Killbuck Bancshares (KLIB) 10-K 2005 FY Annual report

EXHIBIT 13

Killbuck Bancshares, Inc.

Corporate Profile

Killbuck Bancshares, Inc. (the “Company”) was incorporated under the laws of the State of Ohio on November 29, 1991 at the direction of management of the Bank, for the purpose of becoming a bank holding company by acquiring all of the outstanding shares of The Killbuck Savings Bank Company. In November 1992, the Company became the sole shareholder of the Bank. The Bank carries on business under the name “The Killbuck Savings Bank Company.” The principal office of the Company is located at 165 N. Main Street, Killbuck, Ohio.

The Killbuck Savings Bank Company was established under the banking laws of the State of Ohio in September of 1900. The Bank is headquartered in Killbuck, Ohio, which is located in the northeast portion of Ohio, in Holmes County. The Bank is insured by the Federal Deposit Insurance Corporation, and is regulated by the Ohio Division of Financial Institutions and the Board of Governors of the Federal Reserve System.

The Bank provides customary retail and commercial banking services to its customers, including checking and savings accounts, Health Savings Accounts (HSA), time deposits, interest-bearing accounts, internet banking, bill payment, safe deposit facilities, real estate mortgage loans and consumer loans. The Bank also makes secured and unsecured commercial loans.

Stock Market Information

There is no established public trading market for our common stock and our shares are not listed on any exchange. Sale price information is based on information reported to us by individual buyers and sellers of our stock. The following table summarizes the high and low prices and dividend information for 2005 and 2004. Cash dividends are paid on a semi-annual basis.

Quarter Ended		High		Low		Cash Dividends Paid
2005	March 31	$	98.75	$	97.64		N/A
	June 30		100.06		98.85	$	1.05
	September 30		102.44		100.80		N/A
	December 31		103.45		102.44	$	1.15
2004	March 31	$	95.00	$	95.00		N/A
	June 30		95.00		95.00	$	.95
	September 30		96.69		95.00		N/A
	December 31		97.38		96.38	$	1.00

At December 31, 2005, the Company had approximately 1,023 shareholders of record.

Selected Financial Data

The following table sets forth general information and ratios of the Company at the dates indicated (in thousands except per share data and shares).

	Year Ended December 31,
	2005			2004			2003			2002			2001
For The Year:
Total interest income	$	16,618		$	14,033		$	14,283		$	16,057		$	19,025
Total interest expense		4,169			3,264			4,017			5,926			9,237
Net interest income		12,449			10,769			10,266			10,131			9,788
Provision for loan losses		377			225			390			210			263
Net interest income after provision for loan losses		12,072			10,544			9,876			9,921			9,525
Total other income		1,265			1,015			1,120			873			730
Total other expense		7,613			7,158			7,045			6,642			6,407
Income before income taxes		5,724			4,401			3,951			4,152			3,848
Income tax expense		1,513			982			742			934			903
Net income	$	4,211		$	3,419		$	3,209		$	3,218		$	2,945
Per share data
Net earnings	$	6.44		$	5.16		$	4.75		$	4.68		$	4.23
Dividends	$	2.20		$	1.95		$	1.85		$	1.75		$	1.60
Book value (at period end)	$	57.20		$	53.78		$	51.24		$	50.03		$	47.65
Average no. of shares outstanding		653,996			662,130			676,133			686,739			696,017
Year-end balances:
Total loans	$	208,901		$	217,173		$	201,697		$	175,157		$	152,158
Securities		45,078			45,769			58,211			80,626			91,223
Total assets		298,050			293,867			284,139			283,174			281,258
Deposits		250,349			247,349			241,724			239,039			237,971
Borrowings		9,599			10,575			7,810			9,198			9,522
Shareholders’ equity		37,049			35,359			34,062			34,204			33,037
Significant ratios:
Return on average assets		1.44	%		1.18	%		1.13	%		1.15	%		1.10	%
Return on average equity		12.24			10.26			9.77			10.10			9.34
Dividends per share to net income per share		34.16			37.72			38.95			37.31			37.83
Average equity to average assets		11.79			11.55			11.53			11.36			11.75
Loans to deposits		83.44			87.80			83.44			73.28			63.94
Allowance for loan loss to total loans		1.11			1.22			1.34			1.33			1.49

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Killbuck Bancshares, Inc. (“Killbuck” or the “Company”) is the parent holding company for the Killbuck Savings Bank Company (the “Bank”). The following discussion and analysis is intended to provide information about the financial condition and results of operation of the Company and should be read in conjunction with the audited Consolidated Financial Statements, footnotes and other discussions appearing elsewhere in this annual report and the Company’s Form 10-K.

Certain information presented in this discussion and analysis and other statements concerning future performance, developments or events, and expectations for growth and market forecasts constitute forward-looking statements which are subject to a number of risks and uncertainties, including interest rate fluctuations, changes in local or national economic conditions, and government and regulatory actions which might cause actual results to differ materially from stated expectations or estimates.

Critical Accounting Policies

The Company’s accounting policies are integral to understanding the results reported. The accounting policies are described in detail in Note 1 of the consolidated financial statements. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments.

Allowance for Loan Losses

Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.

Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for loan losses, refer to Note 1 of “Notes to Consolidated Financial Statements.”

Goodwill and Other Intangible Assets

As discussed in Note 7 of the consolidated financial statements, the Company must assess goodwill and other intangible assets each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash flows were less than the recorded goodwill and other intangible assets balances, we would be required to take a charge against earnings to write down the assets to the lower value.

Deferred Tax Assets

We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. Our deferred tax assets are described further in Note 14 of the consolidated financial statements.

Overview

The reported results of the Company are dependent on a variety of factors, including the general interest rate environment, competitive conditions in the industry, governmental policies and regulations and conditions in the markets for financial assets. We are not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on liquidity, capital resources or operations. Net interest income is the largest component of net income, and consists of the difference between income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Net interest income is primarily affected by the volume, interest rates and composition of interest-earning assets and interest-bearing liabilities.

The branch facility in Sugarcreek, Ohio opened for business in February 2000. In July 2001, a branch facility in Howard, Ohio (Apple Valley Area) opened for business. These locations have given us a presence in the Sugarcreek and Apple Valley areas and allowed us to develop new business and deposit relationships in these areas. A loan production facility was opened in Millersburg, Ohio in July 2003. This facility has allowed us to concentrate our Millersburg lenders into one location to provide better service, more office space, and new business opportunities with a commercial calling officer. In April of 2004, a branch facility was opened in the German Village grocery store complex in Berlin, Ohio. It provides a greater level of convenience to the Berlin community.

RESULTS OF OPERATIONS

Summary

For 2005, we recorded net income of $4.2 million compared to $3.4 million for 2004 and $3.2 million for 2003.

Other operating income was $1.3 million for 2005 compared to $1.0 million for 2004 and $1.1 million for 2003.

Total other operating expenses were $7.6 million in 2005 compared to $7.2 million in 2004 and $7.0 million in 2003.

Earnings per share for 2005 were $6.44 compared to $5.16 for 2004 and $4.75 for 2003.

NET INTEREST INCOME

Our net interest income increased by $1,680,000 in 2005 from 2004 and increased by $503,000 in 2004 from 2003.

Total interest income increased by $2,585,000 or 18.4% for 2005 from 2004. The increase for 2005 resulted primarily from an increase of $2,567,000 in interest income on loans. The increases in loan interest income resulted primarily from increases in the current yield on the loan portfolios. The current yield on the average loan portfolios increased from 5.46% to 6.60%. The increase in the current yield was a result of the loans repricing replacing historically low interest rates. The average loan portfolio increased $2.0 million or .9% for 2005. The $283,000 decrease in investment interest income resulted primarily from decreases in the average volume in the investment portfolio. The average balances of the investment portfolio decreased by $7.4 million or 13.8% for 2005 from 2004 due to increasing federal funds sold for liquidity purposes.

Total interest income decreased by $250,000 or 1.8% for 2004 from 2003. The decrease of $ 250,000 for 2004 resulted primarily from a decrease of $875,000 in interest income on investment securities. The decrease in investment interest income resulted primarily from decreases in the average volume in the investment portfolio, which led to a decrease of 1 basis point to 4.26%. The increases in loan interest income resulted primarily from increases in the average volume of the loan portfolio. The average loan portfolio increased $25.9 million or 13.8% for 2004. The current yield on the average loan portfolios decreased 42 basis points to 5.46%. The decrease in the current yield was a result of the economic environment, historically low interest rates.

The yield on earning assets was 6.09%, 5.13%, and 5.28% for 2005, 2004, and 2003 respectively. The increase in the yield on earning assets is attributable to the general increase in interest rates.

Interest expense for 2005 increased by $905,000 or 27.7% from 2004 and decreased by $753,000 for 2004 from 2003. The increase was primarily due to an increase in the cost on interest bearing liabilities, which increased 45 basis points from 1.54% in 2004 to 1.99% in 2005 and declined 35 basis points from 1.89% in 2003 to 1.54% in 2004.

The average volume of time deposits increased $1.1 million and interest-bearing demand deposits, money market deposits, and savings deposits decreased $1.5 million, $2.1 million, and $150,000 respectively in 2005. The volume increase in time deposits and decreases in other deposit categories are primarily due to the rising interest rate environment. The funds are starting to shift into time deposits. The average volume of time deposits decreased $5.8 million while interest bearing demand deposits, money market deposits, and savings deposits increased $.7 million, $39,000, and $1.6 million respectively for 2004.

The cost on average interest-bearing liabilities was 1.99% for 2005 and 1.54% for 2004, and 1.89% for 2003. The increase for 2005 is due mainly to an increase in the cost of time deposits of 63 basis points.

Mainly due to an increase in the current yields on loans, the net yield on earning assets has increased this year maintaining the rising trend of prior years. The net yield on average interest-earning assets is 4.56%, 3.94% and 3.80% for 2005, 2004 and 2003 respectively.

The following table sets forth, for the periods indicated, information regarding the total dollar amounts of interest income from average interest-earning assets and the resulting yields, the total dollar amount of interest expense on average interest-bearing liabilities and the resulting rate paid, net interest income, interest rate spread and the net yield on interest-earning assets (dollars in thousands):

Average Balance Sheet and Net Interest Analysis

	For the Year Ended December 31
	2005						2004							2003
	Average Balance			Interest	Yield/ Rate		Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate
Assets
Interest earning assets:
Loans (1)(2)(3)	$	215,486		14,224	6.60	%	$	213,463		$	11,657	5.46	%	$	187,554		$	11,029	5.88	%
Securities - taxable (4)		9,863		400	4.06	%		13,308			517	3.88	%		30,874			1,263	4.09	%
Securities – nontaxable		34,719		1,525	4.39	%		38,685			1,700	4.39	%		41,504			1,827	4.40	%
Securities – Equity (4)(5)		1,565		76	4.86	%		1,515			67	4.45	%		1,470			69	4.69	%
Federal funds sold		11,182		393	3.51	%		6,404			92	1.44	%		8,860			95	1.07	%
Total interest - earnings assets		272,815		16,618	6.09	%		273,375			14,033	5.13	%		270,262			14,283	5.28	%
Noninterest-earning assets
Cash and due from other Institutions		9,801						9,627							8,508
Premises and equipment, net		5,175						5,013							5,088
Accrued interest		893						781							978
Other assets		5,644						2,542							2,401
Less allowance for loan losses		(2,510	)					(2,764	)						(2,512	)
Total	$	291,818					$	288,574						$	284,725
Liabilities and Shareholders Equity
Interest bearing liabilities:
Interest bearing demand		32,117		162	0.50	%	$	33,610		$	123	0.37	%	$	32,944		$	161	.49	%
Money market accounts		17,196		235	1.37	%		19,316			171	0.89	%		19,277			198	1.03	%
Savings deposits		42,049		315	0.75	%		42,198			267	0.63	%		40,582			415	1.02	%
Time deposits		107,701		3,129	2.91	%		106,629			2,427	2.28	%		112,388			2,980	2.65	%
Short term borrowings		4,140		47	1.14	%		3,871			8	0.21	%		3,913			5	.13	%

Average Balance Sheet and Net Interest Analysis (Continued)

	For the Year Ended December 31
	2005						2004						2003
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Federal Home Loan Bank Advances		6,084		281	4.62	%		6,003		268	4.46	%		3,838		258	6.72	%
Total interest bearing liabilities		209,287		4,169	1.99	%		211,627		3,264	1.54	%		212,942		4,017	1.89	%
Noninterest bearing liabilities:
Demand deposits		44,856						41,220						36,327
Accrued expenses and other liabilities		3,265						2,394						2,618
Shareholder’s equity		34,410						33,333						32,838
Total	$	291,818					$	288,574					$	284,725
Net interest income			$	12,449					$	10,769					$	10,266
Interest rate spread (6)					4.10	%					3.59	%					3.39	%
Net yield on interest earning assets (7)					4.56	%					3.94	%					3.80	%

(1) For purposes of these computations, the daily average loan amounts outstanding are net of deferred loan fees.

(2) Included in loan interest income are loan related fees of $292,727, $299,952, and $406,089 in 2005, 2004, and 2003, respectively.

(3) Nonaccrual loans are included in loan totals and do not have a material impact on the information presented.

(4) Average balance is computed using the carrying value of securities. The average yield has been computed using the historical amortized cost average balance for available for sale securities.

(5) Equity securities are comprised of common stock of the Federal Home Loan Bank, Federal Reserve Bank, and Great Lakes Bankers Bank.

(6) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities.

(7) Net yield on interest earning assets represents net interest income as a percentage of average interest earning assets.

Rate/Volume Analysis

The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate) and (ii) changes in rates (changes in rate multiplied by old average volume). Changes which are not solely attributable to rate or volume are allocated to changes in rate due to rate sensitivity of interest-earning assets and interest-bearing liabilities (dollars in thousands).

	2005 Compared to 2004 Increase (Decrease) Due To									2004 Compared to 2003 Increase (Decrease) Due To
	Volume			Rate			Net			Volume			Rate			Net
Interest income
Loans	$	110		$	2,457		$	2,567		$	1,524		$	(896	)	$	628
Securities-taxable		(134	)		17			(117	)		(719	)		(27	)		(746	)
Securities-nontaxable		(174	)		(1	)		(175	)		(124	)		(3	)		(127	)
Securities-equities		2			7			9			2			(4	)		(2	)
Federal funds sold		69			232			301			(26	)		23			(3	)
Total interest earning Assets		(127	)		2,712			2,585			657			(907	)		(250	)
Interest expense
Interest bearing demand		(5	)		44			39			3			(41	)		(38	)
Money market accounts		(19	)		83			64			—			(27	)		(27	)
Savings deposits		(1	)		49			48			17			(165	)		(148	)
Time deposits		24			678			702			(153	)		(400	)		(553	)
Short-term borrowing		1			38			39			—			3			3
Federal Home Loan Bank Advances		4			9			13			146			(136	)		10
Total interest bearing Liabilities		4			901			905			13			(766	)		(753	)
Net change in interest income	$	(131	)	$	1,811		$	1,680		$	644		$	(141	)	$	503

Provision for Loan Losses

The provision for loan losses was $376,722 for 2005, $225,000 for 2004, and $390,000 for 2003. We make periodic provisions to the allowance for loan losses to maintain the allowance at an acceptable level commensurate with the credit risks inherent in the loan portfolio. There can be no assurances, however, that additional provisions will not be required in future periods. The allowance for loan losses as a percent of total loans was 1.11%, 1.22%, and 1.34% for 2005, 2004 and 2003 respectively.

The allowance for loan losses is Management’s estimate of the amount of probable credit losses in the portfolio. The Company determines the allowance for loan losses based upon an ongoing evaluation. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans that may be susceptible to significant change. Increases to the allowance for loan losses are made by charges to the provision for loan losses. Loans deemed uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

The Company’s allowance for loan losses is the accumulation of various components calculated based upon independent methodologies. All components of the allowance for loan losses represent an estimation performed according to either Financial Accounting Standards No. 5 or No. 114. Management’s estimate of each allowance component is based on certain observable data that Management believes is the most reflective of the underlying loan losses being estimated. Changes in the amount of each component of the allowance for loan losses are directionally consistent with changes in the observable data and corresponding analyses. Some of the components that Management factors in are current economic conditions, loan growth assumptions, credit concentrations, and levels of nonperforming loans.

A key element of the methodology for determining the allowance for loan losses is the Company’s credit-risk-evaluation process, which includes credit-risk grading of individual commercial loans. Loans are assigned credit-risk grades based on an internal assessment of conditions that affect a borrower’s ability to meet its contractual obligation under the loan agreement. The assessment process includes reviewing a borrower’s current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Certain commercial loans are reviewed on an annual or rotational basis or as Management becomes aware of information affecting a borrower’s ability to fulfill its obligation.

Noninterest Income

Total non-interest income, which is comprised principally of fees and charges on customers’ deposit accounts increased $249,000 or 24.5% to $1,264,000 in 2005 and decreased $104,000 or 9.3% to $1,015,000 in 2004 from $1,119,000 in 2003. Service charges increased $20,000 or 2.5% in 2005 due mainly to a continued increase in ATM and debit card interchange fees. In 2004, these fees increased $67,000 or 9.1% due in part to an increase in ATM and debit card usage and an increase in Non Sufficient Funds occurrences, $22,000 and $38,000, respectively. The Bank sells fixed rate loans in the secondary market. Due to market conditions, the Bank originated and sold $719,000 more of these loans in 2005 compared to 2004. Gains for these sales were $72,000 in 2005, $63,000 in 2004 and $241,000 in 2003. Other Income increased $220,000 due primarily to the $149,000 in income from the Bank-Owned Life Insurance (BOLI) purchased in December 2004. The Company purchased life insurance policies on certain key employees. The BOLI is recorded at its cash surrender value or the amount that can be realized. Income from the alternative investment service was $41,000 for 2005 and $25,000 for 2004 and $15,000 for 2003.

Noninterest Expense

Total non-interest expense increased $455,000 or 6.4% to $7.6 million in 2005 as compared to $7.2 million in 2004 and increased $113,000 or 1.6% for 2004 from $7.0 million in 2003.

Salary and employee benefits for 2005 totaled $4.3 million, an increase of $302,000 or 7.6% from $4.0 million in 2004 and increased $268,000 or 7.2% from $3.7 million in 2003. These increases are due to normal increases for annual salary raises and employee benefits and additional branch management personnel hired in December 2004 for Knox County. The increase for 2004 was attributable to staff additions and normal recurring employee cost increases for salary and employee benefits.

Occupancy and equipment expense decreased $40,000 in 2005 and decreased $72,000 in 2004. Depreciation expense decreased another $31,000 in 2005. In 2003, the majority of the computer network equipment was fully depreciated, hence the decrease in expense during 2004.

Other operating expenses for 2005 totaled $2.39 million, a $192,000 or 8.7% increase from the $2.20 million reported in 2004 and an $81,000 or 3.6% decrease from the $2.28 million reported in 2003. Professional fees increased approximately $100,000 of which $70,000 is directly related to the Sarbanes-Oxley Act Section 404 Internal Controls certification work. The public relations expenses increased $27,000 or 28.7% from $94,000 in 2004 to $121,000 for 2005. The increase is due mainly to additional items being provided to the local schools and their activities. Charitable Contributions increased $26,000 or 68.4% from 2004 to 2005 due mainly to the acceleration in the payment of existing pledges and some new recipients. The directors’ fees increased $12,000 or 10.5% from $114,000 in 2004 to $126,000 for 2005. The changes in the remaining expense accounts were attributable to increases/decreases in items that are normal and recurring in nature. The credit card processing expenses decreased $115,000 or 53.5% from $215,000 in 2003 to $100,000 in 2004 due to the sale of the merchant program. The postage, express and freight expenses increased by $9,000 or 6.1% from $147,000 in 2003 to $156,000 in 2004 due to increased branch usage and the German Village Branch, Berlin, Ohio opening in April 2004. The telephone expense increased $24,000 or 18.3% from $131,000 in 2003 to $155,000 in 2004 due to increased bandwidth on the frame relay and the increased taxes and government surcharges and additional usage at the Loan Annex and German Village locations.

Income Tax Expense

Income tax expense increased $532,000 for 2005 to $1,513,000 from $981,000 in 2004; and increased $239,000 for 2004 to $981,000 from $742,000 in 2003. The effective rate on taxes for 2005, 2004 and 2003 was 26.4%, 22.2%and 18.8% respectively. The effective tax rate is affected by the amount of tax-exempt income earned by the Company each year.

Comparison of Financial Condition at December 31, 2005 and 2004

Total assets at December 31, 2005 amounted to $298 million, an increase of $4 million compared to $294 million at December 31, 2004.

Cash and cash equivalents increased $11.7 million or 53.9% from December 31, 2004 to December 31, 2005, with liquid funds held in the form of federal funds sold increasing $8.8 million. The increase in federal funds sold at December 31, 2005 is the excess of funds from the net increase in deposits that was not used in investing activities, financing activities, or operating activities and from the decrease in net loans.

Total investment securities decreased $.7 million or 1.5% from December 31, 2004 to December 31, 2005. The decrease in investments was due to maturities and calls. Information detailing the book value of the investment portfolio by security type and classification is present in Note 3 to the consolidated financial statements.

Total loans were $208.9 million at December 31, 2005 a decrease of $8.3 million or 3.8% from $217.2 million at December 31, 2004. The loan decreases were due in part to an aggressive loan rate environment, the increase in interest rates, and a general slowdown of the business expansion in the communities we serve. Of this $8.3 million decrease approximately $6.8 million was in the residential real estate loan portfolio, approximately $2.2 million was an increase in the agriculture real estate loan portfolio, approximately $.1 million was an increase in the commercial real estate loan portfolio, approximately $1.6 million was a decrease in the construction real estate loan portfolio, approximately $2.4 million was a decrease in the commercial and other loan portfolio, and approximately $.2 million was a decrease in the consumer and credit loan portfolio. Approximately $.2 million in residential 1 to 4 family fixed rate mortgages increased while the residential 1 to 4 family adjustable rate mortgage portfolio decreased. Late in 1997, we began to offer residential mortgage customers a fixed rate product. This program enables us to offer competitive long-term fixed rates. These loans are made with the intent to sell in the secondary loan market. We originated and sold $12.3 million and $11.6 million of loans in 2005 and 2004. Profit on the sale of these loans was $72,000 and $63,000 for 2005 and 2004. Information detailing the composition of the loan portfolio is presented in Note 4 to the consolidated financial statements.

Total deposits increased $3.0 million or 1.2% from December 31, 2004 to December 31, 2005. Non-interest bearing demand deposit accounts and time deposits increased $3.9 million and $5.1 million, respectively. The interest bearing demand deposits, money market deposits, and savings deposits decreased $2.3 million, $2.8 million, and $.9 million, respectively. The increases are attributable to new deposit account growth and internal growth for existing accounts. See also, Average Balance Sheet and Net Interest Analysis for information related to the average amount and average interest paid on deposit accounts during 2005 and 2004. Information related to the maturity of time deposits of $100,000 and over at December 31, 2005 is presented in Note 8 of the accompanying consolidated financial statements.

Advances were $6.0 million and $6.8 million at December 31, 2005 and 2004 respectively. There was $1.7 million in new advances in 2005 for the matched funding loan program. In 2004, there were $6.0 million in new advances for general liquidity purposes. Additional information on the Federal Home Loan Bank Advances is presented in Note 10 of the accompanying consolidated financial statements.

Shareholders’ equity increased $1.7 million during 2005 to $37.1 million at December 31, 2005 from $35.4 million at December 31, 2004. This increase was the result of $4.2 million in net earnings during the year, a net unrealized loss on securities available for sale of $.1 million, and Cash Dividends paid totaling $1.4 million. The Company also purchased treasury stock for $1.0 million. Treasury stock purchases are monitored against the Company’s Strategic Plan and the goals set forth in the plan. The Treasury stock purchases have not exceeded the Strategic Plan’s guidelines for 2005.

Market Risk and Asset/Liability Management

Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. Because of the nature of our operations, we are not subject to currency exchange or commodity price risk and, since we have no trading portfolio, it is not subject to trading risk. Currently, we have equity securities that represent only 3.4% of its investment portfolio and, therefore, equity price risk is not significant.

We actively manage interest rate sensitivity and asset/liability products through an asset/liability management committee. The principle objectives of asset-liability management are to maximize current net interest income while minimizing the risk to future earnings of negative fluctuations in net interest margin and to insure adequate liquidity exists to meet operational needs.

In an effort to reduce interest rate risk and protect itself from the negative effects or rapid or prolonged changes in interest rates, we have instituted certain asset and liability management measures, including underwriting long-term fixed rate loans that are saleable in the secondary market, offering longer term deposit products and diversifying the loan portfolio into shorter term consumer and commercial business loans. In addition, since the mid-1980’s, we have originated adjustable-rate loans and as of December 31, 2005, they comprised approximately 84.6% of the total loan portfolio.

Liquidity

Liquidity represents our ability to meet normal cash flow requirements of our customers for the funding of loans and repayment of deposits. Both short term and long term liquidity needs are generally derived from the repayments and maturities of loans and investment securities, and the receipt of deposits. Management monitors liquidity daily, and on a monthly basis incorporates liquidity management into its asset/liability program. The assets defined as liquid are cash, cash equivalents, and the available for sale security portfolio. The liquidity ratio as of December 31, 2005 and 2004 are 16% and 11%, respectively.

Operating activities, as presented in the statement of cash flows in the accompanying consolidated financial statements, provided $5.2 million and $1.5 million in cash during 2005 and 2004 respectively, generated principally from net income.

Investing activities consist primarily of loan originations and repayments, investment purchases and maturities, and investment in technology. These activities provided $6.9 million in funds during 2005 principally by the net payments of loans and the net proceeds of investments of $7.5 million and $.7 million, respectively; and used funds for the net purchase of technology and fixed asset totaling $1.3 million. These activities used $3.8 million in funds during 2004, principally for the net funding of loans, and the net purchase of technology and fixed assets totaling $15.7 million, and $.3 million respectively; and provided the net proceeds of investments of $12.2 million.

Financing activities consisted of the solicitation and repayment of customer deposits, borrowings and repayments, purchase of treasury stock, and the payment of dividends. For 2005, financing activities used $.4 million in funds, comprised mainly of net Federal Home Loan Bank advance repayments of $.9 million, net decrease in short-term borrowings of $.1 million, purchase of treasury stock of $1.0 million and payment of dividends of $1.4 million; and provided net deposit increases of $3.0 million. For 2004, financing activities provided $6.4 million, comprised mainly of net deposit increases of $5.6 million, proceeds from Federal Home Loan Bank advances of $6 million, repayment of Federal Home Loan Bank advances of $2.6 million, net decrease in short-term borrowings of $.6 million, purchase of treasury stock of $.7 million and payment of dividends of $1.3 million.

In addition to using the loan, investment and deposit portfolios as sources of liquidity, we have access to funds from the Federal Home Loan Bank of Cincinnati. We also have a ready source of funds through the available-for-sale component of the investment securities portfolio.

Capital Resources

Capital adequacy is our ability to support growth while protecting the interests of shareholders and depositors. Bank regulatory agencies have developed certain capital ratio requirements, which are used to assist them in monitoring the safety and soundness of financial institutions. We continually monitor these capital requirements and believe the Company to be in compliance with these regulations at December 31, 2005.

Our regulatory capital position at December 31, 2005, as compared to the minimum regulatory capital requirements imposed on us by banking regulators at that date is presented in Note 17 of the accompanying consolidated financial statements. We are not aware of any actions contemplated by banking regulators, which would result in us being in non-compliance with capital requirements.

Impact of Inflation Changing Prices

The consolidated financial statements and the accompanying notes presented elsewhere in this document, have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities are monetary in nature. The impact of inflation is reflected in the increased cost of operations. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Killbuck Bancshares, Inc.

Killbuck, Ohio

Audit Report

December 31, 2005

Killbuck Bancshares, Inc.

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005

	Page Number
Report of Independent Registered Public Accounting Firm	2
Financial Statements
Consolidated Balance Sheet	3
Consolidated Statement of Income	4
Consolidated Statement of Changes in Shareholders’ Equity	5
Consolidated Statement of Cash Flows	6
Notes to Consolidated Financial Statements	7-25

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Killbuck Bancshares, Inc.

We have audited the accompanying consolidated balance sheet of Killbuck Bancshares, Inc. and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits 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 audits provide 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 Killbuck Bancshares, Inc. and subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.

/s/ S.R. Snodgrass, A.C.

Steubenville, Ohio

February 9, 2006

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Killbuck Bancshares, Inc.

CONSOLIDATED BALANCE SHEET

	December 31,
	2005			2004
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	15,031,294		$	12,163,199
Federal funds sold		18,300,000			9,500,000
Total cash and cash equivalents		33,331,294			21,663,199
Investment securities:
Securities available for sale		14,307,200			9,754,110
Securities held to maturity (fair value of $31,696,907 and $37,947,368)		30,770,829			36,015,317
Total investment securities		45,078,029			45,769,427
Loans (net of allowance for loan losses of $2,313,312 and $2,645,981)		206,241,946			214,161,315
Loans held for sale		94,600			167,500
Premises and equipment, net		5,834,516			4,949,795
Accrued interest receivable		1,145,875			927,860
Goodwill, net		1,329,249			1,329,249
Other assets		4,994,451			4,898,694
Total assets	$	298,049,960		$	293,867,039
LIABILITIES
Deposits:
Noninterest bearing demand	$	51,130,983		$	47,185,066
Interest bearing demand		32,244,405			34,569,644
Money market		14,716,407			17,504,480
Savings		42,347,138			43,282,000
Time		109,910,217			104,807,571
Total deposits		250,349,150			247,348,761
Federal Home Loan Bank advances		5,989,051			6,845,342
Short-term borrowings		3,610,000			3,730,000
Accrued interest and other liabilities		1,052,456			584,002
Total liabilities		261,000,657			258,508,105
SHAREHOLDERS’ EQUITY
Common stock – No par value: 1,000,000 shares authorized, 718,431 issued		8,846,670			8,846,670
Retained earnings		34,332,104			31,558,974
Accumulated other comprehensive income		(64,736	)		35,201
Treasury stock, at cost (70,671 and 60,945 shares)		(6,064,735	)		(5,081,911	)
Total shareholders’ equity		37,049,303			35,358,934
Total liabilities and shareholders’ equity	$	298,049,960		$	293,867,039

See accompanying notes to the consolidated financial statements.

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Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF INCOME

	Year Ended December 31,
	2005		2004		2003
INTEREST INCOME
Interest and fees on loans	$	14,224,557	$	11,656,645	$	11,029,106
Federal funds sold		392,963		92,160		95,625
Investment securities:
Taxable		475,958		583,917		1,331,800
Exempt from federal income tax		1,524,894		1,700,170		1,826,764
Total interest income		16,618,372		14,032,892		14,283,295
INTEREST EXPENSE
Deposits		3,841,007		2,988,827		3,754,438
Federal Home Loan Bank advances		280,628		267,509		257,525
Short term borrowings		47,447		7,844		5,081
Total interest expense		4,169,082		3,264,180		4,017,044
NET INTEREST INCOME		12,449,290		10,768,712		10,266,251
Provision for loan losses		376,722		225,000		390,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		12,072,568		10,543,712		9,876,251
NONINTEREST INCOME
Service charges on deposit accounts		824,306		803,823		736,763
Gain on sale of loans, net		72,492		62,777		240,885
Other income		367,670		148,615		141,787
Total other income		1,264,468		1,015,215		1,119,435
NONINTEREST EXPENSE
Salaries and employee benefits		4,288,850		3,987,149		3,719,307
Occupancy and equipment		934,534		974,517		1,047,156
Other expense		2,389,316		2,196,676		2,278,040
Total other expense		7,612,700		7,158,342		7,044,503
INCOME BEFORE INCOME TAXES		5,724,336		4,400,585		3,951,183
Income taxes		1,513,468		981,177		742,363
NET INCOME	$	4,210,868	$	3,419,408	$	3,208,820
EARNINGS PER SHARE	$	6.44	$	5.16	$	4.75
WEIGHTED AVERAGE SHARES OUTSTANDING		654,289		662,415		676,380

See accompanying notes to the consolidated financial statements.

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Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss )			Treasury Stock			Total Shareholders’ Equity			Comprehensive Income
BALANCE, DECEMBER 31, 2002	$	8,846,670	$	27,462,762		$	534,990		$	(2,640,763	)	$	34,203,659
Net income				3,208,820									3,208,820		$	3,208,820
Other comprehensive income:
Unrealized loss on available for sale securities, net of tax benefit of $189,843							(368,519	)					(368,519	)		(368,519	)
Comprehensive income															$	2,840,301
Cash dividends paid ($1.85 per share)				(1,240,872	)								(1,240,872	)
Purchase of Treasury Stock, at cost (18,872 shares)										(1,741,534	)		(1,741,534	)
BALANCE, DECEMBER 31, 2003		8,846,670		29,430,710			166,471			(4,382,297	)		34,061,554
Net income				3,419,408									3,419,408		$	3,419,408
Other comprehensive income:
Unrealized loss on available for sale securities, net of tax benefit of $67,624							(131,270	)					(131,270	)		(131,270	)
Comprehensive income															$	3,288,138
Cash dividends paid ($1.95 per share)				(1,291,144	)								(1,291,144	)
Purchase of Treasury Stock, at cost (7,302 shares)										(699,614	)		(699,614	)
BALANCE, DECEMBER 31, 2004		8,846,670		31,558,974			35,201			(5,081,911	)		35,358,934
Net income				4,210,868									4,210,868		$	4,210,868
Other comprehensive income:
Unrealized loss on available for sale securities, net of tax benefit of $51,483							(99,937	)					(99,937	)		(99,937	)
Comprehensive income															$	4,110,931
Cash dividends paid ($2.20 per share)				(1,437,738	)								(1,437,738	)
Purchase of Treasury Stock, at cost (9,726 shares)										(982,824	)		(982,824	)
BALANCE, DECEMBER 31, 2005	$	8,846,670	$	34,332,104		$	(64,736	)	$	(6,064,735	)	$	37,049,303

See accompanying notes to the consolidated financial statements.

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Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS

	Year Ended December 31,
	2005			2004			2003
OPERATING ACTIVITIES
Net income	$	4,210,868		$	3,419,408		$	3,208,820
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		376,722			225,000			390,000
Depreciation, amortization and accretion, net		282,704			395,031			541,810
Gain on sale of loans, net		(72,492	)		(62,777	)		(240,885	)
Origination of loans held for sale		(12,287,154	)		(11,567,660	)		(22,109,417	)
Proceeds from the sale of loans		12,432,545			11,984,386			22,248,602
Federal Home Loan Bank stock dividend		(55,200	)		(46,500	)		(45,300	)
Net changes in:
Accrued interest and other assets		(196,631	)		(2,838,759	)		166,875
Accrued interest and other liabilities		457,997			39,800			(190,244	)
Net cash provided by operating activities		5,149,359			1,547,929			3,970,261
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments		5,246,396			8,202,151			32,954,112
Purchases		(9,951,484	)		(563,104	)		(12,031,475	)
Investment securities held to maturity:
Proceeds from maturities and repayments		5,743,430			4,843,728			5,571,974
Purchases		(396,456	)		(235,000	)		(4,681,460	)
Net decrease (increase) in loans		7,542,647			(15,758,177	)		(26,535,632	)
Purchase of premises and equipment		(1,269,333	)		(329,272	)		(314,933	)
Net cash provided by (used in) investing activities		6,915,200			(3,839,674	)		(5,037,414	)
FINANCING ACTIVITIES
Net increase in deposits		3,000,389			5,624,947			2,685,183
Proceeds from Federal Home Loan Bank advances		1,700,000			6,035,000			—
Repayment of Federal Home Loan Bank advances		(2,556,291	)		(2,634,463	)		(822,861	)
Net decrease in short-term borrowings		(120,000	)		(635,000	)		(564,993	)
Purchase of treasury shares		(982,824	)		(699,614	)		(1,741,534	)
Cash dividends paid		(1,437,738	)		(1,291,144	)		(1,240,872	)
Net cash (used in) provided by financing activities		(396,464	)		6,399,726			(1,685,077	)
Increase (decrease) in cash and cash equivalents		11,668,095			4,107,981			(2,752,230	)
Cash and cash equivalents at beginning of year		21,663,199			17,555,218			20,307,448
Cash and cash equivalents at end of year	$	33,331,294		$	21,663,199		$	17,555,218

See accompanying notes to the consolidated financial statements.

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Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting and reporting policies applied in the presentation of the consolidated financial statements follows:

Nature of Operations and Basis of Presentation

Killbuck Bancshares, Inc. (the “Company”) is an Ohio corporation organized as the holding company of The Killbuck Savings Bank Company (the “Bank”). The Bank is a state-chartered bank located in Ohio. The Company and its subsidiary operate in the single industry of commercial banking and derive substantially all their income from banking and bank-related services which include interest earnings on residential real estate, commercial mortgage, commercial and consumer loan financing as well as interest earnings on investment securities and charges for deposit services to its customers through nine full service branches and one loan production office. The Board of Governors of the Federal Reserve System supervises the Company and Bank, while the Bank is also subject to regulation and supervision by the Ohio Division of Financial Institutions.

The consolidated financial statements of the Company include its wholly owned subsidiary, the Bank. All intercompany transactions have been eliminated in consolidation. The investment in subsidiary on the parent company financial statements is carried at the parent company’s equity in the underlying net assets.

The accounting principles followed by the Company and the methods of applying these principles conform with U.S. generally accepted accounting principles and with general practice within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the consolidated balance sheet date and related revenues and expenses for the period. Actual results may differ significantly from those estimates.

Investment Securities

Investment securities are classified, at the time of purchase, based upon management’s intention and ability, as securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost adjusted for amortization of premium and accretion of discount which are computed using the level yield method. Certain other debt and equity securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses on available for sale securities are reported as a separate component of shareholders’ equity, net of tax, until realized. Realized securities gains and losses are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned.

Common stock of the Federal Home Loan Bank, Federal Reserve Bank and Great Lakes Bankers Bank represent ownership in institutions, which are wholly-owned by other financial institutions. These securities are accounted for at cost and are classified with other assets.

Bank-Owned Life Insurance (BOLI)

The Company purchased life insurance policies on certain key employees. BOLI is recorded at its cash surrender value or the amount that can be realized.

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Loans

Loans are stated at their outstanding principal, less the allowance for loan losses and any net deferred loan fees. Interest income on loans is recognized on the accrual method. Accrual of interest on loans is generally discontinued when it is determined that a reasonable doubt exists as to the collectibility of principal, interest, or both. Loans are returned to accrual status when past due interest is collected, and the collection of principal is probable.

Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.

Mortgage loans originated and held for sale in the secondary market are carried at the lower of cost or market value determined on an aggregate basis. Net unrealized losses are recognized in a valuation allowance through charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method. All loans are sold to Freddie Mac.

Allowance for Loan Losses

The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations. The provision is based upon management’s periodic evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant change in the near term.

Impaired loans are commercial and commercial real estate loans for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired, provided the loan is not a commercial or commercial real estate classification. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis, taking into consideration all of the circumstances concerning the loan, the credit worthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall in relation to the principal and interest owed.

-8-

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from three to ten years for furniture, fixtures and equipment and 25 to 50 years for building premises. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease terms, which range from seven to fifteen years. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.

Real Estate Owned

Real estate acquired in settlement of loans is stated at the lower of the recorded investment in the property or its fair value minus estimated costs of sale. Prior to foreclosure the value of the underlying collateral is written down by a charge to the allowance for loan losses if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income and losses on their disposition, are included in other expenses.

Intangible Assets and Liabilities

Goodwill represents the amount by which the market value of the stock issued in the merger of Commercial Saving Bank Co. (Commercial) of Danville, Ohio with and into The Killbuck Savings Bank Company exceeded the market value of the assets, liabilities and capital of Commercial on the date of the merger. As of December 31, 2005 and 2004 respectively, net goodwill was $1,329,249 and $1,329,249. The Company adopted Statement of Financial Accounting Standards (“FAS”) No. 142,Goodwill and Other Intangible Assets, which changed the accounting for goodwill from an amortization method to an impairment-only approach. This statement eliminates the regularly scheduled amortization of goodwill and replaces this method with a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts.

Mortgage Servicing Rights (“MSRs”)

The Company has agreements for the express purpose of selling loans in the secondary market. The Company maintains all servicing rights for these loans. Originated MSRs are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio. Impairment is evaluated based on the fair value of the right, based on portfolio interest rates and prepayment characteristics. MSRs are a component of other assets on the Consolidated Balance Sheet.

Employee Benefits Plans

The Bank maintains an integrated money purchase pension plan and a 401(K) plan covering eligible employees. The Bank’s contributions are based upon the plan’s contribution formula.

-9-

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment(FAS No. 123R). FAS No. 123R revised FAS No. 123,Accounting for Stock-BasedCompensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and its related implementation guidance. FAS No. 123R will require compensation costs related to share-based payment transactions to be be recognized in the fianancial statement (with limited exceptions). The amount of compensation cost will be measure based on the grant-date fair value of the equity or liabiliaty instruments issed. Compensation cost will be recognized over the period that an employee provides service in exchange for the award.

In April 2005, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for FAS No. 123R. The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. FAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123R on January 1, 2006.

In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB No. 107”),Share-Based Payment, providing guidance on option valuation methods, the accounting for income tax effects of share-based payment arrangements upon adoption of FAS No. 123R, and the disclosures in MD&A subsequent to the adoption. The Company will provide SAB No. 107 required disclosures upon adoption of FAS No. 123R on January 1, 2006.

In December 2004, FASB issued FAS No. 153,Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. FAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of FAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2005, the FASB issued FAS No. 154,Accounting Changes and Errors Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. FAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impractical. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FAS No.154 improves the financial reporting because its requirements enhance the consistency of financial reporting between periods. The provisions of FAS No. 154 are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

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Income Taxes

The Company and its subsidiary file a consolidated federal income tax return. Income tax expense is allocated among the parent company and the subsidiary as if each had filed a separate return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Deferred income tax expenses or benefits are based on the changes in the deferred tax asset or liability from period to period.

Earnings Per Share

The Company currently maintains a simple capital structure; therefore, there are no dilutive effects on earnings per share. As such, earnings per share are calculated using the weighted average number of share outstanding for the period.

Comprehensive Income

The Company is required to present comprehensive income in a full set of general purpose financial statements for all periods presented. Other comprehensive income is comprised exclusively of unrealized holding gains and losses on the available for sale securities portfolio. The Company has elected to report the effects of other comprehensive income as part of the Consolidated Statement of Changes in Shareholders’ Equity.

Cash Flow Information

For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from financial institutions and federal funds sold. Cash payments for interest in 2005, 2004 and 2003 were $4,086,202, $3,275,495, and $4,082,922, respectively. Cash payments for income taxes for 2005, 2004, and 2003 were $1,233,912, $883,858, and $940,517 respectively.

Reclassification of Comparative Amounts

Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on shareholders’ equity or net income.

2. FEDERAL FUNDS SOLD

Federal funds sold at December 31 consists of the following:

	2005			2004
Institution	Maturity	Balance		Maturity	Balance
National City Bank	1-02-06	$	10,600,000	1-02-05	$	7,100,000
Great Lakes Bankers Bank	1-02-06		7,700,000	1-02-05		2,400,000
		$	18,300,000		$	9,500,000

-11-

3. INVESTMENT SECURITIES

The amortized cost of securities and their estimated market values are as follows:

Securities available for sale
	2005
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. Government Agencies and Corporations	$	14,405,286	$	12,921	$	111,007	$	14,307,200
Total	$	14,405,286	$	12,921	$	111,007	$	14,307,200
	2004
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. Government Agencies and Corporations	$	9,700,775	$	93,480	$	40,145	$	9,754,110
Total	$	9,700,775	$	93,480	$	40,145	$	9,754,110
Securities held to maturity
	2005
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of States and Political Subdivisions	$	30,770,829	$	996,010	$	69,932	$	31,696,907
Total	$	30,770,829	$	996,010	$	69,932	$	31,696,907
	2004
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of States and Political Subdivisions	$	35,564,141	$	1,955,536	$	29,684	$	37,489,993
Corporate Securities		451,176		6,199		—		457,375
Total	$	36,015,317	$	1,961,735	$	29,684	$	37,947,368

-12-

3. INVESTMENT SECURITIES (CONTINUED)

The amortized cost and fair market values of debt securities at December 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.

	Available For Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	2,000,000	$	1,983,750	$	3,571,288	$	3,597,245
Due after one year through five years		11,161,298		11,108,139		14,706,178		15,134,909
Due after five through ten years		834,121		818,734		12,297,818		12,771,615
Due after ten years		409,867		396,577		195,545		193,138
	$	14,405,286	$	14,307,200	$	30,770,829	$	31,696,907

Investment securities with an approximate carrying value of $32,595,000 and $38,141,000 at December 31, 2005 and 2004, respectively were pledged to secure public deposits, securities sold under agreement to repurchase and for other purposes as required or permitted by law.

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at December 31, 2005 and 2004. As of December 31, 2005, there were a total of 38 securities in a loss position.

	2005
	Less Than Twelve Months				Twelve Months or Greater				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
U.S. Government agencies and corporations	$	7,687,525	$	63,972	$	2,505,467	$	47,035	$	10,192,992	$	111,007
Obligations of states and Political subdivisions		2,249,380		23,085		1,599,113		46,847		3,848,493		69,932
Total debt securities	$	9,936,905	$	87,057	$	4,104,580	$	93,882	$	14,041,485	$	180,939
	2004
	Less Than Twelve Months				Twelve Months or Greater				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
U.S. Government agencies and corporations	$	1,420,010	$	22,075	$	1,214,914	$	18,070	$	2,634,924	$	40,145
Obligations of states and Political subdivisions		2,005,933		16,117		457,993		13,567		2,463,926		29,684
Total debt securities	$	3,425,943	$	38,192	$	1,672,907	$	31,637	$	5,098,850	$	69,829

The Company’s investment securities portfolio contains unrealized losses of direct obligations of the U.S. Government securities, including mortgage-related instruments issued or backed by the full faith and credit of the United States government, and debt obligations of a U.S. state or political subdivision.

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3. INVESTMENT SECURITIES (CONTINUED)

On a monthly basis, the Company evaluates, the severity and duration of impairment for its investment securities portfolio. Unless the Company has the ability to hold the security to maturity without incurring a loss, impairment is considered other than temporary when an investment security has sustained a decline of ten percent or more for six months.

The Company has concluded that any impairment of its investment securities portfolio is not other than temporary, but is the result of interest rate changes that are not expected to result in the noncollection of principal and interest, during the period.

4. LOANS

Major classification of loans are summarized as follows:

	2005			2004
Real estate – residential	$	90,976,398		$	97,811,648
Real estate – farm		14,550,237			12,308,653
Real estate – commercial		47,312,047			47,226,324
Real estate – construction		9,446,729			10,999,833
Commercial and other loans		38,399,400			40,751,867
Consumer and credit loans		8,216,453			8,074,908
		208,901,264			217,173,233
Less allowance for loan losses		(2,313,312	)		(2,645,981	)
Less net deferred loan fees		(346,006	)		(365,937	)
Loans, net	$	206,241,946		$	214,161,315

Loans held for sale at December 31, 2005 and 2004 were $94,600 and $167,500 respectively. Real estate loans serviced for Freddie Mac, which are not included in the consolidated balance sheet, totaled $50,287,462 and $44,545,402 at December 31, 2005 and 2004, respectively. The Bank is currently collecting a fee of .25% for servicing these loans.

Total nonaccrual loans and the related interest for the years ended December 31 are as follows. In management’s opinion, these loans did not meet the definition of impaired loans.

	2005		2004		2003
Principal outstanding	$	631,791	$	1,094,922	$	220,098
Contractual interest due	$	31,115	$	38,263	$	6,560
Interest income recognized	$	—	$	—	$	—

The Company’s primary business activity is with customers located within its local trade area. Residential, commercial, personal, and agricultural loans are granted. The Company also selectively funds loans originated outside of its trade area provided such loans meet its credit policy guidelines. Although the Company has a diversified loan portfolio at December 31, 2005 and 2004, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

The Bank entered into transactions with certain directors, executive officers, significant stockholders, and their affiliates. A summary of loan activity for those directors, executive officers, and their associates with loan balances in excess of $60,000 for the year ended December 31, 2005 is as follows:

Balance December 31, 2004	Additions	Amounts Collected	Balance December 31, 2005
$4,028,580	$91,605	$766,956	$	3,353,229

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5. ALLOWANCE FOR LOAN LOSSES

An analysis of the change in the allowance for loan losses follows:

	2005			2004			2003
Balance, January 1	$	2,645,981		$	2,701,943		$	2,325,560
Add:
Provision charged to operations		376,722			225,000			390,000
Loan recoveries		74,953			74,942			106,885
Less: Loans charged off		(784,343	)		(355,904	)		(120,502	)
Balance, December 31	$	2,313,313		$	2,645,981		$	2,701,943

6. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

	2005			2004
Land	$	1,775,541		$	1,415,541
Building and improvements		4,165,964			4,115,367
Leasehold improvements		75,619			75,619
Furniture, fixtures and equipment		4,223,945			4,469,710
Other Real Estate Owned		700,000			—
		10,941,069			10,076,237
Less accumulated depreciation		(5,106,553	)		(5,126,442	)
Total	$	5,834,516		$	4,949,795

Depreciation expense charged to operations was $378,558 for 2005, $408,422 for 2004, and $492,257 for 2003.

7. GOODWILL

As of December 31, 2005 and 2004, goodwill had a gross carrying amount of $1,661,561 and an accumulated amortization amount of $332,312 resulting in a net carrying amount of $1,329,249.

The gross carrying amount of goodwill was tested for impairment in the second quarter. Due to an increase in overall earning asset growth, operating profits and cash flows were greater than expected for the reporting units. Based on fair value of the reporting unit, estimated using the expected present value of future cash flows, no goodwill impairment loss was recognized in the current year.

8. DEPOSITS

Time deposits include certificates of deposit in denominations of $100,000 or more. Such deposits aggregated $38,459,171 and $34,479,668 at December 31, 2005 and 2004, respectively.

Interest expense on certificates of deposit $100,000 and over amounted to $1,010,191 in 2005, $661,560 in 2004, and $855,558 in 2003.

The following table sets forth the remaining maturity of time certificates of deposits of $100,000 or more at December 31, 2005.

3 months or less	$	9,465,278
Over 3 through 6 months		5,844,205
Over 6 through 12 months		10,537,405
Over 12 months		12,612,283
Total	$	38,459,171

-15-

8. DEPOSITS (CONTINUED)

The following table sets forth the remaining maturity of all time deposits at December 31, 2005.

12 month or less	$	66,892,252
12 months through 24 months		19,217,544
24 months through 36 months		11,994,124
36 months through 48 months		8,857,700
48 months through 60 months		2,929,905
Over 60 months		18,692
	$	109,910,217

9. SHORT-TERM BORROWINGS

Short-term borrowings consist of securities sold under agreements to repurchase. These retail repurchase agreements are with customers in their respective loan market areas. These borrowings are collateralized with securities owned by the Company and held in their safekeeping account at an independent correspondent bank. The outstanding balances and related information for short-term borrowings are summarized as follows:

	2005			2004
Short-term borrowings:
Ending balance	$	3,610,000		$	3,730,000
Maximum month-end balance during the year		5,275,000			4,480,000
Average month-end balance during the year		4,159,999			3,624,583
Weighted average at year end		1.96	%		.13	%
Weighted average rate during the year		1.14	%		.13	%

The Company has pledged investment securities with carrying values of $4,944,376 and $5,005,625 as of December 31, 2005 and 2004, respectively, as collateral for the repurchase agreements.

10. FEDERAL HOME LOAN BANK ADVANCES

The Federal Home Loan Bank advances have monthly principal and interest payments due with maturity dates from 2006 through 2017. Interest rates range from 3.10% to 8.90% on the advances. The scheduled aggregate minimum future principal payments on the advances outstanding as of December 31, 2005 are as follows:

Year Ending December 31,	Amount
2006	$	2,719,123
2007		692,106
2008		670,215
2009		651,825
2010		569,105
2011 and thereafter		686,677
Total	$	5,989,051

The Bank maintains a credit arrangement with Federal Home Loan Bank of Cincinnati, Ohio (“FHLB”). The FHLB borrowings, when used, are collateralized by the Bank’s investment in Federal Home Loan Bank stock and a blanket collateral pledge agreement with FHLB under which the Bank has pledged certain qualifying assets equal to 150 percent of the unpaid amount of the outstanding balances. At December 31, 2005 the Bank had a borrowing capacity of approximately $40.5 million with the FHLB. At December 31, 2005 and 2004 there was $5,989,051 and $6,845,342, respectively borrowed against this credit arrangement.

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11. EMPLOYEE BENEFIT PLANS

The Bank maintains an integrated money purchase pension plan and a 401(k) plan.

Under the integrated money purchase pension plan contribution formula, the Bank, for each plan year, will contribute an amount equal to 8% of an employee’s compensation for the plan year and 5.7% of the amount of an employee’s excess compensation for the plan year. Excess compensation is a participant’s compensation in excess of the designated integration level. This designated integration level is 100% of the taxable wage base in effect at the beginning of the plan year. The federal government annually adjusts the taxable wage base. This plan does not permit nor require employees to make contributions to the plan.

The 401(k) plan allows employees to make salary reduction contributions to the plan up to 20% of a participant’s compensation. For each plan year, the Bank may contribute to the plan an amount of matching contributions for a particular plan year. The Bank may choose not to make matching contributions for a particular plan year. For 2005 and 2004 the Bank matched 25% of the employees’ voluntary contributions up to 1% of the employee’s compensation.

Both plans cover substantially all employees with one year of service and attained age 21. For 2005, the annual contribution to a participant’s retirement account may not exceed $42,000.

The pension costs charged to operating expense for the years 2005, 2004 and 2003 amounted to $275,660, $253,812 and $237,540, respectively.

12. OTHER OPERATING EXPENSE

Other operating expense included the following:

	2005		2004		2003
Professional fees	$	313,062	$	190,389	$	231,217
Franchise tax		438,630		433,920		398,931
Telephone		158,748		154,739		131,249
Stationery, supplies and printing		160,646		165,140		166,304
Postage, express and freight		155,388		156,279		146,537
Data processing		148,822		167,532		160,268
Other		1,014,020		928,677		1,043,534
Total	$	2,389,316	$	2,196,676	$	2,278,040

13. OPERATING LEASES

The bank leases the space housing the German Village branch located in Berlin, Ohio. The lease expires in eight years, with an option to automatically renew for an additional ten year period. Minimum future rental payments are as follows:

Less than 1 year	$	18,900
1 to 3 years		37,800
3 to 5 years		38,942
Greater than 5 years		294,441
	$	390,083

14. INCOME TAXES

The provision for federal income taxes for the years ended December 31 consist of:

	2005			2004		2003
Current payable	$	1,516,365		$	884,920	$	806,521
Deferred		(2,897	)		96,257		(64,158	)
Total provision	$	1,513,468		$	981,177	$	742,363

-17-

14. INCOME TAXES (CONTINUED)

The following is a reconcilement between the actual provision for federal income taxes and the amount of income taxes, which would have been provided at statutory rates for the year ended December 31:

	2005					2004					2003
	Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income
Provision at statutory rate	$	1,946,274		34.0	%	$	1,496,199		34.0	%	$	1,343,402		34.0	%
Tax exempt income		(519,659	)	(9.1	)%		(579,220	)	(13.2	)		(622,791	)	(15.7	)
Non-deductible interest Expense		33,291		0.6			30,376		.7			40,364		1.00
Other, net		53,562		0.9			33,822		.7			(18,612	)	(.5	)
Tax expense and effective rate	$	1,513,468		26.4	%	$	981,177		22.2	%	$	742,363		18.8	%

The tax effects of deductible and taxable temporary differences that gave rise to significant portions of the net deferred tax assets and liabilities at December 31 are as follows:

	2005		2004
Deferred Tax Assets:
Allowance for loan losses	$	786,526	$	705,680
Deferred loan fees		5,075		7,115
Net unrealized loss on securities		33,349		—
Deferred tax asset		824,950		712,795
Deferred Tax Liabilities:
Premise and equipment		316,520		298,375
Stock dividends		194,344		175,576
Net unrealized gain on securities		—		18,136
Other, net		130,871		86,081
Deferred tax liabilities		641,735		578,168
Net deferred tax assets	$	183,215	$	134,627

No valuation allowance was established at December 31, 2005 and 2004 in view of certain tax strategies coupled with the anticipated future taxable income as evidenced by the company’s earnings potential.

15. COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheet.

These commitments were comprised of the following at December 31:

	2005		2004
Commitments to extend credit	$	35,011,000	$	40,136,000
Standby letters of credit		730,000		529,000
Total	$	35,741,000	$	40,665,000

-18-

15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The fees earned from issuance of letters are recognized at the origination of the coverage period. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

The Company has not been required to perform any financial guarantees during the past two years. The Company has not incurred any losses on its commitments in either 2005 or 2004.

Contingent Liabilities

The Company and its subsidiary are subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company.

16. REGULATORY MATTERS

The approval of regulatory authorities is required if the total of all dividends declared by the Bank in any calendar year exceeds net profits as defined for that year combined with its retained net profits for the two preceding calendar years less any required transfers to surplus. Under this formula, the amount available for payment of dividends by the Bank to the Company in 2005, without the approval of the regulatory authorities, is approximately $3,122,920 plus 2006 profits retained up to the date of the dividend declaration.

Included in cash and due from banks are required federal reserves of $3,957,000 and $3,866,000 at December 31, 2005 and 2004, respectively, for facilitating the implementation of monetary policy by the Federal Reserve System. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These are held in the form of cash on hand and/or balances maintained directly with the Federal Reserve Bank.

Federal law prevents the Company from borrowing from the Bank unless the loans are secured by specific obligations. Further, such secured loans are limited in amount to ten percent of the Bank’s capital. The Company had no such borrowings at December 31, 2005 and 2004.

17. REGULATORY CAPITAL REQUIREMENTS

Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average total assets.

In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any institution fail to meet the requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory actions.

-19-

17. REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

As of December 31, 2005 and 2004, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier I risk-based, and Tier I Leverage capital ratios must be at least ten percent, six percent, and five percent, respectively. There have been no conditions or events since notification that management believes have changed this category.

The Company’s actual capital ratios are presented in the following table, which shows the Company met all regulatory capital requirements. The capital position of the Bank does not differ significantly from the Company’s.

	2005				2004
	Amount		Ratio		Amount		Ratio
Total Risk Based Capital (to Risk Weighted Assets)
Actual	$	38,098	17.38	%	$	36,595	17.31	%
For Capital Adequacy Purposes		17,539	8.00			16,913	8.00
To be well capitalized		21,924	10.00			21,142	10.00
Tier 1 Capital (to Risk Weighted Assets)
Actual	$	35,785	16.32	%	$	33,994	16.08	%
For Capital Adequacy Purposes		8,770	4.00			8,457	4.00
To be well capitalized		13,154	6.00			12,685	6.00
Tier 1 Capital (to Average Assets)
Actual	$	35,785	12.07	%	$	33,994	11.54	%
For Capital Adequacy Purposes		11,854	4.00			11,785	4.00
To be well capitalized		14,818	5.00			14,732	5.00

18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values at December 31 are as follows:

	2005				2004
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and due from banks	$	15,031,294	$	15,031,294	$	12,163,199	$	12,163,199
Federal funds sold		18,300,000		18,300,000		9,500,000		9,500,000
Securities available for sale		14,307,200		14,307,200		9,754,110		9,754,110
Securities held to maturity		30,770,829		31,696,907		36,015,317		37,947,368
Net loans		206,241,946		208,546,387		214,161,315		217,168,148
Loans held for sale		94,600		95,613		167,500		169,852
Accrued interest receivable		1,145,875		1,145,875		927,860		927,860
Regulatory Stock		1,589,010		1,589,010		1,533,810		1,533,810
BOLI		3,141,889		3,141,889		3,000,000		3,000,000
Financial liabilities:
Deposits	$	250,349,150	$	242,227,000	$	247,348,761	$	246,138,000
Federal Home Loan Bank advances		5,989,051		6,010,000		6,845,342		6,906,000
Short term borrowings		3,610,000		3,610,000		3,730,000		3,730,000
Accrued interest payable		234,237		234,237		151,357		151,357

-20-

18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

As certain assets and liabilities such as deferred tax assets and liabilities, premises and equipment and many other operational elements of the Company, are not considered financial instruments, but have value, this estimated fair value of financial instruments would not represent the full market value of the Company.

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

Cash and Due from Banks, Federal Funds Sold, Accrued Interest Receivable, Regulatory Stock, BOLI, Short-Term Borrowings, and Accrued Interest Payable

The fair value approximates the current carrying value.

Investment Securities and Loans Held for Sale

The fair value of investment securities and loans held for sale are equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.

Loans, Deposits, and Federal Home Loan Bank Advances

The fair value of loans is estimated by discounting the future cash flows using a simulation model which estimates future cash flows and constructs discount rates that consider reinvestment opportunities, operating expenses, non-interest income, credit quality, and prepayment risk. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year end. Fair values for time deposits and Federal Home Loan Bank advances are estimated using a discounted cash flow calculation that applies contractual costs currently being offered in the existing portfolio to current market rates being offered for deposits and borrowings of similar remaining maturities.

Commitments to Extend Credit and Standby Letters of Credit

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented previously in the commitments and contingent liabilities note.

-21-

19. PARENT COMPANY

The following are parent only condensed financial statements:

CONDENSED BALANCE SHEET

	December 31,
	2005		2004
ASSETS
Cash	$	338,484	$	104,802
Dividends Cash		130,280		—
Investment in bank subsidiary		36,710,818		35,254,115
Federal income tax receivable		—		17
Total assets	$	37,179,582	$	35,358,934
LIABILITIES AND SHAREHOLDERS’ EQUITY
Dividend Checks Outstanding	$	130,280	$	—
Shareholders’ equity		37,049,302		35,358,934
Total liabilities and shareholders’ equity	$	37,179,582	$	35,358,934

CONDENSED STATEMENT OF INCOME

	Year Ended December 31,
	2005			2004			2003
INCOME
Dividends from bank subsidiary	$	2,750,000		$	1,825,000		$	3,110,000
Operating expenses		102,415			50			50
Income before income taxes		2,647,585			1,824,950			3,109,950
Income tax benefit		(34,804	)		(17	)		(17	)
Income before equity in undistributed net income of subsidiary		2,682,389			1,824,967			3,109,967
Equity in undistributed net income of subsidiary		1,528,479			1,594,441			98,853
NET INCOME	$	4,210,868		$	3,419,408		$	3,208,820

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19. PARENT COMPANY (CONTINUED)

CONDENSED STATEMENT OF CASH FLOWS

	Year Ended December 31,
	2005			2004			2003
OPERATING ACTIVITIES
Net income	$	4,210,868		$	3,419,408		$	3,208,820
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiary		(1,528,479	)		(1,594,441	)		(98,853	)
(Increase) decrease in other assets		—			(17	)		—
Increase in other liabilities		51,198			—			—
Net cash provided by operating activities		2,733,587			1,824,950			3,109,967
FINANCING ACTIVITIES
Purchase of treasury shares		(982,824	)		(699,614	)		(1,741,534	)
Dividends paid		(1,437,738	)		(1,291,144	)		(1,240,872	)
Advance from subsidiary		50,937			—			—
Net cash used in financing activities		(2,369,625	)		(1,990,758	)		(2,982,406	)
INCREASE (DECREASE) IN CASH		363,962			(165,808	)		127,561
CASH AT BEGINNING OF YEAR		104,802			270,610			143,049
CASH AT END OF YEAR	$	468,764		$	104,802		$	270,610

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20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

(IN THOUSANDS EXCEPT PER SHARE DATA)

	Three Months Ended
	March 2005		June 2005		September 2005		December 2005
Total interest income	$	3,768	$	4,018	$	4,274	$	4,558
Total interest expense		865		998		1,101		1,205
Net interest income		2,903		3,020		3,173		3,353
Provision for loan losses		75		75		30		197
Net interest income after provision for loans losses		2,828		2,945		3,143		3,156
Total other income		311		361		300		293
Total other expense		2,045		1,743		1,939		1,886
Income before income taxes		1,094		1,563		1,504		1,563
Income taxes		249		425		403		436
Net income	$	845	$	1,138	$	1,101	$	1,127
Per share data:
Net earnings	$	1.29	$	1.73	$	1.69	$	1.73
Weighted average shares outstanding		657,046		656,402		653,225		650,482

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20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)(CONTINUED)

(IN THOUSANDS EXCEPT PER SHARE DATA)

	Three Months Ended
	March 2004		June 2004		September 2004		December 2004
Total interest income	$	3,386	$	3,435	$	3,522	$	3,690
Total interest expense		812		779		817		856
Net interest income		2,574		2,656		2,705		2,834
Provision for loan losses		90		30		30		75
Net interest income after provision for loans losses		2,484		2,626		2,675		2,759
Total other income		245		250		262		258
Total other expense		1,746		1,883		1,708		1,821
Income before income taxes		983		993		1,229		1,196
Income taxes		210		211		282		279
Net income	$	773	$	782	$	947	$	917
Per share data:
Net earnings	$	1.16	$	1.18	$	1.43	$	1.39
Weighted average shares outstanding		664,369		662,919		661,644		660,727

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