**Consolidated Balance Sheets**           **December 31,** (Dollar amounts in thousands, except per share data) **2009**  **2008** **ASSETS**        Cash and due from banks $84,371  $67,298 Federal funds sold  21,576   9,530 Securities available-for-sale  587,246   596,915 Loans, net of allowance of $19,437 in 2009 and $16,280 in 2008  1,612,327   1,442,247 Credit card loans held-for-sale  —   12,800 Restricted stock  27,835   26,227 Accrued interest receivable  12,005   13,081 Premises and equipment, net  35,551   32,145 Bank-owned life insurance  64,057   62,107 Goodwill  7,102   7,102 Other intangible assets  4,916   1,512 Other real estate owned  5,885   3,200 FDIC indemnification asset  12,124   — Other assets  43,727   28,511        **Total Assets** $2,518,722  $2,302,675                 **LIABILITIES AND SHAREHOLDERS’ EQUITY**        Deposits:        Non-interest-bearing $312,990  $236,249 Interest-bearing:        Certificates of deposit of $100 or more  238,830   211,107 Other interest-bearing deposits  1,237,881   1,116,142           1,789,701   1,563,498          Short-term borrowings  30,436   21,500 Other borrowings  332,737   385,153 Other liabilities  59,365   45,680        **Total Liabilities**  2,212,239   2,015,831          Shareholders’ equity                 Common stock, $.125 stated value per share,        Authorized shares — 40,000,000        Issued shares — 14,450,966        Outstanding shares — 13,129,630 in 2009 and 13,116,630 in 2008  1,806   1,806 Additional paid-in capital  68,739   68,654 Retained earnings  277,357   263,115 Accumulated other comprehensive income (loss)  (7,904)  (12,946)Less: Treasury shares at cost — 1,321,336 in 2009 and 1,334,336 in 2008  (33,515)  (33,785)                **Total Shareholders’ Equity**  306,483   286,844                 **TotalLiabilities and Shareholders’ Equity** $2,518,722  $2,302,675        See accompanying notes.
 
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**Consolidated Statements of Income**               **Years Ended December 31,** (Dollar amounts in thousands, except per share data) **2009**  **2008**  **2007**              **INTEREST AND DIVIDEND INCOME:**            Loans, including related fees $94,930  $99,572  $104,950 Securities:            Taxable  22,755   25,303   23,336 Tax-exempt  6,604   6,415   6,635 Other  1,966   2,664   2,813           **Total Interest and Dividend Income**  126,255   133,954   137,734              **INTEREST EXPENSE:**            Deposits  21,544   32,696   41,956 Short-term borrowings  541   1,068   1,611 Other borrowings  17,176   18,726   19,394           **Total Interest Expense**  39,261   52,490   62,961           **Net Interest Income**  86,994   81,464   74,773 Provision for loan losses  11,870   7,855   6,580           **Net Interest Income After Provision For Loan Losses**  75,124   73,609   68,193              **NON-INTEREST INCOME:**            Trust and financial services  4,197   3,993   3,697 Service charges and fees on deposit accounts  11,082   11,889   11,877 Other service charges and fees  7,026   6,050   5,783 Securities gains, net  4   358   211 Other-than-temporary loss            Total impairment loss  (18,939)  (6,145)  — Less recognized in other comprehensive income  8,170   —   —           Net impairment loss recognized in earnings  (10,769)  (6,145)  — Insurance commissions  6,464   6,688   6,541 Gain on sale of mortgage loans  2,291   817   816 Gain on sale of credit card loans  2,549   —   — Gain on bargain purchase  5,057   —   — Other  631   1,760   2,572           **Total Non-Interest Income**  28,532   25,410   31,497              **NON-INTEREST EXPENSES:**            Salaries and employee benefits  42,259   41,287   39,432 Occupancy expense  4,534   4,182   4,034 Equipment expense  4,640   4,560   4,322 Federal Deposit Insurance  3,277   220   238 Other  18,671   16,198   16,700           **Total Non-Interest Expense**  73,381   66,447   64,72                        **Income Before Income Taxes**  30,275   32,572   34,964              Provision for income taxes  7,555   7,803   9,384                        **Net Income** $22,720  $24,769  $25,580                        **EARNINGS PER SHARE:**                         **Basic and Diluted** $1.73  $1.89  $1.94                        Weighted average number of shares outstanding (in thousands)  13,119   13,110   13,178           See accompanying notes.
 
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**Consolidated Statements of Changes in Shareholders’Equity**                                       **Accumulated**                     **Other**         **Common**  **Additional**  **Retained**  **Comprehensive**  **Treasury**    (Dollar amounts in thousands, except per share data) **Stock**  **Paid-In Capital**  **Earnings**  **Income (Loss)**  **Stock**  **Total**                          **Balance, January 1, 2007** $1,806  $68,003  $235,967  $(5,494) $(29,022) $271,260                          Comprehensive income:                        Net income  —   —   25,580   —   —   25,580 Other comprehensive loss, net of tax:                        Change in net unrealized gains/losseson securities available-for-sale, net  —   —   —   1,110   —   1,110 Change in unrealized gains/losses onpost-retirement benefits  —   —   —   (797)  —   (797)                        Total comprehensive income                      25,893                          Adjustment to initially apply guidanceon uncertain tax positions (Note 1)  —   —   (86)  —   —   (86)Contribution of 41,000 shares to ESOP  —   209   —   —   1,033   1,242 Treasury stock purchases (174,962 shares)  —   —   —   —   (5,167)  (5,167)Cash dividends, $ .87 per share  —   —   (11,450)  —   —   (11,450)                                            **Balance, December 31, 2007**  1,806   68,212   250,011   (5,181)  (33,156)  281,692                          Comprehensive income:                        Net income  —   —   24,769   —   —   24,769 Other comprehensive loss, net of tax:                        Change in net unrealized gains/losseson securities available-for-sale, net  —   —   —   (8,276)  —   (8,276)Change in unrealized gains/losses onpost-retirement benefits  —   —   —   511   —   511                         Total comprehensive income                      17,004                          Contribution of 33,015 shares to ESOP  —   442   —   —   835   1,277 Treasury stock purchases (52,744 shares)  —   —   —   —   (1,464)  (1,464)Cash dividends, $ .89 per share  —   —   (11,665)  —   —   (11,665)                                            **Balance, December 31, 2008**  1,806   68,654   263,115   (12,946)  (33,785)  286,844                          Comprehensive income:                        Net income  —   —   22,720   —   —   22,720 Other comprehensive loss, net of tax:                        Change in net unrealized gains/losseson securities available-for-sale, net  —   —   —   10,869   —   10,869                          Change in unrealized gains/losses onpost-retirement benefits  —   —   —   (2,494)  —   (2,494)                        Total comprehensive income                      31,095                          Adjustment for adoption of other-thantemporary impairment guidance,net of tax (Note 1)  —   —   3,333   (3,333)  —   — Contribution of 35,000 shares to ESOP  —   85   —   —   886   971 Treasury stock purchases (22,000 shares)  —   —   —   —   (616)  (616)Cash dividends, $ .90 per share  —   —   (11,811)  —   —   (11,811)                                            **Balance, December 31, 2009** $1,806  $68,739  $277,357  $(7,904) $(33,515) $306,483                    See accompanying notes.
 
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**Consolidated Statements of Cash Flows**               **Years Ended December 31,** (Dollar amounts in thousands, except per share data) **2009**  **2008**  **2007**              **CASH FLOWS FROM OPERATING ACTIVITIES:**            Net income $22,720  $24,769  $25,580 Adjustments to reconcile net income to net cashprovided by operating activities:            Net (accretion) amortization on securities  (2,442)  (2,874)  (2,619)Provision for loan losses  11,870   7,855   6,580 Securities impairment loss recognized in earnings  10,769   —   — Securities (gains) losses  (4)  5,787   (211)Depreciation and amortization  4,199   3,535   3,443 Provision for deferred income taxes  (4,265)  (5,147)  27 Net change in accrued interest receivable  1,076   617   274 Contribution of shares to ESOP  971   1,277   1,242 Gain on sale of mortgage loans  (2,291)  (817)  (816)Loss on sale of student loans  399   —   — Gain on sale of credit card loans  (2,549)  —   — Gain on purchase of business unit  (5,057)  —   — Loss on sales of other real estate  196   35   (116)Other, net  (6,202)  1,494   2,118           **Net Cash From Operating Activities**  29,390   36,531   35,502                        **CASH FLOWS FROM INVESTING ACTIVITIES:**            Sales of securities available-for-sale  —   1,063   3,140 Calls, maturities and principal reductions on securities available-for-sale  128,349   95,198   94,587 Purchases of securities available-for-sale  (88,532)  (151,863)  (120,657)Loans made to customers, net of repayments  (265,976)  (76,216)  (85,909)Net change in federal funds sold  (12,046)  (5,329)  17,236 Redemption of restricted stock  —   2,386   30 Cash received from sale of mortgage loans  146,625   36,910   25,424 Cash received from sale of student loans  13,347   —   — Cash received from sale of credit card loans  14,689   —   — Cash received from purchase of business unit  30,977   —   — Sale of other real estate  2,448   2,357   4,322 Additions to premises and equipment  (6,655)  (2,623)  (2,382)          **Net Cash From Investing Activities**  (36,774)  (98,117)  (64,209)                       **CASH FLOWS FROM FINANCING ACTIVITIES:**            Net change in deposits  80,359   33,777   27,039 Net change in other short-term borrowings  8,936   (5,831)  11,128 Dividends paid  (11,806)  (11,548)  (11,373)Purchases of treasury stock  (616)  (1,464)  (5,167)Proceeds from other borrowings  120,000   408,500   81,750 Repayments on other borrowings  (172,416)  (364,632)  (82,270)          **Net Cash From Financing Activities**  24,457   58,802   21,107           **Net Change in Cash and Cash Equivalents**  17,073   (2,784)  (7,600)**Cash and Cash Equivalents, Beginning of Year**  67,298   70,082   77,682           **Cash and Cash Equivalents, End of Year** $84,371  $67,298  $70,082                        **SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND NONCASH INFORMATION:**            Cash paid during the year for:            Interest $40,005  $54,168  $62,080           Income taxes $13,485  $11,657  $8,494           Transfers from loans to loans held-for-sale $—  $—  $14,608           See accompanying notes.
 
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**Notes to Consolidated Financial Statements****1.** **BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:****Business****Organization:**The consolidated financial statements of First Financial Corporation and itssubsidiaries (the Corporation) include the parent company and its wholly-owned subsidiaries,First Financial Bank, N.A. of Vigo County, Indiana, The Morris Plan Company of Terre Haute(Morris Plan), and Forrest Sherer Inc., a full-line insurance agency headquartered in TerreHaute, Indiana. Inter-company transactions and balances have been eliminated.First Financial Bank also has two investment subsidiaries, Portfolio Management Specialists A(Specialists A) and Portfolio Management Specialists B (Specialists B), which were establishedto hold and manage certain assets as part of a strategy to better manage various income streamsand provide opportunities for capital creation as needed. Specialists A and Specialists Bsubsequently entered into a limited partnership agreement, Global Portfolio Limited Partners.Portfolio Management Specialists B also owns First Financial Real Estate, LLC. At December 31,2009, $581.3 million of securities and loans were owned by these subsidiaries. Specialists A,Specialists B, Global Portfolio Limited Partners and First Financial Real Estate LLC areincluded in the consolidated financial statements.The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide variety offinancial services including commercial, mortgage and consumer lending, lease financing, trustaccount services and depositor services through its four subsidiaries. The Corporation’s primarysource of revenue is derived from loans to customers, primarily middle-income individuals, andinvestment activities.The Corporation operates 54 branches in west-central Indiana and east-central Illinois. FirstFinancial Bank is the largest bank in Vigo County. It operates 13 full-service banking brancheswithin the county; five in Clay County, Indiana; one in Greene County, Indiana; three in KnoxCounty, Indiana; five in Parke County, Indiana; one in Putnam County, Indiana; five in SullivanCounty, Indiana; four in Vermillion County, Indiana; one in Clark County, Illinois; one in ColesCounty, Illinois; three in Crawford County, Illinois; one in Jasper County, Illinois; two inLawrence County, Illinois; two in Richland County, Illinois; six in Vermilion County, Illinois;and one in Wayne County, Illinois. It also has a main office in downtown Terre Haute and anoperations center/office building in southern Terre Haute.**Regulatory Agencies:**First Financial Corporation is a multi-bank holding company and as such isregulated by various banking agencies. The holding company is regulated by the Seventh Districtof the Federal Reserve System. The national bank subsidiary is regulated by the Office of theComptroller of the Currency. The state bank subsidiary is jointly regulated by the state bankingorganization and the Federal Deposit Insurance Corporation.**Significant Accounting Policies****Use of Estimates:**To prepare financial statements in conformity with U.S. generally acceptedaccounting principles, management makes estimates and assumptions based on availableinformation. These estimates and assumptions affect the amounts reported in the financialstatements and disclosures provided, and actual results could differ. The allowance for loanlosses, carrying value of intangible assets, loan servicing rights, other-than-temporarysecurities impairment and the fair values of financial instruments are particularly subject tochange.**Cash Flows:**Cash and cash equivalents include cash and demand deposits with other financialinstitutions. Net cash flows are reported for customer loan and deposit transactions andshort-term borrowings.**Securities:**The Corporation classifies all securities as “available for sale.” Securities areclassified as available for sale when they might be sold before maturity. Securities availablefor sale are carried at fair value with unrealized holdings gains and losses, net of taxes,reported in other comprehensive income within shareholders’ equity.Interest income includes amortization of purchase premium or discount. Premiums and discountsare amortized on the level yield method without anticipating prepayments. Mortgage-backedsecurities are amortized over the expected life. Realized gains and losses on sales are based onthe amortized cost of the security sold. Management evaluates securities forother-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently wheneconomic or market conditions warrant such an evaluation.**Loans:**Loans that management has the intent and ability to hold for the foreseeable future untilmaturity or pay-off are reported at the principal balance outstanding, net of unearned interest,purchase premiums and discounts, deferred loan fees and costs, and allowance for loan losses.Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interestincome is accrued on the unpaid principal balance and includes amortization of net deferred loanfees and costs over the loan term without anticipating prepayments. Interest income is notreported when full loan repayment is in doubt, typically when the loan is impaired or paymentsare significantly past due. Past-due status is based on the contractual terms of the loan. Allinterest accrued but not received for loans placed on nonaccrual is reversed against interestincome. Interest received on such loans is accounted for on the cash-basis or cost-recoverymethod, until qualifying for return to accrual. Loans are returned to accrual status when allthe principal and interest amounts contractually due are brought current and future payments arereasonably assured. In all cases, loans are placed on non-accrual or charged-off if collectionof principal or interest is considered doubtful.**Certain Purchased Loans:**The Corporation purchases individual loans and groups of loans, some of which have shown evidence of creditdeterioration since origination. These purchased loans are recorded at the amount paid, suchthat there is no carryover of the seller’s allowance for loan losses. After acquisition, lossesare recognized by an increase in the allowance for loan losses.Such purchased loans accountedfor individually or aggregated into pools of loans based on common risk characteristics such ascredit score, loan type and date of origination. The Corporation estimates the amount and timingof expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid are recorded asinterest income over the remaining life of the loan or pool (accretable yield). The excess of theloan’s or pool’s contractual principal and interest over expected cash flows is not recorded(nonaccretable difference).
 
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**Notes to Consolidated Financial Statements**Over the life of the loan or pool, expected cash flows continue to be estimated. If the presentvalue of expected cash flows is less than the carrying amount, a loss is recorded. If the presentvalue of expected cash flows is greater than the carrying amount, it is recognized as part offuture interest income.**Concentration of Credit Risk:**Most of the Corporation’s business activity is with customerslocated within Vigo County. Therefore, the Corporation’s exposure to credit risk is significantlyaffected by changes in the economy of the Vigo County area. A major economic downturn in this areawould have a negative effect on the Corporation’s loan portfolio.**Allowance for Loan Losses:**The allowance for loan losses is a valuation allowance for probableincurred credit losses. Loan losses are charged against the allowance when management believes theuncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to theallowance. Management estimates the allowance balance required using past loan loss experience, thenature and volume of the portfolio, information about specific borrower situations and estimatedcollateral values, economic conditions and other factors. Allocations of the allowance may be madefor specific loans, but the entire allowance is available for any loan that, in management’sjudgment, should be charged off. The allowance consists of specific and general components. Thespecific component relates to loans that are individually classified as impaired or loans otherwiseclassified as substandard or doubtful. The general component covers non-classified loans and isbased on historical loss experience adjusted for current factors.A loan is impaired when full payment under the loan terms is not expected. Loans for which theterms have been modified, and for which the borrower is experiencing financial difficulties, areconsidered troubled debt restructurings and classified as impaired. Impairment is evaluated intotal for smaller-balance loans of similar nature such as residential mortgages, consumer andcredit card loans, and on an individual basis for other loans. If a loan is impaired, a portion ofthe allowance is allocated so that the loan is reported, net, at the present value of estimatedfuture cash flows, using the loan’s existing rate, or at the fair value of collateral if repaymentis expected solely from the collateral. Large groups of smaller balance homogeneous loans, such asconsumer and residential real estate loans, are collectively evaluated for impairment and,accordingly, they are not separately identified for impairment disclosures.**Foreclosed Assets:**Assets acquired through or instead of loan foreclosures are initially recordedat fair value less estimated selling costs when acquired, establishing a new cost basis. If fairvalue declines, a valuation allowance is recorded through expense. Costs after acquisition areexpensed.**Premises and Equipment:**Land is carried at cost. Premises and equipment are stated at cost lessaccumulated depreciation. Depreciation is computed over the useful lives of the assets, which rangefrom 3 to 33 years for furniture and equipment and 5 to 39 years for buildings and leaseholdimprovements.**Restricted Stock:**Restricted stock includes Federal Home Loan Bank (FHLB) of Indianapolis andChicago and Federal Reserve stock. This restricted stock is carried at cost and periodicallyevaluated for impairment. Because this stock is viewed as a long-term investment, impairment isbased on ultimate recovery of par value. Both cash and stock dividends are reported as income.**Servicing Rights:**Servicing rights are recognized separately when they are acquired through salesof loans. When mortgage loans are sold, servicing rights are initially recorded at fair value withthe income statement effect recorded in gains on sales of loans. Fair value is based on marketprices for comparable mortgage servicing contracts, when available, or alternatively, is based onthird-party valuations that incorporate assumptions that market participants would use inestimating future net servicing income, such as the cost to service, the discount rate, ancillaryincome, prepayment speeds and default rates and losses. All classes of servicing assets aresubsequently measured using the amortization method, which requires servicing rights to beamortized into non-interest income in proportion to, and over the period of, the estimated futurenet servicing income of the underlying loans.Servicing assets are evaluated for impairment based upon the fair value of the rights as comparedto carrying amount. Impairment is determined by stratifying rights into groupings based onpredominant risk characteristics, such as interest rate, loan type and investor type. Impairment isrecognized through a valuation allowance for an individual grouping, to the extent that fair valueis less than the carrying amount. If the Corporation later determines that all or a portion of theimpairment no longer exists for a particular grouping, a reduction of the allowance may be recordedas an increase to income. Changes in valuation allowances are reported with Other Service Fees onthe income statement. The fair values of servicing rights are subject to significant fluctuationsas a result of changes in estimated and actual prepayment speeds and default rates and losses.Servicing fee income, which is included in Other Service Fees on the income statement, is forfees earned for servicing loans. The fees are based on a contractual percentage of the outstandingprincipal or a fixed amount per loan and are recorded as income when earned. The amortization ofmortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $958thousand, $901 thousand and $947 thousand for the years ended December 31, 2009, 2008 and 2007.Late fees and ancillary fees related to loan servicing are not material.**Bank-Owned Life Insurance:**The Corporation has purchased life insurance policies on certain keyexecutives. Bank-owned life insurance is recorded at its cash surrender value, or the amount thatcan be realized. Income on the investments in life insurance is included in other interest income.
 
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**Notes to Consolidated Financial Statements****Goodwill and Other Intangible Assets:**Goodwill resulting from business combinations prior toJanuary 1, 2009 represents the excess of the purchase price over the fair value of the net assetsof businesses acquired. Goodwill resulting from business combinations after January 1, 2009represents the future economic benefits arising from other assets acquired that are notindividually identified and separately recognized. Goodwill and intangible assets acquired in a purchasebusiness combination and determined to have an indefinite useful life are not amortized, but testedfor impairment at least annually. The Corporation has selected May 31 as the date to perform theannual impairment test. Intangible assets with definite useful lives are amortized over theirestimated useful lives to their estimated residual values. Goodwill is the only intangible assetwith an indefinite life on our balance sheet. Other intangible assets consist of core deposit andacquired customer relationship intangible assets arising from the whole bank, insurance agency andbranch acquisitions. They are initially measured at fair value and then are amortized on anaccelerated basis over their estimated useful lives, which are 12 and 10 years, respectively.**Long-Term Assets:**Premises and equipment and other long-term assets are reviewed for impairmentwhen events indicate their carrying amount may not be recoverable from future undiscounted cashflows. If impaired, the assets are recorded at fair value.**Benefit Plans:**Pension expense is thenet of service and interest cost, return on plan assets and amortization of gains and losses notimmediately recognized. The amount contributed is determined by a formula as decided by the Boardof Directors. Deferred compensation and supplemental retirement plan expense allocates the benefitsover years of service.**Employee Stock Ownership Plan:**Shares of treasury stock are issued to the ESOP and compensationexpense is recognized based upon the total market price of shares when contributed.**Deferred Compensation Plan:**A deferred compensation plan covers all directors. Under the plan, theCorporation pays each director, or their beneficiary, the amount of fees deferred plus interestover 10 years, beginning when the director achieves age 65. A liability is accrued for theobligation under these plans. The expense incurred for the deferred compensation for each of thelast three years was $184 thousand, $169 thousand and $177 thousand, resulting in a deferredcompensation liability of $2.5 million and $2.4 million as of year-end 2009 and 2008.**Long-Term Incentive Plan:**A long-term incentive plan provides for the payment of incentive rewardsas a 15-year annuity to all directors and certain key officers. The plan expires December 31, 2009,and compensation expense is recognized over the service period. Payments under the plan generallydo not begin until the earlier of January 1, 2015, or the January 1 immediately following the yearin which the participant reaches age 65. Compensation expense for each of the last three years was$2.3 million, $2.0 million and $2.0 million, resulting in a liability of $15.4 million and $13.2million as of year-end 2009 and 2008.**Income Taxes:**Income tax expense is the total of the current year income tax due or refundable andthe change in deferred tax assets and liabilities. Deferred tax assets and liabilities are theexpected future tax amounts for the temporary differences between carrying amounts and tax bases ofassets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reducesdeferred tax assets to the amount expected to be realized.The Corporation adopted new guidance regarding uncertain tax positions as of January 1, 2007. A taxposition is recognized as a benefit only if it is “more likely than not” that the tax positionwould be sustained in a tax examination, with a tax examination being presumed to occur. The amountrecognized is the largest amount of tax benefit that is greater than 50% likely of being realizedon examination. For tax positions not meeting the “more likely than not” test, no tax benefit isrecorded. The adoption of this new guidance reduced retained earnings and increased liabilities by$86 thousand.The Corporation recognizes interest and/or penalties related to income tax matters in income taxexpense.**Loan Commitments and Related Financial Instruments:**Financial instruments include creditinstruments, such as commitments to make loans and standby letters of credit, issued to meetcustomer financing needs. The face amount for these items represents the exposure to loss, beforeconsidering customer collateral or ability to repay. Such financial instruments are recorded whenthey are funded.**Earnings Per Share:**Earnings per common share is net income divided by the weighted average numberof common shares outstanding during the period. The Corporation does not have any potentiallydilutive securities. Earnings and dividends per share are restated for stock splits and dividendsthrough the date of issue of the financial statements.**Comprehensive Income:**Comprehensive income consists of net income and other comprehensive income.Other comprehensive income includes unrealized gains and losses on securities available for saleand changes in the funded status of the retirement plans, which are also recognized as separatecomponents of equity.**Loss Contingencies:**Loss contingencies, including claims and legal actions arising in the ordinarycourse of business, are recorded as liabilities when the likelihood of loss is probable and anamount of range of loss can be reasonably estimated. Management does not believe there arecurrently such matters that will have a material effect on the financial statements. **DividendRestriction:**Banking regulations require maintaining certain capital levels and may limit thedividends paid by the bank to the holding company or by the holding company to shareholders.**Fair Value of Financial Instruments:**Fair values of financial instruments are estimated usingrelevant market information and other assumptions, as more fully disclosed in a separate note. Fairvalue estimates involve uncertainties and matters of significant judgment regarding interest rates,credit risk, prepayments and other factors, especially in the absence of broad markets forparticular items. Changes in assumptions or market conditions could significantly affect theestimates.**Operating Segment:**While the Corporation’s chief decision-makers monitor the revenue streamsof the various products and services, the operating results of significant segments are similar andoperations are managed and financial performance is evaluated on a corporate-wide basis.Accordingly, all of the Corporation’s financial service operations are considered by management tobe aggregated in one reportable operating segment, which is banking.
 
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**Notes to Consolidated Financial Statements****Adoption of New Accounting Standards:**In September 2006, the FASB issued Statement No. 157, *FairValue Measurements*(ASC 820-10). This Statement defines fair value, establishes a framework formeasuring fair value and expands disclosures about fair value measurements. This Statement alsoestablishes a fair value hierarchy about the assumptions used to measure fair value and clarifiesassumptions about risk and the effect of a restriction on the sale or use of an asset. The standardwas effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issuedStaff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157, which is currently FASBASC 820-10. This FSP delayed the effective date of FAS 157 for all nonfi-nancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fair value on arecurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interimperiods within those fiscal years. The effect of adopting this new guidance was not material. Wehave included the disclosures required by this standard in this document. In December 2007, theFASB issued new guidance impacting FASB ASC 805, *Business Combinations*(SFAS No. 141(R) *BusinessCombinations)*. The new guidance establishes principles and requirements for how an acquiringcompany (1) recognizes and measures in its financial statements the identifiable assets acquired,the liabilities assumed and any noncontrolling interest in the acquiree, (2) recognizes andmeasures the goodwill acquired in the business combination or a gain from a bargain purchase, and(3) determines what information to disclose to enable users of the financial statements to evaluatethe nature and financial effects of the business combination. The new standard affects businesscombinations after January 1, 2009. See Note 6 to the consolidated financial statements for theimpact on the Corporation of adopting this standard.In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments andHedging Activities,*an amendment of SFAS No. 133 (ASC 815) which amends and expands the disclosurerequirements of SFAS No. 133 for derivative instruments and hedging activities. ASC 815 requiresqualitative disclosure about objectives and strategies for using derivative and hedginginstruments, quantitative disclosures about fair value amounts of the instruments and gains andlosses on such instruments, as well as disclosures about credit-risk features in derivativeagreements. ASC 815 was effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008, with early application encouraged. The adoption of thisstandard did not have a material impact on the Corporation’s consolidated financial position orresults of operations.In June 2009, the FASB issued FASB ASC 105-10, Generally Accepted Accounting Principles(Statement No. 168), *The FASB Accounting Standards Codification and the Hierarchy of GenerallyAccepted Accounting Principles.*The new guidance replaces SFAS No. 162 and establishes the FASBAccounting Standards Codification as the source of authoritative accounting principles recognizedby the FASB to be applied by nongovernmental entities in the preparation of financial statements inconformity with Generally Accepted Accounting Principles (“GAAP”). Rules and interpretive releasesof the Securities and Exchange Commission under federal securities laws are also sources ofauthoritative GAAP for SEC registrants. The new standard became effective for financial statementsissued for interim and annual periods ending after September 15, 2009. The adoption of thisstatement did not have a material impact on the Corporation’s consolidated financial position orresults of operations. Technical references to generally accepted accounting principles included inthe Notes to Consolidated Financial Statements are provided under the new FASB ASC structure.In December 2008, the FASB issued Staff Position (“FSP”) No. 132(R)-1, *Employer’s Disclosuresabout Postretirement Benefit Plan Assets*(ASC 715-20). The FSP provides guidance on an employer’sdisclosures about plan assets of a defined benefit pension or other post-retirement plan. Theseadditional disclosures include disclosure of investment policies and fair value disclosures of planassets, including fair value hierarchy. The FSP also includes a technical amendment that requires anonpublic entity to disclose net periodic benefit cost for each annual period for which a statementof income is presented. This FSP is effective for fiscal years ending after December 15, 2009. Uponinitial application, provisions of the FSP are not required for earlier periods that are presentedfor comparative purposes. The new disclosures have been presented in the notes to the consolidatedfinancial statements.In April 2009, the FASB issued Staff Position No. 115-2 and No. 124-2, *Recognition andPresentation of Other-Than-Temporary Impairments*(ASC 320-10), which amended existing guidance fordetermining whether impairment is other-than-temporary for debt securities. The requires an entityto assess whether it intends to sell, or it is more likely than not that it will be required tosell, a security in an unrealized loss position before recovery of its amortized cost basis. Ifeither of these criteria is met, the entire difference between amortized cost and fair value isrecognized as impairment through earnings. For securities that do not meet the aforementionedcriteria, the amount of impairment is split into two components as follows: 1) other-than-temporaryimpairment (OTTI) related to other factors, which is recognized in other comprehensive income and2) OTTI related to credit loss, which must be recognized in the income statement. The credit lossis determined as the difference between the present value of the cash flows expected to becollected and the amortized cost basis. Additionally, disclosures about other-than-temporaryimpairments for debt and equity securities were expanded. ASC 320-10 was effective for interim andannual reporting periods ending June 15, 2009, with early adoption permitted for periods endingafter March 15, 2009. At adoption, the Corporation reversed $3 million (net of tax) of previouslyrecognized impairment charges, representing the non-credit portion. In April 2009, the FASB issuedStaff Position (FSP) No. 157-4, *Determining Fair Value When the Volume and Level of Activity forthe Asset and Liability Have Significantly Decreased and Identifying Transactions That Are NotOrderly*(ASC 820-10). This FSP emphasizes that the objective of a fair value measurement does notchange even when market activity for the asset or liability has decreased significantly. Fair valueis the price that would be received for an asset sold or paid to transfer a liability in an orderlytransaction (that is, not a forced liquidation or distressed sale) between market participants atthe measurement date under current market conditions. When observable transactions or quoted pricesare not considered orderly, then little, if any, weight should be assigned to the indication of theasset or liability’s fair value. Adjustments to those transactions or prices would be needed todetermine the appropriate fair value. The FSP, which was applied prospectively, was effective forinterim and annual reporting periods ending after June 15, 2009 with early adoption for periodsending after March 15, 2009. The effect of adopting this new guidance was not material.
 
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**Notes to Consolidated Financial Statements**In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, *MeasuringLiabilities at Fair Value*(ASC 820). This Update provides amendments to ASC 820 for the fairvalue measurement of liabilities by clarifying that in circumstances in which a quoted price inan active market for the identical liability is not available, a reporting entity is required tomeasure fair value using a valuation technique that uses the quoted price of the identicalliability when traded as an asset, quoted prices for similar liabilities or similar liabilitieswhen traded as assets, or that is consistent with the principles of ASC 820. The amendments inthis guidance also clarify that both a quoted price for the identical liability at themeasurement date and the quoted price for the identical liability when traded as an asset in anactive market when no adjustments to the quoted price of the asset are required are Level 1 fairvalue measurements. The guidance was effective for the first reporting period beginning afterissuance. There was no effect of adopting this new guidance.**Newly Issued But Not Yet Effective Standards Accounting Standards:**In June 2009, the FASBissued Statement of Financial Accounting Standards No. 166, *Accounting for Transfers ofFinancial Assets, an Amendment of FASB Statement No. 140*(ASC 810). The new accountingrequirement amends previous guidance relating to the transfers of financial assets andeliminates the concept of a qualifying special purpose entity. This Statement must be applied asof the beginning of each reporting entity’s first annual reporting period that begins afterNovember 15, 2009, for interim periods within that first annual reporting period and for interimand annual reporting periods thereafter. This Statement must be applied to transfers occurringon or after the effective date. Additionally, on and after the effective date, the concept of aqualifying special-purpose entity is no longer relevant for accounting purposes. Therefore,formerly qualifying special-purpose entities should be evaluated for consolidation by reportingentities on and after the effective date in accordance with the applicable consolidationguidance. Additionally, the disclosure provisions of this Statement were also amended and applyto transfers that occurred both before and after the effective date of this Statement. Theadoption of this new guidance is not expected to have a material impact on the Corporation’sresults of operations or financial position.In June 2009, the FASB issued Statement of Accounting Standard No. 167, *Amendments to FASBInterpretation No. 46(R),*which amended guidance for consolidation of variable interest entitiesby replacing the quantitative-based risks and rewards calculation for determining whichenterprise, if any, has a controlling financial interest in a variable interest entity with anapproach focused on identifying which enterprise has the power to direct the activities of avariable interest entity that most significantly impact the entity’s economic performance and(1) the obligation to absorb losses of the entity or (2) the right to receive benefits from theentity. This Statement also requires additional disclosures about an enterprise’s involvement invariable interest entities. This Statement will be effective as of the beginning of eachreporting entity’s first annual reporting period that begins after November 15, 2009, forinterim periods within that first annual reporting period, and for interim and annual reportingperiods thereafter. Early adoption is prohibited. The adoption of this new guidance is notexpected to have a material impact on the Corporation’s results of operations or financialposition.**2.** **FAIR VALUES OF FINANCIAL INSTRUMENTS:**ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use ofobservable inputs and minimize the use of unobservable inputs when measuring fair value. Thestandard describes three level of inputs that may be used to measure fair value: Level 1: Quotedprices (unadjusted) of identical assets or liabilities in active markets that the entity has theability to access as of the measurement date.Level 2: Significant other observable inputs other thanLevel 1 prices such as such asquoted prices for similar assets or liabilities; quoted prices in markets that are not active;or other inputs that are observable or can be corroborated by observable market data.Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptionsabout the assumptions that market participants would use in pricing an asset or liability.The fair value of securities available-for-sale is determined by obtaining quoted prices onnationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is amathematical technique widely used in the industry to value debt securities without relyingexclusively on quoted prices for the specific securities but rather by relying on thesecurities’ relationship to other benchmark quoted securities (Level 2 inputs).For those securities that cannot be priced using quoted market prices or observable inputs, aLevel 3 valuation is determined. These securities are primarily trust preferred securities,which are priced using Level 3 due to current market illiquidity. The fair value of thesesecurities is compute based upon discounted cash flows estimated using payment, default andrecovery assumptions. Cash flows are discounted at appropriate market rates, includingconsideration of credit spreads and illiquidity discounts. Due to current market conditions, aswell as the limited trading activity of these securities, the market value of the securities ishighly sensitive to assumption changes and market volatility.The fair value of derivatives is based on valuation models using observable market data as ofthe measurement date (Level 2 inputs).
 
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**Notes to Consolidated Financial Statements**                   **December 31, 2009**   **Fair Value Measurements Using** (Dollar amounts in thousands) **Level 1**  **Level 2**  **Level 3**  **Carrying Value** U.S. Government entity mortgage-backed securities $—  $4,148  $—  $4,148 Mortgage-backed securities, residential  —   300,184   —   300,184 Mortgage-backed securities, commercial  —   168   —   168 Collateralized mortgage obligations  —   119,564   —   119,564 State and municipal obligations  —   148,733   —   148,733 Collateralized debt obligations  —   —   1,416   1,416 Corporate debt securities  —   7,072   —   7,072 Equity securities  2,600   —   3,361   5,961              **Total** $2,600  $579,869  $4,777  $587,246                               Derivative assets      889         Derivative liabilities      (889)                           **December 31, 2008**   **Fair Value Measurements Using** (Dollar amounts in thousands) **Level 1**  **Level 2**  **Level 3**  **Carrying Value** U.S. Government entity mortgage-backed securities $—  $154  $—  $154 Mortgage-backed securities, residential  —   365,292   —   365,292 Mortgage-backed securities, commercial  —   185   —   185 Collateralized mortgage obligations  —   70,227   —   70,227 State and municipal obligations  —   143,841   —   143,841 Collateralized debt obligations  —   —   4,238   4,238 Corporate debt securities  —   6,395   —   6,395 Equity securities  2,827   —   3,756   6,583              **Total** $2,827  $586,094  $7,994  $596,915              The table below presents a reconciliation and income statement classification of gains and lossesfor all assets measured at fair value on a recurring basis using significant unobservable inputs(Level 3) for the twelve months ended December 31, 2009 and 2008.           **Fair Value Measurements**   **Using Significant**   **Unobservable Inputs (Level 3)**   **2009**  **2008** Beginning balance, January 1 $7,994  $33,745 Total realized/unrealized gains or losses        Included in earnings  (10,769)  (6,145)Included in other comprehensive income  7,651   (19,318)Settlements  (99)  (288)       Ending balance, December 31 $4,777  $7,994        
 
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**Notes to Consolidated Financial Statements**Change in unrealized gains and losses recorded in earnings for the year ended December 31, 2009 forLevel 3 assets that are still held at December 31, 2009 was related to fair value declines recordedas other-than-temporary impairment. Impaired loans disclosed in footnote 7, which are measured forimpairment using the fair value of collateral, are valued at Level 3. They are carried at a fairvalue of $19.3 million, net of a valuation allowance of $5.4 million at December 31, 2009 and at afair value of $12.2 million, net of valuation allowance of $4.7 million at December 31, 2008. Theimpact to the provision for loan losses for the twelve months ended December 31, 2009 and December31, 2008 was $1.7 million and $3.7 million, respectively. Fair value is measured based on the valueof the collateral securing those loans and is determined using several methods. Generally, the fairvalue of real estate is determined based on appraisals by qualified licensed appraisers. If anappraisal is not available, the fair value may be determined by using a cash flow analysis, abroker’s opinion of value, the net present value of future cash flows, or an observable marketprice from an active market. Fair value on non-real estate loans is determined using similarmethods. Other real estate owned at December 31, 2009 with a value of $5.9 million was reduced $164thousand for fair value adjustment.The carrying amounts and estimated fair values of financial instruments are shown below. Carryingamount is the estimated fair value for cash and due from banks, federal funds sold, accruedinterest receivable and payable, demand deposits, short-term and certain other borrowings, andvariable-rate loans or deposits that reprice frequently and fully. Security fair values aredetermined as previously described. It is not practicable to determine the fair value of FederalHome Loan Bank stock due to restrictions placed on its transferability. For fixed-rate loans ordeposits, variable rate loans or deposits with infrequent repricing or repricing limits, and forlonger-term borrowings, fair value is based on discounted cash flows using current market ratesapplied to the estimated life and credit risk. Fair values for impaired loans are estimated usingdiscounted cash flow analysis or underlying collateral values. Fair value of debt is based oncurrent rates for similar financing. The fair value of off-balance sheet items is not consideredmaterial.The carrying amount and estimated fair value of assets and liabilities are presented in the tablebelow and were determined based on the above assumptions:                   **December 31,**   **2009**  **2008**   **Carrying**  **Fair**  **Carrying**  **Fair** (Dollar amounts in thousands) **Value**  **Value**  **Value**  **Value** Cash and due from banks $84,371  $84,371  $67,298  $67,298 Federal funds sold  21,576   21,576   9,530   9,530 Securities available-for-sale  587,246   587,246   596,915   596,915 Federal Home Loan Bank stock  26,181   N/A   24,573   N/A Loans, net*  1,612,237   1,604,412   1,455,047   1,457,842 Accrued interest receivable  12,005   12,005   13,081   13,081 Deposits  (1,789,701)  (1,798,059)  (1,563,498)  (1,554,912)Short-term borrowings  (30,436)  (30,436)  (21,500)  (21,500)Federal Home Loan Bank advances  (326,137)  (337,847)  (378,553)  (390,296)Other borrowings  (6,600)  (6,600)  (6,600)  (6,600)Accrued interest payable  (3,127)  (3,127)  (3,871)  (3,871)   * Includes credit card loans held for sale.
 
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**Notes to Consolidated Financial Statements****3.** **RESTRICTIONS ON CASH AND DUE FROM BANKS:**Certain affiliate banks are required to maintain average reserve balances with the FederalReserve Bank that do not earn interest. The amount of those reserve balances was approximately$8.2 million and $8.6 million at December 31, 2009 and 2008, respectively.**4.** **SECURITIES:**The fair value of securities available-for-sale and related gross unrealized gains and lossesrecognized in accumulated other comprehensive income were as follows:                   **December 31, 2009**   **Amortized**  **Unrealized**  **Fair** (Dollar amounts in thousands) **Cost**  **Gains**  **Losses**  **Value** U.S. Government entity mortgage-backed securities $4,103  $45  $—  $4,148 Mortgage-backed securities, residential  285,964   14,260   (40)  300,184 Mortgage-backed securities, commercial  162   6   —   168 Collateralized debt obligations  116,330   3,334   (100)  119,564 State and municipal obligations  143,039   5,926   (232)  148,733 Collateralized debt obligations  19,253   —   (17,837)  1,416 Corporate debt securities  7,004   257   (189)  7,072 Equity securities  5,668   1,462   (1,169)  5,961              **Total** $581,523  $25,290  $(19,567) $587,246                                 **December 31, 2008**   **Amortized**  **Unrealized**  **Fair** (Dollar amounts in thousands) **Cost**  **Gains**  **Losses**  **Value** U.S. Government entity mortgage-backed securities $148  $6  $—  $154 Mortgage-backed securities, residential  354,123   11,179   (10)  365,292 Mortgage-backed securities, commercial  185   —   —   185 Collateralized debt obligations  68,838   1,389   —   70,227 State and municipal obligations  143,224   2,439   (1,822)  143,841 Collateralized debt obligations  24,579   —   (20,341)  4,238 Corporate debt securities  7,007   —   (612)  6,395 Equity securities  5,649   2,097   (1,163)  6,583              **Total** $603,753  $17,110  $(23,948) $596,915              As of December 31, 2009, the Corporation does not have any securities from any issuer, other thanthe U.S. Government, with an aggregate book or fair value that exceeds ten percent of shareholders’equity.Securities with a carrying value of approximately $200.8 million and $118.8 million at December 31,2009 and 2008, respectively, were pledged as collateral for short-term borrowings and for otherpurposes.Below is a summary of the gross gains and losses realized by the Corporation on investment salesduring the years ended December 31, 2009, 2008 and 2007, respectively.             (Dollar amounts in thousands) **2009**  **2008**  **2007** Proceeds  —   —  $3,140 Gross gains  —   —   192 Gross losses  —   —   10 Additional gains of $4 thousand in 2009, $5 thousand in 2008 and $29 thousand in 2007 resulted fromredemption premiums on called securities.
 
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**Notes to Consolidated Financial Statements**Contractual maturities of debt securities at year-end 2009 were as follows. Securities not due at asingle maturity or with no maturity date, primarily mortgage-backed and equity securities, areshown separately.           **Available-for-Sale**   **Amortized**    (Dollar amounts in thousands) **Cost**  **Fair Value** Due in one year or less $9,019  $9,116 Due after one but within five years  45,340   47,145 Due after five but within ten years  42,084   44,094 Due after ten years  193,286   180,579           289,729   280,934 Mortgage-backed securities and equities  291,794   306,312        **Total** $581,523  $587,246        The following tables show the securities’ gross unrealized losses and fair value, aggregated byinvestment category and length of time that individual securities have been in continuousunrealized loss position, at December 31, 2009 and 2008.                           **December 31, 2009**   **Less Than 12 Months**  **More Than 12 Months**  **Total**       **Unrealized**      **Unrealized**      **Unrealized** (Dollar amounts in thousands) **Fair Value**  **Losses**  **Fair Value**  **Losses**  **Fair Value**  **Losses** Mortgage-backed securities, residential $6,985  $(38) $47  $(2) $7,032  $(40)Collateralized mortgage obligations  6,094   (100)  —   —   6,094   (100)State and municipal obligations  6,594   (45)  4,841   (187)  11,435   (232)Collateralized debt obligations  —   —   1,416   (17,837)  1,416   (17,837)Corporate debt securities  —   —   811   (189)  811   (189)Equity securities  543   (280)  1,150   (889)  1,693   (1,169)                   Total temporarily impaired securities $20,216  $(463) $8,265  $(19,104) $28,481  $(19,567)                                              **December 31, 2008**   **Less Than 12 Months**  **More Than 12 Months**  **Total**       **Unrealized**      **Unrealized**      **Unrealized** (Dollar amounts in thousands) **Fair Value**  **Losses**  **Fair Value**  **Losses**  **Fair Value**  **Losses** Mortgage-backed securities, residential $1,735  $(7) $84  $(3) $1,819  $(10)State and municipal obligations  51,011   (1,797)  321   (25)  51,332   (1,822)Collateralized debt obligations  —   —   4,239   (20,341)  4,239   (20,341)Corporate debt securities  6,394   (612)  —   —   6,394   (612)Equity securities  1,668   (1,163)  —   —   1,668   (1,163)                   Total temporarily impaired securities $60,808  $(3,579) $4,644  $(20,369) $65,452  $(23,948)                   The Corporation held 707 investment securities with an amortized cost greater than fair value as ofDecember 31, 2009. The unrealized losses on mortgage-backed and state and municipal obligationsrepresent negative adjustments to market value relative to the rate of interest paid on thesecurities and not losses related to the creditworthiness of the issuer. Management does not intendto sell and it is not more likely than not that management would be required to sell the securitiesprior to their anticipated recovery. Management believes the value will recover as the securitiesapproach maturity or market rates change.
 
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**Notes to Consolidated Financial Statements**Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on aquarterly basis, and more frequently when economic or market conditions warrant such an evaluation.The investment securities portfolio is evaluated for OTTI by segregating the portfolio into twogeneral segments and applying the appropriate OTTI model.Investment securities classified as available-for-sale or held-to-maturity are generally evaluatedfor OTTI under FASB ASC 320, *Investments—Debt and Equity Securities.*However, certain purchasedbeneficial interests, including non-agency mortgage-backed securities, asset-backed securities, andcollateralized debt obligations, that had credit ratings at the time of purchase of below AA areevaluated using the model outlined in FASB ASC 325-40, *Beneficial Interests in SecuritizedFinancial Assets.*In determining OTTI under the FASB ASC 320 model, management considers many factors, including: (1)the length of time and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, (3) whether the market decline wasaffected by macroeconomic conditions, and (4) whether the entity has the intent to sell thesecurity or more likely than not will be required to sell the security before its anticipatedrecovery. The assessment of whether an other-than-temporary decline exists involves a high degreeof subjectivity and judgment and is based on the information available to management at a point intime.The second segment of the portfolio uses the OTTI guidance provided by FASB ASC 325 that isspecific to purchase beneficial interests that, on the purchase date, were rated below AA. Underthe FASB ASC 325 model, the Corporation compares the present value of the remaining cash flows asestimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI isdeemed to have occurred if there has been an adverse change in the remaining expected future cashflows.When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends onwhether an entity intends to sell the security or it is more likely than not it will be required tosell the security before recovery of its amortized cost basis, less any current-period credit loss.If an entity intends to sell or it is more likely than not it will be required to sell the securitybefore recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall berecognized in earnings equal to the entire difference between the investment’s amortized cost basisand its fair value at the balance sheet date. If an entity does not intend to sell the security andit is not more likely than not that the entity will be required to sell the security beforerecovery of its amortized cost basis less any current-period loss, the OTTI shall be separated intothe amount representing the credit loss and the amount related to all other factors. The amount ofthe total OTTI related to the credit loss is determined based on the present value of cash flowsexpected to be collected and is recognized in earnings. The amount of the total OTTI related toother factors is recognized in other comprehensive income, net of applicable taxes. The previousamortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis ofthe investment.Gross unrealized losses on investment securities were $19.6 million as of December 31, 2009 and$23.9 million as of December 31, 2008. A majority of these losses represent negative adjustments tofair value relative to the illiquidity in the markets on the securities and not losses related tothe creditworthiness of the issuer.A significant portion of the total unrealized losses relates to collateralized debt obligationsthat were separately evaluated under FASB ASC 325-40, *Beneficial Interests in Securitized FinancialAssets.*Based upon qualitative considerations, such as a downgrade in credit rating or furtherdefaults of underlying issuers during the year, and an analysis of expected cash flows, wedetermined that four CDOs included in collateralized debt obligations were other-than-temporarilyimpaired. The total amount of OTTI was $27.0 million, of which $10.8 million was recognized throughearnings and $16.2 was recorded in other comprehensive income. The Corporation wrote down ourinvestments in those CDOs to their present value of expected cash flows through earnings of $16.9million at December 31, 2009. The OTTI recorded in other comprehensive income represents OTTI dueto factors other than credit loss, mainly current market illiquidity. These securities arecollateralized by trust preferred securities issued primarily by bank holding companies, butcertain pools do include a limited number of insurance companies. The market for these securitieshas become very illiquid, there are very few new issuances of trust preferred securities and thecredit spreads implied by current prices have increased dramatically and remain very high,resulting in significant non-credit related impairment. The Corporation uses the OTTI evaluationmodel to compare the present value of expected cash flows to the previous estimate to determine ifthere are adverse changes in cash flows during the year. The OTTI model considers the structure andterm of the CDO and the financial condition of the underlying issuers. Specifically, the modeldetails interest rates, principal balances of note classes and underlying issuers, the timing andamount of interest and principal payments of the underlying issuers, and the allocation of thepayments to the note classes. Cash flows are projected using a forward rate LIBOR curve, as theseCDOs are variable-rate instruments. An average rate is then computed using this same forward ratecurve to determine an appropriate discount rate (3 month LIBOR plus margin ranging from 160 to 180basis points). The current estimate of expected cash flows is based on the most recent trusteereports and any other relevant market information, including announcements of interest paymentdeferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. Weassume no recoveries on defaults and treat all interest payment deferrals as defaults. In additionwe use the model to “stress” each CDO, or make assumptions more severe than expected activity, todetermine the degree to which assumptions could deteriorate before the CDO could no longer fullysupport repayment of the Corporation’s note class.
 
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**Notes to Consolidated Financial Statements**Collateralized debt obligations include one additional investment in a CDO consisting of pooledtrust preferred securities in which the issuers are primarily banks. This CDO, with an amortizedcost of $2.3 million and a fair value of $733.2 thousand, is currently rated BAA1 and is the seniortranche, is not in the scope of FASB ASC 325 as it was rated high investment grade at purchase, andis not considered to be other-than-temporarily impaired based on its credit quality. Its fair valueis negatively impacted by the factors described above.Management has consistently used Standard & Poors pricing to value these investments. There are anumber of other pricing sources available to determine fair value for these investments. Thesesources utilize a variety of methods to determine fair value. The result is a wide range ofestimates of fair value for these securities. The Standard & Poors pricing ranges from .53 to 17.68while Moody’s Investor Service pricing ranges from 15.00 to 58.00, with others falling somewhere inbetween. We recognize that the Standard & Poors pricing utilized is likely a conservative estimate,but have been consistent in using this source and its estimate of fair value.Unrealized losses on equity securities relate to investments in bank stocks held at the holdingcompany. Bank stock values have been negatively impacted by the current economic environment andmarket pessimism. The largest part of this unrealized loss ($753 or 64%) relates to theCorporation’s ownership of stock in Fifth Third Corporation. The stock price of this issuer hasimproved since the previous year and even more markedly since the low reported in mid-2009. Thepositive price change and relatively positive outlook for the equity supports our currentconclusion that the decline in value is temporary. Based upon our review of the other issuers, wedo not believe these investments to be other-than-temporarily impaired. Management does not intendto sell these securities and it is not more likely than not that we will be required to sell thembefore their anticipated recovery.The table below presents a rollforward of the credit losses recognized in earnings for the yearended December 31, 2009:     (Dollar amounts in thousands)    Beginning balance, January 1, 2009 $6,145 Amounts related to credit loss for which other-than-temporary impairment was not previously recognized  5,438 Amounts realized for securities sold during the period  — Reductions for increase in cash flows expected to be collectedthat are recognized over the remaining life of the security  — Increases in the amount related to the credit loss for which other-than-temporary impairment was previously recognized  5,332 Adoption of new accounting guidance on OTTI  (5,556)    Ending balance, December 31, 2009 $11,359     **5.** **LOANS:**Loans are summarized as follows:           **December 31,** (Dollar amounts in thousands) **2009**  **2008** Commercial, financial and agricultural $558,211  $499,636 Real estate — construction  27,231   26,137 Real estate — residential  436,337   424,529 Real estate — commercial  293,331   203,498 Consumer  314,417   302,977 Lease financing  2,313   1,878        Total gross loans  1,631,840   1,458,655 Less: unearned income  (76)  (128)Allowance for loan losses  (19,437)  (16,280)       **Total** $1,612,327  $1,442,247        Loans in the above summary include loans totaling $71.9 million that are subject to the FDIC lossshare arrangement (“covered loans”) discussed in footnote 6.
 
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**Notes to Consolidated Financial Statements**The Corporation periodically sells residential mortgage loans it originates based on the overallloan demand of the Corporation and the outstanding balances in the residential mortgage portfolio.At December 31, 2009 and 2008, loans held for sale included $3.3 million and $943 thousand,respectively, and are included in the totals on the previous page.In the normal course ofbusiness, the Corporation’s subsidiary banks make loans to directors and executive officers and totheir associates. In 2009 the aggregate dollar amount of these loans to directors and executiveofficers who held office amounted to $43.8 million at the beginning of the year. During 2009,advances of $25.9 million and repayments of $27.7 million were made with respect to related partyloans for an aggregate dollar amount outstanding of $42.0 million at December 31, 2009. Loansserviced for others, which are not reported as assets, total $460.3 million and $353.7 million atyear-end 2009 and 2008. Custodial escrow balances maintained in connection with serviced loans were$1.47 million and $1.65 million at year-end 2009 and 2008.Activity for capitalized mortgage servicing rights (included in other assets) was as follows:               **December 31,** (Dollar amounts in thousands) **2009**  **2008**  **2007** Servicing rights:            Beginning of year $1,604  $1,909  $2,319 Additions  1,294   332   218 Amortized to expense  (864)  (637)  (628)          End of year $2,034  $1,604  $1,909           Third party valuations are conducted periodically for mortgage servicing rights. Based on thesevaluations, fair values were approximately $3.0 million and $2.6 million at year end 2009 and2008. There was no valuation allowance in 2009 or 2008.Fair value for 2009 was determined using a discount rate of 9%, prepayment speeds ranging from213% to 700%, depending on the stratification of the specific right. Fair value at year end2008 was determined using a discount rate of 13%, prepayment speeds ranging from 136% to 960%,depending on the stratification of the specific right. Mortgage servicing rights are amortizedover 8 years.**6.** **ACQUISITION:**On July 2, 2009, the Bank entered into a purchase and assumption agreement with the FederalDeposit Insurance Corporation (“FDIC”) to assume all of the deposits (excluding brokereddeposits) and certain assets of The First National Bank of Danville, a full-service commercialbank headquartered in Danville, Illinois, that had failed and been placed in receivershipwith the FDIC. The acquisition consisted of assets with a fair value of approximately $151.8million, including $77.5 million of loans, $24.2 million of investment securities, $31.0 millionof cash and cash equivalents, and $146.3 million in liabilities, including $145.7 million ofdeposits. A customer-related core deposit intangible asset of $4.6 million was also recorded. Inaddition to the excess of liabilities over assets, the Bank received approximately $14.6 millionin cash from the FDIC and entered into a loss-sharing agreement with the FDIC. Under theloss-sharing agreement (“LSA”), the Bank will share in the losses on assets covered under theagreement (referred to as covered assets). On losses up to $29 million, the FDIC has agreed toreimburse the Bank for 80 percent of the losses. On losses exceeding $29 million, the FDIC hasagreed to reimburse the Bank for 95 percent of the losses. The loss-sharing agreement is subjectto following servicing procedures as specified in the agreement with the FDIC. The expectedreimbursements under the loss-sharing agreement were recorded as the indemnification asset attheir estimated fair value of $12.1 million on the acquisition date. The loss-sharing asset ismeasured separately from the loan portfolio because it is not contractually embedded in theloans and is not transferrable should they be disposed of. While the asset was recorded at itsestimated fair value at July 2, 2009, it is not practicable to complete a fair value analysis onan ongoing basis. Based upon the acquisition date fair values of the net assets acquired, nogoodwill was recorded. The transaction resulted in a gain of $5.1 million, which is included innon-interest income in the December 31, 2009 Consolidated Statement of Operations. Because ofthe short time period between the July 2, 2009 closing of the transaction and the end of theCorporation’s fiscal year on December 31, 2009, the Corporation continues to analyze itsestimates of the fair values of the loans acquired and the indemnification asset recorded. TheCorporation expects to finalize its analysis of these assets and, therefore, adjustments to therecorded carrying values may occur. Pro forma income statement information is not disclosed asthe acquisition is immaterial to the Corporation. Loans acquired that are subject to theloss-sharing agreement with the FDIC are referred to as covered loans for disclosure purposes.
 
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**Notes to Consolidated Financial Statements**FASB ASC 310-30, *Loans and Debt Securities Acquired with Deteriorated Credit Quality,*applies to aloan with evidence of deterioration of credit quality since origination, acquired by completion ofa transfer for which it is probable, at acquisition, that the investor will be unable to collectall contractually required payments receivable. FASB ASC 310-30 prohibits carrying over or creatingan allowance for loan losses upon initial recognition. The carrying amount of covered assets atDecember 31, 2009, consisted of loans accounted for in accordance with FASB ASC 310-30, loans notsubject to FASB ASC 310-30 and other assets as shown in the following table:                   **ASC**  **Non-ASC**         **310-30**  **310-30**       (Dollar amounts in thousands) **Loans**  **Loans**  **Other**  **Total** Loans $16,849  $55,025  $—  $71,874 Foreclosed assets  —   —   1,256   1,256              Total covered assets $16,849  $55,025  $1,256  $73,130              On the acquisition date, the preliminary estimate of the contractually required paymentsreceivable for all SOP 03-3 loans acquired in the acquisition were $31.6 million, the cash flowsexpected to be collected were $18.4 million including interest, and the estimated fair value ofthe loans was $16.7 million. These amounts were determined based upon the estimated remaininglife of the underlying loans, which include the effects of estimated prepayments. At December31, 2009, a majority of these loans were valued based on the liquidation value of the underlyingcollateral, because the expected cash flows are primarily based on the liquidation of underlyingcollateral and the timing and amount of the cash flows could not be reasonably estimated. Therewas a $237 thousand allowance for credit losses related to these loans at December 31, 2009.Because of the short time period between the closing of the transaction and December 31, 2009,certain amounts related to the FASB ASC 310-30 loans are preliminary estimates and changes inthe carrying amount and accretable yield for these loans from the acquisition date and December31, 2009 were not material. The Corporation expects to finalize its analysis of these loans and,therefore, adjustments to the estimated amounts may occur.On the acquisition date, the preliminary estimate of contractually required payments receivablefor all non-FASB ASC 310-30 loans acquired in the acquisition was $58.4 million and theestimated fair value of the loans was $60.7 million. The impact to the Corporation from theamortization and accretion of premiums and discounts was immaterial.**7.** **ALLOWANCE FOR LOAN LOSSES:**Changes in the allowance for loan losses are summarized as follows:               **December 31,** (Dollar amounts in thousands) **2009**  **2008**  **2007** Balance at beginning of year $16,280  $15,351  $16,169 Provision for loan losses  11,870   7,855   6,580 Recoveries of loans previously charged off  2,948   2,668   2,778 Loans charged off  (11,661)  (9,594)  (10,176)          **Balance at End of Year** $19,437  $16,280  $15,351           Impaired loans were as follows:           **December 31,** (Dollar amounts in thousands) **2009**  **2008** Year-end loans with no allocated allowance for loan losses $5,344  $— Year-end loans with allocated allowance for loan losses  19,330   16,959        **Total** $24,674  $16,959                 Amount of the allowance for loan losses allocated $5,438  $4,735 Nonperforming loans:        Loans past due over 90 days still on accrual  8,218   3,624 Non-accrual loans  35,953   12,486 
 
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**Notes to Consolidated Financial Statements**Covered loans included in loans past due over 90 days still on accrual are $4.4 million.Covered loans included in non-accrual loans are $7.5 million. Covered loans of $6.1 million aredeemed impaired at December 31, 2009 and have allowance for loan loss allocated to them of $82thousand. Non-performing loans include both smaller balance homogeneous loans that arecollectively evaluated for impairment and individually classified impaired loans.             (Dollar amounts in thousands) **2009**  **2008**  **2007** Average of impaired loans during the year $21,731  $6,531  $3,505 Interest income recognized during impairment  36   3   11 Cash-basis interest income recognized  19   —   1 **8.** **PREMISES AND EQUIPMENT:**Premises and equipment are summarized as follows:           **December 31,** (Dollar amounts in thousands) **2009**  **2008** Land $7,305  $5,629 Building and leasehold improvements  41,964   38,985 Furniture and equipment  33,520   32,239           82,789   76,853 Less accumulated depreciation  (47,238)  (44,708)       **Total** $35,551  $32,145        Aggregate depreciation expense was $3.25 million, $3.11 million and $3.02 million for 2009,2008 and 2007, respectively.**9.** **GOODWILL AND INTANGIBLE ASSETS:**The Corporation completed its annual impairment testing of goodwill during the second quarterof 2009 and 2008. Management does not believe any amount of goodwill is impaired.Intangible assets subject to amortization at December 31, 2009 and 2008 are as follows:                   **2009**  **2008**   **Gross**  **Accumulated**  **Gross**  **Accumulated** (Dollar amounts in thousands) **Amount**  **Amortization**  **Amount**  **Amortization** Customer list intangible $3,446  $2,912  $3,446  $2,607 Core deposit intangible  6,546   2,164   2,193   1,520                $9,992  $5,076  $5,639  $4,127              Aggregate amortization expense was $950 thousand, $425 thousand and $426 thousand for 2009, 2008and 2007, respectively.Estimated amortization expense for the next five years is as follows:       In thousands 2010 $1,372 2011  997 2012  739 2013  604 2014  406 **10.** **DEPOSITS:**Scheduled maturities of time deposits for the next five years are as follows:     2010 $440,293 2011  103,334 2012  126,222 2013  32,628 2014  6,031 
 
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**Notes to Consolidated Financial Statements****11.** **SHORT-TERM BORROWINGS:**A summary of the carrying value of the Corporation’s short-term borrowings at December 31, 2009and 2008 is presented below:         (Dollar amounts in thousands) **2009**  **2008** Federal funds purchased $5,754  $1,111 Repurchase agreements  22,578   19,405 Other short-term borrowings  2,104   984          $30,436  $21,500                 (Dollar amounts in thousands) **2009**  **2008** Average amount outstanding $53,930  $37,068 Maximum amount outstanding at a month end  95,568   76,049 Average interest rate during year  1.00%  2.89%Interest rate at year-end  1.37%  3.23%Federal funds purchased are generally due in one day and bear interest at market rates. Otherborrowings, primarily note payable—U.S. government, are due on demand, secured by a pledge ofsecurities and bear interest at market rates.Substantially all repurchase agreement liabilities represent amounts advanced by variouscustomers. Securities are pledged to cover these liabilities, which are not covered by federaldeposit insurance. The Corporation maintains possession of and control over these securities.**12.** **OTHER BORROWINGS:**Other borrowings at December 31, 2009 and 2008 are summarized as follows:         (Dollar amounts in thousands) **2009**  **2008** FHLB advances $326,137  $378,553 City of Terre Haute, Indiana economic development revenue bonds  6,600   6,600        **Total** $332,737  $385,153        The aggregate minimum annual retirements of other borrowings are as follows:     2010 $202,250 2011  2,067 2012  20,000 2013  56,000 2014  45,000 Thereafter  7,420       $332,737     The Corporation’s subsidiary banks are members of the Federal Home Loan Bank (FHLB) of Indianapolisand accordingly are permitted to obtain advances. The advances from the FHLB, aggregating $326.1million at December 31, 2009, and $378.6 million at December 31, 2008, accrue interest, payablemonthly, at annual rates, primarily fixed, varying from 3.2% to 6.6% in 2009 and 0.7% to 6.6% in2008. The advances are due at various dates through August 2017. FHLB advances are, generally, duein full at maturity. They are secured by eligible securities totaling $217.6 million at December31, 2009, and $284.1 million at December 31, 2008, and a blanket pledge on real estate loancollateral. Based on this collateral and the Corporation’s holdings of FHLB stock, the Corporationis eligible to borrow up to $400.9 million at year end 2009. Certain advances may be prepaid,without penalty, prior to maturity. The FHLB can adjust the interest rate from fixed to variable oncertain advances, but those advances may then be prepaid, without penalty.
 
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**Notes to Consolidated Financial Statements**The economic development revenue bonds (bonds) require periodic interest payments each yearuntil maturity or redemption. The interest rate, which was 0.27% at December 31, 2009, and0.80% at December 31, 2008, is determined by a formula which considers rates for comparablebonds and is adjusted periodically. The bonds are collateralized by a first mortgage on theCorporation’s headquarters building. The bonds mature December 1, 2015, but bondholders mayperiodically require earlier redemption.The debt agreement for the bonds requires the Corporation to meet certain financial covenants.These covenants require the Corporation to maintain a Tier I capital ratio of at least 6.2% andnet income to average assets of 0.6%. At December 31, 2009 and 2008, the Corporation was incompliance with all of its debt covenants.The Corporation maintains a letter of credit with another financial institution, which could beused to repay the bonds, should they be called. The letter of credit expired November 1, 2009,and was automatically extended for one year. Assuming redemption will be funded by the letterof credit, or by other similar borrowings, there are no anticipated principal maturities of thebonds within the next five years.**13.** **INCOME TAXES:******Income tax expense is summarized as follows:             (Dollar amounts in thousands) **2009**  **2008**  **2007** Federal:            Currently payable $10,543  $12,238  $8,250 Deferred  (3,396)  (4,727)  242              7,147   7,511   8,762              State:            Currently payable $1,277   712   837 Deferred  (869)  (420)  (215)             408   292   622           **Total** $7,555  $7,803  $9,384           The reconciliation of income tax expense with the amount computed by applying the statutory federalincome tax rate of 35% to income before income taxes is summarized as follows:             (Dollar amounts in thousands) **2009**  **2008**  **2007** Federal income taxes computed at the statutory rate $10,596  $11,400  $12,238 Add (deduct) tax effect of:            Tax exempt income  (3,521)  (3,505)  (3,263)State tax, net of federal benefit  265   189   404 Affordable housing credits  —   (30)  (113)Other, net  215   (251)  118                        **Total** $7,555  $7,803  $9,384           
 
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**Notes to Consolidated Financial Statements**The tax effects of temporary differences that give rise to significant portions of the deferredtax assets and liabilities at December 31, 2009 and 2008, are as follows:         (Dollar amounts in thousands) **2009**  **2008** Deferred tax assets:        Other than temporary impairment $6,708  $2,440 Net unrealized losses on securities available-for-sale  —   2,735 Net unrealized losses on retirement plans  7,236   5,573 Loan losses provision  7,717   6,473 Deferred compensation  7,118   6,243 Compensated absences  633   625 Post-retirement benefits  1,785   1,715 Other  1,288   1,241        **Gross Deferred Assets**  32,485   27,045                 Deferred tax liabilities:        Net unrealized gains on securities available-for-sale  (2,290)  — Depreciation  (1,496)  (1,533)Federal Home Loan Bank stock dividends  (456)  (456)Mortgage servicing rights  (807)  (637)Pensions  (2,385)  (2,782)Deferred gain on acquisition  (2,039)  — Other  (1,704)  (1,232)       **Gross Deferred Liabilities**  (11,177)  (6,640)       **Net Deferred Tax Assets (Liabilities)** $21,308  $20,405        **Unrecognized Tax Benefits**— A reconciliation of the beginning and ending amount of unrecognizedtax benefits is as follows:             (Dollar amounts in thousands) **2009**  **2008**  **2007** Balance at January 1 $549  $803  $601 Additions based on tax positions related to the current year  111   47   290 Reductions for tax positions of prior years  —   (291)  — Reductions due to the statute of limitations  —   —   (88)Settlements  —   (10)  —           Balance at December 31 $660  $549  $803           Of this total, $660 represents the amount of unrecognized tax benefits that, if recognized, wouldfavorably affect the effective income tax rate in future periods. The Corporation does not expectthe total amount of unrecognized tax benefits to significantly increase or decrease in the next 12months.The total amount of interest and penalties recorded in the income statement for the years endedDecember 31, 2009, 2008 and 2007 was an expense increase of $9 and a reduction of $48 and $30,respectively. The amount accrued for interest and penalties at December 31, 2009, 2008 and 2007 was$73, $64 and $112, respectively.The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income taxof the states of Indiana and Illinois. The Corporation is no longer subject to examination bytaxing authorities for years before 2006.
 
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**Notes to Consolidated Financial Statements****14.** **FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:**The Corporation is a party to financial instruments with off-balance-sheet risk in the normalcourse of business to meet the financing needs of its customers. These financial instrumentsinclude conditional commitments and commercial letters of credit. The financial instrumentsinvolve to varying degrees, elements of credit and interest rate risk in excess of amountsrecognized in the financial statements. The Corporation’s maximum exposure to credit loss inthe event of nonperformance by the other party to the financial instrument for commitments tomake loans is limited generally by the contractual amount of those instruments. The Corporationfollows the same credit policy to make such commitments as is followed for those loans recordedin the consolidated financial statements.Commitment and contingent liabilities are summarized as follows at December 31:         (Dollar amounts in thousands) **2009**  **2008** Home equity $43,385  $44,346 Credit card lines  —   47,635 Commercial operating lines  206,294   142,781 Other commitments  40,480   67,379          $290,159  $302,141          Commercial letters of credit $15,791  $16,230 The majority of commercial operating lines and home equity lines are variable rate, while themajority of other commitments to fund loans are fixed rate. Since many commitments to makeloans expire without being used, these amounts do not necessarily represent future cashcommitments. Collateral obtained upon exercise of the commitment is determined usingmanagement’s credit evaluation of the borrower, and may include accounts receivable, inventory,property, land and other items. The approximate duration of these commitments is generally oneyear or less.**Derivatives:**The Corporation enters into derivative instruments for the benefit of itscustomers. At the inception of a derivative contract, the Corporation designates the derivativeas an instrument with no hedging designation (“stand-alone derivative”). Changes in the fairvalue of derivatives are reported currently in earnings as non-interest income. Net cashsettlements on derivatives that do not qualify for hedge accounting are reported innon-interest income. First Financial Bank offers clients the ability on certain transactions toenter into interest rate swaps. Typically, these are pay fixed, receive floating swaps used inconjunction with commercial loans. These derivative contracts do not qualify for hedgeaccounting. The Bank hedges the exposure to these contracts by entering into offsettingcontracts with substantially matching terms. At December 31, 2009, the notional amount of theseinterest rate swaps was $32.6 million. The fair value of these contracts combined was zero, asgains offset losses. The gross gain and loss associated with these interest rate swaps atDecember 31, 2009 is $889 thousand. Derivatives were not recorded in 2008 as they were notmaterial to the Corporation.**15.** **RETIREMENT PLANS:**Substantially all employees of the Corporation are covered by a retirement program thatconsists of a defined benefit plan and an employee stock ownership plan (ESOP). Plan assetsconsist primarily of the Corporation’s stock and obligations of U.S. Government agencies.Benefits under the defined benefit plan are actuarially determined based on an employee’sservice and compensation, as defined, and funded as necessary.Assets in the ESOP are considered in calculating the funding to the defined benefit planrequired to provide such benefits. Any shortfall of benefits under the ESOP are to be providedby the defined benefit plan. The ESOP may provide benefits beyond those determined under thedefined benefit plan. Contributions to the ESOP are determined by the Corporation’s Board ofDirectors. The Corporation made contributions to the defined benefit plan of $1.20 million,$1.73 million and $1.02 million in 2009, 2008 and 2007. The Corporation contributed $971thousand, $1.28 million and $1.24 million to the ESOP in 2009, 2008 and 2007.The Corporation uses a measurement date of December 31, 2009.
 
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**Notes to Consolidated Financial Statements**Net periodic benefit cost and other amounts recognized in other comprehensive income includedthe following components:             (Dollar amounts in thousands) **2009**  **2008**  **2007** Service cost — benefits earned $3,100  $3,031  $3,073 Interest cost on projected benefit obligation  3,296   2,908   2,773 Expected return on plan assets  (3,857)  (3,292)  (3,644)Net amortization and deferral  625   711   444           Net periodic pension cost $3,164  $3,358  $2,646              Net loss (gain) during the period $4,762  $—  $3,422 Amortization of prior service cost  29   18   18 Amortization of unrecognized gain (loss)  (353)  (729)  (462)          Total recognized in other comprehensive income (loss) $4,438  $(711) $2,978           Total recognized net periodic pension cost and othercomprehensive income $7,602  $2,647  $5,624           The estimated net loss and prior service costs for the defined benefit pension plan that will beamortized from accumulated other comprehensive income into net periodic benefit cost over the nextfiscal year are $982 thousand and $(18) thousand.The information below sets forth the change in projected benefit obligation, reconciliation of planassets, and the funded status of the Corporation’s retirement program. Actuarial present value ofbenefits is based on service to date and present pay levels.         (Dollar amounts in thousands) **2009**  **2008** Change in benefit obligation:        Benefit obligation at January 1 $56,476  $49,444 Service cost  3,100   3,031 Interest cost  3,296   2,908 Actuarial (gain) loss  (4,672)  6,217 Benefits paid  (2,286)  (5,124)       Benefit obligation at December 31  55,914   56,476                 Reconciliation of fair value of plan assets:        Fair value of plan assets at January 1  47,892   40,803 Actual return on plan assets  (5,578)  9,208 Employer contributions  2,171   3,005 Benefits paid  (2,286)  (5,124)       Fair value of plan assets at December 31  42,199   47,892        Funded status at December 31 (plan assets less benefit obligations) $(13,715) $(8,584)       Amounts recognized in accumulated other comprehensive income at December 31, 2009 and 2008 consistof:         (Dollar amounts in thousands) **2009**  **2008** Net loss (gain) $17,994  $13,585 Prior service cost (credit)  (74)  (103)         $17,920  $13,482        
 
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**Notes to Consolidated Financial Statements**The accumulated benefit obligation for the defined benefit pension plan was $45,964 and $47,537at year-end 2009 and 2008.           **2009**  **2008** Principal assumptions used:        Discount rate  5.96%  5.87%Rate of increase in compensation levels  3.75   3.75 Expected long-term rate of return on plan assets  8.00   8.00 The expected long-term rate of return was estimated using market benchmarks for equities and bondsapplied to the plan’s target asset allocation. Management estimated the rate by which plan assetswould perform based on historical experience as adjusted for changes in asset allocations andexpectations for future return on equities as compared to past periods.**Plan Assets**— The Corporation’s pension plan weighted-average asset allocation for the years 2009and 2008 by asset category are as follows:                                   **Pension Plan**  **ESOP**   **Pension Plan**  **ESOP**  **Percentage of Plan**  **Percentage of Plan**   **Target Allocation**  **Target Allocation**  **Assets at December 31,**  **Assets at December 31,** **Asset Category** **2010**  **2009**  **2009**  **2008**  **2009**  **2008** Equity securities  40-65%  99-100%  57%  54%  100%  100%Debt securities  40-60   0-0   35   40   0   0 Other  0   0-0   8   6   0   0                    **Total**          100%  100%  100%  100%                   **Fair Value of Plan Assets**— Fair value is the exchange price that would be received for an assetin the principal or most advantageous market for the asset in an orderly transaction between marketparticipants on the measurement date. It also establishes a fair value hierarchy which requires anentity to maximize the use of of observable inputs and minimize the use of unobservable inputs whenmeasuring fair value.The Corporation used the following methods and significant assumptions to estimate the fair valueof each type of financial instrument: **Equity, Debt, Investment Funds and Other Securities**— Thefair values for investment securities are determined by quoted market prices, if available (Level1). For securities where quoted price are not available, fair values are calculated based on marketprices of similar securities (Level 2). For securities where quoted prices ormarket prices of similar securities are not available, fair values are calculated using discountedcash flows or other market indicators (Level 3).The fair value of the plan assets at December 31, 2009, by asset category, is as follows:                       **Fair Value Measurements at**       **December 31, 2009 Using:**       **Quoted**             **Prices in**             **Active**  **Significant**          **Markets for**  **Other**  **Significant**       **Identical**  **Observable**  **Unobservable**   **Carrying**  **Assets**  **Inputs**  **Inputs** (Dollar amounts in thousands) **Value**  **(Level 1)**  **(Level 2)**  **(Level 3)** Plan assets                Equity securities $32,583  $32,583  $—  $— Debt securities  8,133   —   8,133   — Investment funds  1,483   1,483   —   —              Total plan assets $42,199  $34,066  $8,133  $—              
 
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**Notes to Consolidated Financial Statements**The investment objective for the retirement program is to maximize total return withoutexposure to undue risk. Asset allocation favors equities, with a target allocation ofapproximately 88%. This target includes the Corporation’s ESOP, which is 100% invested incorporate stock. Other investment allocations include fixed income securities and cash.The plan is prohibited from investing in the following: private placement equity and debttransactions; letter stock and uncovered options; short-sale margin transactions and otherspecialized investment activity; and fixed income or interest rate futures. All otherinvestments not prohibited by the plan are permitted.Equity securities include First Financial Corporation common stock in the amount of $25.3million (60 percent of total plan assets) and $33.7 million (70 percent of total plan assets)at December 31, 2009 and 2008, respectively.**Contributions**— The Corporation expects to contribute $1.6 million to its pension plan and$1.2 million to its ESOP in 2010.**Estimated Future Payments**— The following benefit payments, which reflect expected futureservice, are expected:       **Pension Benefits**   (Dollar amounts in thousands) 2010 $888 2011  995 2012  1,227 2013  1,277 2014  1,627 2015—2019  11,668 **Supplemental Executive Retirement Plan**— The Corporation has established a Supplemental ExecutiveRetirement Plan (SERP) for certain executive officers. The provisions of the SERP allow the Plan’sparticipants who are also participants in the Corporation’s defined benefit pension plan to receivesupplemental retirement benefits to help recompense for benefits lost due to imposition of IRSlimitations on benefits under the Corporation’s tax qualified defined benefit pension plan.Expenses related to the plan were $196 thousand in 2009 and $208 thousand in 2008. The plan isunfunded and has a measurement date of December 31. The amounts recognized in other comprehensiveincome in the current year are as follows:             (Dollar amounts in thousands) **2009**  **2008**  **2007** Net loss (gain) during the period $—  $—  $(179)Amortization of prior service cost  (74)  (74)  (74)Amortization of unrecognized gain (loss)  (37)  5   17           Total recognized in other comprehensiveincome (loss) $(111) $(69) $(236)          The Corporation has $1.2 million and $1.1 million recognized in the balance sheet as a liability atDecember 31, 2009 and 2008. Amounts in accumulated other comprehensive income consist of $146thousand net gain and $148 thousand in prior service cost at December 31, 2009 and $109 thousandnet gain and $222 thousand in prior service cost at December 31, 2008. The estimated gain and priorservice costs for the SERP that will be amortized from accumulated other comprehensive income intonet periodic benefit cost over the next fiscal year are $80 thousand and $74 thousand.**Estimated Future Payments**— The following benefit payments, which reflect expected future service,are expected:       **SERP Benefits**   (Dollar amounts in thousands) 2010 $— 2011  — 2012  146 2013  144 2014  142 2015—2019  679 
 
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**Notes to Consolidated Financial Statements**The Corporation also provides medical benefits to its employees subsequent to their retirement. TheCorporation uses a measurement date of December 31, 2009. Accrued post-retirement benefits as ofDecember 31, 2009 and 2008 are as follows:           **December 31,** (Dollar amounts in thousands) **2009**  **2008** Change in benefit obligation:        Benefit obligation at January 1 $4,248  $4,058 Service cost  109   125 Interest cost  240   238 Plan participants’ contributions  26   19 Actuarial (gain) loss  16   — Benefits paid  (214)  (192)       Benefit obligation at December 31 $4,425  $4,248                 Funded status at December 31 $4,425  $4,248        Amounts recognized in accumulated other comprehensive income consist of a net loss of $410 thousandand $241 thousand in transition obligation at December 31, 2009 and $520 thousand net loss and $301thousand in transition obligation at December 31, 2008. The post-retirement benefits paid in 2009and 2008 of $214 thousand and $192 thousand, respectively, were fully funded by company andparticipant contributions.The estimated net gain and transition obligation for the post-retirement benefit plan that will beamortized from accumulated other comprehensive income into net periodic benefit cost over the nextfiscal year is $153 thousand and $60 thousand.Weighted-average assumptions as of December 31:           **December 31,**   **2009**  **2008** Discount rate  5.25%  6.00%Initial weighted health care cost trend rate  7.50   8.50 Ultimate health care cost trend rate  5.00   5.00 Year in which the rate is assumed to  2013   2016 stabilize and remain unchanged        Post-retirement health benefit expense included the following components:               **Years Ended December 31,** (Dollar amounts in thousands) **2009**  **2008**  **2007** Service cost $70  $125  $118 Interest cost  240   238   310 Amortization of transition obligation  60   60   60 Recognized actuarial loss  —   11   172           Net periodic benefit cost $370  $434  $660              Net loss (gain) during the period $—  $—  $(1,506)Amortization of prior service cost  (60)  (60)  (60)Amortization of unrecognized gain (loss)  (110)  (11)  (172)          Total recognized in other comprehensive income (loss) $(170) $(71) $(1,738)          Total recognized net periodic benefit cost and othercomprehensive income $200  $363  $(1,078)          
 
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**Notes to Consolidated Financial Statements**Assumed health care cost trend rates have a significant effect on the amounts reported for thehealth care plans. A one-percentage-point change in the assumed health care cost trend rates wouldhave the following effects:           **1% Point**  **1% Point** (Dollar amounts in thousands) **Increase**  **Decrease** Effect on total of service and interest costcomponents $10  $(8)Effect on post-retirement benefit obligation  83   (75)**Contributions**— The Corporation expects to contribute $185 thousand to its other post-retirementbenefit plan in 2010.**Estimated Future Payments**— The following benefit payments, which reflect expected future service,are expected:       **Post-Retirement Medical Benefits**   (Dollar amounts in thousands) 2010 $267 2011  275 2012  289 2013  290 2014  297 2015—2019  1,614 **16.** **OTHER COMPREHENSIVE INCOME (LOSS):**Other comprehensive income (loss) components and related taxes were as follows:               **December 31,** (Dollar amounts in thousands) **2009**  **2008**  **2007** Unrealized holding gains and (losses) on securities available-for-sale $9,950  $(19,580) $2,063 Change in unrealized gains (losses) on securities available-for-salefor which a portion of OTTI has been recognized in earnings  (2,599)  —   — Reclassification adjustments for (gains) and losses laterrecognized in income  10,765   5,787   (211)Reclassification adjustment for prior OTTI charges  (5,555)  —   —           Net unrealized gains and (losses)  12,561   (13,793)  1,852 Tax effect  (5,025)  5,517   (742)          Other comprehensive income (loss) $7,536  $(8,276) $1,110               Unrecognized gains and (losses) on benefit plans $(4,762) $—  $(1,737)Amortization of prior service cost included in net periodic pensioncost  105   116   116 Amortization of unrecognized gains (losses) included in netperiodic pension cost  500   735   617           Benefit plans, net  (4,157)  851   (1,004)Tax effect  1,663   (340)  207           Other comprehensive income (loss) $(2,494) $511  $(797)          The following is a summary of the accumulated other comprehensive income balances, net of tax:               **Balance**  **Current**  **Balance**   **at**  **Period**  **at** (Dollar amounts in thousands) **12/31/08**  **Change**  **12/31/09** Unrealized gains (losses) onsecurities available-for-sale $(4,102) $7,536  $3,434 Unrealized loss on benefit plans  (8,844)  (2,494)  (11,338)          **Total** $(12,946) $5,042  $(7,904)          
 
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**Notes to Consolidated Financial Statements****17.** **REGULATORY MATTERS:**The Corporation and its bank affiliates are subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capital requirements caninitiate certain mandatory—and possibly additional discretionary—actions by regulators that, ifundertaken, could have a direct material effect on the Corporation’s financial statements.Further, the Corporation’s primary source of funds to pay dividends to shareholders is dividendsfrom its subsidiary banks and compliance with these capital requirements can affect the ability ofthe Corporation and its banking affiliates to pay dividends. At December 31, 2009, approximately$24.6 million of undistributed earnings of the subsidiary banks, included in consolidated retainedearnings, were available for distribution to the Corporation without regulatory approval.Under capital adequacy guidelines and the regulatory framework for prompt corrective action, theCorporation and Banks must meet specific capital guidelines that involve quantitative measures ofthe Corporation’s assets, liabilities, and certain off-balance-sheet items as calculated underregulatory accounting practices. The Corporation’s and Banks’ capital amounts and classificationare also subject to qualitative judgments by the regulators about components, risk weightings andother factors.Quantitative measures established by regulation to ensure capital adequacy require the Corporationand Banks to maintain minimum amounts and ratios of Total and Tier I Capital to risk-weightedassets, and of Tier I Capital to average assets. Management believes, as of December 31, 2009 and2008, that the Corporation meets all capital adequacy requirements to which it is subject.As of December 31, 2009, the most recent notification from the respective regulatory agenciescategorized the subsidiary banks as well capitalized under the regulatory framework for promptcorrective action. To be categorized as well capitalized, the banks must maintain minimum totalrisk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are noconditions or events since that notification that management believes have changed the banks’category.The following table presents the actual and required capital amounts and related ratios for theCorporation and First Financial Bank, N.A., at year end 2009 and 2008.                                           **To Be Well Capitalized**           **For Capital**  **Under Prompt Corrective**   **Actual**  **Adequacy Purposes**  **Action Provisions** (Dollar amounts in thousands) **Amount**  **Ratio**  **Amount**  **Ratio**  **Amount**  **Ratio** **Total risk-based capital**                        Corporation — 2009 $321,604   16.44% $156,502   8.00%  N/A   N/A Corporation — 2008  307,297   17.32%  141,978   8.00%  N/A   N/A First Financial Bank —2009  305,100   16.09%  151,688   8.00%  189,611   10.00%First Financial Bank —2008  293,165   17.11%  137,067   8.00%  171,334   10.00%                         **Tier I risk-based capital**                        Corporation — 2009 $302,167   15.45% $78,251   4.00%  N/A   N/A Corporation — 2008  291,017   16.40%  70,989   4.00%  N/A   N/A First Financial Bank —2009  288,791   15.23%  75,844   4.00%  113,766   6.00%First Financial Bank —2008  280,015   16.34%  68,534   4.00%  102,801   6.00%                         **Tier I leverage capital**                        Corporation — 2009 $302,167   12.01% $100,630   4.00%  N/A   N/A Corporation — 2008  291,017   12.72%  91,530   4.00%  N/A   N/A First Financial Bank —2009  288,791   11.86%  97,393   4.00%  121,742   5.00%First Financial Bank —2008  280,015   12.64%  88,586   4.00%  110,733   5.00%
 
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**Notes to Consolidated Financial Statements****18.** **PARENT COMPANY CONDENSED FINANCIAL STATEMENTS:**The parent company’s condensed balance sheets as of December 31, 2009 and 2008, and the relatedcondensed statements of income and cash flows for each of the three years in the period endedDecember 31, 2009, are as follows:**CONDENSED BALANCE SHEETS**           **December 31,** (Dollar amounts in thousands) **2009**  **2008** **ASSETS**        Cash deposits in affiliated banks $9,005  $7,150 Investments in subsidiaries  305,380   286,525 Land and headquarters building, net  5,349   5,562 Other  6,710   7,180        **Total Assets** $326,444  $306,417                 **LIABILITIES AND SHAREHOLDERS’ EQUITY**        **Liabilities**        Borrowings (including $1.0 and $3.4 million from subsidiary) $7,636  $7,636 Dividends payable  5,908   5,902 Other liabilities  6,417   6,035        **Total Liabilities**  19,961   19,573          **Shareholders’ equity**  306,483   286,844        **Total Liabilities and Shareholders’ Equity** $326,444  $306,417        **CONDENSED STATEMENTS OF INCOME**               **Years Ended December 31,** (Dollar amounts in thousands) **2009**  **2008**  **2007** Dividends from subsidiaries $14,300  $14,836  $16,500 Other income  816   1,010   1,026 Interest on borrowings  (121)  (362)  (655)Other operating expenses  (3,462)  (3,342)  (3,343)                       Income before income taxes and equityin undistributed earnings of subsidiaries  11,533   12,142   13,528 Income tax benefit  1,092   1,124   1,230           Income before equity in undistributedearnings of subsidiaries  12,625   13,266   14,758 Equity in undistributed earnings of subsidiaries  10,095   11,503   10,822           Net income $22,720  $24,769  $25,580           
 
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**Notes to Consolidated Financial Statements****CONDENSED STATEMENTS OF CASH FLOWS**               **Years Ended December 31,** (Dollar amounts in thousands) **2009**  **2008**  **2007** **CASH FLOWS FROM OPERATING ACTIVITIES:**            Net income $22,720  $24,769  $25,580 Adjustments to reconcile net income to net cashprovided by operating activities:            Provision for depreciation and amortization  250   263   260 Equity in undistributed earnings  (10,095)  (11,503)  (10,822)Contribution of shares to ESOP  971   1,277   1,242 Increase (decrease) in other liabilities  (167)  638   239 (Increase) decrease in other assets  638   1,010   (41)          **Net Cash From Operating Activities**  14,317   16,454   16,458              **CASH FLOWS FROM INVESTING ACTIVITIES:**            Purchase of investment securities  (19)  (928)  — Purchase of furniture and fixtures  (21)  (4)  (8)          **Net Cash From Investing Activities**  (40)  (932)  (8)             **CASH FLOWS FROM FINANCING ACTIVITIES:**            Principal payments on borrowings  —   (2,400)  (600)Purchase of treasury stock  (616)  (1,464)  (5,167)Dividends paid  (11,806)  (11,548)  (11,373)          **Net Cash From Financing Activities**  (12,422)  (15,412)  (17,140)          **Net (Decrease) Increase in Cash**  1,855   110   (690)**Cash, Beginning of Year**  7,150   7,040   7,730           **Cash, End of Year** $9,005  $7,150  $7,040           Supplemental disclosures of cash flow information:            Cash paid during the year for:            Interest $124  $358  $657           Income taxes $13,485  $11,657  $8,494           **19.** **SELECTED QUARTERLY DATA (UNAUDITED):**                           **2009**           **Net**  **Provision**         **Interest**  **Interest**  **Interest**  **for Loan**  **Net**  **Net Income** (Dollar amounts in thousands) **Income**  **Expense**  **Income**  **Losses**  **Income**  **Per Share** March 31 $31,186  $10,723  $20,463  $2,830  $4,530  $.35 June 30 $30,658  $10,082  $20,576  $2,860  $4,621  $.35 September 30 $32,224  $9,357  $22,867  $3,690  $7,719  $.59 December 31 $32,187  $9,099  $23,088  $2,490  $5,850  $.45                            **2008**           **Net**  **Provision**         **Interest**  **Interest**  **Interest**  **for Loan**  **Net**  **Net Income** (Dollar amounts in thousands) **Income**  **Expense**  **Income**  **Losses**  **Income**  **Per Share** March 31 $34,287  $15,331  $18,956  $1,925  $6,950  $.53 June 30 $33,271  $13,311  $19,960  $1,735  $7,143  $.55 September 30 $33,374  $12,270  $21,104  $2,215  $3,502  $.27 December 31 $33,022  $11,578  $21,444  $1,980  $7,174  $.55 
 
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**Report of Independent Registered Public Accounting Firm**To the Shareholders and Board of Directors of First Financial Corporation:We have audited the accompanying consolidated balance sheets of First Financial Corporation asof December 31, 2009 and 2008 and the related consolidated statements of income, changes inshareholders’ equity, and cash flows for each of the three years in the period ended December 31,2009. We also have audited First Financial Corporation’s internal control over financial reportingas of December 31, 2009, based on criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). FirstFinancial Corporation’s management is responsible for these financial statements, for maintainingeffective internal control over financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Management’s Report onInternal Control over Financial Reporting. Our responsibility is to express an opinion on thesefinancial statements and an opinion on the company’s internal control over financial reportingbased on our audits.We conducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of materialmisstatement and whether effective internal control over financial reporting was maintained in allmaterial respects. Our audits of the financial statements included examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, and evaluating the overallfinancial statement presentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting, assessing the risk that amaterial weakness exists, and testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk. Our audits also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audits provide areasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts and expenditures of the companyare being made only in accordance with authorizations of management and directors of the company;and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.In our opinion, the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of First Financial Corporation as of December 31, 2009and 2008, and the results of its operations and its cash flows for each of the three years in theperiod ended December 31, 2009, in conformity with accounting principles generally accepted in theUnited States of America. Also in our opinion First Financial Corporation maintained, in allmaterial respects, effective internal control over financial reporting as of December 31, 2009,based on criteria established in*Internal Control —Integrated Framework*issued by the COSO./s/ Crowe Horwath LLPIndianapolis,