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

FIRST FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

INDIANA		35-1546989
(State or other jurisdiction		(I.R.S. Employer
incorporation or organization)		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 November 3, 2010, the registrant had outstanding 13,151,630 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			20
Item 1A. Risk Factors			20
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			21
Signatures			22
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)

		September 30,				December 31,
		2010				2009
		(Unaudited)
ASSETS
Cash and due from banks		$	63,151			$	84,371
Federal funds sold and short-term investments			77,980				21,576
Securities available-for-sale			594,476				587,246
Loans:
Commercial			881,741				870,977
Resisdential			443,630				447,379
Consumer			315,262				314,561
			1,640,633				1,632,917
Less:
Unearned Income			(979	)			(1,153	)
Allowance for loan losses			(19,974	)			(19,437	)
			1,619,680				1,612,327
Restricted Stock			27,835				27,835
Accrued interest receivable			11,769				12,005
Premises and equipment, net			34,519				35,551
Bank-owned life insurance			65,597				64,057
Goodwill			7,102				7,102
Other intangible assets			3,860				4,916
Other real estate owned			4,743				5,885
FDIC indemnification ssset			2,498				12,124
Other assets			48,933				43,727
TOTAL ASSETS		$	2,562,143			$	2,518,722
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	307,876			$	312,990
Interest-bearing:
Certificates of deposit of $100 or more			227,712				238,830
Other interest-bearing deposits			1,382,075				1,237,881
			1,917,663				1,789,701
Short-term borrowings			36,218				30,436
Other borrowings			219,160				332,737
Other liabilities			61,420				59,365
TOTAL LIABILITIES			2,234,461				2,212,239
Shareholders’ equity
Common stock, $.125 stated value per share;
Authorized shares-40,000,000
Issued shares-14,450,966
Outstanding shares-13,106,630 in 2010 and 13,116,630 in 2009			1,806				1,806
Additional paid-in capital			68,739				68,739
Retained earnings			291,017				277,357
Accumulated other comprehensive income (loss)			245				(7,904	)
Treasury shares at cost-1,344,336 in 2010 and 1,334,336 in 2009			(34,125	)			(33,515	)
TOTAL SHAREHOLDERS’ EQUITY			327,682				306,483
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	2,562,143			$	2,518,722

See accompanying notes.

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
INTEREST INCOME:
Loans, including related fees		$	24,355			$	24,332			$	72,407			$	69,969
Securities:
Taxable			4,544				5,712				14,394				17,699
Tax-exempt			1,680				1,672				4,982				4,961
Other			607				508				1,575				1,439
TOTAL INTEREST INCOME			31,186				32,224				93,358				94,068
INTEREST EXPENSE:
Deposits			3,932				5,012				12,589				16,789
Short-term borrowings			80				145				250				425
Other borrowings			2,521				4,200				8,504				12,948
TOTAL INTEREST EXPENSE			6,533				9,357				21,343				30,162
NET INTEREST INCOME			24,653				22,867				72,015				63,906
Provision for loan losses			2,390				3,690				7,010				9,380
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			22,263				19,177				65,005				54,526
NON-INTEREST INCOME:
Trust and financial services			1,077				1,174				3,533				3,120
Service charges and fees on deposit accounts			2,737				2,968				7,809				8,232
Other service charges and fees			2,027				1,871				5,786				5,055
Securities gains/(losses), net			28				—				273				2
Total Impairment Losses			(859	)			(3,806	)			(4,028	)			(9,116	)
Loss recognized in other comprehensive loss			—				484				—				1,229
Net impairment loss recognized in earnings			(859	)			(3,322	)			(4,028	)			(7,887	)
Insurance commissions			1,590				1,584				4,842				4,600
Gain on sales of mortgage loans			630				526				1,301				1,710
Gain on bargain purchase			—				5,409				—				5,409
Other			66				89				666				933
TOTAL NON-INTEREST INCOME			7,296				10,299				20,182				21,174
NON-INTEREST EXPENSE:
Salaries and employee benefits			12,046				10,619				33,554				30,813
Occupancy expense			1,374				1,171				3,776				3,290
Equipment expense			1,190				1,174				3,611				3,404
FDIC Insurance			757				692				2,186				2,599
Other			5,213				4,855				14,434				13,104
TOTAL NON-INTEREST EXPENSE			20,580				18,511				57,561				53,210
INCOME BEFORE INCOME TAXES			8,979				10,965				27,626				22,490
Provision for income taxes			2,686				3,246				7,934				5,620
NET INCOME		$	6,293			$	7,719			$	19,692			$	16,870
PER SHARE DATA
Basic and Diluted		$	0.48			$	0.59			$	1.50			$	1.29
Dividends Per Share			—				—			$	0.46			$	0.45
Weighted average number of shares outstanding (in thousands)			13,107				13,117				13,113				13,117

See accompanying notes.

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Months Ended

September 30, 2010, and 2009

(Dollar amounts in thousands, except per share data)

(Unaudited)

														Accoumulated
														Other
		Common				Additional				Retained				Comprehensive				Treasury
		Stock				Capital				Earnings				Income/(Loss)				Stock				Total
Balance, July 1, 2010		$	1,806			$	68,739			$	284,724			$	(2,024	)		$	(34,059	)		$	319,186
Comprehensive income:
Net income			—				—				6,293				—				—				6,293
Change in net unrealized gains/(losses) on securities available for-sale			—				—				—				1,836				—				1,836
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			—				—				—				255				—				255
Change in net unrealized gains/ (losses) on retirement plans			—				—				—				178				—				178
Total comprehensive income/(loss)																							8,562
Treasury stock purchase (2,500 shares)			—				—				—				—				(66	)			(66	)
Balance, September 30, 2010		$	1,806			$	68,739			$	291,017			$	245			$	(34,125	)		$	327,682
Balance, July 1, 2009		$	1,806			$	68,654			$	269,696			$	(13,714	)		$	(33,785	)		$	292,657
Comprehensive income:
Net income			—				—				7,719				—				—				7,719
Change in net unrealized gains/(losses) on securities available for-sale			—				—				—				9,248				—				9,248
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			—				—				—				(492	)			—				—
Change in net unrealized gains/ (losses) on retirement plans			—				—				—				91				—				91
Total comprehensive income/(loss)																							17,058
Balance, September 30, 2009		$	1,806			$	68,654			$	277,415			$	(4,867	)		$	(33,785	)		$	309,715

See accompanying notes.

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Nine Months Ended

September 30, 2010, and 2009

(Dollar amounts in thousands, except per share data)

(Unaudited)

														Accoumulated
														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			—				—				19,692				—				—				19,692
Change in net unrealized gains/(losses) on securities available for-sale			—				—				—				5,341				—				5,341
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			—				—				—				2,274				—				2,274
Change in net unrealized gains/ (losses) on retirement plans			—				—				—				534				—				534
Total comprehensive income/(loss)																							27,841
Cash Dividends, $.46 per share			—				—				(6,032	)			—				—				(6,032	)
Treasury stock purchase (23,000 shares)			—				—				—				—				(610	)			(610	)
Balance, September 30, 2010		$	1,806			$	68,739			$	291,017			$	245			$	(34,125	)			327,682
Balance, January 1, 2009		$	1,806			$	68,654			$	263,115			$	(12,946	)		$	(33,785	)		$	286,844
Comprehensive income:
Net income			—				—				16,870				—				—				16,870
Change in net unrealized gains/(losses) on securities available for-sale			—				—				—				23,116				—				23,116
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			—				—				—				(11,977	)			—				—
Change in net unrealized gains/ (losses) on retirement plans			—				—				—				273				—				273
Total comprehensive income/(loss)																							40,259
Cumulative Effect of change in accounting principle, adoption of ASC320-10-65-65, net of tax			—				—				3,333				(3,333	)			—				—
Cash Dividends, $.45 per share			—				—				(5,903	)			—				—				(5,903	)
Balance, September 30, 2009		$	1,806			$	68,654			$	277,415			$	(4,867	)		$	(33,785	)		$	321,200

See accompanying notes.

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands, except per share data)

		Nine Months Ended
		September 30,
		2010				2009
		(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	19,692			$	16,870
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization (accretion) of premiums and discounts on investments			(768	)			(2,018	)
Provision for loan losses			7,010				9,380
Securities (gains) losses			(273	)			7,887
Securities impairment loss			4,028				—
Gain on purchase of business unit			—				(5,409	)
(Gain) loss on sale of other real estate			80				90
Depreciation and amortization			3,528				2,854
Other, net			6,347				(536	)
NET CASH FROM OPERATING ACTIVITIES			39,644				29,118
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			174,359				89,911
Purchases of securities available-for-sale			(179,137	)			(65,683	)
Loans made to customers, net of repayment			(15,613	)			(100,956	)
Cash received from purchase of business unit			—				30,977
Proceeds from sales of other real estate owned			2,628				2,020
Net change in federal funds sold			(56,404	)			6,530
Additions to premises and equipment			(1,440	)			(2,739	)
NET CASH FROM INVESTING ACTIVITIES			(68,357	)			(39,940	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits			127,838				18,475
Net change in short-term borrowings			5,782				59,292
Dividends paid			(11,940	)			(11,805	)
Purchase of treasury stock			(610	)			—
Proceeds from other borrowings			2,000				120,000
Repayments on other borrowings			(115,577	)			(172,401	)
NET CASH FROM FINANCING ACTIVITIES			7,493				13,561
NET CHANGE IN CASH AND CASH EQUIVALENTS			(21,220	)			2,739
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			84,371				67,298
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	63,151			$	70,037

See accompanying notes.

FIRST FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying September 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:

		September 30,
(Dollar amounts in thousands)		2010				2009
Balance at beginning of year		$	19,437			$	16,280
Provision for loan losses			7,010				9,380
Recoveries of loans previously charged off			3,681				1,675
Loans charged off			(10,154	)			(8,507	)
Balance at End of Period		$	19,974			$	18,828

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 smaller 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)
		September 30,				December 31,
		2010				2009
Impaired Loans with allocated allowance for loan losses		$	17,262			$	19,330
Impaired Loans with no allocated allowance for loan losses			5,980				5,344
		$	23,242			$	24,674
Amount of allowance allocated to impaired loans		$	5,494			$	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)
		September 30, 2010
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
U.S. Government sponcored entities and entity mortgage-backed securities		$	2,033			$	58			$	—			$	2,091
Mortgage Backed Securities — Residential			299,894				16,682				—				316,576
Mortgage Backed Securities — Commercial			142				4				—				146
Collateralized Mortgage Obligations			100,464				3,250				—				103,714
State and Municipal Obligations			153,060				10,870				(38	)			163,892
Collateralized Debt Obligations			15,341				—				(13,145	)			2,196
Equity Securities			5,128				1,391				(658	)			5,861
		$	576,062			$	32,255			$	(13,841	)		$	594,476

		December 31, 2009
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
U.S. Government sponcored entities and 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 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 September 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.

		September 30, 2010
		Available-for-Sale
		Amortized				Fair
(Dollar amounts in thousands)		Cost				Value
Due in one year or less		$	9,024			$	9,162
Due after one but within five years			38,292				40,553
Due after five but within ten years			41,126				44,437
Due after ten years			182,456				177,741
			270,898				271,893
Mortgage-backed securities and equities			305,164				322,583
TOTAL		$	576,062			$	594,476

There were $348 thousand in gains and $75 thousand in losses realized by the Corporation on investment sales and calls for the nine months ended September 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 September 30, 2010 and December 31, 2009.

										September 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
State and municipal obligations		$	—			$	—				1,009				(38	)			1,009				(38	)
Collateralized Debt Obligations			—				—				2,197				(13,145	)			2,197				(13,145	)
Equities			764				(100	)			649				(558	)			1,413				(658	)
Total temporarily impaired securities		$	764			$	(100	)		$	3,855			$	(13,741	)		$	4,619			$	(13,841	)

										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 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 $13.84 million as of September 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 illiquidity in the markets 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. Based upon our review of the issuers during the third quarter of 2010, we recognized other-than-temporary impairment on our investment in the stock of Fifth Third Corporation in the amount of $548 thousand. Based on our review of our other bank stock holdings we do not believe these investments to be other than temporarily impaired. 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 one CDO included in collateralized debt obligations was other-than-temporarily impaired and wrote our investments in that CDO’s totaling $10.9 million down to their present value of expected cash flows through earnings of $10.6 million at September 30, 2010 to properly reflect credit losses associated that CDO. The fair value of this CDO is $528 thousand as compared to the current book value of $10.6 million. The unrealized loss on this CDO of $10.1 million makes up the majority of unrealized losses on CDOs of $13.1 million. This CDO is part of the B-1 class of preTSL XI and has 65 underlying issuers, of which 49 are currently performing. Currently, deferrals and defaults make up 24% of remaining collateral. In the current quarter, one issuer that was previously in deferral has now been cured. Based on a review of the underlying issuers during the quarter, the financial condition of most issuers has remained relatively stable or improved with only a few issuers showing slight declines for the quarter, supporting the amount of OTTI recorded in relation to the total unrealized loss on this security. 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. Three of the CDO’s included in collateralized debt obligations did not have any adverse change in the projected cash flows during the quarter. During 2010 our analysis of expected cash flows determined that four CDO’s included in collateralized debt obligations were other-than-temporarily impaired and recorded $4.028 million of OTTI on these CDO’s to write them down to present value of expected cash flows. The third quarter activity, which includes interest payments applied to principal on the two of the CDO’s that did not experience additional impairment, brings the present value of expected cash flows through earnings of all four CDO’s to $13.16 million at September 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 $2.2 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 .58 to 8.01 while Moody Investor Service pricing ranges from 8.90 to 76.01, 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 nine month periods ended September 30:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Beginning balance		$	14,529			$	9,124			$	11,360			$	6,145
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		$	548			$	1,192			$	548			$	1,485
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized			311				5,950				3,480				8,636
Adoption of new accounting guidance on OTTI							(5,556	)							(5,556	)
Ending balance		$	15,388			$	10,710			$	15,388			$	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 is 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).

		September 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			$	2,091			$	0			$	2,091
Mortgage Backed Securities-residential			—				316,576				—				316,576
Mortgage Backed Securities-commercial			—			$	146				—				146
Collateralized mortgage obligations			—				103,714				—				103,714
State and municipal			—				163,892				—				163,892
Collateralized debt obligations			—				—				2,196				2,196
Equities			2,529				—				3,332				5,861
TOTAL		$	2,529			$	586,419			$	5,528			$	594,476
Derivitive Assets							2,451
Derivitive Liabilities							(2,451	)

		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 nine months ended September 30, 2010 and 2009.

		(000’s)
		Fair Value Measurements Using Significant
		Unobservable Inputs (Level 3)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Beginning Balance		$	5,463			$	6,679			$	4,777			$	7,994
Total realized/unrealized gains or losses
Included in earnings			(859	)			(778	)			(4,028	)			(2,041	)
Included in other comprehensive income			924				—				4,981				—
Settlements			0				—				(202	)			(52	)
Transfers into Level 3			—				—				—				—
Ending Balance		$	5,528			$	5,901			$	5,528			$	5,901

Changes in unrealized gains and losses recorded in earnings for the nine months ended September 30, 2010 for Level 3 assets and liabilities that are still held at September 30, 2010 were approximately $4.0 million.

All impaired loans disclosed in footnote 2 are valued at Level 3 and are carried at a fair value of $17.3 million, net of a valuation allowance of $5.5 million at September 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 $1.4 million for the nine months ended September 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 September 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:

		September 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
(Dollar amounts in thousands)		Value				Value				Value				Value
Cash and due from banks			63,151				63,151				84,371				84,371
Federal funds sold			77,980				77,980				21,576				21,576
Securities available—for—sale			594,476				594,476				587,246				587,246
Federal Home Loan Bank stock			26,181				N/A				26,181				N/A
Loans, net			1,619,680				1,617,426				1,612,237				1,604,412
Accrued interest receivable			11,769				11,769				12,005				12,005
Deposits			(1,917,663	)			(1,924,618	)			(1,789,701	)			(1,798,059	)
Short—term borrowings			(36,218	)			(36,218	)			(30,436	)			(30,436	)
Federal Home Loan Bank advances			(219,160	)			(226,431	)			(326,137	)			(337,847	)
Other borrowings			(6,600	)			(6,600	)			(6,600	)			(6,600	)
Accrued interest payable			(2,320	)			(2,320	)			(3,127	)			(3,127	)

5. Short-Term Borrowings

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

		(000’s)
		September 30,				December 31,
		2010				2009
Federal Funds Purchased		$	4,847			$	5,754
Repurchase Agreements			29,427				22,578
Note Payable — U.S. Government			1,944				2,104
		$	36,218			$	30,436

6. Other Borrowings

Other borrowings at period-end are summarized as follows:

		(000’s)
		September 30,				December 31,
		2010				2009
FHLB Advances		$	212,560			$	326,137
City of T erre Haute, Indiana economic development revenue bonds			6,600				6,600
		$	219,160			$	332,737

7. Components of Net Periodic Benefit Cost

		Three Months Ended September 30,																Nine Months Ended September 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			$	2,319			$	2,304			$	49			$	82
Interest cost			828				693				54				60				2,485				2,080				164				180
Expected return on plan assets			(850	)			(911	)			—				—				(2,550	)			(2,733	)			—				—
Amortization of transition obligation			—				—				16				15				—				—				45				45
Net amortization of prior service cost			(4	)			(5	)			—				—				(13	)			(14	)			—				—
Net amortization of net (gain) loss			245				116				3				0				736				347				9				0
Net Periodic Benefit Cost		$	992			$	661			$	89			$	102			$	2,977			$	1,984			$	267			$	307