The purpose of this discussion is to point out key factors in the Corporation's recent performance compared with earlier periods. The discussion should be read in conjunction with the financial statements beginning on page three of this report. All figures are for the consolidated entities. It is presumed the readers of these financial statements and of the following narrative have previously read the Corporation's annual report for 2008 filed as an exhibit to the Corporation's 10-K filed for the fiscal year ended December 31, 2008.

This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date. The forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, the Corporation's ability to effectively execute its business plans; changes in general economic and financial market conditions; changes in interest rates; changes in the competitive environment; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or legislative requirements affecting the Corporation's business; and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements is available in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2008, and subsequent filings with the United States Securities and Exchange Commission (SEC). Copies of these filings are available at no cost on the SEC's Web site at www.sec.gov or on the Corporation's Web site at www.first-online.com. Management may elect to update forward-looking statements at some future point; however, it specifically disclaims any obligation to do so.

Certain of the Corporation's accounting policies are important to the portrayal of the Corporation's financial condition and results of operations, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and the valuation of goodwill and valuing investment securities. See further discussion of these critical accounting policies in the 2008 Annual Report on Form 10-K.

Net income for the three and nine months ended September 30, 2009 was $7.72 and $16.87 million respectively compared to $3.50 and $17.60 million for the same period of 2008. Basic earnings per share increased to $0.59 for the third quarter of 2009 compared to $0.27 for same period of 2008. Return on Assets and Return on Equity were 1.26% and 10.25% respectively for the three months ended September 30, 2009, compared to 0.61%and 4.94% for the three months ended September 30, 2008.

The primary components of income and expense affecting net income are discussed in the following analysis.

Net Interest Income

The Corporation's primary source of earnings is net interest income, which is the difference between the interest earned on loans and other investments and the interest paid for deposits and other sources of funds. Net interest income increased $1.76 million in the three months ended September 30, 2009 to $22.9 million from $21.1 million in the same period in 2008. The net interest margin for the first nine months of 2009 is 4.11% compared to 4.02% for the same period of 2008, a 2.2% increase, driven by a greater decline in the costs of funding than the decline in the income realized on earning assets.

Non-Interest Income

Non-interest income for the three months ended September 30, 2009 was $10.3 million compared to the $1.4 million for the same period of 2008. During the quarter a gain on acquisition of business of $5.4 million was recognized as discussed in Note 9. Non-interest income was reduced by the other than temporary impairment loss on securities which was $2.8 million less in the three months ended September 30, 2009 than for the same period of 2008. Further discussion on OTTI is included in Note 3. Mortgage loan sales for the Corporation as a result of the lower interest rate environment has produced gains on sale of mortgage loans of $526 thousand, an increase of $342 thousand in the third quarter of 2009 compared to the same period of 2008.

Non-Interest Expenses

The Corporation's non-interest expense for the quarter ended September 30, 2009 increased by $2.0 million compared to the same periods in 2008 due to increased FDIC expenses of $633 thousand and increased personnel and occupancy costs of $700 thousand associated in part with the acquisition of the business unit discussed in Note 9.

Allowance for Loan Losses

The Corporation's provision for loan losses increased $3.51 million for 2009 compared to the same period of 2008. The provision was $9.38 million for the nine months ended September 30, 2009, compared to $5.88 million for the same period of 2008, while net charge-offs for the same periods increased by $1.45 million. The volume of impaired and non-accrual loans both increased reflecting management's conservative approach to the recognition of problem credits as well as from the acquisition of a failed financial institution from the FDIC. The specific allocation of probable losses for these credits increased by $2.4 million. The allowance for loan losses has increased from 1.12% of gross loans, or $16.3 million at December 31, 2008 to 1.16% of gross loans, or $18.8 million at September 30, 2009. Based on management's analysis of the current portfolio, an evaluation that includes consideration of historical loss experience, non-performing loans trends, and probable incurred losses on identified problem loans, management believes the allowance is adequate.

Non-performing Loans

Non-performing loans consist of (1) non-accrual loans on which the ultimate
collectability of the full amount of interest is uncertain, (2) loans which have
been renegotiated to provide for a reduction or deferral of interest or
principal because of a deterioration in the financial position of the borrower,
and (3) loans past due ninety days or more as to principal or interest. A
summary of non-performing loans at September 30, 2009 and December 31, 2008
follows:

                                                                        (000's)
                                                            September 30,       December 31,
                                                                2009                2008
Non-accrual loans                                          $        37,918     $       12,486
Restructured loans                                                     115                 98
Accruing loans past due over 90 days                                 7,809              3,624
                                                           $        45,842     $       16,208
Ratio of the allowance for loan losses as a percentage
of non-performing loans                                                 41 %              100 %

The following loan categories comprise significant components of the nonperforming loans:

                            September 30,       December 31,
                                2009                2008
Non-accrual loans
1-4 family residential     $         2,672     $        1,835
Commercial loans                    33,327              9,210
Installment loans                    1,919              1,441
                           $        37,918     $       12,486

Past due 90 days or more
1-4 family residential     $         1,450     $        1,495
Commercial loans                     5,846              1,582
Installment loans                      513                547
                           $         7,809     $        3,624

The following table is information on the non-accrual loans at September 30, 2009 that were from the assumption of assets from The First National Bank of

Danville

                             (000's)
                          September 30,
                              2009
Non-accrual loans
1-4 family residential   $           160
Commercial loans                   6,983
Installment loans                      -
                         $         7,143

Interest Rate Sensitivity and Liquidity

First Financial Corporation has established risk measures, limits and policy guidelines for managing interest rate risk and liquidity. Responsibility for management of these functions resides with the Asset Liability Committee. The primary goal of the Asset Liability Committee is to maximize net interest income within the interest rate risk limits approved by the Board of Directors.

Interest Rate Risk

Management considers interest rate risk to be the Corporation's most significant market risk. Interest rate risk is the exposure to changes in net interest income as a result of changes in interest rates. Consistency in the Corporation's net interest income is largely dependent on the effective management of this risk.

The Asset Liability position is measured using sophisticated risk management tools, including earning simulation and market value of equity sensitivity analysis. These tools allow management to quantify and monitor both short-term and long-term exposure to interest rate risk. Simulation modeling measures the effects of changes in interest rates, changes in the shape of the yield curve and the effects of embedded options on net interest income. This measure projects earnings in the various environments over the next three years. It is important to note that measures of interest rate risk have limitations and are dependent on various assumptions. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of interest rate fluctuations on net interest income. Actual results will differ from simulated results due to timing, frequency and amount of interest rate changes as well as overall market conditions. The Committee has performed a thorough analysis of these assumptions and believes them to be valid and theoretically sound. These assumptions are continuously monitored for behavioral changes.

The Corporation from time to time utilizes derivatives to manage interest rate risk. Management continuously evaluates the merits of such interest rate risk products but does not anticipate the use of such products to become a major part of the Corporation's risk management strategy.

The table below shows the Corporation's estimated sensitivity profile as of September 30, 2009. The change in interest rates assumes a parallel shift in interest rates of 100 and 200 basis points. Given a 100 basis point increase in rates, net interest income would decrease 0.10% over the next 12 months and increase 1.04% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would increase 0.55% over the next 12 months and increase 0.49% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this change.

Basis Point                Percentage Change in Net Interest Income
Interest Rate Change     12 months          24 months         36 months
Down 200                        1.03 %            0.95 %            0.96 %
Down 100                        0.55              0.49              0.50
Up 100                         -0.10              1.04              3.29
Up 200                         -1.09              0.87              5.31

Typical rate shock analysis does not reflect management's ability to react and thereby reduce the effect of rate changes, and represents a worst-case scenario.

Liquidity Risk
Liquidity is measured by each bank's ability to raise funds to meet the obligations of its customers, including deposit withdrawals and credit needs. This is accomplished primarily by maintaining sufficient liquid assets in the form of investment securities and core deposits. The Corporation has $12.7 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $152.6 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $19.6 million in securities to be called within the next 12 months. With these sources of funds, the Corporation currently anticipates adequate liquidity to meet the expected obligations of its customers.

Financial Condition

Comparing the third quarter of 2009 to the same period in 2008, loans, including credit card loans held-for-sale, net of unearned discount are up 10.01% or $149.2 million. Deposits are up $198.5 million at September 30, 2009, a 13.0% increase from the balances at the same time in 2008. Shareholders' equity increased $29.6 million from September 30, 2008. This financial performance increased book value per share 10.4% to $23.58 at September 30, 2009 from $21.35 at September 30, 2008. Book value per share is calculated by dividing the total shareholders' equity by the number of shares outstanding.

Capital Adequacy

As of September 30, 2009, the most recent notification from the respective regulatory agencies categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the bank's category. Below are the capital ratios for the Corporation and lead bank.

                                                      September 30,       December 31, 2008       To Be Well Capitalized

Total risk-based capital
Corporation                                                    16.29 %                 17.32 %                        N/A
First Financial Bank                                           16.03 %                 17.11 %                      10.00 %

Tier I risk-based capital
Corporation                                                    15.33 %                 16.40 %                        N/A
First Financial Bank                                           15.20 %                 16.34 %                       6.00 %

Tier I leverage capital
Corporation                                                    12.40 %                 12.72 %                        N/A
First Financial Bank                                           12.24 %                 12.64 %                       5.00 %