2009 Message to Shareholders
Shareholder Information / 5 Year Financial Summary / Message to Shareholders

Dear Shareholder:

I am pleased to report that we did earn a profit of $1,655,000 or $.21 per common share for the year 2009. Certainly not the profit we wanted to see, but it is a profit nonetheless. As stated many times before in our communications, the results reflect the impact of this recession. Below is an apples-to- apples recap of the last three years which clearly shows the recession’s impact.

	2009	2008	2007
Net Income Before Economic Issues	$18,212,000	$14,684,000	$11,304,000
Less:
Provision for Loan Losses	13,323,000	8,207,000	1,020,000
Other Bad Debt & Collection Expense	1,500,000	604,000	318,000
FDIC Premiums	1,971,000	191,000	68,000
Total Economic Issues	16,794,000	9,002,000	1,406,000
Net Income before Goodwill & Tax	1,418,000	5,682,000	9,898,000
Non-Cash Goodwill Write-down	-	(43,291,000)	-
Federal Income Tax	237,000	(1,369,000)	(3,013,000)
Net Income (Loss)	$ 1,655,000	$(38,978,000)	$ 6,885,000

We are very pleased with the growth in Net Income before Economic Issues. This number reflects our work to maintain margin dollars and implement efficiencies which reduced non-interest expenses. Our success in these areas has allowed us to absorb the negative financial impact of the recession and still earn a profit. The last available peer comparison from the Federal Reserve’s September 2009 Uniform Bank Holding Company Performance Report, which compares the performance of 295 companies our size for the first nine months of 2009, indicates that while we earned .20% on assets, our peer group lost (.20%) on assets.

Below is a three year comparison of key year-end balance sheet numbers.

	2009	2008	2007
Total Assets	$1,102,812,000	$1,053,611,000	$1,119,257,000
Total Loans	775,547,000	787,789,000	787,386,000
Total Securities	207,292,000	150,936,000	144,351,000
Total Deposits	856,052,000	809,921,000	839,820,000

In this economy, we have purposely held the size of the company (reflected by total assets) at approximately $1,100,000,000. From 2008 to 2009 our deposits grew from $809,921,000 to $856,098,000. As a community bank, we are in the business of taking customers’ deposits and putting them to work in loans or investments. During 2009, the increase in deposits was primarily used for investments, which increased from $150,936,000 to $207,292,000. Our loan totals actually decreased slightly from $787,789,000 to $775,548,000 – about 1 ½ %.

We receive approximately $14,000,000 in payments from our loan customers each month, so we need at least $14,000,000 a month in new loans just to keep the amount of our total outstanding loans even. Again it’s reflective of the economy that loan demand has been down slightly, and we will not lessen our loan standards or reach outside of our markets or customer base for loan growth.

As we enter this third year of recession our short term goal will remain the same – to weather the economic downturn and come out of it with the least amount of negative impact to the company. To achieve this goal, our priorities will continue to focus on capital, liquidity, and asset quality.

Capital
By historical standards the bank remains, by definition, well capitalized. Over the last two years, the marketplace and the regulators have encouraged the conservation and/or the accumulation of capital. This is a sound approach given the unknown continuing financial impact of the recession. Positive earnings, limited dividends, and holding the asset size of the bank at approximately $1,100,000,000 allows us the ability to manage the bank’s capital needs. In 2009 we participated in the U.S. Treasury’s Capital Purchase Program (CPP) which added $23,184,000 in additional capital to the holding company. This additional capital took the form of preferred stock issued to the U. S. Treasury. The addition of the preferred stock increased the holding company’s Tier I capital level from 5.8% at year end 2008 to 9.6% at year end 2009. I understand (and share) the concern over participation in government programs, but the additional capital has significantly strengthened the ability of the company to endure a prolonged recession of unpredictable depth. Over the next several years and as the economy improves we will need to balance the use of our earnings for shareholder dividends, accumulation of capital for growth, and eventually retiring the treasury stock.

Liquidity
Maintaining adequate liquidity remains a top priority issue for the company. We are pleased with our base of core deposits and access to outside sources of liquidity. At December 31, 2009, our available day to day operational liquidity was approximately $201,000,000. This was equal to approximately 23.5% of deposits at year end. Not to be confused with capital, the day to day operational liquidity is the money that we can raise to fund new loans or investments or to put additional cash in our vaults. This liquidity can also be used to supplement temporary decreases in our deposit balances. For example, when our business customers write checks for their quarterly tax payments or our customers write their checks to pay their property taxes, our total deposit balances will decrease. We can draw on our sources of liquidity to make up the decrease. Our comfort level with our liquidity resources at year-end is high.

Asset Quality
Asset Quality remains our biggest challenge. First we had the impact of the financial crises. Fortunately, we had avoided the types of loans and investments embroiled in the crises. However, we are now dealing with the aftereffects. The fallout from any recession is unemployment, and we are experiencing unprecedented levels of unemployment in our communities.

At the time of this writing, unemployment in three counties within our market area is greater than 14% with the highest over 17%. Unemployment in our remaining counties where we operate is greater than 10% with the exception of Franklin and Madison County which are less than 10%. This level of unemployment tends to create a vicious cycle of reduced spending on the part of consumers, reduced sales for businesses, efforts by businesses to reduce wage and other expenses and ultimately less economic activity and higher unemployment. Lower tax receipts and the budget issues faced by many local governments are forcing cuts which will exacerbate the unemployment problem.

We have seen a mixed impact on our small business customers. Small businesses are typically the financial and employment backbone of the communities where we operate. Some have a product mix or line of business which are faring well in spite of the economy. Others are not. A number of these businesses had the ability to weather a recession of 12 or even 18 months – but now their resources are being strained. We will generally try to work with a customer who is cooperative when it seems possible to save a viable business. When we do not see a reasonable alternative, we will take the actions necessary to limit our losses.

The chart below recaps our year-end loan balances by the general loan types and the corresponding charge-offs for the year 2009.

	12/31/09	2009
Loan Type	Balances	Charge-offs
Commercial and Agriculture	$96,298,000	$1,493,000
Commercial and Real Estate	335,652,000	2,377,000
Residential Real Estate	314,552,000	3,029,000
Real Estate Construction	30,068,000	497,000
Consumer and Other	14,564,000	655,000
Total	$791,134,000	$8,051,000

This indicates that the economic issues have affected all types of loans. Although you may have read about problems related to commercial real estate loans, from our experience, the recession has had an effect on all types of borrowers.

2010 and Beyond

In last year’s letter I indicated that 2009 was going to be a challenging year – perhaps more challenging than 2008. This was, in fact, the case. We can repeat that statement with respect to 2010. We do not expect to see a quick recovery in Ohio. Still, we cannot forget the first series of numbers provided in this letter – the ability of this company to generate core earnings. This is significant. The company has not shown internal systemic or structural problems that we must divert resources to remedy. Our issues are driven from outside the company, and we expect that those issues – through time, patience, and staying with the plan - will pass.

While significant time and energy are being devoted to managing this company through the effects of the economic downturn, we have not lessened our commitment to our communities and to the customers who support this company. In 2009 we had a positive response to the campaign and promotions related to our 125th anniversary. We have seen growth in the number of deposit accounts and wealth management accounts. And although the total dollar amount of our loans was down slightly at year-end 2009, we have taken advantage of many new sound loan opportunities in our newer markets, such as Franklin County, where the impact of the recession has been less than in some of our other markets. We have used the fallout from cuts at the big regional banks to selectively add customers and experienced staff, which should make us a stronger and more diversified institution going forward.

We appreciate the overwhelming support we have continued to receive from shareholders during these trying times, and we will continue to keep you informed on the status of your company.

Very truly yours,

James O. Miller
President & CEO

 

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