• 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;

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

• Availability of capital under the Troubled Asset Relief Program Capital Purchase Program (the "TARP Capital Purchase Program") of the U.S.

• Further declines in the fair value of certain securities may increase the potential that certain unrealized losses be designated as other than temporary and that the Company may incur additional write-downs in the future.

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, company 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 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
The Company incurred a net loss of $28.4 million, or $2.68 per diluted share, for the third quarter of 2008, compared with net income of $5.3 million, or $0.44 per diluted share, for the same quarter last year. The net loss for the first nine months of 2008 was $23.0 million, or $2.22 per diluted share, compared with net income of $12.3 million, or $1.00 per diluted share, for the first nine months of 2007.
Included in the third quarter 2008 results is an other-than-temporary impairment ("OTTI") non-cash charge on certain investment securities of $34.6 million pre-tax and $33.2 million after-tax (or $3.09 per diluted share) related to auction rate preferred equity securities collateralized by preferred stock of FNMA and FHLMC and pooled trust preferred securities issued principally by financial institutions. For the first nine months of 2008, OTTI non-cash charges were $38.3 million pre-tax and $35.5 million after-tax (or $3.27 per diluted share). The tax benefit recognized on the OTTI charge for the period ended September 30, 2008 was based on the treatment of a substantial portion of the OTTI charge incurred in the third quarter being classified as a capital loss for tax purposes, which significantly limited the tax benefit. Subsequently, on October 3, 2008, the Emergency Economic Stabilization Act (the "Act") was enacted, which included a provision permitting banks, under certain circumstances, to recognize losses relating to FNMA and FHLMC preferred stock as an ordinary loss, increasing the tax benefit to the Company in the fourth quarter. The Company expects that it will recognize an additional tax benefit of $12.0 million (or $1.12 per diluted share) in the fourth quarter of 2008. Prior to this OTTI charge, impairment was considered temporary and was recorded as an unrealized loss on securities available-for-sale, which resulted in an equity reduction recognized in other comprehensive income (loss).
Net interest income was $16.7 million for the third quarter, up $1.9 million, or 13%, from the third 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 $48.0 million for the nine months ended September 30, 2008, up $5.1 million in comparison to the same period last year. The net interest margin increased 35 basis points, to 3.98%, compared with 3.63% for the third quarter of 2007. The nine month period ended September 30, 2008 saw a similar increase of 43 basis points in net interest margin to 3.88% 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 nine months ended September 30, 2008 were $1.9 million and $4.0 million, respectively, compared to a credit to provision for loan losses of $82 thousand and $235 thousand for the comparable periods in 2007.
Noninterest income (loss) for the third quarter of 2008 was $(29.3) million, versus $6.3 million in the third quarter of 2007. For the nine months ended September 30, 2008 noninterest income (loss) was $(23.7) million compared with $15.7 million for the same period in 2007. The 2008 periods reflect OTTI non-cash charges on investment securities totaling $34.6 million and $3.8 million in the third and second quarters, respectively. Absent the OTTI charges in 2008, noninterest income would have been $5.2 million for the third quarter and $14.7 million for the first nine months. The higher level of noninterest income in 2007, compared to the same periods in 2008, results primarily from the $1.1 million in proceeds from company owned life insurance recorded in the third quarter of 2007.
Noninterest expense for the third quarter of 2008 was $13.4 million, versus $14.6 million in the third quarter of 2007. The third quarter of 2008 includes a $1.0 million reversal of accrued compensation expense that recognizes financial results for 2008 will not meet certain annual senior management incentive targets. Absent this reversal, noninterest expense for the third quarter would have been $14.4 million, down slightly from the same quarter last year. For the nine months ended September 30, 2008, noninterest expense was $42.1 million compared with $42.9 million for the same period in 2007. The decreases in both the three and nine-month periods of 2008 compared to those in 2007 are primarily due to lower salaries and benefits expense as previously discussed, partially offset by an increase in occupancy and equipment costs.
The Company experienced an increase of $114.0 million in loans to $1.078 billion at September 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 and includes a $93.0 million increase in indirect auto loans, coupled with a $21.6 million increase in the commercial-related loan portfolio. Nonperforming assets decreased $848 thousand from December 31, 2007 to $8.7 million at September 30, 2008. Since September 30, 2007, nonperforming assets have declined $1.3 million, or 13%. On November 5, 2008, the Board of Directors of the Company approved filing an application to issue $25.0 million of its preferred stock through the Treasury's recently announced TARP Capital Purchase Program. See "Capital Resources" included herein for additional information.

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, defined benefit pension plan and impairment of investment securities 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.
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 discontinued 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
Securities are evaluated periodically to determine whether a decline in their fair value is other than temporary. Management utilizes criteria such as, the magnitude and duration of the decline and, when appropriate, consideration of negative changes in cash flows from a market participant's viewpoint, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term "other than temporary" is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable. Once a decline in fair value is determined to be other than temporary the cost basis of the security is reduced through a charge to earnings.

NET INCOME ANALYSIS
Net Interest Income
Net interest income was $16.7 million for the third quarter of 2008, up $1.9 million versus the third quarter of 2007. Net interest margin improved 35 basis points to 3.98% in the third quarter of 2008 versus 3.63% in the third quarter of 2007. The yield on interest-earning assets decreased 52 basis points, to 5.73%, for the quarter ended September 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 September 30, 2008, investment securities and loans comprised 40.7% and 58.6%, respectively of total average interest-earnings assets. For the quarter ended September 30, 2007, investment securities and loans comprised 45.9% and 53.3%, 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 87 basis points, to 1.75%, for the third 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 nine months of 2008 net interest income was $48.0 million compared with $42.9 million for the same period in 2007. Net interest margin improved 43 basis points to 3.88% for the first nine months of 2008 versus 3.45% for the same period last year. The yield on interest-earning assets decreased 27 basis points, 5.87%, for the nine months ended September 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 nine months ended September 30, 2008, investment securities and loans comprised 41.8% and 56.4%, respectively of total average interest-earnings assets. For the nine months ended September 30, 2007, investment securities and loans comprised 45.8% and 52.1%, respectively of total average interest-earnings assets. The Company's cost of funds decreased 70 basis points, to 1.99%, for the first nine months 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 nine months
                                          ended September 30,          ended September 30,
(Dollars in thousands)                    2008            2007          2008           2007

Net interest income (tax equivalent)   $    17,686      $ 16,051     $    51,448     $ 46,349
Less: tax-exempt TE adjustment                 859         1,071           2,926        3,284
Less: tax-preferred TE adjustment               81           119             504          196

Net interest income                    $    16,746      $ 14,861     $    48,018     $ 42,869

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 September 30,
                                                2008                                       2007
                                 Average                     Average        Average                     Average
(Dollars in thousands)           Balance       Interest        Rate         Balance       Interest        Rate
Interest-earning assets:
Federal funds sold and
interest-earning deposits      $    12,897     $      68         2.10 %   $    12,552     $     168         5.32 %
Investment securities:
Taxable                            493,438         5,577         4.52         555,330         6,404         4.61
Tax-exempt                         195,074         2,527         5.18         227,684         3,149         5.53
Tax-preferred                       32,907           308         3.66          27,778           451         6.35

Total investment securities        721,419         8,412         4.66         810,792        10,004         4.93
Loans held for sale                    799            14         6.81             773            14         7.31
Loans:
Commercial                         150,373         2,244         5.94         121,258         2,519         8.24
Commercial real estate             246,746         4,234         6.83         243,230         4,601         7.50
Agricultural                        45,965           732         6.34          54,017         1,231         9.04
Residential real estate            173,175         2,669         6.17         166,589         2,731         6.56
Consumer indirect                  200,586         3,626         7.19         122,095         2,130         6.92
Consumer direct and home
equity                             222,241         3,499         6.26         235,205         4,345         7.33

Total loans                      1,039,086        17,004         6.52         942,394        17,557         7.40

Total interest-earning
assets                           1,774,201        25,498         5.73       1,766,511        27,743         6.25

Allowance for loan losses          (16,385 )                                  (16,450 )
Other noninterest-earning
assets                             150,761                                    140,608

Total assets                   $ 1,908,577                                $ 1,890,669


Interest-bearing
liabilities:
Deposits:
Interest-bearing demand        $   342,188     $     738         0.86 %   $   325,675     $   1,339         1.63 %
Savings and money market           366,449           853         0.93         333,895         1,349         1.60
Certificates of deposit            591,025         4,947         3.33         663,845         7,740         4.63

Total interest-bearing
deposits                         1,299,662         6,538         2.00       1,323,415        10,428         3.13
Short-term borrowings               52,608           287         2.17          37,699           360         3.79
Long-term borrowings                48,713           555         4.53          35,911           472         5.21
Junior subordinated
debentures                          16,702           432        10.35          16,702           432        10.35

Total interest-bearing
liabilities                      1,417,685         7,812         2.19       1,413,727        11,692         3.28

Noninterest-bearing demand
deposits                           294,136                                    275,228
Other noninterest-bearing
liabilities                         15,652                                     17,156
Shareholders' equity               181,104                                    184,558

Total liabilities and
shareholders' equity           $ 1,908,577                                $ 1,890,669

Net interest income
(tax-equivalent)                               $  17,686                                  $  16,051

Interest rate spread                                             3.54 %                                     2.97 %

Net earning assets             $   356,516                                $   352,784

Net interest margin
(tax-equivalent)                                                 3.98 %                                     3.63 %

Ratio of average
interest-earning assets to
average interest-bearing
liabilities                                                    125.15 %                                   124.95 %

                                                        Nine Months Ended September 30,
                                                2008                                       2007
                                 Average                     Average        Average                     Average
(Dollars in thousands)           Balance       Interest        Rate         Balance       Interest        Rate
Interest-earning assets:
Federal funds sold and
interest-earning deposits      $    29,751     $     572         2.57 %   $    37,595     $   1,494         5.31 %
Investment securities:
Taxable                            492,434        16,570         4.49         569,692        19,273         4.51
Tax-exempt                         214,348         8,606         5.35         234,363         9,659         5.50
Tax-preferred                       33,114         1,902         7.54          15,412           740         6.33

Total investment securities        739,896        27,078         4.87         819,467        29,672         4.83
Loans held for sale                    891            41         6.11             686            34         6.58
Loans:
Commercial                         147,044         6,981         6.34         116,582         7,134         8.18
Commercial real estate             245,560        12,831         6.98         245,038        13,776         7.52
Agricultural                        45,283         2,391         7.05          54,336         3,300         8.12
Residential real estate            169,939         8,021         6.29         164,443         8,046         6.52
Consumer indirect                  165,153         8,815         7.13         113,360         5,783         6.82
. . .