• 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 on deposits. Our primary source of funding for our loans is deposits we hold in 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 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 Statement of Financial Accounting Standards (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 further 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's available-for-sale and trading securities portfolios are recorded at fair value.
Effective January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements". We also adopted FSP No. FAS 157-3 that provides additional guidance on valuation and disclosures. 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) 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. 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.

Operating Results
Three-months ended March 31, 2009 and 2008 Net income for the first quarter of 2009 totaled $13.7 million, an increase of $542 thousand, or 4.1%, from the same period last year. This increase was principally attributable to an increase in net interest income of $2.1 million. Offsetting this item was a decrease in noninterest income of $776 thousand, an increase in the provision for loan losses of $692 thousand and an increase in noninterest expense of $286 thousand.
Basic earnings per share were $0.66 for the first quarter of 2009, as compared to $0.63 for the first quarter of 2008. The return on average assets and return on average equity for the first quarter of 2009 were 1.76% and 14.59%, respectively. For the same period in 2008, the return on average assets and return on average equity amounted to 1.75% and 15.42%, respectively. Tax equivalent net interest income for the first quarter of 2009 amounted to $34.2 million as compared to $31.4 million for the same period last year. Our yield on interest earning assets decreased approximately 85 basis points while our rates paid on interest bearing liabilities decreased 143 basis points. The increase in volume of average interest earning assets of $153.1 million partially offset the decrease in rates, but overall resulted in a decrease of $4.1 million in interest income. Average interest bearing liabilities increased $38.2 million. The impact of the moderate increase in the volume of interest bearing liabilities was offset by a decrease in rates paid resulting in a decline in interest expense totaling $6.9 million. Average earning assets were $2.91 billion for the first quarter of 2009, which were 5.6% greater than for the first quarter of 2008. Average interest bearing liabilities were $2.00 billion for the first quarter of 2009, which were 1.9% greater than for the first quarter of 2008. The Company's interest spread increased to 4.44% for 2009 from 3.88% for 2008. The Company's net interest margin was 4.76% for the first quarter of 2009, an increase of 18 basis points compared to 4.58% for the same period of 2008, and down 1 basis point from the 4.77% level for the fourth quarter of 2008. Our net interest margin increased slightly from prior periods despite the volatile interest rate environment which saw the Federal funds rate drop 200 basis points from March 2008 through December 2008. Should interest rates remain at the current low levels, we anticipate that the impact of lower yields on loans and investment securities and competition for deposits will put downward pressure on our net interest margin.
The provision for loan losses for the first quarter of 2009 was $1.8 million compared to $1.1 million for the same period in 2008. The increase in the provision for loan losses recorded in the first quarter of 2009 resulted from the slowdown in the economy and the increase in nonperforming loans. Gross charge-offs for the quarter ended March 31, 2009, totaled $893 thousand compared to $288 thousand for the same period of 2008. Recoveries of previously charged-off loans totaled $255 thousand in the quarter ended March 31, 2009, as compared to $135 thousand in the same period of 2008. On an annualized basis, net charge-offs as a percentage of average loans were 0.17% for the first quarter of 2009, as compared to 0.04% for the same period in 2008. The Company's allowance for loan losses totaled $22.7 million at March 31, 2009, up $4.3 million from the balance of $18.4 million at March 31, 2008, and up $1.1 million from the balance of $21.5 million at December 31, 2008. The Company's allowance as a percentage of nonperforming loans amounted 233.5% at March 31, 2009 compared to 465.0% at March 31, 2008, and 216.8% at December 31, 2008.

Total noninterest income for the first quarter of 2009 was $11.5 million, as compared to $12.3 million for the same period last year. Trust fees totaled $2.1 million for 2009, down $253 thousand over the same period in 2008, reflecting declines in the market value of the equity investments under management and lower oil and gas prices, offset in part by a growth of $223 million in trust assets under management over the prior year. The market value of trust assets managed totaled $1.9 billion at March 31, 2009, compared to $1.8 billion at March 31, 2008. The book value of trust assets managed totaled $1.7 billion at March 31, 2009, compared to $1.5 billion at March 31, 2008. Service charges on deposit accounts totaled $5.1 million for the first quarter of 2009, compared to $5.5 million for the same period of 2008, a decrease of $384 thousand reflecting primarily a decline in usage of our overdraft privilege product. Fees from the Company's real estate mortgage operations of $588 thousand represented a slight decrease from the $605 thousand recognized in the first quarter of 2008. ATM and credit card fees increased 8.8% to $2.2 million versus $2.0 million a year ago, indicative of continued increases in the use of debit cards and growth in net new deposit accounts. A net gain of $616 thousand on the sale of approximately $73.7 million in student loans, approximately 86% of the student loan portfolio, was recorded in the first quarter of 2009, compared to a net gain of $283 thousand recorded in the same period last year on the sale of $9.4 million in student loans. The Company recognized a net gain of $1.7 million on the sale of $62.7 million in student loans for the year ended December 31, 2008, the most significant portion was realized in the second quarter of 2008. The Company has suspended its student lending 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 the remaining portfolio of student loans will be sold in the second or third quarter of this year.
Noninterest expense for the first quarter of 2009 amounted to $22.9 million, as compared to $22.7 million for the same period in 2008. Salaries and employee benefits expense, the Company's largest noninterest expense item, decreased 4.4% to $12.0 million in 2009, down $556 thousand from the same period in 2008. The decrease in salaries and benefits expense reflected decreases in healthcare costs of $342 thousand and employee profit sharing of $550 thousand. Net occupancy expense was $1.6 million for the first quarter of 2009, an increase of 1.8% over the same period last year. Equipment expense was $1.9 million for the quarter ended March 31, 2009, an increase of $93 thousand over the first quarter of 2008. FDIC insurance premiums were $951 thousand in the first quarter of 2009 compared to $133 thousand for the same period last year. The increase in the FDIC insurance premiums is the result of having utilized FDIC insurance premium credits in prior periods and an increase in 2009 of the FDIC insurance premium rates. The FDIC is currently considering an additional special assessment that could further significantly increase this expense for the Company for the remainder of 2009.
All other categories of the Company's noninterest expense decreased $98 thousand in the first quarter of 2009, compared to the first quarter of 2008. Advertising and public relations decreased $110 thousand. Amortization of intangible assets decreased $89 thousand. ATM and credit card expenses were $79 lower primarily as a result of a new contract with our processor. Offsetting these decreases were an increase in legal, tax and professional expense of $184 thousand and increases in various other categories of noninterest expense. The increase in legal, tax and professional expense was largely the result of higher costs associated with servicing the Company's portfolio of student loans. Income tax expense was $5.0 million for the first quarter of 2009, as compared to $5.3 million for the same period in 2008. Our effective tax rates on pretax income were 26.92%, and 28.52% for the first quarters of 2009 and 2008, respectively. The effective tax rates differ from the federal statutory tax rate of 35% largely due to tax exempt interest income earned on certain investment securities and loans, the deductibility of dividends paid to our employee stock ownership plan and the Texas margin tax. The decrease in the effective rate in 2009 compared to 2008 is due to an increase in tax exempt interest income. We believe a key indicator of our operating efficiency is expressed by the ratio that is calculated by dividing noninterest expense by the sum of net interest income (on a tax equivalent basis) and noninterest income. This ratio in effect measures the amount of funds expended to generate revenue. Our efficiency ratio was 50.22% for the first quarter of 2009 and 51.86% for the first quarter of 2008.

Balance Sheet Review
Total assets at March 31, 2009 amounted to $3.12 billion as compared to $3.21 billion at December 31, 2008, and $3.06 billion at March 31, 2008. Deposits totaled $2.52 billion at March 31, 2009, down $61.0 million from December 31, 2008 amounts. Deposits at March 31, 2008 were $2.50 billion. Loans totaled $1.48 billion, $1.57 billion and $1.54 billion at March 31, 2009, December 31, 2008 and March 31, 2008, respectively. Loans held for investment at March 31, 2009, were $1.47 billion, a decrease of $14.1 million from the March 31, 2008 balance. As compared to March 31, 2008, loans held for investment at March 31, 2009, reflect (i) a $13.2 million decrease in commercial, financial and agricultural loans; (ii) a $1.1 million decrease in real estate loans; and
(iii) a $0.3 million increase in consumer loans. Loans held for sale at March 31, 2009, were $14.2 million, a decrease of $42.2 million from the March 31, 2008 balance, substantially all as a result of the sale of student loans recorded in the first quarter of 2009. At March 31, 2009, loans held for sale were comprised of $9.8 million in student loans and $4.5 million in residential mortgage loans. Investment securities, including trading securities, at March 31, 2009, totaled $1.33 billion as compared to $1.32 billion at year-end 2008 and $1.12 billion at March 31, 2008. The net unrealized gain in the investment portfolio at March 31, 2009, was $35.4 million. At March 31, 2009, gross unrealized gains totaled $40.7 million and gross unrealized losses totaled $5.3 million. We do not believe these unrealized losses are "other than temporary" as (1) we do not have the intent to sell our securities prior to recovery and (2) it is more likely than not that we will not have to sell our securities prior to recovery. The unrealized losses noted are interest rate related due to the level of short-term and intermediate interest rates at March 31, 2009. We have reviewed the ratings of the issuers and have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities. Our mortgage related securities are backed by GNMA, FNMA and FHLMC or are collateralized by securities backed by these agencies. The portfolio had an overall tax equivalent yield of 5.19% at March 31, 2009. At March 31, 2009, the investment portfolio had a weighted average life of 4.50 years and modified duration of 3.84 years. At March 31, 2009, the Company did not hold any structured notes. At March 31, 2009 and 2008 and December 31, 2008, the Company's investment portfolio consisted of the following:

                                                        March 31, 2009         March 31, 2008          December 31, 2008
Trading Securities                                      $    93,194,729        $             -        $        55,990,882


Held-to-Maturity:
Obligations of state and political subdivisions              19,250,204             23,590,904                 22,574,235

Mortgage backed securities                                      836,091              1,275,154                    918,853

                                                        $    20,086,295        $    24,866,058        $        23,493,088

Available-for-Sale:
U.S. Treasuries and obligations of U.S. government
sponsored enterprises and agencies                          274,851,197            286,206,921                330,045,589

Obligations of state and political subdivisions             416,055,834            321,874,707                380,775,388

Corporate bonds                                              74,981,449             40,040,039                 68,448,454

Mortgage backed securities                                  445,531,196            440,828,475                453,923,545

Other securities                                              5,765,804              5,973,248                  5,728,892

                                                        $ 1,217,185,480        $ 1,094,923,390        $     1,238,921,868

Trading securities consist of a government securities money market fund comprising primarily of U. S. Government agency securities and repurchase agreements collateralized by U. S. Government agency securities.

Nonperforming asset information at March 31, 2009 and 2008, and December 31, 2008 is as follows (dollars in thousand):

                                                  March 31,            December 31,
                                               2009        2008            2008
     Nonaccrual loans                        $  9,606     $ 3,933     $        9,893
     Accruing loans 90 days past due               94          19                 36
     Foreclosed assets                          4,415       1,908              2,602


                                             $ 14,115     $ 5,860     $       12,531


     As a % of loans and foreclosed assets       0.95 %      0.38 %             0.80 %
     As a % of end of period total assets        0.45 %      0.19 %             0.39 %

Short-term borrowings were $166.3 million at March 31, 2009 as compared to $235.6 million at December 31, 2008, and $163.1 million at March 31, 2008. At March 31, 2009, short-term borrowings included securities sold under repurchase agreements of $150.2 million. These borrowings are generally with significant customers of the Company that require short-term liquidity for their funds. Liquidity and Capital
Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument. Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. Liquid assets include cash, federal funds sold, trading assets and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include core depositors and correspondent banks that maintain accounts with, and sell federal funds to, our subsidiary banks. Other sources of funds include our ability to sell securities under agreements to repurchase, and an unfunded $50 million line of credit which matures December 31, 2009, established with a nonaffiliated bank. One of our subsidiary banks also has federal funds purchased lines of credit with two non-affiliated banks totaling $80 million. Given the strong core deposit base and relatively low loan to deposit ratios maintained at our subsidiary banks, management considers the current liquidity position to be adequate to meet short- and long-term liquidity needs. We anticipate that any future acquisitions of financial institutions and expansion of branch locations could place a demand on our cash resources. Available cash at our parent company, available dividends from subsidiary banks, utilization of available lines of credit, and future debt or equity offerings . . .