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, 2006 through 2008. The Company's and its subsidiaries' state income tax returns are open to audit under the statute of limitations for the years ended December 31, 2007 and December 31, 2008.

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 $4.4 million of other than temporary impairment charges during the nine months ended September 30, 2009. These impairment charges were related to credit losses on pooled bank trust preferreds with a remaining book value of $7.4 million and community bank and bank holding company equity positions with a remaining book value of $8.5 million at September 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 $109.7 million and unrealized losses of $5.3 million at September 30, 2009. 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 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
Nine Months Ended September 30, 2009 vs. 2008 The Company reported consolidated net income of $31.6 million, or $1.98 per diluted common share, for the nine months ended September 30, 2009, compared to $23.9 million, or $1.47 per diluted common share for the first nine months of 2008. Return on average assets ("ROA") was 1.62% and return on average equity ("ROE") was 14.5% for the first nine months of 2009, compared to 1.27% and 10.3%, respectively, for the first nine months of 2008.

The Company's net interest income for the first nine months of 2009 decreased $3.8 million compared to the first nine months of 2008 (see Net Interest Income). The Company recorded a provision for loan losses of $5.5 million for the first nine months of 2009 while $5.1 million was recorded for the first nine months of 2008 (see Allowance and Provision for Loan Losses). The Company recorded $4.4 million and $27.5 million of investment impairment losses in the first nine months of 2009 and the first nine months of 2008, respectively (see Non-Interest Income and Expense). 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 nine months ended September 30, 2008, to the nine months ended September 30, 2009. Excluding the loss on the early redemption of the trust preferred securities in the first nine months of 2008, non-interest expense for the nine months ended September 30, 2009 would have increased $1.3 million from the nine months ended September 30, 2008.
Three Months Ended September 30, 2009 vs. 2008 The Company reported consolidated net income of $10.5 million, or $0.66 per diluted common share, for the three months ended September 30, 2009, compared to a net loss of $(2.6) million, or $(0.16) per diluted common share for the third quarter of 2008. Return on average assets ("ROA") was 1.60% and return on average equity ("ROE") was 14.1% for the third quarter of 2009, compared to
(0.41)% and (3.3)%, respectively, for the third quarter of 2008. The Company's net interest income for the third quarter of 2009 decreased $2.6 million compared to the third quarter of 2008 (see Net Interest Income). The Company recorded a provision for loan losses of $1.68 million for the third quarter of 2009 while $2.35 million was recorded for the third quarter of 2008 (see Allowance and Provision for Loan Losses). As further discussed under the caption Non-Interest Income and Expense, excluding investment impairment losses, non-interest income remained flat at $14.7 million for both the three months ended September 30, 2008, and the three months ended September 30, 2009. Non-interest expense for the three months ended September 30, 2009 decreased $0.4 million from the three months ended September 30, 2008. Net Interest Income
Nine Months Ended September 30, 2009 vs. 2008 The Company's tax equivalent net interest income decreased $3.8 million, or 5.0%, from $76.3 million during the first nine months of 2008 to $72.5 million during the first nine 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 4.61% for the nine months ended September 30, 2008 to 4.22% for the nine months ended September 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 nine months of 2009, the Company recognized $7.8 million of interest income compared to $5.6 million of interest income recognized in the first nine months of 2008 from the interest rate floors.

Three Months Ended September 30, 2009 vs. 2008 The Company's tax equivalent net interest income decreased $2.6 million, or 9.8%, from $26.5 million during the third quarter of 2008 to $23.9 million during the third 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 105 basis points from the third quarter of 2008, interest income related to loans declined $4.2 million. In addition, interest income declined $0.9 million from the third quarter of 2008 due to a decline in the yield on investments. Deposit growth also increased interest expense by $1.2 million. Partially offsetting these decreases in net interest income was a decline in interest expense on deposits of $1.9 million due to a decline of 37 basis points on interest bearing deposits. In addition, higher average balances of loans and investments increased interest income by $1.3 million. The Company's reported net interest margin decreased from 4.78% for the quarter ended September 30, 2008 to 4.09% for the quarter ended September 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 third quarter of 2009, the Company recognized $2.2 million of interest income compared to $2.4 million of interest income recognized in the third quarter of 2008 from the interest rate floors.

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

                                                   Nine months ended September 30,
                                          2009                                        2008
                           Average                      Yield/         Average                      Yield/
                           Balance       Interest        Rate          Balance       Interest        Rate
Assets
Loan portfolio (1):
Residential real
estate                   $   597,282     $  25,495          5.71 %   $   604,798     $  28,187          6.23 %
Home equity (2)              390,388        18,165          6.22         359,101        19,520          7.26
Commercial, financial,
and agriculture (3)          758,050        31,519          5.56         705,819        35,563          6.73
Loans to depository
institutions                       -             -             -           1,551            35          3.01
Installment loans to
individuals                   49,498         3,150          8.51          52,277         4,014         10.26
Previously securitized
loans                          3,364         3,067        121.90           5,521         4,343        105.08
Total loans                1,798,582        81,396          6.05       1,729,067        91,662          7.08
Securities:
Taxable                      453,713        17,494          5.16         436,440        18,034          5.52
Tax-exempt (4)                39,829         1,921          6.45          36,253         1,771          6.53
Total securities             493,542        19,415          5.26         472,693        19,805          5.60
Deposits in depository
institutions                   5,271            10          0.25           8,981           163          2.42
Federal Funds Sold               165             -             -               -             -             -
Total interest-earning
assets                     2,297,560       100,821          5.87       2,210,741       111,630          6.74
Cash and due from
banks                         51,553                                      58,293
Bank premises and
equipment                     62,443                                      56,217
Other assets                 213,285                                     191,625
Less: allowance for
loan losses                  (21,867 )                                   (18,240 )
Total assets             $ 2,602,974                                 $ 2,498,636

Liabilities
Interest-bearing
demand deposits          $   425,972     $   1,327          0.42 %   $   412,417     $   1,979          0.64 %
Savings deposits             371,706         1,386          0.50         361,465         2,796          1.03
Time deposits              1,004,959        24,517          3.26         910,187        27,204          3.99
Short-term borrowings        135,708           395          0.39         136,644         2,286          2.23
Long-term debt                18,669           676          4.84          21,663         1,070          6.60
Total interest-bearing
liabilities                1,957,014        28,301          1.93       1,842,376        35,335          2.56
Noninterest-bearing
demand deposits              328,302                                     322,344
Other liabilities             27,335                                      26,213
Stockholders' equity         290,323                                     307,703
Total liabilities and
stockholders' equity     $ 2,602,974                                 $ 2,498,636
Net interest income                      $  72,520                                   $  76,295
Net yield on earning
assets                                                      4.22 %                                      4.61 %

(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 $3,884 and $2,715 from interest rate floors for the nine months ended September 30, 2009 and September 30, 2008, respectively.

(3) Interest income includes $3,927 and $2,929 from interest rate floors for the nine months ended September 30, 2009 and September 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)
                                                 Nine months ended September 30,
                                                          2009 vs. 2008
                                                       Increase (Decrease)
                                                        Due to Change In:
                                               Volume           Rate           Net
    Interest-earning assets:
    Loan portfolio
    Residential real estate                  $     (350 )     $  (2,342 )   $  (2,692 )
    Home equity                                   1,699          (3,054 )      (1,355 )
    Commercial, financial, and agriculture        2,629          (6,673 )      (4,044 )
    Loans to depository institutions                (35 )             -           (35 )
    Installment loans to individuals               (213 )          (651 )        (864 )
    Previously securitized loans                 (1,695 )           419        (1,276 )
    Total loans                                   2,035         (12,301 )     (10,266 )
    Securities:
    Taxable                                         713          (1,253 )        (540 )
    Tax-exempt (1)                                  175             (25 )         150
    Total securities                                888          (1,278 )        (390 )
    Deposits in depository institutions             (67 )           (86 )        (153 )
    Total interest-earning assets            $    2,856       $ (13,665 )   $ (10,809 )

    Interest-bearing liabilities:
    Demand deposits                          $       65       $    (717 )   $    (652 )
    Savings deposits                                 79          (1,489 )      (1,410 )
    Time deposits                                 2,830          (5,517 )      (2,687 )
    Short-term borrowings                           (16 )        (1,875 )      (1,891 )
    Long-term debt                                 (148 )          (246 )        (394 )
    Total interest-bearing liabilities       $    2,810       $  (9,844 )   $  (7,034 )
    Net Interest Income                      $       46       $  (3,821 )   $  (3,775 )

(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 September 30,
                                           2009                                         2008
                           Average                       Yield/         Average                       Yield/
                           Balance        Interest        Rate          Balance        Interest        Rate
Assets
Loan portfolio (5):
Residential real
estate                   $   590,108     $    8,170          5.49 %   $   613,771     $    9,393          6.09 %
Home equity (6)              394,069          5,972          6.01         373,445          6,644          7.08
Commercial, financial,
and
Agriculture (7)              765,689         10,334          5.35         708,665         11,622          6.52
Installment loans to
individuals                   50,935            975          7.59          53,521          1,270          9.44
Previously securitized
loans                          2,810            942        133.00           4,781          1,325        110.25
Total loans                1,803,611         26,393          5.81       1,754,183         30,254          6.86
Securities:
Taxable                      463,703          5,820          4.98         407,754          5,850          5.71
Tax-exempt (8)                43,682            672          6.10          34,653            571          6.56
Total securities             507,385          6,492          5.08         442,407          6,421          5.77
Deposits in depository
institutions                   5,753              2          0.14           8,981             47          2.08
Federal Funds Sold               489              -             -               -              -             -
Total interest-earning
assets                     2,317,238         32,887          5.63       2,205,571         36,722          6.62
Cash and due from
banks                         50,496                                       54,572
Bank premises and
equipment                     63,709                                       57,923
Other assets                 212,925                                      195,217
Less: allowance for
loan losses                  (20,828 )                                    (18,158 )
Total assets             $ 2,623,540                                  $ 2,495,125

Liabilities
Interest-bearing
demand deposits          $   431,676     $      418          0.38 %   $   414,022     $      654          0.63 %
Savings deposits             379,793            417          0.44         362,550            862          0.95
Time deposits              1,013,610          7,838          3.07         887,884          7,929          3.55
Short-term borrowings        134,323            131          0.39         142,290            477          1.33
Long-term debt                17,988            192          4.23          21,089            316          5.96
Total interest-bearing
liabilities                1,977,390          8,996          1.80       1,827,835         10,238          2.23
Noninterest-bearing
demand deposits              325,821                                      331,919
Other liabilities             23,065                                       24,677
Stockholders' equity         297,264                                      310,694
Total liabilities and
stockholders' equity     $ 2,623,540                                  $ 2,495,125
Net interest income                      $   23,891                                   $   26,484
Net yield on earning
assets                                                       4.09 %                                       4.78 %

(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 $1,194 and $1,136 from interest rate floors for the three months ended September 30, 2009 and September 30, 2008, respectively.

(7) Interest income includes $958 and $1,228 from interest rate floors for the three months ended September 30, 2009 and September 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 September 30,
                                                           2009 vs. 2008
                                                        Increase (Decrease)
                                                         Due to Change In:
                                               Volume            Rate           Net
    Interest-earning assets:
    Loan portfolio
    Residential real estate                  $     (355 )     $      (868 )   $ (1,223 )
    Home equity                                     360            (1,032 )       (672 )
    Commercial, financial, and agriculture          917            (2,205 )     (1,288 )
    Installment loans to individuals                (60 )            (235 )       (295 )
    Previously securitized loans                   (536 )             153         (383 )
    Total loans                                     326            (4,187 )     (3,861 )
    Securities:
    Taxable                                         788              (818 )        (30 )
    Tax-exempt (1)                                  146               (45 )        101
    Total securities                                934              (863 )         71
    Deposits in depository institutions             (17 )             (28 )        (45 )
    Total interest-earning assets            $    1,243       $    (5,078 )   $ (3,835 )

    Interest-bearing liabilities:
    Demand deposits                          $       27       $      (263 )   $   (236 )
    Savings deposits                                 40              (485 )       (445 )
    Time deposits                                 1,101            (1,192 )        (91 )
    Short-term borrowings                           (26 )            (320 )       (346 )
    Long-term debt                                  (46 )             (78 )       (124 )
    Total interest-bearing liabilities       $    1,096       $    (2,338 )   $ (1,242 )
    Net Interest Income                      $      147       $    (2,740 )   $ (2,593 )

(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
                                                      September 30,       December 31,       September 30,
(in thousands)                                            2009                2008               2008


Commercial, financial, and agricultural              $       264,260     $      271,609     $       254,681
Real Estate:
Construction:
Commercial                                                    41,767             55,836              59,237
Consumer                                                       2,391              4,971               5,514
Land:
Commercial                                                     3,088              3,179               3,225
. . .