Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project," and similar expressions, as they relate to us or management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited to, those listed in "Item 1A- Risk Factors" in our Annual Report on Form 10-K and the following:
• General economic conditions, including our local and national real estate markets and employment trends;

• Volatility and disruption in national and international financial markets;

• Legislative, tax and regulatory actions and reforms;

• Political instability;

• The ability of the Federal government to deal with the national economic slowdown and the terms of any stimulus package enacted by Congress;

• Competition from other financial institutions and financial holding companies;

• The effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Governors of the Federal Reserve System;

• Changes in the demand for loans;

• Fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for loan losses;

• The accuracy of our estimates of future loan losses;

• The accuracy of our estimates and assumptions regarding the performance of our securities portfolio;

• Soundness of other financial institutions with which we have transactions;

• Inflation, interest rate, market and monetary fluctuations;

• Changes in consumer spending, borrowing and savings habits;

• Anticipated increases in deposit insurance assessments by the Federal Deposit Insurance Corporation ("FDIC");

• Our ability to attract deposits;

• Consequences of continued bank mergers and acquisitions in our market area, resulting in fewer but much larger and stronger competitors;

• Expansion of operations, including branch openings, new product offerings and expansion into new markets;

• Acquisitions and integration of acquired businesses; and

• Acts of God or of war or terrorism.

Such statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Introduction
As a multi-bank financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, and service charges. Our primary source of funding for our loans and investments are deposits held by our subsidiary banks. Our largest expenses are interest on these deposits and salaries and related employee benefits. We usually measure our performance by calculating our return on average assets, return on average equity, our regulatory leverage and risk based capital ratios, and our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income.
The following discussion of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as those included in the Company's 2008 Annual Report on Form 10-K.
Critical Accounting Policies
We prepare consolidated financial statements based on the selection of certain accounting policies, generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions.
We deem a policy critical if (1) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (2) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements.
The following discussion addresses (1) our allowance for loan losses and our provision for loan losses and (2) our valuation of securities, which we deem to be our most critical accounting policies. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period.
Allowance for Loan Losses. The allowance for loan losses is an amount we believe will be adequate to absorb probable losses on existing loans in which full collectibility is unlikely based upon our review and evaluation of the loan portfolio. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries).
Our methodology is based on current accounting authoritative guidance, including guidance from the SEC. We also follow the guidance of the "Interagency Policy Statement on the Allowance for Loan and Lease Losses," issued jointly by the Office of the Comptroller of the Currency ("OCC"), the Federal Reserve Board, the FDIC, the National Credit Union Administration and the Office of Thrift Supervision. We have developed a loan review methodology that includes allowances assigned to certain classified loans, allowances assigned based upon estimated loss factors and qualitative reserves. The level of the allowance reflects our periodic evaluation of general economic conditions, the financial condition of our borrowers, the value and liquidity of collateral, delinquencies, prior loan loss experience, and the results of periodic reviews of the portfolio by our independent loan review department and regulatory examiners.

Our allowance for loan losses is comprised of three elements: (i) specific reserves based on probable losses on specific classified loans; (ii) general reserves that consider historical loss rates; and (iii) a qualitative reserve based upon general economic conditions and other qualitative risk factors both internal and external to the Company. We regularly evaluate our allowance for loan losses to maintain an adequate level to absorb estimated probable loan losses inherent in the loan portfolio. Factors contributing to the determination of specific reserves include the credit-worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All classified loans are specifically reviewed and a specific allocation is assigned based on the losses expected to be realized from those loans. For purposes of determining the general reserve, the loan portfolio less cash secured loans, government guaranteed loans and classified loans is multiplied by the Company's historical loss rates. The qualitative reserves are determined by evaluating such things as current economic conditions and trends, changes in lending staff, policies or procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans. Although we believe we use the best information available to make loan loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. A downturn in the economy and employment could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reductions in income. Additionally, as an integral part of their examination process, bank regulatory agencies periodically review our allowance for loan losses. The bank regulatory agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.
Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, the borrower's financial condition is such that collection of principal and interest is doubtful.
Our policy requires measurement of the allowance for an impaired collateral dependent loan based on the fair value of the collateral. Other loan impairments are measured based on the present value of expected future cash flows or the loan's observable market price.
Valuation of Securities. The Company records its available-for-sale and trading securities portfolio at fair value.
Fair values of these securities are determined based on methodologies in accordance with current accounting authoritative guidance. Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security.

When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists. Available-for-sale and held-to-maturity securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) whether we have the intent to sell our securities prior to recovery and/or maturity and (ii) whether it is more likely than not that we will have to sell our securities prior to recovery and/or maturity. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the Company's results of operations and financial condition. Results of Operations
Performance Summary. Net earnings for the third quarter of 2009 were $14.0 million, an increase of $625 thousand, or 4.7%, from the same period in 2008. Net earnings for the third quarter of 2009 compared to the third quarter of 2008 were positively impacted by increases in net interest income and noninterest income and a decrease in noninterest expense, which offset the increase in the provision for loan losses.
On a basic net earnings per share basis, net earnings were $0.67 for the third quarter of 2009, an increase of 4.7% over $0.64 reported for the third quarter of 2008. The return on average assets was 1.81% for the third quarter of 2009, as compared to 1.74% for the same quarter of 2008. The return on average equity was 13.99% for the third quarter of 2009 as compared to 15.31% for the same quarter of 2008.
Net earnings for the nine-month period ended September 30, 2009 were $41.3 million, an increase of $1.1 million, or 2.8%, compared to net earnings for the nine-month period ended September 30, 2008 of $40.1 million. The increase in net earnings for 2009 over 2008 was primarily attributable to an increase in net interest income that offset the impact of (i) an increase in the provision for loan losses, (ii) a decrease in noninterest income and (iii) an increase in noninterest expense, primarily from the special FDIC insurance assessment in the second quarter of 2009.
On a basic net earnings per share basis, net earnings were $1.98 for the nine months of 2009, as compared to $1.93 for the same period of 2008. The return on average assets was 1.78% for the first nine months of 2009, as compared to 1.77% for the same period of 2008. The return on average equity was 14.18% for the first nine months of 2009, as compared to 15.42% for the same period of 2008. Net Interest Income. Net interest income is the difference between interest income on earning assets and interest expense on liabilities incurred to fund those assets. Our earning assets consist primarily of loans and investment securities. Our liabilities to fund those assets consist primarily of noninterest-bearing and interest-bearing deposits.
Tax-equivalent net interest income was $35.2 million for the third quarter of 2009, as compared to $33.2 million for the same period last year. The increase in 2009 compared to 2008 was largely attributable to (i) the decrease in the rate paid on interest-bearing liabilities in an amount greater than the decrease in rates earned on interest earning assets and (ii) an increase in the volume of earning assets. Average earning assets increased $44.2 million for the third quarter of 2009 over the same period in 2008. Average tax exempt securities increased $120.7 million for the third quarter of 2009 over the third quarter of 2008, offsetting a decrease of $64.4 million in average loans. Average interest bearing liabilities decreased $33.3 million for the third quarter of 2009, as compared to the same period in 2008. The yield on earning assets decreased 36 basis points in the third quarter of 2009, whereas the rate paid on interest-bearing liabilities decreased 77 basis points, primarily due to the effects of lower interest rates.

Tax-equivalent net interest income was $103.9 million for the first nine months of 2009, as compared to $96.3 million for the same period last year. The increase in 2009 as compared to 2008 was largely attributable to (i) the decrease in the rate paid on interest-bearing liabilities in an amount greater than the decrease in rates earned on interest earning assets and (ii) an increase in the volume of earning assets. Average earning assets increased $89.9 million for the first nine months of 2009. Average taxable and tax exempt securities increased $158.3 million, offsetting a decrease of $23.9 million in average loans. Average interest bearing liabilities were virtually unchanged for the nine-month period of 2009 from the same period in 2008. The yield on earning assets decreased 54 basis points in the first three quarters of 2009, whereas the rate paid on interest-bearing liabilities decreased 105 basis points. Table 1 allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.
Table 1 - Changes in Interest Income and Interest Expense (in thousands):

                                      Three Months Ended September 30, 2009                      Nine Months Ended September 30, 2009
                                          Compared to Three Months Ended                            Compared to Nine Months Ended
                                                September 30, 2008                                        September 30, 2008
                                     Change Attributable to                Total               Change Attributable to                Total
                                   Volume                Rate              Change           Volume                Rate              Change
Short-term investments          $         24         $       (262 )       $   (238 )      $      (744 )       $        (757 )      $  (1,501 )
Taxable investment
securities (1)                           (82 )               (385 )           (467 )            1,929                (1,942 )            (13 )
Tax-exempt investment
securities (2)                         1,869                   83            1,952              4,654                   424            5,078
Loans (2) (3)                         (1,024 )             (2,059 )         (3,083 )           (1,040 )             (10,183 )        (11,223 )

Interest income                          787               (2,623 )         (1,836 )            4,799               (12,458 )         (7,659 )

Interest-bearing deposits                (96 )             (3,381 )         (3,477 )             (323 )             (13,801 )        (14,124 )
Short-term borrowings                    (15 )               (312 )           (327 )              275                (1,416 )         (1,141 )

Interest expense                        (111 )             (3,693 )         (3,804 )              (48 )             (15,217 )        (15,265 )

Net interest income             $        898         $      1,070         $  1,968        $     4,847         $       2,759        $   7,606

(1) Trading securities are included in taxable investment securities.

(2) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.

(3) Nonaccrual loans are included in loans.

The net interest margin for the third quarter of 2009 was 4.92%, an increase of 19 basis points from the same period in 2008. The net interest margin for the first nine months of 2009 was 4.85%, an increase of 21 basis points from the same period in 2008.
Our net interest margin increased from prior periods despite the volatile interest rate environment that saw the Federal funds rate drop 400 basis points from January 2008 through September 2009. We have been more successful in implementing floors on our loans and have improved the pricing for loan risk, which previously we were unable to do due to competition. Additionally, we have purchased investment securities at favorable yields. Should interest rates remain at the current low levels through the remainder of 2009, we anticipate that the impact of lower yields on loans and investment securities and competition for deposits may put pressure on our net interest margin.

The net interest margin, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in Table 2.
Table 2 - Average Balances and Average Yields and Rates (in thousands, except percentages):

                                                    Three months ended September 30,
                                           2009                                           2008
                           Average         Income/        Yield/          Average         Income/        Yield/
                           Balance         Expense         Rate           Balance         Expense         Rate
Assets

Short-term investments   $    64,838       $     96          0.59 %     $    69,599       $    334          1.91 %
Taxable investment
securities (1)               855,409          9,155          4.28           862,778          9,622          4.46
Tax-exempt investment
securities (2)               450,508          7,060          6.27           329,840          5,108          6.19
Loans (2)(3)               1,465,423         22,857          6.19         1,529,811         25,940          6.75

Total earning assets       2,836,178         39,168          5.48 %       2,792,028         41,004          5.84 %
Cash and due from
banks                         95,935                                        116,160
Bank premises and
equipment, net                63,795                                         65,095
Other assets                  36,079                                         36,781
Goodwill and other
intangible assets, net        63,461                                         64,446
Allowance for loan
losses                       (23,674 )                                      (19,339 )

Total assets             $ 3,071,774                                    $ 3,055,171


Liabilities and
Shareholders' Equity
Interest-bearing
deposits                 $ 1,730,708       $  3,836          0.88 %     $ 1,758,371          7,313          1.65 %
Short-term borrowings        171,621            179          0.41           177,278            506          1.14

Total interest-bearing
liabilities                1,902,329          4,015          0.84 %       1,935,649          7,819          1.61 %

Noninterest-bearing
deposits                     738,625                                        753,733
Other liabilities             34,143                                         18,617

Total liabilities          2,675,097                                      2,707,999
Shareholders' equity         396,677                                        347,172

Total liabilities and
shareholders' equity     $ 3,071,774                                    $ 3,055,171

Net interest income                        $ 35,153                                       $ 33,185

Rate Analysis:
Interest
income/earning assets                                        5.48 %                                         5.84 %
Interest
expense/earning assets                                       0.56                                           1.11

Net yield on earning
assets                                                       4.92 %                                         4.73 %

                                                      Nine months ended September 30,
                                           2009                                            2008
                           Average          Income/        Yield/          Average          Income/        Yield/
                           Balance          Expense         Rate           Balance          Expense         Rate
Assets

Short-term investments   $    49,109       $     209          0.57 %     $    93,582       $   1,710          2.44 %
Taxable investment
securities (1)               881,726          28,102          4.25           825,104          28,115          4.54
Tax-exempt investment
securities (2)               426,621          19,958          6.24           324,976          14,880          6.11
Loans (2)(3)               1,504,400          69,015          6.13         1,528,338          80,238          7.01

Total earning assets       2,861,856         117,284          5.48 %       2,772,000         124,943          6.02 %
Cash and due from
banks                        102,907                                         116,792
Bank premises and
equipment, net                64,526                                          63,763
Other assets                  36,754                                          32,962
Goodwill and other
intangible assets, net        63,674                                          64,750
Allowance for loan
losses                       (22,900 )                                       (18,599 )

Total assets             $ 3,106,817                                     $ 3,031,668


Liabilities and
Shareholders' Equity
Interest-bearing
deposits                 $ 1,744,336       $  12,768          0.98 %     $ 1,770,394       $  26,891          2.03 %
Short-term borrowings        191,376             633          0.44           166,173           1,775          1.43

Total interest-bearing
liabilities                1,935,712          13,401          0.93 %       1,936,567          28,666          1.98 %

Noninterest-bearing
deposits                     749,383                                         728,227
Other liabilities             32,801                                          19,393

Total liabilities          2,717,896                                       2,684,187
Shareholders' equity         388,921                                         347,481

Total liabilities and
shareholders' equity     $ 3,106,817                                     $ 3,031,668

Net interest income                        $ 103,883                                       $  96,277

Rate Analysis:
Interest
income/earning assets                                         5.48 %                                          6.02 %
Interest
expense/earning assets                                        0.63                                            1.38

Net yield on earning
assets                                                        4.85 %                                          4.64 %

(1) Trading securities are included in taxable investment securities.

(2) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.

(3) Nonaccrual loans are included in loans.

Noninterest Income. Noninterest income for the third quarter of 2009 was $12.9 million, an increase of $588 thousand, or 4.8%, as compared to the same period in 2008. This increase is primarily due to (i) an increase of $751 thousand in the net gain on securities transactions, (ii) an increase of $270 thousand in the gain on the sale of student loans, (iii) an increase of $100 thousand in ATM and credit card fees primarily as a result of increased use of debit cards and (iv) an increase of $82 thousand in real estate mortgage fees. This increase was offset by (i) a decrease of $173 thousand in trust fees,
(ii) an increase of $155 thousand in net losses on the sale of foreclosed assets and (iii) a decrease of $77 thousand in service charges on deposit accounts. In the third quarter of 2009, we recorded a gain of $273 thousand on the sale of approximately $10.6 million in student loans, representing substantially all of the remainder of our student loan portfolio. The Company has suspended its student loan origination activities as a result of changes mandated by the Department of Education that significantly reduced the profitability of the student loan program. The decline in trust fees reflects declines in the market values of the equity investments under management and lower oil and gas prices, offset in part by an increase of $46.0 million in assets under management over the prior year. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheet, totaled $2.03 billion at September 30, 2009 as compared to $1.98 billion for the same date in 2008. The decline in service charges on deposit accounts was the result of a decrease in the usage of overdraft privileges.

Noninterest income for the nine-month period ended September 30, 2009 was $36.5 million, a decrease of $1.5 million, or 4.0%, as compared to the same period in 2008. This decrease is primarily due to (i) the decrease of $828 thousand in net gain on sale of student loans, (ii) a decrease of $660 thousand in trust fees, (iii) a decrease of $711 thousand in service charges on deposit accounts, and (iv) an increase of $303 thousand in the net loss on the sale of foreclosed assets. This decrease was partially offset by (i) an increase of $439 . . .