Forward-Looking Statements

When used in this discussion and elsewhere in this Annual Report on Form 10-K, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "intends", "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors, including regional and national economic conditions, unfavorable judicial decisions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Overview

During 2008, net interest income before provision for credit losses increased to $11,922,003 from $11,866,208 in 2007, a 0.47% increase. Total interest income increased from $17,837,256 in 2007 to $18,176,036 in 2008, a 1.90% increase. Interest expense for 2008 totaled $6,254,033, a 4.74% increase from $5,971,048 in 2007. Net income in 2008 was $403,962 compared to $2,782,141 in 2007. The decrease in net income was primarily due to a write-down of $2,816,000 taken in the third quarter on investments in three series of preferred stock issued by Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) held by the Company, as a result of the appointment of the Federal Housing Finance Agency as conservator over Fannie Mae and Freddie Mac. In 2008, the Company recorded a provision for loan losses of $1,145,649, an increase from the $50,000 provision made in 2007.

The Bank and, as a result, the Company, have not been immune to the impact of the economic downturn in the United States during 2008. While, due to conservative lending decisions, the Bank has no exposure to the credit issues affecting the sub-prime residential mortgage market, the economic slowdown resulted in the necessity of our increasing our reserve for loan losses in 2008, as noted above, primarily due to delinquency in our indirect automobile portfolio combined with adjustments we made to the risk factors in our calculation of required loan loss reserves. In addition to the Fannie Mae and Freddie Mac losses noted above, the economic downturn also resulted in the necessity of the Bank taking in our first OREO (Other Real Estate Owned) property on a defaulted mortgage since 1999. Despite the sharp economic downturn and these events, we realized net income of $403,962 for 2008, remained well capitalized and did not need to apply for any funding from the U.S. Department of Treasury's Troubled Asset Relief Program (TARP). In 2008, the Bank saw continued growth in the loan portfolio. The loan portfolio increased by $35,379,000, primarily due to increases in commercial and residential mortgage loans.

All per share amounts throughout this report have been adjusted to give retroactive effect to a 20% stock dividend paid on January 23, 2006 and to a 20% stock dividend paid on January 18, 2008.

Comparison of Results of Operations for the Years Ended December 31, 2008, 2007 and 2006

General. For the year ended December 31, 2008, the Company reported consolidated net income of $403,962 ($0.14 basic and diluted earnings per share) compared to consolidated net income of $2,782,141 ($0.93 basic and diluted earnings per share) for the year ended December 31, 2007 and consolidated net income of $2,720,045 ($0.92 basic and diluted earnings per share) for the year ended December 31, 2006. The decrease in consolidated net income was due to the write down on Fannie Mae and Freddie Mac preferred stock and the increase in the provision for loan losses.

Net Interest Income. The primary component of the Company's net income is its net interest income, which is the difference between income earned on assets and interest paid on the deposits and borrowings used to fund income producing assets. Net interest income is determined by the spread between the yields earned on the Company's interest-earning assets and the rates paid on interest-bearing liabilities as well as the relative amounts of such assets and liabilities. Net interest income, divided by average interest-earning assets, represents the Company's net interest margin.

Net interest income is affected by the mix of loans in the Bank's loan portfolio. Currently a majority of the Bank's loans are residential and commercial mortgage loans secured by real estate and indirect automobile loans secured by automobiles.

In 2008, the Bank reduced its portfolio of above market rate savings products and continued to direct its efforts to increase higher yielding commercial loans. This strategy produced significant increases in the Bank's commercial loan portfolio. Because mortgage lending decisions are based on conservative lending policies the Company has no exposure to the credit issues affecting the sub-prime residential mortgage market. At the same time, we have reduced our exposure to lower yielding indirect automobile loans.

Consolidated net interest income for the year ended December 31, 2008 was $11,922,003 compared to $11,866,208 for the year ended December 31, 2007 and $11,821,431 for the year ended December 31, 2006. The $55,795 increase for the most recent year was primarily due to an increase in loan income partially offset by decreases in interest income on securities and increases in interest expense on long term borrowings. The $44,777 increase for 2007 compared to 2006 was primarily due to an increase in loan income partially offset by decreases in interest income on securities and increases in interest expense on deposits, short term borrowings and long term borrowings. The interest income, net of tax, for 2008 was $12,594,339, a $28,869 or 0.23% decrease from the after tax net interest income for 2007, which was $12,623,208, a $117,935 or 0.92% decrease from the $12,741,143 after tax net interest income for 2006.

Interest expense increased from $5,971,048 in 2007 to $6,254,033 in 2008, a $282,985 or a 4.74% increase, primarily due to increased borrowings used to fund the outflow from maturing higher rate 15-month certificates of deposit and IRAs and to fund loan growth. Interest expense increased from $5,833,765 in 2006 to $5,971,048 in 2007, a $137,283 or a 2.35% increase, primarily due to increased borrowings used to fund the outflow from maturing higher rate 15-month certificates of deposit and IRAs and the interest paid on the 15-month certificates of deposit and IRAs. Net interest margin for the year ended December 31, 2008 was 4.31% compared to 4.39% and 4.31% for the years ended December 31, 2007 and 2006, respectively.

The following table allocates changes in income and expense attributable to the Company's interest-earning assets and interest-bearing liabilities for the periods indicated between changes due to changes in rate and changes in volume. Changes due to rate/volume are allocated to changes due to volume.

Year Ended December 31, 2008 VS. 2007 2007 VS. 2006

                                            Change Due To:                              Change Due To:
                         Increase/                                   Increase/
                         Decrease         Rate         Volume        Decrease         Rate         Volume
                                                          (In Thousands)
ASSETS:
Interest-earning
assets:
Federal funds sold      $      (134 )   $     (18 )   $    (116 )   $       (61 )   $       -     $     (61 )
Interest-bearing
deposits                         31          (207 )         238            (134 )           7          (141 )

Investment
securities:
U.S. Treasury
securities,
obligations of U.S.
government agencies
and mortgage-backed
securities                     (591 )           7          (598 )          (793 )          14          (807 )
Obligations of states
and political
subdivisions(1)                 (75 )          43          (118 )          (307 )         (20 )        (287 )
All other investment
securities                      (58 )           1           (59 )          (124 )           1          (125 )
Total investment
securities                     (724 )          51          (775 )        (1,224 )          (5 )      (1,219 )

Loans, net of
unearned income:
Demand, time and
lease                           (58 )        (179 )         121              (8 )          17           (25 )
Mortgage and
construction                  1,749           152         1,597             719          (265 )         984
Installment and
credit card                    (183 )         253          (436 )           406           504           (98 )
Total gross loans(2)          1,508           226         1,282           1,117           256           861
Allowance for credit
losses                            -             -             -               -             -             -
Total net loans               1,508           226         1,282           1,117           256           861
Total
interest-earning
assets                  $       681     $      52     $     629     $      (302 )   $     258     $    (560 )

LIABILITIES:
Interest-bearing
deposits:
Savings and NOW         $       (79 )   $     (69 )   $     (10 )   $       (11 )   $       -     $     (11 )
Money market                    (41 )         (27 )         (14 )            (3 )           -            (3 )
Other time deposits              76          (209 )         285              57           298          (241 )
Total
interest-bearing
deposits                        (44 )        (305 )         261              43           298          (255 )
Non-interest-bearing
deposits                          -             -             -               -             -             -
Borrowed funds                  328          (577 )         905              94           (71 )         165
Total
interest-bearing
liabilities             $       284     $    (882 )   $   1,166     $       137     $     227     $     (90 )

(1) Tax equivalent basis.

(2) Non-accrual loans included in average balances.

The following table provides information for the designated periods with respect to the average balances, income and expense and annualized yields and costs associated with various categories of interest-earning assets and interest-bearing liabilities.

                                                                        Year Ended December 31,
                                       2008                                      2007                                      2006
                        Average                     Yield/        Average                     Yield/        Average                     Yield/
                        Balance      Interest        Cost         Balance      Interest        Cost         Balance      Interest        Cost

                                                                        (Dollars In Thousands)
ASSETS:
Interest-earning
assets:
Federal funds sold     $     433     $       5          1.15 %   $   2,665     $     139          5.22 %   $   3,848     $     200          5.20 %
Interest-bearing
deposits                   6,560           130          1.98         1,929            99          5.13         4,901           233          4.76

Investment
securities:
U.S. Treasury
securities,
obligations of U.S.
government agencies
and mortgage-backed
securities                38,532         1,963          5.09        50,392         2,554          5.07        66,501         3,347          5.04
Obligations of
states and political
subdivisions(1)           32,421         2,134          6.58        34,288         2,209          6.45        38,723         2,516          6.50
All other investment
securities                 2,168           193          8.90         2,839           251          8.84         4,257           375          8.81
Total investment
securities                73,121         4,290          5.87        87,519         5,014          5.73       109,481         6,238          5.70

Loans, net of
unearned income:
Demand, time and
lease                      6,082           390          6.41         4,788           448          9.36         5,064           456          9.01
Mortgage and
construction             151,656         9,775          6.45       126,391         8,026          6.35       111,426         7,307          6.56
Installment and
credit card               61,747         4,291          6.95        68,453         4,474          6.54        70,216         4,068          5.80
Total gross loans(2)     219,485        14,456          6.59       199,632        12,948          6.49       186,706        11,831          6.34
Allowance for credit
losses                    (1,479 )                                  (1,766 )                                  (2,071 )
Total net loans          218,006        14,456          6.63       197,866        12,948          6.54       184,635        11,831          6.41
Total
interest-earning
assets                   298,120        18,881          6.33       289,979        18,200          6.28       302,865        18,502          6.11
Cash and due from
banks                      7,891                                     8,862                                     9,493
Other assets              14,740                                    13,661                                    13,045
Total assets           $ 320,751                                 $ 312,502                                 $ 325,403

LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Interest-bearing
deposits:
Savings and NOW        $  69,468           184          0.26 %   $  72,831           263          0.36 %   $  77,761           274          0.36 %
Money market              13,751            62          0.45        15,918           103          0.65        16,415           106          0.65
Other time deposits      110,049         4,534          4.12       103,491         4,458          4.31       109,499         4,401          4.02
Total
interest-bearing
deposits                 193,268         4,780          2.47       192,240         4,824          2.51       203,675         4,781          2.35
Short-term borrowed
funds                      2,209            51          2.31         2,294           119          5.19         1,603            81          5.06
Long-term borrowed
funds                     26,287         1,424          5.42        13,949         1,028          7.37        12,309           972          7.90
Total
interest-bearing
liabilities              221,764         6,255          2.82       208,483         5,971          2.86       217,587         5,834          2.69

Non-interest-bearing
deposits                  68,340                                    73,415                                    79,199
Other liabilities          1,806                                     1,609                                     1,407
Stockholders' equity      28,841                                    28,995                                    27,210
Total liabilities
and equity             $ 320,751                                 $ 312,502                                 $ 325,403
Net interest income                  $ $12,626                                 $ $12,229                                 $ $12,668
Net interest spread                                     3.51 %                                    3.42 %                                    3.42 %
Net interest margin                                     4.31 %                                    4.39 %                                    4.31 %

Provision for Credit Losses. During the year ended December 31, 2008, the Company made a provision of $1,145,649 for credit losses, compared to a provision of $50,000 and $62,000 for credit losses for the years ended December 31, 2007 and 2006, respectively. The increase in the provision for credit losses for 2008 was due to net charge offs on installment loans of $746,000 (primarily made up of charge offs on indirect automobile loans of $719,000) and adjustments to the risk factors for our loan loss reserve calculation as economic conditions deteriorated. At December 31, 2008, the allowance for credit losses equaled 224.42% of non-accrual and past due loans compared to 188.27% and 3,116.95% at December 31, 2007 and 2006, respectively. During the year ended December 31, 2008, the Company recorded net charge-offs of $728,000 compared to $285,000 and $424,256 in net charge-offs during the years ended December 31, 2007 and 2006, respectively.

Other Income. Other income includes service charges on deposit accounts, other fees and commissions, net gains on investment securities, and income on life insurance. Other income decreased from $2,157,292 in 2007 to $2,050,587 in 2008, a $106,705, or 4.95% decrease. The decrease was primarily due to a decrease in service charges and other fees and commissions, partially offset by gains on investment securities. Other income decreased from $2,244,390 in 2006 to $2,157,292 in 2007, an $87,098, or 3.88% decrease. The decrease was primarily due to a decrease in gains on investment securities with lesser decreases in service charges and other fees and commissions.

Other Expenses. Other expenses increased from $10,433,019 in 2007 to $13,102,341 in 2008, a $2,669,322 or 25.59% increase. This increase, which consists of non-interest operating expenses, was primarily due to the write-down of one Fannie Mae and two Freddie Mac securities in the amount of $2,816,000. Lesser increases occurred in salaries and wages and occupancy costs, partially offset by decreases in employee benefits and furniture and equipment. Other expenses decreased from $10,596,661 in 2006 to $10,433,019 in 2007, a $163,190 or 1.55% decrease. This decrease, which consists of non-interest operating expenses, was primarily due to a decrease in salaries, employee benefits, and furniture and equipment costs partially offset by an increase in occupancy and other miscellaneous expenses.

Income Taxes. During the year ended December 31, 2008, the Company recorded income tax benefit of $679,362, compared to income tax expense of $758,340 for the year ended December 31, 2007. This decrease was primarily due to a tax benefit of $1,110,770 from the write-down of $2,816,000 for the Fannie Mae and Freddie Mac securities. In addition to this, the amount of tax exempt income on municipal securities decreased and there was a larger amount contributed to provision for credit losses. During the year ended December 31, 2007, the Company recorded income tax expense of $758,340, compared to income tax expense of $687,115 for the year ended December 31, 2006. This increase was primarily due to less tax exempt income on municipal securities.

Comparison of Financial Condition at December 31, 2008, 2007 and 2006

The Company's total assets increased to $332,502,215 at December 31, 2008 from $307,273,868 at December 31, 2007. The Company's total assets decreased to $307,273,868 at December 31, 2007 from $317,745,601 at December 31, 2006.

The Company's net loan portfolio increased to $235,132,621 at December 31, 2008 compared to $199,753,132 at December 31, 2007 and $193,336,604 at December 31, 2006. The increase in the loan portfolio during the 2008 period is primarily due to an increase in refinanced mortgage loans, commercial and residential construction loans, demand commercial secured loans and mortgage participations purchased. They were partially offset by a decline in indirect automobile loans and additional mortgage participations sold. The increase in the loan portfolio during the 2007 period is primarily due to an increase in refinanced mortgage loans, commercial and residential construction loans, personal and commercial secured installment loans. They were partially offset by a decline in indirect automobile loans and mortgage participations purchased.

During 2008, the Company's total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $57,948,645, a $19,917,368 or 25.58%, decrease from $77,866,013 at December 31, 2007. This decrease is primarily attributable to a decrease in mortgage backed securities. During 2007, the Company's total investment securities portfolio (including both investment securities available for sale and investment securities held to maturity) totaled $77,866,013, an $18,628,646 or 19.31%, decrease from $96,494,659 at December 31, 2006. This decrease is primarily attributable to a decrease in mortgage backed securities and government agencies.

Deposits as of December 31, 2008 totaled $269,767,598, an increase of $16,850,832, or 6.66%, from the $252,916,766 total as of December 31, 2007. Deposits as of December 31, 2007 totaled $252,916,766, a decrease of $21,916,691, or 7.98%, from the $274,833,457 total as of December 31, 2006. Demand deposits as of December 31, 2008 totaled $63,538,759, a $5,221,614, or 7.59%, decrease from $68,760,373 at December 31, 2007. NOW and Super NOW accounts, as of December 31, 2008, decreased by $2,075,226, or 8.96% from their 2007 level to $21,079,314. Money market accounts decreased by $184,175, or 1.42%, from their 2007 level, to total $12,764,167 at December 31, 2008. Savings deposits decreased by $1,579,894, or 3.33%, from their 2007 level, to $45,801,719 at December 31, 2008. Time deposits over $100,000 totaled $37,643,347 on December 31, 2008, an increase of $9,759,573, or 35.00% from December 31, 2007. Other time deposits (made up of certificates of deposit less than $100,000 and individual retirement accounts) totaled $88,940,292 on December 31, 2008, a $16,153,569 or 22.19% increase from December 31, 2007.

Total stockholders' equity as of December 31, 2008 decreased by $1,827,902, or 6.15%, from the 2007 period. The decrease was attributed to an increase in accumulated other comprehensive loss, net of tax, and the excess of the cash dividends paid and common stock shares repurchased and retired over the net income for 2008. Total stockholders' equity as of December 31, 2007 increased by $1,535,641, or 5.45%, from the 2006 period. The increase was attributed to the excess of net income over the cash dividends paid and partially offset by an increase in accumulated other comprehensive loss, net of tax.

Off-Balance Sheet Arrangements

Off-Balance Sheet Arrangements. The Bank is a party to financial instruments 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, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements.

Loan commitments and lines of credit are agreements to lend to customers as long as there is no violation of any conditions of the contracts. Loan commitments generally have interest rates fixed at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Many of the loan commitments and lines of credit are expected to expire without being drawn upon; accordingly, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral or other security obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include deposits held in financial institutions, U.S. Treasury securities, other marketable securities, accounts receivable, inventory, property and equipment, personal residences, income-producing commercial properties, and land under development. Personal guarantees are also obtained to provide added security for certain commitments.

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 guarantee the installation of real property improvements and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral and obtains personal guarantees supporting those commitments for which collateral or other securities is deemed necessary.

The Bank's exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. As of December 31, 2008, the Bank has accrued $200,000 for unfunded commitments related to these financial instruments with off balance sheet risk, which is included in other liabilities.

Market Risk Management

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates or equity pricing. The Company's principal market risk is interest rate risk that arises from its lending, investing and deposit taking activities. The Company's profitability is dependent on the Bank's net interest income. Interest rate risk can significantly affect net interest income to the degree that interest bearing liabilities mature or reprice at different intervals than interest earning assets. The Bank's Asset/Liability and Risk Management Committee oversees the management of interest rate risk. The primary purpose of the committee is to manage the exposure of net interest margins to unexpected changes due to interest rate fluctuations. The Company does not utilize derivative financial or commodity instruments or hedging strategies in its management of interest rate risk. The primary tool used by the committee to monitor interest rate risk is a "gap" report which measures the dollar difference between the amount of interest bearing assets and interest bearing liabilities subject to repricing within a given time period. These efforts affect the loan pricing and deposit rate policies of the Company as well as the asset mix, volume guidelines, and liquidity and capital planning.

The following table sets forth the Bank's interest-rate sensitivity at December 31, 2008.

                                                    Over 3 To            Over 1             Over 5
                                   0-3 Months       12 Months        Through 5 Years         Years         Total
                                                               (Dollars In Thousands)
Assets:
Cash and due from banks           $          -      $        -      $               -      $       -     $  14,844
. . .