The purpose of this analysis is to provide the reader with information relevant to understanding and assessing our results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis the reader is encouraged to review the consolidated financial statements and statistical data presented in this document.

Forward-Looking Statements

This report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements. Words such as "believe," "contemplate," "seek," "estimate," "plan," "project," "anticipate," "possible," "assume," "expect," "intend," "targeted," "continue," "remain," "will," "should," "indicate," "would," "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date.

All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise, or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made. We have expressed our expectations, beliefs, and projections in good faith and we believe they have a reasonable basis. However, we make no assurances that our expectations, beliefs, or projections will be achieved or accomplished. The results or outcomes indicated by our forward-looking statements may not be realized due to a variety of factors, including, without limitation, the following:

† Local, regional, national, and international economic conditions and the impact they may have on us and our clients and our assessment of that impact.

† Changes in the level of nonperforming assets and charge-offs.

† Changes in estimates of future cash reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

† The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.

† Inflation, interest rate, securities market, and monetary fluctuations.

†          Political instability.

†          Acts of war or terrorism.

†          Substantial increases in the cost of fuel.

†          The timely development and acceptance of new products and services
and perceived overall value of these products and services by others.

†          Changes in consumer spending, borrowings, and savings habits.

†          Changes in the financial performance and/or condition of our
borrowers.

†          Technological changes.

†          Acquisitions and integration of acquired businesses.

†          The ability to increase market share and control expenses.

†          Changes in the competitive environment among bank holding companies.

†          The effect of changes in laws and regulations (including laws and

† The effect of changes in accounting policies and practices and auditing requirements, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters.

† Changes in our organization, compensation, and benefit plans.

† The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquires and the results of regulatory examinations or reviews.

† Greater than expected costs or difficulties related to the integration of new products and lines of business.

† Our success at managing the risks described in Item 1A. Risk Factors.

Application of Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) and follow general practices within the industries in which we operate. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates or judgments reflect management's view of the most appropriate manner in which to record and report our overall financial performance. Because these estimates or judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. As such, changes in these estimates, judgments, and/or assumptions may have a significant impact on our financial statements. All accounting policies are important, and all policies described in Part II, Item 8, Financial Statements and Supplementary Data, Note
1 (Note 1), should be reviewed for a greater understanding of how our financial performance is recorded and reported.

We have identified the following three policies as being critical because they require management to make particularly difficult, subjective, and/or complex estimates or judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the determination of the reserve for loan and lease losses, fair value measurements, and the valuation of mortgage servicing rights. Management believes it has used the best information available to make the estimations or judgments necessary to value the related assets and liabilities. Actual performance that differs from estimates or judgments and future changes in the key variables could change future valuations and impact net income. Management has reviewed the application of these policies with the Audit Committee of the Board of Directors. Following is a discussion of the areas we view as our most critical accounting policies.

Reserve for Loan and Lease Losses - The reserve for loan and lease losses represents management's estimate of probable losses inherent in the loan and lease portfolio and the establishment of a reserve that is sufficient to absorb those losses. In determining an appropriate reserve, management makes numerous judgments, assumptions, and estimates based on continuous review of the loan and lease portfolio, estimates of client performance, collateral values, and disposition, as well as historical loss rates and expected cash flows. In assessing these factors, management benefits from a lengthy organizational history and experience with credit decisions and related outcomes. Nonetheless, if management's underlying assumptions prove to be inaccurate, the reserve for loan and lease losses would have to be adjusted. Our accounting policy related to the reserve is disclosed in Note 1 under the heading "Reserve for Loan and Lease Losses."

Fair Value Measurements - We use fair value measurements to record certain financial instruments and to determine fair value disclosures.
Available-for-sale securities, trading account securities, mortgage loans held for sale, and interest rate swap agreements are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets. GAAP establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data. For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value. When observable market prices and data are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement. Fair value is discussed further in Note 1 under the heading "Fair Value Measurements" and in Note 20, "Fair Value Measurements."

Mortgage Servicing Rights Valuation - We recognize as assets the rights to service mortgage loans for others, known as mortgage servicing rights, whether the servicing rights are acquired through purchases or through originated loans. Mortgage servicing rights do not trade in an active open market with readily observable market prices. Although sales of mortgage servicing rights do occur, the precise terms and conditions may not be readily available. As such, the value of mortgage servicing assets is established and valued using discounted cash flow modeling techniques which require management to make estimates regarding future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. The estimated rates of mortgage loan prepayments are the most significant factors driving the value of mortgage servicing assets. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the fair value of the mortgage servicing assets, mortgage interest rates (which are used to determine prepayment rates), and discount rates are held constant over the estimated life of the portfolio. Estimated mortgage loan prepayment rates are derived from a third-party model and adjusted to reflect our actual prepayment experience. Mortgage servicing assets are carried at the lower of amortized cost or fair value. The values of these assets are sensitive to changes in the assumptions used and readily available market pricing does not exist. The valuation of mortgage servicing assets is discussed further in Note
20 "Fair Value Measurements."

Earnings Summary

Net income in 2012 was $49.63 million, up from $48.20 million in 2011 and up from $41.24 million in 2010. Diluted net income per common share was $2.02 in 2012, $1.96 in 2011, and $1.21 in 2010. Return on average total assets was 1.11% in 2012 compared to 1.09% in 2011, and 0.91% in 2010. Return on average common shareholders' equity was 9.10% in 2012 versus 9.51% in 2011, and 6.10% in 2010.

Net income in 2012 was positively impacted by a $3.38 million or 2.27% increase in net interest income from 2011, which was offset by an increase of $2.62 million or 83.83% in provision for loan and lease losses. Net income in 2011, as compared to 2010, was positively impacted by a $16.08 million or 83.71% decrease in provision for loan and lease losses, which was offset by a decrease of $5.82 million or 6.71% in noninterest income and an increase of $6.36 million or 33.08% in income tax expense.

Dividends paid on common stock in 2012 amounted to $0.66 per share, compared to $0.64 per share in 2011, and $0.61 per share in 2010. The level of earnings reinvested and dividend payouts are determined by the Board of Directors based on management's assessment of future growth opportunities and the level of capital necessary to support them.

Net Interest Income - Our primary source of earnings is net interest income, the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities while deposits and borrowings represent the major portion of interest-bearing liabilities. For purposes of the following discussion, comparison of net interest income is done on a tax equivalent basis, which provides a common basis for comparing yields on earning assets exempt from federal income taxes to those which are fully taxable.

Net interest margin (the ratio of net interest income to average earning assets) is significantly affected by movements in interest rates and changes in the mix of earning assets and the liabilities that fund those assets. Net interest margin on a fully taxable equivalent basis was 3.69% in 2012 and 2011, compared to 3.59% in 2010. The stable margin in 2012 reflects the decline in funding costs offset by lower yields on earnings assets. The higher margin in 2011 compared to 2010 was due to a decline in funding costs. Net interest income was $151.78 million for 2012, compared to $148.40 million for 2011 and $147.50 for 2010. Tax-equivalent net interest income totaled $153.84 million for 2012, up $2.93 million from the $150.91 million reported for 2011. Tax-equivalent net interest income for 2011 was relatively flat from the $150.87 million reported in 2010.

During 2012, average earning assets increased $84.15 million while average interest-bearing liabilities decreased $46.72 million over the comparable period in 2011. The yield on average earning assets decreased 24 basis points to 4.41% for 2012 from 4.65% for 2011 due to reduced market interest rates. Total cost of average interest-bearing liabilities decreased 25 basis points to 0.94% during 2012 from 1.19% in 2011 as liabilities were impacted by decreases in market rates and rate re-pricing on maturing certificates of deposit. The result was an increase of 1 basis point to net interest spread, or the difference between interest income on earning assets and expense on interest-bearing liabilities.

The largest contributor to the decrease in the yield on average earning assets in 2012 was the 31 basis point decrease in the loan and lease portfolio yield. Average net loans and leases increased $130.91 million or 4.25% in 2012 from 2011 while the yield decreased to 5.02%.

During 2012, the tax-equivalent yield on securities available for sale decreased 30 basis points to 2.42% while the average balance decreased $17.50 million. Average mortgages held for sale increased $5.74 million during 2012 and the yield decreased 73 basis points. Average other investments, which include federal funds sold, time deposits with other banks, Federal Reserve Bank excess balances, Federal Reserve Bank and Federal Home Loan Bank stock and commercial paper decreased $35.00 million during 2012 while the yield increased 45 basis points. The increase in yield was primarily a result of higher dividends on Federal Home Loan Bank stock.

Average interest-bearing deposits decreased $56.25 million during 2012 while the effective rate paid on those deposits decreased 28 basis points. Average noninterest-bearing demand deposits increased $75.01 million during 2012.

Average short-term borrowings decreased $11.49 million during 2012 while the effective rate paid decreased 8 basis points. Average long-term debt increased $22.29 million during 2012 as the effective rate decreased 124 basis points.

The following table provides an analysis of net interest income and illustrates interest income earned and interest expense charged for each major component of interest earning assets and the interest bearing liabilities. Yields/rates are computed on a tax-equivalent basis, using a 35% rate. Nonaccrual loans and leases are included in the average loan and lease balance outstanding.

                                         2012                                  2011                                  2010
                                          Interest                              Interest                              Interest
                            Average       Income/     Yield/      Average       Income/     Yield/      Average       Income/     Yield/
(Dollars in thousands)      Balance       Expense      Rate       Balance       Expense      Rate       Balance       Expense      Rate
ASSETS
Investment securities:
Taxable                   $    775,103   $   16,426      2.12 % $    780,215   $   18,533      2.38 % $    743,838   $   20,466      2.75 %
Tax-exempt                     107,289        4,939      4.60        119,680        5,921      4.95        170,415        8,201      4.81
Mortgages held for sale         16,700          592      3.54         10,959          468      4.27         52,097        2,430      4.66
Net loans and leases         3,209,490      161,253      5.02      3,078,581      164,117      5.33      3,109,508      171,843      5.53
Other investments               65,861          943      1.43        100,862          991      0.98        131,627        1,061      0.81
Total earning assets         4,174,443      184,153      4.41      4,090,297      190,030      4.65      4,207,485      204,001      4.85
Cash and due from banks         60,099                                59,698                                60,977
Reserve for loan and
lease losses                   (83,430 )                             (86,617 )                             (89,656 )
Other assets                   321,767                               339,176                               364,896
Total assets              $  4,472,879                          $  4,402,554                          $  4,543,702
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
deposits                  $  2,957,785   $   21,877      0.74 % $  3,014,033   $   30,762      1.02 % $  3,121,167   $   44,605      1.43 %
Short-term borrowings          137,937          169      0.12        149,428          300      0.20        164,191          800      0.49
Subordinated notes              88,425        6,484      7.33         89,692        6,589      7.35         89,692        6,589      7.35
Long-term debt and
mandatorily redeemable
securities                      55,383        1,779      3.21         33,093        1,472      4.45         27,149        1,135      4.18
Total interest bearing
liabilities                  3,239,530       30,309      0.94      3,286,246       39,123      1.19      3,402,199       53,129      1.56
Noninterest bearing
deposits                       616,426                               541,421                               484,028
Other liabilities               71,292                                67,948                                67,011
Shareholders' equity           545,631                               506,939                               590,464
Total liabilities and
shareholders' equity      $  4,472,879                          $  4,402,554                          $  4,543,702
Net interest income                      $  153,844                            $  150,907                            $  150,872
Net interest margin on
a tax equivalent basis                                   3.69 %                                3.69 %                                3.59 %

The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The following table shows changes in tax equivalent interest earned and interest paid, resulting from changes in volume and changes in rates:

                                                   Increase (Decrease) due to
(Dollars in thousands)                             Volume             Rate             Net
2012 compared to 2011
Interest earned on:
Investment securities:
Taxable                                         $         (90 )  $        (2,017 )  $   (2,107 )
Tax-exempt                                               (581 )             (401 )        (982 )
Mortgages held for sale                                   184                (60 )         124
Net loans and leases                                    8,256            (11,120 )      (2,864 )
Other investments                                         150               (198 )         (48 )
Total earning assets                            $       7,919    $       (13,796 )  $   (5,877 )
Interest paid on:
Interest bearing deposits                       $        (593 )  $        (8,292 )  $   (8,885 )
Short-term borrowings                                     (19 )             (112 )        (131 )
Subordinated notes                                        (87 )              (18 )        (105 )
Long-term debt and mandatorily redeemable
securities                                                523               (216 )         307
Total interest bearing liabilities              $        (176 )  $        (8,638 )  $   (8,814 )
Net interest income                             $       8,095    $        (5,158 )  $    2,937
2011 compared to 2010
Interest earned on:
Investment securities:
Taxable                                         $       1,026    $        (2,959 )  $   (1,933 )
Tax-exempt                                             (2,527 )              247        (2,280 )
Mortgages held for sale                                (1,774 )             (188 )      (1,962 )
Net loans and leases                                   (1,557 )           (6,169 )      (7,726 )
Other investments                                        (941 )              871           (70 )
Total interest earning assets                   $      (5,773 )  $        (8,198 )  $  (13,971 )
Interest paid on:
Interest bearing deposits                       $      (1,439 )  $       (12,404 )  $  (13,843 )
Short-term borrowings                                     (62 )             (438 )        (500 )
Subordinated notes                                          -                  -             -
Long-term debt and mandatorily redeemable
securities                                                260                 77           337
Total interest bearing liabilities              $      (1,241 )  $       (12,765 )  $  (14,006 )
Net interest income                             $      (4,532 )  $         4,567    $       35

Noninterest Income - Noninterest income increased $0.32 million or 0.40% in 2012 from 2011 following a $5.82 million or 6.71% decrease in 2011 over 2010. Noninterest income for the most recent three years ended December 31 was as follows:

(Dollars in thousands)                               2012       2011       2010
Noninterest income:
Trust fees                                         $ 16,498   $ 16,327   $ 15,838
Service charges on deposit accounts                  18,807     18,488     19,323
Mortgage banking income                               8,357      3,839      6,218
Insurance commissions                                 5,494      4,793      5,074
Equipment rental income                              18,796     23,361     26,036
Other income                                         12,660     12,665     11,909
Investment securities and other investment gains        580      1,399      2,293
Total noninterest income                           $ 81,192   $ 80,872   $ 86,691

Trust fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) increased by $0.17 million or 1.05% in 2012 from 2011 compared to an increase of $0.49 million or 3.09% in 2011 over 2010. Trust fees are largely based on the size of client relationships and the market value of assets under management. The market value of trust assets under management at December 31, 2012 and 2011 was $3.40 billion and $3.30 billion, respectively. At December 31, 2012, these trust assets were comprised of $2.01 billion of personal and agency trusts, $966.54 million of employee benefit plan assets, $309.63 million of estate administration assets and individual retirement accounts, and $113.29 million of custody assets. The increase in trust fees in 2012 and 2011 was primarily a result of an increase in the market values of investment accounts.

Service charges on deposit accounts increased $0.32 million or 1.73% in 2012 from 2011 compared to a decrease of $0.84 million or 4.32% in 2011 from 2010. The improvement in service charges on deposit accounts in 2012 was primarily due to higher usage of debit cards offset by lower volume of nonsufficient fund transactions. The decline in service charges on deposit accounts in 2011 from 2010 largely reflects a lower volume of nonsufficient fund transactions.

Mortgage banking income increased $4.52 million or 117.69% in 2012 over 2011, compared to a decrease of $2.38 million or 38.26% in 2011 over 2010. In 2012, we had $0.24 million in valuation recovery adjustments of mortgage servicing rights compared to $0.24 million in valuation impairment adjustments of mortgage servicing rights in 2011 and no mortgage servicing rights impairment in 2010. During 2012, 2011 and 2010, we determined that no permanent write-down was necessary for previously recorded impairment on mortgage servicing assets. During 2012, mortgage banking income was also positively impacted by higher loan production volumes and higher margins on loan sales. Mortgage banking income was impacted by reduced loan production volumes in 2011 as a result of exiting wholesale broker lending in late 2010.

Insurance commissions increased $0.70 million or 14.63% in 2012 from 2011 compared to a decrease of $0.28 million or 5.54% in 2011 from 2010. The increase in 2012 was due to the acquisition of a benefits agency's book of business in January 2012. The lower commission income in 2011 was mainly due to reduced contingent commissions, primarily as a result of a higher level of claims activity in our books of business and intense competition which drove premiums lower.

Equipment rental income generated from operating leases declined by $4.57 million or 19.54% during 2012 from 2011 compared to a decrease of $2.68 million or 10.27% during 2011 from 2010. The average equipment rental portfolio decreased 19.10% in 2012 over 2011 and 8.79% in 2011 over 2010 resulting in lower rental income. In addition, new leases are at lower rates due to current . . .