Exhibit 13.1

LOGO

CONSOLIDATED FINANCIAL REPORT

DECEMBER 31, 2008



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PIEDMONT COMMUNITY BANK GROUP, INC.

AND SUBSIDIARY

CONSOLIDATED FINANCIAL REPORT

December 31, 2008

TABLE OF
CONTENTS



|                                                                 |  |     
|---------------------------------------------------------------- |  | ----
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM          |  | 1   
|                                                                 | 
|FINANCIAL STATEMENTS                                             |  |     
|                                                                 | 
|Consolidated balance sheets                                      |  | 2   
|Consolidated statements of income and other comprehensive income |  | 3   
|Consolidated statements of changes in shareholders equity       |  | 4   
|Consolidated statements of cash flows                            |  | 5   
|Notes to consolidated financial statements                       |  | 6-19



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MCNAIR, MCLEMORE,
MIDDLEBROOKS & CO., LLP

CERTIFIED PUBLIC ACCOUNTANTS

389 Mulberry Street  Post Office Box One  Macon, GA 31202

Telephone (478) 746-6277  Facsimile (478) 743-6858

www.mmmcpa.com



|                                        |  |  |  |                              
|--------------------------------------- |  |  |  | -----------------------------
|RALPH S. McLEMORE, SR., CPA (1902-1981) |  |  |  |                              
|SIDNEY B. McNAIR, CPA (1913-1992)       |  |  |  |                              
|                                        |  |  |  | RICHARD A. WHITTEN, JR., CPA 
|SIDNEY E. MIDDLEBROOKS, CPA, PC         |  |  |  | ELIZABETH WARE HARDIN, CPA   
|RAY C. PEARSON, CPA                     |  |  |  | CAROLINE E. GRIFFIN, CPA     
|J. RANDOLPH NICHOLS, CPA                |  |  |  | RONNIE K. GILBERT, CPA       
|WILLIAM H. EPPS, JR., CPA               |  |  |  | RON C. DOUTHIT, CPA          
|RAYMOND A. PIPPIN, JR., CPA             |  |  |  | CHARLES A. FLETCHER, CPA     
|JERRY A. WOLFE, CPA                     |  |  |  | MARJORIE HUCKABEE CARTER, CPA
|W. E. BARFIELD, JR., CPA                |  |  |  | BRYAN A. ISGETT, CPA         
|HOWARD S. HOLLEMAN, CPA                 |  |  |  | DAVID PASCHAL MUSE, JR., CPA 
|F. GAY McMICHAEL, CPA                   |  |  |  | KATHY W. FLETCHER, CPA       

March 27, 2009

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Piedmont Community Bank Group, Inc.

We have audited the accompanying consolidated balance sheet of Piedmont Community Bank Group, Inc. and Subsidiaryas of December 31, 2008 and
the related consolidated statements of income, comprehensive income, changes in shareholders equity and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of Piedmont Community Bank Group, Inc. and Subsidiary for the year ended December 31, 2007, were audited by other
auditors whose report, dated March 28, 2008 expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of Piedmont Community Bank Group, Inc. and Subsidiary as of December 31, 2008, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to examine
managements assessment of the effectiveness of Piedmont Community Bank Group, Inc. and Subsidiarys internal control over financial reporting as of December 31, 2008, included under Item 9A, Controls and Procedures, in
Piedmont Community Bank Group, Inc. and Subsidiarys Annual Report on Form 10-K and, accordingly, we do not express an opinion thereon.

McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLP



1



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PIEDMONT COMMUNITY BANK GROUP, INC.

AND SUBSIDIARY

Consolidated Balance
Sheets

December 31, 2008 and 2007



|                                                                                                    |  |      |             |   |      |   |            
|--------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | -----------
|                                                                                                    |  | 2008 |             |   | 2007
|ASSETS                                                                                              |  |      |             |   |      |   |            
|Cash and due from banks                                                                             |  | $    | 2,450,217   |   |      | $ | 1,570,492  
|Interest-bearing deposits in banks                                                                  |  |      | 3,802,160   |   |      |   | 2,764,112  
|Federal funds sold                                                                                  |  |      | 7,198,000   |   |      |   | 6,113,000  
|Securities held to maturity, at cost (fair value of $2,464,937 and $1,977,994, respectively)        |  |      | 2,522,250   |   |      |   | 1,999,674  
|Securities available for sale, at fair value                                                        |  |      | 24,786,543  |   |      |   | 9,283,207  
|Restricted equity securities, at cost                                                               |  |      | 1,516,723   |   |      |   | 1,115,730  
|Loans, less allowance for loan losses of $2,948,204 and $1,849,044, respectively                    |  |      | 190,016,311 |   |      |   | 176,185,526
|Accrued interest receivable                                                                         |  |      | 2,215,265   |   |      |   | 1,920,920  
|Premises and equipment, net                                                                         |  |      | 8,418,500   |   |      |   | 7,541,387  
|Other real estate owned                                                                             |  |      | 8,845,275   |   |      |   | 241,821    
|Long-lived assets held for sale                                                                     |  |      | 681,707     |   |      |   |           
|Bank-owned life insurance                                                                           |  |      | 3,682,410   |   |      |   | 3,512,212  
|Other assets                                                                                        |  |      | 1,972,615   |   |      |   | 792,860    
|                                                                                                    |  |      |             |   |      |   |            
|Total assets                                                                                        |  | $    | 258,107,976 |   |      | $ | 213,040,941
|                                                                                                    |  |      |             |   |      |   |            
|                                                                                                    |  |     
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                |  |      |             |   |      |   |            
|Deposits:                                                                                           |  |      |             |   |      |   |            
|Noninterest-bearing                                                                                 |  | $    | 4,901,699   |   |      | $ | 5,663,482  
|Interest-bearing                                                                                    |  |      | 216,177,748 |   |      |   | 174,772,117
|                                                                                                    |  |      |             |   |      |   |            
|Total deposits                                                                                      |  |      | 221,079,447 |   |      |   | 180,435,599
|Accrued interest payable                                                                            |  |      | 1,079,576   |   |      |   | 947,614    
|Other borrowings                                                                                    |  |      | 19,736,933  |   |      |   | 14,100,000 
|Other liabilities                                                                                   |  |      | 144,045     |   |      |   | 387,261    
|                                                                                                    |  |      |             |   |      |   |            
|Total liabilities                                                                                   |  |      | 242,040,001 |   |      |   | 195,870,474
|                                                                                                    |  |      |             |   |      |   |            
|                                                                                                    |  |     
|Shareholders equity:                                                                               |  |      |             |   |      |   |            
|Preferred stock (no par value), 5,000,000 shares authorized: no shares issued and outstanding       |  |      |            |   |      |   |           
|Common stock, (no par value), 10,000,000 shares authorized: 1,630,734 shares issued and outstanding |  |      | 16,334,059  |   |      |   | 16,089,274 
|Undivided profits (losses)                                                                          |  |      | (470,431    | ) |      |   | 1,073,576  
|Accumulated other comprehensive income                                                              |  |      | 204,347     |   |      |   | 7,617      
|                                                                                                    |  |      |             |   |      |   |            
|Total shareholders equity                                                                          |  |      | 16,067,975  |   |      |   | 17,170,467 
|                                                                                                    |  |      |             |   |      |   |            
|Total liabilities and shareholders equity                                                          |  | $    | 258,107,976 |   |      | $ | 213,040,941
|                                                                                                    |  |      |             |   |      |   |            

See accompanying report of independent registered public accounting firm and notes to consolidated
financial statements.



2



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PIEDMONT COMMUNITY BANK GROUP, INC.

AND SUBSIDIARY

Consolidated
Statements of Income and Other Comprehensive Income

Years Ended December 31, 2008 and 2007



|                                                                                                                    |  |      |            |   |      |   |           
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------
|                                                                                                                    |  | 2008 |            |   | 2007
|Interest and dividend income:                                                                                       |  |      |            |   |      |   |           
|Loans, including fees                                                                                               |  | $    | 11,500,070 |   |      | $ | 12,616,823
|Securities available for sale                                                                                       |  |      | 572,852    |   |      |   | 426,389   
|Securities held to maturity                                                                                         |  |      | 86,237     |   |      |   | 65,127    
|Interest-bearing deposits in banks                                                                                  |  |      | 141,994    |   |      |   | 159,748   
|Federal funds sold                                                                                                  |  |      | 45,485     |   |      |   | 141,155   
|Dividends                                                                                                           |  |      | 47,092     |   |      |   | 48,659    
|                                                                                                                    |  |      |            |   |      |   |           
|                                                                                                                    |  |      | 12,393,730 |   |      |   | 13,457,901
|                                                                                                                    |  |      |            |   |      |   |           
|                                                                                                                    |  |     
|Interest expense:                                                                                                   |  |      |            |   |      |   |           
|Deposits                                                                                                            |  |      | 7,572,546  |   |      |   | 7,278,710 
|Other borrowings                                                                                                    |  |      | 724,262    |   |      |   | 545,721   
|                                                                                                                    |  |      |            |   |      |   |           
|                                                                                                                    |  |      | 8,296,808  |   |      |   | 7,824,431 
|                                                                                                                    |  |      |            |   |      |   |           
|Net interest income                                                                                                 |  |      | 4,096,922  |   |      |   | 5,633,470 
|Provision for loan losses                                                                                           |  |      | 2,157,500  |   |      |   | 614,000   
|                                                                                                                    |  |      |            |   |      |   |           
|Net interest income after provision for loan losses                                                                 |  |      | 1,939,422  |   |      |   | 5,019,470 
|                                                                                                                    |  |      |            |   |      |   |           
|                                                                                                                    |  |     
|Noninterest income:                                                                                                 |  |      |            |   |      |   |           
|Service charges on deposit accounts                                                                                 |  |      | 138,726    |   |      |   | 106,468   
|Mortgage origination income                                                                                         |  |      | 39,092     |   |      |   | 157,295   
|Gain on sale of securities                                                                                          |  |      | 61,952     |   |      |   |          
|Other                                                                                                               |  |      | 396,167    |   |      |   | 65,840    
|                                                                                                                    |  |      |            |   |      |   |           
|                                                                                                                    |  |      | 635,937    |   |      |   | 329,603   
|                                                                                                                    |  |      |            |   |      |   |           
|Noninterest expense:                                                                                                |  |      |            |   |      |   |           
|Salaries and employee benefits                                                                                      |  |      | 2,449,643  |   |      |   | 2,252,030 
|Equipment and occupancy                                                                                             |  |      | 558,097    |   |      |   | 440,997   
|Other operating                                                                                                     |  |      | 2,183,796  |   |      |   | 1,502,372 
|                                                                                                                    |  |      |            |   |      |   |           
|                                                                                                                    |  |      | 5,191,536  |   |      |   | 4,195,399 
|                                                                                                                    |  |      |            |   |      |   |           
|Income (loss) before provision for income taxes (benefits)                                                          |  |      | (2,616,177 | ) |      |   | 1,153,674 
|                                                                                                                    |  |     
|Provision for income taxes (benefits)                                                                               |  |      | (1,072,170 | ) |      |   | 484,733   
|                                                                                                                    |  |      |            |   |      |   |           
|                                                                                                                    |  |     
|Net income (loss)                                                                                                   |  |      | (1,544,007 | ) |      |   | 668,941   
|                                                                                                                    |  |      |            |   |      |   |           
|Other comprehensive income (loss):                                                                                  |  |      |            |   |      |   |           
|Gains on securities arising during the year                                                                         |  |      | 237,618    |   |      |   | 74,045    
|Reclassification adjustment                                                                                         |  |      | (40,888    | ) |      |   |          
|                                                                                                                    |  |      |            |   |      |   |           
|Change in net unrealized gains on securities available for sale, net of reclassification adjustment and tax effects |  |      | 196,730    |   |      |   | 74,045    
|                                                                                                                    |  |      |            |   |      |   |           
|Comprehensive income (loss)                                                                                         |  | $    | (1,347,277 | ) |      | $ | 742,986   
|                                                                                                                    |  |      |            |   |      |   |           
|Earnings (loss) per share:                                                                                          |  |      |            |   |      |   |           
|Basic                                                                                                               |  | $    | (0.95      | ) |      | $ | 0.41      
|                                                                                                                    |  |      |            |   |      |   |           
|Diluted                                                                                                             |  | $    | (0.95      | ) |      | $ | 0.40      
|                                                                                                                    |  |      |            |   |      |   |           

See accompanying report of independent registered public accounting firm and notes to consolidated
financial statements.



3



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PIEDMONT COMMUNITY BANK GROUP, INC.

AND SUBSIDIARY

Consolidated
Statements of Changes in Shareholders Equity

Years Ended December 31, 2008 and 2007



|                                       |  |           |  |             |            |                |   |            |                          |  |   |                                            |   |  |                          |         |   |  |   |            |  
|-------------------------------------- |  | --------- |  | ----------- | ---------- | -------------- | - | ---------- | ------------------------ |  | - | ------------------------------------------ | - |  | ------------------------ | ------- | - |  | - | ---------- | -
|                                       |  | Shares    |  | CommonStock |            | CapitalSurplus |   |            | UndividedProfits(Losses) |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalShareholdersEquity |        
|Balance, December 31, 2006             |  | 1,358,968 |  | $           | 6,794,840  |                | $ | 9,017,451  |                          |  | $ | 405,061                                    |   |  | $                        | (66,428 | ) |  | $ | 16,150,924 |  
|Net income                             |  |          |  |             |           |                |   |           |                          |  |   | 668,941                                    |   |  |                          |        |   |  |   | 668,941    |  
|Formation of holding company           |  |          |  |             | 9,017,451  |                |   | (9,017,451 | )                        |  |   |                                           |   |  |                          |        |   |  |   |           |  
|1.2 for 1 stock split                  |  | 271,766   |  |             |           |                |   |           |                          |  |   | (426                                       | ) |  |                          |        |   |  |   | (426       | )
|Stock-based employee compensation cost |  |          |  |             | 276,983    |                |   |           |                          |  |   |                                           |   |  |                          |        |   |  |   | 276,983    |  
|Other comprehensive income             |  |          |  |             |           |                |   |           |                          |  |   |                                           |   |  |                          | 74,045  |   |  |   | 74,045     |  
|                                       |  |           |  |             |            |                |   |            |                          |  |   |                                            |   |  |                          |         |   |  |   |            |  
|Balance, December 31, 2007             |  | 1,630,734 |  |             | 16,089,274 |                |   |           |                          |  |   | 1,073,576                                  |   |  |                          | 7,617   |   |  |   | 17,170,467 |  
|Net loss                               |  |          |  |             |           |                |   |           |                          |  |   | (1,544,007                                 | ) |  |                          |        |   |  |   | (1,544,007 | )
|Stock-based employee compensation cost |  |          |  |             | 244,785    |                |   |           |                          |  |   |                                           |   |  |                          |        |   |  |   | 244,785    |  
|Other comprehensive income             |  |          |  |             |           |                |   |           |                          |  |   |                                           |   |  |                          | 196,730 |   |  |   | 196,730    |  
|                                       |  |           |  |             |            |                |   |            |                          |  |   |                                            |   |  |                          |         |   |  |   |            |  
|Balance, December 31, 2008             |  | 1,630,734 |  | $           | 16,334,059 |                | $ |           |                          |  | $ | (470,431                                   | ) |  | $                        | 204,347 |   |  | $ | 16,067,975 |  
|                                       |  |           |  |             |            |                |   |            |                          |  |   |                                            |   |  |                          |         |   |  |   |            |  

See accompanying report of independent registered public accounting firm and notes to consolidated
financial statements.



4



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PIEDMONT COMMUNITY BANK GROUP, INC.

AND SUBSIDIARY

Consolidated
Statements of Cash Flows

Years Ended December 31, 2008 and 2007



|                                                                                         |  |      |             |   |      |   |             |  
|---------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                         |  | 2008 |             |   | 2007 |  
|Cash flow from operating activities:                                                     |  |      |             |   |      |   |             |  
|Net income (loss)                                                                        |  | $    | (1,544,007  | ) |      | $ | 668,941     |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |      |             |   |      |   |             |  
|Depreciation, amortization and accretion                                                 |  |      | 287,963     |   |      |   | 293,876     |  
|Provision for loan losses                                                                |  |      | 2,157,500   |   |      |   | 614,000     |  
|Increase in cash surrender value of life insurance                                       |  |      | (170,198    | ) |      |   | (12,212     | )
|Share-based compensation cost                                                            |  |      | 244,785     |   |      |   | 276,983     |  
|Deferred taxes                                                                           |  |      | (275,538    | ) |      |   | (238,043    | )
|Increase in accrued interest receivable                                                  |  |      | (294,345    | ) |      |   | (544,684    | )
|Increase in accrued interest payable                                                     |  |      | 131,962     |   |      |   | 6,116       |  
|Loss on disposal of bank premises and equipment                                          |  |      | 36,886      |   |      |   |            |  
|Gain on sale of other real estate                                                        |  |      | (156,110    | ) |      |   |            |  
|Gain on sale of securities available for sale                                            |  |      | (63,554     | ) |      |   |            |  
|Loss on sale of securities held to maturity                                              |  |      | 1,602       |   |      |   |            |  
|Net other operating activities                                                           |  |      | (1,147,432  | ) |      |   | (420,719    | )
|                                                                                         |  |      |             |   |      |   |             |  
|Net cash flow provided by operating activities                                           |  |      | (790,486    | ) |      |   | 644,258     |  
|                                                                                         |  |      |             |   |      |   |             |  
|                                                                                         |  |     
|Cash flow from investing activities:                                                     |  |      |             |   |      |   |             |  
|Net increase in loans                                                                    |  |      | (29,587,115 | ) |      |   | (59,348,871 | )
|Net increase in federal funds sold                                                       |  |      | (1,085,000  | ) |      |   | (2,351,000  | )
|Net increase in interest-bearing deposits in banks                                       |  |      | (1,038,048  | ) |      |   | (1,180,112  | )
|Purchases of restricted equity securities                                                |  |      | (400,993    | ) |      |   | (348,485    | )
|Purchases of securities available for sale                                               |  |      | (24,152,669 | ) |      |   | (4,497,327  | )
|Proceeds from sale of securities available for sale                                      |  |      | 4,551,750   |   |      |   |            |  
|Proceeds from maturities of securities available for sale                                |  |      | 4,471,461   |   |      |   | 1,473,395   |  
|Purchase of securities held to maturity                                                  |  |      | (750,000    | ) |      |   | (1,355,000  | )
|Proceeds from sale of securities held to maturity                                        |  |      | 199,650     |   |      |   |            |  
|Proceeds from maturities of securities held to maturity                                  |  |      | 26,000      |   |      |   |            |  
|Purchase of bank-owned life insurance                                                    |  |      |            |   |      |   | (3,500,000  | )
|Purchases of premises and equipment                                                      |  |      | (1,974,882  | ) |      |   | (999,190    | )
|Proceeds from sale of other real estate                                                  |  |      | 5,129,276   |   |      |   |            |  
|                                                                                         |  |      |             |   |      |   |             |  
|Net cash flow used in investing activities                                               |  |      | (44,610,570 | ) |      |   | (72,106,590 | )
|                                                                                         |  |      |             |   |      |   |             |  
|                                                                                         |  |     
|Cash flow from financing activities:                                                     |  |      |             |   |      |   |             |  
|Net increase in deposits                                                                 |  |      | 40,643,848  |   |      |   | 68,350,757  |  
|Payment of dividends on fractional shares                                                |  |      |            |   |      |   | (426        | )
|Net (decrease) increase in federal funds purchased                                       |  |      |            |   |      |   | (1,977,500  | )
|Proceeds from Federal Home Loan Bank advances                                            |  |      | 4,800,000   |   |      |   | 4,000,000   |  
|Repayment of Federal Home Loan Bank advances                                             |  |      | (2,100,000  | ) |      |   |            |  
|Proceeds from other borrowings                                                           |  |      | 3,936,933   |   |      |   | 1,000,000   |  
|Repayment of other borrowings                                                            |  |      | (1,000,000  | ) |      |   |            |  
|                                                                                         |  |      |             |   |      |   |             |  
|Net cash flow provided by financing activities                                           |  |      | 46,280,781  |   |      |   | 71,372,831  |  
|                                                                                         |  |      |             |   |      |   |             |  
|                                                                                         |  |     
|Net increase (decrease) in cash and due from banks                                       |  |      | 879,725     |   |      |   | (89,501     | )
|Cash and due from banks at beginning of period                                           |  |      | 1,570,492   |   |      |   | 1,659,993   |  
|                                                                                         |  |      |             |   |      |   |             |  
|Cash and due from banks at end of period                                                 |  | $    | 2,450,217   |   |      | $ | 1,570,492   |  
|                                                                                         |  |      |             |   |      |   |             |  
|                                                                                         |  |     
|Supplemental schedule of noncash investing and financing activities                     |  |      |             |   |      |   |             |  
|Change in accumulated other comprehensive loss                                           |  | $    | 196,730     |   |      | $ | (74,045     | )
|                                                                                         |  |      |             |   |      |   |             |  
|Transfer of loans to other real estate                                                   |  | $    | 13,598,830  |   |      | $ | (241,821    | )
|                                                                                         |  |      |             |   |      |   |             |  
|                                                                                         |  |     
|Supplemental disclosures of cash flow information  Cash paid for:                       |  |      |             |   |      |   |             |  
|Interest                                                                                 |  | $    | 8,164,846   |   |      | $ | 7,818,315   |  
|                                                                                         |  |      |             |   |      |   |             |  
|Income taxes                                                                             |  | $    | 237,165     |   |      | $ | 1,211,258   |  
|                                                                                         |  |      |             |   |      |   |             |  

See accompanying report of independent registered public accounting firm and notes to consolidated
financial statements.



5



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PIEDMONT COMMUNITY BANK GROUP, INC.

AND SUBSIDIARY

Notes to
Consolidated Financial Statements

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Piedmont Community Bank Group, Inc. (the
Company) is a one-bank holding company with respect to its wholly-owned subsidiary bank, Piedmont Community Bank (the Bank). The Company was organized on April 26, 2006 and consummated the acquisition of all of the
outstanding common stock of the Bank in exchange for 1,358,968 shares of $5 par value common stock on February 7, 2007. In accounting for the transaction, the $5 par value common stock of the Bank became no par value common stock of the
Company. The formation and reorganization was approved by the shareholders during the fourth quarter of 2006.

The Bank is a commercial bank headquartered
in Gray, Jones County, Georgia. The Bank provides a full range of banking services in its primary market areas of Jones, Bibb, Monroe, Houston, Greene, Baldwin, Putnam and the surrounding counties.

Basis of Presentation

In preparing the consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the
accounts of the Company and its subsidiary. Significant intercompany transactions and balances have been eliminated in consolidation.

Material estimates
that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, deferred income taxes, the valuation of foreclosed assets, determination of fair values of financial instruments and contingent
assets and liabilities. The determination of the adequacy of the allowance for loan losses is based on estimates that are susceptible to significant changes in the economic environment and market conditions. In connection with the determination of
the estimated losses on loans and the valuation of foreclosed assets, management obtains independent appraisals for significant collateral.

In certain
instances, amounts reported in prior years consolidated financial statements and note disclosures have been reclassified to conform to statement presentations selected for 2008. Such reclassifications had no effect on previously reported
shareholders equity or net income.

Cash, Due From Banks and Cash Flows

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

Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity are classified
as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (loss). Equity securities including restricted equity securities without a readily
determinable fair value are classified as available for sale and recorded at cost.

The amortization of premiums and accretion of discounts are recognized
in interest income using a level yield method over the life of the securities. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings on the trade date. Declines in the fair value of
securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.



6



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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of
the issuer and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans

Loans are reported at their outstanding principal balances less net deferred loan origination fees and costs
and the allowance for loan losses. Interest income is accrued on the outstanding principal balance. Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as an adjustment of the related loan yield over the
life of the loan using the straight-line method.

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

A loan is considered impaired
when it is probable, based on current information and events, the Bank will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured by either the
present value of expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any,
and any subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status.

Allowance for Loan Losses

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

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as
probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific problem loans, concentration and current economic conditions that may affect the borrowers ability to pay. This evaluation does not include the effects of expected
losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance for loan losses, and may require the Bank to make
additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of
specific, general and unallocated components. The specific component relates to loans that are identified as impaired. The general component covers nonimpaired loans and is based on historical loss experience adjusted for qualitative factors. An
unallocated component is maintained to cover uncertainties that could affect managements estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in
the methodologies for estimating specific and general losses in the portfolio.



7



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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Premises and Equipment

Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation, computed principally by the straight-line method over the following estimated useful lives of the assets or the expected terms of the leases,
if shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured.



|                        |  |            
|----------------------- |  | -----------
|Asset Type              |  | Useful Life
|Land improvements       |  | 15 years   
|Buildings               |  | 10-40 years
|Furniture and equipment |  | 3-10 years 
|Computer software       |  | 3 years    

Long-Lived Assets Held For Sale

Long-lived assets held for sale consist of land originally purchased for branch expansion. Due to the current economic slowdown and changes in the market conditions, the Bank has decided not to open an office any time
in the near future. The property has been listed for sale and is carried at cost.

Other Real Estate Owned

Other real estate owned represents properties acquired through or in lieu of loan foreclosure and is initially recorded at the lower of cost or fair value less estimated
costs to sell. Any write-down to fair value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Costs of improvements are capitalized to the extent permitted by the overall fair value of the property,
whereas costs relating to holding other real estate owned and subsequent adjustments to the value are expensed.

Income Taxes

Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based
on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is recorded for those deferred
tax items for which it is more likely than not that realization will not occur in the near term.

Bank-Owned Life Insurance

During 2007, the Bank invested in bank-owned life insurance (BOLI) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by
the Bank on certain employees. The Bank is the owner and beneficiary of the policies. Income from the increase in cash surrender value of the policies is included on the consolidated statements of income. The investment in BOLI totaled $3,682,410
million at December 31, 2008.

Stock Compensation Plan

The Company has a stock-based employee/director compensation plan which is more fully described in Note 11. Statement of Financial Accounting Standards (SFAS) No. 123(R) (revised 2004), Share-Based Payment, requires an entity to
recognize the cost of employee services received in share-based payment transactions and measure the cost on a grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in
exchange for the award.

Mortgage Origination Income

The Bank originates and processes mortgage loans for independent investors. These mortgage loans are handled and closed by the independent investors. Mortgage origination income represents commissions paid by the investors and is recognized
at date of loan closing.



8



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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Earning per Common Share

SFAS No. 128, Earnings Per Share, establishes standards for computing and presenting basic and diluted earnings per share. In this regard, the Company is required to report earnings per common share with and without the dilutive
effects of potential common stock issuances from instruments such as options, convertible securities and warrants on the face of the consolidated statements of income. Earnings per common share are based on the weighted average number of common
shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per share. Presented below is a summary of the components used to calculate basic and diluted earnings
per common share.



|                                                                                                                                  |  |                          |            |   |      |   |          
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------
|                                                                                                                                  |  | Years Ended December 31,
|                                                                                                                                  |  | 2008                     |            |   | 2007
|Basic earnings (loss) per share:                                                                                                  |  |                          |            |   |      |   |          
|Weighted average common shares outstanding                                                                                        |  |                          | 1,630,742  |   |      |   | 1,630,742
|                                                                                                                                  |  |                          |            |   |      |   |          
|Net income (loss)                                                                                                                 |  | $                        | (1,544,007 | ) |      | $ | 668,941  
|                                                                                                                                  |  |                          |            |   |      |   |          
|Basic earnings (loss) per share                                                                                                   |  | $                        | (0.95      | ) |      | $ | 0.41     
|                                                                                                                                  |  |                          |            |   |      |   |          
|                                                                                                                                  |  |                         
|Diluted earnings (loss) per share:                                                                                                |  |                          |            |   |      |   |          
|Weighted average common shares outstanding                                                                                        |  |                          | 1,630,742  |   |      |   | 1,630,742
|Net effect of the assumed exercise of stock options based on the treasury stock method using average market prices for the
period |  |                          |           |   |      |   | 25,151   
|                                                                                                                                  |  |                          |            |   |      |   |          
|Total weighted average common shares and common stock equivalents outstanding                                                     |  |                          | 1,630,742  |   |      |   | 1,655,893
|                                                                                                                                  |  |                          |            |   |      |   |          
|Net income (loss)                                                                                                                 |  | $                        | (1,544,007 | ) |      | $ | 668,941  
|                                                                                                                                  |  |                          |            |   |      |   |          
|Diluted earnings (loss) per share                                                                                                 |  | $                        | (0.95      | ) |      | $ | 0.40     
|                                                                                                                                  |  |                          |            |   |      |   |          

Options to purchase 348,090 shares of common stock at prices ranging from $11.67 to $13.75 per share were
outstanding during the year but were not included in the computation of diluted earnings per share for the year ended December 31, 2008 because the options exercise price was greater than the average market price of the common shares.

Comprehensive Income

Accounting principles generally
require recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Recent Accounting Standards

SFAS No. 141, Business Combinations (Revised 2007).SFAS No. 141R replaces SFAS No. 141, Business Combinations, and
applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS No. 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets,
liabilities and any noncontrolling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when
the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS No. 141 whereby the cost of an acquisition was allocated to the individual
assets acquired and liabilities assumed based on their estimated fair value. SFAS No. 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities
assumed, as was previously the case under SFAS No. 141. Under SFAS No. 141R, the requirements of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, would have to be met in order to accrue for a
restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a noncontractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase
accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS No. 5,Accounting for Contingencies. SFAS No. 141R is expected to have an impact on the Companys
accounting for business combinations closing on or after January 1, 2009.



9



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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
109.Interpretation No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax
positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant
information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously-recognized tax positions that no longer meet the
more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Interpretation No. 48 also provides guidance on the accounting for and
disclosure of unrecognized tax benefits, interest and penalties. The adoption of Interpretation No. 48 on January 1, 2007 did not significantly impact the Companys consolidated financial statements.

FSP No. 48-1 Definition of Settlement in FASB Interpretation No. 48.FSP No. 48-1 provides guidance on how to determine whether a tax position
is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP No. 48-1 was effective retroactively to January 1, 2007 and did not significantly impact the Companys consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value measurement. SFAS No. 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets. Under SFAS No. 157, fair value measurements are disclosed by level within that hierarchy. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date
of FASB Statement No. 157, which permits a one-year deferral for the implementation of SFAS No. 157 with regard to nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a
recurring basis. The Company adopted SFAS No. 157 for the fiscal year beginning January 1, 2008, except for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on
a nonrecurring basis for which delayed application is permitted until the fiscal year beginning January 1, 2009. The Company is currently assessing the potential effect of the adoption of the remaining provisions of SFAS No. 157 on
its financial position, results of operations and cash flows. The adoption of the remaining provisions of SFAS No. 157 is not expected to have a material impact on the Companys consolidated financial position, results of operations
or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities 
Including an Amendment to FASB Statement No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are
not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement requires a business entity to report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting date. An entity may decide whether to elect the fair value option for each eligible item on its election date, subject to certain
requirements described in the statement. SFAS No. 159 became effective for the Company on January 1, 2008. The Company elected not to adopt the fair value option.

SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51.SFAS No. 160 amends Accounting Research Bulletin (ARB) No. 51,
Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling interest in
a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements,
SFAS No. 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statements of
income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 is effective for the Company on January 1, 2009 and is not expected to have a significant impact on the
Companys consolidated financial statements.



10



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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162
identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States (the GAAP hierarchy). The hierarchical guidance provided by SFAS 162 did not have a significant impact on the Companys consolidated financial statements.

NOTE 2. SECURITIES

The amortized cost and fair value of securities
are summarized as follows:



|                              |  |           |            |            |   |            |  |   |            |   |  |   |           
|----------------------------- |  | --------- | ---------- | ---------- | - | ---------- |  | - | ---------- | - |  | - | ----------
|                              |  |           |            | Gross      |   | Gross      |  |   |           
|                              |  | Amortized |            | Unrealized |   | Unrealized |  |   |           
|                              |  | Cost      |            | Gains      |   | Losses     |  |   | Fair Value
|Available for Sale            |  |           |            |            |   |            |  |   |            |   |  |   |           
|December 31, 2008:            |  |           |            |            |   |            |  |   |            |   |  |   |           
|Government sponsored agencies |  | $         | 4,828,071  |            | $ | 68,820     |  | $ |           |   |  | $ | 4,896,891 
|Mortgage-backed securities    |  |           | 19,630,116 |            |   | 309,996    |  |   | (50,460    | ) |  |   | 19,889,652
|                              |  |           |            |            |   |            |  |   |            |   |  |   |           
|                              |  | $         | 24,458,187 |            | $ | 378,816    |  | $ | (50,460    | ) |  | $ | 24,786,543
|                              |  |           |            |            |   |            |  |   |            |   |  |   |           
|                              |  |           |            |           
|December 31, 2007:            |  |           |            |            |   |            |  |   |            |   |  |   |           
|Government sponsored agencies |  | $         | 7,368,382  |            | $ | 61,452     |  | $ | (5,161     | ) |  | $ | 7,424,673 
|Mortgage-backed securities    |  |           | 1,902,588  |            |   | 821        |  |   | (44,875    | ) |  |   | 1,858,534 
|                              |  |           |            |            |   |            |  |   |            |   |  |   |           
|                              |  | $         | 9,270,970  |            | $ | 62,273     |  | $ | (50,036    | ) |  | $ | 9,283,207 
|                              |  |           |            |            |   |            |  |   |            |   |  |   |           
|                              |  |           |            |           
|Held to Maturity              |  |           |            |            |   |            |  |   |            |   |  |   |           
|December 31, 2008:            |  |           |            |            |   |            |  |   |            |   |  |   |           
|State and county municipals   |  | $         | 2,522,250  |            | $ | 10,786     |  | $ | (68,099    | ) |  | $ | 2,464,937 
|                              |  |           |            |            |   |            |  |   |            |   |  |   |           
|                              |  |           |            |           
|December 31, 2007:            |  |           |            |            |   |            |  |   |            |   |  |   |           
|State and county municipals   |  | $         | 1,999,674  |            | $ | 1,390      |  | $ | (23,070    | ) |  | $ | 1,977,994 
|                              |  |           |            |            |   |            |  |   |            |   |  |   |           

The market value of investment securities is based on quoted market values and is significantly affected by the
interest rate environment. At December 31, 2008 and 2007, all unrealized losses in the investment securities portfolio were for debt securities. These unrealized losses are considered temporary because of acceptable investment grades and the
Companys ability to hold these securities until a market price recovery or maturity.



11



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NOTE 2. SECURITIES (CONTINUED)



Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of
time individual securities have been in a continuous loss position, follows:



|                              |  |                     |           |            |                   |         |       |       |            |           |  |       |         |            |  |   |           |  |   |          |  
|----------------------------- |  | ------------------- | --------- | ---------- | ----------------- | ------- | ----- | ----- | ---------- | --------- |  | ----- | ------- | ---------- |  | - | --------- |  | - | -------- | -
|                              |  | Less than 12 Months |           |            | 12 Months or More |         |       | Total |           
|                              |  | Fair                |           | Unrealized |                   |         | Fair  |       | Unrealized |           |  | Fair  |         | Unrealized | 
|                              |  | Value               |           | Losses     |                   |         | Value |       | Losses     |           |  | Value |         | Losses     | 
|December 31, 2008:            |  |                     |           |            |                   |         |       |       |            |           |  |       |         |            |  |   |           |  |   |          |  
|State and county municipals   |  | $                   | 590,651   |            | $                 | (34,349 | )     |       | $          | 1,091,250 |  | $     | (33,750 | )          |  | $ | 1,681,901 |  | $ | (68,099  | )
|Mortgage-backed securities    |  |                     | 5,794,044 |            |                   | (50,156 | )     |       |            | 53,260    |  |       | (304    | )          |  |   | 5,847,304 |  |   | (50,460  | )
|                              |  |                     |           |            |                   |         |       |       |            |           |  |       |         |            |  |   |           |  |   |          |  
|                              |  | $                   | 6,384,695 |            | $                 | (84,505 | )     |       | $          | 1,144,510 |  | $     | (34,054 | )          |  | $ | 7,529,205 |  | $ | (118,559 | )
|                              |  |                     |           |            |                   |         |       |       |            |           |  |       |         |            |  |   |           |  |   |          |  
|                              |  |                     |           |            |                   |        
|December 31, 2007:            |  |                     |           |            |                   |         |       |       |            |           |  |       |         |            |  |   |           |  |   |          |  
|Government sponsored agencies |  | $                   |          |            | $                 |        |       |       | $          | 1,205,484 |  | $     | (16,456 | )          |  | $ | 1,205,484 |  | $ | (16,456  | )
|State and county municipals   |  |                     | 490,000   |            |                   | (10,000 | )     |       |            | 1,285,180 |  |       | (13,070 | )          |  |   | 1,775,180 |  |   | (23,070  | )
|Mortgage-backed securities    |  |                     |          |            |                   |        |       |       |            | 1,202,916 |  |       | (33,580 | )          |  |   | 1,202,916 |  |   | (33,580  | )
|                              |  |                     |           |            |                   |         |       |       |            |           |  |       |         |            |  |   |           |  |   |          |  
|                              |  | $                   | 490,000   |            | $                 | (10,000 | )     |       | $          | 3,693,580 |  | $     | (63,106 | )          |  | $ | 4,183,580 |  | $ | (73,106  | )
|                              |  |                     |           |            |                   |         |       |       |            |           |  |       |         |            |  |   |           |  |   |          |  

The amortized cost and fair value of debt securities available for sale as of December 31, 2008 by
contractual maturity are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                           |  |                    |            |                  |   |            |  |       |           |  |   |          
|-------------------------- |  | ------------------ | ---------- | ---------------- | - | ---------- |  | ----- | --------- |  | - | ---------
|                           |  | Available for Sale |            | Held to Maturity
|                           |  | Amortized          |            | Fair             |   | Amortized  |  | Fair 
|                           |  | Cost               |            | Value            |   | Cost       |  | Value
|Due in one year or less    |  | $                  |           |                  | $ |           |  | $     | 522,250   |  | $ | 522,363  
|Due from one to five years |  |                    | 250,000    |                  |   | 257,055    |  |       | 125,000   |  |   | 124,976  
|Due from five to ten years |  |                    | 585,369    |                  |   | 589,936    |  |       | 250,000   |  |   | 260,673  
|Due after ten years        |  |                    | 3,992,702  |                  |   | 4,049,900  |  |       | 1,625,000 |  |   | 1,556,925
|Mortgage-backed securities |  |                    | 19,630,116 |                  |   | 19,889,652 |  |       |          |  |   |         
|                           |  |                    |            |                  |   |            |  |       |           |  |   |          
|                           |  | $                  | 24,458,187 |                  | $ | 24,786,543 |  | $     | 2,522,250 |  | $ | 2,464,937
|                           |  |                    |            |                  |   |            |  |       |           |  |   |          

Proceeds from sales of investments available for sale were $4,551,750 in 2008 and $0 in 2007. Gross realized gains
totaled $63,554 in 2008 and $0 in 2007. Gross realized losses totaled $0 in 2008 and 2007.

Proceeds from sales of investments held to maturity were
$199,650 in 2008 and $0 in 2007. Gross realized gains totaled $0 in 2008 and 2007. Gross realized losses totaled $1,602 in 2008 and $0 in 2007. One investment held to maturity was sold during 2008 due to the bond rating falling below investment
grade.

Investment securities with a carrying amount of $10,409,447 and $1,512,629 at December 31, 2008 and 2007, respectively, were pledged as
collateral on public deposits and for other purposes as required by law.



12



---

NOTE 3. LOANS

The
composition of loans is summarized as follows:



|                               |  |              |             |   |      |   |             |  
|------------------------------ |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                               |  | December 31, |            
|                               |  | 2008         |             |   | 2007 |  
|Commercial                     |  | $            | 16,227,382  |   |      | $ | 19,031,997  |  
|Real estate  construction     |  |              | 34,735,791  |   |      |   | 37,310,324  |  
|Real estate  mortgage         |  |              | 19,694,402  |   |      |   | 19,212,502  |  
|Real estate  commercial       |  |              | 120,225,378 |   |      |   | 100,505,031 |  
|Consumer installment and other |  |              | 2,077,490   |   |      |   | 1,993,067   |  
|                               |  |              |             |   |      |   |             |  
|                               |  |              | 192,960,443 |   |      |   | 178,052,921 |  
|Net deferred loan (fees) costs |  |              | 4,072       |   |      |   | (18,351     | )
|Allowance for loan losses      |  |              | (2,948,204  | ) |      |   | (1,849,044  | )
|                               |  |              |             |   |      |   |             |  
|Loans, net                     |  | $            | 190,016,311 |   |      | $ | 176,185,526 |  
|                               |  |              |             |   |      |   |             |  

Changes in the allowance for loan losses are as follow:



|                                           |  |              |            |   |      |   |          
|------------------------------------------ |  | ------------ | ---------- | - | ---- | - | ---------
|                                           |  | December 31,
|                                           |  | 2008         |            |   | 2007
|Balance, beginning of year                 |  | $            | 1,849,044  |   |      | $ | 1,235,044
|Provision for loan losses                  |  |              | 2,157,500  |   |      |   | 614,000  
|Loans charged off                          |  |              | (1,058,340 | ) |      |   |         
|Recoveries of loans previously charged off |  |              |           |   |      |   |         
|                                           |  |              |            |   |      |   |          
|Balance, end of year                       |  | $            | 2,948,204  |   |      | $ | 1,849,044
|                                           |  |              |            |   |      |   |          

The following is a summary of information pertaining to impaired loans, nonaccrual loans, loans past due 90 days
or more, and loans defined as troubled debt restructurings:



|                                                            |  |                               |            |      |   |          
|----------------------------------------------------------- |  | ----------------------------- | ---------- | ---- | - | ---------
|                                                            |  | As of and for the Years Ended
|                                                            |  | December 31,                 
|                                                            |  | 2008                          |            | 2007
|Impaired loans with a valuation allowance                   |  | $                             | 4,454,191  |      | $ | 2,812,672
|Impaired loans without a valuation allowance                |  |                               | 19,033,119 |      |   | 1,531,912
|                                                            |  |                               |            |      |   |          
|Total impaired loans                                        |  | $                             | 23,487,310 |      | $ | 4,344,584
|                                                            |  |                               |            |      |   |          
|Valuation allowance related to impaired loans               |  | $                             | 211,331    |      | $ | 104,752  
|Total nonaccrual loans                                      |  | $                             | 8,450,927  |      | $ | 128,113  
|Total loans past due ninety days or more and still accruing |  | $                             | 3,688,158  |      | $ | 200,253  
|Average investment in impaired loans                        |  | $                             | 23,170,652 |      | $ | 29,399   
|Interest income recognized on impaired loans                |  | $                             | 1,004,577  |      | $ |         
|Troubled debt restructurings                                |  | $                             | 2,863,241  |      | $ |         

In the ordinary course of business, the Bank has granted loans to certain related parties, including executive
officers, directors and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the
year ended December 31, 2008 are as follows:



|                           |  |   |           |  
|-------------------------- |  | - | --------- | -
|Balance, beginning of year |  | $ | 3,280,135 |  
|Advances                   |  |   | 1,305,701 |  
|Repayments                 |  |   | (811,867  | )
|                           |  |   |           |  
|Balance, end of year       |  | $ | 3,773,969 |  
|                           |  |   |           |  



13



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NOTE 4. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:



|                                          |  |              |            |   |      |   |           |  
|----------------------------------------- |  | ------------ | ---------- | - | ---- | - | --------- | -
|                                          |  | December 31, |           
|                                          |  | 2008         |            |   | 2007 |  
|Land and land improvements                |  | $            | 2,960,595  |   |      | $ | 3,475,218 |  
|Buildings                                 |  |              | 4,478,297  |   |      |   | 3,101,282 |  
|Furniture and equipment                   |  |              | 1,900,982  |   |      |   | 1,606,507 |  
|Computer software                         |  |              | 348,260    |   |      |   | 253,191   |  
|                                          |  |              |            |   |      |   |           |  
|                                          |  |              | 9,688,134  |   |      |   | 8,436,198 |  
|Accumulated depreciation and amortization |  |              | (1,269,634 | ) |      |   | (894,811  | )
|                                          |  |              |            |   |      |   |           |  
|                                          |  | $            | 8,418,500  |   |      | $ | 7,541,387 |  
|                                          |  |              |            |   |      |   |           |  

Depreciation and amortization expense for the years ended December 31, 2008 and 2007 was $380,477 and
$289,583, respectively.

Pursuant to the terms of noncancelable lease agreements in effect at December 31, 2008, pertaining to banking premises and
equipment, future minimum rent commitments under various operating leases are as follows:



|             |  |        |      
|------------ |  | ------ | -----
|Year Ended   |  |       
|December 31, |  | Amount
|2009         |  | $      | 6,082
|             |  |        |      

The leases contain options to extend for periods from two to four years. The cost of such rentals is not included
above. Total rent expense for the years ended December 31, 2008 and 2007 amounted to $30,181 and $27,518, respectively.

NOTE 5.

The aggregate amount of overdrawn deposit accounts reclassified as loan balances totaled $93,332 and $59,980 as of December 31, 2008 and 2007, respectively.

Components of interest-bearing deposits are as follows:



|                        |  |              |             |      |   |            
|----------------------- |  | ------------ | ----------- | ---- | - | -----------
|                        |  | December 31,
|                        |  | 2008         |             | 2007
|Interest-Bearing Demand |  | $            | 15,481,338  |      | $ | 23,163,181 
|Savings                 |  |              | 28,033,764  |      |   | 35,062,821 
|Time, $100,000 and Over |  |              | 90,107,174  |      |   | 39,638,920 
|Other Time              |  |              | 82,555,472  |      |   | 76,907,195 
|                        |  |              |             |      |   |            
|                        |  | $            | 216,177,748 |      | $ | 174,772,117
|                        |  |              |             |      |   |            

The aggregate amount of short-term time deposits in denominations of $100,000 or more at December 31, 2008
and 2007 was approximately $62,777,000 and $33,662,000. The scheduled maturities of time deposits at December 31, 2008 are as follows:



|                    |  |   |            
|------------------- |  | - | -----------
|2009                |  | $ | 132,130,142
|2010                |  |   | 38,025,178 
|2011                |  |   | 1,341,222  
|2012                |  |   | 1,058,821  
|2013                |  |   | 107,283    
|2014 and thereafter |  |   |           
|                    |  |   |            
|                    |  | $ | 172,662,646
|                    |  |   |            

The Bank had brokered deposits of $40,988,000 and $16,495,000 at December 31, 2008 and 2007, respectively.



14



---

NOTE 6. OTHER BORROWINGS

Federal Home Loan Bank (FHLB) advances as of December 31, 2008 and 2007 are summarized as follows:



|                    |  |                 |  |              |            |      |   |           
|------------------- |  | --------------- |  | ------------ | ---------- | ---- | - | ----------
|                    |  |                 |  | December 31,
|                    |  | Maturity Date   |  | 2008         |            | 2007
|4.20% Fixed rate    |  | October 3, 2016 |  | $            | 9,100,000  |      | $ | 9,100,000 
|4.286% Fixed rate   |  | March 9, 2012   |  |              | 3,000,000  |      |   | 3,000,000 
|4.82% Fixed rate    |  | June 29, 2012   |  |              | 1,000,000  |      |   | 1,000,000 
|0.46% Variable rate |  | March 2, 2009   |  |              | 900,000    |      |   |          
|2.36% Fixed rate    |  | June 26, 2018   |  |              | 1,800,000  |      |   |          
|                    |  |                 |  |              |            |      |   |           
|                    |  |                 |  | $            | 15,800,000 |      | $ | 13,100,000
|                    |  |                 |  |              |            |      |   |           

The advances from the FHLB are secured by certain qualifying loans of $28,361,321, FHLB stock of $1,144,000 and
cash of $105,000.

Advances on a line of credit as of December 31, 2008 and 2007 are summarized as follows:



|                                       |  |                   |  |              |           |      |   |          
|-------------------------------------- |  | ----------------- |  | ------------ | --------- | ---- | - | ---------
|                                       |  |                   |  | December 31,
|                                       |  | Maturity Date     |  | 2008         |           | 2007
|Prime minus 1.0% floating, 3.25% floor |  | March 28, 2020    |  | $            | 3,411,933 |      | $ | 1,000,000
|Unsecured  Directors 12% fixed        |  | December 31, 2009 |  |              | 525,000   |      |   |         
|                                       |  |                   |  | $            | 3,936,933 |      | $ | 1,000,000

In addition, the Bank has available unused lines of credit with various financial institutions totaling
$12,500,000 at December 31, 2008.

NOTE 7. INCOME TAXES

Income taxes consist of the following:



|                        |  |                          |            |   |      |   |          |  
|----------------------- |  | ------------------------ | ---------- | - | ---- | - | -------- | -
|                        |  | Years Ended December 31, |           
|                        |  | 2008                     |            |   | 2007 |  
|Current                 |  | $                        | (796,632   | ) |      | $ | 722,776  |  
|Deferred                |  |                          | (275,538   | ) |      |   | (238,043 | )
|                        |  |                          |            |   |      |   |          |  
|Income taxes (benefits) |  | $                        | (1,072,170 | ) |      | $ | 484,733  |  
|                        |  |                          |            |   |      |   |          |  

The Companys income tax differs from the amounts computed by applying the federal income tax statutory rates
to income before income taxes. A reconciliation of the differences as of December 31, 2008 and 2007 is as follows:



|                                        |  |                          |            |   |      |   |         |  
|--------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ------- | -
|                                        |  | Years Ended December 31, |           
|                                        |  | 2008                     |            |   | 2007 |  
|Tax provision at federal statutory rate |  | $                        | (889,500   | ) |      | $ | 392,249 |  
|Tax-free income                         |  |                          | (19,631    | ) |      |   | (19,075 | )
|Disallowed interest expense             |  |                          | 3,255      |   |      |   | 4,557   |  
|Incentive stock compensation            |  |                          | 33,162     |   |      |   | 43,877  |  
|State income tax                        |  |                          | (190,421   | ) |      |   | 29,500  |  
|Other items, net                        |  |                          | (9,035     | ) |      |   | 33,625  |  
|                                        |  |                          |            |   |      |   |         |  
|Income taxes (benefits)                 |  | $                        | (1,072,170 | ) |      | $ | 484,733 |  
|                                        |  |                          |            |   |      |   |         |  



15



---

NOTE 7. INCOME TAXES (CONTINUED)



The components of deferred taxes are as follows:



|                                     |  |              |           |      |   |        
|------------------------------------ |  | ------------ | --------- | ---- | - | -------
|                                     |  | December 31,
|                                     |  | 2008         |           | 2007
|Deferred income tax assets:          |  |              |           |      |   |        
|Loan loss reserves                   |  | $            | 976,615   |      | $ | 658,554
|Preopening and organization expenses |  |              | 9,947     |      |   | 12,473 
|Nonqualified stock compensation      |  |              | 173,576   |      |   | 118,009
|Deferred compensation                |  |              | 7,848     |      |   |       
|                                     |  |              |           |      |   |        
|                                     |  |              | 1,167,986 |      |   | 789,036
|                                     |  |              |           |      |   |        
|                                     |  |             
|Deferred income tax liabilities:     |  |              |           |      |   |        
|Depreciation                         |  |              | 252,374   |      |   | 148,962
|Securities available for sale        |  |              | 123,921   |      |   | 4,620  
|                                     |  |              |           |      |   |        
|                                     |  |              | 376,295   |      |   | 153,582
|                                     |  |              |           |      |   |        
|Net deferred income taxes            |  | $            | 791,691   |      | $ | 635,454
|                                     |  |              |           |      |   |        

NOTE 8. FAIR VALUE MEASUREMENTS

SFAS No. 157, Fair Value Measurements,defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and
enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:



| |  |  | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset
or liability, either directly or indirectly, for substantially the full term of the financial instrument.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
| | - |  | -----------------------------------------------------------------------------------------------------------

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy:

Assets

Securities

Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 inputs include
securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted
cash flow. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy, included certain collateralized mortgage and debt obligations and certain high-yield debt securities. In certain cases where
there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. When measuring fair value, the valuation techniques available under the market approach, income
approach and/or cost approach are used. The Companys evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

Impaired loans

SFAS No. 157 applies to loans measured for
impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan,including impaired loans measured at an observable market price (if available), or at the fair value of the
loans collateral (if the loan is collateral dependent). When fair value of the loans collateral is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral, the
Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the
Company records the impaired loan as nonrecurring Level 3.



16



---

NOTE 8. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the recorded amount
of the Companys assets measured at fair value on a recurring or nonrecurring basis as of December 31, 2008 aggregated by the level in the fair value hierarchy within which those measurements fall.



|                              |  |                  |            |                                                             |   |                                           |  |                                        |            |  |   |           
|----------------------------- |  | ---------------- | ---------- | ----------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | ---------- |  | - | ----------
|                              |  |                  |            | Fair Value Measurements at Reporting Date Using            
|                              |  | December 31,2008 |            | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Recurring                     |  |                  |            |                                                             |   |                                           |  |                                        |            |  |   |           
|Securities Available for Sale |  |                  |            |                                                             |   |                                           |  |                                        |            |  |   |           
|Government sponsored agencies |  | $                | 4,896,891  |                                                             | $ |                                          |  | $                                      | 4,896,891  |  | $ |          
|Mortgage-backed securities    |  |                  | 19,889,652 |                                                             |   |                                          |  |                                        | 19,889,652 |  |   |          
|                              |  |                  |            |                                                             |   |                                           |  |                                        |            |  |   |           
|                              |  | $                | 24,786,543 |                                                             | $ |                                          |  | $                                      | 24,786,543 |  | $ |          
|                              |  |                  |            |                                                             |   |                                           |  |                                        |            |  |   |           
|Nonrecurring                  |  |                  |            |                                                             |   |                                           |  |                                        |            |  |   |           
|Impaired Loans                |  | $                | 23,275,979 |                                                             | $ |                                          |  | $                                      |           |  | $ | 23,275,979
|                              |  |                  |            |                                                             |   |                                           |  |                                        |            |  |   |           

The Company did not identify any liabilities that are required to be presented at fair value.

NOTE 9. COMMITMENTS AND CONTINGENCIES

Loan Commitments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. The majority
of all commitments to extend credit and standby letters of credit are variable rate instruments.

The Banks exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments
as it does for on-balance sheet instruments. A summary of the Banks commitments is as follow:



|                            |  |              |            |      |   |           
|--------------------------- |  | ------------ | ---------- | ---- | - | ----------
|                            |  | December 31,
|                            |  | 2008         |            | 2007
|Commitment to extend credit |  | $            | 21,434,000 |      | $ | 33,158,000
|Letters of credit           |  |              | 20,000     |      |   | 20,000    
|                            |  |              |            |      |   |           
|                            |  | $            | 21,454,000 |      | $ | 33,178,000
|                            |  |              |            |      |   |           

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit evaluation for the party. Collateral held
varies, but may include property and equipment, residential real estate and income-producing commercial properties.

Standby letters of credit are
conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loans to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary.

At December 31, 2008 and 2007, the carrying amount of liabilities related to the Banks obligation to perform under standby letters of credit was insignificant. The Bank has not been required to perform on
any standby letters of credit, and the Bank has not incurred any losses on standby letters of credit for the years ended December 31, 2008 and 2007.



17



---

NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)



Contingencies

In
the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Companys consolidated financial
statements.

NOTE 10. CONCENTRATIONS OF CREDIT

The
Bank originates primarily commercial, residential and consumer loans to customers in its primary market area. The ability of the majority of the Banks customers to honor their contractual loan obligations is dependent on the economy in these
areas. Ninety percent of the Banks loan portfolio is secured by real estate, of which a substantial portion is secured by real estate in the Banks market area.

The Bank, as a matter of policy, does not generally extend credit to any single borrower or group of related borrowers in excess of 25% of the Banks statutory capital or approximately $5,033,000.

NOTE 11. EMPLOYEE AND DIRECTOR BENEFITS

Stock Options

The Company has a Stock Option Plan (Plan) that offers stock options to key employees and directors to encourage continued employment by
facilitating their purchase of an equity interest in the Company. The options granted under the Plan may either be incentive stock options or nonqualified stock options as specified in the option agreement. These options are granted at the
discretion of the board of directors at an exercise price at least equal to the fair market value of the common stock on the date of the grant. The options have a term of ten years from the date of grant and vest ratably over varying vesting
periods. A total of 383,502 shares have been reserved under the Plan.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes-Merton option-pricing model with the weighted-average assumptions listed in the table below. Expected volatility is based on expected volatility of similar entities. Expected dividends are based on anticipated dividends over the
expected life and the market price of the Companys stock price at grant date. Historical data is used to estimate option exercises and employee terminations within the valuation mode. The risk-free rate for periods within the contractual life
of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of the options granted is estimated based on the short-cut method. There were no stock options granted during the year ended December 31,
2008 or 2007. The following assumptions were used for the year ended December 31, 2006.



|                                                                    |  |      |           |  
|------------------------------------------------------------------- |  | ---- | --------- | -
|                                                                    |  | 2006 |          
|Weighted-average risk-free interest rate                            |  |      | 4.71      | %
|Expected life of the options                                        |  |      | 6.5 years |  
|Expected dividends (as a percentage of the fair value of the stock) |  |      | 1.10      | %
|Expected volatility                                                 |  |      | 17.34     | %
|Weighted-average grant-date fair value                              |  | $    | 3.06      |  

A summary of activity of the Companys Stock Option Plan is as follows:



|                                 |  |         |   |  |                |      
|-------------------------------- |  | ------- | - |  | -------------- | -----
|                                 |  | 2008   
|                                 |  |         |   |  | Weighted-     
|                                 |  |         |   |  | Average       
|                                 |  | Number  |   |  | Exercise Price
|Outstanding at beginning of year |  | 380,705 |   |  | $              | 11.68
|Granted                          |  |        |   |  |                |      
|Exercised                        |  |        |   |  |                |      
|Forfeited/Expired                |  | (32,615 | ) |  |                | 11.67
|                                 |  |         |   |  |                |      
|Outstanding at end of year       |  | 348,090 |   |  | $              | 11.72
|                                 |  |         |   |  |                |      
|Options exercisable at year-end  |  | 267,028 |   |  | $              | 11.68
|                                 |  |         |   |  |                |      



18



---

NOTE 11. STOCK OPTIONS (CONTINUED)



Information pertaining to options outstanding December 31, 2008 as follows:



|                    |  |                                          |  |                               |       |                         |   |                   |  |                               |  |   |      
|------------------- |  | ---------------------------------------- |  | ----------------------------- | ----- | ----------------------- | - | ----------------- |  | ----------------------------- |  | - | -----
|Options Outstanding |  | Options Exercisable                     
|NumberOutstanding   |  | Weighted-averageremainingcontractuallife |  | Weighted-averageexerciseprice |       | AggregateIntrinsicValue |   | Numberexercisable |  | Weighted-averageexerciseprice
|348,090             |  | 6.78                                     |  | $                             | 11.67 |                         | $ | -0-               |  | 267,028                       |  | $ | 11.67

As of December 31, 2008, the weighted-average remaining contractual life of the options outstanding was 6.78
years.



|                                     |  |         |   |  |                  |     
|------------------------------------ |  | ------- | - |  | ---------------- | ----
|                                     |  | Number  |   |  | Weighted-Average
|                                     |  | of      |   |  | Grant Date      
|                                     |  | shares  |   |  | Fair Value      
|Nonvested options, December 31, 2007 |  | 180,973 |   |  | $                | 3.78
|Granted                              |  |        |   |  | $                |    
|Vested                               |  | (81,460 | ) |  | $                | 3.11
|Forfeited/Expired                    |  | (18,451 | ) |  | $                | 3.50
|                                     |  |         |   |  |                  |     
|Nonvested options, December 31, 2008 |  | 81,062  |   |  | $                | 3.10
|                                     |  |         |   |  |                  |     

There were no options exercised during the years ended December 31, 2008 and 2007. The total fair value of
options vested during the years ended December 31, 2008 and 2007 was $253,222 and $342,674, respectively.

The compensation cost charged against
income for the years ended December 31, 2008 and 2007 was $244,785 and $276,983, respectively. Income tax benefits recognized for the years ended December 31, 2008 and 2007 was $55,567 and $55,824, respectively.

At December 31, 2008, there was approximately $42,779 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a
weighted-average period of 0.27 years.

401(k) Profit Sharing Plan

The Company has a 401(k) profit sharing plan available to all eligible employees, subject to certain minimum age and service requirements. Contributions charged to expense totaled $38,993 and $30,401 for the years
ended December 31, 2008 and 2007, respectively.

Deferred Compensation Plan

Effective August 1, 2008, the Bank commenced a salary continuation plan covering its executive officers through individual contracts. Under this plan, the Bank is committed to pay the individuals an annual
benefit of 5 percent of the officers base salary at retirement. The benefit will be paid over a period of 15 years beginning at age 65. If the individual dies before age 65, a single lump sum payment equal to the accounting accrued liability
as of the date of death will be paid to the individuals beneficiary. Liabilities accrued under the plan totaled $15,280 as of December 31, 2008. Expense charged to operations totaled $15,280 for the year ended December 31, 2008. No
benefits have been paid as of December 31, 2008.

Also, effective August 1, 2008, the Bank commenced a directors fee continuation plan.
Under this plan, the Bank is committed to pay an annual benefit of $1,000. The benefit will be paid over 10 years beginning at retirement. The total amount accrued under the plan is $865 as of December 31, 2008.



19



---

NOTE 12. REGULATION MATTERS

The Bank is subject to certain restrictions on the amount of dividends that may be declared without prior regulator approval. At December 31, 2008, none of retained earnings were available for dividend declaration without regulatory
approval.

The Company and Bank are subject to various capital requirements administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional discretionary regulatory actions by regulators that, if undertaken, could have a direct material effect on the Companys and Banks consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Companys and Banks capital classification is also subject to qualitative judgments by the regulators about components, risk weighting, and other factors.

Quantitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios (set forth in the table below) of
total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2008 and 2007, that the Company and Bank
met all capital adequacy requirements to which they are subject.

As of December 31, 2008, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institutions category. Prompt corrective action provisions are not applicable to bank holding
companies.

The Banks actual capital amounts (in thousands) and ratios are presented in the following table.



|                                         |  |        |        |       |           |   |          |                    |        |                   |      |                   |  |       |        |  |      |  
|---------------------------------------- |  | ------ | ------ | ----- | --------- | - | -------- | ------------------ | ------ | ----------------- | ---- | ----------------- |  | ----- | ------ |  | ---- | -
|                                         |  |        |        |       |           |   |          |                    |        |                   |      | To Be Well        | 
|                                         |  |        |        |       |           |   |          |                    |        |                   |      | Capitalized Under | 
|                                         |  |        |        |       |           |   | Adequacy |                    |        | Prompt Corrective |     
|                                         |  | Actual |        |       | Purposes: |   |          | Action Provisions: |       
|                                         |  | Amount |        | Ratio |           |   | Amount   |                    | Ratio  |                   |      | Amount            |  | Ratio |       
|As of December 31, 2008:                 |  |        |        |       |           |   |          |                    |        |                   |      |                   |  |       |        |  |      |  
|Total Capital (to Risk Weighted Assets)  |  |        |        |       |           |   |          |                    |        |                   |      |                   |  |       |        |  |      |  
|Consolidated                             |  | $      | 18,398 |       | 8.2       | % |          | $                  | 17,852 |                   | 8.0  | %                 |  |       | N/A    |  | N/A  |  
|Bank                                     |  | $      | 22,327 |       | 10.0      | % |          | $                  | 17,850 |                   | 8.0  | %                 |  | $     | 22,312 |  | 10.0 | %
|Tier I Capital (to Risk Weighted Assets) |  |        |        |       |           |   |          |                    |        |                   |      |                   |  |       |        |  |      |  
|Consolidated                             |  | $      | 15,607 |       | 7.0       | % |          | $                  | 8,926  |                   | 4.0  | %                 |  |       | N/A    |  | N/A  |  
|Bank                                     |  | $      | 19,536 |       | 8.8       | % |          | $                  | 9,653  |                   | 4.0  | %                 |  | $     | 12,066 |  | 6.0  | %
|Tier I Capital (to Average Assets)       |  |        |        |       |           |   |          |                    |        |                   |      |                   |  |       |        |  |      |  
|Consolidated                             |  | $      | 15,607 |       | 6.8       | % |          | $                  | 9,199  |                   | 4.0  | %                 |  |       | N/A    |  | N/A  |  
|Bank                                     |  | $      | 19,536 |       | 8.1       | % |          | $                  | 9,653  |                   | 4.0  | %                 |  | $     | 12,066 |  | 5.0  | %
|                                         |  |        |        |       |           |  
|As of December 31, 2007:                 |  |        |        |       |           |   |          |                    |        |                   |      |                   |  |       |        |  |      |  
|Total Capital (to Risk Weighted Assets)  |  |        |        |       |           |   |          |                    |        |                   |      |                   |  |       |        |  |      |  
|Consolidated                             |  | $      | 19,012 |       | 9.6       | % |          | $                  | 15,838 |                   | 8.00 | %                 |  |       | N/A    |  | N/A  |  
|Bank                                     |  | $      | 20,000 |       | 10.1      | % |          | $                  | 15,837 |                   | 8.0  | %                 |  | $     | 19,796 |  | 10.0 | %
|Tier I Capital (to Risk Weighted Assets) |  |        |        |       |           |   |          |                    |        |                   |      |                   |  |       |        |  |      |  
|Consolidated                             |  | $      | 17,163 |       | 8.7       | % |          | $                  | 7,919  |                   | 4.0  | %                 |  |       | N/A    |  | N/A  |  
|Bank                                     |  | $      | 18,151 |       | 9.2       | % |          | $                  | 7,918  |                   | 4.0  | %                 |  | $     | 11,877 |  | 6.0  | %
|Tier I Capital (to Average Assets)       |  |        |        |       |           |   |          |                    |        |                   |      |                   |  |       |        |  |      |  
|Consolidated                             |  | $      | 17,163 |       | 8.7       | % |          | $                  | 7,220  |                   | 4.0  | %                 |  |       | N/A    |  | N/A  |  
|Bank                                     |  | $      | 18,151 |       | 9.2       | % |          | $                  | 7,917  |                   | 4.0  | %                 |  | $     | 9,896  |  | 5.0  | %



20



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NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices.
However, in many instances, there are no quoted market prices for the Companys various financial instruments. In cases where quoted market prices are not available, fair value is based on discounted cash flows or other valuation techniques.
These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. FASB
Statement No. 107, Disclosures about Fair Value of Financial Instruments, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented
may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:

Cash and due from banks and interest-bearing deposits with other banks: Fair value equals the carrying value of
such assets.

Investment securities and investment securities available for sale: Fair values for investment securities are based on bond accounting
reports.

Loans: For variable rate loans, those repricing within six months or less, fair values are based on carrying values. Fixed rate commercial loans,
other installment loans, and certain real estate mortgage loans were valued using discounted cash flows. The discount rates used to determine the present value of these loans were based on interest rates currently being charged by the Bank on
comparable loans as to credit risk term.

Deposit liabilities: The fair values of demand deposits are, as required by FASB 107, equal to the carrying value
of such deposits. Demand deposits include noninterest-bearing demand deposits, savings accounts, NOW accounts, and money market demand accounts. Discounted cash flows are used to value fixed rate term deposits. The discount rate used is based on
interest rates currently being offered by the Bank on comparable deposits as to amount and term.

Short-term borrowings: The carrying values of federal
funds purchased, securities sold under agreements to repurchase and other short-term borrowings approximate their carrying values.

FHLB and other
borrowings: The fair value of fixed rate borrowings are estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount on variable rate borrowings approximates
their fair value. The fair value of convertible FHLB borrowings is based on FHLB of Atlantas estimate.

Accrued interest: The carrying amount of
accrued interest approximates its fair value.

Off-balance sheet instruments: Loan commitments are negotiated at current market rates and are relatively
short-term in nature. Therefore, the estimated value of loan commitments approximates the fees charged.



21



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NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

The carrying amount and estimated fair values of the Companys financial instruments are as follows:



|                                                                                |  |                |         |       |   |          |  |       |         |  |   |        
|------------------------------------------------------------------------------- |  | -------------- | ------- | ----- | - | -------- |  | ----- | ------- |  | - | -------
|                                                                                |  | December 31,  
|                                                                                |  | 2008           |         | 2007 
|                                                                                |  | Carrying       |         | Fair  |   | Carrying |  | Fair 
|                                                                                |  | Amount         |         | Value |   | Amount   |  | Value
|                                                                                |  | (In Thousands)
|Financial assets:                                                               |  |                |         |       |   |          |  |       |         |  |   |        
|Cash, due from banks, interest-bearing deposits in banks and federal funds sold |  | $              | 13,450  |       | $ | 13,450   |  | $     | 10,448  |  | $ | 10,448 
|Securities                                                                      |  |                | 28,826  |       |   | 28,768   |  |       | 12,399  |  |   | 12,377 
|Loans                                                                           |  |                | 190,016 |       |   | 189,469  |  |       | 176,186 |  |   | 176,916
|Accrued interest receivable                                                     |  |                | 2,215   |       |   | 2,215    |  |       | 1,921   |  |   | 1,921  
|Financial liabilities:                                                          |  |                |         |       |   |          |  |       |         |  |   |        
|Deposits                                                                        |  |                | 221,079 |       |   | 222,120  |  |       | 180,436 |  |   | 180,669
|Other borrowings                                                                |  |                | 19,737  |       |   | 19,488   |  |       | 14,100  |  |   | 14,569 
|Accrued interest payable                                                        |  |                | 1,080   |       |   | 1,080    |  |       | 948     |  |   | 948    
|Unrecognized financial instruments-                                             |  |                |         |       |   |          |  |       |         |  |   |        
|Commitments to extend credit and standby letters of credit                      |  |                | 21,454  |       |   | 70       |  |       | 33,178  |  |   | 295    

NOTE 14. SUPPLEMENTAL FINANCIAL DATA

Components of other operating expense are as follows:



|                         |  |                          |           |      |   |          
|------------------------ |  | ------------------------ | --------- | ---- | - | ---------
|                         |  | Years Ended December 31,
|                         |  | 2008                     |           | 2007
|Data processing          |  | $                        | 204,744   |      | $ | 177,793  
|Professional services    |  |                          | 321,194   |      |   | 303,716  
|All other operating      |  |                          | 1,657,858 |      |   | 1,020,863
|                         |  |                          |           |      |   |          
|Other operating expenses |  | $                        | 2,183,796 |      | $ | 1,502,372
|                         |  |                          |           |      |   |          



22



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NOTE 15. PARENT COMPANY FINANCIAL INFORMATION

The following information presents the condensed balance sheet as of December 31, 2008 and statements of income and cash flows of Piedmont Community Bank Group, Inc. for the year ended December 31, 2008.



|                                                                                        |  |      |            |  
|--------------------------------------------------------------------------------------- |  | ---- | ---------- | -
|                                                                                        |  | 2008 |           
|Assets                                                                                  |  |      |            |  
|Cash                                                                                    |  | $    | 138,019    |  
|Investment in subsidiary                                                                |  |      | 19,997,008 |  
|Other assets                                                                            |  |      | 210,602    |  
|                                                                                        |  |      |            |  
|Total assets                                                                            |  | $    | 20,345,629 |  
|                                                                                        |  |      |            |  
|                                                                                        | 
|Liabilities                                                                             |  |      |            |  
|Note payable                                                                            |  | $    | 3,936,933  |  
|Due to bank                                                                             |  |      | 339,307    |  
|Other liabilities                                                                       |  |      | 1,414      |  
|                                                                                        |  |      |            |  
|Total liabilities                                                                       |  |      | 4,277,654  |  
|Shareholders equity                                                                    |  |      | 16,067,975 |  
|                                                                                        |  |      |            |  
|Total liabilities and shareholders equity                                              |  | $    | 20,345,629 |  
|                                                                                        |  |      |            |  
|                                                                                        | 
|Income                                                                                  |  |      |            |  
|Dividends from subsidiary                                                               |  | $    | 137,000    |  
|                                                                                        |  |      |            |  
|Total income                                                                            |  |      | 137,000    |  
|                                                                                        |  |      |            |  
|                                                                                        | 
|Expenses                                                                                |  |      |            |  
|Interest on other borrowings                                                            |  |      | 105,149    |  
|Other expense                                                                           |  |      | 372,790    |  
|                                                                                        |  |      |            |  
|Total expenses                                                                          |  |      | 477,939    |  
|                                                                                        |  |      |            |  
|                                                                                        | 
|Loss before income tax benefit and equity in undistributed income of subsidiary         |  |      | (340,939   | )
|Income tax benefit                                                                      |  |      | 199,891    |  
|                                                                                        |  |      |            |  
|Income before equity in undistributed income of subsidiary                              |  |      | (141,048   | )
|Equity in undistributed income of subsidiary                                            |  |      | (1,402,959 | )
|                                                                                        |  |      |            |  
|Net income (loss)                                                                       |  | $    | (1,544,007 | )
|                                                                                        |  |      |            |  
|                                                                                        | 
|Operating activities                                                                    |  |      |            |  
|Net income (loss)                                                                       |  | $    | (1,544,007 | )
|Adjustment to reconcile net income (loss) to net cash provided by operating activities: |  |      |            |  
|Undistributed income of subsidiary                                                      |  |      | 1,402,959  |  
|Deferred taxes                                                                          |  |      |            |  
|Increase in accrued interest payable                                                    |  |      | 6,684      |  
|Other operating activities                                                              |  |      | 147,383    |  
|                                                                                        |  |      |            |  
|Net cash provided by operating activities                                               |  |      | 13,019     |  
|                                                                                        |  |      |            |  
|                                                                                        | 
|Investing activities                                                                    |  |      |            |  
|                                                                                        | 
|Capital injection into subsidiary                                                       |  |      | (2,800,000 | )
|                                                                                        |  |      |            |  
|Net cash provided by financing activities                                               |  |      | (2,800,000 | )
|                                                                                        |  |      |            |  
|                                                                                        | 
|Financing activities                                                                    |  |      |            |  
|Proceeds from note payable                                                              |  |      | 2,925,000  |  
|                                                                                        |  |      |            |  
|Net cash provided by financing activities                                               |  |      | 2,925,000  |  
|                                                                                        |  |      |            |  
|Net increase in cash                                                                    |  |      | 138,019    |  
|Cash at beginning of period                                                             |  |      |           |  
|                                                                                        |  |      |            |  
|Cash at end of period                                                                   |  | $    | 138,019    |  
|                                                                                        |  |      |            |  



23



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NOTE 16. STOCK SPLIT

On April 19, 2007, the board of directors of Piedmont Community Bank Group, Inc. declared a 1.2 for 1 stock split payable on May 10, 2007 to shareholders of record as of April 30, 2007. As a part of the split, each
shareholder received an additional one share of common stock for each five shares of common stock owned. All per share amounts in all periods have been retroactively adjusted for this split as if it occurred in the first year presented.

NOTE 17. COMMON STOCK OFFERING

On September 20, 2007, the
Company filed a registration statement on Form SB-2 to register up to 600,000 shares of its common stock for a sale in a public offering. The rules issued by the Securities and Exchange Commission no longer permit the Company to file a registration
statement on Form SB-2. Pursuant to the guidelines set forth by the SEC on December 19, 2007 (Smaller Reporting Regulatory Relief and Simplification), the Company filed pre-effective amendments to the registration statement on Form
S-1. On January 30, 2009, the Company requested that the SEC consent to the withdrawal of the registration statement on Form S-1. No securities were sold in connection with the offering.

NOTE 18. PREFERRED STOCK OFFERING

On March 3, 2009, the Company
commenced an offering of a maximum of 160,000 shares of 12% cumulative, nonvoting series A preferred stock through a private placement. The shares are offered for $25 per share with a minimum subscription of 1,000 shares. The offering is eligible to
qualified investors under an exemption from registration contained in Section 4(2) of the Securities Act of 1933 and Rule 505 of Regulation D under the Securities Act. The offering will terminate 120 days following the date of the private
placement memorandum.



24