The following is a discussion of our financial condition at December 31, 2008 and 2007 and our results of operations for the years ended December 31, 2008, 2007, and 2006. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein. In addition, this discussion and analysis contains forward-looking statements, so you should refer to "Special Cautionary Notice Regarding Forward-Looking Statements."

Certain amounts reported in prior periods have been reclassified to conform to the current-period presentation. These reclassifications had no effect on the Company's previously reported stockholders' equity or net earnings during the periods involved.

OVERVIEW

The Company is a bank holding company established in 1984, and incorporated in 1990 under the laws of the State of Delaware. The Bank, the Company's principal subsidiary, is an Alabama state-chartered bank that is a member of the Federal Reserve System and has operated continuously since 1907. Both the Company and the Bank are headquartered in Auburn, Alabama. The Bank conducts its business in East Alabama, including Lee County and surrounding areas. The Bank operates full-service branches in Auburn, Opelika, Hurtsboro and Notasulga, Alabama. In-store branches are located in the Auburn and Opelika Kroger stores, as well as Wal-Mart SuperCenter stores in Auburn, Opelika and Phenix City, Alabama. Mortgage loan offices are located in Phenix City, Valley, and Mountain Brook, Alabama.

Summary of Results of Operations

                                                                       Years ended December 31


 (Dollars in thousands, except per share amounts)       2008           2007           2006

 Net interest income (GAAP)                         $     18,639   $     16,875   $     15,980
 Tax-equivalent adjustment                                 1,361          1,123          1,033
Net interest income (a)                                   20,000         17,998         17,013
 Noninterest income                                        3,433          4,666          4,448
Total revenue (a)                                         23,433         22,664         21,461
 Provision for loan losses                                   870             23            330
 Noninterest expense                                      12,542         12,360         11,201
 Income tax expense                                        2,023          2,240          2,312
 Tax-equivalent adjustment                                 1,361          1,123          1,033

Net earnings                                        $      6,637   $      6,918   $      6,585


 Basic and diluted earnings per share               $       1.81   $       1.86   $       1.74

(a) Tax-equivalent. See "Table 1 - Explanation of Non-GAAP Financial Measures".

Financial Summary

The Company's net earnings were $6.6 million for the full year 2008, compared to $6.9 million in 2007. Basic and diluted earnings per share were down 3% to $1.81 per share.

Total tax-equivalent net interest income increased 11% to $20.0 million for 2008 compared to $18.0 million for 2007, reflecting strong balance sheet growth. Average loans and loans held for sale increased 14% in 2008 from 2007 to $347.2 million. Average total deposits increased 6% in 2008 from 2007 to $520.2 million.

Credit quality continued to compare favorably among industry peers, with an annualized net charge-off

ratio of 0.17% for the full year 2008. Nonperforming assets were 1.29% and 0.17% of total loans and foreclosed properties at December 31, 2008 and 2007, respectively. The increase in nonperforming assets from December 31, 2007 is primarily due to one purchased loan participation. The purchased loan participation represents approximately $4.3 million of the $4.8 million in nonperforming assets at December 31, 2008. Excluding the effects of this loan participation, nonperforming assets were only 0.12% of total loans and foreclosed properties. The provision for loan losses increased $847 thousand in 2008 from 2007 due to an increase in net charge-offs and growth in the loan portfolio.

Noninterest income decreased $1.2 million, or 26%, in 2008 from 2007. This decrease was primarily due to a non-cash charge of $1.5 million due to other-than-temporary impairment. The other-than-temporary impairment charge related to the valuation of a pooled trust preferred security held in the Company's portfolio.

Noninterest expense increased 1%, or $182, thousand in 2008 from 2007. The slight increase in noninterest expense during 2008 was primarily due to normal increases in salaries and benefits expense.

In 2008, the Company paid cash dividends of $2.7 million, or $0.74 per share, and the dividend payout ratio was 40.88%. The Company's balance sheet remains strong and well capitalized under regulatory guidelines with a Tier 1 capital ratio of 14.23% and a leverage capital ratio of 8.75% at December 31, 2008.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. generally accepted accounting principles and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses and fair value measurements, were critical to the determination of our financial position and results of operations. Other policies also require subjective judgment and assumptions and may accordingly impact our financial position and results of operations.

Allowance for loan losses

Our management assesses the adequacy of the allowance for loan losses prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors. This evaluation is inherently subjective as it requires various material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a "confirming event" has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, is deemed to be uncollectible.

Larger balance commercial and commercial real estate loans are impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement.

An impairment allowance is recognized if the present value of expected future cash flows from the loan is less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net deferred loan fees or costs and unamortized premium or discount, and does not reflect any direct write-down of the loan). The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan's effective

interest rate, or if the loan is collateral dependent, impairment measurement is based on the fair value of the collateral, less estimated disposal costs. Income is recognized on impaired loans on a cash basis.

The allowance for loan losses is maintained at levels management believes should be adequate to absorb our estimate of probable losses in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process. We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, analysis and judgments from our independent loan reviewer, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process. We incorporate loan review results in the determination of whether or not it is probable that we will be able to collect all amounts due according to the contractual terms of a loan.

In addition, our regulators, as an integral part of their examination process, will periodically review the Company's allowance for loan losses, and may require the Company to make additional provisions to the allowance for loan losses based on their judgment about information available to them at the time of their examinations.

Fair Value Determination

GAAP requires management to value and present at fair value certain of the Company's assets and liabilities, including investments classified as available-for-sale and all derivatives. In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. On January 1, 2008, the Company adopted the provisions of SFAS No. 157. For more information regarding the Company's adoption of SFAS No. 157, please refer to "Note 15 to the Consolidated Financial Statements".

Fair values are based on market prices when available. However, some of the Company's transactions lack an available trading market characterized by frequent transactions between a willing buyer and seller. In these cases, such values are estimated using pricing models that use discounted cash flows and other pricing techniques. Pricing models and their underlying assumptions are based upon management's best estimates for appropriate discount rates, default rates, prepayments, market volatility and other factors, taking into account current observable market data and experience.

These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the related income and expense. As such, the use of different models and assumptions, as well as changes in market conditions, could result in materially different net earnings and retained earnings results.

Average Balance Sheet and Interest Rates



                                                                                                      Years ended December 31


                                            2008                             2007                              2006

                                    Average        Yield/            Average        Yield/              Average       Yield/
 (Dollars in thousands)             Balance         Rate             Balance         Rate               Balance        Rate
 Loans and loans held for sale   $     347,176       6.69%        $     304,389       7.98%          $     286,613       7.78%
 Securities - taxable                  258,160       5.11%              242,826       4.96%                241,298       4.51%
 Securities - tax-exempt                62,801       6.37%               51,995       6.36%                 47,748       6.37%

Total securities                       320,961       5.36%              294,821       5.21%                289,046       4.82%
 Federal funds sold                      3,197       1.91%                5,539       4.98%                  7,321       4.99%
 Interest bearing bank
deposits                                   511       2.74%                  693       4.62%                  1,264       5.06%

Total interest-earning assets          671,845       6.03%              605,442       6.60%                584,244       6.27%

 Deposits:
NOW                                     75,461       2.08%               57,532       2.26%                 65,029       2.45%
Savings and money market               103,379       1.76%              143,587       3.65%                142,610       3.67%
Certificates of deposits less
than $100,000                          110,592       4.23%               85,831       5.33%                 84,227       4.55%
Certificates of deposits and
other time deposits of
$100,000 or more                       157,830       4.44%              133,466       4.45%                104,446       3.87%

Total interest-bearing
deposits                               447,262       3.37%              420,416       4.06%                396,312       3.71%
 Short-term borrowings                  16,604       1.95%               12,727       4.72%                  7,502       5.48%
 Long-term debt                        123,108       4.14%               93,278       4.60%                102,848       4.40%

Total interest-bearing
liabilities                            586,974       3.49%              526,421       4.17%                506,662       3.88%

 Net interest income and
margin (a)                       $      20,000       2.98%        $      17,998        2.97%         $      17,013       2.91%

(a) Tax-equivalent. See "Table 1- Explanation of Non-GAAP Financial Measures".

RESULTS OF OPERATIONS

Net Interest Income and Margin

2008 vs. 2007 comparison

Tax-equivalent net interest income increased 11% in 2008 from 2007 due to growth in the loan portfolio. Net interest margin increased 1 basis point to 2.98%.

The tax-equivalent yield on total interest earning assets decreased 57 basis points in 2008 from 2007 to 6.03%. This decrease was comprised of a 129 basis point decrease in the yield on loans and loans held for sale to 6.69%, which was offset by a 15 basis point increase in the tax-equivalent yield on total securities to 5.36%.

The cost of total interest-bearing liabilities decreased 68 basis points in 2008 from 2007, to 3.49%. This decrease was comprised of a 69 basis point increase in the cost of total interest-bearing deposits to 3.37%, a 277 basis point decrease in the cost of short-term borrowings to 1.95% and a 46 basis point decrease in the cost of long-term debt to 4.14%.

2007 vs. 2006 comparison

Tax-equivalent net interest income increased 6% in 2007 from 2006 due to growth in the loan portfolio. Net interest margin increased 6 basis points to 2.97%.

The tax-equivalent yield on total interest earning assets increased 33 basis points in 2007 from 2006 to 6.60%. This increase was comprised of a 20 basis point increase in the yield on loans and loans held for sale to 7.98% and a 39 basis point increase in the tax-equivalent yield on total securities to 5.21%.

The cost of total interest-bearing liabilities increased 29 basis points in 2007 from 2006, to 4.17%. This increase was comprised of a 35 basis point increase in the cost of total interest-bearing deposits to 4.06%, a 76

basis point decrease in the cost of short-term borrowings to 4.72% and a 20 basis point increase in the cost of long-term debt to 4.60%.

Noninterest Income



                                                               Years ended December 31


    (Dollars in thousands)                        2008            2007            2006

   Service charges on deposit accounts   $       1,252   $       1,302   $       1,387
   Servicing fees                                  319             339             375
   Gain on sale of loans held for sale             606             626             649
   Bank-owned life insurance                       470             547             452
   Securities (losses) gains, net              (1,168)             253              10
   Other                                         1,954           1,599           1,575
   Total noninterest income              $       3,433   $       4,666   $       4,448

The major components of noninterest income are service charges on deposit accounts, servicing fees, gain on sale of loans held for sale, income from bank-owned life insurance, securities (losses) gains, net, and other noninterest income.

2008 vs. 2007 comparison

Noninterest income decreased 26%, or $1.2 million, in 2008 compared to 2007. This decrease was primarily due to a non-cash charge of $1.5 million due to other-than-temporary impairment recorded in 2008. The other-than-temporary impairment charge related to the valuation of a pooled trust preferred security held in the Company's portfolio. Other noninterest income for the year ended December 31, 2008 included a $1.1 million gain related to the sale of certain real property, net of a $452 thousand pre-tax charge related to the correction of an accounting error in prior periods. Information concerning the correction of an accounting error is included in "Note 1 to the Consolidated Financial Statements."

2007 vs. 2006 comparison

Noninterest income increased 5%, or $218 thousand, in 2007 compared to 2006. This increase was driven by the Company's decision to sell $21.1 million in securities available-for-sale, generating gross gains of $227 thousand. Other changes in the components of noninterest income included an increase of $95 thousand in income from bank-owned life insurance, offset by a decrease of $85 thousand in service charges on deposit accounts.

Noninterest Expense



                                                               Years ended December 31


    (Dollars in thousands)                        2008            2007            2006

   Salaries and benefits                 $       7,278   $       7,110   $       6,714
   Net occupancy and equipment                   1,314           1,267           1,159
   Professional fees                               511             621             476
   Loss on prepayment of FHLB advances            -                313            -
   Other                                         3,439           3,049           2,852
   Total noninterest expense             $      12,542   $      12,360   $      11,201

The major components of noninterest expense are salaries and benefits, net occupancy and equipment, professional fees, loss on prepayment of FHLB advances, and other noninterest expense.

2008 vs. 2007 comparison

Noninterest expense increased 1%, or $182 thousand, in 2008 from 2007. Salaries and benefits expense increased $168 thousand during 2008 due to normal increases in salaries and benefits. Other noninterest expense increased by $390 thousand in 2008 due to various factors, including increases in FDIC insurance

assessments as a result of the expiration of the remainder of our one-time FDIC insurance credit in 2008. These increases were offset by a decrease in the loss on prepayment penalties of Federal Home Loan Bank advances of $313 thousand, which was incurred in 2007.

2007 vs. 2006 comparison

Noninterest expense increased 10%, or $1.2 million, in 2007 compared to 2006. This increase was primarily impacted by the Company's decision to prepay $10.0 million of higher cost Federal Home Loan Bank ("FHLB") advances and increases in salaries and benefits and professional fees expense. The prepayment of the FHLB advances resulted in a charge of $313 thousand. Salaries and benefits increased $396 thousand during 2007, due to normal increases in salaries and benefits costs, increases in commissions related to mortgage origination activity, and the hiring of additional mortgage originators in our loan production offices. Professional fees increased $145 thousand during 2007 due to increased legal fees and costs associated with regulatory compliance.

Income Tax Expense

2008 vs. 2007 comparison

Income tax expense was $2.0 million in 2008, compared to $2.2 million in 2007. The Company's effective tax rate decreased to 23.36% in 2008, compared to 24.46% in 2007. The decrease in the Company's effective tax rate in 2008 was primarily driven by a decrease in earnings before taxes and an increase in tax-exempt interest income when compared to 2007.

2007 vs. 2006 comparison

Income tax expense was $2.2 million in 2007, compared to $2.3 million in 2006. Although the decrease in income tax expense was not significant, the Company's effective tax rate decreased to 24.46% in 2007 compared to 25.99% in 2006. The decrease in the Company's effective tax rate was primarily driven by the recognition of previously unrecognized tax benefits upon settlement of an uncertain tax position related to state income tax matters.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $302.7 million and $318.4 million as of December 31, 2008 and 2007, respectively. The decrease from December 31, 2007 was primarily due to proceeds from maturities and paydowns funding loan growth. Unrealized net gains on securities available-for-sale were $1.0 million as of December 31, 2008 compared to unrealized net losses of $0.7 million as of December 31, 2007. The increase in unrealized net gains (losses) of $1.7 million from December 31, 2007 was due to changes in interest rates.

The average yields earned on total securities were 5.36% in 2008 and 5.21% in 2007. Information concerning the maturity distribution and the weighted average yields for investments in the securities portfolio as of December 31, 2008 and 2007 is included in "Note 2 to the Consolidated Financial Statements."

Loans



                                                                                                   December 31


(Dollars in thousands)                            2008          2007          2006          2005          2004

 Commercial, financial
and agricultural                         $      63,338        62,478        52,923        51,784        50,075
 Leases - commercial                               341           486           761         1,488         5,397
 Real estate - construction:
Commercial                                       3,019         7,901         4,684         2,039           945
Residential                                     10,151        11,370         9,912         8,832         5,426
 Real estate - mortgage:
Commercial                                     210,353       161,703       142,092       148,118       136,037
Residential                                     69,736        67,246        62,596        59,757        42,545
 Consumer installment                           12,481        11,539         9,349        10,334        11,021
Total loans                                    369,419       322,723       282,317       282,352       251,446

 Less: unearned income                           (257)         (312)         (334)         (293)         (317)

Loans, net of unearned income            $     369,162       322,411       281,983       282,059       251,129

Total loans, net of unearned income were $369.2 million as of December 31, 2008, an increase of $46.8 million or 14% from $322.4 million at December 31, 2007. Growth in commercial real estate mortgage loans was the primary driver of the increase. As of December 31, 2008, commercial real estate mortgage loans increased $48.7 million from December 31, 2007.

Three loan categories represented the majority of the loan portfolio as of December 31, 2008. Commercial real estate mortgage loans represented 57%, residential real estate mortgage loans represented 19% and commercial, financial and agricultural loans represented 17% of the Bank's total loans at December 31, 2008. The average yield earned on loans and loans held for sale was 6.69% in 2008 and 7.98% in 2007. See "Table 7 - Loan Maturities and Sensitivities to Changes in Interest Rates" for additional information.

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level that management deems appropriate to cover the probable losses in the loan portfolio. As of December 31, 2008 and 2007, the allowance for loan losses was $4.4 million and $4.1 million, respectively, which management deemed to be adequate at each of the respective dates. The judgments and estimates associated with the determination of the allowance for loan losses are described under "CRITICAL ACCOUNTING POLICIES" above.

We periodically analyze our loan portfolio with respect to our commercial borrowers' industries to determine if a concentration of credit risk exists to any one or more industries. We have moderate credit exposures arising from loans outstanding to residential and commercial builders, lessors of residential and commercial properties, and religious and professional organizations. We evaluate these exposures in connection with our assessment of our allowance for loan losses.

A summary of changes in the allowance for loan losses for each of the years in the five year period ended December 31, 2007, is presented below.

                                                                                      Years ended December 31


 (Dollars in thousands)                        2008          2007          2006          2005            2004

 Allowance for loan losses:

 Balance at beginning of period         $     4,105         4,044         3,843         3,456           4,313
 Charge-offs:
Commercial, financial and agricutural         (454)          (62)          (37)          (39)           (215)
Real estate                                   (153)         (143)         (106)         (124)         (1,507)
Consumer                                       (98)          (45)          (46)         (193)            (44)
Total charge-offs                             (705)         (250)         (189)         (356)         (1,766)
 Recoveries:
. . .