UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2010

Commission File Number 0-16759

FIRST FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

INDIANA		35-1546989
(State or other jurisdiction incorporation or organization)		(I.R.S. Employer Identification No.)
One First Financial Plaza, Terre Haute, IN		47807
(Address of principal executive office)		(Zip Code)

(812)238-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ.

As of August 5, 2010, the registrant had outstanding 13,106,630 shares of common stock, without par value.

 

 

FIRST FINANCIAL CORPORATION

FORM 10-Q

INDEX

		Page No.
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets			3
Consolidated Statements of Income			4
Consolidated Statements of Shareholders’ Equity			5
Consolidated Statements of Cash Flows			7
Notes to Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures about Market Risk			16
Item 4. Controls and Procedures			19
PART II. Other Information:
Item 1. Legal Proceedings			19
Item 1A. Risk Factors			19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			20
Item 3. Defaults upon Senior Securities			20
Item 4. Submission of Matters to a Vote of Security Holders			20
Item 5. Other Information			20
Item 6. Exhibits			20
Signatures			21
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

Part I – Financial Information

Item 1. Financial Statements

FIRST FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

		June 30,				December 31,
		2010				2009
		(Unaudited)
ASSETS
Cash and due from banks		$	60,302			$	84,371
Federal funds sold and short-term investments			24,930				21,576
Securities available-for-sale			600,986				587,246
Loans:
Commercial, financial and agricultural			591,493				558,211
Real estate – construction			25,182				27,231
Real estate – mortgage			720,587				729,668
Installment			313,112				314,417
Lease financing			2,314				2,313
			1,652,688				1,631,840
Less:
Unearned Income			(69	)			(76	)
Allowance for loan losses			(19,915	)			(19,437	)
			1,632,704				1,612,327
Restricted Stock			27,835				27,835
Accrued interest receivable			10,959				12,005
Premises and equipment, net			35,079				35,551
Bank-owned life insurance			65,008				64,057
Goodwill			7,102				7,102
Other intangible assets			4,178				4,916
Other real estate owned			5,397				5,885
FDIC Indimnification Asset			4,873				12,124
Other assets			49,716				43,727
TOTAL ASSETS		$	2,529,069			$	2,518,722
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	357,706			$	312,990
Interest-bearing:
Certificates of deposit of $100 or more			253,620				238,830
Other interest-bearing deposits			1,269,872				1,237,881
			1,881,198				1,789,701
Short-term borrowings			36,917				30,436
Other borrowings			223,237				332,737
Other liabilities			68,531				59,365
TOTAL LIABILITIES			2,209,883				2,212,239
Shareholders’ equity
Common stock, $.125 stated value per share; Authorized shares-40,000,000 Issued shares-14,450,966 Outstanding shares-13,109,130 in 2010 and 13,129,630 in 2009			1,806				1,806
Additional paid-in capital			68,739				68,739
Retained earnings			284,724				277,357
Accumulated other comprehensive income (loss)			(2,024	)			(7,904	)
Treasury shares at cost-1,341,836 in 2010 and 1,321,336 in 2009			(34,059	)			(33,515	)
TOTAL SHAREHOLDERS’ EQUITY			319,186				306,483
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	2,529,069			$	2,518,722

See accompanying notes.

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
INTEREST INCOME:
Loans, including related fees		$	24,032			$	22,730			$	48,052			$	45,637
Securities:
Taxable			4,842				5,819				9,850				11,987
Tax-exempt			1,676				1,648				3,302				3,289
Other			430				461				968				931
TOTAL INTEREST INCOME			30,980				30,658				62,172				61,844
INTEREST EXPENSE:
Deposits			4,259				5,573				8,657				11,777
Short-term borrowings			80				137				170				280
Other borrowings			2,560				4,372				5,983				8,748
TOTAL INTEREST EXPENSE			6,899				10,082				14,810				20,805
NET INTEREST INCOME			24,081				20,576				47,362				41,039
Provision for loan losses			2,190				2,860				4,620				5,690
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES			21,891				17,716				42,742				35,349
NON-INTEREST INCOME:
Trust and financial services			1,197				932				2,456				1,946
Service charges and fees on deposit accounts			2,670				2,767				5,072				5,264
Other service charges and fees			1,938				1,652				3,759				3,184
Securities gains/(losses), net			0				2				245				2
Total Impairment Losses			(71	)			(3,783	)			(3,170	)			(7,408	)
Loss recognized in other comprehensive loss			0				2,197				—				2,843
Net impairment loss recognized in earnings			(71	)			(1,586	)			(3,170	)			(4,565	)
Insurance commissions			1,582				1,577				3,252				3,016
Gain on sales of mortgage loans			399				608				671				1,184
Other			157				177				601				844
TOTAL NON-INTEREST INCOME			7,872				6,129				12,886				10,875
NON-INTEREST EXPENSE:
Salaries and employee benefits			10,678				10,014				21,508				20,194
Occupancy expense			1,151				1,027				2,402				2,119
Equipment expense			1,205				1,109				2,421				2,230
FDIC Expense			727				1,601				1,429				1,907
Other			4,939				4,251				9,221				8,249
TOTAL NON-INTEREST EXPENSE			18,700				18,002				36,981				34,699
INCOME BEFORE INCOME TAXES			11,063				5,843				18,647				11,525
Provision for income taxes			3,350				1,222				5,248				2,374
NET INCOME		$	7,713			$	4,621			$	13,399			$	9,151
PER SHARE DATA
Basic and Diluted		$	0.59			$	0.35			$	1.02			$	0.70
Dividends Per Share		$	0.46			$	0.45			$	0.46			$	0.45
Weighted average number of shares outstanding (in thousands)			13,112				13,117				13,116				13,117

See accompanying notes.

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Months Ended

June 30, 2010, and 2009

(Dollar amounts in thousands, except per share data)

(Unaudited)

														Accumulated
														Other
		Common				Additional				Retained				Comprehensive				Treasury
		Stock				Capital				Earnings				Income/(Loss)				Stock				Total
Balance, April 1, 2010		$	1,806			$	68,739			$	283,043			$	(3,526	)		$	(33,966	)		$	316,096
Comprehensive income:
Net income			—				—				7,713				—				—				7,713
Change in net unrealized gains/(losses) on securities available for-sale			—				—				—				1,224				—				1,224
Change in unrealized gains(losses) on securities available-for-sale for which a portion of an other-than-temporary -impairment has been recognized in earnings, net of tax			—				—				—				100				—				100
Change in net unrealized gains/ (losses) on retirement plans			—				—				—				178				—				178
Total comprehensive income/(loss)																							9,215
Cash Dividends, $.46 per share			—				—				(6,032	)			—				—				(6,032	)
Treasury stock purchase (3,500 shares)			—				—				—				—				(93	)			(93	)
Balance, June 30, 2010		$	1,806			$	68,739			$	284,724			$	(2,024	)		$	(34,059	)		$	319,186
Balance, April 1, 2009		$	1,806			$	68,654			$	267,645			$	(8,403	)		$	(33,785	)		$	295,917
Comprehensive income:
Net income			—				—				4,621				—				—				4,621
Change in net unrealized gains/(losses) on securities available for-sale			—				—				—				(55	)			—				(55	)
Change in unrealized gains(losses) on securities available-for-sale for which a portion of an other-than-temporary -impairment has been recognized in earnings, net of tax			—				—				—				(2,014	)			—				(2,014	)
Change in net unrealized gains/ (losses) on retirement plans			—				—				—				91				—				91
Total comprehensive income/(loss)																							2,643
Cumulative Effect of change in accounting principle, adoption of FSP ASC 320-10-65, net of tax			—				—				3,333				(3,333	)			—				—
Cash Dividends, $.45 per share			—				—				(5,903	)			—				—				(5,903	)
Balance, June 30, 2009		$	1,806			$	68,654			$	269,696			$	(13,714	)		$	(33,785	)		$	292,657

See accompanying notes.

FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Six Months Ended
June 30, 2010, and 2009
(Dollar amounts in thousands, except per share data)
(Unaudited)

														Accumulated
														Other
		Common				Additional				Retained				Comprehensive				Treasury
		Stock				Capital				Earnings				Income/(Loss)				Stock				Total
Balance, January 1, 2010		$	1,806			$	68,739			$	277,357			$	(7,904	)		$	(33,515	)		$	306,483
Comprehensive income:
Net income			—				—				13,399				—				—				13,399
Change in net unrealized gains/(losses) on securities available for-sale			—				—				—				3,508				—				3,508
Change in unrealized gains(losses) on securities available-for-sale for which a portion of an other-than-temporary -impairment has been recognized in earnings, net of tax			—				—				—				2,016				—				2,016
Change in net unrealized gains/ (losses) on retirement plans			—				—				—				356				—				356
Total comprehensive income/(loss)																							19,279
Cash Dividends, $.46 per share			—				—				(6,032	)			—				—				(6,032	)
Treasury stock purchase (20,500 shares)			—				—				—				—				(544	)			(544	)
Balance, June 30, 2010		$	1,806			$	68,739			$	284,724			$	(2,024	)		$	(34,059	)		$	319,186
Balance, January 1, 2009		$	1,806			$	68,654			$	263,115			$	(12,946	)		$	(33,785	)		$	286,844
Comprehensive income:
Net income			—				—				9,151				—				—				9,151
Change in net unrealized gains/(losses) on securities available for-sale			—				—				—				4,591				—				4,591
Change in unrealized gains(losses) on securities available-for-sale for which a portion of an other-than-temporary -impairment has been recognized in earnings, net of tax			—				—				—				(2,208	)			—				(2,208	)
Change in net unrealized gains/ (losses) on retirement plans			—				—				—				182				—				182
Total comprehensive income/(loss)																							11,716
Cumulative Effect of change in accounting principle, adoption of FSP ASC 320-10-65, net of tax			—				—				3,333				(3,333	)			—				—
Cash Dividends, $.45 per share			—				—				(5,903	)			—				—				(5,903	)
Balance, June 30, 2009		$	1,806			$	68,654			$	269,696			$	(13,714	)		$	(33,785	)		$	292,657

See accompanying notes.

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands, except per share data)

		Six Months Ended
		June 30,
		2010				2009
		(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	13,399			$	9,151
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization (accretion) of premiums and discounts on investments			(610	)			(1,501	)
Provision for loan losses			4,620				5,690
Securities (gains) losses			(245	)			(2	)
Securities impairment loss			3,169				4,565
(Gain) loss on sale of other real estate			59				36
Depreciation and amortization			2,384				1,821
Other, net			6,913				(5,281	)
NET CASH FROM OPERATING ACTIVITIES			29,689				14,479
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available-for-sale			7,250				—
Calls, maturities and principal reductions on securities available-for-sale			131,690				58,507
Purchases of securities available-for-sale			(145,791	)			(46,989	)
Loans made to customers, net of repayment			(25,815	)			(79,917	)
Proceeds from sales of other real estate owned			1,495				1,483
Net change in federal funds sold			(3,354	)			4,030
Additions to premises and equipment			(1,174	)			(1,192	)
NET CASH FROM INVESTING ACTIVITIES			(35,699	)			(64,078	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits			91,412				21,128
Net change in short-term borrowings			6,481				74,069
Dividends paid			(5,908	)			(5,903	)
Purchase of treasury stock			(544	)			—
Proceeds from other borrowings			2,000				70,000
Repayments on other borrowings			(111,500	)			(122,329	)
NET CASH FROM FINANCING ACTIVITIES			(18,059	)			36,965
NET CHANGE IN CASH AND CASH EQUIVALENTS			(24,069	)			(12,634	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			84,371				67,298
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	60,302			$	54,664

See accompanying notes.

FIRST FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying June 30, 2010 and 2009 consolidated financial statements are unaudited. The December 31, 2009 consolidated financial statements are as reported in the First Financial Corporation (the “Corporation”) 2009 annual report. The information presented does not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The following notes should be read together with notes to the consolidated financial statements included in the 2009 annual report filed with the Securities and Exchange Commission as an exhibit to Form 10-K filed for the fiscal year ended December 31, 2009.

1. Significant Accounting Policies

The significant accounting policies followed by the Corporation and its subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are, in the opinion of management, necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated financial statements and are of a normal recurring nature. The Corporation reports financial information for only one segment, banking. Some items in the prior year financials were reclassified to conform to the current presentation.

2. Allowance for Loan Losses

The activity in the Corporation’s allowance for loan losses is shown in the following analysis:

		June 30,
(Dollar amounts in thousands)		2010				2009
Balance at beginning of year		$	19,437			$	16,280
Provision for loan losses			4,620				5,690
Recoveries of loans previously charged off			2,652				1,087
Loans charged off			(6,794	)			(6,020	)
BALANCE AT END OF PERIOD		$	19,915			$	17,037

A loan is considered to be impaired when, based upon current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan. Large groups of smaller balance homogeneous loans, such as consumer, residential real estate and even smaller balance commercial loans, are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Also included in impaired loans are loans acquired in the First National Bank of Danville acquisition. See Note 9 for further discussion of these loans. Impairment is primarily measured based on the fair value of the loan’s collateral. The following table summarizes impaired loan information:

		(000’s)
		June 30,				December 31,
		2010				2009
Impaired Loans with allocated allowance for loan losses		$	17,603			$	19,330
Impaired Loans with no allocated allowance for loan losses			6,715				5,344
		$	24,318			$	24,674
Amount of allowance allocated to impaired loans		$	5,972			$	5,438

Interest payments on impaired loans are typically applied to principal unless collection of the principal amount is deemed to be fully assured, in which case interest is recognized on a cash basis.

3. Securities

The amortized cost and fair value of the Corporation’s investments are shown below. All securities are classified as available-for-sale.

		(000’s)
		June 30, 2010
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
U.S. Government sponcored entities and entity mortgage-backed securities		$	4,050			$	68			$	0			$	4,118
Mortgage Backed Securities — Residential			305,265				18,213				—			$	323,478
Mortgage Backed Securities — Commercial			150				4				—			$	154
Collateralized Mortgage Obligations			105,378				3,310				(5	)		$	108,683
State and Municipal Obligations			149,693				6,852				(183	)		$	156,362
Collateralized Debt Obligations			15,846				—				(13,715	)		$	2,131
Equity Securities			5,674				1,385				(999	)			6,060
		$	586,056			$	29,832			$	(14,902	)		$	600,986

		(000’s)
		December 31, 2009
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
U.S. Government sponcored entities and entity mortgage-backed securities		$	4,103			$	45			$	0			$	4,148
Mortgage Backed Securities — Residential			285,964				14,260				(40	)		$	300,184
Mortgage Backed Securities — Commercial			162				6				—			$	168
Collateralized Mortgage 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
Other Securities			7,004				257				(189	)		$	7,072
Equity Securities			5,668				1,462				(1,169	)			5,961
		$	581,523			$	25,290			$	(19,567	)		$	587,246

Contractual maturities of debt securities at June 30, 2010 were as follows. Securities not due at a single maturity or with no maturity date, primarily mortgage-backed and equity securities, are shown separately.

		Amortized				Fair
(Dollar amounts in thousands)		Cost				Value
Due in one year or less		$	7,467			$	7,709
Due after one but within five years			38,969				40,897
Due after five but within ten years			41,427				43,682
Due after ten years			187,104				179,006
			274,967				271,294
Mortgage-backed securities and equities			311,089				329,692
TOTAL		$	586,056			$	600,986

There were $320 thousand in gains and $75 thousand in losses realized by the Corporation on investment sales for the six months ended June 30, 2010.

The following tables show the securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at June 30, 2010 and December 31, 2009.

		June 30, 2010
		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
Collateralized mortgage obligations		$	6,073			$	(5	)		$	—			$	—			$	6,073			$	(5	)
State and municipal obligations			5,198				(89	)			2,880				(94	)			8,078				(183	)
Collateralized Debt Obligations			—				—				2,131				(13,715	)			2,131				(13,715	)
Equities			382				(41	)			1,880				(958	)			2,262				(999	)
Total temporarily impaired securities		$	11,653			$	(135	)		$	6,891			$	(14,767	)		$	18,544			$	(14,902	)

		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	)
Other Securities			—				—				811				(189	)			811				(189	)
Equities			543				(280	)			1,150				(889	)			1,693				(1,169	)
Total temporarily impaired securities		$	20,216			$	(463	)		$	8,265			$	(19,104	)		$	28,481			$	(19,567	)

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly 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 two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under FASB ASC 320, Investments — Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB ASC 325-40, Beneficial Interests in Securitized Financial 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) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The second segment of the portfolio uses the OTTI guidance provided by FASB ASC 325 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the FASB ASC 325 model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell 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 security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

Gross unrealized losses on investment securities were $14.9 million as of June 30, 2010 and $19.6 million as of December 31, 2009. A majority of these losses represent negative adjustments to market value relative to the rate of interest paid on the securities and not losses related to the creditworthiness of the issuer. Unrealized losses on equity securities relate to investments in bank stocks held at the holding company. Bank stock values have been negatively impacted by the current economic environment and market pessimism. The largest part of this unrealized loss ($525 or 53%) relates to the Corporations ownership of stock in Fifth Third Corporation. The stock price of this issuer has increased significantly from its low in February 2009. Although the June 30, 2010 price was below that of March 31, 2010, the stock traded higher than the first quarter closing price for much of the quarter. Based upon the continued positive price momentum and our review of current projected financial performance of the issuers, we do not believe these investments to be other than temporarily impaired as of June 30, 2010. Further management does not intend to sell these securities and it is not more likely than not that we will be required to sell them before their anticipated recovery.

A significant portion of the total unrealized loss in investment securities relates to collateralized debt obligations that were separately evaluated under FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets. Based upon qualitative considerations, such as a down grade in credit rating or further defaults of underlying issuers during the quarter, and an analysis of expected cash flows, we determined that two CDO’s included in collateralized debt obligations were other-than-temporarily impaired and wrote our investments in those CDO’s totaling $1.44 million down to their present value of expected cash flows through earnings of $1.37 million at June 30, 2010 to properly reflect credit losses associated those CDO’s. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies. The Company uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to ensure there are no

adverse changes in cash flows during the quarter. Two of the CDO’s included in collateralized debt obligations did not have any adverse change in the projected cash flows during the quarter. In the first quarter of 2010 our analysis of expected cash flows determined that four CDO’s included in collateralized debt obligations were other-than-temporarily impaired and wrote our investments in those CDO’s totaling $16.95 million down to their present value of expected cash flows through earnings of $13.75 million at March 31, 2010. The second quarter activity, which includes interest payments applied to principal on the two CDO’s that did not experience additional impairment, brings the present value of expected cash flows through earnings of all four CDO’s to $13.58 million at June 30, 2010. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. Cash flows are projected using a forward rate LIBOR curve, as these CDOs are variable rate instruments. An average rate is then computed using this same forward rate curve to determine an appropriate discount rate (3 month LIBOR plus margin ranging from 160 to 180 basis points). The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and treat all interest payment deferrals as defaults. In addition we use the model to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Company’s note class.

Collateralized debt obligations include an additional investment in a CDO consisting of pooled trust preferred securities in which the issuers are primarily banks. This CDO with an amortized cost of $2.3 million and a fair value of $1.5 million is rated BAA1 and is the senior tranche, is not in the scope of FASB ASC 325 and is not considered to be other-than-temporarily impaired based on its credit quality.

Management has consistently used Standard & Poors pricing to value these investments. There are a number of other pricing sources available to determine fair value for these investments. These sources utilize a variety of methods to determine fair value. The result is a wide range of estimates of fair value for these securities. The Standard & Poors pricing ranges from .53 to 8.01 while Moody Investor Service pricing ranges from 3.77 to 46.00, with others falling somewhere in between. 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.

The table below presents a rollforward of the credit losses recognized in earnings for the three and six month periods ended June 30, 2010 and 2009:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Beginning balance		$	14,458			$	9,124			$	11,359			$	6,145
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized						$	1,192							$	1,485
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized			71				5,950				3,170				8,636
Adoption of new accounting guidance on OTTI							(5,556	)							(5,556	)
Ending balance, June 30, 2010		$	14,529			$	10,710			$	14,529			$	10,710

4. Fair Value

FASB ASC No. 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

	Level 1:		Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
	Level 2:		Significant other observable inputs other than Level I prices such as quoted 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 assumptions about 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 on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

For those securities that cannot be priced using quoted market prices or observable inputs a Level 3 valuation is determined. These securities are primarily trust preferred securities, which are priced using Level 3 due to current market illiquidity and certain investments in bank equities. The fair value of the trust preferred securities is computed based upon discounted cash flows estimated using interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation to the note classes. Current estimates of expected cash flows are based on the most recent trustee reports and any other relevant market information, including announcements of interest payment deferrals or defaults of underlying issuers. The payment, default and recovery assumptions are believed to reflect the assumptions of market participants. Cash flows are discounted at appropriate market rates, including consideration of credit spreads and illiquidity discounts. The fair value of investments in bank equities is based on the prices of recent stock trades and is considered Level 3 because these stocks are not publicly traded.

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs).

		June 30, 2010
		Fair Value Measurements Using Significant
		Unobservable Inputs (Level 3)
(Dollar amounts in thousands)		Level 1				Level 2				Level 3				Carrying Value
U.S. Government sponcored entities and entity mortgage-backed securities		$	0			$	4,118			$	0			$	4,118
Mortgage Backed Securities-residential			—				323,478				—				323,478
Mortgage Backed Securities-commercial			—			$	154				—				154
Collateralized mortgage obligations			—				108,683				—				108,683
State and municipal			—				156,362				—				156,362
Collateralized debt obligations			—				—				2,131				2,131
Equities			2,728				—				3,332				6,060
TOTAL		$	2,728			$	592,795			$	5,463			$	600,986
Derivitive Assets							1,751
Derivitive Liabilities							(1,751	)

		December 31, 2009
		Fair Value Measurements Using Significant
		Unobservable Inputs (Level 3)
(Dollar amounts in thousands)		Level 1				Level 2				Level 3				Carrying Value
U.S. Government sponcored entities and entity mortgage-backed securities		$	0			$	4,148			$	0			$	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			—				148,733				—				148,733
Collateralized debt obligations			—				0				1,416				1,416
Other Securities			—				7,072				—				7,072
Equities			2,600				0				3,361				5,961
TOTAL		$	2,600			$	579,869			$	4,777			$	587,246
Derivitive Assets							889
Derivitive Liabilities							(889	)

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2010 and 2009.

		(000’s)
		Fair Value Measurements Using Significant
		Unobservable Inputs (Level 3)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Beginning Balance		$	5,484			$	7,161			$	4,777			$	7,994
Total realized/unrealized gains or losses
Included in earnings			(70	)			(1,586	)			(3,169	)			(4,565	)
Included in other comprehensive income			149				1,104				4,057				3,302
Settlements			(100	)			—				(202	)			(52	)
Transfers into Level 3			—				—				—				—
Ending Balance		$	5,463			$	6,679			$	5,463			$	6,679

Changes in unrealized gains and losses recorded in earnings for the three and six months ended June 30, 2010 for Level 3 assets and liabilities that are still held at June 30, 2010 were approximately $70 thousand and $3.2 million, respectively.

All impaired loans disclosed in footnote 2 are valued at Level 3 and are carried at a fair value of $18.3 million, net of a valuation allowance of $6.0 million at June 30, 2010. At December 31, 2009 impaired loans valued at Level 3 were carried at a fair value of $19.3 million, net of a valuation allowance of $5.4 million. The impact to the provision for loan losses was $534 thousand for the six months ended June 30, 2010, and was $1.7 million for the year ended December 31, 2009. Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods. Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value on non real estate loans is determined using similar methods. In addition, business equipment may be valued by using the net book value from the business’ financial statements.

The carrying amounts and estimated fair value of financial instruments at June 30, 2010 and December 31, 2009, are shown below. Carrying amount is the estimated fair value for cash and due from banks, federal funds sold, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt and variable-rate loans or deposits that reprice frequently and fully. Security fair values were described previously. For fixed-rate loans or deposits, variable rate loans or deposits with infrequent repricing or repricing limits, and for longer-term borrowings, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values of loans held for sale are based on market bids on the loans or similar loans. It was not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is not considered material.

The carrying amount and estimated fair value of financial instruments are presented in the table below and were determined based on the above assumptions:

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
(Dollar amounts in thousands)		Value				Value				Value				Value
Cash and due from banks			60,302				60,302				84,371				84,371
Federal funds sold			24,930				24,930				21,576				21,576
Securities available-for-sale			600,986				600,986				587,246				587,246
Federal Home Loan Bank stock			26,181				N/A				26,181				N/A
Loans, net			1,632,704				1,630,321				1,612,237				1,604,412
Accrued interest receivable			10,959				10,959				12,005				12,005
Deposits			(1,881,198	)			(1,888,562	)			(1,789,701	)			(1,798,059	)
Short-term borrowings			(36,917	)			(36,917	)			(30,436	)			(30,436	)
Federal Home Loan Bank advances			(216,637	)			(223,768	)			(326,137	)			(337,847	)
Other borrowings			(6,600	)			(6,600	)			(6,600	)			(6,600	)
Accrued interest payable			(2,358	)			(2,358	)			(3,127	)			(3,127	)

5. Short-Term Borrowings

Period-end short-term borrowings were comprised of the following:

		(000’s)
		June 30,				December 31,
		2010				2009
Federal Funds Purchased		$	6,158			$	5,754
Repurchase Agreements			29,166				22,578
Note Payable — U.S. Government			1,593				2,104
		$	36,917			$	30,436

6. Other Borrowings

Other borrowings at period-end are summarized as follows:

		(000’s)
		June 30,				December 31,
		2010				2009
FHLB Advances		$	216,637			$	326,137
City of Terre Haute, Indiana economic development revenue bonds			6,600				6,600
		$	223,237			$	332,737

7. Components of Net Periodic Benefit Cost

		Three Months Ended June 30,																Six Months Ended June 30,
		(000’s)																(000’s)
										Post-Retirement																Post-Retirement
		Pension Benefits								Health Benefits								Pension Benefits								Health Benefits
		2010				2009				2010				2009				2010				2009				2010				2009
Service cost		$	773			$	768			$	16			$	27			$	1,546			$	1,536			$	33			$	55
Interest cost			828				693				55				60				1,657				1,387				109				120
Expected return on plan assets			(850	)			(911	)			—				—				(1,700	)			(1,822	)			—				—
Amortization of transition obligation			—				—				15				15				—				—				30				30
Net amortization of prior service cost			(4	)			(5	)			—				—				(9	)			(9	)			—				—
Net amortization of net (gain) loss			245				116				3				—				491				231				6				—
Net Periodic Benefit Cost		$	992			$	661			$	89			$	102			$	1,985			$	1,323			$	178			$	205

Employer Contributions

First Financial Corporation previously disclosed in its financial statements for the year ended December 31, 2009 that it expected to contribute $1.6 and $1.2 million respectively to its Pension Plan and ESOP and $185,000 to the Post Retirement Health Benefits Plan in 2010. Contributions of $332 thousand have been made through the first six months of 2010 for the Pension Plan. Contributions of $103 thousand have been made through the first six months of 2010 for the Post Retirement Health Benefits plan.

8. New accounting standards

In April 2010, the FASB issued ASU No. 2010-18, “Receivables (Topic 310)-Effect of a Loan Modification When the Loan Is Part of a Pool That is Accounted for as a Single Asset”. This ASU clarifies that modifications of loans that are accounted for within a pool under Topic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. No additional disclosures are required with this ASU. The amendments in this ASU are effective for modifications of loans accounted for within pools under Topic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively and early application is permitted. Upon initial adoption of the guidance in this ASU, an entity may make a onetime election to terminate accounting for loans as a pool under Topic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The Corporation has evaluated the impact of adoption and does not expect the ASU will have a material impact on the Corporation’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 will improve transparency in financial reporting for companies that hold financing receivables, which include loans, lease receivables and other long-term receivables. The additional disclosures required by ASU 2010-20 are effective for interim and annual reporting periods ending on or after December 15, 2010. The ASU has not yet been adopted and is not expected to have a material impact on our company’s financial position, cash flows or results of operations.

9. Acquisitions

On July 2, 2009, the Bank entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to assume all of the deposits (excluding brokered deposits) and certain assets of The First National Bank of Danville., a full service commercial bank headquartered in Danville, Illinois that had failed and been placed in receivership with the FDIC. The acquisition consisted of assets with a fair value of approximately $151.8 million, including $77.5 million of loans, $24.2 million of investment securities, $31.0 million of cash and cash equivalents, and $146.3 million in liabilities, including $145.7 million of deposits. A customer-related core deposit intangible asset of $4.6 million was also recorded. In addition to the excess of liabilities over assets, the Bank received approximately $14.6 million in cash from the FDIC and entered into a loss sharing agreement with the FDIC. Under the loss sharing agreement, the Bank will share in the losses on assets covered under the agreement (referred to as covered assets). On losses up to $29 million, the FDIC has agreed to reimburse the Bank for 80 percent of the losses. On losses exceeding $29 million, the FDIC has agreed to reimburse the bank for 95 percent of the losses. The loss sharing agreement is subject to following servicing procedures as specified in the agreement with the FDIC. The expected reimbursements under the loss sharing agreement were recorded as an indemnification asset at their estimated fair value of $12.1 million on the acquisition date. At June 30, 2010 the indemnification asset was $4.9 million. The decrease in this balance since acquisition date is due to reimbursement received from the FDIC on losses incurred. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded. The transaction resulted in a gain of $5.1 million, which was included in Non-Interest Income in the 2009 Consolidated Statement of Operations. Pro forma income statement information is not disclosed as the acquisition is immaterial to the Corporation.

FASB ASC 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” applies to a loan with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. FASB ASC 310-10 prohibits carrying over or creating an allowance for loan losses upon initial recognition. The carrying amount of covered assets at June 30, 2010, consisted of loans accounted for in accordance with FASB ASC 310-30, loans not subject to FASB ASC 310-30 and other assets as shown in the following table:

		June 30, 2010
		ASC 310-30				Non ASC 310-30
		Loans				Loans				Other				Total
Loans		$	14,139			$	39,388			$	—			$	53,527
Foreclosed Assets			—				—				1,163				1,163
Total Covered Assets		$	14,139			$	39,388			$	1,163			$	54,690