The following presents management's discussion and analysis of the consolidated financial condition of the Company as of September 30, 2008 and December 31, 2007 and results of operations for the three- and nine-month periods ended September 30, 2008 and September 30, 2007. This discussion should be read in conjunction with the Company's consolidated condensed financial statements and the related notes appearing elsewhere in this report and the Company's Annual Report on Form 10-K for the year ended December 31, 2007.

Critical Accounting Policies

A comprehensive discussion of the Company's critical accounting policies is disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007 and included by reference in Note 2 above. There have been no material changes in the information regarding our critical accounting policies since December 31, 2007.

Executive Overview

Net Income was $329,601 and $1.4 million for the third quarter 2008 and first nine months of 2008, respectively. This is an increase from a net loss of ($2,208,246) and ($1,814,520) for the third quarter 2007 and the first nine months of 2007, respectively. The year-to-date and quarterly change was primarily due to a lower provision.

Net interest income decreased $522,356 or 3.2% from the nine-month period ended September 30, 2007 to the same period ended September 30, 2008. The decrease was primarily due to the rapid decrease in the prime rate in the first quarter of 2008 coupled with the purposeful decrease of approximately $21.0 million in loan volume. Although nonperforming assets have remained consistent with balances at December 31, 2007, they have decreased by $3.0 million since June 30, 2008.

Noninterest income increased approximately $593,977 from the nine-month period ended September 30, 2007 to the same period ended September 30, 2008. Increases were seen in nearly every area, including trust and brokerage fees of $415,223, service charges of $203,057, loan broker fees of $48,347, and gain on sale of securities of $108,405.

Noninterest expenses increased by 2.1% in the third quarter of 2008 compared to third quarter 2007 and 4.8% year-to-date 2008 compared to the same period in 2007. The increases are due to increased marketing expenses from television commercial production and broadcasting, data processing, employment expenses, and increases in FDIC insurance premiums.

Total assets decreased $10.4 million from December 31, 2007 to September 30, 2008. The decrease was primarily in the loan portfolio, which decreased $21.0 million or 3.6% and loans held-for-sale, which decreased by $2.5 million. This was offset somewhat by the increase in investments of $12.9 million. The decrease in loans was a result of the sale of certain non-performing loans, deterioration of economic conditions, and a change in management's strategic plan to focus on more profitable relationships verses growth.

Total deposits decreased by $27.5 million from December 31, 2007 to September 30, 2008 as certificates of deposits and out-of-market deposits declined by $51.1 million and $12.8 million, respectively. Helping to offset the decline were non-interest bearing checking accounts, NOW accounts, and money market accounts which grew by $14.8 million, $11.9 million, and $7.0 million, respectively.

Financial Condition

Total assets were $696.1 million at September 30, 2008 compared to total assets at December 31, 2007 of $706.5 million. The 1.5% decrease in assets was primarily due to a decrease in loans of $21.0 million, or 3.6%, offset by an increase in long-term investments.

Cash and Investments. Cash and cash equivalents, which include federal funds sold, were $34.9 million at September 30, 2008, a $1.0 million, or 3.0%, increase from $33.8 million at December 31, 2007. Securities available for sale were $78.2 million at the end of the third quarter of 2008, an increase of $12.9 million from December 31, 2007. The increase in investments was primarily funded by the pay downs in the loan portfolio to follow the Company's plan to increase liquidity and lower the loan to deposit ratio. The increase in long-term investments during the third quarter of 2008 was also reflective of our strategy to increase core deposits and reduce loans outstanding.

Loans Held for Sale. Loans held for sale decreased $2.5 million during the first nine months of 2008. These loans at December 31, 2007 were originated by the Indianapolis loan production office. In June of 2007, when the decision was made to defer further action on the creation of the Indianapolis de novo bank an agreement was reached with a financial institution in the Indianapolis market to sell theses loans at par. The loans from the Indianapolis loan production office reported at December 31, 2007 were sold during the first quarter of 2008. The loans held for sale at September 30, 2008 were mortgage loans originated with the intent to sell to other financial institutions.

Loans. Total loans were $554.8 million at September 30, 2008 reflecting a 3.6% decrease from total loans of $575.7 million at December 31, 2007. The decline in the loan portfolio occurred mainly in Commercial and Commercial Real Estate loans, which accounted for $22.1 million of the decline in the total loan portfolio since December 31, 2007. The decline in the portfolios is primarily due to the Company's purposeful plan to reduce loan volume and to focus on asset quality. The overall mix of the loan portfolio has not materially changed since year-end as the total of commercial and commercial real estate loans of the portfolio was 72.1% at September 30, 2008 and 73.4% at December 31, 2007.

Nonperforming Assets. Nonperforming assets include nonperforming loans and other real estate owned (OREO). Nonperforming loans include loans past due over 90 days and still accruing interest, trouble debt restructured loans, and all nonaccrual loans. Nonperforming assets have increased from $20.0 million, or 2.84% of total assets, at December 31, 2007 to $20.8 million, or 2.99% of total assets, at September 30, 2008. Approximately $3.7 million or 17.9% of our nonperforming assets plus delinquencies are currently performing according to the original terms of their contracts. Some loans have been partially charged down to reflect deterioration in underlying project collateral values despite each operator's ability thus far to generate sufficient operating cash flow to service required payments. Management considers the original loan amounts to be impaired justifying the adverse classification, but thinks the current basis fairly represents amounts collectible should the borrower actually default. Total impaired loans at September 30, 2008 were $18.9 million compared to $21.2 million at December 31, 2007. The decrease was due to the paydowns received during the first nine months of 2008, loan charge-offs, and sales of collateral. At September 30, 2008, management believes it has allocated adequate specific allowances for these risks of $1.7 million. The specific reserves for impaired loans at December 31, 2007 were $2.0 million.

Allowance for Loan Losses. In each quarter the allowance for loan losses is adjusted by management to the amount management believes is necessary to maintain the allowance at adequate levels. Management allocates specific portions of the allowance for loan losses to specific problem loans. Problem loans are identified through a loan risk rating system and monitored through watchlist reporting. Specific reserves are determined for each identified problem loan based on delinquency rates, collateral and other risk factors specific to that problem loan. Management's allocation of the allowance to other loan pools considers various factors including historical loss experience, the present and prospective financial condition of borrowers, industry concentrations within the loan portfolio, general economic conditions, and peer industry data of comparable banks.

The allowance for loan losses at September 30, 2008 was $9.3 million, or 1.67% of total loans outstanding, an increase of $1.1 million from $8.2 million, or 1.43%, at December 31, 2007. The provision for loan losses during the first nine months of 2008 was $3.2 million compared to $8.2 million in the first nine months of 2007.

The expense to the allowance of $3.2 million during the first nine months of 2008 was primarily due to six commercial and commercial real estate lending relationships being downgraded, the increase in the FAS 114 pool percentages, and the increase in specific reserves on one commercial and two commercial real estate lending relationships. The downgrades made to the six commercial and commercial real estate loans were made primarily to reflect the change in the borrowers' ability pay and/or the decrease in the value of collateral reflective of the decline in the real estate market and the recent economic downturn. The downgrades increased the allowance by approximately $450,000. The allowance for loan loss calculation uses a two-year average of net charge-offs to determine the amount that should be reserved for each loan type on regular, higher quality loans. Due to large charge-offs taken throughout the year in 2007, the Company has recorded additional expense of approximately $770,000 to the allowance to reflect an increase in the allocation percentages from 51 basis points and 30 basis points at December 31, 2007 to 65 basis points and 79 basis points at September 30, 2008 on Commercial and Commercial Real Estate loans, respectively. The amount of the allowance allocated to the other pools remained flat during the first nine months of 2008. During the first nine months, three lending relationships were downgraded to nonaccrual status with specific reserves totaling $1.7 million, of which $1.0 million has been charged off.

Other Assets. The $1.2 million increase in other assets was primarily attributable to the increase in Other Real Estate Owned of $1.0 million. The increase in Other Real Estate Owned was due to foreclosure on five commercial real estate loans and two residential real estate loan. The increase was offset by the sale of the interest rate floor as discussed in Note 5. The interest rate floor had a carrying value of approximately $420,000 at the time of settlement. There was also a deferred tax liability of approximately $140,000 recorded relating to the gain on the sale. A receivable was recorded in the amount of $415,000 at September 30, 2008 for the amount due from the money market sweep provider for amounts previously paid to customers using that product. The remainder of the difference in Other Assets is an increase in deferred tax assets.

Deposits. Total deposits were $573.2 million at September 30, 2008 compared to total deposits at December 31, 2007 of $600.7 million. Along with the decrease in total deposits, the composition of the deposit portfolio changed significantly. Core deposits increased by $36.4 million, or 9.8%, while non-core deposits decreased by $63.9 million or 27.7% during the first nine months of 2008. The increase in core deposits was primarily in the noninterest-bearing demand deposit accounts and interest-bearing checking accounts since December 31, 2007 by $14.8 million and $11.9 million, respectively. The increase in the low-cost core deposits was offset by decreases in certificate of deposits greater than $100,000 and brokered certificate of deposits since December 31, 2007 by $51.0 million and $12.8 million, respectively. At September 30, 2008, brokered CD's and out of market deposits comprised 10.9% of total deposits, compared to 12.5% as of December 31, 2007.

The following table summarizes the Company's deposit balances at the dates indicated:

                                        September 30, 2008             December 31, 2007
                                        Balance           %           Balance           %

  Core Deposits:
  Noninterest-bearing demand         $  86,542,430        15.1 %   $  71,705,395        11.9 %
  Interest-bearing checking             66,826,884        11.7 %      54,928,439         9.2 %
  Money market                         142,340,827        24.8 %     135,304,113        22.5 %
  Savings                               16,444,172         3.0 %      13,746,704         2.3 %
  Time, under $100,000                  94,554,759        16.5 %      94,604,892        15.7 %
  Total Core Deposits                  406,709,072        71.0 %     370,289,543        61.6 %
  Non-core Deposits:
  In Market Non-core Deposits:
  Time, $100,000 and over              104,182,896        18.2 %     155,224,215        25.9 %
  Out-of-Market Non-Core Deposits:
  Brokered CD's                         62,329,313        10.9 %      75,175,713        12.5 %
  Total Non-core Deposits              166,512,209        29.0 %     230,399,928        38.4 %

  Total deposits                     $ 573,221,281       100.0 %   $ 600,689,471       100.0 %

Borrowings. The Company had borrowings in the amount of $52.7 million in Federal Home Loan Bank ("FHLB") advances at September 30, 2008 and $35.1 million at December 31, 2007. Of the outstanding advances, 11 are bullet advances totaling $24.2 million and maturing in a range from April 2009 through March 2013. The other seven outstanding advances are variable rate advances and will mature in a range from February 2009 to March 2009.

Other Liabilities. Other liabilities increased $131,843 from year-end 2007. The increase was primarily due to the increases in deferred compensation and deferred director fees totaling $383,240. The increase was offset by a decrease in the other accrued expenses for the final payment on construction of the Warsaw location.

Results of Operations

For The Three-Month Periods Ended September 30

Results of operations for the three-month period ended September 30, 2008 reflected net income of $329,601 or $.08 per diluted share. This was a $2.5 million increase over 2007's third quarter net loss of $2.2 million or ($0.54) per diluted share. While net interest income was lower in the third quarter of 2008 by $62,687 compared to the third quarter of 2007, the provision expense in 2008 for the same time period was $3.2 million lower than the prior year. Non-interest income increased by $403,842 in the third quarter 2008 compared to the third quarter 2007, primarily due to the combination of an increase of $146,687 in trust and brokerage fees and a market value gain on an investment held at the Holding Company. Non-interest expense also increased by $101,956, primarily due to the increase in the employee incentive bonus by $59,499, the decrease in deferred loan cost by $19,400, and the increase in FDIC premiums by $63,776 compared to the third quarter 2007.

Total revenue, defined as net interest income plus total noninterest income, increased from third quarter 2007 to third quarter 2008 by 5.0% to $7.2 million, up from $6.9 million. For the three-month period ended September 30, 2008, net interest income decreased 1.1%, while total noninterest income increased 28.7% from the same period one year ago primarily due to an increase in trust and brokerage fees, service charges, and loan broker fees.

                  Performance Ratios                September 30
                                                 2008         2007

                  Return on average assets *       0.19 %      -1.25 %
                  Return on average equity *       2.66 %     -17.52 %
                  Net interest margin (TEY) *      3.42 %       3.31 %
                  Efficiency ratio                69.67 %      71.64 %

* annualized

Net Interest Income. Interest income for the three-month periods ended September 30, 2008 and 2007 was $9.3 million and $12.1 million, respectively, while interest expense for the third quarter was $3.9 million in 2008 and $6.6 million in 2007, resulting in net interest income of $5.4 million for the third quarter of 2008 and $5.5 million for the third quarter of 2007. The tax equivalent net interest margin for the third quarter of 2008 was 3.42%, while the tax equivalent net interest margin for the third quarter of 2007 was 3.31%. The decrease in net interest income was a reflection of the elevated levels of non-performing assets, the sharp decline in interest rates, and management's purposeful decline in the loan portfolio. Although non-performing assets are higher than the
third quarter 2007, they have decreased $2.9 million since the quarter ending June 30, 2008.

The following table reflects the average balance, interest earned or paid, and yields or costs of the Company's assets, liabilities and stockholders' equity at and for the dates indicated:

                                                 At and For The Three Month Period Ended
                                     September 30, 2008                           September 30, 2007
                                         Interest      Annualized                     Interest      Annualized
                           Average        Earned          Yield         Average        Earned          Yield
($ in thousands)           Balance       or Paid         or Cost        Balance       or Paid         or Cost
Assets
Short-term investments
and interest-earning
deposits                  $   5,641     $       27            1.90 %   $   6,545     $       77            4.67 %
Federal funds sold            6,636             33            1.98 %       4,469             51            4.53 %
Securities - taxable         59,096            735            4.95 %      51,854            660            5.05 %
Securities - tax exempt
(1)                          21,065            334            6.31 %      19,126            306            6.35 %
Loan Held for Sale              710              -            0.00 %          70              -            0.00 %
Loans                       551,407          8,304            5.99 %     587,531         11,086            7.49 %
Total interest-earning
assets                      644,555          9,433            5.82 %     669,595         12,180            7.22 %
Allowance for loan
losses                       (8,995 )                                     (8,731 )
Cash and due from banks      15,217                                       11,546
Other assets                 32,178                                       30,127
Total assets              $ 682,955                                    $ 702,537
Liabilities and
Stockholders' Equity
Interest-bearing
checking                  $  68,851     $      200            1.16 %   $  47,381     $      183            1.53 %
Savings                      17,235             43            0.99 %      14,797             39            1.05 %
Money market                145,448            791            2.16 %     120,422          1,187            3.91 %
Certificates of deposit     276,206          2,288            3.30 %     340,321          4,455            5.19 %
Short-term borrowings           452              3            2.64 %                                          -
FHLB advances                31,368            285            3.61 %      34,094            436            5.07 %
Junior subordinated
debt                         17,527            283            6.42 %      17,527            288            6.52 %
Total interest-bearing
liabilities                 557,087          3,893            2.78 %     574,542          6,588            4.55 %
Noninterest-bearing
checking                     72,845                                       73,219
Other liabilities             3,529                                        4,762
Stockholders' equity         49,494                                       50,014
Total liabilities and
stockholders' equity      $ 682,955                                    $ 702,537
Net interest income                     $    5,540                                   $    5,592
Rate spread                                                   3.04 %                                       2.67 %
Net interest income as
a percent of average
earning assets                                                3.42 %                                       3.31 %

(1) Computed on a tax equivalent basis for tax exempt securities using a 34% statutory tax rate.

Provision for Loan Losses. A provision for loan losses was recorded in the amount of $2.0 million or 145 basis points on average loans (annualized) during the third quarter of 2008 as compared to $5.2 million, or 357 basis points on average loans (annualized) for the third quarter of 2007. The provision recorded in the third quarter of 2008 was primarily due to downgrading several loans from the "Watch" category to the "Special Mention" and "Substandard" categories on the watchlist. Due to downgrading these loans, an additional $690,000 was recorded to increase the allowance for loan losses. The allowance for loan losses at September 30, 2008 totaled $9.3 million and was 1.67% of total loans outstanding on that date. Total net charge-offs for the three-month period ended September 30, 2008 were $1.6 million, or 114 basis points, annualized, on average loans and were $5.2 million, or 354 basis points, annualized, on average loans during the same period a year ago.

Noninterest Income. Noninterest income was $1.8 million during the third quarter of 2008. This was a $403,842, or 28.7%, increase compared to the third quarter of 2007. Trust services fee income, service charges, loan broker fees, and other fee revenue all contributed to the increase. Trust services fees increased $146,687 from the third quarter of 2007 to $936,689 for the three-month period ended September 30, 2008, reflective of an increase of $95 million, or 11.5%, in assets under management. Service charge revenue increased $53,529, or 22.8%, from $234,657 for the three-month period ending September 30, 2007 to $288,186 for the same period ended September 30, 2008. The increase was primarily from an increase in over-draft fees and in service charges on deposit accounts. Other fee revenue increased by $150,053, or 41.0%, primarily due to the gain of $144,708 recorded for a limited partnership investment at the Holding Company.

Noninterest Expense. Noninterest expense was $5.0 million for the third quarter of 2008 while noninterest expense for the three-month period ended September 30, 2007 was $4.9 million. The main components of noninterest expense for the third quarter of 2008 were salaries and benefits of $2.8 million and occupancy and equipment costs of $719,948. Total employment expenses increased $185,537 for the third quarter 2008 compared to the third quarter 2007; however, the salary expense has steadily decreased during the first nine months of 2008. Other expenses were $237,450 in the third quarter 2008, a $217,962 decrease from the same quarter 2007. FDIC premiums increased $63,776, or 54.9%, from $116,260 at September 30, 2007 to $180,036 at September 30, 2008.

Income Taxes. During the quarters ended September 30, 2008 and 2007, we recorded $133,632 and $1.1 million in income tax benefit, respectively. The effective tax rate recorded was (68.2%) for third quarter 2008 as compared to (32.9%) for third quarter 2007. The tax benefit in 2007 and 2008 is the result of excess tax-exempt income over net income and carryforward losses. Tax-exempt income includes earnings on bank-owned life insurance and municipal securities.

For The Nine-Month Periods Ended September 30

Results of operations for the nine-month period ended September 30, 2008 reflected net income of $1.4 million, or $0.34 per diluted share. This was a $3.2 million increase over 2007's nine-month period net loss of $1.8 million, or $(0.45) per diluted share. The operating results for the nine-month period ended September 30, 2008 were favorable compared to the same period in 2007 primarily due to a strategic plan to improve asset quality through a reduction of loans outstanding, a reduction of non-performing assets, and a reduction in non-interest expenses.

Total revenue, defined as net interest income plus total noninterest income, remained relatively unchanged at $20.7 million in the first three quarters of 2007 and 2008. For the nine-month period ended September 30, 2008, net interest income decreased 3.2%, while total noninterest income increased 13.7% from the same period one year ago primarily due to an increase in trust and brokerage fees, loan broker fees, and service charge income.

Performance Ratios               September 30
                               2008        2007

Return on average assets *       0.27 %     -0.35 %
Return on average equity *       3.77 %     -4.78 %
Net interest margin (TEY) *      3.31 %      3.39 %
Efficiency ratio                77.90 %     74.60 %

* annualized

Net Interest Income. Interest income for the nine-month periods ended September 30, 2008 and 2007 was $28.9 million and $35.5 million, respectively, while interest expense was $13.1 million through September 30, 2008 and $19.1 million through September 30, 2007, resulting in net interest income of $15.8 million for the first nine months of 2008 and $16.3 million for the first nine months of 2007. The decrease in net interest income was reflective of the general decline in the prime rate. The tax equivalent net interest margin for the first nine months of 2008 was 3.31%, while the tax equivalent net interest margin for the first nine months of 2007 was 3.39%. The decrease in net interest margin is due to the elevated levels of non-performing assets, the declining interest rates, and management's purposeful decrease in total loans.

The following table reflects the average balance, interest earned or paid, and yields or costs of the Company's assets, liabilities and stockholders' equity at and for the dates indicated:

                                                 At and For The Nine Month Periods Ended
                                     September 30, 2008                           September 30, 2007
                                         Interest      Annualized                     Interest      Annualized
                           Average        Earned          Yield         Average        Earned          Yield
($ in thousands)           Balance       or Paid         or Cost        Balance       or Paid         or Cost
Assets
Short-term investments
and
interest-earning
deposits                  $   8,802     $      182            2.76 %   $   4,445     $      194            5.84 %
Federal funds sold            6,281            150            3.19 %       4,931            175            4.74 %
Securities - taxable         53,869          1,997            4.95 %      51,960          1,991            5.12 %
Securities - tax exempt
(1)                          21,148            997            6.30 %      19,495            906            6.21 %
Loans held for sale             497              -            0.00 %          48              -            0.00 %
Loans                       561,205         25,919            6.17 %     574,670         32,492            7.56 %
Total interest-earning
assets                      651,802         29,245            5.99 %     655,549         35,758            7.29 %
Allowance for loan
. . .