##### 



EXHIBIT 13
 Business of DCB Financial Corp
     Common Stock and Shareholder Matters
  25




---



##### 



Quarter endedMarch 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
 March 31,
    
    June 30,
    
    September 30,
    
    December 31,2006
    
    2006
    
    2006
    
    2006High
    
    $
    29.50
    
    
    $
    31.75
    
    
    $
    31.25
    
    
    $
    30.25Low
    
    
    28.00
    
    
    
    29.20
    
    
    
    29.25
    
    
    
    29.20Dividends per share
    
    
    0.13
    
    
    
    0.14
    
    
    
    0.14
    
    
    
    0.14
   Selected Consolidated Financial Information and Other Data
  Selected consolidated financial condition data:
    
    At December 31,(In thousands)
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Total assets
    
    $
    680,786
    
    
    $
    684,004
    
    
    $
    690,896
    
    
    $
    611,685
    
    
    $
    553,297Cash and cash equivalents
    
    
    32,068
    
    
    
    15,894
    
    
    
    18,069
    
    
    
    11,238
    
    
    
    20,349Securities available for sale
    
    
    89,009
    
    
    
    88,071
    
    
    
    96,580
    
    
    
    96,123
    
    
    
    108,547Net loans
    
    
    512,195
    
    
    
    547,021
    
    
    
    547,510
    
    
    
    478,487
    
    
    
    400,616Deposits
    
    
    510,874
    
    
    
    524,094
    
    
    
    503,906
    
    
    
    454,574
    
    
    
    442,352Borrowed funds
    
    
    110,082
    
    
    
    95,512
    
    
    
    128,535
    
    
    
    101,028
    
    
    
    54,312Shareholders equity
    
    
    57,068
    
    
    
    61,399
    
    
    
    56,254
    
    
    
    54,261
    
    
    
    49,689
 26




---



##### 



Selected Operating Data
    
    Year ended December 31,(In thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Interest and dividend income
    
    $
    43,556
    
    
    $
    44,407
    
    
    $
    36,566
    
    
    $
    27,813
    
    
    $
    26,591Interest expense
    
    
    22,154
    
    
    
    21,315
    
    
    
    13,750
    
    
    
    7,802
    
    
    
    7,973Net interest income
    
    
    21,402
    
    
    
    23,092
    
    
    
    22,816
    
    
    
    20,011
    
    
    
    18,618Provision for loan losses
    
    
    10,159
    
    
    
    1,808
    
    
    
    2,000
    
    
    
    1,696
    
    
    
    1,418Net interest income after
provision for loan losses
    
    
    11,243
    
    
    
    21,284
    
    
    
    20,816
    
    
    
    18,315
    
    
    
    17,200Noninterest income
    
    
    5,928
    
    
    
    5,619
    
    
    
    5,654
    
    
    
    7,618
    
    
    
    6,624Noninterest expense
    
    
    17,962
    
    
    
    16,452
    
    
    
    15,665
    
    
    
    15,985
    
    
    
    16,508Income (loss) before income tax
    
    
    (791
    )
    
    
    10,451
    
    
    
    10,805
    
    
    
    9,948
    
    
    
    7,316Income tax expense (benefit)
    
    
    (930
    )
    
    
    3,098
    
    
    
    3,249
    
    
    
    2,973
    
    
    
    2,287Net income
    
    $
    139
    
    
    $
    7,353
    
    
    $
    7,556
    
    
    $
    6,975
    
    
    $
    5,029Per Share Data:Basic earnings per share
    
    $
    0.04
    
    
    $
    1.93
    
    
    $
    1.94
    
    
    $
    1.77
    
    
    $
    1.26Diluted earnings per share
    
    $
    0.04
    
    
    $
    1.92
    
    
    $
    1.94
    
    
    $
    1.77
    
    
    $
    1.26Dividends declared per share
    
    $
    0.60
    
    
    $
    0.55
    
    
    $
    0.48
    
    
    $
    0.48
    
    
    $
    0.39
 At or for the year ended December 31,Selected Financial Ratios:
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Interest rate spread
    
    
    2.90
    %
    
    
    2.85
    %
    
    
    3.37
    %
    
    
    3.55
    %
    
    
    3.48
    %Net interest margin
    
    
    3.36
    
    
    
    3.48
    
    
    
    3.66
    
    
    
    3.72
    
    
    
    3.75Return on average equity
    
    
    0.23
    
    
    
    12.55
    
    
    
    13.68
    
    
    
    13.14
    
    
    
    10.11Return on average assets
    
    
    0.02
    
    
    
    1.05
    
    
    
    1.15
    
    
    
    1.13
    
    
    
    0.91Average equity to average assets
    
    
    8.88
    
    
    
    8.39
    
    
    
    8.41
    
    
    
    8.60
    
    
    
    8.96Dividend payout ratio
    
    
    *
    
    
    
    28.50
    
    
    
    24.74
    
    
    
    27.12
    
    
    
    30.95Allowance for loan losses as
a percentage of loans past
due over 90 days
    
    
    63.34
    
    
    
    64.05
    
    
    
    114.53
    
    
    
    140.75
    
    
    
    151.18
 
 *
    
    Not meaningful. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
  27




---



##### 



Forward-Looking Statements
   Critical Accounting Policies
    28




---



##### 



Overview of 2007
    
    
    The Corporations assets totaled $680,786 at December 31, 2007, compared to $684,004 at
December 31, 2006, a decrease of $3,218, or 0.5%. The decrease in assets is primarily
attributed to slower loan growth or a higher volume of loan pay offs.
    
    Net income for 2007 totaled $139, a decrease of $7,214, or 98.1%, compared to net income
for 2006 of $7,353. The decrease in net income was primarily due to deterioration in the
Corporations Columbus real estate investment property loan portfolio coupled with the
slowdown in the economy, pricing competition and a reduction in interest income due to
non-accrual loans.
    
    The provision for loan losses totaled $10,159 for the year ended December 31, 2007
compared to $1,808 in 2006. The increase in the provision was primarily due to
deterioration in the Corporations Columbus real estate investment property portfolio
coupled with the effects of a slowdown in the economy in DCBs market area. The majority
of nonperforming loans were those in the investment real estate sector that were not
generating sufficient cash flow to service the debt. The Bank realized significant losses
centered in this portfolio during the fourth quarter of 2007, recording loan charge-offs
of $4.7 million and an addition to the allowance for loan losses of $7.4 million. Net
charge-offs for the year ended December 31, 2007 were $7,302, compared to $1,902 for the
same period in 2006.
    
    With the flattening of the yield curve during the year, the Corporations net interest
margin decreased from the preceding year. Net interest income decreased to $21,402 for
2007 compared to $23,092 for 2006. The $1,690 decrease was mainly attributed to a decline
in loan balances due to competitive pricing pressures and credit issues attributed to the
slower economic environment, coupled with the additions of non-accrual loans.
 29




---



##### 




    
    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.
    
    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.
    
    The Banks wealth management department continues to grow in revenue as the Corporation
is able to add additional new products in order to expand its current client base and
diversify its services wealth management provides.
    
    During 2007, the Bank opened three of its five new office locations throughout the
Banks geographical market area. 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
    30




---



##### 



31




---



##### 



Comparison of Results of Operations for the Years Ended December 31, 2007 and December 31, 2006
 Net Income.
 Net Interest Income.
   Provision and Allowance for Loan Losses.
  32




---



##### 



Noninterest Income.
 Noninterest Expense.
 33




---



##### 



Income Taxes.
 Comparison of Results of Operations for the Years Ended December 31, 2006 and December 31, 2005
 Net Income.
 Net Interest Income.
  Provision and Allowance for Loan Losses.
  34




---



##### 



Noninterest Income.
 Noninterest Expense.
 Income Taxes.
 35




---



##### 



Year ended December 31,2007
    
    
    2006
    
    
    2005Average
    
    
    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
    
    $
    4,604
    
    
    $
    298
    
    
    
    6.47
    %
    
    $
    4,499
    
    
    $
    177
    
    
    
    3.93
    %
    
    $
    238
    
    
    $
    13
    
    
    
    5.59
    %Taxable securities
    
    
    68,588
    
    
    
    3,585
    
    
    
    5.23
    
    
    
    67,384
    
    
    
    3,447
    
    
    
    5.12
    
    
    
    73,932
    
    
    
    3,091
    
    
    
    4.18Tax-exempt securities (1)
    
    
    24,705
    
    
    
    892
    
    
    
    3.61
    
    
    
    29,272
    
    
    
    942
    
    
    
    3.22
    
    
    
    23,861
    
    
    
    800
    
    
    
    3.35Loans (2)
    
    
    538,608
    
    
    
    38,781
    
    
    
    7.20
    
    
    
    561,881
    
    
    
    39,841
    
    
    
    7.09
    
    
    
    525,233
    
    
    
    32,662
    
    
    
    6.22Total interest-earning assets
    
    
    636,505
    
    
    
    43,556
    
    
    
    6.84
    
    
    
    663,036
    
    
    
    44,407
    
    
    
    6.70
    
    
    
    623,264
    
    
    
    36,566
    
    
    
    5.87Noninterest-earning assets
    
    
    44,612
    
    
    
    
    
    
    
    
    
    
    
    34,927
    
    
    
    
    
    
    
    
    
    
    
    33,609Total assets
    
    $
    681,117
    
    
    
    
    
    
    
    
    
    
    $
    697,963
    
    
    
    
    
    
    
    
    
    
    $
    656,873Interest-bearing liabilities:Demand and money market deposits
    
    $
    259,051
    
    
    $
    9,618
    
    
    
    3.71
    %
    
    $
    254,134
    
    
    $
    9,749
    
    
    
    3.84
    %
    
    $
    195,959
    
    
    $
    4,267
    
    
    
    2.18
    %Savings deposits
    
    
    31,343
    
    
    
    151
    
    
    
    0.48
    
    
    
    39,480
    
    
    
    193
    
    
    
    0.49
    
    
    
    54,920
    
    
    
    271
    
    
    
    0.49Certificates of deposit
    
    
    173,377
    
    
    
    8,323
    
    
    
    4.80
    
    
    
    163,302
    
    
    
    7,239
    
    
    
    4.43
    
    
    
    173,216
    
    
    
    5,128
    
    
    
    2.96Total deposits
    
    
    463,771
    
    
    
    18,092
    
    
    
    3.90
    
    
    
    456,916
    
    
    
    17,181
    
    
    
    3.76
    
    
    
    424,095
    
    
    
    9,666
    
    
    
    2.28Borrowed funds
    
    
    98,459
    
    
    
    4,062
    
    
    
    4.13
    
    
    
    97,224
    
    
    
    4,134
    
    
    
    4.25
    
    
    
    125,013
    
    
    
    4,084
    
    
    
    3.27Total interest-bearing liabilities
    
    
    562,230
    
    
    
    22,154
    
    
    
    3.94
    
    
    
    554,140
    
    
    
    21,315
    
    
    
    3.85
    
    
    
    549,108
    
    
    
    13,750
    
    
    
    2.50Noninterest-bearing liabilities
    
    
    58,379
    
    
    
    
    
    
    
    
    
    
    
    85,237
    
    
    
    
    
    
    
    
    
    
    
    52,519Total liabilities
    
    
    620,609
    
    
    
    
    
    
    
    
    
    
    
    639,377
    
    
    
    
    
    
    
    
    
    
    
    601,627Shareholders equity
    
    
    60,508
    
    
    
    
    
    
    
    
    
    
    
    58,586
    
    
    
    
    
    
    
    
    
    
    
    55,246Total liabilities and shareholders
  equity
    
    $
    681,117
    
    
    
    
    
    
    
    
    
    
    $
    697,963
    
    
    
    
    
    
    
    
    
    
    $
    656,873Net interest income; interest rate spread
    
    
    
    
    
    $
    21,402
    
    
    
    2.90
    %
    
    
    
    
    
    $
    23,092
    
    
    
    2.85
    %
    
    
    
    
    
    $
    22,816
    
    
    
    3.37
    %Net interest margin (net interest income
  as a percent of average interest-earning
  assets)
    
    
    
    
    
    
    
    
    
    
    3.36
    %
    
    
    
    
    
    
    
    
    
    
    3.48
    %
    
    
    
    
    
    
    
    
    
    
    3.66
    %Average interest-earning assets to average
  interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    113.21
    %
    
    
    
    
    
    
    
    
    
    
    119.65
    %
    
    
    
    
    
    
    
    
    
    
    113.50
    %
 
 (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 $1,352 in 2007,
$1,335 in 2006, and $1,222 in 2005.(2)
    
    Includes nonaccrual loans. 36




---



##### 



Year ended December 31,2007 vs. 2006
    
    
    2006 vs. 2005Increase
    
    
    
    
    
    
    Increase(decrease)
    
    
    
    
    
    
    (decrease)due to
    
    
    
    
    
    
    due toVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalInterest income attributable to:Federal funds sold
    
    $
    5
    
    
    $
    116
    
    
    $
    121
    
    
    $
    239
    
    
    $
    (74
    )
    
    $
    165Taxable securities
    
    
    62
    
    
    
    76
    
    
    
    138
    
    
    
    (275
    )
    
    
    631
    
    
    
    356Tax-exempt securities
    
    
    (147
    )
    
    
    97
    
    
    
    (50
    )
    
    
    182
    
    
    
    (40
    )
    
    
    142Loans
    
    
    (1,650
    )
    
    
    590
    
    
    
    (1,060
    )
    
    
    2,278
    
    
    
    4,900
    
    
    
    7,178Total interest income
    
    
    (1,730
    )
    
    
    879
    
    
    
    (851
    )
    
    
    2,424
    
    
    
    5,417
    
    
    
    7,841Interest expense attributable to:Demand and money market deposits
    
    
    189
    
    
    
    (320
    )
    
    
    (131
    )
    
    
    1,266
    
    
    
    4,216
    
    
    
    5,482Savings deposits
    
    
    (40
    )
    
    
    (2
    )
    
    
    (42
    )
    
    
    (76
    )
    
    
    (2
    )
    
    
    (78
    )Certificates of deposit
    
    
    447
    
    
    
    637
    
    
    
    1,084
    
    
    
    (293
    )
    
    
    2,404
    
    
    
    2,111Borrowed funds
    
    
    52
    
    
    
    (124
    )
    
    
    (72
    )
    
    
    (908
    )
    
    
    958
    
    
    
    50Total interest expense
    
    
    648
    
    
    
    191
    
    
    
    839
    
    
    
    (11
    )
    
    
    7,576
    
    
    
    7,565Increase (decrease) in net
interest income
    
    $
    (2,378
    )
    
    $
    688
    
    
    $
    (1,690
    )
    
    $
    2,435
    
    
    $
    (2,159
    )
    
    $
    276
 Asset and Liability Management and Market Risk
   37




---



##### 



Change in
    
    December 31, 2007
    
    December 31, 2006Interest Rate
    
    $ Change
    
    % Change
    
    NPV
    
    $ Change
    
    % Change
    
    NPV(Basis Points)
    
    In NPV
    
    In NPV
    
    Ratio
    
    In NPV
    
    In NPV
    
    Ratio+100
    
    
    $
    (640
    )
    
    
    (1
    )%
    
    
    12.3
    %
    
    $
    (2,145
    )
    
    
    (3
    )%
    
    
    11.8
    %Base
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -100
    
    
    
    (1,715
    )
    
    
    (2
    )
    
    
    11.8
    
    
    
    (324
    )
    
    
    (1
    )
    
    
    11.7-200
    
    
    
    (9,291
    )
    
    
    (11
    )
    
    
    10.7
    
    
    
    (4,855
    )
    
    
    (6
    )
    
    
    10.9-300
    
    
    
    (20,145
    )
    
    
    (24
    )
    
    
    9.1
    
    
    
    (14,531
    )
    
    
    (18
    )
    
    
    9.5
 38




---



##### 



Liquidity
     39




---



##### 



Capital Resources
     Payment due by yearLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsFHLB advances
    
    $
    93,486
    
    
    $
    10,246
    
    
    $
    16,602
    
    
    $
    53,771
    
    
    $
    12,867Federal funds purchased and
other short-term borrowings
    
    
    16,596
    
    
    
    16,596
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    6,204
    
    
    
    826
    
    
    
    1,122
    
    
    
    1,119
    
    
    
    3,137Loan and line of credit
commitments
    
    
    106,657
    
    
    
    106,657
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    229,943
    
    
    $
    134,325
    
    
    $
    17,724
    
    
    $
    54,890
    
    
    $
    16,004
 40




---



##### 



2007
    
    
    2006ASSETSCash and due from financial institutions
    
    $
    15,588
    
    
    $
    12,910Federal funds sold
    
    
    16,480
    
    
    
    2,984Cash and cash equivalents
    
    
    32,068
    
    
    
    15,894Securities available for sale, at fair value
    
    
    89,009
    
    
    
    88,071Loans held for sale, at lower of cost or market
    
    
    1,078
    
    
    
    1,455Loans
    
    
    520,493
    
    
    
    552,463Less allowance for loan losses
    
    
    (8,298
    )
    
    
    (5,442
    )Net loans
    
    
    512,195
    
    
    
    547,021Real estate owned
    
    
    1,406
    
    
    
    Investment in FHLB stock
    
    
    3,670
    
    
    
    3,604Premises and equipment, net
    
    
    14,178
    
    
    
    9,468Investment in unconsolidated affiliates
    
    
    1,270
    
    
    
    968Bank-owned life insurance
    
    
    14,963
    
    
    
    9,396Accrued interest receivable and other assets
    
    
    10,949
    
    
    
    8,127Total assets
    
    $
    680,786
    
    
    $
    684,004LIABILITIESDepositsNoninterest-bearing
    
    $
    53,112
    
    
    $
    70,428Interest-bearing
    
    
    457,762
    
    
    
    453,666Total deposits
    
    
    510,874
    
    
    
    524,094Federal funds purchased and other short-term borrowings
    
    
    16,596
    
    
    
    1,776Federal Home Loan Bank advances
    
    
    93,486
    
    
    
    93,736Accrued interest payable and other liabilities
    
    
    2,762
    
    
    
    2,999Total liabilities
    
    
    623,718
    
    
    
    622,605SHAREHOLDERS EQUITYCommon stock, no par value, 7,500,000 shares authorized,
4,273,750 issued
    
    
    3,780
    
    
    
    3,780Retained earnings
    
    
    66,690
    
    
    
    68,807Treasury stock, at cost, 556,365 and 458,786
shares at December 31, 2007 and 2006, respectively
    
    
    (13,489
    )
    
    
    (10,841
    )Accumulated other comprehensive income (loss)
    
    
    87
    
    
    
    (347
    )Total shareholders equity
    
    
    57,068
    
    
    
    61,399Total liabilities and shareholders equity
    
    $
    680,786
    
    
    $
    684,004
  41




---



##### 



2007
    
    
    2006
    
    
    2005Interest and dividend incomeLoans
    
    $
    38,781
    
    
    $
    39,841
    
    
    $
    32,662Taxable securities
    
    
    3,585
    
    
    
    3,447
    
    
    
    3,091Tax-exempt securities
    
    
    892
    
    
    
    942
    
    
    
    800Federal funds sold and other
    
    
    298
    
    
    
    177
    
    
    
    13Total interest income
    
    
    43,556
    
    
    
    44,407
    
    
    
    36,566Interest expenseDeposits
    
    
    18,092
    
    
    
    17,181
    
    
    
    9,666Borrowings
    
    
    4,062
    
    
    
    4,134
    
    
    
    4,084Total interest expense
    
    
    22,154
    
    
    
    21,315
    
    
    
    13,750Net interest income
    
    
    21,402
    
    
    
    23,092
    
    
    
    22,816Provision for loan losses
    
    
    10,159
    
    
    
    1,808
    
    
    
    2,000Net interest income after provision for loan losses
    
    
    11,243
    
    
    
    21,284
    
    
    
    20,816Noninterest incomeService charges on deposit accounts
    
    
    2,656
    
    
    
    2,660
    
    
    
    2,592Trust department income
    
    
    876
    
    
    
    738
    
    
    
    668Loss on sale of assets
    
    
    (228
    )
    
    
    (7
    )
    
    
    (35
    )Gain on sale of loans
    
    
    344
    
    
    
    350
    
    
    
    407Gain on sale of investment securities
    
    
    33
    
    
    
    
    
    
    
    Treasury management fees
    
    
    551
    
    
    
    562
    
    
    
    469Data processing servicing fees
    
    
    408
    
    
    
    336
    
    
    
    310Earnings on bank owned life insurance
    
    
    567
    
    
    
    498
    
    
    
    441Other
    
    
    721
    
    
    
    482
    
    
    
    802Total noninterest income
    
    
    5,928
    
    
    
    5,619
    
    
    
    5,654Noninterest expenseSalaries and other employee benefits
    
    
    9,643
    
    
    
    9,043
    
    
    
    8,541Occupancy and equipment
    
    
    3,663
    
    
    
    3,225
    
    
    
    3,244Professional services
    
    
    475
    
    
    
    455
    
    
    
    417Advertising
    
    
    427
    
    
    
    401
    
    
    
    394Postage, freight and courier
    
    
    286
    
    
    
    317
    
    
    
    361Supplies
    
    
    290
    
    
    
    249
    
    
    
    247State franchise taxes
    
    
    463
    
    
    
    548
    
    
    
    458Other
    
    
    2,715
    
    
    
    2,214
    
    
    
    2,003Total noninterest expense
    
    
    17,962
    
    
    
    16,452
    
    
    
    15,665Income (loss) before income taxes (credit)
    
    
    (791
    )
    
    
    10,451
    
    
    
    10,805Income tax expense (credit)
    
    
    (930
    )
    
    
    3,098
    
    
    
    3,249Net income
    
    $
    139
    
    
    $
    7,353
    
    
    $
    7,556Basic earnings per common share
    
    $
    0.04
    
    
    $
    1.93
    
    
    $
    1.94Diluted earnings per common share
    
    $
    0.04
    
    
    $
    1.92
    
    
    $
    1.94
  42




---



##### 



2007
    
    
    2006
    
    
    2005Net income
    
    $
    139
    
    
    $
    7,353
    
    
    $
    7,556Unrealized gains (losses) on securities
available for sale, net of related (taxes)
benefits of $(235), $(116) and $416 in
2007, 2006 and 2005
    
    
    456
    
    
    
    225
    
    
    
    (807
    )Reclassification adjustment for realized gains,
net of taxes $11
    
    
    (22
    )
    
    
    
    
    
    
    Comprehensive income
    
    $
    573
    
    
    $
    7,578
    
    
    $
    6,749Accumulated other comprehensive income (loss)
    
    $
    87
    
    
    $
    (347
    )
    
    $
    (572
    )
  43




---



##### 



AccumulatedOther
    
    
    TotalCommon
    
    
    Retained
    
    
    Treasury
    
    
    Comprehensive
    
    
    ShareholdersStock
    
    
    Earnings
    
    
    Stock
    
    
    Income (Loss)
    
    
    EquityBalance at January 1, 2005
    
    $
    3,780
    
    
    $
    57,862
    
    
    $
    (7,616
    )
    
    $
    235
    
    
    $
    54,261Net income
    
    
    
    
    
    
    7,556
    
    
    
    
    
    
    
    
    
    
    
    7,556Unrealized losses on securities
designated as available for
sale, net of tax benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (807
    )
    
    
    (807
    )Purchase of treasury stock-
108,672 shares at cost
    
    
    
    
    
    
    
    
    
    
    (2,890
    )
    
    
    
    
    
    
    (2,890
    )Dividends ($0.48 per share)
    
    
    
    
    
    
    (1,866
    )
    
    
    
    
    
    
    
    
    
    
    (1,866
    )Balance at December 31, 2005
    
    
    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 tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    434
    
    
    
    434Purchase of treasury stock-
97,737 shares at cost
    
    
    
    
    
    
    
    
    
    
    (2,653
    )
    
    
    
    
    
    
    (2,653
    )Issuance of 158 shares of
treasury stock
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Dividends ($0.60 per share)
    
    
    
    
    
    
    (2,256
    )
    
    
    
    
    
    
    
    
    
    
    (2,256
    )Balance at December 31, 2007
    
    $
    3,780
    
    
    $
    66,690
    
    
    $
    (13,489
    )
    
    $
    87
    
    
    $
    57,068
  44




---



##### 



2007
    
    
    2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    139
    
    
    $
    7,353
    
    
    $
    7,556Adjustments to reconcile net income to net cash
provided by (used in) operating activitiesDepreciation
    
    
    1,180
    
    
    
    966
    
    
    
    1,049Provision for loan losses
    
    
    10,159
    
    
    
    1,808
    
    
    
    2,000Deferred income taxes
    
    
    (1,051
    )
    
    
    (12
    )
    
    
    (2,288
    )Gain on sale of security
    
    
    (33
    )
    
    
    
    
    
    
    Gain on sale of loans
    
    
    (344
    )
    
    
    (350
    )
    
    
    (407
    )Loss on sale of assets
    
    
    228
    
    
    
    7
    
    
    
    35Premium amortization on securities, net
    
    
    270
    
    
    
    530
    
    
    
    868FHLB stock dividends
    
    
    (66
    )
    
    
    (210
    )
    
    
    (153
    )Net change in loans held for sale
    
    
    377
    
    
    
    185
    
    
    
    (518
    )Earnings on bank owned life insurance
    
    
    (567
    )
    
    
    (498
    )
    
    
    (441
    )Net changes in other assets and other liabilities
    
    
    (2,232
    )
    
    
    (2,342
    )
    
    
    144Net cash provided by operating activities
    
    
    8,060
    
    
    
    7,437
    
    
    
    7,845Cash flows used in investing activitiesSecurities available for salePurchases
    
    
    (22,711
    )
    
    
    (13,932
    )
    
    
    (32,413
    )Maturities, principal payments, and calls
    
    
    22,194
    
    
    
    22,183
    
    
    
    31,343Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (71
    )
    
    
    Net change in loans
    
    
    22,632
    
    
    
    (976
    )
    
    
    (70,651
    )Premises and equipment expenditures
    
    
    (5,890
    )
    
    
    (1,580
    )
    
    
    (1,057
    )Purchase of bank-owned life insurance policies
    
    
    (5,000
    )
    
    
    
    
    
    
    Proceeds from sale of real estate owned
    
    
    745
    
    
    
    386
    
    
    
    Investment in unconsolidated affiliates
    
    
    (302
    )
    
    
    (354
    )
    
    
    (319
    )Net cash provided by (used in) investing activities
    
    
    11,668
    
    
    
    5,656
    
    
    
    (73,097
    )Cash flows provided by (used in) financing activitiesNet change in deposits
    
    
    (13,220
    )
    
    
    20,189
    
    
    
    49,332Net change in federal funds purchased
and other short-term borrowings
    
    
    14,820
    
    
    
    (23,835
    )
    
    
    20,395Proceeds from Federal Home Loan Bank advances
    
    
    26,500
    
    
    
    29,000
    
    
    
    171,261Repayment of Federal Home Loan Bank advances
    
    
    (26,750
    )
    
    
    (38,189
    )
    
    
    (164,149
    )Purchase of treasury stock
    
    
    (2,653
    )
    
    
    (341
    )
    
    
    (2,890
    )Issuance of treasury stock
    
    
    5
    
    
    
    6
    
    
    
    Cash dividends paid
    
    
    (2,256
    )
    
    
    (2,098
    )
    
    
    (1,866
    )Net cash provided by (used in) financing activities
    
    
    (3,554
    )
    
    
    (15,268
    )
    
    
    72,083Net change in cash and cash equivalents
    
    
    16,174
    
    
    
    (2,175
    )
    
    
    6,831Cash and cash equivalents at beginning of year
    
    
    15,894
    
    
    
    18,069
    
    
    
    11,238Cash and cash equivalents at end of year
    
    $
    32,068
    
    
    $
    15,894
    
    
    $
    18,069
  45




---



##### 



2007
    
    
    2006
    
    
    2005Supplemental cash flow informationInterest paid
    
    $
    22,160
    
    
    $
    20,841
    
    
    $
    12,097Income taxes paid
    
    $
    1,850
    
    
    $
    4,214
    
    
    $
    2,950Supplemental non cash disclosuresUnrealized gain (losses) on securities designated
as available for sale, net of related tax effects
    
    $
    456
    
    
    $
    225
    
    
    $
    (807
    )Transfers from loans to real estate owned
    
    $
    2,379
    
    
    $
    
    
    
    $
    386Loans originated upon sale of real estate owned
    
    $
    384
    
    
    $
    
    
    
    $
    
  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
  2007
    
    
    2006
    
    
    2005Weighted-average common shares
outstanding (basic)
    
    
    3,743,157
    
    
    
    3,816,322
    
    
    
    3,890,717Dilutive effect of assumed exercise
of stock options
    
    
    2,927
    
    
    
    17,787
    
    
    
    2,994Weighted-average common shares
outstanding (diluted)
    
    
    3,746,084
    
    
    
    3,834,109
    
    
    
    3,893,711
   Stock option plan
   50




---



##### 



51




---



##### 



2005(In thousands,except per share data)NET INCOME
    
    As reported
    
    $
    7,556Stock-based compensation, net of tax
    
    
    (16
    )Pro-forma
    
    $
    7,540EARNINGS PER SHAREBASIC
    
    As reported
    
    $
    1.94Stock-based compensation, net of tax
    
    
    Pro-forma
    
    $
    1.94DILUTED
    
    As reported
    
    $
    1.94Stock-based compensation, net of tax
    
    
    Pro-forma
    
    $
    1.94
    52




---



##### 



Year EndedDecember 31,2007WEIGHTEDWEIGHTED
    
    
    AVERAGEAVERAGE
    
    
    REMAINING
    
    
    AGGREGATEEXERCISE
    
    
    CONTRACTUAL
    
    
    INTRINSICSHARES
    
    
    PRICE
    
    
    LIFE
    
    
    VALUEOutstanding at beginning of year
    
    
    70,040
    
    
    $
    27.19
    
    
    8.0 years
    
    $
    Granted
    
    
    44,214
    
    
    
    23.43
    
    
    9.8 years
    
    
    Exercised
    
    
    (158
    )
    
    
    28.69
    
    
    
    
    
    
    
    Forfeited
    
    
    (6,045
    )
    
    
    26.20Outstanding at end of year
    
    
    108,051
    
    
    $
    25.80
    
    
    8.9 years
    
    $
    Options exercisable at year end
    
    
    21,553
    
    
    $
    26.13
    
    
    
    
    
    
    $
    Weighted-average fair value of
options granted during the year
    
    
    
    
    
    $
    2.57
    
    
    
    
    
    
    $
    
  2006
    
    
    
    
    
    
    2005WEIGHTED
    
    
    
    
    
    
    WEIGHTEDAVERAGE
    
    
    
    
    
    
    AVERAGEEXERCISE
    
    
    
    
    
    
    EXERCISESHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICEOutstanding at beginning of year
    
    
    40,687
    
    
    $
    25.31
    
    
    
    15,105
    
    
    $
    23.40Granted
    
    
    34,532
    
    
    $
    29.94
    
    
    
    26,219
    
    
    $
    25.74Exercised
    
    
    (427
    )
    
    $
    30.26
    
    
    
    
    
    
    
    Forfeited
    
    
    (4,752
    )
    
    $
    28.56
    
    
    
    (637
    )
    
    $
    23.40Outstanding at end of year
    
    
    70,040
    
    
    $
    27.19
    
    
    
    40,687
    
    
    $
    25.31Options exercisable at year-end
    
    
    8,959
    
    
    $
    24.49
    
    
    
    2,894
    
    
    $
    23.40Weighted-average fair value of
options granted during the year
    
    
    
    
    
    $
    6.19
    
    
    
    
    
    
    $
    4.68
  NUMBER OUTSTANDING
    
    RANGE OF EXERCISE PRICES108,051
    
    $23.00 - $30.70
  53




---



##### 



Comprehensive Income
 Recent Accounting Standards
       54




---



##### 




 
 
       55




---



##### 



Restrictions on Cash
 Dividend Restrictions
 Fair Value of Financial Instruments
  56




---



##### 



Advertising and Marketing:
 Reclassification
 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
 Gross
    
    
    GrossFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    Losses
    
    
    Cost2006U.S. Government and agency obligations
    
    $
    21,360
    
    
    $
    2
    
    
    $
    (191
    )
    
    $
    21,549States and municipal obligations
    
    
    24,510
    
    
    
    106
    
    
    
    (78
    )
    
    
    24,482Corporate bonds
    
    
    8,532
    
    
    
    54
    
    
    
    (1
    )
    
    
    8,479Mortgage-backed securities
    
    
    33,576
    
    
    
    36
    
    
    
    (488
    )
    
    
    34,028Total debt securities
    
    
    87,978
    
    
    
    198
    
    
    
    (758
    )
    
    
    88,538Other securities
    
    
    93
    
    
    
    42
    
    
    
    (8
    )
    
    
    59Total
    
    $
    88,071
    
    
    $
    240
    
    
    $
    (766
    )
    
    $
    88,597
  57




---



##### 



NOTE 2  SECURITIES
  (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
    
    
    losses2007U.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
    )Corporate bonds
    
    
    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
    )
  (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
    
    
    losses2006U.S. Government and
agency obligations
    
    
    5
    
    
    $
    4,330
    
    
    $
    (12
    )
    
    
    18
    
    
    $
    14,522
    
    
    $
    (179
    )
    
    
    23
    
    
    $
    18,852
    
    
    $
    (191
    )State and municipal
obligations
    
    
    13
    
    
    
    3,861
    
    
    
    (19
    )
    
    
    17
    
    
    
    7,124
    
    
    
    (59
    )
    
    
    30
    
    
    
    10,985
    
    
    
    (78
    )Corporate bonds
    
    
    1
    
    
    
    472
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    472
    
    
    
    (1
    )Mortgage-backed
securities and other
    
    
    21
    
    
    
    4,544
    
    
    
    (26
    )
    
    
    79
    
    
    
    23,488
    
    
    
    (470
    )
    
    
    100
    
    
    
    28,032
    
    
    
    (496
    )Total temporarily
impaired securities
    
    
    40
    
    
    $
    13,207
    
    
    $
    (58
    )
    
    
    114
    
    
    $
    45,134
    
    
    $
    (708
    )
    
    
    154
    
    
    $
    58,341
    
    
    $
    (766
    )
   58




---



##### 



NOTE 2  SECURITIES
  FairValueDue in one year or less
    
    $
    9,467Due from one to five years
    
    
    9,536Due from five to ten years
    
    
    18,426Due after ten years
    
    
    18,713Mortgage-backed securities
    
    
    32,773$
    88,915
  2007
    
    2006
    
    2005Proceeds from sales and/or calls
    
    $
    8,558
    
    
    $
    12,397
    
    
    $
    15,263Gross gains
    
    
    33
    
    
    
    
    
    
    
    1Gross losses
    
    
    
    
    
    
    
    
    
    
    (1
    )
    59




---



##### 



NOTE 3  LOANS
  2007
    
    
    2006Commercial and industrial
    
    $
    41,500
    
    
    $
    44,369Commercial real estate
    
    
    193,608
    
    
    
    200,821Residential real estate and home equity
    
    
    200,931
    
    
    
    206,488Real estate construction and land development
    
    
    49,037
    
    
    
    51,584Consumer and credit card
    
    
    35,066
    
    
    
    48,680520,142
    
    
    
    551,942Add: Net deferred loan origination costs
    
    
    351
    
    
    
    521Total loans receivable
    
    $
    520,493
    
    
    $
    552,463
  Beginning balance
    
    $
    26,974New loans
    
    
    2,601Repayments
    
    
    (10,352
    )Ending balance
    
    $
    19,223
  60




---



##### 



NOTE 4  ALLOWANCE FOR LOAN LOSSES
 Activity in the allowance for loan losses was as follows:
    
    2007
    
    
    2006
    
    
    2005Balance beginning of year
    
    $
    5,442
    
    
    $
    5,535
    
    
    $
    4,818Provision for loan losses
    
    
    10,159
    
    
    
    1,808
    
    
    
    2,000Loans charged-off
    
    
    (7,691
    )
    
    
    (2,335
    )
    
    
    (1,457
    )Recoveries
    
    
    388
    
    
    
    434
    
    
    
    174Balance at end of year
    
    $
    8,298
    
    
    $
    5,442
    
    
    $
    5,535
 Impaired loans were as follows at year-end:
    
    2007
    
    
    2006
    
    
    2005Loans with no allocated allowance for
unconfirmed loan losses
    
    $
    538
    
    
    $
    
    
    
    $
    1,845Loans with allocated allowance for
unconfirmed loan losses
    
    
    9,800
    
    
    
    5,189
    
    
    
    2,185Total
    
    $
    10,338
    
    
    $
    5,189
    
    
    $
    4,030Amount of the allowance for loan losses allocated
to unconfirmed losses on impaired loans
    
    $
    2,114
    
    
    $
    1,562
    
    
    $
    1,060
 2007
    
    2006
    
    2005Average of impaired loans during the year
    
    $
    7,907
    
    
    $
    2,584
    
    
    $
    1,807Interest income recognized during impairment
    
    
    
    
    
    
    
    
    
    
    Cash basis interest income recognized
    
    
    
    
    
    
    
    
    
    
    101
 Allowance on impaired loans was as follows at year-end:
    
    2007
    
    
    2006
    
    
    2005Beginning balance
    
    $
    1,562
    
    
    $
    1,060
    
    
    $
    360Provision related to impaired loans
    
    
    6,608
    
    
    
    945
    
    
    
    940Loans charge-offs (net of recoveries)
    
    
    (6,056
    )
    
    
    (443
    )
    
    
    (240
    )Ending balance
    
    $
    2,114
    
    
    $
    1,562
    
    
    $
    1,060
   61




---



##### 



NOTE 4  ALLOWANCE FOR LOAN LOSSES (continued)
 Nonperforming loans were as follows at year-end:
    
    2007
    
    
    2006
    
    
    2005Loans past due over 90 days still accruing interest
    
    $
    2,740
    
    
    $
    3,307
    
    
    $
    2,648Nonaccrual loans
    
    
    10,360
    
    
    
    5,189
    
    
    
    2,185Total
    
    $
    13,100
    
    
    $
    8,496
    
    
    $
    4,833
   62




---



##### 



NOTE 5  PREMISES AND EQUIPMENT
  2007
    
    
    2006Land
    
    $
    1,899
    
    
    $
    1,266Buildings
    
    
    12,220
    
    
    
    8,598Furniture and equipment
    
    
    11,569
    
    
    
    9,92725,688
    
    
    
    19,791Accumulated depreciation
    
    
    (11,510
    )
    
    
    (10,323
    )$
    14,178
    
    
    $
    9,468
  2008
    
    $
    8262009
    
    
    5632010
    
    
    5592011
    
    
    5592012
    
    
    560Thereafter
    
    
    3,137$
    6,204
 NOTE 6  INTEREST-BEARING DEPOSITS
  2007
    
    
    2006Interest-bearing demand
    
    $
    65,310
    
    
    $
    74,282Money market
    
    
    179,820
    
    
    
    176,451Savings deposits
    
    
    28,359
    
    
    
    34,623Time depositsIn denominations under $100,000
    
    
    62,326
    
    
    
    57,492In denominations of $100,000 or more
    
    
    121,947
    
    
    
    110,818$
    457,762
    
    
    $
    453,666
  63




---



##### 



NOTE 6  INTEREST-BEARING DEPOSITS
  2008
    
    $
    160,4652009
    
    
    16,1312010
    
    
    3,8982011
    
    
    3,5902012
    
    
    189$
    184,273
  NOTE 7  BORROWED FUNDS
   Interest
    
    Maturing yearrate range
    
    ending December 31,
    
    2007
    
    
    20063.84% - 5.25%
    
    2007
    
    $
    
    
    
    $
    19,0002.79% - 4.70%
    
    2008
    
    
    1,487
    
    
    
    2,6713.62% - 4.67%
    
    2009
    
    
    3,760
    
    
    
    4,2583.77% - 5.50%
    
    2010
    
    
    1,505
    
    
    
    1,5624.44% - 5.50%
    
    2011
    
    
    15,000
    
    
    
    2.59% - 5.72%
    

Thereafter
    
    
    71,734
    
    
    
    66,245$
    93,486
    
    
    $
    93,736Weighted average interest rate
    
    
    
    
    4.23
    %
    
    
    4.24
    %
  64




---



##### 



NOTE 7  BORROWED FUNDS
   2008
    
    $
    10,2462009
    
    
    9,4902010
    
    
    7,1122011
    
    
    19,9592012
    
    
    33,812Thereafter
    
    
    12,867$
    93,486
 NOTE 8  RETIREMENT PLANS
     65




---



##### 



NOTE 9  FEDERAL INCOME TAXES
  2007
    
    
    2006
    
    
    2005Current
    
    $
    121
    
    
    $
    3,110
    
    
    $
    5,537Deferred
    
    
    (1,051
    )
    
    
    (12
    )
    
    
    (2,288
    )Totals
    
    $
    (930
    )
    
    $
    3,098
    
    
    $
    3,249
  2007
    
    
    2006
    
    
    2005Income taxes (credits) computed at the statutory federal
income tax rate
    
    $
    (269
    )
    
    $
    3,553
    
    
    $
    3,674Tax exempt income
    
    
    (512
    )
    
    
    (521
    )
    
    
    (486
    )Other
    
    
    (149
    )
    
    
    66
    
    
    
    61Totals
    
    $
    (930
    )
    
    $
    3,098
    
    
    $
    3,249Effective federal income tax rate
    
    
    *
    %
    
    
    29.6
    %
    
    
    30.1
    %
 
 *
    
    Not meaningful in net loss year.  2007
    
    
    2006Deferred tax assetsAllowance for loan losses
    
    $
    2,822
    
    
    $
    1,850Deferred compensation
    
    
    138
    
    
    
    136Unrealized loss on securities available for sale
    
    
    
    
    
    
    1792,960
    
    
    
    2,165Deferred tax liabilitiesFHLB stock dividends
    
    
    (406
    )
    
    
    (406
    )Unrealized gain on securities available for sale
    
    
    (45
    )
    
    
    Deferred loan origination fees and costs
    
    
    (23
    )
    
    
    (82
    )Leases
    
    
    (24
    )
    
    
    (76
    )Depreciation
    
    
    (330
    )
    
    
    (293
    )Mortgage servicing rights
    
    
    (16
    )
    
    
    (19
    )Other
    
    
    (4
    )
    
    
    (4
    )(848
    )
    
    
    (880
    )Net deferred tax asset
    
    $
    2,112
    
    
    $
    1,285
   66




---



##### 



NOTE 10  COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
    2007
    
    2006Fixed
    
    Variable
    
    Fixed
    
    VariableRate
    
    Rate
    
    Rate
    
    RateCommitments to extend credit
    
    $
    2,267
    
    
    $
    76,095
    
    
    $
    2,342
    
    
    $
    63,356Unused lines of credit and letters of credit
    
    $
    
    
    
    $
    28,295
    
    
    $
    
    
    
    $
    75,223
  Legal Proceedings
    67




---



##### 



NOTE 11  REGULATORY CAPITAL
     68




---



##### 



NOTE 11  REGULATORY CAPITAL
  To Be WellCapitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio2007Total 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
    
    
    
    5.02006Total capital to risk-weighted assetsConsolidated
    
    $
    67,204
    
    
    
    12.1
    %
    
    $
    44,354
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    60,639
    
    
    
    11.3
    
    
    
    42,874
    
    
    
    8.0
    
    
    $
    53,592
    
    
    
    10.0
    %Tier 1 (core) capital to risk-weighted assetsConsolidated
    
    
    61,762
    
    
    
    11.1
    
    
    
    22,177
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    40,197
    
    
    
    7.5
    
    
    
    21,437
    
    
    
    4.0
    
    
    
    32,155
    
    
    
    6.0Tier 1 (core) capital to average assetsConsolidated
    
    
    61,762
    
    
    
    9.0
    
    
    
    27,425
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    40,197
    
    
    
    5.9
    
    
    
    27,354
    
    
    
    4.0
    
    
    
    34,193
    
    
    
    5.0
   69




---



##### 



NOTE 12  DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
  2007
    
    2006Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assetsCash and cash equivalents
    
    $
    32,068
    
    
    $
    32,068
    
    
    $
    15,894
    
    
    $
    15,894Securities available for sale
    
    
    89,009
    
    
    
    89,009
    
    
    
    88,071
    
    
    
    88,071Loans held for sale
    
    
    1,078
    
    
    
    1,078
    
    
    
    1,455
    
    
    
    1,455Loans
    
    
    520,493
    
    
    
    529,057
    
    
    
    552,463
    
    
    
    551,851FHLB stock
    
    
    3,670
    
    
    
    3,670
    
    
    
    3,604
    
    
    
    3,604Accrued interest receivable
    
    
    3,340
    
    
    
    3,340
    
    
    
    3,609
    
    
    
    3,609Financial liabilitiesNoninterest-bearing deposits
    
    $
    53,112
    
    
    $
    53,112
    
    
    $
    70,428
    
    
    $
    70,428Interest-bearing deposits
    
    
    457,762
    
    
    
    450,896
    
    
    
    453,666
    
    
    
    456,372Federal funds purchased and
other short-term borrowings
    
    
    16,596
    
    
    
    16,596
    
    
    
    1,776
    
    
    
    1,776FHLB advances
    
    
    93,486
    
    
    
    92,334
    
    
    
    93,736
    
    
    
    91,936Accrued interest payable
    
    
    1,434
    
    
    
    1,434
    
    
    
    1,440
    
    
    
    1,440
   70




---



##### 



NOTE 13  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
  CONDENSED BALANCE SHEETS
 2007
    
    
    2006AssetsCash and cash equivalents
    
    $
    36
    
    
    $
    1,118Investment in Bank
    
    
    40,821
    
    
    
    39,891Subordinated note from Bank
    
    
    16,510
    
    
    
    17,652Investment in affiliates
    
    
    1,299
    
    
    
    979Other assets
    
    
    1,040
    
    
    
    1,789Total assets
    
    $
    59,706
    
    
    $
    61,429LiabilitiesShort term borrowings
    
    $
    2,610
    
    
    $
    Other liabilities
    
    
    28
    
    
    
    30Shareholders Equity
    
    
    57,068
    
    
    
    61,399Total liabilities and shareholders equity
    
    $
    59,706
    
    
    $
    61,429
 CONDENSED STATEMENTS OF INCOME
 2007
    
    
    2006
    
    
    2005IncomeDividends from Bank subsidiary
    
    $
    5,300
    
    
    $
    7,350
    
    
    $
    2,600Equity in undistributed earnings (excess-distributions) of Bank
    
    
    (5,002
    )
    
    
    308
    
    
    
    4,948Other
    
    
    1,015
    
    
    
    565
    
    
    
    276Total income
    
    
    1,313
    
    
    
    8,223
    
    
    
    7,824Operating expenses
    
    
    1,174
    
    
    
    870
    
    
    
    268Net income
    
    $
    139
    
    
    $
    7,353
    
    
    $
    7,556
  71




---



##### 



NOTE 14  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
 CONDENSED STATEMENTS OF CASH FLOWS
 2007
    
    
    2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    139
    
    
    $
    7,353
    
    
    $
    7,556Adjustments to reconcile net income
to cash provided by operating activities:(Undistributed earnings of) excess distributions
from Bank
    
    
    5,002
    
    
    
    (308
    )
    
    
    (808
    )Net change in other assets and liabilities
    
    
    3,359
    
    
    
    (2,431
    )
    
    
    (949
    )Net cash from operating activities
    
    
    8,500
    
    
    
    4,614
    
    
    
    5,799Cash flows used in investing activitiesInvestment in unconsolidated affiliates
    
    
    (320
    )
    
    
    (354
    )
    
    
    (319
    )(Issuance) repayment of subordinated note to Bank
    
    
    1,142
    
    
    
    (750
    )
    
    
    (750
    )Investment in Bank
    
    
    (5,500
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (4,678
    )
    
    
    (1,104
    )
    
    
    (1,069
    )Cash flows from financing activitiesCash dividends paid
    
    
    (2,256
    )
    
    
    (2,098
    )
    
    
    (1,866
    )Proceeds from exercise of stock options
    
    
    5
    
    
    
    
    
    
    
    Purchase of treasury stock, net
    
    
    (2,653
    )
    
    
    (335
    )
    
    
    (2,890
    )Net cash from financing activities
    
    
    (4,904
    )
    
    
    (2,433
    )
    
    
    (4,756
    )Net change in cash and cash equivalents
    
    
    (1,082
    )
    
    
    1,077
    
    
    
    (26
    )Cash and cash equivalents at beginning of year
    
    
    1,118
    
    
    
    41
    
    
    
    67Cash and cash equivalents at end of year
    
    $
    36
    
    
    $
    1,118
    
    
    $
    41
 72




---



##### 



NOTE 15  CONCENTRATIONS
  NOTE 16  DETAILS OF OPERATING EXPENSES
  2007
    
    
    2006
    
    
    2005Bank premises rent
    
    $
    625
    
    
    $
    486
    
    
    $
    482Bank premises maintenance
    
    
    405
    
    
    
    398
    
    
    
    415Bank depreciation
    
    
    356
    
    
    
    281
    
    
    
    279Equipment lease
    
    
    257
    
    
    
    251
    
    
    
    339Equipment depreciation
    
    
    700
    
    
    
    493
    
    
    
    453Software maintenance
    
    
    681
    
    
    
    624
    
    
    
    507Other
    
    
    639
    
    
    
    692
    
    
    
    769Total
    
    $
    3,663
    
    
    $
    3,225
    
    
    $
    3,244
  2007
    
    
    2006
    
    
    2005ATM and debit cards
    
    $
    456
    
    
    $
    379
    
    
    $
    342Telephone
    
    
    308
    
    
    
    374
    
    
    
    338Other
    
    
    1,951
    
    
    
    1,461
    
    
    
    1,323Total
    
    $
    2,715
    
    
    $
    2,214
    
    
    $
    2,003
 73




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##### 



NOTE 17  QUARTERLY FINANCIAL DATA (Unaudited)
  THREE MONTHS ENDEDDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,2007:
    
    (In thousands, except per share data)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
    
    
    (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
  74




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##### 



NOTE 17  QUARTERLY FINANCIAL DATA (Unaudited)
 THREE MONTHS ENDEDDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,2006:
    
    (In thousands, except per share data)Total interest income
    
    $
    11,206
    
    
    $
    11,568
    
    
    $
    11,089
    
    
    $
    10,544Total interest expense
    
    
    5,623
    
    
    
    5,731
    
    
    
    5,240
    
    
    
    4,721Net interest income
    
    
    5,583
    
    
    
    5,837
    
    
    
    5,849
    
    
    
    5,823Provision for losses on loans
    
    
    438
    
    
    
    390
    
    
    
    420
    
    
    
    560Noninterest income
    
    
    1,335
    
    
    
    1,427
    
    
    
    1,473
    
    
    
    1,384Noninterest expense
    
    
    4,121
    
    
    
    4,116
    
    
    
    4,213
    
    
    
    4,002Income before income taxes
    
    
    2,359
    
    
    
    2,758
    
    
    
    2,689
    
    
    
    2,645Federal income tax expense
    
    
    695
    
    
    
    823
    
    
    
    795
    
    
    
    785Net income
    
    $
    1,664
    
    
    $
    1,935
    
    
    $
    1,894
    
    
    $
    1,860Earnings per share:Basic
    
    $
    0.44
    
    
    $
    0.51
    
    
    $
    0.50
    
    
    $
    0.49Diluted
    
    $
    0.43
    
    
    $
    0.51
    
    
    $
    0.50
    
    
    $
    0.49
 75




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##### 



Internal Control  Integrated
Framework
 
 
 76




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##### 



77




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##### 



Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
   
 78