2008_annual-report_town-and-country-financial-

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Financial Summary ...................................................................................... 2-3

Letter to Shareholders ............................................................................. 4-5

Board of Directors and Executive Officers ...................................................... 6

FDIC Insurance and CDARS .............................................................................. 7

Product Innovation .......................................................................................... 8

INDEPENDENT AUDITOR’S REPORT ........................................................... 11-29

Corporate Information ...................................................................................... 30

Locations ......................................................................................................... 31

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TABLE OF CONTENTS

FINANCIAL SUMMARY

04 05 06 07 08

$5.00

$7.50

$10.00

$12.50

$15.00

04 05 06 07 08

Total Excluding�Accumulated�Comprehensive�Income

$11,000

$12,000

$13,000

$14,000

$15,000

04 05 06 07 08

Total Net Revenue

$0.10

$0.15

$0.20

$0.25

$0.30

04 05 06 07 08

Dividends Declared Per Common Share

$120,000

$130,000

$140,000

$150,000

$160,000

04 05 06 07 08

Total Non-Maturity Deposits

$300,000

$325,000

$350,000

$375,000

$400,000

04 05 06 07 08

Total Assets

Total Risk Based Capital Book Value Per Share

Total Net Revenue Dividends Declared Per Common Share

Total Non-Maturity Deposits Total Assets

Stated in thousands except per share and ratio data.

"Well Capitalized" = 10%

20.0%

15.0%

10.0%

5.0%

0.0%

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FINANCIAL SUMMARY

5-YEAR SUMMARY OF CONSOLIDATED FINANCIAL HIGHLIGHTSStated in thousands except per share, shares outstanding, and ratio data.

FINANCIAL SUMMARY

303

FINANCIAL SUMMARY

Dear Shareholder:

Whew!—we’re glad 2008 is over. It was certainly an interesting and tumultuous year to be bankers. Nevertheless, we aregrateful that Town and Country Financial Corporation is a safe and strong banking organization and that we were stillprofitable in a year where so many economic factors were beyond our control. Many community banks like ours hadnothing to do with the practices and excesses that caused some of our industry’s problems. Yet, we bore more than our fairshare of the fallout. Misguided “mark-to-market” accounting rules and the federal government’s conservatorship of FannieMae and Freddie Mac had a significant impact on banks like Town & Country even though we were never involved insubprime lending.

With this as the backdrop, our recorded net income was $113 thousand in 2008. However, when excluding certain non-recurring items such as mark-to-market and other accounting adjustments, our core net income was actually $936 thousand.This compares to the core net income of $951 thousand that wereported to you last year. The 5-year summary on theprevious page illustrates our financial results on a pro-formabasis so that you can see the year over year comparisonsexclusive of certain non-recurring items.

Despite the difficult economic environment, we were able tomove our company forward on several fronts during 2008.Most importantly, after some years of flat or declining revenue,we were able to grow our net revenue in 2008 by $0.9 million,or 6.9%, over 2007 levels. We have improved our net interestmargin—which represents our primary revenue source—froma low of 2.74% in 2006 to 2.88% in 2007 and 3.00% in 2008.We also increased our mortgage income from $687 thousand in 2007 to over $1 million in 2008. This 52% increase wasdriven by better pricing practices in addition to a 44% increase in volume – accomplished despite a difficult home purchasemarket.

We are also happy to report that our balance sheet and capital position remain strong. Our consolidated risk-based capitalratio was 15.4% at the end of 2008 and each of our banks is designated as “well-capitalized” according to regulatorystandards. We did not participate in any subprime lending programs nor do we hold subprime mortgage assets on ourbalance sheet. Our allowance for loan losses was 1.39% of total loans, excluding loans held for sale, at December 31, 2008as compared to 1.34% at the prior year-end. Net charge-offs were 0.14% for 2008 as compared to 0.06% for 2007. Ourasset quality metrics are generally better than national and local peer banks.

Total assets at December 31, 2008 were $374.6 million compared to $367.2 million at the end of 2007. Total loans excludingheld for sale decreased 4.9% to $220.1 million from $231.5 million as a result of weak loan demand. Total depositsincreased 3% to $300.1 million, with non-time “core” deposits increasing over $15 million or 10.8%. Total stockholders’equity ended the year at $28.6 million, down 13.1% mostly due to changes in unrealized gains and mark-to-marketaccounting.

During 2008, we also accomplished several other initiatives: we opened a commercial loan production office in Decatur andoriginated nearly $9 million in new credit relationships; we completed a major remodel of our MacArthur Boulevard location inSpringfield; we launched several new products and raised over $11 million in new core deposits through our High YieldInvestment Account; we implemented a more effective retail sales process and significantly deepened existing retailrelationships and products per household; we discontinued our third party insurance agency to reduce net overhead in thefuture; and we made additional investments and improvements to our operations department and compliance program.

2.25%

2.50%

2.75%

3.00%

3.25%

04 05 06 07 08

Net Interest Margin

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LETTER TO SHAREHOLDERS

We believe community

banks like ours are now

uniquely positioned to

take advantage of new

growth opportunities.

As you can see from our financial results, our non-interest expenses were higher in 2008 as a result of significant investments madein people and infrastructure to improve our Company’s long-term growth prospects. However, we tempered these investmentsduring the second half when it became apparent that the economic environment might get worse before it gets better. Going forward,our goal is to produce revenue growth at twice the pace of expense growth in order to increase net profits to an acceptable level.We are not satisfied with the profitability of our Company, and we are working diligently to improve our long-term revenue while alsocontrolling the growth in our expenses.

The business atmosphere in 2009 will continue to be a challenge. We are forecasting significant increases in FDIC insuranceassessments, as healthy institutions like Town & Country are asked to pay more into the deposit insurance fund. We are alsoguarded in our management of asset quality both in loans and certain types of investments that are more vulnerable in this economicenvironment.

There is a silver lining in all of the bad news about the impacts to our industry and our Company from theeconomic and real estate crises: we believe community banks like ours are now uniquely positioned totake advantage of new growth opportunities. For instance, many of the crazy lending practices havecollapsed and traditional bank lending products are gaining market share. There is virtually no market forsubprime lending so a resurgence in FHA and VA lending products is taking place. We have addedresources to take advantage of the new market realities for prudent mortgage lending. Also, largerregional and money center banks are becoming more difficult to deal with by imposing “one size fits all”rules. We are increasingly able to attract creditworthy businesses and consumers away from largerinstitutions simply by providing competitive products delivered with good service by capable bankingprofessionals.

We want to thank you—our valued shareholders—for your continued confidence and investment in ourCompany. We also want to thank our customers for their confidence in our products and services and thehigh-touch way in which we deliver them. We encourage you to tell your friends the Town & Countrystory—that they too can feel confident banking with professionals who live in their neighborhoods and who

keep their best interests at the forefront.

We would especially like to thank our employees for their hard work and dedication. Significant efforts have been made to improveour Company and we are veryoptimistic about our long-term growthprospects based on the team ofprofessionals assembled at Town andCountry Financial Corporation.

We are glad to be a community bank.

Thank you for your support,

Micah R. BartlettPresident and COO

David E. KirschnerChairman and CEO

LETTER TO SHAREHOLDERS

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David E. Kirschner 1,2,3,4,5

Chairman & CEOTown and Country Financial Corporation

Micah R. Bartlett 1,2,3,4,5

President & COOTown and Country Financial Corporation

John E. Staudt 1,2,3,4,5

Vice ChairmanTown and Country Financial Corporation

John S. Cobb 1,3

AttorneySamuels, Miller, Schroeder, Jackson & Fly

Louis H. Dixon 1,2,5

Engineer & Senior Vice PresidentCrawford, Murphy & Tilly, Inc.

Robert L. Evans 1,3

Retired OwnerEvans Construction Company

BOARD OF DIRECTORS

Mark O. Roberts, Jr. 1,4

President & Chairman of the BoardStandard Mutual Insurance Company

Dewey R. Yaeger 1,2,5

Retired Bank PresidentUnion Bancorp

In January, J. Michael Houston announced his partial-retirement from Town & Country Bank of Springfield where he had served as Chairman, President and CEOsince May 2005. He is now serving in a new role as Chairman Emeritus and Director of Business Development.

We are extremely grateful for Mr. Houston’s service to the Company. Based on his diverse experience as a small business owner, mayor, and banker in a largefinancial services organization, he was instrumental in moving Town & Country Bank of Springfield forward by instilling a culture of professionalism and high serviceexpectations. We are also honored that he will remain affiliated with the Company and continue to be active in business development and community activities whichare the lifeblood of a community bank.

SPECIAL THANK YOU TO MIKE HOUSTON

David E. KirschnerChairman & CEO 1

Micah R. BartlettPresident & COO 1

Chairman, President & CEO 2, 3

John E. StaudtVice Chairman 1

Larry D. AndersonExecutive Vice President 3

EXECUTIVE OFFICERS

Brian K. AshChairman, President & CEO 4

Nancy J. BahreSenior Vice President & CFO 1

John W. ClarkSenior Vice President - Retail Banking 2

Dana M. DowChairman, President & CEO 5

Thomas M. GallagherVice President - Private Client Group 2

Michael J.A. ShawExecutive Vice President 2

Barbara L. WeatherfordVice President - Human Resources 1

BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

KEY:1 Town and Country Financial Corporation2 Town & Country Bank of Springfield3 Town & Country Bank4 Logan County Bank5 Town & Country Banc Mortgage Services, Inc.

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BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

NEW FDIC STANDARDS

On October 3, 2008, FDIC deposit insurance temporarily increased from $100,000 to $250,000 per depositor through December 31, 2009. The FDIC provides separatecoverage for deposits held in different account ownership categories. The coverage limits shown in the chart below refer to the total of all deposits that an accountholder hasin the same ownership categories at each FDIC-insured bank. The chart shows only the most common ownership categories that apply to individual and family deposits,and assumes that all FDIC requirements are met. These deposit insurance coverage limits refer to the total of all deposits that an accountholder (or accountholders) has ateach FDIC-insured Bank.

FDIC TEMPORARY LIQUIDITY GUARANTEE PROGRAM

Our institution has elected to participate in the FDIC’s Transaction Account Guarantee Program. Under this program, through December 31, 2009, all non-interestbearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the Transaction Account Guarantee Program is inaddition to and separate from the coverage available under the FDIC’s general deposit insurance rules.

CDARS

With CDARS, you can access FDIC protection on multi-million dollar CD investments through us. There are fewguarantees in life – FDIC insurance is one of them. CDARS can be a valuable cash management or longer-terminvestment tool for you.

Why CDARS? It’s one-stop shopping. With help from CDARS, you can access:Safety – Your money can access multi-million dollar FDIC insurance coverage.Convenience – You work directly with us. You earn one interest rate, receive one monthly statement, and receive oneyear-end tax form.Community Investment – The full value of your money can support lending opportunities in your local community.CD-Level Rates – Your money earns CD-level returns which may compare favorably with other investmentalternatives, including Treasuries, corporate sweep accounts, and money market funds.

Single Accounts (one person) $250,000 per ownerJoint Accounts (two or more persons) $250,000 per co-ownerIRAs and certain other retirement accounts $250,000 per ownerTrust Accounts $250,000 per owner per beneficiary subject to

specific limitations and requirements

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FDIC INSURANCE AND CDARS

During 2008,Town & Countrycontinued itstradition ofproductinnovation.

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PRODUCT INNOVATION

THIS PAGE LEFT INTENTIONALLY BLANK

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Town and Country Financial Corporation

Accountants’ Report and Consolidated Financial Statements

December 31, 2008 and 2007

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Tow n and Countr y Fi nancial Corporation December 31, 2008 and 2007 Contents

Consolidated Financial Statements

Independent Accountants’ Report ......................................................................................................................................... 13

Balance Sheets ................................................................................................................................................................... 14 Statements of Income ......................................................................................................................................................... 15 Statements of Stockholders’ Equity .................................................................................................................................... 16 Statements of Cash Flows .................................................................................................................................................. 17 Notes to Financial Statements ...................................................................................................................................... 18-29

Town and Country Financial CorporationDecember 31, 2008 and 2007

Contents

Independent Accountants’ Report ...................................................................................................................................... 13

Consolidated Financial Statements Balance Sheets.............................................................................................................................................................. 14 Statements of Income ................................................................................................................................................... 15 Statements of Stockholders’ Equity ............................................................................................................................ 16 Statements of Cash Flows............................................................................................................................................ 17 Notes to Financial Statements ................................................................................................................................ 18-29

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Town and Country Financial Corporation Consolidated Balance SheetsDecember 31, 2008 and 2007

Assets2008 2007

Cash and due from banks $ 6,035,183 $ 6,888,327Interest-bearing demand deposits 2,743,131 1,539,218Federal funds sold 1,725,000 9,650,000

Cash and cash equivalents 10,503,314 18,077,545

Available-for-sale securities 111,777,694 92,326,935

Held-to-maturity securities 1,659,125 1,837,654

Loans held for sale 6,940,207 1,862,333

Loans, net of allowance for loan losses of $3,102,057 and $3,153,862 at December 31, 2008 and 2007 220,106,928 231,528,779

Premises and equipment, net 10,116,916 9,372,428

Federal Reserve and Federal Home Loan Bank stock 2,132,456 2,132,456

Deferred income taxes 968,622 —

Cash surrender value of life insurance 4,459,906 4,315,383

Mortgage servicing rights, net of valuation allowance of $320,419 at December 31, 2008 1,855,623 2,197,748

Other 4,079,124 3,520,747

Total assets $ 374,599,915 $ 367,172,008

Liabilities and Stockholders’ Equity 2008 2007

Liabilities Deposits

Demand $ 34,647,831 $ 31,676,753Savings, NOW and money market 123,992,326 111,535,682Time 140,530,496 147,312,671Brokered time deposits 994,326 998,318

Total deposits $ 300,164,979 $ 291,523,424

Federal Home Loan Bank advances 30,650,000 25,522,600Junior subordinated debt owed to unconsolidated parties 11,856,000 11,856,000U.S Treasury demand note 518,215 272,747Deferred income taxes — 1,818,270Other liabilities 2,798,318 3,234,434

Total liabilities $ 345,987,512 $ 334,227,475

Stockholders’ Equity Common stock, no par value; authorized 5,000,000 shares; issued – 2,983,608 shares 1,657,560 1,657,560Additional paid-in capital 9,935,098 9,935,098Retained earnings 17,367,547 17,820,537Accumulated other comprehensive income 788,708 4,272,290

$ 29,748,913 $ 33,685,485Treasury stock, at cost Common; 2008 – 190,904 shares, 2007 – 151,139 shares 1,136,510 740,952

Total stockholders’ equity $ 28,612,403 $ 32,944,533

Total liabilities and stockholders’ equity $ 374,599,915 $ 367,172,008

See Notes to Consolidated Financial Statements

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Town and Country Financial Corporation Consolidated Statements of Income Years Ended December 31, 2008 and 2007

2008 2007Interest and Dividend Income

Loans $ 14,317,499 $ 16,442,390Securities

Taxable 3,092,790 1,981,021Tax-exempt 983,377 1,082,413Other 671,182 682,917

Federal funds sold 181,327 475,418Dividends on Federal Home Loan and Federal Reserve Bank stock 18,243 58,659Deposits with financial institutions 130,479 82,509

Total interest and dividend income $ 19,394,897 $ 20,805,327

Interest Expense Deposits 7,947,005 9,465,660Other borrowings 1,967,358 2,462,732

Total interest expense $ 9,914,363 $ 11,928,392

Net Interest Income 9,480,534 8,876,935

Provision for Loan Losses 281,000 341,000

Net Interest Income After Provision for Loan Losses $ 9,199,534 $ 8,535,935

Noninterest Income Fiduciary activities 158,843 173,632Customer service fees 1,261,980 1,111,888Other service charges and fees 801,795 809,064Realized gains on sales of available-for-sale securities 803,965 4,293,376Gains on loan sales 830,147 1,050,871Loan servicing income 738,714 753,857Fees on loans sold 216,842 187,456Other 344,482 417,747

Total noninterest income $ 5,156,768 $ 8,797,891

2008 2007Noninterest Expense

Salaries and employee benefits $ 7,316,291 $ 7,744,762Net occupancy expense 1,060,751 994,283Equipment expense 512,928 547,202Amortization of mortgage servicing rights 543,685 522,385Loss on impairment of mortgage servicing rights 320,419 —Loss on other-than-temporary impairment of securities 1,874,691 50,000Other 3,457,883 3,362,588

Total noninterest expense 15,086,648 13,221,220

Income (Loss) Before Income Taxes (730,346) 4,112,606

Provision (Credit) for Income Taxes (843,400) 992,500

Net Income $ 113,054 $ 3,120,106

Basic Earnings Per Share $ 0.04 $ 1.10

Weighted Average Shares Outstanding 2,828,070 2,836,460


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Town and Country Financial Corporation Consolidated Statements of Stockholders’ Equity December 31, 2008 and 2007


Accumulated Additional Other

Common Stock Paid-in Retained Comprehensive TreasuryShares Issued Amount Capital Earnings Income Stock Total

Balance, January 1, 2007 2,983,608 $ 1,657,560 $ 9,935,098 $ 15,493,522 $ 11,445,124 $ (740,952) $ 37,790,352Comprehensive loss Net income — — — 3,120,106 — — 3,120,106Change in unrealized appreciation on available-for-

sale securities, net of taxes — — — — (7,172,834) — (7,172,834)

Total comprehensive loss (4,052,728)

Dividends on common stock, $0.28 per share — — — (793,091) — — (793,091)

Balance, December 31, 2007 2,983,608 1,657,560 9,935,098 17,820,537 4,272,290 (740,952) 32,944,533Comprehensive loss Net income — — — 113,054 — — 113,054Change in unrealized appreciation on available-for-

sale securities, net of taxes — — — — (3,483,582) — (3,483,582)

Total comprehensive loss (3,370,528)

Dividends on common stock, $0.20 per share — — — (566,044) — — (566,044)

Purchase of treasury stock (39,765 shares) — — — — — (395,558) (395,558)

Balance, December 31, 2008 2,983,608 $ 1,657,560 $ 9,935,098 $ 17,367,547 $ 788,708 $ (1,136,510) $ 28,612,403

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Town and Country Financial Corporation Consolidated Statements of Cash Flows December 31, 2008 and 2007


2008 2007Operating Activities

Net income $ 113,054 $ 3,120,106Items not requiring (providing) cash

Depreciation 709,347 790,543Provision for loan losses 281,000 341,000Amortization of premiums and

discounts on securities 34,600 32,276 Amortization of loan-servicing rights 543,685 522,385Loss on impaired mortgage servicing

rights 320,419 —Deferred income taxes (582,605) (12,764)Net realized gains on available-for-

sale securities (803,965) (4,293,376) Loss on impairment of securities 1,874,691 50,000Gains on loan sales (830,147) (1,050,871)Net loss on foreclosed assets 16,038 35,730Amortization of intangibles 39,288 39,288Increase in cash surrender value of

life insurance (144,523) (118,033) Changes in

Other assets (370,202) 465,204Other liabilities (436,116) 253,639Loans originated for sale (67,090,969) (46,808,078)Proceeds from sales of loans

originated for sale 62,321,263 45,452,511

Net cash used in operating activities (4,005,142) (1,180,440)

Investing Activities Purchases of available-for-sale securities (57,968,467) (30,858,241)Proceeds from maturities of available-for-

sale securities 27,363,158 22,164,164 Proceeds from the sales of available-for-

sale securities 4,363,884 5,295,380 Purchases of held-to-maturity securities — (155,630)Proceeds from maturities of held-to-

maturity securities 176,000 1,149,000 Net change in loans 10,790,266 22,381,785Purchase of premises and equipment (1,453,835) (429,681)Proceeds from the sale of foreclosed

assets 107,084 183,700

Net cash provided by (used in) investing activities (16,621,910) 19,730,477

2008 2007 Financing Activities

Net increase in demand deposits, money market, NOW and savings accounts $ 15,427,722 $ 1,766,721

Net decrease in certificates of deposit (6,786,167) (4,615,231)Net increase (decrease) in short-term

borrowings 245,468 (2,175,000) Proceeds from issuance of

subordinated debt — 7,500,000 Repayment of subordinated debt — (10,091,000)Proceeds from Federal Home Loan

Bank advance 9,900,000 8,046,843 Repayment of Federal Home Loan

Bank advances (4,772,600) (10,134,321) Purchase of treasury stock (395,558) —Dividends paid (566,044) (793,091)

Net cash provided by (used in) financing activities 13,052,821 (10,495,079)

Increase (Decrease) in Cash and Cash Equivalents (7,574,231) 8,054,958

Cash and Cash Equivalents, Beginning of Year 18,077,545 10,022,587

Cash and Cash Equivalents, End of Year $ 10,503,314 $ 18,077,545

Supplemental Cash Flows Information

Interest paid $ 10,660,866 $ 11,870,639

Income taxes paid (net of refunds) $ 766,434 $ 1,995,091

Real estate acquired in settlement of loans $ 350,585 $ 832,498

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Town and Country Financial Corporation Notes to Consolidated Financial Statements December 31, 2008 and 2007

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Town and Country Financial Corporation (“Company”) is a multi-bank holding company which through its subsidiaries provides a full range of banking and financial services to individual and corporate customers in Central Illinois. The Company is subject to competition from other financial institutions. The Company and its bank subsidiaries are subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Town & Country Bank of Springfield and its wholly-owned subsidiary Town & Country Banc Mortgage Services, Inc., Logan County Bank, Town & Country Bank, Haley, LLC, and Town & Country Insurance Services, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, other-than-temporary impairment of investments, valuation of mortgage servicing rights, and Federal Home Loan Bank (FHLB) stock impairment. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties. In connection with the determination of other-than-temporary impairment of investments, management obtains financial information of the issuer and performs an analysis, as assisted by an independent consultant, of the abilities of the issuer to meet the obligations. In connection with mortgage servicing rights, management obtains an independent appraisal of the fair value of the servicing rights. In connection with the determination of FHLB stock impairment, management performs an analysis based on the FHLB’s current activities.

Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2008 and 2007, cash equivalents consisted primarily of noninterest bearing deposits, interest bearing deposits and federal funds sold.

The financial institutions holding the Company’s cash accounts are participating in the FDIC’s Transaction Account Guarantee Program. Under that program, through December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account.

Effective October 3, 2008, the FDIC’s insurance limits increased to $250,000. The increase in federally insured limits is currently set to expire December 31, 2009. At December 31, 2008, the Company’s interest-bearing cash accounts exceeded federally insured limits by approximately $338,590.

Securities

Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses are recorded, net of related income tax effects, in other comprehensive income.

Securities (continued)

Held-to-maturity securities, which include any security for which the Company has the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts.

Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on non-accrual status at ninety days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

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Note 1: Nature of Operations and Summary of Significant Accounting Policies (continued)

Allowance for Loan Losses (continued)

Groups of loans with similar risk characteristics, including individually evaluated loans not determined to be impaired, are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

Premises and Equipment

Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line and accelerated depreciation methods over the estimated useful lives of the assets.

Federal Reserve and Federal Home Loan Bank Stock

Federal Reserve and Federal Home Loan Bank (FHLB) stock are required investments for institutions that are members of the Federal Reserve and FHLB systems. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.

The Company owns $1,828,406 of Federal Home Loan Bank (FHLB) stock as of December 31, 2008. During the third quarter of 2007, the FHLB of Chicago received a Cease and Desist Order from their regulator, the Federal Housing Finance Board. The order prohibits capital stock repurchases and redemptions until a time to be determined by the Federal Housing Finance Board. The FHLB will continue to provide liquidity and funding through advances and purchase loans through the MPF program. With regard to dividends, the FHLB will continue to assess their dividend capacity each quarter and make appropriate request for approval. The FHLB did not pay a dividend during 2008, and the stock is considered a non-earning asset as of December 31, 2008 and 2007. Management performed an analysis and deemed the investment in FHLB stock was not other than temporarily impaired.

Foreclosed Assets Held for Sale

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

Intangible Assets

Intangible assets are being amortized on the straight-line basis over a period of 15 years. Such assets are periodically evaluated as to the recoverability of their carrying value.

Mortgage Servicing Rights

Mortgage servicing rights on originated loans that have been sold are initially recorded at fair value. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. Impairment of mortgage-servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the predominant risk characteristics of the underlying loans. The predominant characteristic currently used for stratification is type of loan. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.

Treasury Stock

Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.

Trust Assets and Fees

Assets held in fiduciary or agency capacities are not included in the consolidated balance sheet, since such items are not assets of the Company.

Fees from trust activities are recorded on the cash basis, for the period in which the service is provided. Fees are a function of the market value of assets managed and administered, the volume of transactions and fees for other services rendered, as set forth in the underlying trust agreements.

Income Taxes

Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. The Company files consolidated income tax returns with its subsidiaries.

In accordance with Financial Accounting Standards Board (FASB) Staff Position No. FIN 48-3, the Company has elected to defer the effective date of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, until its fiscal year ending December 31, 2009. The Company has continued to account for any uncertain tax positions in accordance with literature that was authoritative immediately prior to the effective date of FIN 48, such as FASB Statement No. 109, Accounting for Income Taxes, and FASB Statement No. 5, Accounting for Contingencies.

Earnings Per Share

Earnings per share have been computed based upon the weighted-average common shares outstanding during each year.

Reclassifications

Certain reclassifications have been made to the 2007 financial statements to conform to the 2008 financial statement presentation. These reclassifications had no effect on net income.

Note 2: Restriction on Cash and Due From Banks

The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank and MoneyGram. The reserve required at December 31, 2008 and 2007, was $480,566 and $3,234,000, respectively.

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Note 3: Securities

The amortized cost and approximate fair values of securities are as follows:

Amortized Cost

Gross Unrealized

Gains

Gross Unrealized

Losses Approximate

Fair Value

Available-for-sale Securities:

December 31, 2008: U.S. Government

agencies $ 18,444,333 $ 732,816 — $ 19,177,149Mortgage-backed

securities 61,744,125 1,461,082 (1,190) 63,204,017State and political

subdivisions 17,594,553 415,688 (104,522) 17,905,719Equity securities 135,121 2,051,747 (82,779) 2,104,089Other securities 12,564,507 69,243 (3,247,030) 9,386,720

$110,482,639 $ 4,730,576 $(3,435,521) $111,777,694

December 31, 2007: U.S. government

agencies $ 19,313,112 $ 190,293 $ (21,788) $ 19,481,617Mortgage-backed

securities 32,144,522 187,377 (115,040) 32,216,859State and political

subdivisions 20,401,953 819,382 — 21,221,335Equity securities 1,511,554 6,346,116 (22,400) 7,835,270Other securities 11,972,876 — (401,022) 11,571,854

$ 85,344,017 $ 7,543,168 $ (560,250) $ 92,326,935

Held-to-maturity Securities:

December 31, 2008: State and political

subdivisions $ 1,185,870 $ 26,628 $ (14,628) $ 1,197,870Pooled trust preferred

security 473,255 — (170,344) 302,911

$ 1,659,125 $ 26,628 $ (184,972) $ 1,500,781

December 31, 2007: State and political

subdivisions $ 1,364,610 $ 10,333 $ (51,413) $ 1,323,530Pooled trust preferred

security 473,044 14,289 — 487,333

$ 1,837,654 $ 24,622 $ (51,413) $ 1,810,863

Available-for-sale equity securities consist of investments in SLM Corp. (SLMA) stock, FNMA and FHLMC preferred stock, and corporate stock.

The Company recorded an other-than-temporary impairment on the FNMA and FHLMC preferred stock of $1,355,730 and $50,000 in 2008 and 2007, respectively. As of December 31, 2008, the Company held investments in FNMA and FHLMC preferred stock with a book value of $118,865. The FNMA and FHLMC preferred stock had an unrealized loss of $77,026 and a market value of $41,839 as of December 31, 2008. The investments in FNMA and FHLMC preferred stock are valued using available market prices. Management performed an analysis and deemed the remaining investment in FNMA and FHLMC preferred stock was not other than temporarily impaired as of December 31, 2008.

The Company held 230,361 and 282,861 shares of SLMA stock with a carrying value of $2,050,213 and $5,696,821 at December 31, 2008 and 2007, respectively. During 2008 and 2007, the Company sold 52,500 and 75,000 shares of SLMA stock resulting in a gain of $758,255 and $4,293,376, respectively.

Available-for-sale other securities consist of investments in corporate bonds and pooled trust preferred securities (PreTSLs). During 2008, the Company recorded an other-than-temporary impairment on one of the PreTSLs of $518,961. As of December 31, 2008, the Company’s investment in PreTSLs was $10,117,278. The PreTSLs had an unrealized loss of $3,199,193 and a market value of $6,918,085 as of December 31, 2008. Management performed an analysis, which included assistance by an independent valuation specialist, and deemed the remaining balance of the PreTSLs were not other than temporarily impaired as of December 31, 2008.

The PreTSL included in held-to-maturity securities was also reviewed by management. The unrealized loss of $170,344 was deemed not other than temporarily impaired as of December 31, 2008.

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at December 31, 2008, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Available-for-sale Held-to-maturityAmortized

CostFair

ValueAmortized

CostFair

Value

Within one year $ 1,100,208 $ 1,128,170 $ 145,781 $ 148,046One to five years 7,404,419 7,713,295 396,589 408,390

Five to ten years 20,240,271 20,901,491 479,000 481,193After ten years 19,858,495 16,726,632 637,755 463,152

48,603,393 46,469,588 1,659,125 1,500,781Mortgage-backed

securities 61,744,125 63,204,017

Equity securities 135,121 2,104,089 — —

Totals $110,482,639 $ 111,777,694 $ 1,659,125 $ 1,500,781

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $47,546,000 at December 31, 2008, and $35,288,000 at December 31, 2007.

Gross gains of $803,965 and $4,293,376 resulting from sales of available-for-sale securities were realized for 2008 and 2007, respectively.

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Note 3: Securities (continued)

Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2008 and 2007, was $12,196,205 and $30,148,719, which is approximately 11% and 32%, respectively, of the Company’s available-for-sale and held-to-maturity investment portfolio. These declines primarily resulted from recent changes in market interest rates and failure of certain investments to maintain consistent credit quality ratings.

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.

Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. Other-than-temporary impairment was recorded during 2008 and 2007 and totaled $1,874,691 and $50,000, respectively as previously described.

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2008 and 2007:

December 31, 2008Less than 12 Months 12 Months or More Total

Description ofSecurities

FairValue

UnrealizedLosses

FairValue

UnrealizedLosses

FairValue

UnrealizedLosses

Mortgage-backed securities $ 91,477 $ (896) $ 160,580 $ (294) $ 252,057 $ (1,190)State and political subdivisions 3,767,167 (104,576) 295,426 (14,574) 4,062,593 (119,150)Equity securities 37,716 (82,779) — — 37,716 (82,779)Other securities 1,880,186 (552,217) 5,963,653 (2,865,157) 7,843,839 (3,417,374)

Total temporarily impaired securities $ 5,776,546 $ (740,468) $ 6,419,659 $ (2,880,025) $ 12,196,205 $ (3,620,493)

December 31, 2007Less than 12 Months 12 Months or More Total

Description ofSecurities

FairValue

UnrealizedLosses

FairValue

UnrealizedLosses

FairValue

UnrealizedLosses

U.S. government agencies $ — $ — $ 5,463,590 $ (21,788) $ 5,463,590 $ (21,788)Mortgage-backed securities 1,428 (3) 13,195,702 (115,037) 13,197,130 (115,040)State and political subdivisions 19,933 (66) 734,101 (51,347) 754,034 (51,413)Equity securities — — 128,000 (22,400) 128,000 (22,400)Other securities 9,598,970 (396,313) 1,006,995 (4,709) 10,605,965 (401,022)

Total temporarily impaired securities $ 9,620,331 $ (396,382) $ 20,528,388 $ (215,281) $ 30,148,719 $ (611,663)

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Note 4: Loans and Allowance for Loan Losses

Categories of loans at December 31, include:

2008 2007

Commercial and agricultural $ 147,925,926 $ 145,835,786Residential real estate 30,414,028 38,216,630Consumer 44,869,031 50,630,225Total loans 223,208,985 234,682,641

Less Allowance for loan losses 3,102,057 3,153,862

Net loans $ 220,106,928 $ 231,528,779

Activity in the allowance for loan losses was as follows:

2008 2007

Balance, beginning of year $ 3,153,862 $ 2,963,070Provision charged to expense 281,000 341,000Losses charged off, net of recoveries of

$70,539 for 2008 and $86,414 for 2007 (332,805) (150,208)

Balance, end of year $ 3,102,057 $ 3,153,862

Impaired loans totaled $7,959,392 and $5,038,262 at December 31, 2008 and 2007, respectively. An allowance for loan losses of $1,443,747 and $1,294,746 relates to impaired loans of $6,650,342 and $4,747,881, at December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, impaired loans of $1,309,051 and $290,381, respectively, had no related allowance for loan losses.

Interest of $270,434 and $300,920 was recognized on average impaired loans of $6,708,971 and $5,037,186 for 2008 and 2007, respectively. Interest of $289,737 and $306,581 was recognized on impaired loans on a cash basis during 2008 and 2007, respectively.

At December 31, 2008 and 2007, accruing loans delinquent 90 days or more totaled $227,000 and $293,000, respectively. Non-accruing loans at December 31, 2008 and 2007 were $3,690,000 and $1,210,000, respectively.

Note 5: Premises and Equipment

Major classifications of premises and equipment, stated at cost, are as follows:

2008 2007

Land $ 2,645,714 $ 2,645,714Buildings and improvements 8,561,706 7,544,897Construction in progress — 79,727Equipment 6,702,745 6,201,268Leasehold improvements 1,440,260 1,426,510

19,350,425 17,898,116Less accumulated depreciation 9,233,509 8,525,688

Net premises and equipment $ 10,116,916 $ 9,372,428

Note 6: Other Intangible Assets

The carrying basis and accumulated amortization of recognized intangible assets included in other assets on the consolidated balance sheets, at December 31, 2008 and 2007, were:

2008 2007Gross

Carrying Amount

Accumulated Amortization

Gross Carrying Amount

Accumulated Amortization

Core deposits $ 651,610 $ 412,302 $ 651,610 $ 373,014

Amortization expense for the years ended December 31, 2008 and 2007, was $39,288 for each year. Estimated amortization expense for each of the following five years is:

2009 $ 39,2882010 39,2882011 39,2882012 39,2882013 39,288Thereafter 42,868

$ 239,308

Note 7: Loan Servicing

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others was $289,982,298 and $299,356,183 at December 31, 2008 and 2007, respectively.

Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $1,467,868 and $790,764 at December 31, 2008 and 2007, respectively.

The aggregate fair value of capitalized mortgage servicing rights at December 31, 2008 and 2007 totaled $1,855,623 and $2,197,748, respectively. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.

Activity in the balance of mortgage servicing rights, measured using the amortization method, was as follows:

2008 2007

Balance, beginning of year $ 2,197,748 $ 1,765,795Servicing rights capitalized 521,979 954,338Amortization of servicing rights (543,685) (522,385)Valuation allowance (320,419) —

Balance, end of year $ 1,855,623 $ 2,197,748

For the purposes of measuring impairment, risk characteristics (including product type, investor type and interest rates) were used to stratify the originated mortgage servicing rights. Activity in the valuation allowance was as follows:

2008 2007Balance, Beginning of year $ — $ —Additions $ 320,419 $ —

Balance, end of year $ 320,419 $ —

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Note 8: Interest-bearing Deposits

Interest-bearing deposits in denominations of $100,000 or more were $44,543,370 on December 31, 2008, and $51,519,016 on December 31, 2007.

At December 31, 2008, the scheduled maturities of time deposits are as follows:

2009 $ 58,875,8752010 36,286,6862011 11,284,3512012 13,106,4382013 14,122,042Thereafter 7,849,430

$ 141,524,822

Note 9: Junior Subordinated Debentures

On September 15, 2007, the Company repaid $2,591,000 of subordinated debentures outstanding, which required semi-annual interest payments at 9.50%. The debentures were unsecured to the claims of depositors and certain other creditors of the Company.

On March 26, 2002, Statutory Trust I (“Trust”) was formed and issued $7,732,000 of floating rate Cumulative Trust Preferred Securities. The interest rate, 8.97% at January 1, 2007, was tied to the 3-month LIBOR rate plus 3.60%. The funds raised from the Trust’s issuance of these securities were all passed to the Company. The sole asset of the Trust was a note receivable from the Company. On March 22, 2007, the debt was redeemed with the proceeds from Statutory Trust III.

The Company has $4,124,000 of junior subordinated debt owed to Statutory Trust II (“Trust II”) as of December 31, 2008 and 2007. Trust II is a wholly owned unconsolidated subsidiary, which was formed on March 17, 2004, to issue cumulative preferred securities. The Company owns all of the securities of Trust II that possess general voting powers. The Company issued shares of the preferred securities through a private placement offering on March 17, 2004, through the trust. Trust II invested the proceeds in the Company’s junior subordinated debentures. The junior subordinated debentures have an interest rate based on a floating rate equal to 3 month LIBOR plus 279 basis points which adjusts quarterly on March 15, June 15, September 15, and December 15. The rate at December 31, 2008 was 4.66%. The junior subordinated debentures mature on March 17, 2034, which the date may be shortened to a date not earlier than March 31, 2009, if certain conditions are met. Trust II’s sole asset is the holding Company’s junior subordinated debt.

The Company has $7,732,000 of junior subordinated debt owed to Statutory Trust III (“Trust III”) as of December 31, 2008 and 2007. Trust III is a wholly owned unconsolidated subsidiary, which was formed on March 22, 2007, to issue cumulative preferred securities. The Company owns all of the securities of Trust III that possess general voting powers. The Company issued shares of the preferred securities through a private placement offering on March 22, 2007, through the trust. Trust III invested the proceeds in the Company’s junior subordinated debentures. The junior subordinated debentures have an interest rate based on a fixed rate for five years of 6.58%, which was the rate at December 31, 2008 and 2007. Commencing March 22, 2012, the rate is equal to 3 month LIBOR plus 168 basis points. The junior subordinated debentures mature on March 22, 2037, which the date may be shortened to a date not earlier than March 22, 2012, if certain conditions are met. Trust III’s sole asset is the holding Company’s junior subordinated debt.

Note 9: Junior Subordinated Debentures (continued)

The Company’s obligations with respect to the issuance of the preferred securities constitute a full and unconditional guarantee of Trust II’s and III’s obligations with respect to the preferred securities. Interest on the junior subordinated debentures and distributions on the preferred securities are payable quarterly in arrears. Distributions on the preferred securities are cumulative. The Company has the right, at any time, so long as no event of default has occurred and is continuing, to defer payments of interest on the junior subordinated debentures, which will require deferral of distribution of the preferred securities, for a period not exceeding 20 consecutive quarterly periods, provided that such deferral may not extend beyond the stated maturity of the junior subordinated debentures. The preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated debentures at maturity or their earlier redemption.

Interest expense on the junior subordinated debt was $762,343 and $737,813 for the years ended December 31, 2008 and 2007, respectively.

Note 10: Federal Home Loan Bank Advances

The Federal Home Loan Bank (FHLB) advances totaled $30,650,000 and $25,522,600 as of December 31, 2008 and 2007, respectively. The FHLB advances are secured by mortgage loans and investment securities totaling $65,631,000 at December 31, 2008. Advances, at interest rates from 0.34 to 6.26 percent are subject to restrictions or penalties in the event of prepayment.

Aggregate annual maturities of long-term debt at December 31, 2008, are:

2009 $ 7,400,0002010 7,250,0002011 12,000,0002012 —2013 —Thereafter 4,000,000

$ 30,650,000

Note 11: Income Taxes

The provision (credit) for income taxes includes these components:

2008 2007

Taxes currently payable $ (260,795) $ 1,005,264Deferred income taxes (582,605) (12,764)

Income tax expense (credit) $ (843,400) $ 992,500

A reconciliation of income tax expense (credit) at the statutory rate to the Company’s actual income tax expense (credit) is shown below:

2008 2007

Computed at the statutory rate (34%) $ (248,400) $ 1,398,286Increase (decrease) resulting from

Tax exempt interest (429,265) (408,437)State income taxes 34,082 142,646Dividends received (22,525) (35,633)Cash surrender value of life insurance (51,559) (43,896)Other (125,733) (60,466)

Actual tax expense (credit) $ (843,400) $ 992,500

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Note 11: Income Taxes (continued)

The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheets were:

2008 2007

Deferred tax assets Allowance for loan losses $ 1,215,611 $ 1,147,343Deferred compensation 183,333 191,536Alternative minimum tax credits 283,015 456,664Loss on other-than-temporary impairment of

securities 727,718 —Other 68,715 129,526

2,478,392 1,925,069

Deferred tax liabilities Depreciation (168,961) (177,784)Mortgage servicing rights (710,411) (853,122)Deferred loan fees (66,250) —Unrealized gains on available-for-sale

securities (506,347) (2,710,634)Other (57,801) (1,799)

(1,509,770) (3,743,339)

Net deferred tax asset (liability) $ 968,622 $ (1,818,270)

Note 12: Comprehensive Loss

Other comprehensive loss components and related taxes were as follows:

2008 2007

Net unrealized loss on securities available-for-sale $ (4,617,143) $ (16,017,141)Reclassification adjustment for loss on other-

than-temporary impairment of securities (1,874,691) —Reclassification adjustment for realized gains

included in income 803,965 4,293,376Other comprehensive loss, before tax effect (5,687,869) (11,723,765)

Tax benefit 2,204,287 4,550,931

Other comprehensive loss $ (3,483,582) $ (7,172,834)

The components of accumulated other comprehensive loss, included in stockholders’ equity, are as follows:

2008 2007

Net unrealized gain on securities available-for-sale $ 788,708 $ 4,272,290

Note 13: Regulatory Matters

The Company and Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the table below). As of December 31, 2008 and 2007, the Company and Banks meet all capital adequacy requirements to which they are subject.

As of December 31, 2008, the most recent notification from the Company’s and Banks’ regulators categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company’s or Banks’ category.

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Note 13: Regulatory Matters (continued)

The Company and Banks’ actual and required capital amounts (in thousands) and ratios are also presented in the table:

Actual For Capital Adequacy Purposes

To Be Well Capitalized Under Prompt Corrective Action

Provisions Amount Ratio Amount Ratio Amount Ratio

As of December 31, 2008 Total capital (to risk-weighted assets)

Consolidated $ 43,196 15.4% $ 22,408 8.0% — —Town & Country Bank of Springfield 23,629 12.9 14,699 8.0 18,374 10.0%Logan County Bank 6,672 13.5 3,949 8.0 4,936 10.0Town & Country Bank 5,577 13.7 3,255 8.0 4,069 10.0

Tier I capital (to risk-weighted assets) Consolidated 36,779 13.1 11,204 4.0 — —Town & Country Bank of Springfield 20,597 11.2 7,349 4.0 11,024 6.0Logan County Bank 6,329 12.8 1,974 4.0 2,961 6.0Town & Country Bank 5,065 12.4 1,628 4.0 2,441 6.0

Tier I capital (to average assets) Consolidated 36,779 10.0 14,677 4.0 — —Town & Country Bank of Springfield 20,597 9.3 8,829 4.0 11,036 5.0Logan County Bank 6,329 8.4 3,029 4.0 3,786 5.0Town & Country Bank 5,065 7.0 2,915 4.0 3,644 5.0

As of December 31, 2007 Total capital (to risk-weighted assets)

Consolidated $ 45,871 15.5% $ 23,647 8.0% — —Town & Country Bank of Springfield 25,140 12.4 16,183 8.0 20,229 10.0%Logan County Bank 6,702 14.8 3,619 8.0 4,524 10.0Town & Country Bank 5,860 13.8 3,396 8.0 4,245 10.0

Tier I capital (to risk-weighted assets) Consolidated 37,858 12.8 11,823 4.0 — —Town & Country Bank of Springfield 20,357 10.0 8,092 4.0 12,137 6.0Logan County Bank 6,334 14.0 1,810 4.0 2,714 6.0Town & Country Bank 5,327 12.6 1,698 4.0 2,547 6.0

Tier I capital (to average assets) Consolidated 37,858 10.2 14,901 4.0 — —Town & Country Bank of Springfield 20,357 8.6 9,492 4.0 11,865 5.0Logan County Bank 6,334 8.7 2,907 4.0 3,634 5.0Town & Country Bank 5,327 8.4 2,541 4.0 3,177 5.0

Note 14: Related Party Transactions

At December 31, 2008 and 2007, the Company had loans outstanding to executive officers, directors, significant stockholders and their affiliates (related parties), in the amount of $3,182,577 and $2,908,000, respectively.

In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features.

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Note 15: Employee Benefits

The Company has an Employee Stock Ownership Plan (ESOP) to provide retirement benefits for substantially all employees. All full time employees who meet certain age and length of service requirements are eligible to participate in the ESOP. Dividends on allocated shares of common stock are allocated directly to the participant’s account. All shares held by the ESOP have been allocated to the Plan participants and are included in the computation of weighted average common shares outstanding.

The Plan owned 95,605 and 89,855 shares of the Company’s common stock as of December 31, 2008 and 2007, respectively. The fair market value of those shares totaled $717,038 and $1,257,970 as of December 31, 2008 and 2007, respectively.

In the event a terminated Plan participant desires to sell his or her shares of the Company’s stock, the Company would be required to purchase the shares from the participant at their fair market value as determined by an independent appraiser.

The Bank’s expense for the Plan was approximately $5,000 for each of the years ended December 31, 2008 and 2007.

The Company makes contributions to a savings investment plan established for the benefit of substantially all of the Company’s employees. A portion of the Company’s contribution is based upon the employees’ contributions and another portion of the Company’s contribution is at the discretion of the Board of Directors. Contributions by the Company to the plan were $155,549 and $142,458 for the years ended December 31, 2008 and 2007, respectively.

Also, the Company has a non-qualified executive incentive retirement plan (Plan) that covers select members of management. Contributions to the Plan are based upon the Company meeting certain financial performance measures and are deferred until the employee reaches the normal retirement age of 65. Retirement benefits are paid out of the general assets of the Company. The retirement benefit is paid out in monthly installments for a 13 year period and equals the deferral account balance. The liability recorded was $329,633 and $394,683 at December 31, 2008 and 2007, respectively. The Company’s expense for the plan was $7,610 and $14,034 for 2008 and 2007, respectively.

Note 16: Leases

The Company has several noncancellable operating leases, primarily for branch offices, that expire through 2015. These leases generally contain renewal options for periods ranging from 2 to 5 years and require the Company to pay all executory costs such as taxes, maintenance and insurance. Rental expense for these leases was $92,127 and $83,895 for the years ended December 31, 2008 and 2007, respectively.

Future minimum lease payments under operating leases are:

2009 $ 52,7252010 49,7372011 50,2842012 50,2842013 50,284Thereafter 54,474

Total minimum lease payments $ 307,788

Note 17: Disclosures About Fair Value of Assets and Liabilities

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the year.

FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include SLMA stock, FNMA and FHLMC preferred stock and corporate stock. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. government agencies, mortgage-backed securities and municipal securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include investments in pooled trust preferred securities (PreTSLs).

The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at December 31, 2008:

Fair Value Measurements Using

Fair Value

Quoted Prices in Active

Markets for Identical Assets

(Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant Unobservable

Inputs (Level 3)

Available-for-sale securities $ 111,777,694 $ 2,104,089 $102,755,520 $ 6,918,085

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Note 17: Disclosures About Fair Value of Assets and Liabilities (continued) The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

Pooled Trust Preferred Securities

Balance, January 1, 2008 $ 10,554,431

Total realized and unrealized losses Included in net income (518,961)Included in other comprehensive loss (2,795,355)

Purchases, issuances and settlements (322,030)

Balance, December 31, 2008 $6,918,085

Total losses for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date $ (518,961)

Realized and unrealized gains and losses included in net income for the period from January 1, 2008, through December 31, 2008, are reported in the consolidated statements of income as follows:

Noninterest Expense

Total losses $ (518,961)Change in unrealized losses relating to assets still held at the balance sheet date $ (518,961)

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Impaired Loans

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with the provisions of Financial Accounting Standard No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums or discount existing at origination or acquisition of the loan.

Impaired loans are classified within Level 3 of the fair value hierarchy.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at December 31, 2008:

Fair Value Measurements Using

Fair Value

Quoted Prices in Active

Markets for Identical Assets

(Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant Unobservable

Inputs (Level 3)

Impaired loans $ 5,839,193 $ — $ — $ 5,839,193Mortgage

servicing rights 1,855,623 — — 1,855,623

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value.

Cash and Cash Equivalents, Federal Reserve and Federal Home Loan Bank Stock, U.S Treasury Demand Note, Interest Receivable and Interest Payable

The carrying amount approximates fair value.

Securities

Fair values equal quoted market prices, if available. If quoted market prices are not available, fair value is estimated based on quoted market prices of similar securities.

Loans Held for Sale

For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

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Note 17: Disclosures About Fair Value of Assets and Liabilities (continued)

Long-term Debt

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

Commitments to Originate Loans, Letters of Credit and Lines of Credit

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

December 31, 2008 December 31, 2007 Carrying Amount Fair Value Carrying Amount Fair Value

Financial assets Cash and cash equivalents $ 10,503,314 $ 10,503,314 $ 18,077,545 $ 18,077,545Available-for-sale securities 111,777,694 111,777,694 92,326,935 92,326,935Held-to-maturity securities 1,659,125 1,500,781 1,837,654 1,810,863Loans held for sale 6,940,208 7,066,830 1,862,333 1,872,517Loans, net of allowance for loan losses 220,106,928 221,945,469 231,528,779 230,754,748Federal Reserve and Federal Home Loan Bank stock 2,132,456 2,132,456 2,132,456 2,132,456Interest receivable 1,873,788 1,873,788 1,909,799 1,909,799

Financial liabilities Deposits 300,164,979 300,910,976 291,523,424 292,779,628Junior subordinated debentures 11,856,000 11,856,000 11,856,000 11,856,000Federal Home Loan Bank advances 30,650,000 31,250,525 25,522,600 26,691,337U.S. Treasury demand note 518,215 518,215 272,747 272,747Interest payable 997,385 997,385 1,743,888 1,743,888

Unrecognized financial instruments (net of contract amount) Commitments to originate loans 0 0 0 0Letters of credit 0 0 0 0Lines of credit 0 0 0 0

Note 18: Significant Estimates and Concentrations

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk. Estimates related to other-than-temporary impairment of securities, FHLB stock impairment and valuation of mortgage servicing rights are described in Note 1. Other significant estimates and concentrations not discussed in those footnotes include:

Current Economic Conditions

The current economic environment presents financial institutions with unprecedented circumstances and challenges which in some cases have resulted in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Company.

Given the volatility of current economic conditions, the value of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses, capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

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Note 19: Commitments and Credit Risk

The Company grants commercial, mortgage and consumer loans and receives deposits from customers primarily located within Central Illinois. The Company’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Company has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon the economic conditions within Central Illinois.

Commitments to Originate Loans

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

At December 31, 2008 and 2007, the Company had outstanding commitments to originate loans aggregating approximately $764,000 and $788,000, respectively. The commitments extended over varying periods of time with the majority being disbursed within a one-year period. Loan commitments at fixed rates of interest amounted to $414,000 and $417,000 at December 31, 2008 and 2007, respectively, with the remainder at floating market rates.

Standby Letters of Credit

Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should the Company be obligated to perform under the standby letters of credit, the Company may seek recourse from the customer for reimbursement of amounts paid.

The Company had total outstanding standby letters of credit amounting to $1,223,929 and $1,969,785, at December 31, 2008 and 2007, respectively, with terms ranging from 1 day to 25 months. At December 31, 2008 and 2007, the Company’s deferred revenue under standby letter of credit agreements was nominal.

Lines of Credit

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

At December 31, 2008, the Company had granted unused lines of credit to borrowers aggregating approximately $28,831,646 and $18,011,760 for commercial lines and open-end consumer lines, respectively. At December 31, 2007, unused lines of credit to borrowers aggregated approximately $23,677,340 for commercial lines and $17,017,667 for open-end consumer lines.

Note 20: FDIC Assessment

On February 27, 2009, the FDIC announced it had adopted an interim rule to impose a 20 basis point emergency special assessment on June 30, 2009 which will be collected on September 30, 2009. The interim rule also provides that an additional emergency assessment of up to 10 basis points may be imposed if the reserve ratio of the Deposit Insurance Fund is estimated to fall to a level that the Board believes would adversely affect public confidence or to a level which shall be close to zero or negative at the end of a calendar quarter. The 20 basis point assessment is based on the institution’s assessment base which is total deposits. If the June 30, 2009 assessment base is consistent with December 31, 2008, the assessment would approximate $600,000.

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We value teamwork. Together, we can achieve more than we could on our own.

Town & Country community support is a classic example of the power of teamwork. Our employee-volunteers reachout to our communities and beyond. We also provide financial support to a number of local charities as diverse as ouremployee base. Town and Country Financial Corporation is dedicated to leveraging our financial and humanresources to better our communities. That’s what community banking is all about.

COMMUNITY INVOLVEMENT

MARKET MAKERS

Town and Country Financial Corporation shares are quoted on the OTC Bulletin Board under the symbolTWCF. If you are interested in purchasing shares of Town and Country Financial Corporation, you may contactthe following Market Makers:

Automated Trading Desk 866.283.2831Domestic Securities, Inc. 732.661.0300Ferris, Baker Watts Inc. 800.436.2000Hudson Securities, Inc. 800.624.0050Hill, Thompson, Magid and Co. 201.434.8100Howe Barnes Investments Inc. 800.621.2364Monroe Securities Inc. 800.766.5560McAdams Wright & Ragan 503.922.4888Knight Equity Markets, L.P. 800.544.7508Pershing LLC 866.880.9410

CORPORATE INFORMATION

Town and Country Financial Corporation acts as its own Transfer Agent. Contact us by calling 866.770.3100with questions on registrations or stock transfer instructions. Mail requests to our Corporate Office at the addresson the following page.

TRANSFER AGENT

Automated Trading Desk Financial Services, LLC 866.283.2831Howe Barnes Investments, Inc. 800.621.2364 Hudson Securities, Inc. 800.624.0050 Knight Equity Markets, L.P. 800.232.3684McAdams Wright Ragan, Inc. 503.922.4888Monroe Securities, Inc. 800.766.5560Pershing Trading Company, L.P. 866.880.9410 RBC Capital Markets Corp 800.862.8029

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CORPORATE INFORMATION

Additional Contact InformationToll Free 866.770.3100

Telephone Banking Line 800.505.5124E-mail: [email protected]

www.townandcountrybank.comwww.logancountybank.com

Town & Country Bank of Springfield3601 Wabash Avenue, Springfield, IL 627112401 Wabash Avenue, Springfield, IL 627041925 South MacArthur Blvd., Springfield, IL 627042601 North Dirksen Parkway, Springfield, IL 62702Phone 217.787.3100

Town & Country Banc Mortgage Services, Inc.3601 Wabash Avenue, Springfield, IL 62711Phone 217.787.3100

Town & Country Bank100 Elm Street, Buffalo, IL 62515, Phone 217.364.4406107 East Highland Drive, Forsyth, IL 62535, Phone 217.872.13261645 State Highway 121, Mt. Zion, IL 62549, Phone 217.864.2311Loan Office: 445 North Franklin, Decatur, IL 62523, Phone 217.424.0960

Logan County Bank303 Pulaski Street, Lincoln, IL 62656809 Woodlawn Road, Lincoln, IL 62656Phone 217.732.3151

CORPORATE OFFICE3601 Wabash Avenue, Springfield, IL 62711

Phone 217.787.3100

LOCATIONS AND CONTACT INFORMATION

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LOCATIONS AND CONTACT INFORMATION


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