##### 



EXHIBIT 13
 Business of DCB Financial Corp
     Common Stock and Shareholder Matters
  23




---



##### 



Quarter endedMarch 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
 March 31,
    
    June 30,
    
    September 30,
    
    December 31,2005
    
    2005
    
    2005
    
    2005High
    
    $
    29.00
    
    
    $
    27.15
    
    
    $
    27.90
    
    
    $
    28.85Low
    
    
    20.75
    
    
    
    25.00
    
    
    
    26.05
    
    
    
    25.55Dividends per share
    
    
    0.11
    
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.13
   Selected Consolidated Financial Information and Other Data
   At December 31,(In thousands)
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002Total assets
    
    $
    681,872
    
    
    $
    690,896
    
    
    $
    611,685
    
    
    $
    553,297
    
    
    $
    522,998Cash and cash equivalents
    
    
    15,894
    
    
    
    18,069
    
    
    
    11,238
    
    
    
    20,349
    
    
    
    32,503Securities available for sale
    
    
    88,071
    
    
    
    96,580
    
    
    
    96,123
    
    
    
    108,547
    
    
    
    96,477Net loans
    
    
    547,021
    
    
    
    547,510
    
    
    
    478,487
    
    
    
    400,616
    
    
    
    366,487Deposits
    
    
    524,094
    
    
    
    503,906
    
    
    
    454,574
    
    
    
    442,352
    
    
    
    438,623Borrowed funds
    
    
    95,512
    
    
    
    128,535
    
    
    
    101,028
    
    
    
    54,312
    
    
    
    29,802Shareholders equity
    
    
    61,399
    
    
    
    56,254
    
    
    
    54,261
    
    
    
    49,689
    
    
    
    52,528
 24




---



##### 



Selected Operating Data
 Year ended December 31,(In thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Interest and dividend income
    
    $
    44,407
    
    
    $
    36,566
    
    
    $
    27,813
    
    
    $
    26,591
    
    
    $
    30,882Interest expense
    
    
    21,315
    
    
    
    13,750
    
    
    
    7,802
    
    
    
    7,973
    
    
    
    10,142Net interest income
    
    
    23,092
    
    
    
    22,816
    
    
    
    20,011
    
    
    
    18,618
    
    
    
    20,740Provision for loan losses
    
    
    1,808
    
    
    
    2,000
    
    
    
    1,696
    
    
    
    1,418
    
    
    
    2,950Net interest income after
provision for loan losses
    
    
    21,284
    
    
    
    20,816
    
    
    
    18,315
    
    
    
    17,200
    
    
    
    17,790Noninterest income
    
    
    5,619
    
    
    
    5,654
    
    
    
    7,618
    
    
    
    6,624
    
    
    
    6,259Noninterest expense
    
    
    16,452
    
    
    
    15,665
    
    
    
    15,985
    
    
    
    16,508
    
    
    
    18,010Income before income tax
    
    
    10,451
    
    
    
    10,805
    
    
    
    9,948
    
    
    
    7,316
    
    
    
    6,039Income tax expense
    
    
    3,098
    
    
    
    3,249
    
    
    
    2,973
    
    
    
    2,287
    
    
    
    2,036Net income
    
    $
    7,353
    
    
    $
    7,556
    
    
    $
    6,975
    
    
    $
    5,029
    
    
    $
    4,003Per Share Data:Basic earnings per share
    
    $
    1.93
    
    
    $
    1.94
    
    
    $
    1.77
    
    
    $
    1.26
    
    
    $
    0.96Diluted earnings per share
    
    $
    1.92
    
    
    $
    1.94
    
    
    $
    1.77
    
    
    $
    1.26
    
    
    $
    0.96Dividends declared per share
    
    $
    0.55
    
    
    $
    0.48
    
    
    $
    0.48
    
    
    $
    0.39
    
    
    $
    0.34
  At or for the year ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Interest rate spread
    
    
    2.85
    %
    
    
    3.37
    %
    
    
    3.55
    %
    
    
    3.48
    %
    
    
    3.79
    %Net interest margin
    
    
    3.48
    
    
    
    3.66
    
    
    
    3.72
    
    
    
    3.75
    
    
    
    4.24Return on average equity
    
    
    12.55
    
    
    
    13.68
    
    
    
    13.14
    
    
    
    10.11
    
    
    
    7.82Return on average assets
    
    
    1.05
    
    
    
    1.15
    
    
    
    1.13
    
    
    
    0.91
    
    
    
    0.76Average equity to average assets
    
    
    8.39
    
    
    
    8.41
    
    
    
    8.60
    
    
    
    8.96
    
    
    
    9.78Dividend payout ratio
    
    
    28.54
    
    
    
    24.74
    
    
    
    27.12
    
    
    
    30.95
    
    
    
    35.42Allowance for loan losses as
a percentage of loans past
due over 90 days
    
    
    64.05
    
    
    
    114.53
    
    
    
    140.75
    
    
    
    151.18
    
    
    
    114.55
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
  25




---



##### 



Forward-Looking Statements
   Critical Accounting Policies
    26




---



##### 



Overview of 2006
    
    
    The Corporations assets totaled $681,872 at December 31,
2006, compared to $690,896 at December 31, 2005, a decrease of $9,024, or 1.3%. Loans
remained relatively flat on a year to year comparison, while securities were down from year
to year. Because of the relatively flat loan growth, less funding was required to support
the current level of balance sheet growth.
    
    Shareholders equity increased by $5,145 during 2006, as dividends paid of $2,100, net
repurchase of 333,482 shares for a total of $2.4 million, and partially offset by a $225
after-tax increase in the fair value of securities designated as available for sale and
period earnings of $7,353.
    
    Net income for 2006 totaled $7,353, a decrease of $203 or 2.7% over net income for 2005
of $7,556. Basic and diluted earnings per share totaled $1.93 and $1.92 for 2006 and $1.94
for 2005. Return on average assets was 1.05% and 1.15% for 2006 and 2005, while return on
average equity was 12.55% and 13.68% over the same two years. The decrease in net income
was related principally to slower growth in earning assets, run-off and margin pressures
due to credit and pricing competition, higher borrowings and deposit costs associated with
the current interest rate environment, and higher delinquencies and credit losses.
    
    With the flattening of the yield curve during the year, the Corporations net interest
margin decreased from the preceding year. Net interest income, however increased to
$21,284 for 2006 compared to $20,816 for 2005. The $468 increase was mainly attributed to
increases in earning assets from year over year. However, the Companys net interest
margin continues to experience some pressure as much of the continued loan growth has been
funded with borrowings and
 27




---



##### 



higher cost deposits. The Company also experienced slower
growth in loan
balances, competitive pricing pressures and credit issues attributed to the current interest
rate environment.
    
    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.
 Analysis of Financial Condition
    28




---



##### 



29




---



##### 



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.
  30




---



##### 



Noninterest Income.
 Noninterest Expense.
 31




---



##### 



Income Taxes.
 Comparison of Results of Operations for the Years Ended December 31, 2005 and December 31, 2004
 Net Income.
  Net Interest Income.
   32




---



##### 



Provision and Allowance for Loan Losses.
    Noninterest Income.
 33




---



##### 



Noninterest Expense.
  Income Taxes.
 34




---



##### 



Year ended December 31,2006
    
    
    2005
    
    
    2004Average
    
    
    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
    
    $
    4,499
    
    
    $
    177
    
    
    
    3.93
    %
    
    $
    238
    
    
    $
    13
    
    
    
    5.59
    %
    
    $
    451
    
    
    $
    8
    
    
    
    1.77
    %Taxable securities
    
    
    67,384
    
    
    
    3,447
    
    
    
    5.12
    
    
    
    73,932
    
    
    
    3,091
    
    
    
    4.18
    
    
    
    78,875
    
    
    
    2,855
    
    
    
    3.62Tax-exempt securities (1)
    
    
    29,272
    
    
    
    942
    
    
    
    3.22
    
    
    
    23,861
    
    
    
    800
    
    
    
    3.35
    
    
    
    19,380
    
    
    
    709
    
    
    
    3.66Loans (2)
    
    
    561,881
    
    
    
    39,841
    
    
    
    7.09
    
    
    
    525,233
    
    
    
    32,662
    
    
    
    6.22
    
    
    
    438,861
    
    
    
    24,241
    
    
    
    5.52Total interest-earning assets
    
    
    663,036
    
    
    
    44,407
    
    
    
    6.70
    
    
    
    623,264
    
    
    
    36,566
    
    
    
    5.87
    
    
    
    537,567
    
    
    
    27,813
    
    
    
    5.17Noninterest-earning assets
    
    
    34,927
    
    
    
    
    
    
    
    
    
    
    
    33,609
    
    
    
    
    
    
    
    
    
    
    
    79,696Total assets
    
    $
    697,963
    
    
    
    
    
    
    
    
    
    
    $
    656,873
    
    
    
    
    
    
    
    
    
    
    $
    617,263Interest-bearing liabilities:Demand and money market deposits
    
    $
    254,134
    
    
    $
    9,749
    
    
    
    3.84
    %
    
    $
    195,959
    
    
    $
    4,267
    
    
    
    2.18
    %
    
    $
    168,880
    
    
    $
    1,441
    
    
    
    0.85
    %Savings deposits
    
    
    39,480
    
    
    
    193
    
    
    
    0.49
    
    
    
    54,920
    
    
    
    271
    
    
    
    0.49
    
    
    
    61,320
    
    
    
    303
    
    
    
    0.49Certificates of deposit
    
    
    163,302
    
    
    
    7,239
    
    
    
    4.43
    
    
    
    173,216
    
    
    
    5,128
    
    
    
    2.96
    
    
    
    143,359
    
    
    
    3,334
    
    
    
    2.33Total deposits
    
    
    456,916
    
    
    
    17,181
    
    
    
    3.76
    
    
    
    424,095
    
    
    
    9,666
    
    
    
    2.28
    
    
    
    373,559
    
    
    
    5,078
    
    
    
    1.36Borrowed funds
    
    
    97,224
    
    
    
    4,134
    
    
    
    4.25
    
    
    
    125,013
    
    
    
    4,084
    
    
    
    3.27
    
    
    
    107,826
    
    
    
    2,724
    
    
    
    2.53Total interest-bearing liabilities
    
    
    554,140
    
    
    
    21,315
    
    
    
    3.85
    
    
    
    549,108
    
    
    
    13,750
    
    
    
    2.50
    
    
    
    481,385
    
    
    
    7,802
    
    
    
    1.62Noninterest-bearing liabilities
    
    
    85,237
    
    
    
    
    
    
    
    
    
    
    
    52,519
    
    
    
    
    
    
    
    
    
    
    
    82,800Total liabilities
    
    
    639,377
    
    
    
    
    
    
    
    
    
    
    
    601,627
    
    
    
    
    
    
    
    
    
    
    
    564,185Shareholders equity
    
    
    58,586
    
    
    
    
    
    
    
    
    
    
    
    55,246
    
    
    
    
    
    
    
    
    
    
    
    53,078Total liabilities and
shareholders equity
    
    $
    697,963
    
    
    
    
    
    
    
    
    
    
    $
    656,873
    
    
    
    
    
    
    
    
    
    
    $
    617,263Net interest income; interest
rate spread
    
    
    
    
    
    $
    23,092
    
    
    
    2.85
    %
    
    
    
    
    
    $
    22,816
    
    
    
    3.37
    %
    
    
    
    
    
    $
    20,011
    
    
    
    3.55
    %Net interest margin (net interest
income as a percent of average
interest-earning assets)
    
    
    
    
    
    
    
    
    
    
    3.48
    %
    
    
    
    
    
    
    
    
    
    
    3.66
    %
    
    
    
    
    
    
    
    
    
    
    3.72
    %Average interest-earning assets
to average interest-bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    119.65
    %
    
    
    
    
    
    
    
    
    
    
    113.50
    %
    
    
    
    
    
    
    
    
    
    
    111.67
    %
 
 (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 $1,335 in 2006,
$1,222 in 2005, and $1,076 in 2004.(2)
    
    Includes nonaccrual loans. 35




---



##### 



Year ended December 31,2006 vs. 2005
    
    
    2005 vs. 2004Increase
    
    
    
    
    
    
    Increase(decrease)
    
    
    
    
    
    
    (decrease)due to
    
    
    
    
    
    
    due toVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalInterest income attributable to:Federal funds sold
    
    $
    239
    
    
    $
    (74
    )
    
    $
    165
    
    
    $
    (4
    )
    
    $
    9
    
    
    $
    5Taxable securities
    
    
    (275
    )
    
    
    631
    
    
    
    356
    
    
    
    (180
    )
    
    
    416
    
    
    
    236Tax-exempt securities
    
    
    182
    
    
    
    (40
    )
    
    
    142
    
    
    
    165
    
    
    
    (74
    )
    
    
    91Loans
    
    
    2,278
    
    
    
    4,900
    
    
    
    7,178
    
    
    
    4,770
    
    
    
    3,651
    
    
    
    8,421Total interest income
    
    
    2,424
    
    
    
    5,417
    
    
    
    7,841
    
    
    
    4,751
    
    
    
    4,002
    
    
    
    8,753Interest expense attributable to:Demand and money market deposits
    
    
    1,266
    
    
    
    4,216
    
    
    
    5,482
    
    
    
    231
    
    
    
    2,595
    
    
    
    2,826Savings deposits
    
    
    (76
    )
    
    
    (2
    )
    
    
    (78
    )
    
    
    (31
    )
    
    
    (1
    )
    
    
    (32
    )Certificates of deposit
    
    
    (293
    )
    
    
    2,404
    
    
    
    2,111
    
    
    
    677
    
    
    
    1,117
    
    
    
    1,794Borrowed funds
    
    
    (908
    )
    
    
    958
    
    
    
    50
    
    
    
    433
    
    
    
    927
    
    
    
    1,360Total interest expense
    
    
    (11
    )
    
    
    7,576
    
    
    
    7,565
    
    
    
    1,310
    
    
    
    4,638
    
    
    
    5,948Increase (decrease) in net
interest income
    
    $
    2,435
    
    
    $
    (2,159
    )
    
    $
    276
    
    
    $
    3,441
    
    
    $
    (636
    )
    
    $
    2,805
 Asset and Liability Management and Market Risk
   36




---



##### 



Change in
    
    
    
    December 31, 2006
    
    December 31, 2005Interest Rate
    
    
    
    $ Change
    
    % Change
    
    NPV
    
    $ Change
    
    % Change
    
    NPV(Basis Points)
    
    
    
    In NPV
    
    In NPV
    
    Ratio
    
    In NPV
    
    In NPV
    
    Ratio+100
    
    
    
    
    $
    (2,145
    )
    
    
    (3
    )%
    
    
    11.8
    %
    
    $
    (7187
    )
    
    
    (15
    )%
    
    
    5.98
    %Base
    
    
    
    
    
    
    
    
    
    
    
    
    11.9
    
    
    
    
    
    
    
    
    
    
    
    6.92-100
    
    
    
    
    
    (324
    )
    
    
    (1
    )
    
    
    11.7
    
    
    
    8,456
    
    
    
    18
    
    
    
    8.01-200
    
    
    
    
    
    (4,855
    )
    
    
    (6
    )
    
    
    10.9
    
    
    
    17,670
    
    
    
    38
    
    
    
    9.16-300
    
    
    
    
    
    (14,531
    )
    
    
    (18
    )
    
    
    9.5
    
    
    
    27,109
    
    
    
    58
    
    
    
    10.29
 37




---



##### 



Liquidity
     38




---



##### 



Capital Resources
      Contractual Obligations
 Payment due by yearLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsFHLB advances
    
    $
    93,736
    
    
    $
    19,000
    
    
    $
    6,929
    
    
    $
    16,562
    
    
    $
    51,245Federal funds purchased and
other short-term borrowings
    
    
    1,776
    
    
    
    1,776Operating lease obligations
    
    
    6,418
    
    
    
    790
    
    
    
    1,114
    
    
    
    1,046
    
    
    
    3,468Loan and line of credit
Commitments
    
    
    142,921
    
    
    
    142,921Total contractual obligations
    
    $
    244,851
    
    
    $
    164,487
    
    
    $
    8,043
    
    
    $
    17,608
    
    
    $
    54,713
 39




---



##### 



2006
    
    
    2005ASSETSCash and due from financial institutions
    
    $
    15,894
    
    
    $
    18,069Securities available for sale, at fair value
    
    
    88,071
    
    
    
    96,580Loans held for sale, at lower of cost or market
    
    
    1,455
    
    
    
    1,640Loans
    
    
    552,463
    
    
    
    553,045Less allowance for loan losses
    
    
    (5,442
    )
    
    
    (5,535
    )Net loans
    
    
    547,021
    
    
    
    547,510Real estate owned
    
    
    
    
    
    
    386Investment in FHLB stock
    
    
    3,604
    
    
    
    3,327Premises and equipment, net
    
    
    9,468
    
    
    
    8,854Investment in unconsolidated affiliates
    
    
    968
    
    
    
    614Bank-owned life insurance
    
    
    9,396
    
    
    
    8,898Accrued interest receivable and other assets
    
    
    5,995
    
    
    
    5,018Total assets
    
    $
    681,872
    
    
    $
    690,896LIABILITIESDepositsNoninterest-bearing
    
    $
    70,428
    
    
    $
    68,977Interest-bearing
    
    
    453,666
    
    
    
    434,929Total deposits
    
    
    524,094
    
    
    
    503,906Federal funds purchased and other short-term borrowings
    
    
    1,776
    
    
    
    25,610Federal Home Loan Bank advances
    
    
    93,736
    
    
    
    102,925Accrued interest payable and other liabilities
    
    
    867
    
    
    
    2,201Total liabilities
    
    
    620,473
    
    
    
    634,642SHAREHOLDERS EQUITYCommon stock, no par value, 7,500,000 shares authorized,
4,273,750 and 4,273,200 issued at December 31, 2006
and at December 31, 2005
    
    
    3,780
    
    
    
    3,780Retained earnings
    
    
    68,807
    
    
    
    63,552Treasury stock, at cost, 458,786 and 447,102
shares at December 31, 2006 and 2005
    
    
    (10,841
    )
    
    
    (10,506
    )Accumulated other comprehensive loss
    
    
    (347
    )
    
    
    (572
    )Total shareholders equity
    
    
    61,399
    
    
    
    56,254Total liabilities and shareholders equity
    
    $
    681,872
    
    
    $
    690,896
  40




---



##### 



2006
    
    
    2005
    
    
    2004Interest and dividend incomeLoans
    
    $
    39,841
    
    
    $
    32,662
    
    
    $
    24,241Taxable securities
    
    
    3,447
    
    
    
    3,091
    
    
    
    2,855Tax-exempt securities
    
    
    942
    
    
    
    800
    
    
    
    709Federal funds sold and other
    
    
    177
    
    
    
    13
    
    
    
    8Total interest income
    
    
    44,407
    
    
    
    36,566
    
    
    
    27,813Interest expenseDeposits
    
    
    17,181
    
    
    
    9,666
    
    
    
    5,078Borrowings
    
    
    4,134
    
    
    
    4,084
    
    
    
    2,724Total interest expense
    
    
    21,315
    
    
    
    13,750
    
    
    
    7,802Net interest income
    
    
    23,092
    
    
    
    22,816
    
    
    
    20,011Provision for loan losses
    
    
    1,808
    
    
    
    2,000
    
    
    
    1,696Net interest income after provision for loan losses
    
    
    21,284
    
    
    
    20,816
    
    
    
    18,315Noninterest incomeService charges on deposit accounts
    
    
    2,660
    
    
    
    2,592
    
    
    
    2,543Trust department income
    
    
    738
    
    
    
    668
    
    
    
    646Loss on sale of securities
    
    
    
    
    
    
    
    
    
    
    (4
    )Loss on sale of assets
    
    
    (7
    )
    
    
    (35
    )
    
    
    (140
    )Gain on sale of loans
    
    
    350
    
    
    
    407
    
    
    
    179Gain on sale of unconsolidated affiliate
    
    
    
    
    
    
    
    
    
    
    2,638Treasury management fees
    
    
    562
    
    
    
    469
    
    
    
    512Data processing servicing fees
    
    
    336
    
    
    
    310
    
    
    
    288Earnings on bank owned life insurance
    
    
    498
    
    
    
    441
    
    
    
    450Other
    
    
    482
    
    
    
    802
    
    
    
    506Total noninterest income
    
    
    5,619
    
    
    
    5,654
    
    
    
    7,618Noninterest expenseSalaries and other employee benefits
    
    
    9,043
    
    
    
    8,541
    
    
    
    7,941Occupancy and equipment
    
    
    3,225
    
    
    
    3,244
    
    
    
    3,802Professional services
    
    
    455
    
    
    
    417
    
    
    
    274Advertising
    
    
    401
    
    
    
    394
    
    
    
    337Postage, freight and courier
    
    
    317
    
    
    
    361
    
    
    
    376Supplies
    
    
    249
    
    
    
    247
    
    
    
    243State franchise taxes
    
    
    548
    
    
    
    458
    
    
    
    544Other
    
    
    2,214
    
    
    
    2,003
    
    
    
    2,468Total noninterest expense
    
    
    16,452
    
    
    
    15,665
    
    
    
    15,985Income before income taxes
    
    
    10,451
    
    
    
    10,805
    
    
    
    9,948Income tax expense
    
    
    3,098
    
    
    
    3,249
    
    
    
    2,973Net income
    
    $
    7,353
    
    
    $
    7,556
    
    
    $
    6,975Basic earnings per common share
    
    $
    1.93
    
    
    $
    1.94
    
    
    $
    1.77Diluted earnings per common share
    
    $
    1.92
    
    
    $
    1.94
    
    
    $
    1.77
  41




---



##### 



2006
    
    
    2005
    
    
    2004Net income
    
    $
    7,353
    
    
    $
    7,556
    
    
    $
    6,975Reclassification for realized loss on sale
of securities included in net income,
net of tax benefits
    
    
    
    
    
    
    
    
    
    
    3Unrealized gains (losses) on securities
available for sale, net of related (taxes)
benefits of $(116), $416 and $267 in
2006, 2005 and 2004
    
    
    225
    
    
    
    (807
    )
    
    
    (518
    )Comprehensive income
    
    $
    7,578
    
    
    $
    6,749
    
    
    $
    6,460Accumulated other comprehensive income (loss)
    
    $
    (347
    )
    
    $
    (572
    )
    
    $
    235
  42




---



##### 



AccumulatedOther
    
    
    TotalCommon
    
    
    Retained
    
    
    Treasury
    
    
    Comprehensive
    
    
    ShareholdersStock
    
    
    Earnings
    
    
    Stock
    
    
    Income (Loss)
    
    
    EquityBalance at January 1, 2004
    
    $
    3,780
    
    
    $
    52,775
    
    
    $
    (7,616
    )
    
    $
    750
    
    
    $
    49,689Net income
    
    
    
    
    
    
    6,975
    
    
    
    
    
    
    
    
    
    
    
    6,975Unrealized losses on securities
designated as available for
sale, net of tax benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (515
    )
    
    
    (515
    )Dividends ($0.48 per share)
    
    
    
    
    
    
    (1,888
    )
    
    
    
    
    
    
    
    
    
    
    (1,888
    )Balance at December 31, 2004
    
    
    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 benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    )
    
    $
    61,399
  43




---



##### 



2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    7,353
    
    
    $
    7,556
    
    
    $
    6,975Adjustments to reconcile net income to net cash
provided by (used in) operating activitiesDepreciation
    
    
    966
    
    
    
    1,049
    
    
    
    1,508Provision for loan losses
    
    
    1,808
    
    
    
    2,000
    
    
    
    1,696Deferred income taxes
    
    
    (12
    )
    
    
    (2,288
    )
    
    
    (80
    )Loss on sale of securities
    
    
    
    
    
    
    
    
    
    
    4Gain on sale of loans
    
    
    (350
    )
    
    
    (407
    )
    
    
    (179
    )Loss on sale of assets
    
    
    7
    
    
    
    35
    
    
    
    140Gain on sale of unconsolidated affiliate
    
    
    
    
    
    
    
    
    
    
    (2,638
    )Premium amortization on securities, net
    
    
    530
    
    
    
    868
    
    
    
    1,201FHLB stock dividends
    
    
    (210
    )
    
    
    (153
    )
    
    
    (106
    )Net change in loans held for sale
    
    
    185
    
    
    
    (518
    )
    
    
    (1,122
    )Earnings on bank owned life insurance
    
    
    (498
    )
    
    
    (441
    )
    
    
    (450
    )Net changes in other assets and other liabilities
    
    
    (2,342
    )
    
    
    144
    
    
    
    (5,166
    )Net cash provided by operating activities
    
    
    7,437
    
    
    
    7,845
    
    
    
    1,783Cash flows used in investing activitiesSecurities available for salePurchases
    
    
    (13,932
    )
    
    
    (32,413
    )
    
    
    (48,051
    )Maturities, principal payments, and calls
    
    
    22,183
    
    
    
    31,343
    
    
    
    18,670Sales
    
    
    
    
    
    
    
    
    
    
    37,039Purchase of Federal Home Loan Bank stock
    
    
    (71
    )
    
    
    
    
    
    
    Net increase in loans
    
    
    (976
    )
    
    
    (70,651
    )
    
    
    (79,528
    )Premises and equipment expenditures
    
    
    (1,580
    )
    
    
    (1,057
    )
    
    
    (499
    )Proceeds from sale of unconsolidated affiliate
    
    
    
    
    
    
    
    
    
    
    4,394Proceeds from sale of premises and equipment
    
    
    
    
    
    
    
    
    
    
    91Investment in unconsolidated affiliates
    
    
    (354
    )
    
    
    (319
    )
    
    
    (100
    )Net cash provided by (used in) investing activities
    
    
    5,270
    
    
    
    (73,097
    )
    
    
    (67,984
    )Cash flows provided by (used in) financing activitiesNet change in deposits
    
    
    20,189
    
    
    
    49,332
    
    
    
    12,222Net change in federal funds purchased
and other short-term borrowings
    
    
    (23,835
    )
    
    
    20,395
    
    
    
    596Proceeds from Federal Home Loan Bank advances
    
    
    29,000
    
    
    
    171,261
    
    
    
    154,459Repayment of Federal Home Loan Bank advances
    
    
    (38,189
    )
    
    
    (164,149
    )
    
    
    (108,339
    )Proceeds from sale of real estate owned
    
    
    386
    
    
    
    
    
    
    
    Purchase of Federal Home Loan Bank stock
    
    
    (71
    )
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    (341
    )
    
    
    (2,890
    )
    
    
    Issuance of treasury stock
    
    
    6
    
    
    
    
    
    
    
    Cash dividends paid
    
    
    (2,098
    )
    
    
    (1,866
    )
    
    
    (1,848
    )Net cash provided by (used in) financing activities
    
    
    (14,882
    )
    
    
    72,083
    
    
    
    57,090Net change in cash and cash equivalents
    
    
    (2,175
    )
    
    
    6,831
    
    
    
    (9,111
    )Cash and cash equivalents at beginning of year
    
    
    18,069
    
    
    
    11,238
    
    
    
    20,349Cash and cash equivalents at end of year
    
    $
    15,894
    
    
    $
    18,069
    
    
    $
    11,238
  44




---



##### 



2006
    
    
    2005
    
    
    2004Supplemental cash flow informationInterest paid
    
    $
    20,841
    
    
    $
    12,097
    
    
    $
    7,086Income taxes paid
    
    $
    4,214
    
    
    $
    2,950
    
    
    $
    3,625Supplemental non cash disclosuresUnrealized gain (losses) on
securities designated
as available for sale,
net of related tax effects
    
    $
    225
    
    
    $
    (807
    )
    
    $
    (515
    )
  45




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
 Nature of Operations
 Business Segments
 Use of Estimates
 Cash Flows
 Securities
  46




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Loans
  Allowance for Loan Losses
  Concentrations of Credit Risk
  47




---



##### 



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
 Financial Instruments
  48




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Earnings Per Common Share
  2006
    
    
    2005
    
    
    2004Weighted-average common shares
outstanding (basic)
    
    
    3,816,322
    
    
    
    3,890,717
    
    
    
    3,934,760Dilutive effect of assumed exercise
of stock options
    
    
    17,787
    
    
    
    2,994
    
    
    
    Weighted-average common shares
outstanding (diluted)
    
    
    3,834,109
    
    
    
    3,893,711
    
    
    
    3,934,760
  Stock Option Plan
   49




---



##### 



2005
    
    
    2004(In thousands,except per share data)NET INCOME
    
    As reported
    
    $
    7,556
    
    
    $
    6,975Stock-based compensation, net of tax
    
    
    (16
    )
    
    
    (6
    )Pro-forma
    
    $
    7,540
    
    
    $
    6,969EARNINGS PER SHAREBASIC
    
    As reported
    
    $
    1.94
    
    
    $
    1.77Stock-based compensation, net of tax
    
    
    
    
    
    
    Pro-forma
    
    $
    1.94
    
    
    $
    1.77DILUTED
    
    As reported
    
    $
    1.94
    
    
    $
    1.77Stock-based compensation, net of tax
    
    
    
    
    
    
    Pro-forma
    
    $
    1.94
    
    
    $
    1.77
   50




---



##### 



2006WEIGHTEDAVERAGEEXERCISESHARES
    
    
    PRICEOutstanding at beginning of year
    
    
    40,687
    
    
    $
    25.31Granted
    
    
    34,532
    
    
    $
    29.94Exercised
    
    
    (428
    )
    
    $
    30.26Forfeited
    
    
    (4,752
    )
    
    $
    28.56Outstanding at end of year
    
    
    70,040
    
    
    $
    27.19Options exercisable at year-end
    
    
    8,959
    
    
    $
    24.49Weighted-average fair value of options
granted during the year
    
    
    
    
    
    $
    6.19Aggregate intrinsic value
    
    
    
    
    
    $
    164
  2005
    
    
    
    
    
    
    2004WEIGHTED
    
    
    
    
    
    
    WEIGHTEDAVERAGE
    
    
    
    
    
    
    AVERAGEEXERCISE
    
    
    
    
    
    
    EXERCISESHARES
    
    
    PRICE
    
    
    SHARES
    
    
    PRICEOutstanding at beginning of year
    
    
    15,105
    
    
    $
    23.40
    
    
    
    
    
    
    
    Granted
    
    
    26,219
    
    
    $
    25.74
    
    
    
    15,105
    
    
    $
    23.40Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (637
    )
    
    $
    23.40
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    40,687
    
    
    $
    25.31
    
    
    
    15,105
    
    
    $
    23.40Options exercisable at year-end
    
    
    2,894
    
    
    $
    23.40
    
    
    
    
    
    
    
    Weighted-average fair value of
options granted during the year
    
    
    
    
    
    $
    4.68
    
    
    
    
    
    
    $
    3.44
  NUMBER OUTSTANDING
    
    RANGE OF EXERCISE PRICES70,040
    
    $23.40  $30.70
  51




---



##### 



Comprehensive Income
 Recent Accounting Standards
   
 
 
    52




---



##### 



53




---



##### 



Restrictions on Cash
 Dividend Restrictions
 Fair Value of Financial Instruments
 Advertising:
 Reclassification
  54




---



##### 



NOTE 2  SECURITIES
  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
 Gross
    
    
    GrossFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    Losses
    
    
    Cost2005U.S. Government and agency obligations
    
    $
    24,732
    
    
    $
    9
    
    
    $
    (351
    )
    
    $
    25,074States and municipal obligations
    
    
    25,723
    
    
    
    141
    
    
    
    (225
    )
    
    
    25,807Corporate bonds
    
    
    8,025
    
    
    
    18
    
    
    
    (1
    )
    
    
    8,008Mortgage-backed securities
    
    
    38,016
    
    
    
    109
    
    
    
    (598
    )
    
    
    38,505Total debt securities
    
    
    96,496
    
    
    
    277
    
    
    
    (1,175
    )
    
    
    97,394Other securities
    
    
    84
    
    
    
    38
    
    
    
    (7
    )
    
    
    53Total
    
    $
    96,580
    
    
    $
    315
    
    
    $
    (1,182
    )
    
    $
    97,447
  55




---



##### 



NOTE 2  SECURITIES
  2006(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
    
    
    losses(Dollars in thousands)U.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
    )
 2005(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
    
    
    losses(Dollars in thousands)U.S. Government and
agency obligations
    
    
    12
    
    
    $
    10,805
    
    
    $
    (87
    )
    
    
    17
    
    
    $
    13,008
    
    
    $
    (264
    )
    
    
    29
    
    
    $
    23,813
    
    
    $
    (351
    )State and municipal
obligations
    
    
    23
    
    
    
    9,851
    
    
    
    (149
    )
    
    
    14
    
    
    
    5,824
    
    
    
    (76
    )
    
    
    37
    
    
    
    15,675
    
    
    
    (225
    )Corporate bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    3,008
    
    
    
    (1
    )
    
    
    2
    
    
    
    3,008
    
    
    
    (1
    )Mortgage-backed
securities and other
    
    
    65
    
    
    
    17,582
    
    
    
    (240
    )
    
    
    40
    
    
    
    13,936
    
    
    
    (365
    )
    
    
    105
    
    
    
    31,518
    
    
    
    (605
    )Total temporarily
impaired securities
    
    
    100
    
    
    $
    38,238
    
    
    $
    (476
    )
    
    
    73
    
    
    $
    35,776
    
    
    $
    (706
    )
    
    
    173
    
    
    $
    74,014
    
    
    $
    (1,182
    )
   56




---



##### 



NOTE 2  SECURITIES
  FairValueDue in one year or less
    
    $
    3,175Due from one to five years
    
    
    14,328Due from five to ten years
    
    
    17,344Due after ten years
    
    
    19,555Mortgage-backed securities
    
    
    33,576$
    87,978
  2006
    
    2005
    
    2004Proceeds from sales and/or calls
    
    $
    12,397
    
    
    $
    15,263
    
    
    $
    37,039Gross gains
    
    
    
    
    
    
    1
    
    
    
    Gross losses
    
    
    
    
    
    
    (1
    )
    
    
    (4
    )
    57




---



##### 



NOTE 3  LOANS
  2006
    
    
    2005Commercial and industrial
    
    $
    44,369
    
    
    $
    47,498Commercial real estate
    
    
    200,821
    
    
    
    202,649Residential real estate and home equity
    
    
    206,488
    
    
    
    193,787Real estate construction and land development
    
    
    51,584
    
    
    
    49,553Consumer and credit card
    
    
    48,680
    
    
    
    58,653551,942
    
    
    
    552,140Add: Net deferred loan origination costs
    
    
    521
    
    
    
    905Total loans receivable
    
    $
    552,463
    
    
    $
    553,045
  Beginning balance
    
    $
    12,978New loans
    
    
    14,547Repayments
    
    
    (551
    )Ending balance
    
    $
    26,974
  58




---



##### 



NOTE 4  ALLOWANCE FOR LOAN LOSSES
  2006
    
    
    2005
    
    
    2004Beginning balance of year
    
    $
    5,535
    
    
    $
    4,818
    
    
    $
    4,331Provision for loan losses
    
    
    1,808
    
    
    
    2,000
    
    
    
    1,696Loans charged-off
    
    
    (2,335
    )
    
    
    (1,457
    )
    
    
    (1,385
    )Recoveries
    
    
    434
    
    
    
    174
    
    
    
    176Balance at end of year
    
    $
    5,442
    
    
    $
    5,535
    
    
    $
    4,818
  2006
    
    
    2005
    
    
    2004Year-end loans with no allocated allowance for
unconfirmed loan losses
    
    $
    
    
    
    $
    1,845
    
    
    $
    Year-end loans with allocated allowance for
unconfirmed loan losses
    
    
    5,189
    
    
    
    2,185
    
    
    
    601Total
    
    $
    5,189
    
    
    $
    4,030
    
    
    $
    601Amount of the allowance for loan losses allocated
to unconfirmed losses on impaired loans
    
    $
    1,562
    
    
    $
    1,060
    
    
    $
    360
 2006
    
    
    2005
    
    
    2004Average of impaired loans during the year
    
    $
    2,584
    
    
    $
    1,807
    
    
    $
    709Interest income recognized during impairment
    
    
    
    
    
    
    
    
    
    
    Cash basis interest income recognized
    
    
    
    
    
    
    101
    
    
    
    
  2006
    
    
    2005
    
    
    2004Beginning balance
    
    $
    1,060
    
    
    $
    360
    
    
    $
    580Provision related to impaired loans
    
    
    945
    
    
    
    940
    
    
    
    535Loans charge-offs (net of recoveries)
    
    
    (443
    )
    
    
    (240
    )
    
    
    (755
    )Ending balance
    
    $
    1,562
    
    
    $
    1,060
    
    
    $
    360
   59




---



##### 



NOTE 4  ALLOWANCE FOR LOAN LOSSES (continued)
  2006
    
    
    2005
    
    
    2004Loans past due over 90 days still accruing interest
    
    $
    3,307
    
    
    $
    2,648
    
    
    $
    1,544Nonaccrual loans
    
    
    5,189
    
    
    
    2,185
    
    
    
    1,879Total
    
    $
    8,496
    
    
    $
    4,833
    
    
    $
    3,423
   60




---



##### 



NOTE 5  PREMISES AND EQUIPMENT
  2006
    
    
    2005Land
    
    $
    1,266
    
    
    $
    1,266Buildings
    
    
    8,598
    
    
    
    8,403Furniture and equipment
    
    
    9,927
    
    
    
    8,54219,791
    
    
    
    18,211Accumulated depreciation
    
    
    (10,323
    )
    
    
    (9,357
    )$
    9,468
    
    
    $
    8,854
  2007
    
    $
    7902008
    
    
    5882009
    
    
    5262010
    
    
    5232011
    
    
    523Thereafter
    
    
    3,468$
    6,418
 NOTE 6  INTEREST-BEARING DEPOSITS
  2006
    
    
    2005Interest-bearing demand
    
    $
    74,282
    
    
    $
    84,194Money market
    
    
    176,451
    
    
    
    132,025Savings deposits
    
    
    34,623
    
    
    
    46,159Time depositsIn denominations under $100,000
    
    
    57,492
    
    
    
    74,377In denominations of $100,000 or more
    
    
    110,818
    
    
    
    98,174$
    453,666
    
    
    $
    434,929Weighted average interest rate
    
    
    3.66
    %
    
    
    3.25
    %
  61




---



##### 



NOTE 6  INTEREST-BEARING DEPOSITS
  2007
    
    $
    140,4082008
    
    
    20,6882009
    
    
    6,4702010
    
    
    6862011
    
    
    58$
    168,310
  NOTE 7  BORROWED FUNDS
   Interest
    
    Maturing year
    
    

    2006
    
    
    2005rate range
    
    ending December 31,
    
    
    (Dollars in Thousands)2.76% - 4.33%
    
    
    2006
    
    
    $
    
    
    
    $
    11,9853.84% - 5.25%
    
    
    2007
    
    
    
    19,000
    
    
    
    14,0002.79 % - 4.21%
    
    
    2008
    
    
    
    2,671
    
    
    
    2,9643.62% - 4.70%
    
    
    2009
    
    
    
    4,258
    
    
    
    5,5853.77% - 4.67%
    
    
    2010
    
    
    
    1,562
    
    
    
    68,3912.59% - 5.72%
    
    
    Thereafter
    
    
    66,245
    
    
    
    $
    93,736
    
    
    $
    102,925Weighted average interest rate
    
    
    
    
    4.24
    %
    
    
    4.08
    %
  62




---



##### 



NOTE 7  BORROWED FUNDS
   2007
    
    $
    19,0002008
    
    
    2,6712009
    
    
    4,2582010
    
    
    1,5622011
    
    
    15,000Thereafter
    
    
    51,245$
    93,736
 NOTE 8  RETIREMENT PLANS
     63




---



##### 



NOTE 9  INCOME TAXES
  2006
    
    
    2005
    
    
    2004Current
    
    $
    3,110
    
    
    $
    5,537
    
    
    $
    3,053Deferred
    
    
    (12
    )
    
    
    (2,288
    )
    
    
    (80
    )Totals
    
    $
    3,098
    
    
    $
    3,249
    
    
    $
    2,973
  2006
    
    
    2005
    
    
    2004Income taxes computed at the statutory federal
income tax rate
    
    $
    3,553
    
    
    $
    3,674
    
    
    $
    3,382Tax exempt income
    
    
    (521
    )
    
    
    (486
    )
    
    
    (468
    )Other
    
    
    66
    
    
    
    61
    
    
    
    59Totals
    
    $
    3,098
    
    
    $
    3,249
    
    
    $
    2,973Effective tax rate
    
    
    29.6
    %
    
    
    30.1
    %
    
    
    29.9
    %
  2006
    
    
    2005Deferred tax assetsAllowance for loan losses
    
    $
    1,850
    
    
    $
    1,882Deferred compensation
    
    
    136
    
    
    
    130Unrealized loss on securities available for sale
    
    
    179
    
    
    
    2962,165
    
    
    
    2,308Deferred tax liabilitiesFHLB stock dividends
    
    
    (406
    )
    
    
    (334
    )Deferred loan origination fees and costs
    
    
    (82
    )
    
    
    (97
    )Leases
    
    
    (76
    )
    
    
    (234
    )Depreciation
    
    
    (293
    )
    
    
    (304
    )Mortgage servicing rights
    
    
    (19
    )
    
    
    (26
    )Other
    
    
    (4
    )
    
    
    (4
    )(880
    )
    
    
    (999
    )Net deferred tax asset
    
    $
    1,285
    
    
    $
    1,309
   64




---



##### 



NOTE 10  COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
    2006
    
    2005Fixed
    
    Variable
    
    Fixed
    
    VariableRate
    
    Rate
    
    Rate
    
    RateCommitments to extend credit
    
    $
    2,342
    
    
    $
    63,356
    
    
    $
    8,552
    
    
    $
    51,490Unused lines of credit and letters of credit
    
    $
    
    
    
    $
    75,223
    
    
    $
    
    
    
    $
    73,887
  Legal Proceedings
   65




---



##### 



NOTE 11  REGULATORY CAPITAL
     66




---



##### 



NOTE 11  REGULATORY CAPITAL
  To Be WellCapitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio2006Total 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
    
    
    
    5.02005Total capital to risk-weighted assetsConsolidated
    
    $
    62,353
    
    
    
    11.5
    %
    
    $
    43,331
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    60,422
    
    
    
    11.2
    
    
    
    43,237
    
    
    
    8.0
    
    
    $
    54,046
    
    
    
    10.0
    %Tier 1 (core) capital to risk
weighted assetsConsolidated
    
    
    56,818
    
    
    
    10.5
    
    
    
    21,665
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    39,887
    
    
    
    7.4
    
    
    
    21,618
    
    
    
    4.0
    
    
    
    32,427
    
    
    
    6.0Tier 1 (core) capital to average assetsConsolidated
    
    
    56,818
    
    
    
    8.3
    
    
    
    27,263
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    39,887
    
    
    
    5.9
    
    
    
    27,263
    
    
    
    4.0
    
    
    
    34,079
    
    
    
    5.0
   67




---



##### 



NOTE 12  DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
  2006
    
    2005Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assetsCash and cash equivalents
    
    $
    15,894
    
    
    $
    15,894
    
    
    $
    18,069
    
    
    $
    18,069Securities available for sale
    
    
    88,071
    
    
    
    88,071
    
    
    
    96,580
    
    
    
    96,580Loans held for sale
    
    
    1,455
    
    
    
    1,455
    
    
    
    1,640
    
    
    
    1,640Loans
    
    
    552,463
    
    
    
    551,851
    
    
    
    553,045
    
    
    
    552,973FHLB stock
    
    
    3,604
    
    
    
    3,604
    
    
    
    3,327
    
    
    
    3,327Financial liabilitiesNoninterest-bearing deposits
    
    $
    (70,428
    )
    
    $
    (70,428
    )
    
    $
    (68,977
    )
    
    $
    (68,977
    )Interest-bearing deposits
    
    
    (453,666
    )
    
    
    (456,372
    )
    
    
    (434,929
    )
    
    
    (437,234
    )Federal funds purchased and
other short-term borrowings
    
    
    (1,776
    )
    
    
    (1,776
    )
    
    
    (25,610
    )
    
    
    (25,610
    )FHLB advances
    
    
    (93,736
    )
    
    
    (91,936
    )
    
    
    (102,925
    )
    
    
    (106,249
    )
   68




---



##### 



NOTE 13  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
  CONDENSED BALANCE SHEETS
 2006
    
    
    2005AssetsCash and cash equivalents
    
    $
    1,118
    
    
    $
    41Investment in Bank
    
    
    39,834
    
    
    
    39,302Subordinated note from Bank
    
    
    17,652
    
    
    
    16,902Investment in unconsolidated affiliate
    
    
    968
    
    
    
    614Other assets
    
    
    1,857
    
    
    
    1,746Total assets
    
    $
    61,429
    
    
    $
    58,605LiabilitiesOther liabilities
    
    $
    30
    
    
    $
    2,351Shareholders Equity
    
    
    61,399
    
    
    
    56,254Total liabilities and shareholders equity
    
    $
    61,429
    
    
    $
    58,605
 CONDENSED STATEMENTS OF INCOME
 2006
    
    
    2005
    
    
    2004IncomeEquity in earnings of Bank
    
    $
    7,658
    
    
    $
    7,548
    
    
    $
    5,411Gain on sale of ProCentury Corporation
    
    
    
    
    
    
    
    
    
    
    2,638Other
    
    
    565
    
    
    
    276
    
    
    
    46Total income
    
    
    8,223
    
    
    
    7,824
    
    
    
    8,095Operating expenses
    
    
    870
    
    
    
    268
    
    
    
    323Income before income taxes
    
    
    7,353
    
    
    
    7,556
    
    
    
    7,772Federal income tax expense
    
    
    
    
    
    
    
    
    
    
    797Net income
    
    $
    7,353
    
    
    $
    7,556
    
    
    $
    6,975
  69




---



##### 



NOTE 14  PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
 CONDENSED STATEMENTS OF CASH FLOWS
 2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    7,353
    
    
    $
    7,556
    
    
    $
    6,975Adjustments to reconcile net income
to cash provided by operating activities:(Undistributed earnings of) excess distributions
from Bank
    
    
    (307
    )
    
    
    (808
    )
    
    
    452Net change in other assets and liabilities
    
    
    (2,432
    )
    
    
    (949
    )
    
    
    (3,330
    )Net cash from operating activities
    
    
    4,614
    
    
    
    5,799
    
    
    
    4,097Cash flows used in investing activitiesInvestment in unconsolidated affiliates
    
    
    (354
    )
    
    
    (319
    )
    
    
    (100
    )Issuance of subordinated note to Bank
    
    
    (750
    )
    
    
    (750
    )
    
    
    (2,652
    )Net cash used in investing activities
    
    
    (1,104
    )
    
    
    (1,069
    )
    
    
    (2,752
    )Cash flows from financing activitiesCash dividends paid
    
    
    (2,098
    )
    
    
    (1,866
    )
    
    
    (1,848
    )Purchase of treasury stock, net
    
    
    (335
    )
    
    
    (2,890
    )
    
    
    Net cash from financing activities
    
    
    (2,433
    )
    
    
    (4,756
    )
    
    
    (1,848
    )Net change in cash and cash equivalents
    
    
    1,077
    
    
    
    (26
    )
    
    
    (503
    )Cash and cash equivalents at beginning of year
    
    
    41
    
    
    
    67
    
    
    
    570Cash and cash equivalents at end of year
    
    $
    1,118
    
    
    $
    41
    
    
    $
    67
  70




---



##### 



NOTE 15  CONCENTRATIONS
  NOTE 16  DETAILS OF OPERATING EXPENSES
  2006
    
    
    2005
    
    
    2004Bank premises rent
    
    $
    486
    
    
    $
    482
    
    
    $
    477Bank premises maintenance
    
    
    398
    
    
    
    415
    
    
    
    380Bank depreciation
    
    
    281
    
    
    
    279
    
    
    
    286Equipment lease
    
    
    251
    
    
    
    339
    
    
    
    437Equipment depreciation
    
    
    493
    
    
    
    453
    
    
    
    629Software maintenance
    
    
    624
    
    
    
    507
    
    
    
    498Other
    
    
    692
    
    
    
    769
    
    
    
    1,095Total
    
    $
    3,225
    
    
    $
    3,244
    
    
    $
    3,802
  2006
    
    
    2005
    
    
    2004ATM and debit cards
    
    $
    379
    
    
    $
    342
    
    
    $
    472Telephone
    
    
    374
    
    
    
    338
    
    
    
    422Other
    
    
    1,461
    
    
    
    1,323
    
    
    
    1,574Total
    
    $
    2,214
    
    
    $
    2,003
    
    
    $
    2,468
  71




---



##### 



NOTE 17  QUARTERLY FINANCIAL DATA (Unaudited)
  THREE MONTHS ENDEDDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,(In thousands, except per share data)2006: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
  72




---



##### 



NOTE 17  QUARTERLY FINANCIAL DATA (Unaudited)
 THREE MONTHS ENDEDDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,(In thousands, except per share data)2005:Total interest income
    
    $
    10,055
    
    
    $
    9,559
    
    
    $
    8,846
    
    
    $
    8,106Total interest expense
    
    
    4,231
    
    
    
    3,700
    
    
    
    3,152
    
    
    
    2,667Net interest income
    
    $
    5,824
    
    
    $
    5,859
    
    
    $
    5,694
    
    
    $
    5,439Provision for losses on loans
    
    
    465
    
    
    
    545
    
    
    
    520
    
    
    
    470Noninterest income
    
    
    1,435
    
    
    
    1,350
    
    
    
    1,397
    
    
    
    1,472Noninterest expense
    
    
    3,861
    
    
    
    3,805
    
    
    
    3,901
    
    
    
    4,098Income before income taxes
    
    $
    2,933
    
    
    $
    2,859
    
    
    $
    2,670
    
    
    $
    2,343Federal income tax expense
    
    
    878
    
    
    
    877
    
    
    
    786
    
    
    
    708Net income
    
    $
    2,055
    
    
    $
    1,982
    
    
    $
    1,884
    
    
    $
    1,635Earnings per share:Basic
    
    $
    0.54
    
    
    $
    0.51
    
    
    $
    0.48
    
    
    $
    0.41Diluted
    
    $
    0.54
    
    
    $
    0.51
    
    
    $
    0.48
    
    
    $
    0.41
  73




---



##### 



Internal Control 
Integrated Framework
 
 
 74




---



##### 



Internal Control  Integrated
Framework Internal Control  Integrated Framework
   
 75