• statements preceded by, followed by or that include the words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "projects," or similar expressions.

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in this Quarterly Report on Form 10-Q, including, but not limited to, those presented in the Management's Discussion and Analysis. Factors that might cause such differences include, but are not limited to:
• changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts its operations, including without limitation, reduced rates of business formation and growth, commercial and residential real estate development and real estate prices;

• fluctuations in markets for equity, fixed-income, commercial paper and other securities, including availability, market liquidity levels, and pricing;

• changes in interest rates, the quality and composition of the loan and securities portfolios, demand for loan products, deposit flows and competition;

• changes in fiscal, monetary, regulatory, trade and tax policies and laws, including policies of the U.S. Department of Treasury and the Federal Reserve Board ("FRB");

• the Company's participation or lack of participation in governmental programs implemented under the Emergency Economic Stabilization Act ("EESA") and the American Recovery and Reinvestment Act ("ARRA"), including without limitation the Troubled Asset Relief Program ("TARP"), the Capital Purchase Program ("CPP"), and the Temporary Liquidity Guarantee Program ("TLGP") and the impact of such programs and related regulations on the Company and on international, national, and local economic and financial markets and conditions;

• changes in consumer spending and savings habits;

• increased competitive challenges and expanding product and pricing pressures among financial institutions;

• demand for financial services in the Company's market areas;

• legislation or regulatory changes which adversely affect the Company's operations or business;

• the Company's ability to comply with applicable laws and regulations, including restrictions on dividend payments;

• changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies;

• increased costs of deposit insurance and changes with respect to Federal Deposit Insurance Corporation ("FDIC") insurance coverage levels; and

• further declines in the market value of the Company's publicly traded stock price or declines in the Company's ability to generate future cash flows may increase the potential that goodwill recorded on the Company's consolidated statement of financial position be designated as impaired and that the Company may incur a goodwill write-down in the future.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including those described above, could affect the Company's financial performance and could cause the Company's actual results or circumstances for future periods to differ materially from those anticipated or projected.
Except as required by law, the Company does not undertake, and specifically disclaims any obligation to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES The Company's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and are consistent with predominant practices in the banking industry. Application of critical accounting policies, which are those policies that management believes are the most important to the Company's financial position and results, requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes and are based on information available as of the date of the financial statements. Future changes in information may affect these estimates, assumptions and judgments, which, in turn, may affect amounts reported in the financial statements.
The Company has numerous accounting policies, of which the most significant are presented in Note 1, Summary of Significant Accounting Policies, of the notes to consolidated financial statements included in the Company's most recently filed Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets, liabilities, revenues and expenses are reported in the consolidated financial statements and how those reported amounts are determined. Based on the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for loan losses, valuation of goodwill and deferred tax assets, the valuation of securities and determination of OTTI, and accounting for defined benefit plans require particularly subjective or complex judgments important to the Company's financial position and results of operations, and, as such, are considered to be critical accounting policies. These estimates and assumptions are based on management's best estimates and judgment and are evaluated on an ongoing basis using historical experience and other factors, including the current economic environment. The Company adjusts these estimates and assumptions when facts and circumstances dictate. Illiquid credit markets and volatile equity have combined with declines in consumer spending to increase the uncertainty inherent in these estimates and assumptions. As future events cannot be determined with precision, actual results could differ significantly from the Company's estimates. For additional information regarding critical accounting policies, refer to Note 1, Summary of Significant Accounting Policies, of the notes to consolidated financial statements and the section captioned "Critical Accounting Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2008 Form 10-K. There have been no material changes in the Company's application of critical accounting policies related to the allowance for loan losses, valuation of goodwill and deferred tax assets, the valuation of securities and determination of OTTI, and accounting for defined benefit plans since December 31, 2008.
OVERVIEW
The principal objective of this discussion is to provide an overview of the financial condition and results of operations of the Company for the periods covered in this quarterly report. This discussion and tabular presentations should be read in conjunction with the accompanying consolidated financial statements and accompanying notes.
The Company's revenues are dependent primarily on net interest income, which is the difference between the income earned on loans and investment securities and the interest paid on deposits and borrowings. Revenues are also affected by service charges on deposits, ATM and debit card income, broker-dealer fees and commissions, loan servicing income, company owned life insurance, gain or loss on the sale or call of investment securities, gain or loss on sale of loans held for sale, gain or loss on the sale of other assets and other miscellaneous noninterest income.
The Company's expenses primarily consist of the provision for loan losses, salaries and employee benefits, occupancy and equipment, supplies and postage, amortization of other intangible assets, computer and data processing, professional services, advertising and promotions, other miscellaneous noninterest expense and income tax expense.
Results of operations are also affected by the general economic and competitive conditions, particularly changes in interest rates, government policies and the actions of regulatory authorities.

RESULTS OF OPERATIONS
Summary of Performance
Net income for the first quarter of 2009 was $3.0 million compared to $3.8 million for the first quarter of 2008. Net income available to common shareholders was $2.0 million, or $0.19 per diluted share, for the first quarter of 2009 compared to $3.4 million, or $0.31 per diluted share, for the first quarter of 2008. Return on average equity was 6.29% and return on average assets was 0.61% for the first quarter of 2009, compared to 7.69% and 0.80%, respectively, for the first quarter of 2008.
Net income and net income available to common shareholders decreased $812 thousand, or 21%, and $1.4 million, or 40%, respectively, for the three months ended March 31, 2009 compared to the same period in 2008. The decrease in net income during the three months ended March 31, 2009 was primarily the result of a $1.2 million increase in the provision for loan losses and a $1.8 million increase in noninterest expense offset by a $2.2 million increase in net interest income. An increase in preferred dividends relating to the TARP preferred stock resulted in the additional $547 thousand, or $0.05 per diluted share, decrease in net income available to common shareholders. Details of the changes in the various components of net income are further discussed below.
Net Interest Income
For the first three months of 2009 net interest income was $17.3 million compared to $15.1 million for the same period in 2008. The increase in net interest income was due to an increase in net interest margin for the three month period ended March 31, 2009 to 4.09%, compared to the corresponding period in the prior year of 3.73%. The reason for the increase has been due to a combination of factors, including the following:
• a favorable change in the mix of our earning assets, as the average balance of our higher yielding loan portfolio increased by 18% and lower yielding investment securities portfolio decreased by 20% when comparing the first quarter of 2009 to the first quarter of 2008

• corresponding 200 basis point decreases in both the prime interest rate and the federal funds rate during the last nine months of 2008

• our interest-bearing liabilities generally repriced at a quicker rate than our interest-earning assets, resulting in reductions attributable to rate reductions of $4.8 million in interest expense while interest income was down only $3.1 million when comparing the first quarter of 2009 to the first quarter of 2008

Interest on investment securities and interest-earning deposits was $6.0 million for the three month period ended March 31, 2009, compared to $8.5 million for the same period in 2008. The average balance of investment securities was $601.2 million with an average tax equivalent yield of 4.54% for the three month period ended March 31, 2009 compared to an average balance of $753.8 million with an average yield of 5.04% for the same period in 2008. The decrease in yield is primarily due to lower market interest rates and less tax-exempt and tax-preferred interest income. Tax-preferred interest income for the three months ended March 31, 2008 was primarily dividend income from auction rate preferred equity securities collateralized by FNMA and FHLMC stock, which were sold during the first quarter of 2009. There were no dividends recognized on the auction rate securities during 2009.
Interest on loans was $17.1 million for the three month period ended March 31, 2009, compared to $16.7 million for the three month period in 2008. The average balance of loans was $1.140 billion with an average yield of 6.04% for the three month period ended March 31, 2009 compared to an average balance of $964.4 million with an average yield of 6.97% for the same period in 2008. Average balances of commercial loans in 2009 increased $46.2 million, as compared to 2008 primarily due to strong organic growth in our commercial loan portfolio. The average balance of consumer indirect loans, comprised almost entirely of automobile loans, increased $129.6 million for the first quarter of 2009 over the corresponding quarter last year. This 94.1% increase in volume was responsible for the $2.2 million increase in interest income on consumer indirect loans when comparing the first quarter of 2009 to that of 2008. Interest on deposits was $5.0 million for the three month period ended March 31, 2009, compared to $9.2 million for the same period in 2008. The average balance of interest-bearing deposits was $1.400 billion with an average cost of 1.45% for the three month period ended March 31, 2009 compared to an average balance of $1.340 billion with an average cost of 2.77% for the same period in 2008. The average balance of noninterest-bearing deposits increased to $281.7 million or 5% during the first quarter of this year compared to the same quarter last year. The increase in the balance of total deposits is due to an increase in public fund deposits, while the decrease in average cost is due primarily to the beneficial repricing of certificates of deposits, and to a lesser extent savings and money market accounts, at lower interest rates.
The declines in interest and average cost on borrowed funds from last year's first quarter to this year's first quarter are due to reductions in short-term interest rates.

The following table sets forth certain information relating to the consolidated balance sheets and reflects the average yields earned on interest-earning assets, as well as the average rates paid on interest-bearing liabilities for the periods indicated (in thousands).

                                                         Three Months Ended March 31,
                                                2009                                       2008
                                 Average                     Average        Average                     Average
                                 Balance       Interest        Rate         Balance       Interest        Rate
Interest-earning assets:
Federal funds sold and
interest-earning deposits      $    43,618     $      27         0.25 %   $    40,807     $     310         3.06 %
Investment securities (1):
Taxable                            413,540         4,433         4.29         492,312         5,582         4.54
Tax-exempt (2)                     186,813         2,377         5.09         228,319         3,129         5.48
Tax-preferred (2)                      846             7         3.17          33,192           799         9.52

Total investment securities        601,199         6,817         4.54         753,823         9,510         5.04

Loans held for sale                  2,483            30         4.88             587             9         6.42

Loans:
Commercial                         165,688         1,919         4.70         138,016         2,452         7.15
Commercial real estate             268,749         4,204         6.34         247,557         4,327         7.03
Agricultural                        42,690           597         5.68          45,372           904         8.02
Residential real estate            174,659         2,659         6.09         166,682         2,668         6.40
Consumer indirect                  267,360         4,559         6.92         137,756         2,389         6.98
Consumer direct and home
equity                             221,024         3,091         5.67         229,035         3,979         6.99

Total loans                      1,140,170        17,029         6.04         964,418        16,719         6.97

Total interest-earning
assets                           1,787,470        23,903         5.39       1,759,635        26,548         6.05

Allowance for loan losses          (19,200 )                                  (15,530 )
Other noninterest-earning
assets                             195,494                                    146,769


Total assets                   $ 1,963,764                                $ 1,890,874


Interest-bearing
liabilities:
Deposits:
Interest-bearing demand        $   360,470     $     224         0.25 %   $   345,102     $   1,117         1.30 %
Savings and money market           371,738           251         0.27         361,425         1,324         1.47
Certificates of deposit            668,041         4,540         2.76         633,599         6,795         4.31

Total interest-bearing
deposits                         1,400,249         5,015         1.45       1,340,126         9,236         2.77
Short-term borrowings               24,264            38         0.64          26,814           152         2.28
Long-term borrowings                47,099           713         6.06          42,521           799         7.52

Total interest-bearing
liabilities                      1,471,612         5,766         1.59       1,409,461        10,187         2.91

Noninterest-bearing demand
deposits                           281,690                                    267,322
Other noninterest-bearing
liabilities                         19,075                                     16,517
Shareholders' equity               191,387                                    197,574

Total liabilities and
shareholders' equity           $ 1,963,764                                $ 1,890,874

Net interest income
(tax-equivalent)                               $  18,137                                  $  16,361

Interest rate spread                                             3.80 %                                     3.14 %

Net earning assets             $   315,858                                $   350,174


Net interest margin
(tax-equivalent)                                                 4.09 %                                     3.73 %

Ratio of average
interest-earning assets to
average interest-bearing
liabilities                                                    121.46 %                                   124.84 %

(1) Investment securities are shown at amortized cost.

(2) The interest on tax-exempt and tax-preferred securities is calculated on a tax equivalent basis assuming a Federal tax rate of 34%.

The following table provides a reconciliation between tax equivalent net interest income as presented in the average balance sheets above and net interest income in the consolidated financial statements filed herewith in

Net interest income (tax equivalent) $ 18,137 $ 16,361 Less: tax-exempt tax equivalent adjustment 808 1,064 Less: tax-preferred tax equivalent adjustment 2 212

Net interest income $ 17,327 $ 15,085

The following table presents, on a tax equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated. The change in interest not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands):

                                                                 Three months ended
                                                              March 31, 2009 vs. 2008
                                                       Increase/ (Decrease)
                                                         Due to Change in             Total Net
                                                      Average          Average        Increase
                                                      Volume            Rate         (Decrease)
Interest-earning assets:
Federal funds sold and interest-earning deposits    $        20       $    (303 )    $      (283 )
Investment securities:
Taxable                                                    (856 )          (293 )         (1,149 )
Tax-exempt                                                 (540 )          (212 )           (752 )
Tax-preferred                                              (473 )          (319 )           (792 )

Total investment securities                              (1,796 )          (897 )         (2,693 )
Loans held for sale                                          23              (2 )             21
Loans:
Commercial                                                  429            (962 )           (533 )
Commercial real estate                                      353            (476 )           (123 )
Agricultural                                                (51 )          (256 )           (307 )
Residential real estate                                     125            (134 )             (9 )
Consumer indirect                                         2,211             (41 )          2,170
Consumer direct and home equity                            (135 )          (753 )           (888 )

Total loans                                               2,807          (2,497 )            310

Total interest-earning assets                               414          (3,059 )         (2,645 )


Interest-bearing liabilities:
Deposits:
Interest-bearing demand                                      48            (941 )           (893 )
Savings and money market                                     37          (1,110 )         (1,073 )
Certificates of deposit                                     352          (2,607 )         (2,255 )

Total interest-bearing deposits                             397          (4,618 )         (4,221 )
Short-term borrowings                                       (13 )          (101 )           (114 )
Long-term borrowings                                         80            (166 )            (86 )

Total interest-bearing liabilities                          431          (4,852 )         (4,421 )


Change in net interest income                       $       (17 )     $   1,793      $     1,776

Provision for Loan Losses
The provision for loan losses is based upon credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the current loan portfolio. The provision for loan losses for the first quarter of 2009 was $1.9 million, compared to $716 thousand for the same period in 2008. See "Non-Performing Assets and Allowance for Loan Losses" included herein for additional information. Noninterest Income
The following table details the major categories of noninterest income for the periods presented (in thousands):

                                                        Three months ended
                                                             March 31,
                                                         2009          2008
        Noninterest income:
        Service charges on deposits                   $    2,320      $ 2,500
        ATM and debit card                                   811          752
        Broker-dealer fees and commissions                   269          459
        Loan servicing                                       257          186
        Company owned life insurance                         260           19
        Net gain on sale of loans held for sale              170          164
        Net gain on sale of other assets                     158           37
        Net gain on investment securities                     54          173
        Impairment charges on investment securities          (50 )          -
        Other                                                442          454

        Total noninterest income                      $    4,691      $ 4,744

The components of noninterest income fluctuated as discussed below.
Service charges on deposits were down 7% in the first quarter of 2009 versus the first quarter a year ago. The decline is due to lower non-sufficient funds fees collected.
Automated Teller Machine ("ATM") and debit card income, which represents fees for foreign ATM usage and income associated with customer debit card purchases, was up $59 thousand for the three months ended March 31, 2009 versus the same period in 2008. ATM and debit card income increases as transaction volumes increase.
Broker-dealer fees and commissions were down $190 thousand or 41% in the first quarter of 2009 compared to the same quarter a year ago. Broker-dealer fees and commissions fluctuate mainly due to sales volume, which has declined recently as a result of current economic conditions.
The Company invested $20.0 million in company owned life insurance during the third quarter of 2008, resulted in the $241 thousand increase in income during the first quarter of 2009 compared to the prior year's comparable quarter. Included in the $158 thousand gain on sale of other assets for the quarter ended March 31, 2009 is a gain on the sale of a foreclosed commercial property which accounted for the increase over the first quarter of last year. The commercial property was included in other assets as real estate owned at December 31, 2008. The $54 thousand gain on sale of investment securities for the three months ended March 31, 2009 is net of gross realized losses totaling $361 thousand, of which $242 thousand related to the Company's liquidation of its auction rate preferred equity securities collateralized by Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock.
Based upon our on-going review of our available for sale securities portfolio, the Company recorded an impairment charge of $50 thousand during first quarter of 2009 relating to a single debt security deemed to be other-than-temporarily impaired.

. . .