UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2008

or

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to

Commission File Number 0-14492

FARMERS & MERCHANTS BANCORP, INC.

OHIO		34-1469491
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
307 North Defiance Street Archbold, Ohio		43502
(Address of principal Executive offices)		(Zip Code)

Registrant’s telephone number, including area code (419)446-2501

Securities registered pursuant to Section 12(b) of the Act:

Title of each class None		Name of each exchange on which registered None

Securities registered pursuant to Section 12(g) of the Act:

Common shares without par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

As of June 30, 2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $110,266,614.00.

As of February 25, 2009, the Registrant had 5,200,000 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of Form 10-K — Portions of the definitive Proxy Statement for the 2008 Annual Meeting of Shareholders of Farmers & Merchants Bancorp, Inc.

 

 

FARMERS & MERCHANTS BANCORP, INC.
TABLE OF CONTENTS

Form 10-K Items		PAGE
Item 1. Business			3-9
Item 1.a Risk Factors			9-11
Item 2. Properties			11
Item 3. Legal Proceedings			12
Item 4. Submission of Matters to a Vote of Security Holders			12
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters			12-15
Item 6. Selected Financial Data			16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17-36
Item 7a. Quantitative and Qualitative Disclosures About Market Risk			36-38
Item 8. Financial Statements and Supplementary Data			38-67
Item 9. Disagreements on Accounting and Financial Disclosure			67
Item 9a. Controls and Procedures			67-68
Item 9b. Other Information			68
Item 10. Directors and Executive Officers of the Registrant			69-71
Item 11. Executive Compensation			71
Item 12. Security Ownership of Certain Beneficial Owners and Management			71
Item 13. Certain Relationships and Related Transactions			72
Item 14. Principal Accountant Fees and Services			72
Item 15. Exhibits, Financial Schedules and Reports on Form 8-K			72-73
Signatures and Certifications			74
EX-21
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Statements contained in this portion of the Company’s annual report may be forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of such words as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Such forward-looking statements are based on current expectations, but may differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time. Other factors which could have a material adverse effect on the operations of the Company and its subsidiaries which include, but are not limited to, changes in interest rates, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Bank’s market area, changes in relevant accounting principles and guidelines and other factors over which management has no control. The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

PART 1.

ITEM 1. BUSINESS:

General

Farmers & Merchants Bancorp, Inc. (Company) is a bank holding company incorporated under the laws of Ohio in 1985. Our primary subsidiary, The Farmers & Merchants State Bank (Bank) is a community bank operating in Northwest Ohio since 1897. Our only other subsidiary, Farmers & Merchants Life Insurance Company, a reinsurance company for life, accident and health insurance for the Bank’s consumer credits, was formed in 1992. Farmers & Merchants Life Insurance Company was dissolved during 2007. We report our financial condition and net income on a consolidated basis and we report only one segment.

Our executive offices are located at 307 North Defiance Street, Archbold, Ohio 43502, and our telephone number is (419) 446-2501.

For a discussion of the general development of the Company’s business throughout 2008, please see the portion of Management’s Discussion and Analysis of Financial Condition and Results of Operations captioned “2008 in Review”.

Nature Of Activities

The Farmers & Merchants State Bank engages in general commercial banking and savings business. Our activities include commercial, agricultural and residential mortgage, consumer, and credit card lending activities. Because our Bank’s branches are located in Northwest Ohio and Northeast Indiana, a substantial amount of our loan portfolio is comprised of loans made to customers in the farming industry for such things as farm land, farm equipment, livestock and general operation loans for seed, fertilizer, feed, etc. Other types of lending activities include loans for home improvements, and loans for such items as autos, trucks, recreational vehicles, motorcycles, etc.

We also provide checking account services, as well as savings and time deposit services such as certificates of deposits. In addition, ATM’s (automated teller machines) are also provided at our Ohio offices in Archbold, Wauseon, Stryker, West Unity, Bryan, Delta, Napoleon, Montpelier, Swanton, and Defiance, along with ones at our Auburn and Angola, Indiana offices. Two ATM’s are located at Sauder Woodworking Co., Inc., a major employer in Archbold. Additional locations in Ohio are at Northwest State Community College, Archbold; Community Hospitals of Williams County, Bryan; Fairlawn Haven Wyse Commons, Archbold; R&H Restaurant, Fayette; Delta Eagles, Bryan Eagles; Sauder Village, Archbold; Fulton County Health Center, Wauseon; downtown Defiance; and a mobile trailer ATM. In Indiana, four additional ATM’s are located at St. Joe; at Kaiser’s Supermarket and Therma-Tru in Butler; and at DeKalb Memorial Hospital in Auburn.

Farmers & Merchants Life Insurance Company was established to provide services to our customers through the issuance of life and disability insurance policies. Our Bank’s lending officers were the selling agents of the policies to customers. The activities of Farmers & Merchants Life Insurance Co. are not significant to the consolidated company. The Company dissolved the Farmers & Merchants Life Insurance Company subsidiary as the Bank discontinued offering the credit life, accident and health insurance to its customers.

F&M Investment Services, the brokerage department of the Bank, opened for business in April, 1999. Securities are offered through Raymond James Financial Services, Inc.

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956. Our subsidiary bank is in turn regulated and examined by the Ohio Division of Financial Institutions, and the Federal Deposit Insurance Corporation. The activities of our bank subsidiary are also subject to other federal and state laws and regulations.

The bank is participating in the expanded FDIC limits through all of 2009 and utilizing the additional insurance coverage provided in the Temporary Liquidity Guarantee Program. The FDIC increased the insurance level for deposits from $100,000 to $250,000 on interest bearing accounts and unlimited FDIC insurance on non-interest bearing accounts. We believe the cost for this coverage is offset by the benefit to our depositors.

The Bank’s primary market includes communities located in the Ohio counties of Defiance, Williams, Fulton, Henry and Wood. The commercial banking business in this market is highly competitive, with approximately 17 other depository institutions currently doing business in the Bank’s primary market. In our banking activities, we compete directly with other commercial banks, credit unions, farm credit services, and savings and loan institutions in each of our operating localities. In a number of our locations, we compete against entities which are much larger than us. The primary factors in competing for loans and deposits are the rates charged as well as location and quality of the services provided. On December 31, 2007, the Bank acquired the Knisely Bank of Indiana, expanding its market with the addition of offices in Butler and Auburn, Indiana, both located in DeKalb County. An additional office was opened in the summer of 2008 in Angola, Indiana, located in Steuben County.

At December 31, 2008, we had 258 full time equivalent employees. The employees are not represented by a collective bargaining unit. We provide our employees with a comprehensive benefit program, some of which are contributory. We consider our employee relations to be excellent.

Supervision and Regulation

General

The Company is a corporation organized under the laws of the State of Ohio. The business in which the Company and its subsidiary are engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities. The supervision, regulation and examination to which the Company and its subsidiary are subject are intended primarily for the protection of depositors and the deposit insurance funds that insure the deposits of banks, rather than for the protection of shareholders.

Several of the more significant regulatory provisions applicable to banks and bank holding companies to which the Company and its subsidiary are subject are discussed below, along with certain regulatory matters concerning the Company and its subsidiary. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and its subsidiary.

Regulatory Agencies

The Company is a registered bank holding company and is subject to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) pursuant to the Bank Holding Company Act of 1956, as amended.

The Bank is an Ohio chartered commercial bank. It is subject to regulation and examination by both the Ohio Division of Financial Institutions (ODFI) and the Federal Deposit Insurance Corporation (FDIC).

Holding Company Activities

As a bank holding company incorporated and doing business within the State of Ohio, the Company is subject to regulation and supervision under the Bank Holding Act of 1956, as amended (the “Act”). The Company is required to file with the Federal Reserve Board on a quarterly basis information pursuant to the Act. The Federal Reserve Board may conduct examinations or inspections of the Company and its subsidiary.

The Company is required to obtain prior approval from the Federal Reserve Board for the acquisition of more than five percent of the voting shares or substantially all of the assets of any bank or bank holding company. In addition, the Company is generally prohibited by the Act from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. The Company may, however, subject to the prior approval of the Federal Reserve Board, engage in, or acquire shares of companies engaged in activities which are deemed by the Federal Reserve Board by order or by regulation to be so closely related to banking or managing and controlling a bank as to be a proper activity.

On November 12, 1999, the Gramm-Leach-Bliley Act (the “GLB Act”) was enacted into law. The GLB Act made sweeping changes with respect to the permissible financial services which various types of financial institutions may now provide. The Glass-Steagall Act, which had generally prevented banks from affiliation with securities and insurance firms, was repealed. Pursuant to the GLB Act, bank holding companies may elect to become a “financial holding company,” provided that all of the depository institution subsidiaries of the bank holding company are “well capitalized” and “well managed” under applicable regulatory standards.

Under the GLB Act, a bank holding company that has elected to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Activities that are “financial in nature” include securities underwriting, dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve Board has determined to be closely related to banking. No Federal Reserve Board approval is required for the Company to acquire a company, other than a bank holding company, bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. Prior Federal Reserve Board approval is required before the Company may acquire the beneficial ownership or control of more than 5% of the voting shares, or substantially all of the assets, of a bank holding company, bank or savings association. If any subsidiary bank of the Company ceases to be “well capitalized” or “well managed” under applicable regulatory standards, the Federal Reserve Board may, among other actions, order the Company to divest the subsidiary bank. Alternatively, the Company may elect to conform its activities to those permissible for a bank holding company that is not also a financial holding company. If any subsidiary bank of the Company receives a rating under the Community Reinvestment Act of 1977 of less than satisfactory, the Company will be prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations. The Company has not elected to become a financial holding company and has no current intention of making such an election.

Affiliate Transactions

Various governmental requirements, including Sections 23A and 23B of the Federal Reserve Act, limit borrowings by holding companies and non-bank subsidiaries from affiliated insured depository institutions, and also limit various other transactions between holding companies and their non-bank subsidiaries, on the one hand, and their affiliated insured depository institutions on the other. Section 23A of the Federal Reserve Act also generally requires that an insured depository institution’s loan to its non-bank affiliates be secured, and Section 23B of the Federal Reserve Act generally requires that an insured depository institution’s transactions with its non-bank affiliates be on arms-length terms.

Interstate Banking and Branching

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (“Riegle-Neal”), subject to certain concentration limits and other requirements, adequately capitalized bank holding companies such as the Company are permitted to acquire banks and bank holding companies located in any state. Any bank that is a subsidiary of a bank holding company is permitted to receive deposits, renew time deposits, close loans, service loans and receive loan payments as an agent for any other bank subsidiary of that bank holding company. Banks are permitted to acquire branch offices outside their home states by merging with out-of-state banks, purchasing branches in other states and establishing de novo branch offices in other states. The ability of banks to acquire branch offices is contingent, however, on the host state having adopted legislation “opting in” to those provisions of Riegle-Neal. In addition, the ability of a bank to merge with a bank located in another state is contingent on the host state not having adopted legislation “opting out” of that provision of Riegle-Neal. The Company could from time to time use Riegle-Neal to acquire banks in additional states.

Control Acquisitions

The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company, unless the Federal Reserve Board has been notified and has not objected to the transaction. Under the rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Company, would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. In addition, a company is required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of outstanding voting stock of a bank holding company, or otherwise obtaining control or a “controlling influence” over that bank holding company.

Liability for Banking Subsidiaries

Under the current Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to maintain resources adequate to support each subsidiary bank. This support may be required at times when the bank holding company may not have the resources to provide it. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a U.S. federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to priority of payment. Any depository institution insured by the FDIC can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection with (1) the “default” of a commonly controlled FDIC-insured depository institution;

or (2) any assistance provided by the FDIC to both a commonly controlled FDIC-insured depository institution “in danger of default.” The Company’s subsidiary bank is an FDIC-insured depository institution. If a default occurred with respect to the Bank, any capital loans to the Bank from its parent holding company would be subordinate in right of payment to payment of the Bank’s depositors and certain of its other obligations.

Regulatory Capital Requirements

The Company is required by the various regulatory authorities to maintain certain capital levels. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The required capital levels and the Company’s capital position at December 31, 2008 are summarized in the table included in Note 14 to the consolidated financial statements.

FDICIA

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), and the regulations promulgated under FDICIA, among other things, established five capital categories for insured depository institutions-well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized-and requires U.S. federal bank regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements based on these categories. Unless a bank is well capitalized, it is subject to restrictions on its ability to offer brokered deposits and on certain other aspects of its operations. An undercapitalized bank must develop a capital restoration plan and its parent bank holding company must guarantee the bank’s compliance with the plan up to the lesser of 5% of the banks or thrift’s assets at the time it became undercapitalized and the amount needed to comply with the plan. As of December 31, 2008, the Company’s banking subsidiary was well capitalized pursuant to these prompt corrective action guidelines.

Dividend Restrictions

The ability of the Company to obtain funds for the payment of dividends and for other cash requirements will be largely dependent on the amount of dividends which may be declared by its banking subsidiary. Various U.S. federal statutory provisions limit the amount of dividends the Company’s banking subsidiaries can pay to the Company without regulatory approval. Dividend payments by the Bank are limited to its retained earnings during the current year and its prior two years. See Note 15 to the consolidated financial statements for the actual amount.

Deposit Insurance Assessments

The deposits of the Company’s banking subsidiary are insured up to regulatory limits by the FDIC, and, accordingly, are subject to deposit insurance assessments based on the Federal Deposit Insurance Reform Act of 2005, as adopted and took effect on April 21, 2006.

The Emergency Economic Stabilization Act of 2008 provided a temporary increase in deposit insurance coverage from $100,000 to $250,000 per depositor. This legislation was effective immediately upon the President’s signature on October 3, 2008. The basic deposit insurance limit is set to return to $100,000 on January 1, 2010, however, at this time, there is legislation pending which would permanently set the limit to $250,000.

Depositor Preference Statute

In the “liquidation or other resolution” of an institution by any receiver, U.S. federal legislation provides that deposits and certain claims for administrative expenses and employee compensation against the insured depository institution would be afforded a priority over general unsecured claims against that institution, including federal funds and letters of credit.

Government Monetary Policy

The earnings of the Company are affected primarily by general economic conditions and to a lesser extent by the fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve. Its policies influence, to some degree, the volume of bank loans and deposits, and interest rates charged and paid thereon, and thus have an effect on the earnings of the Company’s subsidiary Bank.

Capital Purchase Program

In response to the financial crisis affecting the banking system and financial markets, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law on October 3, 2008 creating the Troubled Assets Relief Program (“TARP”). As part of TARP, the U.S. Treasury established the Capital Purchase Program to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial institutions for the purpose of stabilizing and providing liquidity to the United States financial markets. The Company has determined not to participate in the TARP Capital Purchase Program. In connection with the EESA, there have been numerous actions by the Federal Reserve Board, the United States Congress, the U.S. Treasury, the FDIC, the SEC and others to further the economic and banking industry stabilization efforts under the EESA. It remains unclear at this time what further legislative and regulatory measures will be implemented under the EESA that affect the Company.

Additional Regulation

The Bank is also subject to federal regulation as to such matters as required reserves, limitation as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirement of their own securities, limitations upon the payment of dividends and other aspects of banking operations. In addition, the activities and operations of the Bank are subject to a number of additional detailed, complex and sometimes overlapping laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Electronic Funds Transfer Act and Regulation E, the Truth in Savings Act and Regulation DD, the Bank Secrecy Act, the Community Reinvestment Act, anti-discrimination laws and legislation, and antitrust laws.

Future Legislation

Changes to the laws and regulations, both at the federal and state levels, can affect the operating environment of the Company and its subsidiary in substantial and unpredictable ways. The Company cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon the financial condition or results of operations of the Company or its subsidiary.

Available Information:

The Company maintains an Internet web site at the following internet address: http://www.fm-bank.com. The Company files reports with the Securities and Exchange Commission (SEC). Copies of all filings made with the SEC may be read and copied at the SEC’s Public Reference Room, 450 Fifth Street, Washington, DC, 20549. You may obtain information about the SEC’s Public Reference Room by calling (800/SEC-0330). Because the Company makes its filing with the SEC electronically, you may access such reports at the SEC’s website, www.sec.gov. The Company makes available, free of charge through its internet address, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports as soon as reasonable practicable after such materials have been filed with or furnished to the SEC. Copies of these documents may also be obtained, either in electronic or paper form, by contacting Barbara J. Britenriker, Chief Financial Officer of the Company at (419) 446-2501.

Please see the Consolidated Financial Statements provided under Part II, Item 8 of this Form 10-K for information regarding the Company’s revenues from external customers, profits, and total assets for and as of, respectively, the fiscal year ended December 31, 2008.

ITEM 1A. RISK FACTORS

Significant Competition from an Array of Financial Service Providers

Our ability to achieve strong financial performance and a satisfactory return on investment to shareholders will depend in part on our ability to expand our available financial services. In addition to the challenge of attracting and retaining customers for traditional banking services, our competitors now include securities dealers, brokers, mortgage bankers, investment advisors and finance and insurance companies who seek to offer one-stop financial services to their customers that may include services that banks have not been able or allowed to offer to their customers in the past. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems and the accelerating pace of consolidation among financial services providers. If we fail to adequately address each of the competitive pressures in the banking industry, our financial condition and results of operations could be adversely affected.

Credit Risk

The risk of nonpayment of loans is inherent in commercial banking. Such nonpayment could have an adverse effect on the Company’s earnings and our overall financial condition as well as the value of our common stock. Management attempts to reduce the Bank’s credit exposure by carefully monitoring the concentration of its loans within specific industries and through loan application and approval procedures. However, there can be no assurance that such monitoring and procedures will reduce such lending risks. Credit losses can cause insolvency and failure of a financial institution and, in such event, its shareholders could lose their entire investment. For more information on the exposure of the Company and the Bank to credit risk, see the section under Part II, Item 7 of this Form 10-K captioned “Loan Portfolio.”

Susceptibility to Changes in Regulation

Any changes to state and federal banking laws and regulations may negatively impact our ability to expand services and to increase the value of our business. We are subject to extensive state and federal regulation, supervision, and legislation that govern almost all aspects of our operations. These laws may change from time to time and are primarily intended for the

protection of consumers, depositors and the deposit insurance funds. In addition, the Company’s earnings are affected by the monetary policies of the Board of Governors of the Federal Reserve. These policies, which include regulating the national supply of bank reserves and bank credit, can have a major effect upon the source and cost of funds and the rates of return earned on loans and investments. The Federal Reserve influences the size and distribution of bank reserves through its open market operations and changes in cash reserve requirements against member bank deposits. The Gramm-Leach-Bliley Act regarding financial modernization that became effective in November, 1999 removed many of the barriers to the integration of the banking, securities and insurance industries and is likely to increase the competitive pressures upon the Bank. We cannot predict what effect such Act and any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, but such changes could be materially adverse to our financial performance. For a more information on this subject, see the section under Part I, Item 1 of this Form 10-K captioned “Supervision and Regulation.”

Interest Rate Risk

Changes in interest rates affect our operating performance and financial condition in diverse ways. Our profitability depends in substantial part on our “net interest spread,” which is the difference between the rates we receive on loans and investments and the rates we pay for deposits and other sources of funds. Our net interest spread will depend on many factors that are partly or entirely outside our control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally. Historically, net interest spreads for other financial institutions have widened and narrowed in response to these and other factors, which are often collectively referred to as “interest rate risk.” Over the last few years, the Bank, along with most other financial institutions, has experienced a “margin squeeze” as drastic interest rate fluctuations have made it difficult to maintain a more favorable net interest spread.

The Bank manages interest rate risk within an overall asset/liability framework. The principal objectives of asset/liability management are to manage sensitivity of net interest spreads and net income to potential changes in interest rates. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. In the event that our asset/liabilities management strategies are unsuccessful, our profitability may be adversely affected. For more information regarding the Company’s exposure to interest rate risk, see Part II, Item 7A of this Form 10-K.

Attraction and Retention of Key Personnel

Our success depends upon the continued service of our senior management team and upon our ability to attract and retain qualified financial services personnel. Competition for qualified employees is intense. In our experience, it can take a significant period of time to identify and hire personnel with the combination of skills and attributes required in carrying out our strategy. If we lose the services of our key personnel, or are unable to attract additional qualified personnel, our business, financial condition, results of operations and cash flows could be materially adversely affected.

Dividend Payout Restrictions

We currently pay a quarterly dividend on our common shares. However, there is no assurance that we will be able to pay dividends in the future. Dividends are subject to determination and declaration by our board of directors, which takes into account many factors. The declaration of dividends by us on our common stock is subject to the discretion of our board and to applicable state and federal regulatory limitations. The Company’s ability to pay dividends on its common

stock depends on its receipt of dividends from the Bank. The Bank is subject to restrictions and limitations in the amount and timing of the dividends it may pay to the Company.

Anti-Takeover Provisions

Provisions of our Articles of Incorporation and Ohio law could have the effect of discouraging takeover attempts which certain stockholders might deem to be in their interest. These anti-takeover provisions may make us a less attractive target for a takeover bid or merger, potentially depriving shareholders of an opportunity to sell their shares of common stock at a premium over prevailing market prices as a result of a takeover bid or merger.

Operational Risks

We are subject to certain operational risks, including, but not limited to, data processing system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. We maintain a system of internal controls to mitigate against such occurrences and maintain insurance coverage for such risks that are insurable, but should such an event occur that is not prevented or detected by our internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on our business, financial condition or results of operations.

Limited Trading Market

Our common stock is not listed on any exchange or The NASDAQ Stock Market. Our stock is currently quoted in the over-the-counter markets.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal office is located in Archbold, Ohio.

The Bank operates from the facilities at 307 North Defiance Street. In addition, the Bank owns the property from 200 to 208 Ditto Street, Archbold, Ohio, which it uses for Bank parking and a community mini-park area. The Bank owns real estate at two locations, 207 Ditto Street and 209 Ditto Street in Archbold, Ohio upon which the bank built a commercial building to be used for storage, and a parking lot for company vehicles and employee parking. The Bank also owns real estate across from the main facilities to provide for parking.

The Bank occupies an Operations Center at 622 Clydes Way in Archbold, Ohio to accommodate our growth over the years. The bank owns a parking lot in downtown Montpelier which had been provided for customer use.

The Bank owns all of its office locations, with the exception of Angola, Indiana. The Angola office location is leased. Current locations of retail banking services are:

Office		Location
Archbold, Ohio		1313 S Defiance Street
Wauseon, Ohio		1130 N Shoop Avenue 119 N Fulton Street

Office		Location
Stryker, Ohio		300 S Defiance Street
West Unity, Ohio		200 W Jackson Street
Bryan, Ohio		924 W High Street 1000 S Main Street
Delta, Ohio		101 Main Street
Montpelier, Ohio		1150 E Main Street
Napoleon, Ohio		2255 Scott Street
Swanton, Ohio		7 Turtle Creek Circle
Defiance, Ohio		1175 Hotel Drive
Perrysburg, Ohio		7001 Lighthouse Way
Butler, Indiana		200 S Broadway
Auburn, Indiana		403 Erie Pass
Angola, Indiana		2310 N Wayne Street

The majority of the above locations have drive-up service facilities.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings, other than ordinary routine proceedings incidental to the business of the Bank or the Company, to which we are a party or of which any of our properties are the subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No items were submitted during the fourth quarter of the year covered by this report to a vote of the security holders through solicitation of proxies or otherwise.

PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is not listed on the NASDAQ stock market or any other stock exchange. While there is no established public trading market for our common stock, our shares are currently dually-quoted by various market makers on the Pink Sheets and the Over the Counter Bulletin Board, which are both over-the-counter quotation services for participant broker-dealers.

There are market makers that set a price for our stock; however, private sales continue to occur. The high and low sale prices were from sales of which we have been made aware by researching daily on Bloomberg.com. The high and low sale prices known to our management are as follows:

		Stock Prices
2008 - quarter		Quarter				Low				High
		1st				$	18.00			$	20.25
		2nd					19.05				22.80
		3rd					20.05				22.25
		4th					19.00				21.35

2007 - quarter		Quarter				Low				High
		1st				$	22.10			$	23.50
		2nd					22.15				23.00
		3rd					20.00				22.50
		4th					18.05				20.25

The Company utilizes Registrar and Transfer Company as its transfer agent.

As of February 2, 2009 there were 2,052 record holders of our common stock.

Below is a line-graph presentation comparing the cumulative total shareholder returns for the Corporation, an index for NASDAQ Stock Market (U.S. Companies) comprised of all domestic common shares traded on the NASDAQ National Market System and the NASDAQ Bank Index for the five-year period ended December 31, 2008. The chart compares the value of $100 invested in the Corporation and each of the indices and assumes investment on December 31, 2003 with all dividends reinvested.

The Board of Directors recognizes that the market price of stock is influenced by many factors, only one of which is performance. The stock price performance shown on the graph is not necessarily indicative of future performance.

Year 2003 as the base

		2003				2004				2005				2006				2007				2008
FMSB		$	100.00			$	101.65			$	81.65			$	83.30			$	78.05			$	79.55
NASDAQ-COMPOSITE		$	100.00			$	109.10			$	111.38			$	122.89			$	135.95			$	81.85
NASDAQ-BANK INDEX		$	100.00			$	113.44			$	111.19			$	126.36			$	101.57			$	80.03

Dividends are declared and paid quarterly. Per share dividends declared for the years ended 2008 and 2007 are as follows:

		1st Quarter				2nd Quarter				3rd Quarter				4th Quarter				Total
2008		$	.16			$	.16			$	.18			$	.18			$	0.68
2007		$	.16			$	.16			$	.16			$	.16			$	0.64

The ability of the Company to pay dividends is limited by the dividend that the Company receives from the Bank. The Bank may pay as dividends to the Company its retained earnings during the current year and its prior two years. Currently, such limitation on the payment of dividends from the Bank to the Company does not materially restrict the Company’s ability to pay dividends to its shareholders.

Dividends declared during 2008 were $0.68 per share totaling $3.28 million, 6.25 percent higher than 2007 declared dividends of $0.64 per share. During 2008, the Company purchased 171,889 shares and awarded 10,000 restricted shares to 51 employees under its long term incentive plan. 245 shares were forfeited during 2008. At year end 2008, the Company held 418,294 shares in Treasury stock and 23,575 in unearned stock awards. The Company purchased 228,000 shares throughout 2007. 8,760 shares were awarded to 46 employees in 2007. 740 restricted shares were forfeited during 2007 and 600 restricted shares whose vesting was accelerated were transferred to a retired employee. At December 31, 2007, the Company held 256,160 shares in Treasury stock and 17,240 in unearned stock awards. The Company continues to have a strong capital base and to maintain regulatory capital ratios that are significantly above the defined regulatory capital ratios. On January 16, 2009, the Company announced the authorization by its Board of Directors for the Company’s repurchase, either on the open market, or in privately negotiated transactions, of up to 225,000 shares of its outstanding common stock commencing January 16, 2009 and ending December 31, 2009.

ISSUER PURCHASES OF EQUITY SECURITIES

										Total Number
										of Shares
		Total								Purchased as
		Number of				Average Price Paid				Part of Publicly				Remaining Share
		Shares				per				Announced				Repurchase
Period		Purchased				Share				Programs				Authorization
10/1/2008 to 10/31/2008			—				—				—				119,492
11/1/2008 to 11/30/2008			34,081			$	19.83				34,081	(1)			85,411
12/1/2008 to 12/31/2008			7,300			$	20.00				7,300	(1)			78,111
Total			41,381			$	19.86				41,381	(1)			78,111

Reclassification

Certain amounts in the 2007 and 2006 consolidated financial statements have been reclassified to conform with the 2008 presentation. The Company’s Board of Directors declared a 4 for 1 stock split effective May 12, 2006. Therefore, all references in the financial statements and other disclosures related to the number of shares and per share amounts of the Company’s stock have been retroactively restated to reflect the increased number of shares outstanding.

ITEM 6. SELECTED FINANCIAL DATA

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

Summary of Consolidated Statement of Income — UNAUDITED

		(In Thousands, except share data)
		2008				2007				2006				2005				2004
Summary of Income:
Interest income		$	43,824			$	45,424			$	42,269			$	38,101			$	37,351
Interest expense			18,101				21,722				18,535				13,539				11,222
Net Interest Income			25,723				23,702				23,734				24,562				26,129
Provision for loan loss			1787				871				52				(425	)			884
Net interest income after provision for loan loss			23,936				22,831				23,209				24,987				25,245
Other income (expense), net			(14,763	)			(12,269	)			(11,966	)			(13,209	)			(13,442	)
Net income before income taxes			9,173				10,562				11,243				11,778				11,803
Income taxes			2,450				2,828				3,107				3,202				3,573
Net income		$	6,723			$	7,734			$	8,136			$	8,576			$	8,230
Per Share of Common Stock:
Earnings per common share outstanding *
Net income		$	1.39			$	1.52			$	1.57			$	1.65			$	1.58
Dividends		$	0.680			$	0.640			$	0.575			$	0.500			$	0.475
Weighted average number of shares outstanding			4,846,310				5,097,636				5,186,329				5,198,728				5,200,000

Summary of Consolidated Balance Sheet — UNAUDITED

		(In Thousands)
		2008				2007				2006				2005				2004
Total assets		$	805,729			$	803,974			$	737,096			$	720,94			$	702,513
Loans			562,336				523,474				498,580				458,704				472,211
Total Deposits			615,732				634,593				585,409				576,297				574,205
Stockholders’ equity			90,547				89,375				87,732				82,588				78,845
Key Ratios
Return on average equity			7.51	%			8.71	%			9.64	%			10.62	%			10.72	%
Return on average assets			0.84	%			1.06	%			1.14	%			1.22	%			1.16	%
Loans to deposits			91.33	%			82.49	%			85.17	%			79.65	%			82.24	%
Capital to assets			11.24	%			11.12	%			11.90	%			11.46	%			11.22	%
Dividend payout			48.77	%			42.00	%			36.63	%			30.31	%			30.02	%

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policy and Estimates

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, and the Company follows general practices within the financial services industry in which it operates. At times the application of these principles requires Management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. These assumptions, estimates and judgments are based on information available as of the date of the financial statements. As this information changes, the financial statements could reflect different assumptions, estimates and judgments. Certain policies inherently have a greater reliance on assumptions, estimates and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Examples of critical assumptions, estimates and judgments are when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not required to be recorded at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability must be recorded contingent upon a future event.

All significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the notes to the consolidated financial statements and in the management discussion and analysis of financial condition and results of operations, provide information on how significant assets and liabilities are valued and how those values are determined for the financial statements. Based on the valuation techniques used and the sensitivity of financial statement amounts to assumptions, estimates and judgments underlying those amounts, management has identified the determination of the Allowance for Loan and Lease Losses (ALLL) and the valuation of its Mortgage Servicing Rights as the accounting areas that requires the most subjective or complex judgments, and as such could be the most subject to revision as new information becomes available.

The ALLL represents management’s estimate of credit losses inherent in the Bank’s loan portfolio at the report date. The estimate is a composite of a variety of factors including past experience, collateral value, and the general economy. ALLL includes a specific portion, a formula driven portion, and a general nonspecific portion. The collection and ultimate recovery of the book value of the collateral, in most cases, is beyond our control.

The Company is also required to estimate the value of its Mortgage Servicing Rights. The Company recognizes as separate assets rights to service fixed rate single-family mortgage loans that it has sold without recourse but services for others for a fee. Mortgage servicing assets are initially recorded at cost, based upon pricing multiples as determined by the purchaser, when the loans are sold. Mortgage servicing assets are carried at the lower of the initial carrying value, adjusted for amortization, or estimated fair value. Amortization is determined in proportion to and over the period of estimated net servicing income using the level yield method. For purposes of determining impairment, the mortgage servicing assets are stratified into like groups based on loan type, term, new versus seasoned and interest rate. The valuation is completed by an independent third party.

The expected and actual rates of mortgage loan prepayments are the most significant factors driving the potential for the impairment of the value of mortgage servicing assets. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced.

For more information regarding the estimates and calculations used to establish the ALLL and the value of Mortgage Servicing Rights, please see Note 1 to the consolidated financial statements provided herewith.

2008 in Review

Changing the mix of the balance sheet was the biggest goal achieved in 2008. The acquisition of Knisely Bank with total assets of $42.5 million was completed on December 31, 2007. With the acquisition came increased liquidity and a need to better utilize the cash assets. Loan growth was at the top of the list for use of excess cash. Growth of 7.42%, or $38.9 million, occurred in the loan portfolio in comparing year end 2008 to 2007. Cash balance at December 31, 2008 decreased 57.3%, or $28 million, from December 31, 2007 balance to end at $21.9 million. In comparing year end balances, loan growth was also funded by a decrease in the investment portfolio of $7.8 million, an increase in Federal Home Loan Bank (FHLB) borrowings of $13.8 million and an increase of $6.9 million in the securities under agreement to repurchase. Overall total assets grew to a record high of $805.7 million.

The Knisely Bank purchase also added goodwill of slightly over $4 million to the balance sheet along with $1.1 million of core deposit intangible and fair value adjustments for both loans and buildings. Additional acquisition costs of $67 thousand paid in 2008 increased goodwill to $4.07 million. The transaction was completed as an asset purchase for tax purposes. The Bank extended its market area and is able to provide many additional services to the Indiana communities of Butler and Auburn. The bank continued with the extension of its footprint in Indiana when another office opened in Angola in late summer 2008.

The Bank launched a new product offering in March 2008: Reward Checking. The product is a free checking account which pays a high rate of interest to customers who agree to three qualifications each statement cycle. The three qualifications enable the Bank to deliver the high interest rate as they create efficiencies or increase non-interest revenue to the Bank. As will be shown later, the increase in interest bearing liabilities is in large part due to the success of this product. It has been extremely well received by customers and embraced by the Bank’s employees. It has exceeded expectations at this point and continues to be the product of choice for a new checking customer. At year end 2008, it had the second highest balance at over $29 million within the business and consumer checking portfolio. More discussion will be focused on this product with the tables to follow.

The foundation for emphasizing a more needs based sales culture was begun in 2007 with the kickoff of the “This Bank is Made For You and Me” campaign. This represents a change in the approach for customer service and a win-win situation for both the Bank and its customers. This is an on-going project with its own dedicated team manager to measure its success. It is to provide better customer service and more relationship building. The program continued to expand with all customer contact positions being exposed to it during 2008. The growth in both loans and Reward checking are largely attributed to the improved needs-based sales culture.

Material Changes in Results of Operations

The discussion now turns to more financial based results and trends as a result of 2008 operations. The increase in non-interest income of customer service fees of $235 thousand over 2007 is attributed to the increase in overdraft fees generated by the increased volume of checking accounts. The overall portfolio grew 16% in number of accounts over 2007. This growth was the impact of the Knisely acquisition and Reward checking. The increased non-interest income in overdraft fees reversed the trend of decreased fees in 2007. Important to note, however, is that the trend of 2007 was caused by a loss of income generated as customers’ accounts were overdrawn less in 2007. The average overdraft fees paid per account were $6.77 less in 2008 than in 2007. The increased revenue was due to the growth in the volume of accounts not the charges paid per account. Overall, 2008’s overdraft charges were higher than 2007’s but below 2006’s. This was offset by the decrease in other service charges and fees of $247 thousand. This decrease in revenue was mainly a loss on sale of assets compared to a gain in 2007. $131 thousand of the loss was attributed to Other Real Estate Owned (OREO) sales and $62.5 thousand to loss on fixed assets which occurred mainly through the sale of an office building in Montpelier, Ohio which had relocated to another office in the same community. Lessening the decrease was the increased non-interest income generated by one of the high rate interest qualifications of Reward checking-twelve point-of-sale (POS) debit card transactions each statement cycle. Those fees, along with ATM fees, increased $218.5 thousand over 2007. The average number of POS transactions is 26 for a Reward checking customer compared to an average of 8 for a free checking customer. This is a part of the reason the Bank can pay a higher interest rate on this product, creating a change in customers’ behavior that rewards both the customer and the Bank.

With the increase in customer service fees offset by the decrease in other service charges and fees, the net gain in non-interest income of $94 thousand over 2007 was achieved through an increase in net gain on sale of loans and sale of securities. The net gain on sale of loans was caused by the increased volume of loans sold during 2008. For a further breakdown of mortgage servicing rights, see Note 6 of the audited financial statements. The gain on sale of security was derived from the sale of stock in a banker’s bank. As a bank chartered under the State of Ohio, the Bank may not hold stock in two banker’s banks. Therefore, the acquisition of Knisely facilitated the need to sell stock in one of the banker’s banks as the F&M already held stock in one entity and Knisely held stock in a different banker’s bank. The gain is from the sale of one of those stocks.

Non-interest expenses were $2.6 million higher than 2007 and $2.8 million higher than 2006. The increase in 2007 as compared to 2006 was impacted by mainly two issues: cost of health benefits and other general and administrative expenses. Important to note is the Bank’s focus on doing more with less — reflected in the decline of salaries and wages expense for those two years. 2007 had the addition of the Perrysburg office in the fourth quarter and 2008 began with the addition of the two Indiana offices with a third in the summer. The number of full time equivalent employees increased 17 to 258, as of year end 2008, from 3^rd quarter 2007’s 241. Salary expense increased for 2008 by $630 thousand due to increased staffing. Dollars spent on incentive or bonus decreased $107 thousand for 2008 compared to 2007. The trend is reversed in the employee benefits as it is an increasing upward trend. 2008 was $214 thousand higher than 2007 and 2007 was $348 thousand higher than 2006. 2008’s increase in employee benefits was driven by a $174 thousand increase in miscellaneous personnel expense and a $42 thousand increase in the Bank’s Owned Life Insurance (BOLI) retirement expense. Miscellaneous personnel expense includes the cost of Bank sponsored employee outings such as the Christmas party, summer outings, and the use of employment agencies (head hunters). Many staffing positions required special qualifications and needed the aid of an employment agency to locate personnel. This cost drove the miscellaneous personnel expense higher in 2008. At the beginning of 2008, a liability was established for post retirement benefits of officers participating in the BOLI. The original entry was posted as an adjustment to retained earnings. The additional expense of $42

thousand over 2007 was to increase the liability to record the expense applicable to 2008. The benefit cost of the pension plan was lower in 2008 as the profit sharing percentage contribution for the Bank was lower due to the lower profit level. The percentage awarded was the lowest since the 401-K plan was established. The higher cost of employee benefits in 2007 over 2006 was attributable both to the health insurance premium expense of the coverage and an increased level of claims. During 2007, alternatives were explored to minimize the exposure for a new Health Savings Accounts option. A wellness benefit was also added to the plans to help defray the cost of the higher deductibles. Employees were given a choice to participate in the Health Savings option or the traditional insurance plan. Over 70% of the employees chose the HSA option and claims were lower in 2008. Even with the Bank’s contribution to the employee’s HSA, group insurance expense for 2008 was $51 thousand lower.

Occupancy expense increased $465 thousand over 2007 after 2007 saw a decrease of $41 thousand. With the increased number of offices, costs such as real estate taxes and depreciation also increased. Angola added the first lease expense for an office. Renovations were also completed to the Auburn office during 2008. The other factor in the increased expense was caused by the decreased building rent received from the Bank’s brokerage division, FM Investments. The bank receives revenue through its partnership with Raymond James in the form of building rent. A difficult market environment and a change in staffing caused a $204.7 thousand decrease in the revenue generated.

Furniture and Equipment expense showed an increase in 2008 of $122 thousand over 2007 and just a $22 thousand increase over 2006. Increased offices again contributed to the expense along with the purchase of a new bank wide phone system which was approved and implementation begun in 2008. The replaced system was antiquated and parts for repairs were becoming difficult and expensive to find. The Perrysburg and Angola offices had systems compatible to the new system installed in anticipation of the replacement. The new phone system utilizes the Bank’s wide area data network or VOIP (voice over internet protocol). The increased depreciation expense will be offset by a cost savings in long distance and telephone line usage in the coming years.

With the increased number of checking accounts mentioned earlier and combined with the overall increase in all accounts from the Knisely acquisition, data processing also increased. A large portion of the Bank’s costs are based on the volume or number of accounts. The increased expense trend from 2006 to 2008 directly correlates to growth attained during those years.
Other general and administrative has the same trend as data processing: increasing. In 2008, the increase came from the amortization of the $1.1 million core deposit intangible created from the Knisely acquisition, equaling $157 thousand for 2008. In addition, advertising increased $107 thousand focusing on our newer markets and communication to our new customers from the acquisition. Tied to this also are the increased consulting fees of $122 thousand from the needs-based sales training and Reward checking consultation. Two other contributors to the 2008 increase of $838 thousand over 2007 were a reflection of the economy: an increase of $92 thousand in loan and collection expense and a $137 thousand increase in miscellaneous NSF checks and other losses. The Bank experiences an increase in fraudulent activity and scams tried on our customers as the economy deteriorates. The staff works diligently to help detect the scams to save our customers but unfortunately, a few slip through the cracks. Lastly, FDIC assessments increased $84 thousand during 2008. This line item will represent a significant increase in 2009 as the percentage of assessment has increased and the Bank will have applied all of its previous credits. In 2007, the increase in other general and administrative cost was due to the expense of Ohio sales use tax. An audit covering the period of 2000 through 2007 was conducted in 2007. It was discovered that many out of state vendors and small service providers were not charging the Bank for sales tax. An additional $177 thousand of expense was incurred

from the findings. Procedures were established to process invoices without sales tax and any future audit would be limited to a three year look back period.

The last large item to be discussed is the Provision for Loan Losses. A tough economic environment existed for most businesses in northwest Ohio during 2007 and 2008. In 2008, the provision expense was $916 thousand higher than 2007. Gross charge-offs were 62.5% or $985 thousand higher. Recoveries were less than half of 2007, making net charge-offs $1.4 million higher in 2008. In 2007, gross charge-offs were up 60% over 2006 with net charge-offs up 164% or $526 thousand higher as compared to 2006. The provision is presented in depth in the pages to follow; however it was important to note the impact here.

Overall, the Company had a solid year of performance in a radical changing and challenging economic environment. The goal of repositioning the balance sheet and the introduction of Reward checking were two major accomplishments. The Bank is prepared to weather the current tough economic environment. The Bank compared favorably to peer both regionally and nationally, though net income was lower in 2008 than 2007 and 2006. It is well capitalized and looking for growth while focusing on controlling costs.

Net Interest Income

The net interest margin tightened slightly during 2008 from the volatile rate environment triggered by the Federal Reserve decreases throughout 2008. Interest income decreased from loan rate adjustments and outpaced the increase from the growth in loans and improvement in other interest earning assets. Overall, interest income decreased $1.6 million during 2008. Fortunately, it did not outpace the decreased 2008 interest cost of the liabilities used for funding of $3.6 million. The results are an interest earning yield of 6.03% with an interest cost yield of 2.82% resulting in a net interest spread of 3.21% for 2008 as compared to 3.04% for 2007. Net interest margin decreased to 3.60% in 2008 from 3.62% in 2007.

Interest income was $43.8 million for 2008, $45.4 million for 2007, and $42.3 million for 2006. Interest expense was $18.1, $21.7, and $18.5 million respectively for 2008, 2007, and 2006. Net Interest income was at its highest at $25.7 million for 2008 as compared to the lower $23.7 million for both 2007 and 2006.

The following table presents net interest income, interest spread and net interest margin for the three years 2006 through 2008, comparing average outstanding balances of earning assets and interest bearing liabilities with the associated interest income and expense. The table also shows their corresponding average rates of interest earned and paid. The tax-exempt asset yields have been tax affected to reflect a marginal corporate tax rate of 34%. Average outstanding loan balances include non-performing loans and mortgage loans held for sale. Average outstanding security balances are computed based on carrying values including unrealized gains and losses on available-for-sale securities.

As the charts indicate, the Company experienced significant increased growth on an average basis for year 2008 compared to 2007 and 2006. Interest earning assets average balance increased during all periods. The biggest component of the interest earning assets was loans with 2008’s average $41.5 million higher than 2007 and 2007’s average being $2.4 million higher than 2006. The increase in yield for 2007 for interest earning assets as compared to 2006 was reversed with a more drastic decrease in yield in all categories during 2008. Interest income on loans was impacted not only by the lower adjusted stated interest rate but also due to interest income reversed due to loans being placed in non-accrual.

Overall, the tax equivalent yield on interest earning assets decreased to 6.03% compared to 6.84% and 6.49% for 2007 and 2006 respectively. The percentage of interest earning assets to total assets increased slightly in 2008 over 2007 and remained above 90% at a respectable 93.14% for 2008.

As stated previously, the decreased yield on the assets was fortunately outpaced by the decreased cost of funds. The average balances for interest bearing liabilities increased only $66.2 million compared to 2007 and $83.3 million as compared to 2006. While the balance increased, the costs on those funds were significantly lower. The average cost for 2008 was 2.82% compared to 2007’s 3.77% and 2006’s 3.32%. The balances in non-interest bearing liabilities also increased during the last three years.

As stated previously, the charts show the constriction of the net interest margin from 2006 to 2008. The largest tightening occurred during 2007. Net interest spread decreased 14 basis points during 2007 and increased 17 basis points during 2008. Net interest margin dropped 2 basis points in 2008 compared to 2007 and a 10 basis point drop from 2006. Competition played a major role in the pressure applied on these margins along with the fluctuating rate environment and the slope of the yield curve during 2007 and 2008. The ability to grow loans was directly impacted by the ability to aggressively price the loans and finding borrowers wishing to borrow. The continued decrease in the prime lending rate and deterioration of the economy made any improvement in interest income very difficult. The two biggest factors in the decrease of interest expense in the liabilities were the volume of other time deposits that re-priced to a significantly lower rate during 2008 and the large drop in the Federal Funds rate which directly impacted the Federal funds purchased and securities sold under agreement to repurchase. The acquisition had a major impact on the average balances in 2008 as compared to 2007.

The yield on Tax-Exempt investments securities shown in the following charts were computed on a tax equivalent basis. The yield on Loans has been tax adjusted for the portion of tax-exempt IDB loans included in the total. Total Interest Earning Assets is therefore also reflecting a tax equivalent yield in both line items, also with the Net Interest Spread and Margin. The adjustments were based on a 34% tax rate.

		2008
		(In Thousands)
		Average				Interest/
		Balance				Dividends				Yield/Rate
ASSETS
Interest Earning Assets:
Loans (1)		$	544,310			$	34,994				6.46	%
Taxable investment securities			146,877				6,963				4.74	%
Tax exempt investment securities			42,361				1,594				5.70	%
Interest bearing deposits			—				—				0.00	%
Federal funds sold			9,423				273				2.90	%
Total Interest Earning Assets			742,971			$	43,824				6.03	%
Non-Interest Earning Assets:
Cash and cash equivalents			19,399
Other assets			35,317
Total Assets		$	797,687
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest Bearing Liabilities:
Savings deposits		$	240,880			$	2,760				1.15	%
Other time deposits			314,005				12,467				3.97	%
Other borrowed money			38,110				1,747				4.58	%
Federal funds purchased and securities sold under agreement to repurchase			49,014				1,127				2.30	%
Total Interest Bearing Liabilities			642,009			$	18,101				2.82	%
Non-Interest Bearing Liabilities:
Non-interest bearing demand deposits			53,208
Other			12,928
Total Liabilities			708,145
Shareholders’ Equity			89,542
Total Liabilities and Shareholders’ Equity		$	797,687
Interest/Dividend income/yield						$	43,824				6.03	%
Interest Expense / yield							18,101				2.82	%
Net Interest Spread						$	25,723				3.21	%
Net Interest Margin											3.60	%

		2007
		(In Thousands)
		Average				Interest/
		Balance				Dividends				Yield/Rate
ASSETS
Interest Earning Assets:
Loans (1)		$	502,815			$	37,429				7.48	%
Taxable investment securities			132,047				6,181				4.68	%
Tax exempt investment securities			40,433				1,533				5.74	%
Interest bearing deposits			286				17				5.94	%
Federal funds sold			5,658				264				4.67	%
Total Interest Earning Assets			681,239			$	45,424				6.81	%
Non-Interest Earning Assets:
Cash and cash equivalents			17,318
Other assets			29,684
Total Assets		$	728,241
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest Bearing Liabilities:
Savings deposits		$	193,539			$	3,978				2.06	%
Other time deposits			312,515				14,424				4.62	%
Other borrowed money			28,233				1,317				4.66	%
Federal funds purchased and securities sold under agreement to repurchase			41,549				2,003				4.82	%
Total Interest Bearing Liabilities			575,836			$	21,722				3.77	%
Non-Interest Bearing Liabilities:
Non-interest bearing demand deposits			44,553
Other			19,029
Total Liabilities			639,418
Shareholders’ Equity			88,823
Total Liabilities and Shareholders’ Equity		$	728,241
Interest/Dividend income/yield						$	45,424				6.81	%
Interest Expense / yield							21,722				3.77	%
Net Interest Spread						$	23,702				3.04	%
Net Interest Margin											3.62	%

						2006
						( In Thousands)
		Average				Interest/
		Balance				Dividends				Yield/Rate
ASSETS
Interest Earning Assets:
Loans (1)		$	484,364			$	35,069				7.28	%
Taxable investment securities			129,406				5,070				3.92	%
Tax exempt investment securities			49,202				1,858				5.72	%
Interest bearing deposits			305				13				4.26	%
Federal funds sold			5,086				259				5.09	%
Total Interest Earning Assets			668,363			$	42,269				6.49	%
Non-Interest Earning Assets:
Cash and cash equivalents			17,145
Other assets			26,881
Total Assets		$	712,389
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest Bearing Liabilities:
Savings deposits		$	192,754			$	3,784				1.96	%
Other time deposits			305,586				12,063				3.95	%
Other borrowed money			30,311				1,268				4.18	%
Federal funds purchased and securities sold under agreement to repurchase			30,042				1,420				4.73	%
Total Interest Bearing Liabilities			558,693			$	18,535				3.32	%
Non-Interest Bearing Liabilities:
Non-interest bearing demand deposits			45,531
Other			23,764
Total Liabilities			627,988
Shareholders’ Equity			84,401
Total Liabilities and Shareholders’ Equity		$	712,389
Interest/Dividend income/yield						$	42,269				6.49	%
Interest Expense / yield							18,535				3.32	%
Net Interest Spread						$	23,734				3.18	%
Net Interest Margin											3.72	%

The primary source of the Company’s traditional banking revenue is net interest income. Net interest income is the difference between interest income on interest earning assets, such as loans and securities, and interest expense on liabilities used to fund those assets, such as interest bearing deposits and other borrowings. Net interest income is affected by changes in both interest rates and the amount and composition of earning assets and liabilities. The change in net interest income is most often measured as a result of two statistics — interest spread and net interest margin. The difference between the yields on earning assets and the rates paid for interest bearing liabilities supporting those funds represents the interest spread. Because non-interest bearing sources of funds such as demand deposits and stockholders’ equity also support earning assets, the net interest margin exceeds the interest spread.

The following tables show changes in interest income, interest expense and net interest resulting from changes in volume and rate variances for major categories of earnings assets and interest bearing liabilities.

						2008 vs 2007
						(In Thousands)
		Net				Due to Change in
Interest Earned On:		Change				Volume				Rate
Loans		$	(2,435	)		$	3,104			$	(5,539	)
Taxable investment securities			782				694				88
Tax-exempt investment securities			61				111				(50	)
Interest bearing deposits			(17	)			(17	)			—
Federal funds sold			9				176				(167	)
Total Interest Earning Assets		$	(1,600	)		$	4,068			$	(5,668	)
Interest Paid On:
Savings deposits		$	(1,218	)		$	973			$	(2,191	)
Other time deposits			(1,957	)			69				(2,026	)
Other borrowed money			430				460				(30	)
Federal funds purchased and
securties sold under agreement to repurchase			(876	)			360				(1,236	)
Total Interest Bearing Liabilities		$	(3,621	)		$	1,862			$	(5,483	)

						2007 vs 2006
						(In Thousands)
		Net				Due to Change in
		Change				Volume				Rate
Interest Earned On:
Loans		$	2,360			$	1,343			$	1,017
Taxable investment securities			1,111				103				1,008
Tax-exempt investment securities			(325	)			(502	)			177
Interest bearing deposits			4				(1	)			5
Federal funds sold			5				29				(24	)
Total Interest Earning Assets		$	3,155			$	972			$	2,183
Interest Paid On:
Savings deposits		$	194			$	15			$	179
Other time deposits			2,361				274				2,087
Other borrowed money			49				(87	)			136
Federal funds purchased and securties sold under agreement to repurchase			583				544				39
Total Interest Bearing Liabilities		$	3,187			$	746			$	2,441

Interest rates began to drop at the end of third quarter 2007 and continued that course throughout 2008. With the increase in average balances during 2008, the significant increase in interest was to be expected due to change in volume. The difference in the two comparisons is the directions of change due to interest rates- 2008 vs. 2007 the opposite of 2007 vs. 2006. What did remain the same in the two comparisons is that the change in interest expense out paced the change in interest income. With the pausing of Federal Fund rate hikes the second half of 2006 the bank focused on keeping “specials” shorter term going into 2007. This strategy helped to slow the increase during 2007 as only $2.1 million of the interest expense was attributed to rate. As rates began to fall in the fourth quarter of 2007, this strategy continued to help in 2008 as interest expense decreased $2 million due to rate. While the change in net interest income was minimal in 2007 vs. 2006, it increased over $2 million on a tax equivalent basis in 2008 vs. 2007.

Allowance for Credit Losses

The Company segregates its Allowance for Loan and Lease Losses (ALLL) into two reserves: The ALLL and the Allowance for Unfunded Loan Commitments and Letters of Credit (AULC). When combined, these reserves constitute the total Allowance for Credit Losses (ACL).

The ACL decreased during 2008 as compared to 2007 as actions were taken to bring the carrying value of troubled loans to their recoverable balance. $2.6 million in loans were charged off in 2008 compared to $1.6 million for 2007 and $.99 million for 2006. The Company increased the allowance for credit losses for 2007 as $301 thousand of the increase was the allowance that came across from the acquisition. The allowance stands at $5.7 million for 2008 compared to $6.1 million for 2007 and $5.8 million for 2006. Provision expense was up $916 thousand for 2008 and $346 thousand for 2007 which totaled $1.8 million for 2008 compared to $871 thousand for 2007 and $525 thousand for 2006. The AULC decreased during 2007, ending at $156 thousand for 2007 and increased to $225 thousand for 2008. Historical factors along with current economic conditions are part of the calculation to determine the adequacy of the allowance.

Non-interest Income

Non-interest income of $6.5 million is almost equivalent to 2007 and 2006, up only $94 thousand from 2007 and 2007 down only $46 thousand from 2006. The largest fluctuations in non-interest income were impacted with the acquisition and the introduction of Reward checking. Overdraft privilege remains an important portion of non-interest income; even though overall usage has decreased per average account; the growth in the number of accounts outweighs it.

Non-interest Expense

Salaries and wages increased in 2008 as compared to 2007. Full time equivalent numbers of employees for December 2008 compared to September 2007 increased by seventeen with the addition of new offices. The incentive paid based on performance for 2008 was lower than both 2007 and 2006 as the overall performance of the Bank was lower. Employee benefits were lower as the Bank’s cost for medical insurance decreased during 2008 with lower claims and 401(k) expense was lower due to performance. This impact was discussed earlier.

Also impacting non-interest expense was the increased costs associated with being a bigger company and providing more physical locations at which to conduct business.

A factor in 2007’s $257 thousand increase in non-interest expense was the additional cost from the Ohio Sales Use Tax audit discussed previously. The focus of the Company remains to decrease the non-interest expense while increasing the non-interest income. Continuing to contain the cost of providing health care for its employees is a step in that direction. Additional revenue generating services and/or products are also constantly being researched for compatibility with the Company’s markets.

Federal Income Taxes

Effective tax rates were 26.71%, 26.78%, and 27.63%, for 2008, 2007, and 2006, respectively. The Company increased its tax-exempt holdings in 2005 with 2006’s average investment balance in tax-exempt securities at $49.2 million. The effect of tax-exempt interest from holding tax- exempt securities and Industrial Development Bonds (IDBs) was $654, $650, and $749 thousand for 2008, 2007, and 2006, respectively.

Financial Condition

Average earning assets increased $61.7 million during 2008 over 2007 and were higher by $73.6 million as compared to 2006. The main cause of fluctuation was caused by the acquisition and repositioning the balance sheet. Average interest bearing liabilities increased $66.2 million over 2007 and $83.3 million from 2006. The increase in 2008 over 2007 and 2006 was from the acquisition and to fund the increase in loans.

Securities

Security balances as of December 31 are summarized below:

						(In Thousands)
		2008				2007				2006
U.S. Government agency		$	82,675			$	104,737			$	91,355
Mortgage-backed securities			51,826				39,367				31,264
State and local governments			43,160				41,467				45,495
		$	177,661			$	185,571			$	168,114

The following table sets forth (dollars in thousands) the maturities of investment securities as of December 31, 2008 and the weighted average yields of such securities calculated on the basis of cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent adjustments, using a thirty-four percent rate have been made in yields on obligations of state and political subdivisions. Stocks of domestic corporations have not been included.

		Maturities
		(Amounts in Thousands)
										After One Year
		Within One Year								Within Five Years
U.S. Government agency			24,882				3.63	%			32,865				4.66	%
Mortgage-backed securities			5,460				3.44	%			36,844				4.77	%
State and local governments			7,195				3.66	%			15,601				3.64	%
Taxable state and local governments			543				6.29	%			2,079				3.50	%

		Maturities
		(Amounts in Thousands)
		After Five Years
		Within Ten Years								After Ten Years
		Amount				Yield				Amount				Yield
U.S. Government agency			24,928				5.35	%			—				0.00	%
Mortgage-backed securities			9,469				5.37	%			53				4.89	%
State and local governments			16,932				3.92	%			810				3.91	%
Taxable state and local governments			—				0.00	%			—				0.00	%

As of December 31, 2008 the Bank did not hold a large block of any one investment security, except for U.S. Government agencies. The Bank also holds stock in the Federal Home Loan Bank of Cincinnati at a cost of $4.2 million. This is required in order to obtain Federal Home Loan Bank Loans. The Bank also acquired stock in the Federal Home Loan Bank of Indianapolis at a cost of $231.4 thousand and Banker’s Bancorp, Inc at a cost of $50.8 thousand through its acquisition of Knisely Bank. There were no borrowings at the time of acquisition associated with Federal Home Loan Bank of Indianapolis. The Bank also owns stock of Farmer Mac with a carrying value of
$27.4 thousand which is required to participate loans in the program.

Loan Portfolio

The Bank’s various loan portfolios are subject to varying levels of credit risk. Management mitigates these risks through portfolio diversification and through standardization of lending policies and procedures.

The following table shows the Bank’s loan portfolio by category of loan as of December 31^st of each year, including loans held for sale:

		(In Thousands)
		2008				2007				2006				2005				2004
Loans:
Commercial Real Estate		$	226,761			$	181,340			$	162,363			$	113,283			$	102,314
Agricultural Real Estate			48,607				45,518				49,564				50,777				49,772
Consumer Real Estate			89,773				102,660				86,688				115,831				133,772
Commercial/industrial			112,526				104,188				101,788				81,893				88,303
Agricultural			56,322				58,809				69,301				61,502				56,239
Consumer			26,469				27,796				27,388				31,935				38,768
Industrial Development Bonds			7,572				9,289				7,335				9,237				10,687
Total Loans		$	568,030			$	529,600			$	504,427			$	464,458			$	479,856

The following table shows the maturity of loans as of December 31, 2008:

		Maturities (In Thousands)
						After One
		Within				Year Within				After
		One Year				Five Years				Five Years				Total
Commercial Real Estate		$	3,976			$	28,661			$	194,124			$	226,761
Agricultural Real Estate			495				4,363				43,749			$	48,607
Consumer Real Estate			3,098				13,974				72,701			$	89,773
Commercial and Industrial Loans			49,955				39,159				23,412			$	112,526
Agricultural			38,574				16,333				1,415			$	56,322
Consumer, Master Card and Overdrafts			4,956				19,452				2,061			$	26,469
Industrial Development Bonds			5,245				1,270				1,057			$	7,572

The following table presents the total of loans due after one year which has 1) predetermined interest rates and 2) floating or adjustable interest rates:

		(In Thousands)
		Fixed				Variable
		Rate				Rate
Commercial Real Estate		$	32,865			$	189,920
Agricultural Real Estate			7,175				40,938
Consumer Real Estate			27,642				59,715
Commercial and Industrial			34,724				24,276
Agricultural			15,593				2,155
Consumer, Overdrafts and other loans			24,036				1,200
Industrial Development Bonds			2,055				—

The following table summarizes the Company’s non-accrual and past due loans as of December 31 for each of the last five years:

		(In Thousands)
		2008				2007				2006				2005				2004
Non-accrual loans		$	13,575			$	4,918			$	4,254			$	4,663			$	6,059
Accruing loans past due 90 days or more			2,524				—				—				—				393
Total		$	16,099			$	4,918			$	4,254			$	4,663			$	6,452

Although loans may be classified as non-performing, some pay on a regular basis, many continue to pay interest irregularly or at less than original contractual rates. Interest income that would have been recorded under the original terms of these loans was $1.4 million for 2008, $313 thousand for 2007, and $174 thousand for 2006. Any collections of interest on non-accrual loans are included in interest income when collected unless it is on an impaired loan with a specific allocation. A collection of interest on an impaired loan with a specific allocation is applied to the loan balance to decrease the allocation needed. Total interest collections amounted to $332 thousand for 2008, $161 thousand for 2007, and $167 thousand for 2006. $20 thousand of interest collected in 2008 was applied to reduce the specific allocations, $40 thousand of interest collected in 2007 was applied to reduce the specific allocations, and $171 thousand of the interest collected in 2006 was applied to reduce the specific allocations for 2006.

Loans are placed on non-accrual status in the event that the loan is in past due status for more than 90 days or payment in full of principal and interest is not expected. The $13.6 million of non-accrual loans as of December 31, 2008 are secured. The loss of interest of $1.4 million on these non-accruals significantly impacted the yield on loans.

As of December 31, 2008 the Bank has $23.2 million of loans which it considers to be potential problem loans in that the borrowers are experiencing financial difficulties. These loans are subject to constant management attention and are reviewed more frequently than quarterly.

The amount of the potential problem loans was considered in management’s review of the loan loss reserve required at December 31, 2008.

In extending credit to families, businesses and governments, banks accept a measure of risk against which an allowance for possible loan loss is established by way of expense charges to earnings. This expense, used to enlarge a bank’s allowance for loan losses, is determined by management based on a detailed monthly review of the risk factors affecting the loan portfolio, including general economic conditions, changes in the portfolio mix, past due loan-loss experience and the financial condition of the bank’s borrowers.
As of December 31, 2008, the Bank had loans outstanding to individuals and firms engaged in the various fields of agriculture in the amount of $56 million with an additional $48.6 million in agricultural real estate loans. The ratio of this segment of loans to the total loan portfolio is not considered unusual for a bank engaged in and servicing rural communities.

The allowance for loan losses is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of two components, allocated and unallocated.

Management considers several different risk assessments in determining the allowance for loan losses. The allocated component of the allowance for loan losses reflects expected losses resulting from an analysis of individual loans, developed through specific credit allocations for

individual loans and historical loss experience for each loan category. For those loans where the internal credit rating is at or below a predetermined classification and management can reasonably estimate the loss that will be sustained based upon collateral, the borrowers operating activity and economic conditions in which the borrower operates, a specific allocation is made. For those borrowers that are not currently behind in their payment, but for which management believes based on economic conditions and operating activities of the borrower, the possibility exists for future collection problems, a reserve is established. The amount of reserve allocated to each loan portfolio is based on past loss experiences and the different levels of risk within each loan portfolio. The historical loan loss portion is determined using a historical loss analysis by loan category.

The unallocated portion of the reserve for loan losses is determined based on management’s assessment of general economic conditions as well as specific economic factors in the Bank’s marketing area. This assessment inherently involves a higher degree of uncertainty. It represents estimated inherent but undetected losses within the portfolio that are probable due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition and other current risk factors that may not have yet manifested themselves in the Bank’s historical loss factors used to determine the allocated component of the allowance.

Actual charge-off of loan balances is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic conditions, financial condition of the borrower, and collateral.

As presented below, charge-offs increased to $2.56 million for 2008, and the provision was $1.8 million. An additional $301 thousand is showing in the provision line for 2007 which represents the allowance for loan losses that was carried over from the acquisition. The Commercial and Industrial portfolio was the only segment in a net recovery for 2008 and 2007. The negative provision of 2005 was necessary to decrease the allowance because of the overall decrease of the loan portfolio and the improved asset quality position. The decrease in the total allowance for credit losses for 2006 was due to the continued improvement in the asset quality position and reassessment of the risk existent in the unfunded loan commitments. The improvement in the ratio of net charge offs to average loans outstanding is evidence of the improved asset quality during that period.

The increase in net charge-offs and past due loans along with the loan growth were the reasons for the increase in the ALLL for 2007. The decrease in the ALLL for 2008 is due to the large level of charge-offs taken. The remaining troubled loans are reviewed monthly and the underlying discounted collateral is considered adequate to minimize future losses.

     The following table presents a reconciliation of the allowance for credit losses:

		(In Thousands)
		2008				2007				2006				2005				2004
Loans		$	568,030			$	529,600			$	504,427			$	464,488			$	479,681
Daily average of outstanding loans		$	544,859			$	503,296			$	484,663			$	469,326			$	491,104
Allowance for Loan Losses-Jan. 1		$	5,922			$	5,594			$	5,388			$	6,814			$	6,614
Loans Charged off:
Commercial Real Estate			—				376				214				82				11
Agricultural Real Estate			—				—				—				—				20
Consumer Real Estate			194				252				167				347				537
Commercial and Industrial			71				538				282				933				417
Agricultural			1,912				42				—				12				102
Consumer & Other Loans			384				368				322				722				739
			2,561				1,576				985				2,096				1,826
Loan Recoveries:
Commercial Real Estate			—				25				2				—				—
Agricultural Real Estate			—				—				214				20				—
Consumer Real Estate			87				5				24				52				38
Commercial and Industrial			78				359				—				580				514
Agricultural			4				103				74				31				185
Consumer & Other Loans			179				240				352				412				405
			348				732				666				1,095				1,142
Net Charge Offs			2,213				844				319				1,001				684
Provision for loan loss			1,787				871				525				(425	)			884
Acquisition allowance for loan loss			—				301				—				—				—
Allowance for Loan & Lease Losses — Dec 31		$	5,496			$	5,922			$	5,594			$	5,388			$	6,814
Allowance for Unfunded Loan Commitments & Letters of Credit Dec 31		$	226			$	156			$	168			$	841			$	686
Total Allowance for Credit Losses — Dec 31		$	5,722			$	6,078			$	5,762			$	6,229			$	7,500
Ratio of net charge-offs to average
Loans outstanding			0.41	%			0.17	%			0.07	%			0.21	%			0.14	%

Allocation of the allowance for credit losses per Loan Category in terms of dollars and percentage of loans in each category to total loans is as follows:

		2008								2007								2006								2005								2004
		Amount								Amount								Amount								Amount								Amount
		(000’s)				%				(000’s)				%				(000’s)				%				(000’s)				%				(000’s)				%
Balance at End of Period Applicable To:
Commercial Real Estate		$	1,810				39.92	%		$	1,358				34.24	%		$	1,221				32.19	%		$	756				24.39	%		$	671				21.32	%
Agricultural Real Estate			130				8.56	%			117				8.60	%			162				9.82	%			88				10.93	%			264				10.37	%
Consumer Real Estate			386				15.80	%			381				19.39	%			288				17.19	%			719				24.95	%			615				27.88	%
Commercial & Industrial			2,278				19.81	%			1,859				19.67	%			2,721				20.18	%			2,246				17.63	%			3,152				18.40	%
Agricultural			413				9.92	%			1,676				11.10	%			250				13.74	%			275				13.24	%			423				11.72	%
Consumer, Overdrafts and other loans			479				5.99	%			531				7.00	%			634				6.88	%			526				8.86	%			665				10.31	%
Unallocated			—								—								318								778								1,024
Allowance for Loan & Lease Losses		$	5,496				100.00	%		$	5,922				100.00	%		$	5,594				100.00	%		$	5,388				100.00	%		$	6,814				100.00	%
Off Balance Sheet Commitments		$	226							$	156							$	168							$	841							$	686
Total Allowance for Credit Losses		$	5,722							$	6,078							$	5,762							$	6,229							$	7,500