    $
    712,564
    
    
    $
    680,786LIABILITIESDepositsNoninterest-bearing
    
    $
    49,018
    
    
    $
    53,112Interest-bearing
    
    
    516,135
    
    
    
    457,762Total deposits
    
    
    565,153
    
    
    
    510,874Federal funds purchased and other short-term borrowings
    
    
    5,370
    
    
    
    16,596Federal Home Loan Bank advances
    
    
    83,014
    
    
    
    93,486Accrued interest payable and other liabilities
    
    
    2,968
    
    
    
    2,762Total liabilities
    
    
    656,505
    
    
    
    623,718SHAREHOLDERS EQUITYCommon stock, no par value, 7,500,000 shares authorized,
4,273,908 issued
    
    
    3,785
    
    
    
    3,785Retained earnings
    
    
    64,933
    
    
    
    66,690Treasury stock, at cost, 556,523 shares
    
    
    (13,494
    )
    
    
    (13,494
    )Accumulated other comprehensive income
    
    
    835
    
    
    
    87Total shareholders equity
    
    
    56,059
    
    
    
    57,068Total liabilities and shareholders equity
    
    $
    712,564
    
    
    $
    680,786
  41




---



##### 



2008
    
    
    2007
    
    
    2006Interest and dividend incomeLoans
    
    $
    32,827
    
    
    $
    38,781
    
    
    $
    39,841Taxable securities
    
    
    3,954
    
    
    
    3,585
    
    
    
    3,447Tax-exempt securities
    
    
    1,010
    
    
    
    892
    
    
    
    942Federal funds sold and other
    
    
    614
    
    
    
    298
    
    
    
    177Total interest income
    
    
    38,405
    
    
    
    43,556
    
    
    
    44,407Interest expenseDeposits
    
    
    12,690
    
    
    
    18,092
    
    
    
    17,181Borrowings
    
    
    4,053
    
    
    
    4,062
    
    
    
    4,134Total interest expense
    
    
    16,743
    
    
    
    22,154
    
    
    
    21,315Net interest income
    
    
    21,662
    
    
    
    21,402
    
    
    
    23,092Provision for loan losses
    
    
    8,177
    
    
    
    10,159
    
    
    
    1,808Net interest income after provision for loan losses
    
    
    13,485
    
    
    
    11,243
    
    
    
    21,284Noninterest incomeService charges on deposit accounts
    
    
    2,653
    
    
    
    2,656
    
    
    
    2,660Trust department income
    
    
    910
    
    
    
    876
    
    
    
    738Loss on sale of assets
    
    
    (1,080
    )
    
    
    (228
    )
    
    
    (7
    )Gain on sale of loans
    
    
    193
    
    
    
    344
    
    
    
    350Gain on sale of securities
    
    
    307
    
    
    
    33
    
    
    
    Treasury management fees
    
    
    533
    
    
    
    551
    
    
    
    562Data processing servicing fees
    
    
    491
    
    
    
    408
    
    
    
    336Earnings on bank owned life insurance
    
    
    660
    
    
    
    567
    
    
    
    498Other
    
    
    820
    
    
    
    721
    
    
    
    482Total noninterest income
    
    
    5,487
    
    
    
    5,928
    
    
    
    5,619Noninterest expenseSalaries and employee benefits
    
    
    9,918
    
    
    
    9,643
    
    
    
    9,043Occupancy and equipment
    
    
    4,452
    
    
    
    3,663
    
    
    
    3,225Professional services
    
    
    1,060
    
    
    
    475
    
    
    
    455Advertising
    
    
    447
    
    
    
    427
    
    
    
    401Postage, freight and courier
    
    
    306
    
    
    
    286
    
    
    
    317Supplies
    
    
    338
    
    
    
    290
    
    
    
    249State franchise taxes
    
    
    499
    
    
    
    463
    
    
    
    548Federal deposit insurance premiums
    
    
    604
    
    
    
    90
    
    
    
    59Other
    
    
    3,260
    
    
    
    2,625
    
    
    
    2,155Total noninterest expense
    
    
    20,884
    
    
    
    17,962
    
    
    
    16,452Income (loss) before income taxes (credit)
    
    
    (1,912
    )
    
    
    (791
    )
    
    
    10,451Income tax expense (credit)
    
    
    (2,241
    )
    
    
    (930
    )
    
    
    3,098Net income
    
    $
    329
    
    
    $
    139
    
    
    $
    7,353Basic earnings per common share
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    1.93Diluted earnings per common share
    
    $
    0.09
    
    
    $
    0.04
    
    
    $
    1.92
  42




---



##### 



2008
    
    
    2007
    
    
    2006Net income
    
    $
    329
    
    
    $
    139
    
    
    $
    7,353Unrealized gains on securities
available for sale, net of related taxes
of $490, $235 and $116 in
2008, 2007 and 2006, respectively
    
    
    951
    
    
    
    456
    
    
    
    225Reclassification adjustment for realized gains
included in net income, net of taxes
of $104 and $11 in 2008 and 2007, respectively
    
    
    (203
    )
    
    
    (22
    )
    
    
    Comprehensive income
    
    $
    1,077
    
    
    $
    573
    
    
    $
    7,578Accumulated other comprehensive income (loss)
    
    $
    835
    
    
    $
    87
    
    
    $
    (347
    )
  43




---



##### 



AccumulatedOther
    
    
    TotalCommon
    
    
    Retained
    
    
    Treasury
    
    
    Comprehensive
    
    
    Shareholders'Stock
    
    
    Earnings
    
    
    Stock
    
    
    Income (Loss)
    
    
    EquityBalance at January 1, 2006
    
    $
    3,780
    
    
    $
    63,552
    
    
    $
    (10,506
    )
    
    $
    (572
    )
    
    $
    56,254Net income
    
    
    
    
    
    
    7,353
    
    
    
    
    
    
    
    
    
    
    
    7,353Unrealized gains on securities
designated as available for
sale, net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    225
    
    
    
    225Purchase of treasury stock-
11,684 shares at cost
    
    
    
    
    
    
    
    
    
    
    (341
    )
    
    
    
    
    
    
    (341
    )Issuance of 550 shares of
treasury stock
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Dividends ($0.55 per share)
    
    
    
    
    
    
    (2,098
    )
    
    
    
    
    
    
    
    
    
    
    (2,098
    )Balance at December 31, 2006
    
    
    3,780
    
    
    
    68,807
    
    
    
    (10,841
    )
    
    
    (347
    )
    
    
    61,399Net income
    
    
    
    
    
    
    139
    
    
    
    
    
    
    
    
    
    
    
    139Unrealized gains on securities
designated as available for
sale, net of realized gains and
tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    434
    
    
    
    434Purchase of treasury stock-
97,737 shares at cost
    
    
    
    
    
    
    
    
    
    
    (2,653
    )
    
    
    
    
    
    
    (2,653
    )Issuance of 158 shares
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Dividends ($0.60 per share)
    
    
    
    
    
    
    (2,256
    )
    
    
    
    
    
    
    
    
    
    
    (2,256
    )Balance at December 31, 2007
    
    
    3,785
    
    
    
    66,690
    
    
    
    (13,494
    )
    
    
    87
    
    
    
    57,068Net income
    
    
    
    
    
    
    329
    
    
    
    
    
    
    
    
    
    
    
    329Unrealized gains on securities
designated as available for
sale, net of realized gains
and tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    748
    
    
    
    748Dividends ($0.56 per share)
    
    
    
    
    
    
    (2,086
    )
    
    
    
    
    
    
    
    
    
    
    (2,086
    )Balance at December 31, 2008
    
    $
    3,785
    
    
    $
    64,933
    
    
    $
    (13,494
    )
    
    $
    835
    
    
    $
    56,059
  44




---



##### 



2008
    
    
    2007
    
    
    2006Cash flows from operating activitiesNet income
    
    $
    329
    
    
    $
    139
    
    
    $
    7,353Adjustments to reconcile net income to net cash
provided by (used in) operating activitiesDepreciation
    
    
    1,622
    
    
    
    1,180
    
    
    
    966Provision for loan losses
    
    
    8,177
    
    
    
    10,159
    
    
    
    1,808Deferred income taxes
    
    
    291
    
    
    
    (1,051
    )
    
    
    (12
    )Gain on sale of securities
    
    
    (307
    )
    
    
    (33
    )
    
    
    Gain on sale of loans
    
    
    (193
    )
    
    
    (344
    )
    
    
    (350
    )Loss on sale of assets
    
    
    1,080
    
    
    
    228
    
    
    
    7Premium amortization on securities, net
    
    
    426
    
    
    
    270
    
    
    
    530FHLB stock dividends
    
    
    (192
    )
    
    
    (66
    )
    
    
    (210
    )Loans originated for sale in the secondary market
    
    
    (17,387
    )
    
    
    (23,531
    )
    
    
    (27,381
    )Proceeds from sale of loans
    
    
    17,575
    
    
    
    23,875
    
    
    
    27,731Earnings on bank owned life insurance
    
    
    (660
    )
    
    
    (567
    )
    
    
    (498
    )Net changes in other assets and other liabilities
    
    
    885
    
    
    
    (2,199
    )
    
    
    (2,507
    )Net cash provided by operating activities
    
    
    11,646
    
    
    
    8,060
    
    
    
    7,437Cash flows used in investing activitiesSecurities available for salePurchases
    
    
    (64,798
    )
    
    
    (22,711
    )
    
    
    (13,932
    )Maturities, principal payments, and calls
    
    
    35,512
    
    
    
    22,194
    
    
    
    22,183Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    
    
    
    
    (71
    )Net change in loans
    
    
    (9,243
    )
    
    
    22,632
    
    
    
    (976
    )Premises and equipment expenditures
    
    
    (2,981
    )
    
    
    (5,890
    )
    
    
    (1,580
    )Purchase of bank-owned life insurance policies
    
    
    
    
    
    
    (5,000
    )
    
    
    Proceeds from sale of real estate owned
    
    
    1,238
    
    
    
    745
    
    
    
    386Investment in unconsolidated affiliates
    
    
    (7
    )
    
    
    (302
    )
    
    
    (354
    )Net cash provided by (used in) investing activities
    
    
    (40,279
    )
    
    
    11,668
    
    
    
    5,656Cash flows provided by (used in) financing activitiesNet change in deposits
    
    
    54,279
    
    
    
    (13,220
    )
    
    
    20,189Net change in federal funds purchased
and other short-term borrowings
    
    
    (11,226
    )
    
    
    14,820
    
    
    
    (23,835
    )Proceeds from Federal Home Loan Bank advances
    
    
    205
    
    
    
    26,500
    
    
    
    29,000Repayment of Federal Home Loan Bank advances
    
    
    (10,677
    )
    
    
    (26,750
    )
    
    
    (38,189
    )Purchase of treasury stock
    
    
    
    
    
    
    (2,653
    )
    
    
    (341
    )Issuance of treasury stock
    
    
    
    
    
    
    5
    
    
    
    6Cash dividends paid
    
    
    (2,384
    )
    
    
    (2,256
    )
    
    
    (2,098
    )Net cash provided by (used in) financing activities
    
    
    30,197
    
    
    
    (3,554
    )
    
    
    (15,268
    )Net change in cash and cash equivalents
    
    
    1,564
    
    
    
    16,174
    
    
    
    (2,175
    )Cash and cash equivalents at beginning of year
    
    
    32,068
    
    
    
    15,894
    
    
    
    18,069Cash and cash equivalents at end of year
    
    $
    33,632
    
    
    $
    32,068
    
    
    $
    15,894
  45




---



##### 



2008
    
    
    2007
    
    
    2006Supplemental disclosure of cash flow information
Cash paid during the year for:Interest on deposits and borrowings
    
    $
    16,868
    
    
    $
    22,160
    
    
    $
    20,841Income taxes
    
    $
    1,145
    
    
    $
    1,805
    
    
    $
    4,214Supplemental disclosure of non cash investing
and financing activities:Unrealized gains on securities designated
as available for sale, net of related tax effects
    
    $
    951
    
    
    $
    456
    
    
    $
    225Transfers from loans to real estate owned
    
    $
    6,190
    
    
    $
    2,379
    
    
    $
    Loans originated upon sale of real estate owned
    
    $
    
    
    
    $
    384
    
    
    $
    Cash dividends declared but unpaid
    
    $
    298
    
    
    $
    595
    
    
    $
    534Transfer of securities from available for sale to the held
to maturity classification
    
    $
    8,002
    
    
    $
    
    
    
    $
    
  46




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
 Nature of Operations
 Business Segments
 Use of Estimates
 Cash Flows
 Securities
  47




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Loans
  Allowance for Loan Losses
  Concentrations of Credit Risk
  48




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Investment in Federal Home Loan Bank Stock
 Premises and Equipment
 Foreclosed Assets
 Servicing Assets
 Bank Owned Life Insurance
 Investment in unconsolidated affiliates
 Income Taxes
  49




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Financial Instruments
 Earnings Per Common Share
  2008
    
    
    2007
    
    
    2006Weighted-average common shares
outstanding (basic)
    
    
    3,717,385
    
    
    
    3,743,157
    
    
    
    3,816,322Dilutive effect of assumed exercise
of stock options
    
    
    
    
    
    
    2,927
    
    
    
    17,787Weighted-average common shares
outstanding (diluted)
    
    
    3,717,385
    
    
    
    3,746,084
    
    
    
    3,834,109
     50




---



##### 



Stock option plan
      Year EndedDecember 31,2008WEIGHTEDWEIGHTED
    
    
    AVERAGEAVERAGE
    
    
    REMAINING
    
    
    AGGREGATEEXERCISE
    
    
    CONTRACTUAL
    
    
    INTRINSICSHARES
    
    
    PRICE
    
    
    LIFE
    
    
    VALUEOutstanding at beginning of year
    
    
    108,051
    
    
    $
    25.80
    
    
    8.9 years
    
    
    $
    Granted
    
    
    57,643
    
    
    
    16.90
    
    
    9.8 years
    
    
    
    Forfeited
    
    
    (6,410
    )
    
    
    22.46Outstanding at end of year
    
    
    159,284
    
    
    $
    22.92
    
    
    9.2 years
    
    
    $
    Options exercisable at year end
    
    
    39,220
    
    
    $
    26.03
    
    
    
    
    
    
    $
    Weighted-average fair value of
options granted during the year
    
    
    
    
    
    $
    1.01
    
    
    
    
    
    
    $
    
  51




---



##### 



Year Ended
    
    
    Year EndedDecember 31, 2007
    
    
    December 31, 2006WEIGHTED
    
    
    
    
    
    
    WEIGHTEDAVERAGE
    
    
    
    
    
    
    AVERAGEEXERCISE
    
    
    
    
    
    
    EXERCISESHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICEOutstanding at beginning of year
    
    
    70,040
    
    
    $
    27.19
    
    
    
    40,687
    
    
    $
    25.31Granted
    
    
    44,214
    
    
    
    23.43
    
    
    
    34,532
    
    
    
    29.94Exercised
    
    
    (158
    )
    
    
    28.69
    
    
    
    (427
    )
    
    
    30.26Forfeited
    
    
    (6,045
    )
    
    
    26.20
    
    
    
    (4,752
    )
    
    
    28.56Outstanding at end of year
    
    
    108,051
    
    
    $
    25.80
    
    
    
    70,040
    
    
    $
    27.19Options exercisable at year end
    
    
    21,553
    
    
    $
    26.13
    
    
    
    8,959
    
    
    $
    24.49Weighted-average fair value of
options granted during the year
    
    
    
    
    
    $
    2.57
    
    
    
    
    
    
    $
    6.19
  NUMBER OUTSTANDING
    
    RANGE OF EXERCISE PRICES104,220
    
    $23.00 - $30.7055,064
    
    $16.90
 Comprehensive Income
 Recent Accounting Standards
   52




---



##### 



,
  "
   53




---



##### 



Restrictions on Cash
 Dividend Restrictions
 Fair Value of Financial Instruments
 Advertising and Marketing:
 Reclassification
 NOTE 2  SECURITIES
  Gross
    
    
    GrossFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    Losses
    
    
    Cost2008U.S. Government and agency obligations
    
    $
    33,197
    
    
    $
    705
    
    
    $
    
    
    
    $
    32,492States and municipal obligations
    
    
    29,161
    
    
    
    286
    
    
    
    (346
    )
    
    
    29,221Mortgage-backed securities
    
    
    48,930
    
    
    
    658
    
    
    
    (52
    )
    
    
    48,324Total debt securities
    
    
    111,288
    
    
    
    1,649
    
    
    
    (398
    )
    
    
    110,037Other securities
    
    
    72
    
    
    
    30
    
    
    
    (15
    )
    
    
    57Total
    
    $
    111,360
    
    
    $
    1,679
    
    
    $
    (413
    )
    
    $
    110,094
  54




---



##### 



NOTE 2  SECURITIES
 Gross
    
    
    GrossFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    Losses
    
    
    Cost2007U.S. Government and agency obligations
    
    $
    24,540
    
    
    $
    87
    
    
    $
    (10
    )
    
    $
    24,463States and municipal obligations
    
    
    23,708
    
    
    
    163
    
    
    
    (20
    )
    
    
    23,565Corporate bonds
    
    
    7,894
    
    
    
    
    
    
    
    (108
    )
    
    
    8,002Mortgage-backed securities
    
    
    32,773
    
    
    
    135
    
    
    
    (152
    )
    
    
    32,790Total debt securities
    
    
    88,915
    
    
    
    385
    
    
    
    (290
    )
    
    
    88,820Other securities
    
    
    94
    
    
    
    45
    
    
    
    (9
    )
    
    
    58Total
    
    $
    89,009
    
    
    $
    430
    
    
    $
    (299
    )
    
    $
    88,878
  EstimatedAmortized
    
    
    FairCost
    
    
    ValueCollateralized debt obligations
    
    $
    8,002
    
    
    $
    4,079
   55




---



##### 



NOTE 2  SECURITIES
  2008
 (Less than 12 months)
    
    
    (12 months or longer)
    
    
    
    
    
    
    
    
    
    
    TotalDescription of
    
    Number of
    
    
    Fair
    
    
    Unrealized
    
    
    Number of
    
    
    Fair
    
    
    Unrealized
    
    
    Number of
    
    
    Fair
    
    
    UnrealizedSecurities
    
    investments
    
    
    value
    
    
    losses
    
    
    investments
    
    
    value
    
    
    losses
    
    
    investments
    
    
    value
    
    
    lossesState and municipal
obligations
    
    
    33
    
    
    $
    12,246
    
    
    $
    (342
    )
    
    
    1
    
    
    $
    302
    
    
    $
    (2
    )
    
    
    34
    
    
    $
    12,548
    
    
    $
    (344
    )Collateralized debt
obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    4,079
    
    
    
    (3,923
    )
    
    
    2
    
    
    
    4,079
    
    
    
    (3,923
    )Mortgage-backed
securities and other
    
    
    39
    
    
    
    6,130
    
    
    
    (37
    )
    
    
    17
    
    
    
    729
    
    
    
    (30
    )
    
    
    56
    
    
    
    6,859
    
    
    
    (67
    )Total temporarily
impaired securities
    
    
    72
    
    
    $
    18,376
    
    
    $
    (379
    )
    
    
    20
    
    
    $
    5,110
    
    
    $
    (3,955
    )
    
    
    92
    
    
    $
    23,486
    
    
    $
    (4,334
    )
 2007
 (Less than 12 months)
    
    
    (12 months or longer)
    
    
    
    
    
    
    
    
    
    
    TotalDescription of
    
    Number of
    
    
    Fair
    
    
    Unrealized
    
    
    Number of
    
    
    Fair
    
    
    Unrealized
    
    
    Number of
    
    
    Fair
    
    
    UnrealizedSecurities
    
    investments
    
    
    value
    
    
    losses
    
    
    investments
    
    
    value
    
    
    losses
    
    
    investments
    
    
    value
    
    
    lossesU.S. Government and
agency obligations
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    6
    
    
    $
    4,783
    
    
    $
    (10
    )
    
    
    6
    
    
    $
    4,783
    
    
    $
    (10
    )State and municipal
obligations
    
    
    4
    
    
    
    1,245
    
    
    
    (8
    )
    
    
    7
    
    
    
    2,839
    
    
    
    (12
    )
    
    
    11
    
    
    
    4,084
    
    
    
    (20
    )Collateralized debt
obligations
    
    
    2
    
    
    
    7,894
    
    
    
    (108
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    7,894
    
    
    
    (108
    )Mortgage-backed
securities and other
    
    
    51
    
    
    
    5,804
    
    
    
    (44
    )
    
    
    45
    
    
    
    12,389
    
    
    
    (117
    )
    
    
    96
    
    
    
    18,193
    
    
    
    (161
    )Total temporarily
impaired securities
    
    
    57
    
    
    $
    14,943
    
    
    $
    (160
    )
    
    
    58
    
    
    $
    20,011
    
    
    $
    (139
    )
    
    
    115
    
    
    $
    34,954
    
    
    $
    (299
    )
    56




---



##### 



NOTE 2  SECURITIES
    FairValueDue in one year or less
    
    $
    2,417Due from one to five years
    
    
    18,556Due from five to ten years
    
    
    25,572Due after ten years
    
    
    23,814Mortgage-backed securities
    
    
    48,931Total debt securities
    
    
    119,290Other securities
    
    
    72Total
    
    $
    119,362
  2008
    
    2007
    
    2006Proceeds from sales and/or calls
    
    $
    728
    
    
    $
    8,558
    
    
    $
    12,397Gross gains
    
    
    307
    
    
    
    33
    
    
    
    
    57




---



##### 



NOTE 3  LOANS
  2008
    
    
    2007Commercial and industrial
    
    $
    45,597
    
    
    $
    41,500Commercial real estate
    
    
    207,968
    
    
    
    193,608Residential real estate and home equity
    
    
    192,331
    
    
    
    200,931Real estate construction and land development
    
    
    41,897
    
    
    
    49,037Consumer and credit card
    
    
    25,249
    
    
    
    35,066513,042
    
    
    
    520,142Add: Net deferred loan origination costs
    
    
    171
    
    
    
    351Total loans receivable
    
    $
    513,213
    
    
    $
    520,493
   Balance at December 31, 2007
    
    $
    19,223New loans
    
    
    8,161Repayments
    
    
    (8,181
    )Balance at December 31, 2008
    
    $
    19,203
  58




---



##### 



NOTE 4  ALLOWANCE FOR LOAN LOSSES
  2008
    
    
    2007
    
    
    2006Balance beginning of year
    
    $
    8,298
    
    
    $
    5,442
    
    
    $
    5,535Provision for loan losses
    
    
    8,177
    
    
    
    10,159
    
    
    
    1,808Loans charged-off
    
    
    (10,654
    )
    
    
    (7,691
    )
    
    
    (2,335
    )Recoveries
    
    
    316
    
    
    
    388
    
    
    
    434Balance at end of year
    
    $
    6,137
    
    
    $
    8,298
    
    
    $
    5,442
  2008
    
    
    2007
    
    
    2006Loans with no allocated allowance for
unconfirmed loan losses
    
    $
    4,644
    
    
    $
    538
    
    
    $
    Loans with allocated allowance for
unconfirmed loan losses
    
    
    8,166
    
    
    
    9,800
    
    
    
    5,189Total
    
    $
    12,810
    
    
    $
    10,338
    
    
    $
    5,189Amount of the allowance for loan losses allocated
to unconfirmed losses on impaired loans
    
    $
    2,767
    
    
    $
    2,114
    
    
    $
    1,562
 2008
    
    2007
    
    2006Average balance of impaired loans during the year
    
    $
    13,301
    
    
    $
    7,907
    
    
    $
    2,584Interest income recognized during impairment
    
    
    
    
    
    
    
    
    
    
    Cash basis interest income recognized
    
    
    
    
    
    
    
    
    
    
    
  2008
    
    
    2007
    
    
    2006Beginning balance
    
    $
    2,114
    
    
    $
    1,562
    
    
    $
    1,060Provision related to impaired loans
    
    
    6,620
    
    
    
    6,608
    
    
    
    945Loan charge-offs (net of recoveries)
    
    
    (5,967
    )
    
    
    (6,056
    )
    
    
    (443
    )Ending balance
    
    $
    2,767
    
    
    $
    2,114
    
    
    $
    1,562
   59




---



##### 



NOTE 4  ALLOWANCE FOR LOAN LOSSES (continued)
  2008
    
    
    2007
    
    
    2006Loans past due over 90 days still accruing interest
    
    $
    1,146
    
    
    $
    2,740
    
    
    $
    3,307Nonaccrual loans
    
    
    4,698
    
    
    
    10,360
    
    
    
    5,189Total
    
    $
    5,844
    
    
    $
    13,100
    
    
    $
    8,496
  NOTE 5  PREMISES AND EQUIPMENT
  2008
    
    
    2007Land
    
    $
    1,899
    
    
    $
    1,899Buildings
    
    
    13,924
    
    
    
    12,220Furniture and equipment
    
    
    12,847
    
    
    
    11,56928,670
    
    
    
    25,688Accumulated depreciation
    
    
    (13,133
    )
    
    
    (11,510
    )$
    15,537
    
    
    $
    14,178
  2009
    
    $
    9662010
    
    
    9322011
    
    
    6562012
    
    
    5642013
    
    
    564Thereafter
    
    
    2,709$
    6,391
  60




---



##### 



NOTE 6  INTEREST-BEARING DEPOSITS
  2008
    
    
    2007Interest-bearing demand
    
    $
    73,057
    
    
    $
    65,310Money market
    
    
    123,646
    
    
    
    179,820Savings deposits
    
    
    30,410
    
    
    
    28,359Time depositsIn denominations under $100,000
    
    
    106,684
    
    
    
    75,061In denominations of $100,000 or more
    
    
    182,338
    
    
    
    109,212$
    516,135
    
    
    $
    457,762
  61




---



##### 



NOTE 6  INTEREST-BEARING DEPOSITS
  2009
    
    $
    217,1622010
    
    
    65,8402011
    
    
    3,8452012
    
    
    1,1482013
    
    
    1,027$
    289,022
  NOTE 7  BORROWED FUNDS
   2008
    
    
    2007Interest
    
    
    Maturing yearrate range
    
    
    ending December 31,2.79% - 3.98
    %
    
    2008
    
    $
    
    
    
    $
    1,4873.62% - 4.70
    %
    
    2009
    
    
    2,785
    
    
    
    3,7603.77% - 4.67
    %
    
    2010
    
    
    1,445
    
    
    
    1,5054.44% - 5.50
    %
    
    2011
    
    
    15,000
    
    
    
    1,5003.36% - 4.68
    %
    
    2012
    
    
    29,500
    
    
    
    29,5002.97% - 5.72
    %
    
    Thereafter
    
    
    34,284
    
    
    
    55,734$
    83,014
    
    
    $
    93,486Weighted-average interest rate

    
    
    
    4.28
    %
    
    
    4.23
    %
  62




---



##### 



NOTE 7  BORROWED FUNDS
   2009
    
    $
    2,7852010
    
    
    1,4452011
    
    
    15,0002012
    
    
    29,5002013
    
    
    5,306Thereafter
    
    
    28,978$
    83,014
  NOTE 8  RETIREMENT PLANS
     63




---



##### 



NOTE 9  FEDERAL INCOME TAXES
  2008
    
    
    2007
    
    
    2006Current
    
    $
    (2,377
    )
    
    $
    121
    
    
    $
    3,110Deferred
    
    
    136
    
    
    
    (1,051
    )
    
    
    (12
    )Totals
    
    $
    (2,241
    )
    
    $
    (930
    )
    
    $
    3,098
  2008
    
    
    2007
    
    
    2006Income taxes (credits) computed at the statutory federal
income tax rate
    
    $
    (650
    )
    
    $
    (269
    )
    
    $
    3,553Tax exempt income
    
    
    (562
    )
    
    
    (512
    )
    
    
    (521
    )Credit for change in estimate
    
    
    (1,061
    )
    
    
    
    
    
    
    Other
    
    
    32
    
    
    
    (149
    )
    
    
    66Totals
    
    $
    (2,241
    )
    
    $
    (930
    )
    
    $
    3,098Effective federal income tax rate
    
    
    *
    %
    
    
    *
    %
    
    
    29.6
    %
 
 *
    
    Not meaningful in net loss year.  2008
    
    
    2007Deferred tax assetsAllowance for loan losses
    
    $
    2,087
    
    
    $
    2,822Depreciation
    
    
    123
    
    
    
    Deferred compensation
    
    
    162
    
    
    
    138Deferred loan origination fees and costs
    
    
    12
    
    
    
    Dividend
    
    
    122
    
    
    
    2,506
    
    
    
    2,960Deferred tax liabilitiesFHLB stock dividends
    
    
    (471
    )
    
    
    (406
    )Unrealized gain on securities available for sale
    
    
    (431
    )
    
    
    (45
    )Deferred loan origination fees and costs
    
    
    
    
    
    
    (23
    )Leases
    
    
    
    
    
    
    (24
    )Depreciation
    
    
    
    
    
    
    (330
    )Mortgage servicing rights
    
    
    (13
    )
    
    
    (16
    )Other
    
    
    (1
    )
    
    
    (4
    )(916
    )
    
    
    (848
    )Net deferred tax asset
    
    $
    1,590
    
    
    $
    2,112
  64




---



##### 



NOTE 10  COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
    2008
    
    2007Fixed
    
    Variable
    
    Fixed
    
    VariableRate
    
    Rate
    
    Rate
    
    RateCommitments to extend credit
    
    $
    2,258
    
    
    $
    46,101
    
    
    $
    2,267
    
    
    $
    76,095Unused lines of credit and letters of credit
    
    $
    
    
    
    $
    35,425
    
    
    $
    
    
    
    $
    28,295
    65




---



##### 



Legal Proceedings
  NOTE 11  REGULATORY CAPITAL
     66




---



##### 



NOTE 11  REGULATORY CAPITAL
  To Be WellCapitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio2008Total capital to risk-weighted assetsConsolidated
    
    $
    61,356
    
    
    
    11.1
    %
    
    $
    44,288
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    59,377
    
    
    
    10.8
    
    
    
    43,909
    
    
    
    8.0
    
    
    $
    54,887
    
    
    
    10.0
    %Tier 1 (core) capital to risk-weighted assetsConsolidated
    
    
    55,219
    
    
    
    10.0
    
    
    
    22,144
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    53,240
    
    
    
    9.7
    
    
    
    21,955
    
    
    
    4.0
    
    
    
    32,933
    
    
    
    6.0Tier 1 (core) capital to average assetsConsolidated
    
    
    55,219
    
    
    
    7.6
    
    
    
    28,894
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    53,240
    
    
    
    7.4
    
    
    
    28,796
    
    
    
    4.0
    
    
    
    35,995
    
    
    
    5.02007Total capital to risk-weighted assetsConsolidated
    
    $
    63,667
    
    
    
    11.9
    %
    
    $
    42,824
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    60,207
    
    
    
    11.7
    
    
    
    41,308
    
    
    
    8.0
    
    
    $
    51,635
    
    
    
    10.0
    %Tier 1 (core) capital to risk-weighted assetsConsolidated
    
    
    56,976
    
    
    
    10.6
    
    
    
    21,412
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    40,753
    
    
    
    7.9
    
    
    
    20,654
    
    
    
    4.0
    
    
    
    30,981
    
    
    
    6.0Tier 1 (core) capital to average assetsConsolidated
    
    
    56,976
    
    
    
    8.5
    
    
    
    26,872
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    40,753
    
    
    
    6.1
    
    
    
    27,044
    
    
    
    4.0
    
    
    
    33,805
    
    
    
    5.0
   67




---



##### 



NOTE 12  DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
  2008
    
    2007Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assetsCash and cash equivalents
    
    $
    33,632
    
    
    $
    33,632
    
    
    $
    32,068
    
    
    $
    32,068Securities available for sale
    
    
    111,360
    
    
    
    111,360
    
    
    
    89,009
    
    
    
    89,009Securities held to maturity
    
    
    8,002
    
    
    
    4,079
    
    
    
    
    
    
    
    Loans held for sale
    
    
    1,083
    
    
    
    1,083
    
    
    
    1,078
    
    
    
    1,078Loans
    
    
    513,213
    
    
    
    517,956
    
    
    
    520,493
    
    
    
    529,057FHLB stock
    
    
    3,796
    
    
    
    3,796
    
    
    
    3,670
    
    
    
    3,670Accrued interest receivable
    
    
    2,790
    
    
    
    2,790
    
    
    
    3,340
    
    
    
    3,340Financial liabilitiesNoninterest-bearing deposits
    
    $
    49,018
    
    
    $
    49,018
    
    
    $
    53,112
    
    
    $
    53,112Interest-bearing deposits
    
    
    516,135
    
    
    
    508,503
    
    
    
    457,762
    
    
    
    450,896Federal funds purchased and
other short-term borrowings
    
    
    5,370
    
    
    
    5,370
    
    
    
    16,596
    
    
    
    16,596FHLB advances
    
    
    83,014
    
    
    
    82,258
    
    
    
    93,486
    
    
    
    92,334Accrued interest payable
    
    
    1,309
    
    
    
    1,309
    
    
    
    1,434
    
    
    
    1,434
   68




---



##### 



FAIR VALUE MEASUREMENTS
 Fair Value Measurements
  The standard describes three levels of inputs that may be used to measure fair value:
 Level 1
    
    Quoted prices in active markets for identical assets or liabilitiesLevel 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 liabilitiesLevel 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
  Securities
    69




---



##### 



Fair Value Measurements UsingQuoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Available for sale
securities
    
    $
    111,360
    
    
    $
    1,926
    
    
    $
    109,434
    
    
    $
    
  Impaired loans
   Fair Value Measurements UsingQuoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Impaired loans
    
    $
    5,528
    
    
    $
    
    
    
    $
    
    
    
    $
    5,528
  70




---



##### 



NOTE 13  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
  CONDENSED BALANCE SHEETS
 2008
    
    
    2007AssetsCash and cash equivalents
    
    $
    2,388
    
    
    $
    36Investment in Bank
    
    
    54,069
    
    
    
    40,821Subordinated note from Bank
    
    
    
    
    
    
    16,510Investment in affiliates
    
    
    1,541
    
    
    
    1,299Other assets
    
    
    4,757
    
    
    
    1,040Total assets
    
    $
    62,755
    
    
    $
    59,706LiabilitiesShort term borrowings
    
    $
    3,370
    
    
    $
    2,610Other liabilities
    
    
    3,326
    
    
    
    28Shareholders Equity
    
    
    56,059
    
    
    
    57,068Total liabilities and shareholders equity
    
    $
    62,755
    
    
    $
    59,706
 CONDENSED STATEMENTS OF INCOME
 2008
    
    
    2007
    
    
    2006IncomeDividends from Bank subsidiary
    
    $
    1,229
    
    
    $
    5,300
    
    
    $
    7,350Equity in undistributed earnings (excess-distributions) of Bank
    
    
    (501
    )
    
    
    (5,002
    )
    
    
    308Other
    
    
    889
    
    
    
    1,015
    
    
    
    565Total income
    
    
    1,617
    
    
    
    1,313
    
    
    
    8,223Operating expenses
    
    
    1,288
    
    
    
    1,174
    
    
    
    870Net income
    
    $
    329
    
    
    $
    139
    
    
    $
    7,353
  71




---



##### 



NOTE 14  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
 CONDENSED STATEMENTS OF CASH FLOWS
 2008
    
    
    2007
    
    
    2006Cash flows from operating activitiesNet income
    
    $
    329
    
    
    $
    139
    
    
    $
    7,353Adjustments to reconcile net income
to cash provided by operating activities:(Undistributed earnings of) excess distributions
from Bank
    
    
    501
    
    
    
    5,002
    
    
    
    (308
    )Net change in other assets and liabilities
    
    
    638
    
    
    
    3,359
    
    
    
    (2,431
    )Net cash from operating activities
    
    
    1,468
    
    
    
    8,500
    
    
    
    4,614Cash flows used in investing activitiesInvestment in unconsolidated affiliates
    
    
    (242
    )
    
    
    (320
    )
    
    
    (354
    )(Issuance) repayment of subordinated note to Bank
    
    
    16,510
    
    
    
    1,142
    
    
    
    (750
    )Investment in Bank
    
    
    (13,000
    )
    
    
    (5,500
    )
    
    
    Net cash from investing activities
    
    
    3,268
    
    
    
    (4,678
    )
    
    
    (1,104
    )Cash flows from financing activitiesCash dividends paid
    
    
    (2,384
    )
    
    
    (2,256
    )
    
    
    (2,098
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    5
    
    
    
    Purchase of treasury stock, net
    
    
    
    
    
    
    (2,653
    )
    
    
    (335
    )Net cash from financing activities
    
    
    (2,384
    )
    
    
    (4,904
    )
    
    
    (2,433
    )Net change in cash and cash equivalents
    
    
    2,352
    
    
    
    (1,082
    )
    
    
    1,077Cash and cash equivalents at beginning of year
    
    
    36
    
    
    
    1,118
    
    
    
    41Cash and cash equivalents at end of year
    
    $
    2,388
    
    
    $
    36
    
    
    $
    1,118
 72




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##### 



NOTE 15  SIGNIFICANT ESTIMATES AND CONCENTRATIONS
  Current Economic Conditions
   NOTE 16  DETAILS OF OPERATING EXPENSES
  2008
    
    
    2007
    
    
    2006Bank premises rent
    
    $
    830
    
    
    $
    625
    
    
    $
    486Bank premises maintenance
    
    
    484
    
    
    
    405
    
    
    
    398Bank premises depreciation
    
    
    535
    
    
    
    356
    
    
    
    281Equipment lease
    
    
    250
    
    
    
    257
    
    
    
    251Equipment depreciation
    
    
    967
    
    
    
    700
    
    
    
    493Software maintenance
    
    
    860
    
    
    
    681
    
    
    
    624Other
    
    
    526
    
    
    
    639
    
    
    
    692Total
    
    $
    4,452
    
    
    $
    3,663
    
    
    $
    3,225
 73




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##### 



2008
    
    
    2007
    
    
    2006ATM and debit cards
    
    $
    546
    
    
    $
    456
    
    
    $
    379Telephone
    
    
    486
    
    
    
    308
    
    
    
    374Other
    
    
    2,228
    
    
    
    1,861
    
    
    
    1,402Total
    
    $
    3,260
    
    
    $
    2,625
    
    
    $
    2,155
 NOTE 17  QUARTERLY FINANCIAL DATA (Unaudited)
  THREE MONTHS ENDEDDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,(In thousands, except per share data)2008:Total interest income
    
    $
    8,953
    
    
    $
    9,525
    
    
    $
    9,787
    
    
    $
    10,140Total interest expense
    
    
    3,943
    
    
    
    4,004
    
    
    
    4,126
    
    
    
    4,670Net interest income
    
    
    5,010
    
    
    
    5,521
    
    
    
    5,661
    
    
    
    5,470Provision for losses on loans
    
    
    4,177
    
    
    
    2,800
    
    
    
    600
    
    
    
    600Noninterest income
    
    
    1,328
    
    
    
    865
    
    
    
    1,516
    
    
    
    1,778Noninterest expense
    
    
    5,635
    
    
    
    5,452
    
    
    
    4,946
    
    
    
    4,851Income (loss) before
income taxes (credits)
    
    
    (3,474
    )
    
    
    (1,866
    )
    
    
    1,631
    
    
    
    1,797Federal income tax
expense (credit)
    
    
    (1,493
    )
    
    
    (1,654
    )
    
    
    407
    
    
    
    499Net income (loss)
    
    $
    (1,981
    )
    
    $
    (212
    )
    
    $
    1,224
    
    
    $
    1,298Earnings (loss) per share:Basic
    
    $
    (0.53
    )
    
    $
    (0.06
    )
    
    $
    0.33
    
    
    $
    0.35Diluted
    
    $
    (0.53
    )
    
    $
    (0.06
    )
    
    $
    0.33
    
    
    $
    0.35
  74




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##### 



NOTE 17  QUARTERLY FINANCIAL DATA (Unaudited) (
 THREE MONTHS ENDEDDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,(In thousands, except per share data)2007:Total interest income
    
    $
    10,186
    
    
    $
    10,959
    
    
    $
    11,192
    
    
    $
    11,219Total interest expense
    
    
    5,125
    
    
    
    5,545
    
    
    
    5,744
    
    
    
    5,740Net interest income
    
    
    5,061
    
    
    
    5,414
    
    
    
    5,448
    
    
    
    5,479Provision for losses on loans
    
    
    7,375
    
    
    
    1,100
    
    
    
    1,069
    
    
    
    615Noninterest income
    
    
    1,291
    
    
    
    1,712
    
    
    
    1,446
    
    
    
    1,479Noninterest expense
    
    
    4,751
    
    
    
    4,511
    
    
    
    4,509
    
    
    
    4,191Income (loss) before
income taxes (credit)
    
    
    (5,774
    )
    
    
    1,515
    
    
    
    1,316
    
    
    
    2,152Federal income tax
expense (credit)
    
    
    (2,123
    )
    
    
    432
    
    
    
    120
    
    
    
    641Net income (loss)
    
    $
    (3,651
    )
    
    $
    1,083
    
    
    $
    1,196
    
    
    $
    1,511Earnings (loss) per share:Basic
    
    $
    (0.97
    )
    
    $
    0.29
    
    
    $
    0.32
    
    
    $
    0.40Diluted
    
    $
    (0.97
    )
    
    $
    0.29
    
    
    $
    0.32
    
    
    $
    0.40
  75




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NOTE 18  SUBSEQUENT EVENT
    76




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77




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78




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79




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80