Critical Accounting Policies

The accounting policies of the Company conform with U.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management's estimates. As this information changes, management's estimates and assumptions used to prepare the Company's financial statements and related disclosures may also change. The most significant accounting policies followed by the Company are presented in Note One to the audited financial statements included in the Company's 2008 Annual Report to Shareholders. The information included in this Quarterly Report on Form 10-Q, including the Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Management's Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the financial statements and notes thereto included in the 2008 Annual Report of the Company. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, income taxes, previously securitized loans, and other than temporary impairment on investment securities to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available. Pages 35-39 of this Quarterly Report on Form 10-Q provide management's analysis of the Company's allowance for loan losses and related provision. The allowance for loan losses is maintained at a level that represents management's best estimate of probable losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based upon an evaluation of individual credits in the loan portfolio, historical loan loss experience, current economic conditions, and other relevant factors. This determination is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses related to loans considered to be impaired is generally evaluated based on the discounted cash flows using the impaired loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. The Company is subject to federal and state income taxes in the jurisdictions in which it conducts business. In computing the provision for income taxes, management must make judgments regarding interpretation of laws in those jurisdictions. Because the application of tax laws and regulations for many types of transactions is susceptible to varying interpretations, amounts reported in the financial statements could be changed at a later date upon final determinations by taxing authorities. On a quarterly basis, the Company estimates its annual effective tax rate for the year and uses that rate to provide for income taxes on a year-to-date basis.
The amount of unrecognized tax benefits could change over the next twelve months as a result of various factors. However, management cannot currently estimate the range of possible change.
The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2005 through 2007. The Company's and its subsidiaries' state income tax returns are open to audit under the statute of limitations for the year ended December 31, 2007.

Note C, beginning on page 13 of this Quarterly Report on Form 10-Q, and page 39 provide management's analysis of the Company's previously securitized loans. The carrying value of previously securitized loans is determined using assumptions with regard to loan prepayment and default rates. Using cash flow modeling techniques that incorporate these assumptions, the Company estimated total future cash collections expected to be received from these loans and determined the yield at which the resulting discount would be accreted into income. If, upon periodic evaluation, the estimate of the total probable collections is increased or decreased but is still greater than the sum of the original carrying amount less subsequent collections plus the discount accreted to date, and it is probable that collection will occur, the amount of the discount to be accreted is adjusted accordingly and the amount of periodic accretion is adjusted over the remaining lives of the loans. If, upon periodic evaluation, the discounted present value of estimated future cash flows declines below the recorded value of previously securitized loans, an impairment charge would be provided through the Company's provision for loan losses. Please refer to Note C of Notes to Consolidated Financial Statements, on page 13 for further discussion.
On a quarterly basis, the Company performs a review of investment securities to determine if any unrealized losses are other than temporarily impaired. Management considers the following, amongst other things, in its determination of the nature of the unrealized losses, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As a result of this review, the Company recognized $2.2 million of other than temporary impairment charges during the six months ended June 30, 2009. These impairment charges were related to credit losses on pooled bank trust preferreds with a remaining book value of $8.8 million. At June 30, 2009, the Company's portfolio of perpetual callable preferred securities, preferred securities, and trust preferred securities primarily invested in regional banks have a total book value of $109.8 million and unrealized losses of $14.0 million. The Company continues to actively monitor the market values of these investments along with the financial strength of the issuers behind these securities, as well as our entire investment portfolio. Based on the market information available the Company believes that the recent declines in market value are temporary and that the Company has the does not have the intent to sell any of the securities classified as available for sale and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The Company cannot guarantee that such securities will recover and if additional information becomes available in the future to suggest that the losses are other than temporary, the Company may need to record impairment charges in future periods.
Financial Summary
Six Months Ended June 30, 2009 vs. 2008
The Company reported consolidated net income of $21.1 million, or $1.32 per diluted common share, for the six months ended June 30, 2009, compared to $26.4 million, or $1.63 per diluted common share for the first six months of 2008. Return on average assets ("ROA") was 1.63% and return on average equity ("ROE") was 14.7% for the first six months of 2009, compared to 2.11% and 17.3%, respectively, for the first six months of 2008.
The Company's net interest income for the first six months of 2009 decreased $1.2 million compared to the first six months of 2008 (see Net Interest Income). The Company recorded a provision for loan losses of $3.8 million for the first six months of 2009 while $2.7 million was recorded for the first six months of 2008 (see Allowance and Provision for Loan Losses). The Company recorded $2.2 million of investment impairment losses in the first six months of 2009 (see Non-Interest Income and Expense) while no such other than temporary impairment charges were recognized in the first six months of 2008. As further discussed under the caption Non-Interest Income and Expense, excluding other than temporary investment impairment losses, investment losses, and the gain from the Visa initial public offering, non-interest income would have increased $0.9 million from the six months ended June 30, 2008, to the six months ended June 30, 2009. Excluding the loss on the early redemption of the trust preferred securities in the first six months of 2008, non-interest expenses for the six months ended June 30, 2009 would have increased $1.7 million from the six months ended June 30, 2008.

Three Months Ended June 30, 2009 vs. 2008 The Company reported consolidated net income of $10.1 million, or $0.64 per diluted common share, for the three months ended June 30, 2009, compared to $13.4 million, or $0.83 per diluted common share for the second quarter of 2008. Return on average assets ("ROA") was 1.55% and return on average equity ("ROE") was 14.1% for the second quarter of 2009, compared to 2.14% and 17.1%, respectively, for the second quarter of 2008.
The Company's net interest income for the second quarter of 2009 decreased $2.0 million compared to the second quarter of 2008 (see Net Interest Income). The Company recorded a provision for loan losses of $2.15 million for the second quarter of 2009 while $0.85 million was recorded for the second quarter of 2008 (see Allowance and Provision for Loan Losses). As further discussed under the caption Non-Interest Income and Expense, non-interest income increased $0.4 million from the three months ended June 30, 2008, to the three months ended June 30, 2009. Non-interest expenses for the three months ended June 30, 2009 increased $1.6 million from the three months ended June 30, 2008. Net Interest Income
Six Months Ended June 30, 2009 vs. 2008
The Company's tax equivalent net interest income decreased $1.2 million, or 2.4%, from $49.8 million during the first six months of 2008 to $48.6 million during the first six months of 2009, as interest income from loans and investments decreased more quickly than interest expense on deposits and other interest bearing liabilities. The Company's reported net interest margin decreased from 4.53% for the six months ended June 30, 2008 to 4.29% for the six months ended June 30, 2009.
During the third and fourth quarters of 2008, the Company sold $450 million of interest rate floors. The gain from sales of these interest rate floors of $16.7 million will be recognized over the remaining lives of the various hedged loans. During the first six months of 2009, the Company recognized $5.7 million of interest income compared to $3.3 million of interest income recognized in the first six months of 2008 from the interest rate floors. Three Months Ended June 30, 2009 vs. 2008 The Company's tax equivalent net interest income decreased $2.0 million, or 7.9%, from $25.7 million during the second quarter of 2008 to $23.7 million during the second quarter of 2009, as interest income from loans and investments decreased more quickly than interest expense on deposits and other interest bearing liabilities. Due to a decrease in the Company's yield on loans of 106 basis points from the second quarter of 2008, interest income related to loans declined $4.0 million. In addition, interest income declined $0.8 million from the second quarter of 2008 due to a decline in the yield on investments. Deposit growth also increased interest expense by $1.1 million. Partially offsetting these decreases in net interest income was a decline in interest expense on deposits of $2.5 million due to a decline of 49 basis points on interest bearing deposits. In addition, higher average balances of loans and investments increased interest income by $0.9 million. The Company's reported net interest margin decreased from 4.65% for the quarter ended June 30, 2008 to 4.12% for the quarter ended June 30, 2009.

During the third and fourth quarters of 2008, the Company sold $450 million of interest rate floors. The gain from sales of these interest rate floors of $16.7 million will be recognized over the remaining lives of the various hedged loans
- predominantly prime-based commercial and home equity loans. During the second quarter of 2009, the Company recognized $2.7 million of interest income compared to $2.3 million of interest income recognized in the second quarter of 2008 from the interest rate floors.

Table One
Average Balance Sheets and Net Interest Income
(in thousands)

                                                       Six months ended June 30,
                                           2009                                         2008
                           Average                       Yield/         Average                       Yield/
                           Balance        Interest        Rate          Balance        Interest        Rate
Assets
Loan portfolio (1):
Residential real
estate                   $   600,929     $   17,325          5.81 %   $   600,262     $   18,763          6.29 %
Home equity (2)              388,517         12,193          6.33         351,850         12,876          7.36
Commercial, financial,
and
agriculture (3)              754,168         21,186          5.66         704,381         23,941          6.84
Loans to depository
institutions                       -              -             -           2,335             35          3.01
Installment loans to
individuals                   48,768          2,175          8.99          51,648          2,743         10.68
Previously securitized
loans                          3,645          2,125        117.56           5,895          3,050        104.05
Total loans                1,796,027         55,004          6.18       1,716,371         61,408          7.19
Securities:
Taxable                      448,636         11,674          5.25         451,137         12,184          5.43
Tax-exempt (4)                37,871          1,249          6.65          36,865          1,200          6.55
Total securities             486,507         12,923          5.36         488,002         13,384          5.52
Deposits in depository
institutions                   5,026              8          0.32           8,982            116          2.60
Total interest-earning
assets                     2,287,560         67,935          5.99       2,213,355         74,908          6.81
Cash and due from
banks                         52,090                                       60,174
Bank premises and
equipment                     61,800                                       55,355
Other assets                 213,467                                      189,810
Less: allowance for
loan losses                  (22,395 )                                    (18,282 )
Total assets             $ 2,592,522                                  $ 2,500,412

Liabilities
Interest-bearing
demand deposits          $   423,073     $      909          0.43 %   $   411,606     $    1,325          0.65 %
Savings deposits             367,595            969          0.53         360,916          1,934          1.08
Time deposits              1,000,562         16,679          3.36         921,462         19,274          4.21
Short-term borrowings        136,412            264          0.39         133,790          1,808          2.72
Long-term debt                19,015            485          5.14          21,953            753          6.90
Total interest-bearing
liabilities                1,946,657         19,306          2.00       1,849,727         25,094          2.73
Noninterest-bearing
demand deposits              329,563                                      317,504
Other liabilities             29,506                                       26,991
Stockholders' equity         286,796                                      306,190
Total liabilities and
stockholders' equity     $ 2,592,522                                  $ 2,500,412
Net interest income                      $   48,629                                   $   49,814
Net yield on earning
assets                                                       4.29 %                                       4.53 %

(1) For purposes of this table, non-accruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income.

(2) Interest income includes $2,689 and $1,578 from interest rate floors for the six months ended June 30, 2009 and June 30, 2008, respectively.

(3) Interest income includes $2,699 and $1,701 from interest rate floors for the six months ended June 30, 2009 and June 30, 2008, respectively.

(4) Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35%.

Table Two
Rate Volume Analysis of Changes in Interest Income and Interest Expense
(in thousands)
                                                    Six months ended June 30,
                                                          2009 vs. 2008
                                                       Increase (Decrease)
                                                        Due to Change In:
                                                 Volume        Rate         Net
       Interest-earning assets:
       Loan portfolio
       Residential real estate                  $     21     $ (1,459 )   $ (1,438 )
       Home equity                                 3,338       (2,021 )       (683 )
       Commercial, financial, and agriculture      1,688       (4,443 )     (2,755 )
       Loans to depository institutions              (35 )          -          (35 )
       Installment loans to individuals             (153 )       (415 )       (568 )
       Previously securitized loans               (1,161 )        236         (925 )
       Total loans                                 1,698       (8,102 )     (6,404 )
       Securities:
       Taxable                                       (67 )       (443 )       (510 )
       Tax-exempt (1)                                 33           16           49
       Total securities                              (34 )       (427 )       (461 )
       Deposits in depository institutions           (51 )        (57 )       (108 )
       Total interest-earning assets            $  1,613     $ (8,586 )   $ (6,973 )

       Interest-bearing liabilities:
       Demand deposits                          $     37     $   (453 )   $   (416 )
       Savings deposits                               36       (1,001 )       (965 )
       Time deposits                               1,650       (4,245 )     (2,595 )
       Short-term borrowings                          35       (1,579 )     (1,544 )
       Long-term debt                               (100 )       (168 )       (268 )
       Total interest-bearing liabilities       $  1,658     $ (7,446 )   $ (5,788 )
       Net Interest Income                      $    (45 )   $ (1,140 )   $ (1,185 )

(1) Fully federal taxable equivalent using a tax rate of 35%.

Table Three
Average Balance Sheets and Net Interest Income
(in thousands)

                                                      Three months ended June 30,
                                           2009                                         2008
                           Average                       Yield/         Average                       Yield/
                           Balance        Interest        Rate          Balance        Interest        Rate
Assets
Loan portfolio (5):
Residential real
estate                   $   598,122     $    8,545          5.73 %   $   598,924     $    9,348          6.28 %
Home equity (6)              390,361          6,050          6.22         360,041          6,493          7.25
Commercial, financial,
and
Agriculture (7)              752,157         10,311          5.50         708,607         11,707          6.64
Installment loans to
individuals                   49,956          1,057          8.49          55,667          1,398         10.10
Previously securitized
loans                          3,426            984        115.20           5,370          1,471        110.17
Total loans                1,794,022         26,947          6.02       1,728,609         30,417          7.08
Securities:
Taxable                      466,341          5,612          4.83         446,625          6,120          5.51
Tax-exempt (8)                38,179            621          6.52          35,994            585          6.54
Total securities             504,520          6,233          4.96         482,619          6,705          5.59
Deposits in depository
institutions                   5,224              3          0.23           9,266             50          2.17
Total interest-earning
assets                     2,303,766         33,183          5.78       2,220,494         37,172          6.73
Cash and due from
banks                         51,774                                       54,906
Bank premises and
equipment                     62,775                                       56,002
Other assets                 215,907                                      193,346
Less: allowance for
loan losses                  (22,229 )                                    (18,726 )
Total assets             $ 2,611,993                                  $ 2,506,022

Liabilities
Interest-bearing
demand deposits          $   429,381     $      446          0.42 %   $   413,467     $      613          0.60 %
Savings deposits             374,375            463          0.50         361,244            831          0.93
Time deposits              1,017,984          8,276          3.26         909,421          9,075          4.01
Short-term borrowings        125,436            111          0.35         139,787            663          1.91
Long-term debt                18,998            231          4.88          21,401            312          5.88
Total interest-bearing
liabilities                1,966,174          9,527          1.94       1,845,320         11,494          2.51
Noninterest-bearing
demand deposits              334,735                                      323,123
Other liabilities             23,680                                       25,214
Stockholders' equity         287,404                                      312,365
Total liabilities and
stockholders' equity     $ 2,611,993                                  $ 2,506,022
Net interest income                      $   23,656                                   $   25,678
Net yield on earning
assets                                                       4.12 %                                       4.65 %

(5) For purposes of this table, non-accruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income.

(6) Interest income includes $1,314 and $1,108 from interest rate floors for the three months ended June 30, 2009 and June 30, 2008, respectively.

(7) Interest income includes $1,400 and $1,215 from interest rate floors for the three months ended June 30, 2009 and June 30, 2008, respectively.

(8) Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35%.

Table Four
Rate Volume Analysis of Changes in Interest Income and Interest Expense
(in thousands)
                                                   Three months ended June 30,
                                                          2009 vs. 2008
                                                       Increase (Decrease)
                                                        Due to Change In:
                                                Volume          Rate         Net
      Interest-earning assets:
      Loan portfolio
      Residential real estate                  $     (12 )    $   (791 )   $   (803 )
      Home equity                                    542          (985 )       (443 )
      Commercial, financial, and agriculture         714        (2,110 )     (1,396 )
      Installment loans to individuals              (142 )        (199 )       (341 )
      Previously securitized loans                  (528 )          41         (487 )
      Total loans                                    574        (4,044 )     (3,470 )
      Securities:
      Taxable                                        268          (776 )       (508 )
      Tax-exempt (1)                                  35             1           36
      Total securities                               303          (775 )       (472 )
      Deposits in depository institutions            (22 )         (25 )        (47 )
      Total interest-earning assets            $     855      $ (4,844 )   $ (3,989 )

      Interest-bearing liabilities:
      Demand deposits                          $      23      $   (190 )   $   (167 )
      Savings deposits                                30          (398 )       (368 )
      Time deposits                                1,071        (1,871 )       (800 )
      Short-term borrowings                          (66 )        (485 )       (551 )
      Long-term debt                                 (35 )         (47 )        (82 )
      Total interest-bearing liabilities       $   1,023      $ (2,991 )   $ (1,968 )
      Net Interest Income                      $    (168 )    $ (1,853 )   $ (2,021 )

(1) Fully federal taxable equivalent using a tax rate of 35%.

Loans

The composition of the Company's loan portfolio as of the dates indicated
follows:

 Table five
 Loan Portfolio
                                            June 30,        December 31,       June 30,
 (in thousands)                               2009              2008             2008


 Commercial, financial, and agricultural   $   241,713     $      271,609     $   258,743
 Real Estate:
 Construction:
 Commercial                                     44,300             55,836          65,430
 Consumer                                        2,246              4,971           6,087
 Land:
 Commercial                                      3,125              3,179           3,199
 Consumer                                       11,399             12,948          16,490
 Commercial mortgages                          458,748            437,631         387,824
 1-4 family residential mortgages              583,280            594,043        590,,099
 Home equity                                   392,751            384,320         371,537
 Total real estate                           1,495,849          1,492,928       1,440,666
 Installment loans to individuals               45,550             43,585          45,385
 Previously securitized loans                    3,223              4,222           5,253
 Total loans                               $ 1,786,335     $    1,812,344     $ 1,750,047

As compared to December 31, 2008, loans have decreased $26.0 million (1.4%) at . . .