Killbuck Bancshares (KLIB) 10-K 2008 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

Our common shares are currently quoted by a number of quotation services, including the Over the Counter Bulletin Board (the “OTCBB”) and the Pink Sheets Electronic Quotation Service (the “Pink Sheets”), as well as by Community Banc Investments, New Concord, Ohio (“CBI”), each of which handles a limited amount of the Corporation’s stock transactions. The OTCBB and the Pink Sheets are both quotation services for “over-the-counter securities,” which are generally considered to be any equity securities not otherwise listed on a national exchange, such as NASDAQ, NYSE or Amex. CBI is a licensed intrastate securities dealer that specializes in marketing the stock of independent banks in Ohio. The Company’s common shares are quoted on the OTCBB and the Pink Sheets under the trading symbol “KLIB.”

The common stock of the Company trades infrequently. Parties interested in buying or selling the Company’s stock are generally referred to Community Banc Investments, New Concord, Ohio (“CBI”). The quarterly high and low price information in the table below was obtained from CBI and the OTCBB.

Quarter Ended		High		Low		Cash Dividends Paid
2008	March 31	$	119.74	$	114.44		N/A
	June 30		115.40		113.77	$	1.45
	September 30		116.36		113.91		N/A
	December 31		116.36		115.48	$	1.50
2007	March 31	$	113.47	$	111.17		N/A
	June 30		114.56		113.13	$	1.35
	September 30		117.76		115.43		N/A
	December 31		119.14		116.49	$	2.40

At December 31, 2008, the Company had approximately 1,001 shareholders of record.

Management does not have knowledge of the prices paid in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for the Company’s stock, these prices may not reflect the prices at which the stock would trade in a more active market.

Cash dividends are paid on a semi-annual basis.

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,
	2008			2007			2006			2005			2004
For The Year:
Total interest income	$	18,856		$	21,680		$	20,038		$	16,618		$	14,033
Total interest expense		6,514			8,068			5,919			4,169			3,264
Net interest income		12,342			13,612			14,119			12,449			10,769
Provision for loan losses		61			127			215			377			225
Net interest income after provision for loan losses		12,281			13,485			13,904			12,072			10,544
Total non-interest income		1,808			1,482			1,307			1,265			1,015
Total non-interest expense		8,529			8,169			7,996			7,613			7,158
Income before income taxes		5,560			6,798			7,215			5,724			4,401
Income tax expense		1,104			1,893			1,992			1,513			982
Net income	$	4,456		$	4,905		$	5,223		$	4,211		$	3,419
Per share data
Net earnings	$	7.12		$	7.73		$	8.14		$	6.44		$	5.16
Dividends	$	2.95		$	3.75		$	3.50		$	2.20		$	1.95
Book value (at period end)	$	69.14		$	65.31		$	61.28		$	57.20		$	53.78
Average no. of shares outstanding		625,839			634,458			641,759			653,996			662,130
Year-end balances:
Total loans	$	203,228		$	199,299		$	194,623		$	208,901		$	217,173
Securities		83,718			83,668			64,746			45,078			45,769
Total assets		341,338			336,337			313,205			298,050			293,867
Deposits		288,947			285,451			264,301			250,349			247,349
Borrowings		8,248			8,282			8,554			9,599			10,575
Shareholders’ equity		42,935			41,118			39,134			37,049			35,359
Significant ratios:
Return on average assets		1.32	%		1.51	%		1.74	%		1.44	%		1.18	%
Return on average equity		11.41			12.88			14.57			12.24			10.26
Dividends per share to net income per share		41.43			48.51			43.00			34.16			37.79
Average equity to average assets		11.54			11.75			11.96			11.79			11.55
Loans to deposits		70.33			69.82			73.64			83.44			87.80
Allowance for loan loss to total loans		1.24			1.26			1.23			1.11			1.22

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

Recent events in the U.S. and global financial markets, including the deterioration of the worldwide credit markets, have created significant challenges for financial institutions both in the United States and around the world. Dramatic declines in the housing market during the past year, marked by falling home prices and increasing levels of mortgage foreclosures, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. In addition, many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers, including other financial institutions, as a result of concern about the stability of the financial markets and the strength of counterparties.

For the most part, however, when you look at the Company’s 2008 performance, it seems like a year of business as usual, but we are all aware that the U.S. is in a severe recession. During previous periods of economic turmoil, we had thought that our service areas have been pretty much immune to these economic downturns, but it appears that this perception has changed a bit. Although there are still pockets of strength, in talking with our customers, this recession seems to be having a bigger impact on them than in the past, with slowing orders and slowing sales. Fortunately, the culture of our service area is such that our customers are tightening their belts and so far have the ability to weather the storm. As of the end of 2008, the Bank has not seen any noticeable increase in delinquencies and loan losses have been very low, even lower than during other periods of economic downturns.

As a consequence, the Bank has continued to lend, defying the national headlines about banks not doing so. We have not tightened our lending standards because we never eased our standards. We loan to people we know, on properties and in communities we know and understand. This is not to say that there will not be loan problems as economic conditions create increased unemployment in our primary markets, but we are currently in the position to work with those people. We expect that 2009 is going to be a challenging year. In addition to the potential for reduced credit quality, the continued credit and housing crisis may also make it more difficult for the Bank to adequately deploy its deposits into new and profitable loans, further squeezing the net interest margins.

The reported results of the Company, as further discussed below, 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. Except as otherwise discussed herein, 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.

RESULTS OF OPERATIONS

Summary

For 2008, we recorded net income of $4.5 million compared to $4.9 million for 2007 and $5.2 million for 2006.

Non-interest income was $1.8 million for 2008 compared to $1.5 million for 2007 and $1.3 million for 2006.

Total non-interest expenses were $8.5 million in 2008 compared to $8.2 million in 2007 and $8.0 million in 2006.

Earnings per share for 2008 were $7.12 compared to $7.73 for 2007 and $8.14 for 2006.

NET INTEREST INCOME

Our net interest income decreased by $1,270,000 in 2008 from 2007 and decreased by $507,000 in 2007 from 2006.

Total interest income decreased by $2,824,000 or 15.0% for 2008 from 2007. The decrease for 2008 resulted primarily from a decrease of $2,648,000 or 15.8% in loan interest income resulted primarily from decreases in the current yield on the loan portfolios. The current yield on the average loan portfolios decreased from 8.28% to 7.03%. The decrease in the current yield was a result of the loans repricing. The average loan portfolio decreased $1,513,000 or .75% for 2008 due to the lack of availability of quality loans. The Company’s credit standards have not changed. Another contributing factor in the total interest income decrease is the decrease in Federal Funds Sold interest income, which decreased $749,000 or 60.3% from 2007 to 2008. The decrease in this component is mainly due to the decrease in Federal Funds interest rates. The yield of 2.21% for 2008 compares to 5.07% for 2007. Investment income on taxable securities of approximately $2,789,000 for 2008 compares to $2,144,000 for 2007. The increase in this investment income on taxable securities is primarily due to an increase in volume. Average investment balances on taxable securities were $54,804,000 compared to $41,603,000 and the yields were 5.09% compared to 5.15% for 2008 and 2007, respectively. The average balances of the investment portfolio increased due to decreasing loan demand and deposit growth. See “Average Balance Sheet” for the year ended December 31, 2008 and 2007.

Total interest income increased by $1,642,000 or 8.2% for 2007 from 2006. The increase for 2007 resulted primarily from an increase of $1,058,000 or 97.4% in interest income on Investment securities – taxable. Investment income on taxable securities of approximately $2,144,000 for 2007 compares to $1,086,000 for 2006. The increase in this investment income on taxable securities is primarily due to an increase in volume. Average investment balances on taxable securities were $41,603,000 compared to $22,136,000 and the yields were 5.15% compared to 4.91% for 2007 and 2006, respectively. The average balances of the investment portfolio increased due to decreasing loan demand and deposit growth. See “Average Balance Sheet” for the year ended December 31, 2007 and 2006. The $402,000 or 2.5% increase 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 8.09% to 8.28%. The average loan portfolio increased only $167,000 or .08% for 2007 due to greater competitive loan pricing.

The yield on earning assets was 6.06%, 7.17%, and 7.16% for 2008, 2007, and 2006 respectively. The yield on earning assets decreased during 2008 attributable to the general decrease in interest rates. The yield on earning assets rose slightly during 2007 and ended near their beginning point.

Interest expense for 2008 decreased by $1,554,000 or 19.26% from 2007. The decrease was primarily due to a decrease in the cost on average interest bearing liabilities, which decreased 76 basis points from 3.41% in 2007 to 2.65% in 2008, and increased 64 basis points from 2.77% in 2006 to 3.41% in 2007. The decrease for 2008 is due to a decrease in the cost of time deposits. The cost of time deposits decreased 90 basis points from 4.65% to 3.75%. The average volume of time deposits increased $5,778,000 or 4.0% from 2007 to 2008.

The average volume of Interest-bearing demand deposits decreased $366,000 while money market deposits and savings deposits increased $2.9 million and $1.7 million respectively in 2008. The volume increases in time deposits and money market deposits and the decreases in other deposit categories are primarily due to the changing interest rate environment. The funds are shifting into the highest yielding deposits.

The average volume of money market deposits increased $1.1 million in 2007. Interest-bearing demand deposits and savings deposits decreased $3.4 million and $2.3 million respectively in 2007.

Mainly due to a decrease in the yield on the average interest earning assets, the interest rate spread as well as the net yield on earning assets has continued to decrease this year. The net yield on average interest-earning assets is 3.97%, 4.50% and 5.04% for 2008, 2007 and 2006 respectively. Management believes this trend will continue due to the current interest rate environment even though the cost on average interest-bearing liabilities has decreased.

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
	2008						2007						2006
	Average Balance			Interest	Yield/ Rate		Average Balance			Interest	Yield/ Rate		Average Balance			Interest	Yield/ Rate
Assets
Interest earning assets:
Loans (1)(2)(3)	$	201,179		14,136	7.03	%	$	202,692		16,784	8.28	%	$	202,525		16,382	8.09	%
Securities – taxable (4)		54,804		2,789	5.09	%		41,603		2,144	5.15	%		22,136		1,086	4.91	%
Securities – nontaxable		31,171		1,342	4.31	%		31,955		1,405	4.40	%		32,034		1,406	4.39	%
Securities – Equity (4)(5)		1,707		96	5.60	%		1,681		105	6.25	%		1,632		93	5.73	%
Federal funds sold		22,343		493	2.21	%		24,515		1,242	5.07	%		21,657		1,071	4.95	%
Total interest – earnings assets		311,204		18,856	6.06	%		302,446		21,680	7.17	%		279,984		20,038	7.16	%
Noninterest-earning assets
Cash and due from other Institutions		14,080						10,757						9,851
Premises and equipment, net		6,484						5,952						5,293
Accrued interest		1,401						1,502						1,195
Other assets		7,776						5,843						5,725
Less allowance for loan losses		(2,500	)					(2,477	)					(2,407	)
Total	$	338,445					$	324,023					$	299,641
Liabilities and Shareholders Equity
Interest bearing liabilities:
Interest bearing demand		26,889		108	0.40	%		27,255		158	0.58	%		30,668		176	0.57	%
Money market accounts		21,830		344	1.58	%		18,961		506	2.67	%		17,837		418	2.34	%
Savings deposits		38,979		276	0.71	%		37,274		382	1.02	%		39,588		377	0.95	%
Time deposits		150,375		5,642	3.75	%		144,597		6,724	4.65	%		116,846		4,587	3.93	%
Short term borrowings		5,580		18	0.32	%		5,456		135	2.47	%		4,193		117	2.79	%

Average Balance Sheet and Net Interest Analysis (Continued)

	For the Year Ended December 31
	2008						2007						2006
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Federal Home Loan Bank Advances		2,168		126	5.79	%		2,855		163	5.71	%		4,683		244	5.20	%
Total interest bearing liabilities		245,821		6,514	2.65	%		236,398		8,068	3.41	%		213,815		5,919	2.77	%
Noninterest bearing liabilities:
Demand deposits		49,711						45,452						45,995
Accrued expenses and other liabilities		3,849						4,101						3,993
Shareholder’s equity		39,064						38,072						35,838
Total	$	338,445					$	324,023					$	299,641
Net interest income			$	12,342					$	13,612					$	14,119
Interest rate spread (6)					3.41	%					3.76	%					4.39	%
Net yield on interest earning assets (7)					3.97	%					4.50	%					5.04	%

(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 $351,322, $353,095, and $326,356 in 2008, 2007, and 2006, 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).

	2008 Compared to 2007									2007 Compared to 2006
	Increase (Decrease) Due To									Increase (Decrease) Due To
	Volume			Rate			Net			Volume			Rate			Net
Interest income
Loans	$	(125	)	$	(2,523	)	$	(2,648	)	$	14		$	388		$	402
Securities-taxable		680			(35	)		645			955			103			1,058
Securities-nontaxable		(34	)		(29	)		(63	)		(3	)		2			(1	)
Securities-equities		2			(11	)		(9	)		3			9			12
Federal funds sold		(110	)		(639	)		(749	)		141			30			171
Total interest earning Assets		413			(3,237	)		(2,824	)		1,110			532			1,642
Interest expense
Interest bearing demand		(2	)		(48	)		(50	)		(20	)		2			(18	)
Money market accounts		77			(239	)		(162	)		26			62			88
Savings deposits		17			(123	)		(106	)		(22	)		27			5
Time deposits		269			(1,351	)		(1,082	)		1,089			1,048			2,137
Short-term borrowing		3			(120	)		(117	)		35			(17	)		18
Federal Home Loan Bank Advances		(39	)		2			(37	)		(95	)		14			(81	)
Total interest bearing Liabilities		325			(1,879	)		(1,554	)		1,013			1,136			2,149
Net change in interest income	$	88		$	(1,358	)	$	(1,270	)	$	97		$	(604	)	$	(507	)

Provision for Loan Losses

The provision for loan losses was $61,000 for 2008, $127,119 for 2007, and $214,514 for 2006. 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 1.24%, 1.26%, and 1.23% for 2008, 2007 and 2006 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 become 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 $324,000 or 21.9% to $1,807,000 in 2008 from $1,483,000 in 2007 and a $176,000 or 13.5% increase from $1,307,000 for 2006. Bank Owned Life Insurance (BOLI) income increased $311,000 primarily due to a benefit payout of approximately $234,000, and approximately $77,000 for the additional $2 million purchase of BOLI on certain Bank officers. Service Charges on deposit account increased $18,000 or 5.1% in 2008. This increase is due primarily to a $28,000 increase in activity of non-customer ATM usage surcharges, which partially offsets a $12,000 decrease in service charges on checking accounts due to the popularity of a service charge free product meeting certain conditions. In 2007, NSF Service charges increased $197,000 or 32.3%. This increase was due to the overdraft program, which began in the fourth quarter 2006.

Other Income decreased $14,000 or 8.8% to $146,000 in 2008 from $160,000 for 2007, due primarily from the decrease in income from check services of approximately $11,000. This income was $22,000 for 2008 and $33,000 for 2007 and $32,000 for 2006. In 2007, Other Income decreased $13,000 or 4.1%, due primarily from the decrease in income from the alternative investment service of approximately $9,000.

Noninterest Expense

Total non-interest expense increased $360,000 or 4.4% to $8,529,000 in 2008 as compared to $8,169,000 in 2007 and increased $173,000 or 2.2% for 2007 from $7,996,000 in 2006.

Salary and employee benefits for 2008 totaled $4,943,000, an increase of $186,000 or 3.9% from $4,757,000 in 2007 and increased $214,000 or 4.7% from $4,543,000 in 2006. These increases are due to normal increases for annual salary raises and employee benefits. The increase for 2007 was attributable to higher medical group insurance costs due to the insurer mandating a higher limit for the partially self-funded plan, staff additions, and normal recurring employee cost increases for salary and employee benefits.

Occupancy and equipment expense increased $89,000 in 2008 and increased $6,000 in 2007. Approximately $67,000 is due to increased depreciation expense on updated branch facilities and updated technologies in the computer network area in the last year. The remaining changes were attributable to changes in items that are normal and recurring in nature. In 2007, the changes were attributable to changes in items that are normal and recurring in nature.

Other operating expenses for 2008 totaled $2,516,000, an $85,000 or 3.5% increase from the $2,431,000 reported in 2007 and a $47,000 or 1.9% increase from the $2,478,000 reported in 2006. Professional fees increased approximately $95,000 or 34.3 % from $277,000 in 2007 to $372,000 for 2008. Approximately $11,000 of the increase is related to utilizing the services of a Human Resources consultant, approximately $51,000 was related to additional auditing fees for SOX 404 compliance and other regulatory requirements such as Bank Secrecy Act and Gramm-Leach-Bliley Act, and increasing regulatory examination costs. Professional fees relating to legal expenses increased approximately $18,000. Approximately $9,000 relates to a difficult foreclosure, which has now been resolved. The changes in the remaining expense accounts were attributable to increases/decreases in items that are normal and recurring in nature.

In 2007, other operating expenses decreased $47,000 or 1.9% from the $2,478,000 reported in 2006. Professional fees decreased approximately $51,000 or 15.5 % from $328,000 in 2006 to $277,000 for 2007. Approximately $7,200 of the decrease was related to no longer utilizing the services of a Human Resources consultant, approximately $19,000 was related to a Human Resources Recruiter, approximately $8,000 was related to strategic planning, and approximately $7,000 was related to new product development. Professional fees relating to legal expenses decreased approximately $11,000. The changes in the remaining expense accounts were attributable to increases/decreases in items that are normal and recurring in nature.

Income Tax Expense

Income tax expense decreased $789,000 for 2008 to $1,104,000 from $1,893,000 in 2007; and decreased $99,000 for 2007 to $1,893,000 from $1,992,000 in 2006. The effective rate on taxes for 2008, 2007 and 2006 was 19.9%, 27.8% and 27.6% 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, 2008 and 2007

Total assets at December 31, 2008 amounted to $341.3 million, an increase of $5 million compared to $336.3 million at December 31, 2007.

Cash and cash equivalents decreased $.9 million or 2.2% from December 31, 2007 to December 31, 2008, with liquid funds held in the form of federal funds sold decreasing $20.9 million. $20.6 million of the decrease in federal funds sold at December 31, 2008 remained in liquid funds on deposit at the Federal Reserve Bank earning the targeted federal funds rate.

Total investment securities increased $50,000 or .06% from December 31, 2007 to December 31, 2008. 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 $203.2 million at December 31, 2008 an increase of $3.9 million or 2.0% from $199.3 million at December 31, 2007. Even though totals loans increased, the overall conservative nature of the people in the communities we serve is evident. The construction real estate loan portfolio increased approximately $4.2 million; the commercial and other loan portfolio increased approximately $1.6 million, while the agriculture real estate loan portfolio, the commercial real estate loan portfolio, the consumer and credit loan portfolio, and the residential real estate loan portfolio decreased approximately $1.1 million, $.3 million, $.3 million, and $.2 million respectively.

In the late 1990’s, we began offering residential mortgage customers a fixed rate product. This program enabled 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 $3.2 million and $5.8 million of loans in 2008 and 2007. Profit on the sale of these loans was $28,000 and $21,000 for 2008 and 2007. In 2008, the Company allocated a small program of residential 1 to 4 family fixed rate mortgage loans to be held in-house.

The mix of the residential 1 to 4 family mortgages continues to change dependent upon the interest rate environment. The fixed rate mortgages continued to increase while the adjustable rate mortgages decreased. There was approximately a $4.6 million increase in residential 1 to 4 family fixed rate mortgages and a $4.7 million decrease in the adjustable rate mortgages. Information detailing the composition of the loan portfolio is presented in Note 4 to the consolidated financial statements.

Total deposits increased $3.5 million or 1.2% from December 31, 2007 to December 31, 2008. Non-interest bearing demand deposit accounts, money market deposits, and savings deposits increased $1.8 million, $7.5 million, and $3.0 million, respectively. The interest bearing demand deposits and time deposits decreased $.1 million and $8.7 million, respectively. The increases are attributable to new deposit account growth and internal movement of 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 2008 and 2007. Information related to the maturity of time deposits of $100,000 and over at December 31, 2008 is presented in Note 8 of the accompanying consolidated financial statements.

Advances were $1.9 million and $2.5 million at December 31, 2008 and 2007 respectively. In 2008, there were no new advances. Additional information on the Federal Home Loan Bank Advances is presented in Note 10 of the accompanying consolidated financial statements.

Shareholders’ equity increased $1.8 million during 2008 to $42.9 million at December 31, 2008 from $41.1 million at December 31, 2007. This increase was the result of $4.5 million in net earnings during the year, a net unrealized gain on securities available for sale of $.1 million, and Cash Dividends paid totaling $1.9 million. The Company also purchased treasury stock for $.9 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 2008.

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 2.0% 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.

Management expected interest rates to fall in 2008; therefore, we began to align the balance sheet for liabilities to begin repricing more quickly than earning assets, which resulted in the positive Gap decreasing. Management anticipates the cost on average interest-bearing liabilities to remain low; however, since these rates never returned to the levels before the historic lows, there is not much room to lower them. While the current interest rate environment continues to exert a downward pressure on the yields on loans, which was a significant component of the net yield on earning assets in 2008, the net interest margin is expected to continue experiencing compression in 2009.

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 variable rate loans and as of December 31, 2008, they comprised approximately 70% 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, 2008 and 2007 are 27% and 28%, respectively.

Operating activities, as presented in the statement of cash flows in the accompanying consolidated financial statements, provided $4.1 million and $5.1 million in cash during 2008 and 2007 respectively, generated principally from net income.

Investing activities consist primarily of loan originations and repayments, investment purchases and maturities, investment in technology, and BOLI purchases and payout. These activities used $5.7 million in funds during 2008 principally by the net funding of loans, the net purchase of fixed assets, and the purchase of BOLI on a select group of officers of $4.0 million, $.3 million, and $2 million respectively. Funds were provided by a BOLI payout and net purchases of investments totaling $.4 million and $.2 million respectively. These activities used $24.1 million in funds during 2007 principally by the net purchases of investments, the net funding of loans, and the net purchase of fixed assets of $18.2 million, $4.7 million, and $1.3 million respectively; and provided funds from the net proceeds from the sale of Other Real Estate Owned (OREO) totaling $.1 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 2008, financing activities provided $.7 million, comprised mainly of net deposit increases of $3.5 million and net increase in short-term borrowings of $.7 million; and used funds in the repayment of Federal Home Loan Bank advances of $.7 million, the purchase of treasury stock of $.9 million, and the payment of dividends of $1.9 million. For 2007, financing activities provided $17.5 million, comprised mainly of net deposit increases of $21.2 million and net increase in short-term borrowings of $.4 million; and used funds in the repayment of Federal Home Loan Bank advances of $.7 million, the purchase of treasury stock of $1.0 million, and the payment of dividends of $2.4 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, 2008.

Our regulatory capital position at December 31, 2008, 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Bank’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. Because of the nature of the Bank’s operations, the Bank is not subject to currency exchange or commodity price risk and, since the Bank has no trading portfolio, it is not subject to trading risk. The Bank’s loan portfolio, concentrated primarily within the surrounding market area, is subject to risks associated with the local economy. Since all of the interest earning assets and interest bearing liabilities are located at the Bank, all of the interest rate risk lies at the Bank level. As a result, all significant interest rate risk management procedures are performed at the Bank level.

The Bank actively manages interest rate sensitivity and asset/liability products through an asset/liability management committee. The principle purposes 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, the Bank has 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, the Bank has originated variable rate loans and as of December 31, 2008, they comprised approximately 70% of the total loan portfolio.

One of the principal functions of the Company’s asset/liability management program is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of this program is to manage the relationship between interest-earning assets and interest-bearing liabilities to minimize the fluctuations in the net interest spread and achieve consistent growth in net interest income during periods of changing interest rates.

Interest rate sensitivity is measured as the difference between the volume of assets and liabilities that are subject to repricing in a future period. These differences are known as interest sensitivity gaps. The Bank utilizes gap management as the primary means of measuring interest rate risk. Gap analysis identifies and quantifies the Bank’s exposure or vulnerability to changes in interest rates in relationship to the Bank’s interest rate sensitivity position. A rate sensitive asset or liability is one, which is capable of being repriced (i.e., the interest rate can be adjusted or principal can be reinvested) within a specified period of time. Subtracting total rate sensitive liabilities (RSL) from total rate sensitive assets (RSA) within specified time horizons nets the Bank’s gap positions. These gaps reflect the Bank’s exposure to changes in market interest rates, as discussed below.

Because many of the Bank’s deposit liabilities are capable of being immediately repriced, the Bank offers variable rate loan products in order to help maintain a proper balance in its ability to reprice various interest bearing assets and liabilities. Furthermore, the Bank’s deposit rates are not tied to an external index. As a result, although changing market interest rates impact repricing, the Bank has retained much of its control over repricing.

The Bank conducts the rate sensitivity analysis using a simulation model, which also monitors earnings at risk by projecting earnings of the Bank based upon an economic forecast of the most likely interest rate movement. The model also calculates earnings of the Bank based upon what are estimated to be the largest foreseeable rate increase and the largest foreseeable rate decrease. Such analysis translates interest rate movements and the Bank’s rate sensitivity position into dollar amounts by which earnings may fluctuate as a result of rate changes. A 2.0% immediate increase in interest rates would increase earnings by 8.1% and a 2.0% immediate decrease in interest rates would decrease earnings by 8.0%.

The data included in the table that follows indicates that the Bank is asset sensitive within one year. Generally, an asset sensitive gap could negatively affect net interest income in an environment of decreasing interest rates as a greater amount of interest bearing assets could be repricing at lower rates. During times of rising interest rates, an asset sensitive gap could positively affect net interest income, as rates would be increased on a larger volume of assets as compared to deposits. As a result, interest income would increase more rapidly than interest expense. A liability sensitive gap indicates that declining interest rates could positively affect net interest income, as expense of liabilities would decrease more rapidly than interest income would decline. Conversely, rising rates could negatively affect net interest income, as income from assets would increase less rapidly than deposit costs. Although rate sensitivity analysis enables the Bank to minimize interest rate risk, the magnitude of rate increases or decreases on assets versus liabilities may not correlate directly. As a result, fluctuations in interest spreads can occur even when repricing capabilities are perfectly matched.

It is the policy of the Bank to generally maintain a gap ratio within a range that is minus 10 percent to plus 20 percent of total assets for the time horizon of one year. When Management believes that interest rates will increase, it can take actions to increase the RSA/RSL ratios. When Management believes interest rates will decline, it can take actions to decrease the RSA/RSL ratio.

Changes in market interest rates can also affect the Bank’s liquidity position through the impact rate changes may have on the market value of the Bank’s investment portfolio. Rapid increases in market rates can negatively impact the market values of investment securities. As securities values decline, it becomes more difficult to sell investments to meet liquidity demands without incurring a loss. The Bank can address this by increasing liquid funds, which may be utilized to meet unexpected liquidity needs when a decline occurs in the value of securities.

The following table presents the Bank’s interest rate sensitivity gap position as of December 31, 2008 (dollars in thousands):

INTEREST RATE SENSITIVITY GAPS

(IN THOUSANDS)

	2009			2010			2011			2012			2013			Thereafter			Total
Interest-earnings assets:
Loans:
Fixed	$	18,147		$	6,989		$	5,327		$	4,212		$	5,788		$	20,430		$	60,893
Variable		106,092			9,690			11,630			5,328			6,288			3,307			142,335
Securities:
Fixed		7,120			8,761			13,529			9,773			14,363			30,172			83,718
Other interest-earning assets		29,412			—			—			—			—			—			29,412
Total interest-earning assets		160,771			25,440			30,486			19,313			26,439			53,909			316,358
Interest-bearing liabilities:
Demand and savings deposits		28,223			28,223			28,223			28,221			—			—			112,891
Time deposits:
Fixed		112,743			14,999			8,557			3,316			4,653			4			144,272
Short-term borrowings		6,385			—			—			—			—			—			6,385
FHLB advances		700			529			223			174			88			149			1,863
Total interest-bearing liabilities		148,051			43,751			37,003			31,711			4,741			153			265,411
Interest rate sensitivity gap		12,720			(18,311	)		(6,517	)		(12,398	)		21,698			53,756
Cumulative rate sensitivity gap	$	12,720		$	(5,591	)	$	(12,108	)	$	(24,506	)	$	(2,808	)	$	50,948
Cumulative interest rate sensitivity gap as a percent of interest earning assets		4.02	%		-1.77	%		-3.83	%		-7.75	%		-0.89	%		16.10	%

Killbuck Bancshares, Inc.

Killbuck, Ohio

Audit Report

December 31, 2008

Killbuck Bancshares, Inc.

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008

	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	7-27

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, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management’s assertion about the effectiveness of Killbuck Bancshares, Inc. internal control over financial reporting as of December 31, 2008, which is included in Form 10-K and, accordingly, we do not express an opinion thereon.

As discussed in the notes to the consolidated financial statements, effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements.

Steubenville, Ohio

February 27, 2009

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Killbuck Bancshares, Inc.

CONSOLIDATED BALANCE SHEET

	December 31,
	2008			2007
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	31,868,633		$	11,794,750
Federal funds sold		8,448,000			29,378,000
Total cash and cash equivalents		40,316,633			41,172,750
Investment securities:
Securities available for sale		51,549,966			54,115,975
Securities held to maturity (fair value of $33,265,569 and $30,247,416)		32,168,512			29,552,217
Total investment securities		83,718,478			83,668,192
Loans (net of allowance for loan losses of $2,525,202 and $2,510,011)		200,448,708			196,519,881
Loans held for sale		—			170,000
Premises and equipment, net		6,321,031			6,537,553
Accrued interest receivable		1,470,883			1,589,899
Goodwill, net		1,329,249			1,329,249
Other assets		7,732,841			5,349,524
Total assets	$	341,337,823		$	336,337,048
LIABILITIES
Deposits:
Noninterest bearing demand	$	52,971,305		$	51,195,017
Interest bearing demand		27,372,343			27,475,379
Money market		23,834,736			16,306,095
Savings		40,496,289			37,467,917
Time		144,272,233			153,006,933
Total deposits		288,946,906			285,451,341
Short-term borrowings		6,385,000			5,745,000
Federal Home Loan Bank advances		1,862,667			2,536,851
Accrued interest and other liabilities		1,207,652			1,486,215
Total liabilities		298,402,225			295,219,407
SHAREHOLDERS’ EQUITY
Common stock – No par value: 1,000,000 shares authorized, 718,431 issued		8,846,670			8,846,670
Retained earnings		42,461,137			39,848,570
Accumulated other comprehensive income		643,359			498,651
Treasury stock, at cost (96,949 and 88,849 shares)		(9,015,568	)		(8,076,250	)
Total shareholders’ equity		42,935,598			41,117,641
Total liabilities and shareholders’ equity	$	341,337,823		$	336,337,048

See accompanying notes to the consolidated financial statements.

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Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF INCOME

	Year Ended December 31,
	2008		2007		2006
INTEREST INCOME
Interest and fees on loans	$	14,136,505	$	16,784,112	$	16,381,634
Federal funds sold		493,224		1,241,808		1,071,435
Investment securities:
Taxable		2,884,342		2,248,837		1,179,370
Exempt from federal income tax		1,342,204		1,405,633		1,405,745
Total interest income		18,856,275		21,680,390		20,038,184
INTEREST EXPENSE
Deposits		6,370,270		7,770,422		5,559,002
Short term borrowings		18,075		135,038		116,882
Federal Home Loan Bank advances		125,569		163,407		243,602
Total interest expense		6,513,914		8,068,867		5,919,486
NET INTEREST INCOME		12,342,361		13,611,523		14,118,698
Provision for loan losses		61,000		127,119		214,514
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		12,281,361		13,484,404		13,904,184
NONINTEREST INCOME
Service charges on deposit accounts		369,710		352,367		344,982
NSF & OD fees, net		809,419		806,722		610,406
Gain on sale of loans, net		28,066		20,517		35,207
BOLI		453,821		143,352		141,358
Other income		146,464		159,543		175,106
Total noninterest income		1,807,480		1,482,501		1,307,059
NONINTEREST EXPENSE
Salaries and employee benefits		4,942,680		4,757,261		4,543,331
Occupancy and equipment		1,070,303		980,920		974,553
Other expense		2,516,212		2,430,897		2,478,005
Total noninterest expense		8,529,195		8,169,078		7,995,889
INCOME BEFORE INCOME TAXES		5,559,646		6,797,827		7,215,354
Income taxes		1,104,013		1,893,128		1,991,961
NET INCOME	$	4,455,633	$	4,904,699	$	5,223,393
EARNINGS PER SHARE	$	7.12	$	7.73	$	8.14
WEIGHTED AVERAGE SHARES OUTSTANDING		626,151		634,911		642,141

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, 2005		8,846,670		34,332,104			(64,736	)		(6,064,735	)		37,049,303
Net income				5,223,393						5,223,393		$	5,223,393
Other comprehensive income:
Unrealized gain on available for sale securities, net of tax of $35,869							69,628						69,628			69,628
Comprehensive income															$	5,293,021
Cash dividends paid ($3.50 per share)				(2,240,163	)								(2,240,163	)
Purchase of Treasury Stock, at cost (9,118 shares)										(968,364	)		(968,364	)
BALANCE, DECEMBER 31, 2006		8,846,670		37,315,334			4,892			(7,033,099	)		39,133,797
Net income				4,904,699						4,904,699		$	4,904,699
Other comprehensive income:
Unrealized gain on available for sale securities, net of tax of $254,361							493,759						493,759			493,759
Comprehensive income															$	5,398,458
Cash dividends paid ($3.75 per share)				(2,371,463	)								(2,371,463	)
Purchase of Treasury Stock, at cost (9,060 shares)										(1,043,151	)		(1,043,151	)
BALANCE, DECEMBER 31, 2007		8,846,670		39,848,570			498,651			(8,076,250	)		41,117,641
Net income				4,455,633						4,455,633		$	4,455,633
Other comprehensive income:
Unrealized gain on available for sale securities, net of tax of $74,547							144,708						144,708			144,708
Comprehensive income															$	4,600,341
Cash dividends paid ($2.95 per share)				(1,843,066	)								(1,843,066	)
Purchase of Treasury Stock, at cost (8,100 shares)										(939,318	)		(939,318	)
BALANCE, DECEMBER 31, 2008	$	8,846,670	$	42,461,137		$	643,359		$	(9,015,568	)	$	42,935,598

See accompanying notes to the consolidated financial statements.

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Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS

	Year Ended December 31,
	2008			2007			2006
OPERATING ACTIVITIES
Net income	$	4,455,633		$	4,904,699		$	5,223,393
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		61,000			127,119			214,514
Depreciation, amortization and accretion, net		439,697			359,585			294,640
Gain on sale of loans, net		(28,066	)		(20,517	)		(35,207	)
Origination of loans held for sale		(3,020,600	)		(5,828,620	)		(8,691,135	)
Proceeds from the sale of loans		3,218,666			5,851,637			8,648,442
BOLI benefit income		(234,396	)		—			—
Federal Home Loan Bank stock dividend		(53,600	)		(19,700	)		(72,200	)
Net changes in:
Accrued interest and other assets		(742,464	)		(304,501	)		(364,131	)
Accrued interest and other liabilities		17,134			6,259			98,705
Net cash provided by operating activities		4,113,004			5,075,961			5,317,021
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments		29,232,154			13,297,670			2,564,933
Purchases		(26,448,780	)		(31,887,283	)		(22,874,680	)
Investment securities held to maturity:
Proceeds from maturities and repayments		4,580,179			4,957,302			5,174,959
Purchases		(7,174,675	)		(4,503,250	)		(4,346,635	)
Net (increase) decrease in loans		(3,989,827	)		(4,714,930	)		14,095,363
Purchase of premises and equipment		(243,084	)		(1,302,496	)		(874,329	)
Net proceeds from sale of other real estate owned		—			80,000			620,000
Bank Owned Life Insurance (BOLI)
Proceeds		395,915			—			—
Purchases		(2,000,000	)		—			—
Net cash used in investing activities		(5,648,118	)		(24,072,987	)		(5,640,389	)
FINANCING ACTIVITIES
Net increase in deposits		3,495,565			21,150,829			13,951,362
Net increase in short-term borrowings		640,000			434,719			1,700,281
Repayment of Federal Home Loan Bank advances		(674,184	)		(706,520	)		(2,745,680	)
Purchase of treasury shares		(939,318	)		(1,043,151	)		(968,364	)
Cash dividends paid		(1,843,066	)		(2,371,463	)		(2,240,163	)
Net cash provided by financing activities		678,997			17,464,414			9,697,436
(Decrease) increase in cash and cash equivalents		(856,117	)		(1,532,612	)		9,374,068
Cash and cash equivalents at beginning of year		41,172,750			42,705,362			33,331,294
Cash and cash equivalents at end of year	$	40,316,633		$	41,172,750		$	42,705,362

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.

Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its market value, and management’s intent and ability to hold the security for a period of time sufficient to allow for a recovery in market value. Among the factors that are considered in determining management’s intent and ability is a review of the Company’s capital adequacy, interest rate risk position and liquidity. The assessment of a

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security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations and management’s intent and ability requires considerable judgment. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the Consolidated Statement of Income.

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.

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.

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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

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, 2008 and 2007 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.

Recent Accounting Pronouncements

In December 2007, the FASB issued FAS No. 141 (revised 2007),Business Combinations (“FAS 141(R)), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In September 2006, the FASB issued FAS No. 157,Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The Standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods

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within those fiscal years. In February 2008, the FASB issued Staff Position No. 157-1,Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which removed leasing transactions accounted for under FAS No. 13 and related guidance from the scope of FAS No. 157. Also in February 2008, the FASB issued Staff Position No. 157-2,Partial Deferral of the Effective Date of Statement 157, which deferred the effective date of FAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In December 2007, the FASB issued FAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. FAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. FAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In March 2008, the FASB issued FAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, to require enhanced disclosures about derivative instruments and hedging activities. The new standard has revised financial reporting for derivative instruments and hedging activities by requiring more transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS No. 133,Accounting for Derivative Instruments and Hedging Activities; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires entities to provide more information about their liquidity by requiring disclosure of derivative features that are credit risk-related. Further, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encourage. 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 2008, the FASB ratified EITF Issue No. 08-4,Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios. This Issue provides transition guidance for conforming changes made to EITF Issue No. 98-5,Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios, that resulted from EITF Issue No. 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments,and FAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity. The conforming changes are effective for financial statements issued for fiscal years ending after December 15, 2008, with earlier application permitted. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In February 2007, the FASB issued FSP No. FAS 158-1,Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guides. This FSP provides conforming amendments to the illustrations in FAS Statements No. 87, 88, and 106 and to related staff implementation guides as a result of the issuance of FAS Statement No. 158. The conforming amendments made by this FSP are effective as of the effective dates of Statement No. 158. The unaffected guidance that this FSP codifies into Statements No. 87, 88, and 106 does not contain new requirements and therefore does not require a separate effective date or transition method. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In February 2008, the FASB issued FSP No. FAS 140-3,Accounting for Transfers of Financial Assets and Repurchase Financing Transactions. This FSP concludes that a transferor and transferee should not separately account for a transfer of a financial asset and a related repurchase financing unless (a) the two transactions have a valid and distinct business or economic purpose for being entered into separately and (b) the repurchase financing does not result in the initial transferor regaining control over the financial asset. The FSP is effective for financial statements issued for fiscal years beginning on or after November 15, 2008, and interim periods within those fiscal years. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

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In April 2008, the FASB issued FASB Staff Position No. 142-3,Determination of the Useful Life of Intangible Assets(“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible Assets. This standard is intended to improve the consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS No. 141R and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The measurement provisions of this standard will apply only to intangible assets of the Company acquired after the effective date. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In May 2008, the FASB issued FSP No. APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement. This FSP provides guidance on the accounting for certain types of convertible debt instruments that may be settled in cash upon conversion. Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to clarify that instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered. A basic principle of the FSP is that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of EPS pursuant to the two-class method. The provisions of this FSP are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented (including interim financial statements, summaries of earnings, and selected financial data) are required to be adjusted retrospectively to conform with the provisions of the FSP. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In December 2008, the FASB issued FASB Staff Position (FSP) No. FAS 132(R)-1,Employers’ Disclosures about Postretirement Benefit Plan Assets. This FSP amends FASB Statement No. 132 (revised 2003),Employers’ Disclosures about Pensions and Other Postretirement Benefits, to improve an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by the FSP are to be provided for fiscal years ending after December 15, 2009. The adoption of this FSP 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 2008, 2007 and 2006 were $6,670,899, $8,002,386, and $5,817,972, respectively. Cash payments for income taxes for 2008, 2007, and 2006 were $1,344,193, $2,021,760, and $1,981,287 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:

	2008					2007
Institution	Rate		Maturity	Balance		Rate		Maturity	Balance
National City Bank	0.03	%	1-02-09	$	299,000	3.44	%	1-02-08	$	14,530,000
Great Lakes Bankers Bank	0.23	%	1-02-09		8,149,000	3.91	%	1-02-08		14,848,000
				$	8,448,000				$	29,378,000

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3. INVESTMENT SECURITIES

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

Securities Available for Sale

	2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. Government Agencies and Corporations	$	49,575,180	$	1,363,875	$	172	$	50,938,883
Mutual Funds		1,000,000		—		388,917		611,083
Total	$	50,575,180	$	1,363,875	$	389,089	$	51,549,966
	2007
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. Government Agencies and Corporations	$	52,360,443	$	776,418	$	20,886	$	53,115,975
Mutual Funds		1,000,000		—		—		1,000,000
Total	$	53,360,443	$	776,418	$	20,886	$	54,115,975

Securities Held to Maturity

	2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of States and Political Subdivisions	$	32,168,512	$	1,137,237	$	40,180	$	33,265,569
Total	$	32,168,512	$	1,137,237	$	40,180	$	33,265,569
	2007
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of States and Political Subdivisions	$	29,552,217	$	718,539	$	23,340	$	30,247,416
Total	$	29,552,217	$	718,539	$	23,340	$	30,247,416

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3. INVESTMENT SECURITIES (CONTINUED)

The amortized cost and fair values of debt securities at December 31, 2008, 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	$	5,103,791	$	4,791,199	$	4,330,686	$	4,408,788
Due after one year through five years		30,602,329		31,555,126		13,869,809		14,453,274
Due after five through ten years		14,582,181		14,916,864		13,306,606		13,751,285
Due after ten years		286,879		286,777		661,411		652,222
	$	50,575,180	$	51,549,966	$	32,168,512	$	33,265,569

Investment securities with an approximate carrying value of $37,375,000 and $34,978,000 at December 31, 2008 and 2007, 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, 2008 and 2007. As of December 31, 2008, there were a total of thirteen securities in a loss position.

	2008
	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	$	20,440	$	70	$	286,777	$	102	$	307,217	$	172
Obligations of states and Political subdivisions		2,056,170		40,180		—		—		2,056,170		40,180
Mutual Funds		611,083		388,917		—		—		611,083		388,917
Total debt securities	$	2,687,693	$	429,167	$	286,777	$	102	$	2,974,470	$	429,269

	2007
	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	$	1,416,959	$	3,933	$	1,974,258	$	16,953	$	3,391,217	$	20,886
Obligations of states and Political subdivisions		1,184,025		7,769		1,319,172		15,571		2,503,197		23,340
Total debt securities	$	2,600,984	$	11,702	$	3,293,430	$	32,524	$	5,894,414	$	44,226

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 non-collection of principal and interest, during the period.

4. LOANS

Major classification of loans are summarized as follows:

	2008			2007
Real estate – residential	$	72,663,710		$	72,857,699
Real estate – farm		8,843,146			9,966,991
Real estate – commercial		59,504,843			59,816,968
Real estate – construction		12,076,906			7,778,076
Commercial and other loans		43,239,000			41,678,124
Consumer and credit loans		6,900,712			7,200,963
		203,228,317			199,298,821
Less allowance for loan losses		(2,525,202	)		(2,510,011	)
Less net deferred loan fees		(254,407	)		(268,929	)
Loans, net	$	200,448,708		$	196,519,881

Loans held for sale at December 31, 2008 and 2007 were $0 and $170,000 respectively. Real estate loans serviced for Freddie Mac, which are not included in the consolidated balance sheet, totaled $50,288,839 and $53,527,726 at December 31, 2008 and 2007, 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.

	2008		2007		2006
Principal outstanding	$	72,799	$	838,877	$	471,101
Contractual interest due	$	13,692	$	34,833	$	54,227
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, 2008 and 2007, 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 $120,000 for the year ended December 31, 2008 is as follows:

Balance December 31, 2007		Additions		Amounts Collected		Balance December 31, 2008
$	3,687,846	$	765,895	$	340,680	$	4,113,061

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5. ALLOWANCE FOR LOAN LOSSES

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

	2008			2007			2006
Balance, January 1	$	2,510,011		$	2,393,705		$	2,313,313
Add:
Provision charged to operations		61,000			127,119			214,514
Loan recoveries		67,082			120,973			360,199
Less: Loans charged off		(112,891	)		(131,786	)		(494,319	)
Balance, December 31	$	2,525,202		$	2,510,011		$	2,393,705

6. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

	2008			2007
Land	$	2,050,242		$	2,050,242
Building and improvements		5,465,406			5,425,873
Leasehold improvements		78,761			78,598
Furniture, fixtures and equipment		3,682,240			3,748,121
		11,276,649			11,302,834
Less accumulated depreciation		(4,955,618	)		(4,765,281	)
Total	$	6,321,031		$	6,537,553

Depreciation expense charged to operations was $448,677 for 2008, $381,779 for 2007, and $368,995 for 2006.

7. GOODWILL

As of December 31, 2008 and 2007, 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 $57,451,106 and $57,367,824 at December 31, 2008 and 2007, respectively.

Interest expense on certificates of deposit $100,000 and over amounted to $2,064,635 in 2008, $2,353,663 in 2007, and $1,502,305 in 2006.

The following table sets forth the remaining maturity of time certificates of deposits of $100,000 or more at December 31, 2008.

3 months or less	$	20,376,159
Over 3 through 6 months		11,984,801
Over 6 through 12 months		14,076,461
Over 12 months		11,013,685
Total	$	57,451,106

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8. DEPOSITS (CONTINUED)

The following table sets forth the remaining maturity of all time deposits at December 31, 2008.

12 month or less	$	112,743,086
12 months through 24 months		14,998,753
24 months through 36 months		8,557,293
36 months through 48 months		3,315,513
48 months through 60 months		4,652,889
Over 60 months		4,699
	$	144,272,233

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:

	2008			2007
Short-term borrowings:
Ending balance	$	6,385,000		$	5,745,000
Maximum month-end balance during the year		7,010,000			6,390,000
Average month-end balance during the year		5,662,917			5,484,198
Weighted average at year end		0.23	%		1.24	%
Weighted average rate during the year		0.31	%		2.46	%

The Company has pledged investment securities with carrying values of $8,290,290 and $7,102,740 as of December 31, 2008 and 2007, 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 2009 through 2017. The weighted average rate paid on the advances is 5.69%. The scheduled aggregate minimum future principal payments on the advances outstanding as of December 31, 2008 are as follows:

Year Ending December 31,	Amount
2009	$	699,865
2010		529,202
2011		222,657
2012		173,502
2013		88,015
2014 and thereafter		149,426
Total	$	1,862,667

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, 2008 the Bank had a borrowing capacity of approximately $41.9 million with the FHLB. At December 31, 2008 and 2007 there was $1,862,667 and $2,536,851, 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 2008 and 2007 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 2008, the annual contribution to a participant’s retirement account may not exceed $46,000.

The pension costs charged to operating expense for the years 2008, 2007 and 2006 amounted to $342,596, $318,646, and $301,650, respectively.

12. OTHER OPERATING EXPENSE

Other operating expense included the following:

	2008		2007		2006
Professional fees	$	371,839	$	276,684	$	327,579
Franchise tax		502,008		488,388		460,580
Telephone		138,919		169,388		160,381
Stationery, supplies and printing		168,350		165,438		173,147
Postage, express and freight		186,504		183,047		171,752
Data processing		199,010		177,081		157,012
Other		949,582		970,871		1,027,554
Total	$	2,516,212	$	2,430,897	$	2,478,005

13. OPERATING LEASES

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

Less than 1 year	$	19,278
1 to 3 years		39,720
3 to 5 years		41,325
Greater than 5 years		233,059
	$	333,382

14. INCOME TAXES

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

	2008			2007		2006
Current payable	$	1,474,256		$	1,885,059	$	1,731,861
Deferred		(370,243	)		8,069		260,100
Total provision	$	1,104,013		$	1,893,128	$	1,991,961

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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:

	2008					2007					2006
	Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income
Provision at statutory rate	$	1,890,280		34.0	%	$	2,311,261		34.0	%	$	2,453,220		34.0	%
Tax exempt income		(629,523	)	(11.3	)		(526,655	)	(7.7	)		(533,663	)	(7.4	)
Non-deductible interest Expense		40,852		0.7			52,577		0.8			31,167		0.4
Other, net		(197,595	)	(3.6	)		55,945		0.8			41,237		0.6
Tax expense and effective rate	$	1,104,013		19.9	%	$	1,893,128		27.8	%	$	1,991,961		27.6	%

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:

	2008			2007
Deferred Tax Assets:
Allowance for loan losses	$	660,538		$	656,391
Deferred loan fees		—			995
Other		166,893			11,627
Deferred tax asset		827,431			669,013
Deferred Tax Liabilities:
Premise and equipment		281,770			335,441
Stock dividends		243,814			225,590
Net unrealized gain on securities		331,427			256,881
Other, net		13,975			190,353
Deferred tax liabilities	$	870,986		$	1,008,265
Net deferred tax (liabilities) assets	$	(43,555	)	$	(339,252	)

No valuation allowance was established at December 31, 2008 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:

	2008		2007
Commitments to extend credit	$	42,188,000	$	42,070,000
Standby letters of credit		895,000		785,000
Total	$	43,083,000	$	42,855,000

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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 2008, 2007 or 2006.

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 2009, without the approval of the regulatory authorities, is $2,097,802 plus 2009 profits retained up to the date of the dividend declaration.

Included in cash and due from banks are required federal reserves of $4,148,000 and $3,706,000 at December 31, 2008 and 2007, 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, 2008 and 2007.

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.

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17. REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

As of December 31, 2008 and 2007, 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.

	2008				2007
Amounts expressed in thousands	Amount		Ratio		Amount		Ratio
Total Risk Based Capital (to Risk Weighted Assets)
Actual	$	43,621	19.21	%	$	41,801	18.90	%
For Capital Adequacy Purposes		18,163	8.00			17,695	8.00
To be well capitalized		22,704	10.00			22,119	10.00
Tier 1 Capital (to Risk Weighted Assets)
Actual		41,096	18.10	%		39,291	17.76	%
For Capital Adequacy Purposes		9,082	4.00			8,848	4.00
To be well capitalized		13,623	6.00			13,271	6.00
Tier 1 Capital (to Average Assets)
Actual		41,096	12.10	%		39,291	11.75	%
For Capital Adequacy Purposes		13,585	4.00			13,376	4.00
To be well capitalized		16,981	5.00			16,719	5.00

18. FAIR VALUE MEASUREMENTS (SFAS No. 157)

Effective January 1, 2008, the Company adopted SFAS No. 157, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. SFAS No. 157 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by SFAS No. 157 hierarchy are as follows:

Level I:	Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II:	Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III:	Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

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18. FAIR VALUE MEASUREMENTS (SFAS No. 157) (CONTINUED)

The following table presents the assets reported on the consolidated statements of financial condition at their fair value as of December 31, 2008 by level within the fair value hierarchy. As required by SFAS No. 157, financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	December 31, 2008
	Level I		Level II		Level III		Total
	(In thousands)
Assets:
Securities available for sale	$	—	$	51,549,966	$	—	$	51,549,966

19. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

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

	2008				2007
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and due from depository institutions	$	31,868,633	$	31,868,633	$	11,794,750	$	11,794,750
Federal funds sold		8,448,000		8,448,000		29,378,000		29,378,000
Securities available for sale		51,549,966		51,549,966		54,115,975		54,115,975
Securities held to maturity		32,168,512		33,265,569		29,552,217		30,247,416
Net loans		200,448,708		211,277,000		196,519,881		203,523,000
Loans held for sale		—		—		170,000		170,000
Accrued interest receivable		1,470,883		1,470,883		1,589,899		1,589,899
Regulatory Stock		1,734,560		1,734,560		1,680,910		1,680,910
Bank Owned Life Insurance		5,442,906		5,442,906		3,400,735		3,400,735
Financial liabilities:
Deposits	$	288,946,906	$	292,313,673	$	285,451,341	$	287,527,408
Short term borrowings		6,385,000		6,385,000		5,745,000		5,745,000
Federal Home Loan Bank advances		1,862,667		2,180,000		2,536,851		2,716,000
Accrued interest payable		245,247		245,247		402,232		402,232

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

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19. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)

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 is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year end. The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, Savings, and money market deposits are valued at the amount payable on demand as of year-end.

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.

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20. PARENT COMPANY

The following are parent only condensed financial statements:

CONDENSED BALANCE SHEET

	December 31,
	2008			2007
ASSETS
Cash	$	379,908		$	258,597
Dividends Cash		77,450			110,149
Investment in bank subsidiary		41,812,375			39,859,044
Investment – Available for Sale		611,083			1,000,000
Total assets	$	42,880,816		$	41,227,790
LIABILITIES AND SHAREHOLDERS’ EQUITY
Dividend Checks Outstanding	$	77,450		$	110,149
Deferred FIT Payable		(132,232	)		—
Shareholders’ equity		42,935,598			41,117,641
Total liabilities and shareholders’ equity	$	42,880,816		$	41,227,790

CONDENSED STATEMENT OF INCOME

	Year Ended December 31,
	2008			2007			2006
INCOME
Dividends from bank subsidiary	$	2,950,000		$	4,400,000		$	3,225,000
Operating expenses		70,135			62,370			61,487
Income before income taxes		2,879,865			4,337,630			3,163,513
Income tax benefit		(23,829	)		(21,206	)		(20,905	)
Income before equity in undistributed net income of subsidiary		2,903,694			4,358,836			3,184,418
Equity in undistributed net income of subsidiary		1,551,939			545,863			2,038,975
NET INCOME	$	4,455,633		$	4,904,699		$	5,223,393

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20. PARENT COMPANY (CONTINUED)

CONDENSED STATEMENT OF CASH FLOWS

	Year Ended December 31,
	2008			2007			2006
OPERATING ACTIVITIES
Net income	$	4,455,633		$	4,904,699		$	5,223,393
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiary		(1,551,939	)		(545,863	)		(2,038,975	)
(Decrease) increase in other liabilities		(32,698	)		(31,979	)		11,848
Net cash provided by operating activities		2,870,996			4,326,857			3,196,266
INVESTING ACTIVITIES
Purchase Investment Securities Available for Sale		—			(1,000,000	)		—
Net cash used in investing activities		—			(1,000,000	)		—
FINANCING ACTIVITIES
Purchase of treasury shares		(939,318	)		(1,043,151	)		(968,364	)
Dividends paid		(1,843,066	)		(2,371,463	)		(2,240,163	)
Advance from subsidiary		—			—			—
Net cash used in financing activities		(2,782,384	)		(3,414,614	)		(3,208,527	)
INCREASE (DECREASE) IN CASH		88,612			(87,757	)		(12,261	)
CASH AT BEGINNING OF YEAR		368,746			456,503			468,764
CASH AT END OF YEAR	$	457,358		$	368,746		$	456,503

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21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

(IN THOUSANDS EXCEPT PER SHARE DATA)

	Three Months Ended
	March 2008		June 2008		September 2008		December 2008
Total interest income	$	5,081	$	4,734	$	4,618	$	4,424
Total interest expense		1,924		1,694		1,527		1,369
Net interest income		3,157		3,040		3,091		3,055
Provision for loan losses		—		—		—		61
Net interest income after provision for loans losses		3,157		3,040		3,091		2,994
Total noninterest income		400		648		393		366
Total noninterest expense		2,253		2,037		2,186		2,053
Income before income taxes		1,304		1,651		1,298		1,307
Income taxes		316		326		200		262
Net income	$	988	$	1,325	$	1,098	$	1,045
Per share data:
Net earnings	$	1.57	$	2.11	$	1.75	$	1.68
Weighted average shares outstanding		628,447		627,276		626,410		622,471

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

(IN THOUSANDS EXCEPT PER SHARE DATA)

	Three Months Ended
	March 2007		June 2007		September 2007		December 2007
Total interest income	$	5,300	$	5,483	$	5,496	$	5,401
Total interest expense		1,872		2,012		2,088		2,096
Net interest income		3,428		3,471		3,408		3,305
Provision for loan losses		5		62		60		—
Net interest income after provision for loans losses		3,423		3,409		3,348		3,305
Total noninterest income		330		369		377		406
Total noninterest expense		2,163		1,905		2,113		1,988
Income before income taxes		1,590		1,873		1,612		1,723
Income taxes		422		560		438		473
Net income	$	1,168	$	1,313	$	1,174	$	1,250
Per share data:
Net earnings	$	1.83	$	2.06	$	1.85	$	1.98
Weighted average shares outstanding		638,244		636,455		634,383		630,561

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