• 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;

• 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;

• Legislative changes and other developments in student loan originations and sales;

• Anticipated increases in FDIC deposit insurance assessments;

• 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 its 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 inherent estimated 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 guidance provide in SEC Staff Accounting Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues" and includes allowance allocations calculated in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, and allowance allocations determined in accordance with SFAS No. 5, "Accounting for Contingencies." We also follow the guidance of the "Interagency Policy Statement on the Allowance for Loan and Lease Losses," issued jointly by the 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 determined in accordance with SFAS 114 based on probable losses on specific classified loans; (ii) general reserves determined in accordance with SFAS 5 that consider historical loss rates; and (iii) a qualitative reserve determined in accordance with SFAS 5 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 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 SFAS 157, and as clarified with several FSP's. 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 second quarter of 2009 were $13.6 million, a decrease of $36 thousand, or 0.3% from the same period in 2008. Net earnings for the second quarter of 2009 compared to the second quarter of 2008 were negatively impacted by a decrease in noninterest income, including the gain on sale of student loans in the second quarter of 2008 as compared to the second quarter of 2009 and the increase of $2.2 million in FDIC insurance premiums, including special assessment (see below). The negative impact of these items was substantially offset by an increase in net interest income and decreases in certain other categories of noninterest expense.
On a basic net earnings per share basis, net earnings were $0.65 for the second quarter of 2009, unchanged from the same quarter of 2008. The return on average assets was 1.77% for the second quarter of 2009, as compared to 1.81% for the same quarter of 2008. The return on average equity was 13.98% for the second quarter of 2009 as compared to 15.55% for the same quarter of 2008.
Net earnings for the six-month period ended June 30, 2009 were $27.3 million, an increase of $506 thousand, or 1.9%, compared to net earnings for the six-month period ended June 30, 2008 of $26.8 million. The increase in net earnings for 2009 over 2008 was primarily attributable to an increase in net interest income which offset the impact of the increase in FDIC insurance premiums and the reduction in the gain on the sale of student loans.
On a basic net earnings per share basis, net earnings were $1.31 for the six-months of 2009 as compared to $1.29 for the same period of 2008. The return on average assets was 1.76% for the six-months of 2009, as compared to 1.78% for the same period of 2008. The return on average equity was 14.28% for the six-months of 2009, as compared to 15.48% 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 $34.6 million for the second quarter of 2009, as compared to $31.7 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 $73.3 million for the second quarter of 2009 over the same period in 2008. Average taxable and tax exempt securities increased $162.8 million for the second quarter of 2009 over 2008, offsetting a decrease of $38.3 million in average loans. Average interest bearing liabilities decreased $6.4 million for the second quarter of 2009 over the same period in 2008. The yield on earning assets decreased 41 basis points in the second quarter of 2009, whereas the rate paid on interest-bearing liabilities decreased 97 basis points, primarily due to the effects of lower interest rates.

Tax-equivalent net interest income was $68.7 million for the first six-month period of 2009, as compared to $63.1 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 $113.0 million for the first six-months of 2009. Average taxable and tax exempt securities increased $181.0 million, offsetting a decrease of $3.4 million in average loans. Average interest bearing liabilities increased $15.6 million for the six-month period of 2009 over 2008. The yield on earning assets decreased 63 basis points in the six-months of 2009, whereas the rate paid on interest-bearing liabilities decreased 119 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 June 30, 2009                       Six Months Ended June 30, 2009
                                     Compared to Three Months Ended                         Compared to Six Months Ended
                                             June 30, 2008                                         June 30, 2008
                                 Change Attributable to             Total             Change Attributable to              Total
                               Volume              Rate             Change           Volume              Rate            Change
Short-term investments       $     (234 )       $      (201 )      $   (435 )      $      (813 )       $    (450 )      $  (1,263 )
Taxable investment
securities (1)                      654                (820 )          (166 )            2,042            (1,589 )            453
Tax-exempt investment
securities (2)                    1,602                 184           1,786              2,787               339            3,126
Loans (2) (3)                      (580 )            (2,324 )        (2,904 )             (270 )          (7,870 )         (8,140 )

Interest income                   1,442              (3,161 )        (1,719 )            3,746            (9,570 )         (5,824 )

Interest-bearing
deposits                            (81 )            (4,255 )        (4,336 )             (331 )         (10,316 )        (10,647 )
Short-term borrowings                44                (291 )          (247 )              318            (1,132 )           (814 )

Interest expense                    (37 )            (4,546 )        (4,583 )              (13 )         (11,448 )        (11,461 )

Net interest income          $    1,479         $     1,385        $  2,864        $     3,759         $   1,878        $   5,637

(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, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in Table 2.
The net interest margin for the second quarter of 2009 was 4.88%, an increase of 27 basis points from the same period in 2008. The net interest margin for the six-months of 2009 was 4.82%, an increase of 23 basis points from the same period in 2008.

Our net interest margin increased from prior periods despite the volatile interest rate environment which saw the Federal funds rate drop 400 basis points from January 2008 through June 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.
Table 2 - Average Balances and Average Yields and Rates (in thousands, except percentages):

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

Short-term investments     $    45,286        $     71           0.63 %      $    96,494        $    506           2.11 %
Taxable investment
securities (1)                 885,382           9,209           4.16            827,589           9,376           4.53
Tax-exempt investment
securities (2)                 429,542           6,738           6.27            324,551           4,952           6.10
Loans (2)(3)                 1,481,792          22,900           6.20          1,520,043          25,804           6.83

Total earning assets         2,842,002          38,918           5.49 %        2,768,677          40,638           5.90 %
Cash and due from banks         98,906                                           118,479
Bank premises and
equipment, net                  64,498                                            63,528
Other assets                    36,135                                            30,526
Goodwill and other
intangible assets, net          63,675                                            64,746
Allowance for loan
losses                         (22,938 )                                         (18,616 )

Total assets               $ 3,082,278                                       $ 3,027,340


Liabilities and
Shareholders' Equity
Interest-bearing
deposits                   $ 1,735,640        $  4,155           0.96 %      $ 1,757,120        $  8,491           1.94 %
Short-term borrowings          171,936             192           0.45            156,849             440           1.13

Total interest-bearing
liabilities                  1,907,576           4,347           0.91 %        1,913,969           8,931           1.88 %

Noninterest-bearing
deposits                       753,473                                           740,688
Other liabilities               32,134                                            20,774

Total liabilities            2,693,183                                         2,675,431
Shareholders' equity           389,095                                           351,909

Total liabilities and
shareholders' equity       $ 3,082,278                                       $ 3,027,340

Net interest income                           $ 34,571                                          $ 31,707

Rate Analysis:
Interest income/earning
assets                                                           5.49 %                                            5.90 %
Interest expense/earning
assets                                                           0.61                                              1.29

Net yield on earning
assets                                                           4.88 %                                            4.61 %

                                                            Six months ended June 30,
                                              2009                                              2008
                             Average          Income/         Yield/           Average          Income/         Yield/
                             Balance          Expense          Rate            Balance          Expense          Rate
Assets

Short-term investments     $    41,115        $    113           0.56 %      $   105,705        $  1,376           2.62 %
Taxable investment
securities (1)                 895,102          18,947           4.23            806,059          18,493           4.59
Tax-exempt investment
securities (2)                 414,480          12,899           6.22            322,517           9,772           6.06
Loans (2)(3)                 1,524,211          46,157           6.11          1,527,593          54,298           7.15

Total earning assets         2,874,908          78,116           5.48 %        2,761,874          83,939           6.11 %
Cash and due from banks        106,451                                           117,112
Bank premises and
equipment, net                  64,898                                            63,091
Other assets                    37,096                                            31,032
Goodwill and other
intangible assets, net          63,782                                            64,903
Allowance for loan
losses                         (22,507 )                                         (18,225 )

Total assets               $ 3,124,628                                       $ 3,019,787


Liabilities and
Shareholders' Equity
Interest-bearing
deposits                   $ 1,751,263        $  8,932           1.03 %      $ 1,776,471        $ 19,579           2.22 %
Short-term borrowings          201,416             454           0.45            160,559           1,268           1.59

Total interest-bearing
liabilities                  1,952,679           9,386           0.97 %        1,937,030          20,847           2.16 %

Noninterest-bearing
deposits                       754,851                                           715,334
Other liabilities               32,119                                            19,785

Total liabilities            2,739,649                                         2,672,149
Shareholders' equity           384,979                                           347,638

Total liabilities and
shareholders' equity       $ 3,124,628                                       $ 3,019,787

Net interest income                           $ 68,730                                          $ 63,092

Rate Analysis:
Interest income/earning
assets                                                           5.48 %                                            6.11 %
Interest expense/earning
assets                                                           0.66                                              1.52

Net yield on earning
assets                                                           4.82 %                                            4.59 %

(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 second quarter of 2009 was $12.1 million, a decrease of $1.3 million, or 9.9%, as compared to the same period in 2008. This decrease is primarily due to (i) the student loan sale in the second quarter of 2008 compared to no sales in the second quarter in 2009,
(ii) a decrease of $234 thousand in trust fees and (iii) a decrease of $250 thousand in service charges on deposits. This large decrease was offset by
(i) an increase of $163 thousand in ATM and credit card fees primarily as a result of increased use of debit cards, (ii) an increase of $332 thousand in the net gain on securities transactions, and (iii) an increase of $93 thousand in real estate mortgage fees. In the first quarter of 2009, we recorded a gain of $616 thousand on the sale of approximately $73.7 million in student loans, representing approximately 86% of our student loan portfolio. In the second quarter of 2008, we recognized a net gain of $1.4 million on the sale of $54.1 million in student loans. 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. It is currently anticipated that we will sell the remaining portfolio of student loans in the third quarter of 2009. 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 growth of $92.1 million in new business over the prior year. The fair value of our trust assets managed, which are not reflected in our balance sheet, totaled $1.99 billion at June 30, 2009 compared to $1.92 billion for the same period of 2008. The decline in service charges on deposit accounts was the result of a decrease in the usage of overdraft privilege.

Noninterest income for the six-month period ended June 30, 2009 was $23.7 million, a decrease of $2.1 million, or 8.2%, as compared to the same period in 2008. This decrease is primarily due to (i) the decrease of $1.1 million in profit from sale of student loans, (ii) a decrease of $486 . . .