• Statements of our goals, intentions and expectations;

• Statements regarding our growth and operating strategies;

• Statements regarding the quality of our loan and investment portfolios; and

• Estimates of our risks and future costs and benefits.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. Some of the risks and uncertainties that may affect the operations, performance, development and results of the Company's business, the interest rate sensitivity of its assets and liabilities, and the adequacy of its allowance for loan losses, include but are not limited to those described in Item 1A of the Company's 2007 Annual Report on Form 10-K and the following:
• Significantly increased competition between depository and other financial institutions;

• Changes in the interest rate environment or yield curve that reduces our margins or the fair value of financial instruments;

• General economic conditions, either nationally or in our market areas, that are worse than expected;

• Declines in the value of real estate, equipment, livestock and other assets serving as collateral for our loans outstanding, which could affect our allowance for loan losses;

• Legislative or regulatory changes that adversely affect our business;

• Adverse conditions in the securities markets, including those related to the financial condition of significant issuers in our investment portfolio;

• Changes in consumer spending, borrowing and savings habits;

• Changes in accounting policies and practices, as generally accepted in the United States of America; and

• Actions taken by regulators with jurisdiction over the Company or its subsidiaries.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including those described above, could affect the Company's financial performance and could cause the Company's actual results or circumstances for future periods to differ materially from those anticipated or projected.
Except as required by law, the Company does not undertake, and specifically disclaims any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
GENERAL
The principal objective of this discussion is to provide an overview of the financial condition and results of operations of the Company for the periods covered in this quarterly report. This discussion and tabular presentations should be read in conjunction with the accompanying consolidated financial statements and accompanying notes.
The Company's revenues are dependent primarily on net interest income, which is the difference between the income earned on loans and investment securities and the interest paid on deposits and borrowings. Revenues are also affected by service charges on deposits, ATM and debit card income, broker-dealer fees and commissions, loan servicing income, corporate owned life insurance, gain or loss on the sale or call of investment securities, gain or loss on sale of loans held for sale, gain or loss on the sale of other assets and other miscellaneous noninterest income.
The Company's expenses primarily consist of the provision for loan losses, salaries and employee benefits, occupancy and equipment, supplies and postage, amortization of other intangible assets, computer and data processing, professional fees and services, advertising and promotions, other miscellaneous noninterest expense and income tax expense.
Results of operations are also affected by the general economic and competitive conditions, particularly changes in interest rates, government policies and the actions of regulatory authorities.

OVERVIEW
Net income for the second quarter of 2008 was $1.6 million, or $0.12 per diluted share, compared with $3.4 million, or $0.27 per diluted share, for the same quarter last year. For the first six months of 2008 net income was $5.4 million, or $0.43 per diluted share, compared with $7.1 million, or $0.56 per diluted share, for the first six months of 2007.
The decline in net income reflects a valuation write-down of certain investment securities totaling $3.8 million ($2.3 million, net of tax, or approximately $0.21 per diluted share on both a quarter-to-date and year-to-date basis), as four securities in the investment portfolio were considered to be other-than-temporarily impaired ("OTTI") at June 30, 2008. The OTTI determination related to two privately issued whole loan collateralized mortgage obligations ("CMOs) with exposure to sub-prime mortgages and two pooled trust preferred securities with exposure to banking institutions impacted by recent disruptions facing the banking industry.
Net interest income was $16.2 million for the second quarter, up $2.1 million, or 15%, from the second quarter of 2007, reflecting continued improvement in net interest margin and improved earning asset mix from growth of the loan portfolio. Net interest income was $31.3 million for the six months ended June 30, 2008, up $3.3 million in comparison to the same period last year. The net interest margin increased 59 basis points, to 3.94%, compared with 3.35% for the second quarter of 2007. The six month period ended June 30, 2008 saw a similar increase of 46 basis points in net interest margin to 3.83% compared to the same period last year. The improved net interest margin resulted principally from lower funding costs, an improved yield from investment securities and the benefits associated with a higher percentage of earning assets being deployed in higher yielding loan assets.
The Company's provision for loan losses for the three and six months ended June 30, 2008 were $1.4 million and $2.1 million, respectively, compared to a credit to provision for loan losses of $153 thousand for the comparable periods in 2007.
The Company continued to aggressively manage noninterest expense and saw only slight increases of 0.3% and 1.4% when comparing the second quarter and year-to-date of 2008 to the same periods last year.
The Company experienced an increase of $46.6 million in loans to $1.011 billion at June 30, 2008 compared to $964.2 million at December 31, 2007. The increase reflects execution of the Company's business plan to rebuild its loan portfolio in a disciplined manner. Nonperforming assets decreased $2.0 million from December 31, 2007 to $7.5 million at June 30, 2008. Since June 30, 2007, nonperforming assets have declined $4.3 million, or 36%.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and are consistent with predominant practices in the financial services industry. Application of critical accounting policies, which are those policies that management believes are the most important to the Company's financial position and results, requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes and are based on information available as of the date of the financial statements. Future changes in information may affect these estimates, assumptions and judgments, which, in turn, may affect amounts reported in the financial statements.
The Company has numerous accounting policies, of which the most significant are presented in Note 1 of the notes to consolidated financial statements included in the Company's Annual Report on Form 10-K as of December 31, 2007, dated March 11, 2008, as filed with the Securities and Exchange Commission. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets, liabilities, revenues and expenses are reported in the consolidated financial statements and how those reported amounts are determined. Based on the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for loan losses, goodwill and defined benefit pension plan require particularly subjective or complex judgments important to the Company's consolidated financial statements, results of operations, and, as such, are considered to be critical accounting policies as discussed below.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of subjective measurements including management's assessment of the internal risk classifications of loans, changes in the nature of the loan portfolio, industry concentrations and the impact of current local, regional and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company's consolidated financial statements, results of operations or liquidity.

The Company performs periodic, systematic reviews of the loan portfolio to estimate probable losses in the respective loan portfolios. In addition, the Company regularly evaluates prevailing economic and business conditions, industry concentrations, changes in the size and characteristics of the portfolio and other pertinent factors. The process used by the Company to determine the overall allowance for loan losses is based on this analysis. Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is based upon management's evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighing various factors. The adequacy of the allowance for loan losses is subject to ongoing management review.
A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts of principal and interest under the original terms of the agreement or the loan is restructured in a troubled debt restructuring. Accordingly, the Company evaluates impaired commercial and agricultural loans individually based on the present value of future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or the net realizable value of the collateral if the loan is collateral dependent. The majority of the Company's impaired loans are collateral dependent.
Loans, including impaired loans, are generally classified as nonaccruing if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-collateralized and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccruing if repayment in full of principal and/or interest is uncertain.
Goodwill
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets are subject to at least an annual impairment review, and more frequently if certain impairment indicators are in evidence. Changes in the estimates and assumptions are reasonably possible and may have a material impact on the Company's consolidated financial statements, results of operations or liquidity. During the fourth quarter of 2007, the Company evaluated goodwill for impairment using a discounted cash flow analysis and determined no impairment existed. There were no material events or transactions that occurred subsequent to that evaluation that indicates any impairment as of the current period end.
Defined Benefit Pension Plan
Management is required to make various assumptions in valuing its defined benefit pension plan assets and liabilities. These assumptions include, but are not limited to, the expected long-term rate of return on plan assets, the weighted average discount rate used to value certain liabilities and the rate of compensation increase. The Company uses a third-party specialist to assist in making these estimates and assumptions. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company's consolidated financial statements, results of operations or liquidity. Impairment of Investment Securities
Management also makes judgments and estimates to determine whether a decline in fair value of investment securities below their cost is "other than temporary." Declines in fair value of investment securities below their cost that are deemed "other than temporary" are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers a number of factors including (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

SELECTED FINANCIAL DATA
The following tables present certain information and ratios that management of
the Company considers important in evaluating performance:

                                                        At or for the three months              At or for the six months
                                                              ended June 30,                         ended June 30,
(Dollars in thousands, except per share amounts)          2008                2007               2008               2007
PER COMMON SHARE DATA
Net income - basic                                   $         0.12       $       0.27       $       0.43       $       0.56
Net income - diluted                                           0.12               0.27               0.43               0.56
Cash dividends declared                                        0.15               0.11               0.29               0.21
Book value                                                    15.71              14.80              15.71              14.80
Tangible book value                                           12.24              11.38              12.24              11.38

COMMON SHARES OUTSTANDING
Weighted average shares - basic                          10,879,405         11,188,840         10,908,840         11,252,472
Weighted average shares - diluted                        10,927,981         11,222,994         10,951,328         11,291,219
Period end                                               10,912,612         11,161,835         10,912,612         11,161,835

PERFORMANCE
Return on average assets (1)                                   0.35 %             0.71 %             0.57 %             0.74 %
Return on average common equity (1)                            2.85               7.40               5.25               7.68
Return on average tangible common equity (1)                   3.63               9.60               6.66               9.97
Common dividend payout ratio                                 125.00              40.74              67.44              37.50
Net interest margin (tax-equivalent)                           3.94               3.35               3.83               3.37
Efficiency ratio (2)                                          64.21              72.04              65.87              70.72
Full-time equivalent employees                                  600                636                600                636

ASSET QUALITY DATA
Loans past due 90 days or more                       $            1       $          4       $          1       $          4
Nonaccruing loans                                             6,254             10,402              6,254             10,402

Total nonperforming loans                                     6,255             10,406              6,255             10,406
Other real estate owned (ORE) and repossessed
assets (repos)                                                1,235              1,352              1,235              1,352

Total nonperforming assets                                    7,490             11,758              7,490             11,758
Gross loan charge-offs                                        1,418                969              2,876              1,662
Net loan charge-offs                                            869                239              1,557                373
Allowance for loan losses                                    16,038             16,522             16,038             16,522

ASSET QUALITY RATIOS
Nonperforming loans to total loans                             0.62 %             1.11 %             0.62 %             1.11 %
Nonperforming assets to total loans, ORE and
repos                                                          0.74               1.25               0.74               1.25
Nonperforming assets to total assets                           0.40               0.62               0.40               0.62
Allowance for loan losses to total loans                       1.59               1.76               1.59               1.76
Allowance for loan losses to nonperforming loans                256                159                256                159
Net loan charge-offs to average loans (1)                      0.35               0.10               0.32               0.08

CAPITAL RATIOS
Period-end common equity to total assets                       9.04 %             8.70 %
Period-end tangible common equity to total
tangible assets                                                7.19               6.83
Leverage ratio                                                 9.15               8.89
Tier 1 risk-based capital ratio                               14.56              15.86
Total risk-based capital ratio                                15.81              17.12

(1) Ratios have been annualized.

(2) The efficiency ratio represents noninterest expense less other real estate expense and amortization of intangibles divided by net interest income
(tax-equivalent) plus other noninterest income less net gain (loss) on investment securities and net gain on sale of trust relationships.

NET INCOME ANALYSIS
Net Interest Income
Net interest income was $16.2 million for the second quarter of 2008, up $2.1 million versus the second quarter of 2007. Net interest margin improved 59 basis points to 3.94% in the second quarter of 2008 versus 3.35% in the second quarter of 2007. The yield on interest-earning assets decreased 26 basis points, to 5.83%, for the quarter ended June 30, 2008, compared to the same quarter a year ago. The decline in interest-earning asset yield was a result of lower market interest rates, however the benefits associated with a higher percentage of earnings assets being deployed in higher yielding loan assets partially offset the lower interest rates. For the quarter ended June 30, 2008, investment securities and loans comprised 42.0% and 55.9%, respectively of total average interest-earnings assets. For the quarter ended June 30, 2007, investment securities and loans comprised 46.2% and 51.4%, respectively of total average interest-earnings assets. This shift in the mix of interest-earning assets reflects execution of the Company's business plan to rebuild, in a disciplined manner, the commercial loan portfolio and grow consumer indirect auto loans. The Company's cost of funds decreased 85 basis points, to 1.89%, for the second quarter of 2008, versus the same quarter last year, again primarily the result of a reduction in market interest rates, coupled with management's efforts to lower its deposit costs.
For the first six months of 2008 net interest income was $31.3 million compared with $28.0 for the same period in 2007. Net interest margin improved 46 basis points to 3.83% for the first six months of 2008 versus 3.37% for the same period last year. The yield on interest-earning assets decreased 14 basis points, to 5.94%, for the six months ended June 30, 2008, compared to the same period a year ago. The decline in interest-earning asset yield was a result of lower market interest rates, however the benefits associated with a higher percentage of earnings assets being deployed in higher yielding loan assets partially offset the lower interest rates. For the six months ended June 30, 2008, investment securities and loans comprised 42.4% and 55.3%, respectively of total average interest-earnings assets. For the six months ended June 30, 2007, investment securities and loans comprised 45.7% and 51.4%, respectively of total average interest-earnings assets. The Company's cost of funds decreased 60 basis points, to 2.11%, for the first half of 2008, versus the same period last year, again primarily the result of a reduction in market interest rates, coupled with management's efforts to lower its deposit costs.
The following table provides a reconciliation between tax equivalent net interest income as presented in the average balance sheets that follow and net interest income in the consolidated financial statements filed herewith in

                                          For the three months          For the six months
                                             ended June 30,               ended June 30,
 (Dollars in thousands)                    2008            2007          2008          2007
 Net interest income (tax equivalent)   $    17,401      $ 15,193     $   33,762     $ 30,298
 Less: tax-exempt TE adjustment               1,003         1,099          2,067        2,213
 Less: tax-preferred TE adjustment              211            42            423           77

 Net interest income                    $    16,187      $ 14,052     $   31,272     $ 28,008

Average Balance Sheets
The following tables present, for the periods indicated, information regarding:
(i) the average balance sheet; (ii) the amount of interest income from interest-earning assets and the resulting annualized yields (tax-exempt yields and tax-preferred yields on investment securities that qualify for the Federal dividend received deduction ("DRD") have been adjusted to a tax-equivalent basis using the applicable Federal tax rate in each year); (iii) the amount of interest expense on interest-bearing liabilities and the resulting annualized rates; (iv) net interest income; (v) net interest rate spread; (vi) net interest income as a percentage of average interest-earning assets ("net interest margin"); and (vii) the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances are calculated using daily balances. Investment securities are at amortized cost for both held to maturity and available for sale securities. Loans include net unearned income, net deferred loan fees and costs and nonaccruing loans.

                                                          Three Months Ended June 30,
                                                2008                                       2007
                                 Average                     Average        Average                     Average
(Dollars in thousands)           Balance       Interest        Rate         Balance       Interest        Rate
Interest-earning assets:
Federal funds sold and
interest-bearing deposits      $    35,733     $     194         2.18 %   $    43,320     $     574         5.31 %
Investment securities:
Taxable                            491,541         5,411         4.40         591,893         6,702         4.53
Tax-exempt                         219,861         2,950         5.37         235,683         3,233         5.49
Tax-preferred                       33,246           795         9.61          10,030           158         6.32

Total investment securities        744,648         9,156         4.92         837,606        10,093         4.82
Loans held for sale                  1,289            20         6.12             735            11         6.10
Loans:
Commercial                         150,380         2,285         6.11         119,072         2,408         8.11
Commercial real estate             244,688         4,270         7.02         248,135         4,646         7.51
Agricultural                        44,504           754         6.82          53,298         1,019         7.67
Residential real estate            169,925         2,683         6.31         163,656         2,672         6.53
Consumer indirect                  156,728         2,800         7.19         111,563         1,898         6.83
Consumer direct and home
equity                             223,906         3,588         6.44         236,914         4,278         7.24

Total loans                        990,131        16,380         6.65         932,638        16,921         7.27

Total interest-earning
assets                           1,771,801        25,750         5.83       1,814,299        27,599         6.09

Allowance for loan losses          (15,649 )                                  (17,074 )
Other noninterest-earning
assets                             141,362                                    141,460

Total assets                   $ 1,897,514                                $ 1,938,685


Interest-bearing
liabilities:
Deposits:
Savings and money market       $   378,799     $     957         1.02 %   $   357,849     $   1,608         1.80 %
Interest-bearing demand            342,463           761         0.89         335,009         1,459         1.75
Certificates of deposit            615,950         5,701         3.72         706,540         8,271         4.70

Total interest-bearing
deposits                         1,337,212         7,419         2.23       1,399,398        11,338         3.29
Short-term borrowings               31,739           132         1.67          22,952           153         2.68
Long-term borrowings                25,461           366         5.77          37,482           483         5.16
Junior subordinated
debentures                          16,702           432        10.35          16,702           432        10.35

Total interest-bearing
. . .