First Financial Corp
Annual Report 2010

Plain-text annual report

vocBca / i"i. I ipr I First financial Bank 2010 HNNUflL REPORT ) \v ^ • , 5i ^ t ' " * N ; - S S I > S » - ' " .: F I N A N C I AL H I G H L I G H TS December 3 1, Dollar amounts in thousands, except per share amounts For The Year Net income Net income per share Book value per share Cash dividends per sha At Year End Assets 'iPeposits Loans, net Securities $2,451,095 $ 2,518,722 $ 2,302,675 1,903,043 1,640,146 560,846 321,717 1,789,701 1,631,764 587,246 306.483 1,563,498 1,471,327 596,915 286,844 S H A R E H O L D ER I N F O R M A T I ON The common stock of First Financial Corporation is traded on tlie NASDAQ Global under the symbol THFR A copy of form 10-K, as filed with the Securities and Exchange Commission, is available upon written request to: Rodger A. McHargue, First Financial Corporation, P.O. Box 540, Terre Haute, IN 47808. A S I GN OF S E R V I CE First Financial is well known for our signs that display product and service information, time and temperature, and community event announcements. » * ' » « 8 V ^' r " ^ p ^ ^r . - ^ * ^ ^ « ? I M M ! ? ^ *^ ! T' '• ^^-^ r>i^= ' ^ l a ^. •**!«»!» The mission of First Financial Corporation is to be the FIRST choice for all your financial needs. O UR M I S S I ON Inside Front Cover ~ Financial Highlights • 1 ~ Letter to Shareholders • 4 ~ Service Area Map 5 ~ The Year In Review • 9 ~ Financial Report • 56 ~ Directors C O N T E N TS FIRST F I N A N C I AL C O R P O R A T I ON To our SHAREHOLDERS and FRIENDS T, .here is no need to remind you what 2010 was Uke. Not enough time has passed to forget the prolonged slow economy, soaring national debt, state and local budget shortfalls, weak housing market or that one in 10 Americans who wanted a job was unemployed. Regrettably, there was no single formula to guide financial institutions in dealing with the many and varied challenges of 2010. There was no book to read, prior experience to draw on or magic pill to take. We were each left to develop our own strategies. In addressing these challenges, some institutions were successful while others, unfortunately, were not. By the end of 2010, 157 banks had failed across the country and another 800 were on the FDIC's "watch list." During this time of economic uncertainty, First Financial increased to $29.8 million. Total deposits grew by $113.3 Corporation has maintained its focus and refused to stray million, or 6.3%. This deposit increase was used to reduce from the sound business fundamentals that have served as borrowing costs and led to the improvement in the net the bedrock ofour success. The positive results we produce interest margin. do not come from chasing short-term profits at the expense Because ofthe uncertain economy, many ofour customers ofour future. They are the result ofa clear vision of where delayed buying homes, expanding businesses or making big- we want to go and an understanding of how to get there. ticket purchases in 2010, thus reducing loan demand. Our corporate values, coupled with exceptional leadership Notwithstanding, we were able to increase our loan portfolio and dedicated, hardworking employees, are the source ofour by $8.3 million to $1.64 billion. strength and enable us to produce strong financial results in Because ofour strong 2010 results, shareholders' equity bad times as well as good. It is because ofour enduring val and bookvalue per share increased 5% and 4.8% respective ues that First Financial Corporation, unlike so many others, ly, to $321.7 million and $24.46 per share. Our perfor has not waivered in our commitment to provide a fair return mance allowed us to increase dividends to shareholders for to our shareholders. We are pleased to report we delivered the consistent, quality financial results shareholders have come to expect. In 2010, net income increased 23.4%, or S5.3 miUion, to $28.0 million and earnings per share grew 23.7% to $2.14. Return on assets and return on equity were 1.11% and 8.73% respectively. Net interest income rose to $96.6 million in 2010, an 11.1% increase over the prior year. Net interest margin was 4.35%, a 5.3% increase over 2009. Non-interest income the 22nd consecutive year. Our stock price at the beginning ofthe year was $30.52 per share and ended at $35.14 per share, a 15.14% increase. This, coupled with the dividend, resulted in a one-year total return of 18.69%. As shown in the graph on the following page, the five-year total return for First Financial is 50.19%, more than double the 24.46% five-year total return for rhe Russell 2000 Index. The return for the SNL Index of Banks $1-5 Billion over the same period was a negative 43.19%. (continued on page 3) 9 2010 ANNUAL REPORT Donald E. Smith, President and Chairman, and Norman E Loivery, CEO and Vice Chairman TOTAL RETURN PERFORMANCIE First Financial Corporation compared to the Russell 2000 Index and the SNL Index of Banks $1B-$5B 200 9 FIRST FINANCIAL CORPORATION Our financial performance did not go unnoticed in the the three best places to work in the area. Forrest Sherer industry. The August issue of US Banker magazine listed Insurance, a wholly owned subsidiary of First Financial First Financial Corporation among the Top-Performing Corporation, was voted the Best Place for Insurance. Mid-Tier Bank Holding Companies in America based on These accomplishments are only possible through the three-year average return on equity. We were also recognized hard work and dedication ofour employees. Their involve by Sandler O'Neill as one ofits "Sm-ALL Stars," the only ment comes from a deep belief that caring about out neigh Indiana bank holding company to be so recognized and one bors and the communities we serve is not only good for of only 32 in the nation to be included on this exclusive list. business but, more importantly, is the right thing to do. We Also in 2010, First Financial Bank was named hy Ag Lender are extremely proud of them. magazine as one ofthe Top 100 Banks in the United States 2011 will prove to be another challenging year as we sort based on total agricultural loans. through the 2,300 pages ofthe Dodd-Frank Wall Street First Financial Corporation has a long history of commit Reform and Consumer Protection Act. The costs of compli ment to the communities we serve and we encourage each ance with this act and the potential impact it will have on ofour employees to be actively engaged in civic, charitable, revenue are significant. While the outlook for the U.S. econ educational and religious causes. Our responsibilities grew in omy has improved and there is room for optimism, there is 2010, as we renewed our efforts to help neighbors in need also a great deal of uncertainty about the pace and sustain through the "Food for Friends" program we started in 2009. ability of the recovery, especially in light of recent political Since its inception, our employees and customers have con unrest in the Middle East and Africa. To meet these chal tributed over 41 tons of food to local food banks through lenges and others, we will continue to focus, as we always this program. As Notre Dame Coach Knute Rockne said, "When the have, on sound business fundamentals in furtherance ofour commitment to deliver long-rerm value ro our shareholders. going gets tough, the tough get going," an apt way to We are deeply gratefiil to our employees for their contri describe our employees' response to the 2010 United Way butions to our success, to our customers for rheir business Campaign. Realizing the local campaign was struggling to and to you, our shareholders, for your support. Our pledge reach its goal due to the economic climate, our employees is to continue, as we have for decades, to provide customers rolled up their sleeves to raise additional funds. In all, the with excellent products and unparalleled service, to operate Corporation and our employees contributed more than in a safe and sound manner, and to be a source of srability $93,000 to the United Way, surpassing all prior year and strength to the communities we serve. contributions. First Financial promotes good citizenship and community engagement, so it is gratifying when the efforts of our employees are acknowledged. During the year, Ivy Tech Community College and the Ivy Tech Foundation named First Financial Bank as the Wabash Valley "Benefactor ofthe Year." The Terre Flaute Chamber of Commerce presented First Financial Corporation with its "Vision - A Level Above Award," which recognizes individuals, organizations and businesses for achievements or forward-looking initiatives that promise future growth for the community. Popular accolades came from readers of the Terre Haute Tribune- Star, who voted First Financial the Best Bank, Best Mortgage Lender and Best Financial Advisot in the newspaper's People's Choice Awards. The bank was also rated one of Donald E. Smith President and Chairman Norman L. Lowery CEO and Vice Chairman First country is farm country. Agribusiness has always been a key i component In our 16-county service area In west-central Indiana and east- central Illinois. First Financial Bank offers specialized lending programs and trust services tailored to the needs of farmers and delivered by employees with strong agribusiness expertise. In 2010, Ag Lender magazine ranked First Financial as one of the top 100 U.S. banks based on total agricultural loans, reflecting our success In serving the farm market. 1 "'"^^Mi fli ^H^mmiii^gl^p miiiiiiii^ i|^IK:» #.j' ^g^^Kimasm^ fllH ^JPi|i.lfe '^^^^•Hii.^JBl^^^^ |d|^^^^^W|| ^ ^ ^ ^ ^ ^H H ^ ^ ^ v ^ ^ ^ ^ ^ ^ ^ ^H ^ H ^ ^ V j | ^ ^ ^ ^ ^ ^B ^Hi^^H i^l^^^^^^^B H ^ H ^ H H ^ ^ ^ ^ ^ ^ ^ ^ ^A ^^^^2^^^^^^^^^ ^ John Lukens (right), president and CEO of First Financial affiliate Forrest Sherer Insurance, reviews the insurance needs of A P Machine & Tool with Thierry Ponsot, whose father founded the company in Terre Haute in 1966. Forrest Sherer has been a leading provider of commercial insurance. employee benefit and loss preven tion programs, life and long-term care insurance, financial services and personal insurance since 1920. In December, Forrest Sherer acquired Clay Ladd Insurance, an agency that has served Terre Haute and the Wabash Valley for over 100 years. Known for excellent customer service and commitment to the community. Clay Ladd is a good fit for Forrest Sherer and the Corporation. k. . i In late summer, miniature cars turned up all over Terre Haute, including this one outside the main office of First Financial Bank at Sixth and Wabash Avenue. Part of "Cruisin' Around," a public art project to support the Swope Art Museum, "Bee First" was sponsored by First Financial and painted by local artist Kathy Moody, wife of First employee Steve Moody. Even though there were bees buzzing all over the car's body, it brought only sweet ness to those who admired it and absolutely no sting! • First Financial has always strongly supported education. For the second year. First Financial Bank sponsored the "Scholarship Cruisin' Car Show" at the Wabash Valley campus of Ivy Tech Community College, raising $12,000 for the Ivy Tech Scholarship Fund. Becky Miller, Ivy Tech; Donald E. Smith, ptesident and chairman of First Financial Corporation; Deanna King, Ivy Tech; and Fred Rubey, First Financial consultant and Ivy Tech board member, gathered around Smith's Sumar Special #48 during the show that was held in November. 0 •*• The Morris Plan Company of Terre Haute, a First Financial affiliate, was founded in 1906 and is celebrating 95 years of service to the com munity in 2011. Under the leadetship of Morris Plan President Jim Nasser, in 2010 the company expanded its indirect lending relationships and now serves more than 70 auto dealers in west- central Indiana and east-central Illinois. The success of this effort is reflected in loan portfolio growth of 14.25% and net income of $2.33 million, a record for the company. i In 2010, members ofthe First Class Service Council, led by Honey Creek banking center manager Brenda Thomson (lefi), continued efforts to expand and unify customer service training for all banking centers and areas with customer contact. The council leads a corporate- wide initiative to promote consistently excellent service to all First customers through ongoing employee education, coaching and feedback. •*• We like to think we are the best at what we do, but it teally makes us proud when the community thinks so, too. In 2010, Terre Haute Tribune-Star readers were invited to submit their votes for the best services, people, places and events in the Wabash Valley. First Financial Bank was ranked number one in the categories of Best Bank, Best Mortgage Company and Best Financial Advisor. The bank was also chosen as one the Top Three Places to Work in the Wabash Valley. Forrest Sherer Insurance, a First Financial Corporation affiliate, was selected as the Best Place for Insurance. •*• First Financial Bank served as the presenting sponsor for the 2010 Vigo County 4-H Fair, an event that attracts thousands of visitors from around the region. First Financial has always supported activities such as 4-H that help young people grow into responsible adults. In that spirit. First employees have volunteered to help with the 4-H livestock auction for many years. • The Terre Haute Action Track hosted the First Financial Bank Indiana Sprint Week race held during the Vigo County 4-H Fair in July. First has a long tradirion of sponsoring family- oriented community events that appeal to people of all ages. Five Year Comparison of Selected Financial Data 2010 ANNUAL REPORT (Dollar amounts in thousands, except per sliare amoimts) 2010 2009 2008 2007 2006 BALANCE SHEET DATA Total assets Securities Loans, net of uneamed fees* Deposits Borrowings Shareholders' equity INCOME STATEMENT DATA Interest income Interest expense Net interest income Provision for loan losses Other income Other expenses Net incorne PER SHARE DATA: Net Income Cash dividends PERFORMANCE RATIOS: Net income to average assets Net income to average shareholders' equity Average total capital to average assets Average shareholders' equity to average assets Dividend payout 2,451,095 $ 560,846 1,640,146 1,903,043 159,899 321,717 2,518,722 587,246 1,631,764 1,789,701 363,173 306,483 ; 2,302,675 $ i 596,915 1,471,327 1,563,498 406,653 286,844 2,231,562 $ 558,020 1,443,067 1,529,721 368,616 281,692 2,175,998 530,400 1,392,755 1,502,682 358,008 271,260 123,582 26,966 96,616 9,200 29,797 77,202 28,044 126,255 39,261 86,994 11,870 28,532 73,381 22,720 133,954 52,490 81,464 7,855 25,410 66,447 24,769 137,734 62,961 74,773 6,580 31,497 64,726 25,580 130,832 57,129 73,703 6,983 28,826 64,656 23,539 2.14 0.92 1.73 0.90 1.89 0.89 1.94 0.87 1.77 0.85 1.11% 0.95% 1.09% 1.16% 1.10% 8.73 7.54 8.61 9.20 8.57 13.56 13.25 13.28 13.35 13.56 12.76 43.08 12.56 51.99 12.60 47.10 12.64 44.76 12.79 44.18 ' 2008 and 2007 include $12,800 and S 14,068, respectively, ofcredit card loans that are held-for-sale FIRST FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS are data) (Dollar amounts in thousands, except per sh ASSETS Cash and due from banks Federal funds sold Securities available-for-sale Loans, net of allowance of $22,336 in 2010 and $19,437 in 2009 Restricted Stock Accmed interest receivable Premises and equipment, net Bank-owned life insurance Goodwill Other intangible assets Other real estate owned FDIC Indemnification Asset Other assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest-bearing Interest-bearing: Certificates of deposit of $100 or more Other interest-bearing deposits Short-term borrowings Other borrowings Other liabilities TOTAL LIABILITIES Shareholders' equity Common stock, $.125 stated value per share; Authorized shares-40,000,000 Issued shares-14,450,966 Outstanding shares-13,151,630 in 2010 and 13,129,630 in 2009 Additional paid-in capital Retained eamings Accumulated other comprehensive income (loss) Less: Treasury shares at cost-1,299,336 in 2010 and 1,321,336 in 2009 TOTAL SHAREHOLDERS' EQUITY December 31, 2010 2009 $ 58,511 5,104 560,846 1,617,810 25,308 11,208 34,691 66,112 7,102 4,148 6,325 3,977 49,953 $2,451,095 $ 84,371 21,576 587,246 1,612,327 27,835 12,005 35,551 64,057 7,102 4,916 5,885 12,124 43,727 $2,518,722 $ 304,101 312,990 215,501 1,383,441 1,903,043 34,106 125,793 66,436 2,129,378 1,806 68,944 293,319 (9,369) (32,983) 321,717 238,830 1,237,881 1,789,701 30,436 332,737 59,365 2,212,239 1,806 68,739 277,357 (7,904) (33,515) 306,483 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,451,095 $2,518,722 10 2010 ANNUAL REPORT C O N S O L I D A T ED S T A T E M E N TS OF I N C O ME (Dollar amounts in thousands, except per share data) INTEREST AND DTVIDEND INCOME: Loans, including related fees Securities: Taxable Tax-exempt Other TOTAL INTEREST AND DIVIDEND EsfCOME INTEREST EXPENSE: Deposits Short-term borrowings Other borrowings TOTAL EsfTEREST EXPENSE NET INTEREST INCOME Net Provision for loan losses NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES NON-INTEREST INCOME: Trust and financial services Service charges and fees on deposit accounts Other service charges and fees Securities gain, net Other-than-temporary loss Total impairment loss Loss recognized in other comprehensive income Net impairment loss recognized in eamings Insurance commissions Gain on sale of mortgage loans Gain on sale of credit card loans Gain on bargain purchase Other TOTAL NON-INTEREST INCOME NON-INTEREST EXPENSES: Salaries and employee benefits Occupancy expense Equipment expense Federal Deposit Insurance Other TOTAL NON-INTEREST EXPENSE INCOME BEFORE INCOME TAXES Provision for income taxes NET ESICOME EARNDsiGS PER SHARE: BASIC AND DILUTED Weighted average number of shares outstanding (in thousands) 11 Years Ended December 31, 2009 2010 2008 $ 96,206 $ 94,930 $ 99,572 18,597 6,664 2,115 123,582 22,755 6,604 1,966 126,255 25,303 6,415 2,664 133,954 16,306 325 10,335 26,966 21,544 541 17,176 39,261 32,696 1,068 18,726 52,490 96,616 86,994 81,464 9,200 11,870 7,855 87,416 75,124 73,609 4,547 10,342 7,759 1,321 (4,260) (4,260) 6,759 2,206 - - 1,123 29,797 44,887 4,707 4,761 2,847 20,000 77,202 40,011 4,197 11,082 7,026 4 (18,939) 8,170 (10,769) 6,464 2,291 2,549 5,057 631 28,532 42,259 4,534 4,640 3,277 18,671 73,381 30,275 11,967 $ 28,044 7,555 $ 22,720 2.14 13,120 1.73 13,119 3,993 11,889 6,050 358 (6,145) - (6,145) 6,688 817 - - 1,760 25,410 41,287 4,182 4,560 220 16,198 66,447 32,572 7,803 24,769 1.89 13,110 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollar amounts in thousands, except per share data) Common Stoclt Additional Retained Comprehensive Treasury Capital Earnings IncGme/(Loss) Stocli Total Balance, January 1, 2008 1,806 68,212 $ 250,011 (5,181) $ (33,156) $ 281,692 Accumulated Other Comprehensive income: Net income Other comprehensive loss, net of tax: Change in net unrealized gains/losses on securities available-for-sale, net Change in unrealized gains/losses on post-retirement benefits Total comprehensive income Contribution of 33,015 shares to ESOP Treasury stock purchase (52,744 shares) Cash Dividends, $.89 per share 24,769 24,769 (8,276) - (8,276) 511 - _ - - - 835 (1,464) - 511 17,004 1,277 (1,464) (11,665) 442 (11,665) Balance, December 31, 2008 1,806 68,654 263,115 (12,946) (33,785) 286,844 Comprehensive income: Net income Other comprehensive loss, net of tax: Change in net unrealized gains/losses on securities available-for-sale, net Change in unrealized gains/losses on post-retirement benefits Total comprehensive income Adjustment for adoption of other-than temporary impairment guidance, netof tax (Note 1) Contribution of 35,000 shares to ESOP Treasury stock purchase (22,000 shares) Cash Dividends, $.90 per share 22,720 10,869 (2,494) 22,720 10,869 (2,494) 31,095 3,333 (3,333) 85 (11,811) 886 (616) 971 (616) (11,811) Balance, December 31, 2009 1,806 68,739 277,357 (7,904) (33,515) 306,483 Comprehensive income: Net income Change in net imrealized gains/(losses) on securities available for-sale Change in net unrealized gains/ (losses) on retirement plans Total comprehensive income/(loss) Conttibufion of 45,000 shares to ESOP Treasury stock purchase (23,000 shares) Cash Dividends, $.92 per share 28,044 28,044 449 - 449 (1,914) — 1,142 (610) - (1,914) 26,579 1,347 (610) (12,082) 205 (12,082) Balance, December 31, 2010 1,806 $ 68,944 $ 293,319 $ (9,369) $ (32,983) $ 321,717 12 C O N S O L I D A T ED S T A T E M E N TS OF C A SH F L O WS 2010 ANNUAL REPORT (Dollar amounts in thousands, except per share data) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Adjustments to reconcile net income to net cash provided by operating activities: Net (accretion) amortization on securities Provision for loan losses Securities impairment loss recognized in eamings Securities (gains) losses Depreciation and amortization Provision for deferred income taxes Net change in accmed interest receivable Contribution of shares to ESOP Gain on sale of mortgage loans Loss on sale of student loans Gain on sale of credit card loans Gain on purchase ofbusiness unit Loss on sales of other real estate Other, net NET CASH FROM OPERATING ACTD/ITIES CASH FLOWS FROM INVESTESIG ACTIVITIES: Sales of securities available-for-sale Calls, maturities and principal reductions on securities available-for-sale Purchases of securities available-for-sale Loans made to customers, net of payments Net change in federal funds sold Redemption of restricted stock Cash received from sale of mortgage loans Cash received from sale of student loans Cash received from sale of credit card loans Cash received (disbursed) from purchase ofbusiness unit Sale of other real estate Additions to premises and equipment NET CASH FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits Net change in other short-term borrowings Dividends paid Purchases of treasury stock Proceeds from other borrowings Repayments on other borrowings NET CASH FROM FINANCING ACTIVITIES NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUFVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OE YEAR Years Ended December 31, 2009 2010 2008 S 28,044 $ 22,720 24,769 (840) 9,200 4,260 (1,321) 4,643 (5,940) 797 1,347 (2,206) - - - 283 10,293 48,560 (2,442) 11,870 10,769 (4) 4,199 (2,043) 1,076 971 (2,291) 399 (2,549) (5,057) 196 (8,424) 29,390 (2,874) 7,855 6,145 (358) 3,535 (5,147) 617 1,277 (817) - - - 35 1,494 36,531 12,248 223,862 (211,062) (132,997) 16,472 2,527 116,462 - - (609) 3,727 (2,406) 28,224 - 128,349 (88,532) (265,976) (12,046) - 146,625 13,347 14,689 30,977 2,448 (6,655) (36,774) 1,063 95,198 (151,863) (76,216) (5,329) 2,386 36,910 - - - 2,357 (2,623) (98,117) 113,180 3,670 (11,940) (610) 2,000 (208,944) (102,644) (25,860) 84,371 $ 58,511 80,359 8,936 (11,806) (616) 120,000 (172,416) 24,457 17,073 67,298 $ 84,371 33,777 (5,831) (11,548) (1,464) 408,500 (364,632) 58,802 (2,784) 70,082 $ 67,298 SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND NONCASH INFORMATION: Cash paid for the year for: Interest Income Taxes $ 28,051 ~$ 15,713 40,005 13,485 54,168 $ 11,657 13 FIRST FINANCIAL CORPORATION N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: BUSINESS Organization: The consolidated financial statements of First Financial Corporation and its subsidiaries (the Corporation) include the parent company and its wholly-owned subsidiaries. First Financial Bank, N.A. of Vigo County, Indiana, The Morris Plan Company of Terre Haute (Morris Plan), and Forrest Sherer Inc., a full-line insurance agency headquartered in Terre Haute, Indiana. Inter-company transactions and balances have been ehminated. First Financial Bank also has two investment subsidiaries, Portfolio Management SpeciaUsts A (Specialists A) and Portfolio Management Specialists B (Specialists B), which were established to hold and manage certain assets as part of a strategy to better manage various income streams and provide opportunities for capital creation as needed. Specialists A and Specialists B subsequently entered into a limited partnership agreement, Global Portfolio Limited Partners. Portfolio Management Specialists B also owns First Financial Real Estate, LLC. At December 31, 2010, $591.7 miUion of securities and loans were owned by these subsidiaries. Speciahsts A, Specialists B, Global PortfoUo Limited Partners and First Financial Real Estate LLC are included in the consolidated financial statements. The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide variety of financial services including commercial, mortgage and consumer lending, lease financing, tmst accotmt services and depositor services through its four subsidiaries. The Corporation's primary source of revenue is derived from loans to customers, primarily middle-income individuals, and investment activities. The Corporation operates 54 branches in west-central Indiana and east-central Illinois. First Financial Bank is the largest bank in Vigo County. It operates 13 full-service banking branches within the county; five in Clay County, Indiana; one in Greene County, Indiana; three in Knox County, Indiana; five in Parke County, Indiana; one in Putnam County, Indiana; five in Sullivan County, Indiana; four in Vermillion County, Indiana; one in Clark County, Illinois; one in Coles County, Illinois; three in Crawford County, Illinois; one in Jasper County, Illinois; two in Lawrence County, Illinois; two in Richland County, Illinois; six in Vermilion County, Illinois; and one in Wayne County, Illinois. It also has a main office in downtown Terre Haute and an operations center/office building in southem Terre Haute. Regulatory Agencies: First Financial Corporation is a multi-bank holding company and as such is regulated by various banking agencies. The holding company is regulated by the Seventh District of the Federal Reserve System. The national bank subsidiary is regulated by the Office of the Comptroller of the Currency. The state bank subsidiary is jointly regulated by the state banking organization and the Federal Deposit Insurance Corporation. SraNmCANTAOCDUNIlNGFOUaES Use of Estimates: To prepare financial statements in conformity with U.S, generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan losses, carrying value of intangible assets, loan servicing rights, other-than-temporary securities impairment and the fair values of financial instmments are particularly subject to change. Cash Flows: Cash and cash equivalents include cash and demand deposits with other financial institutions. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings. Securities: The Corporation classifies all securities as "available for sale." Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value with unrealized holdings gains and losses, net of taxes, reported in other comprehensive income within shareholders' equity. Interest income includes amortization of purchase premium or discount. Premiums and discounts are amortized on the level yield method without anticipating prepayments. Mortgage-backed securities are amortized over the expected life. Realized gains and losses on sales are based on the amortized cost of the security sold. 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. L o a n s: Loans that management has the intent and ability to hold for the foreseeable future until maturity or pay-off are reported at the principal balance outstanding, net of uneamed interest, purchase premiums and discounts, deferred loan fees and costs, and allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income is accmed on the unpaid principal balance and includes amortization of net deferred loan fees and costs over the loan term without anticipating prepayments. The recorded investment in loans includes accmed interest receivable. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are significantly past due. Past-due status is based on the contractual terms ofthe loan. All interest accmed but not received for loans placed on nonaccraal is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for retum to accmal. Loans are retumed to accmal status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. In all cases, loans are placed on non-accmal or charged-off if collection of principal or interest is considered doubtfiil. 14 2010 ANNUAL REPORT N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS Certain Purchased Loans: The Corporation purchases individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination. These purchased loans are recorded at the amount paid, such that there is no carryover ofthe seller's allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Such purchased loans accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit score, loan type and date of origination. The Corporation estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid are recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan's or pool's contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a provision for loan loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income. Concentration of Credit Risli: Most of the Corporation's business activity is with customers located within Vigo County. Therefore, the Corporation's exposure to credit risk is significantly affected by changes in the economy of the Vigo County area. A major economic downtum in this area would have a negative effect on the Corporation's loan portfolio. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the tmcollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. A loan is impaired when full payment under the loan terms is not expected. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restracturings and classified as impaired. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgages and consumer loans, and on an individual basis for other loans. Ifa loan is impaired, a portion ofthe allowance is allocated so that the loan is reported, net, at the present value of estimated fiiture cash flows, using the loan's existing rate, or at the fair value of collateral if repajTnent is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The historical loss experience is based on the actual loss history experienced over the most recent four years, using a weighted average which places more emphasis on the more current years within loss history window. This actual loss experience is supplemented with other current factors based on the risks present for each portfolio segment. These current factors include consideration ofthe following: levels of and trends in delinquent, classified, and impaired loans; levels of and trends in charge offs and recoveries; national and local economic trends and conditions; changes in lending policies and procedures; trends in volume and terms of loans; experience, ability, and depth of lending management and other relevant staff; credit concentrations; value of underlying collateral for collateral dependent loans; and other extemal factors such as competition and legal and regulatory requirements. The following portfolio segments have been identified: commercial loans, residential loans and consumer loans. Overall, historical loss rates for the Corporation's portfolio segments have remained low during this tough economic cycle. This is primarily attributable to the Corporation's conservative lending practices. Local economic conditions, including elevated unemployment rates, resulted in higher consumer loan delinquencies. For these reasons, consumer loans have the highest adjustments to the historical loss rate. These same factors along with declining real estate values resulted in the residential loan portfolio segment having the next highest level of adjustment to the historical loss rate. The commercial loan portfolio segment had the lowest level of adjustment to the historical loss rate. Adjustments were made for the increasing levels of and trends in delinquent, classified and impaired commercial loans. Commercial loans are generally well secured, which mhigates the risk of loss and has contributed to the low historical loss rate. FDIC Indemniilcation Asset: The FDIC indemnification asset results from the loss share agreements in the 2009 FDIC- assisted transaction. The asset is measured separately from the related covered assets as they are not contractually embedded in the assets and are not transferable with the assets should the Corporation choose to dispose of them. It represents the acquisition date fair value of expected reimbursements from the FDIC which was determined to be $12.1 million. Pursuant to the terms of the loss sharing agreement, covered loans and other real estate are subject to a stated loss threshold whereby the FDIC will reimburse the Corporation for up to 95%) of losses incurred. These expected reimbursements do not include reimbursable amounts related to future covered expenditures. These cash flows are discounted to reflect a metric of uncertainty ofthe timing and receipt of the loss sharing reimbursement from the FDIC. This asset decreases when losses are realized and claims are paid by the FDIC or when customers repay their loans in full and expected losses do not occur. This asset also increases when estimated future losses increase and decreases when estimated future losses decrease. When estimated future losses increase, the Corporation records a provision for loan losses and increases its allowance for loan losses accordingly. The related increase in the FDIC indemnification asset is recorded as an offset to the provision for loan losses. During 2010 and 2009, the provision for loan losses was offset by $1,662 and $0 related to the increases in the FDIC indemnification asset. 15 FIRST FINANCIAL CORPORATION N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS Foreclosed Assets: Assets acquired through or instead of loan foreclosures are initially recorded at fair value less estimated seUing costs when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the useful lives ofthe assets, which range from 3 to 33 years for fumiture and equipment and 5 to 39 years for buildings and leasehold improvements. Restricted Stock: Restricted stock includes Federal Home Loan Bank (FHLB) of Indianapolis and Chicago and Federal Reserve stock. This restricted stock is carried at cost and periodically evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income. Servicing Rights: Servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on third- party valuations that incorporate assumptions that market participants would use in estimating fiiture net servicing income, such as the cost to service, the discount rate, ancillary income, prepayment speeds and default rates and losses. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated fiiture net servicing income ofthe underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Corporation later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with Other Service Fees on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and defauh rates and losses. Servicing fee income, which is included in Other Service Fees on the income statement, is for fees eamed for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when eamed. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $1,153 thousand, $958 thousand and $901 thousand for the years ended December 31, 2010, 2009 and 2008. Late fees and ancillary fees related to loan servicing are not material. Transfers ofFinancial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Bank-Owned Life Insurance: The Corporation has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Income on the investments in life insurance is included in other interest income. Goodwill and Other Intangible Assets: Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January I, 2009 represents the fiiture economic benefits arising from other assets acquired that are not individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Corporation has selected May 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated usefiil lives to their estimated residual values. GoodwiU is the only intangible asset with an indefmite life on our balance sheet. Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from the whole bank, insurance agency and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated basis over their estimated useful lives, which are 12 and 10 years, respectively. Long-Term Assets: Premises and equipment and other long-term assets are reviewed for impainnent when events indicate their carrying amount may not be recoverable fi-om future undiscounted cash flows. If impaired, the assets are recorded at fair value. Benefit Plans: Pension expense is the net of service and interest cost, retum on plan assets and amortization of gains and losses not immediately recognized. The amount contributed is determined by a formula as decided by the Board of Directors. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service. Employee Stock Ownership Plan: Shares of treasury stock are issued to the ESOP and compensation expense is recognized based upon the total market price of shares when contributed. Deferred Compensation Plan: A deferred compensation plan covers aU directors. Under the plan, the Corporation pays each director, or their beneficiary, the amount of fees deferred plus interest over 10 years, beginning when the director achieves age 65. A UabiUty is accmed for the obligation under these plans. The expense incurred for the deferred compensation for each ofthe last three years was $183 thousand, $184 thousand and $169 thousand, resulting in a deferred compensation liability of $2.6 miUion and $2.5 million as of year-end 2010 and 2009. Incentive Plans: A long-term incentive plan provides for the payment of incentive rewards as a 15-year annuity to all directors and certain key officers. The plan expired December 31, 2009, and compensation expense is recognized over the service period. Payments under the plan generally do not begin untU the earUer of January 1, 2015, or the January 1 immediately following the year in which the participant reaches age 65. There was no compensation expense related to this plan for 2010 and the compensation expense for 2009 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2010 ANNUAL REPORT and 2008 was $2.3 million and $2.0 million, resulting in a UabiUty of $15.4 milUon and $15.4 million as of year-end 2010 and 2009. In 2010 the Corporation adopted incentive compensation plans for 2010 that also expired December 31, 2010. These plans are interim with the intention of more developed plans stalling in 2011. The plans were designed to reward key officers based on certain performance measures. The short-term plans will be paid out within 75 days of December 31, 2010 and the long-term plan vests over a three year period and wiU payout within 75 days of December 31, 2013. The compensation related to the three plans in 2010 was $2.2 million and resulted in a hability of $2.2 million at December 31, 2010. Income Taxes: Income tax expense is the total ofthe current year income tax due or reftmdable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation aUowance, if needed, reduces deferred tax assets to tUe amount expected to be realized. A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense. Loan Commitments and Related Financial Instruments: Financial instraments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer fmancing needs. The face amount for these items represents the exposure to loss, before considering customer coUateral or ability to repay. Such financial instruments are recorded when they are fimded. Eamings Per Share: Eamings per common share is net income divided by the weighted average number of common shares outstanding during the period. The Corporation does not have any potentially dilutive securities. Eamings and dividends per share are restated for stock splits and dividends through the date of issue ofthe financial statements. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in the fiinded status of the retirement plans, which are also recognized as separate components of equity. Loss Contingencies; Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount of range of loss can be reasonably estimated. Management does not believe tUere are currentiy such matters that will have a material effect on the financial statements. Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders. Fair Value of Financial Instruments: Fair values of financial instraments are estimated using relevant market information and other assumptions, as more hilly disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especiaUy in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect the estimates. Operating Segment: While the Corporation's chief decision-makers monitor the revenue streams ofthe various products and services, the operating results of significant segments are similar and operations are managed and fmancial performance is evaluated on a corporate-wide basis. Accordingly, aU of the Corporation's financial service operations are considered by management to be aggregated in one reportable operating segment, which is banking. Adoption of New Accounting Standards: In April 2009, the FASB issued Staff Position No. 115-2 and No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (ASC 320-10), which amended existing guidance for determining whether impairment is other-than-temporary for debt securities. The requires an entify to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through eamings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the income statement. The credit loss is determined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary impairments for debt and equity securities were expanded. ASC 320-10 was effective for interim and annual reporting periods ending June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. At adoption, the Corporation reversed $3.3 million (net of tax) of previously recognized impairment charges, representing the non-credit portion. In April 2009, the FASB issued Staff Position (FSP) No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and LiabiUty Have Significantly Decreased and Identifying Transactions That Are Not Orderly (ASC 820-10). This FSP emphasizes that the objective of a fair value measurement does not change even when market activity for the asset or hability has decreased significantiy. Fair value is the price that would be received for an asset sold or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. When observable transactions or quoted prices are not considered orderly, then little, if any, weight should be assigned to the indication of the asset or liability's fair value. Adjustments to those transactions or prices would be needed to determine the appropriate fair value. The FSP, which was applied prospectively, was effective for interim and annual reporting periods ending after June 15, 2009 with early adoption for periods ending after March 15, 2009. The effect of adopting this new guidance was not material. 17 FIRST FINANCIAL CORPORATION N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS 2. FAIR VALUES OF FINANCIAL INSTRUMENTS: Accounting guidance 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 liabiUties in active markets that the entify has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as 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 nationaUy recognized securities exchanges (Level I 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 trast preferred securities and certain equity securities, which are priced using Level 3 due to current market illiquidity. The fair value of trast preferred securities is computed based upon discounted cash flows estimated using payment, default and recovery assumptions. Cash flows are discounted at appropriate market rates, including consideration of credit spreads and illiquidity discounts. The fair value of equity securities is derived through consideration of trading activity, if any, review of financial statements, industry trends and the valuation of comparative issuers. Due to current market conditions, as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility. The fair value of derivatives is based on valuation models using observable market data as ofthe measurement date (Level 2 inputs). (Dollar amounts in thousands) U.S. Govemment entity mortgage-backed securities Mortgage-backed securities, residential Mortgage-backed securities, commercial Collateralized mortgage obligations State and municipal obligations Collateralized debt obligations Corporate debt securities Equity Securities TOTAL Derivative Assets Derivative Liabilities (Dollar amounts in thousands) U.S. Govemment entify mortgage-backed securities Mortgage-backed securities, residential Mortgage-backed securities, commercial Collateralized mortgage obligations State and municipal obligations Collateralized debt obligations Corporate debt securities Equity Securities TOTAL Derivative Assets Derivative Liabilities December 31, 2010 Fair Value Measurment Using Level 1 Level 2 Level 3 2,073 302,423 139 94,457 157,540 2,190 Carrying Value $ 2,073 302,423 139 94,457 157,540 2,190 506 506 $ 556,632 $ $ 1,311 (1,311) l,51S 3,708 $ 2,024 560,846 December 31, ,2009 Fair Value Measurment Usin; S Level I Level 2 Level 3 Can S •ying Value 4,148 300,184 168 119,564 148,733 1,416 7,072 5,961 587,246 - - - - 1,416 - 3,361 4,777 $ $ 4,148 300,184 168 119,564 148,733 - 7,072 - $ 579,869 $ $ (889) 2,600 2,600 18 2010 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below presents a reconciliation and income statement classification of gains and losses for aU assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the twelve months ended December 31,2010 and 2009. Beginning balance, January 1 Total realized/unrealized gains or losses Included in eamings Included in other comprehensive income Settlements Ending balance, December 31 Fair Value Measurments Using Significant Unobservable Inputs (Level 3) 2010 2009 $ 4,777 $ 7,994 (4,260) 3,872 (681) 3,708 $ (10,769) 7,651 (99) 4,777 $_ Change in unrealized gains and losses recorded in eamings for the year ended December 31, 2010 for Level 3 assets that are still held at December 31, 2010 was related to fair value declines recorded as other-than-temporary impairment. Impaired loans disclosed in footnote 7, which are measured for impairment using the fair value of collateral, are valued at Level 3. They are carried at a fair value of $31.6 million, net of a valuation allowance of $5.9 miUion at December 31, 2010 and at a fair value of $19.3 million, net of a valuation allowance of $5.4 million at December 31, 2009. The impact to the provision for loan losses for the twelve months ended December 31, 2010 and December 31, 2009 was $750 thousand and $1.7 million, respectively. 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 Ucensed 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 fiiture cash flows, or an observable market price from an active market. Fair value on non-real estate loans is determined using similar methods. Other real estate ovraed at December 31, 2010 with a value of $6.3 million was reduced $353 thousand for fair value adjustment. At December 31, 2010 other real estate owned was comprised of $3.3 million from commercial loans and $3.0 million from residential loans. OtUer real estate owned at December 31, 2009 with a value of $5.9 million was reduced $164 thousand for fair value adjustment. The following table presents loans identified as impaired by class of loans as of December 31, 2020. (Dollar amounts in thousands) Commercial Commercial & Industrial Farmland Non Farm, Non Residential Agriculture All Other Commercial Residential First Liens Home Equity Junior Liens Multifamily All Other Residential Consumer Motor Vehicle All Other Consumer TOTAL Unpaid Principal Balance Allowance for Loan Losses Allocated Fair Value 19,868 i ; 1,508 $ 18,360 12,397 3,255 9,142 1,577 128 1,449 1,910 533 1,377 1,129 638 443 686 638 37,519 5,867 31,652 19 N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS FIRST FINANCIAL CORPORATION The carrying amounts and estimated fair values of financial instraments are shown below. Carrying amount is the estimated fair value for cash and due from banks, federal funds sold, accraed interest receivable and payable, demand deposits, short-term and certain other borrowings, and variable-rate loans or deposits that reprice frequently and fully. Security fair values are determined as previously described. It is not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on their transferability. For tUe FDIC indemnification asset the carrying value is the estimated fair value as it represents amounts to be received fi-om the FDIC in the near term. 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 for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar fmancing. The fair value of off-balance sheet items is not considered material. The carrying amount and estimated fair value of assets and liabilities are presented in the table below and were determined based on the above assumptions: (Dollar amounts in thousands) Cash and due from banks Federal funds sold Securities available-for-sale Federal Home Loan Bank stock Loans, net FDIC Indemnification Asset Accraed interest receivable Deposits Short-term borrowings Federal Home Loan Bank advances Other borrowings Accraed interest payable December 31, 2010 2009 Carrying Value i 58,511 5,104 560,846 23,654 1,617,810 3,977 11,208 (1,903,043) (34,106) (125,793) Fair Value $ 58,511 5,104 560,846 N/A 1,607,895 3,977 11,208 (1,909,874) (34,106) (128,881) (2,041) (2,041) Carrying Value $ 84,371 21,576 587,246 26,181 1,612,327 12,124 12,005 (1,789,701) (30,436) (326,137) (6,600) (3,127) Fair Value 84,371 21,576 587,246 N/A 1,604,412 12,124 12,005 (1,798,059) (30,436) (337,847) (6,600) (3,127) 3. RESTRICTIONS ON CASH AND DUE FROM BANKS: Certain affiliate banks are required to maintain average reserve balances with the Federal Reserve Bank that do not eam interest. The amount of those reserve balances was approximately $9.1 milhon and $8.2 milhon at December 31, 2010 and 2009, respectively. 4. SECURITIES: The fair value of securities available-for-sale and related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows: (Dollar amounts in thousands) U.S. Govemment entity mortgage-backed securities Mortgage-backed securities, residential Mortgage-backed securities, commercial Collateralized mortgage obligations State and municipal obligations Collateralized debt obligations Equity Securities TOTAL Amortized Cost $2,027 289,962 136 92,803 152,633 15,084 1,729 $554,374 December 31, 2010 Unrealized Gains Losses Fair Value $ $46 13,166 3 2,248 5,318 - 295 $21,076 - (705) - (594) (411) (12,894) - ($14,604) $2,073 302,423 139 94,457 157,540 2,190 2,024 $560,846 20 N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS 2010 ANNUAL REPORT (Dollar amounts in thousands) U.S. Govemment entity mortgage-backed securities Mortgage-backed securities, residential Mortgage-backed securities, commercial Collateralized mortgage obligations State and municipal obligations Collateralized debt obligations Corporate debt securities Equity Securities TOTAL Amortized Cost $4,103 285,964 162 116,330 143,039 19,253 7,004 5,668 $581,523 December 31, 2009 Unrealized Gains Losses Fair Value $ $45 14,260 6 3,334 5,926 - 257 1,462 $25,290 - (40) - (100) (232) (17,837) (189) (1,169) ($19,567) $4,148 300,184 168 119,564 148,733 1,416 7,072 5,961 $587,246 As ofDecember 31, 2010, the Corporation does not have any securities firom any issuer, other than the U.S. Govemment, with an aggregate book or fair value that exceeds ten percent of shareholders' equity. Securities with a carrying value of approximately $227.3 million and $200.8 milhon at December 31, 2010 and 2009, respectively, were pledged as collateral for short-term borrowings and for other purposes. Below is a summary ofthe gross gains and losses reaUzed by the Corporation on investment sales during the years ended December 31, 2010, 2009 and 2008, respectively. (Dollar amounts in thousands) Proceeds Gross gains Gross losses 2010 2009 2008 12,248 $ 1,507 (213) 1,063 353 Additional gains of $27 thousand in 2010, caUed securities. tUousand in 2009 and $5 thousand in 2008 resulted from redemption premiums on Contractual maturities of debt securities at year-end 2010 were as follows. Securities not due at a single maturity or with no maturity date, primarily mortgage-backed and equity securhies, are shown separately. (Dollar amounts in thousands) Due in one year or less Due after one but within five years Due after five but within ten years Due after ten years Mortgage-backed securities and equities TOTAL Available-for-Sale Amortized Cost Fair Value $ $ 10,243 35,651 45,636 171,017 262,547 291,827 554,374 $ $ 10,437 37,517 47,695 160,611 256,260 304,586 560,846 21 N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS FIRST FINANCIAL CORPORATION The foUowing 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 December 31,2010 and 2009. (Dollar amounts in thousands) Mortgage-backed securities, residential Collateralized mortgage obligations State and municipal obligations CoUateralized debt obligations Less Than 12 Months Fair Value $ 35,024 25,338 19,372 - Unrealized Losses $ (705) (594) (411) - Total temporarily impaired securities $ 79,734 $ (1,710) (Dollar amounts in thousands) Mortgage-backed securities, residential Collateralized mortgage obligations State and municipal obligations Collateralized debt obligations Corporate debt securities Equity securities Total temporarily impaired securities Less Than 12 Months Fair Value 6,985 $ 6,094 6,594 - - 543 20,216 Unrealized Losses $ $ (38) (100) (45) - - (280) (463) December 31, 2010 More Than 12 Months Unrealized Losses Fair Value $ $ - - (12,894) (12,894) - - 2,190 2,190 December 31, 2009 More Than 12 Months Unrealized Losses Fair Value 47 $ - 4,841 1,416 811 1,150 :,265 $ $ (2) - (187) (17,837) (189) (889) (19,104) Fair Value $ 35,024 25,338 19,372 2,190 Total Unrealized Losses $ (705) (594) (411) (12,894) (14,604) 81,924 $ Total Fair Value 7,032 $ 6,094 11,435 1,416 811 1,693 28,481 Unrealized Losses $ (40) (100) (232) (17,837) (189) (1,169) (19,567) The Corporation held 697 investment securities with an amortized cost greater than fair value as of December 31, 2010. The unrealized losses on mortgage-backed and state and municipal obligations 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. Management does not intend to sell and it is not more likely than not that management would be required to seU the securities prior to their anticipated recovery. Management believes the value will recover as the securities approach maturity or market rates change. Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequentiy 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-maturify 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 seU the security or more Ukely than not wiU be required to sell the security before its anticipated recovery. The assessment of whether an other-than- temporary decUne 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 ofthe portfolio uses the OTTI guidance provided by FASB ASC-325 that is specific to purchase beneficial interests that, on the purchase date, were rated below AA. Under the FASB ASC-325 model, the Corporation 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 fiiture cash flows. When OTTI occurs under either model, the amount ofthe OTTI recognized in eamings depends on whether an entity intends to seU the security or it is more likely than not it will be required to seU the security before recovery ofits 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 shaU be recognized in eamings equal to the entire difference between the investmenf s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to seU the security and it is not more likely than not that the entity wiU be required to seU the security before recovery ofits 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 aU other factors. The amount ofthe total OTTI related to the credit loss is determined based on the present value ofcash flows expected to be collected and is recognized in eamings. The amount of tUe total OTTI related to other factors is recognized in other comprehensive income, net of appUcable taxes. The previous amortized cost basis less the OTTI recognized in eamings becomes the new amortized cost basis ofthe investment. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2010 ANNUAL REPORT Gross unrealized losses on investment securities were $14.6 miUion as of December 31, 2010 and $19.6 million as ofDecember 31, 2009. A majority of these losses represent negative adjustments to fair value relative to the illiquidity in the markets on the securities and not losses related to the creditworthiness ofthe issuer. A significant portion ofthe total unrealized losses 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 downgrade in credit rating or further defaults of underlying issuers during the year, and an analysis of expected cash flows, we determined that four CDOs included in coUateraUzed debt obligations were other-than-temporarily impaired. Those four CDO's have a contractual balance of $28.3 million at December 31, 2010 which has been reduced to $0.7 miUion by $0.3 million of interest payments received, $15.1 milUon of cumulative OTTI charges recorded through eamings to date, including $3.7 miUion recorded in 2010 and $12.2 million recorded in other comprehensive income. The severity ofthe OTTI recorded varies by security, based on the analysis described below, and ranges, at December 31, 2010 from 28% to 87%. The OTTI recorded in other comprehensive income represents OTTI due to factors other than credh loss, mainly current market Uliquidity. These securities are collateralized by trast preferred securities issued primarily by bank holding companies, but certain pools do include a limited number of insurance companies. The market for these securities has become very illiquid, there are very few new issuances of trast preferred securities and the credh spreads implied by current prices have increased dramatically and remain very high, resulting in significant non- credit related impairment. The Corporation uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine if there are adverse changes in cash flows during the year. The OTTI model considers the stracture and term ofthe CDO and the fmancial condition ofthe underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timmg 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 instraments. 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 trastee reports and any other relevant market infonnation, including annoimcements of interest payment deferrals or defaults of underlying tmst preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and treat aU 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 ofthe Corporation's note class. Collateralized debt obUgations include one additional investment in a CDO consisting of pooled tmst preferred securties in which the issuers are primarily banks. This CDO, with an amortized cost of $2.2 milUon and a fair value of $1.5 milUon, is currently rated BAA3 and is the senior tranche, is not in the scope of FASB ASC 325 as it was rated high investment grade at purchase, and is not considered to be other-than-temporarily impaired based on its credit quality. Its fah value is negatively impacted by the factors described above. Management has consistentiy 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 1.38 to 3.49 while Moody's Investor Service pricing ranges from 1.30 to 24.56, 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. Unrealized losses on equify securities at year end 2009 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. In 2009 the largest part of this unrealized loss ($753 or 64%o) relates to the Corporation's ownership of stock in Fifth Third Corporation. In 2010 the holdings of this issuer were Uquidated along with a majority ofthe equity holdings in order to retire debt $549 thousand of OTTI was recognized on the stock of Fifth Third Corporation prior to its disposal. The table below presents a rollforward ofthe credit losses recognized in eamings for the year ended December 31,2010: (Dollar amounts in thousands) Beginning balance, January 1, Amounts related to credit loss for which other-than- temporary impairment was not previously recognized Amounts realized for securities sold during the period Reductions for increase in cash flows expected to be collected that are recognized over the remaining hfe of the security Increases to the amount related to the credit loss for which other- than-temporary impairment was previously recognized Adoption of new accounting guidance on OTTI Ending balance, December 31, 2010 $ 11,359 2009 $ 6,145 (549) 5,438 4,260 - $ 15,070 5,331 (5,555) $ 11,359 23 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LOANS: Loans are summarized as follows: (Dollar amounts in thousands) Commercial Residential Consumer Total gross loans , Less: uneamed income Allowance for loan losses TOTAL December 31, $ 2010 896,107 437,576 307,403 1,641,086 (940) (22,336) $ 1,617,810 $ 2009 870,977 447,379 314,561 1,632,917 (1,153) (19,437) $ 1,612,327 Loans in the above summary include loans totaling $46.4 mUlion that are subject to the FDIC loss share arrangement ("covered loans") discussed in footnote 6. The Corporation periodically seUs residential mortgage loans it originates based on the overall loan demand of the Corporation and the outstanding balances in the residential mortgage portfoUo. At December 31,2010 and 2009, loans held for sale included $ 3.4 million and $3.3 million, respectively, and are included in the totals above. In the normal course of business, the Corporation's subsidiary banks make loans to directors and executive officers and to their associates. In 2010, the aggregate dollar amount of these loans to directors and executive officers who held office amounted to $42.0 million at the beginning ofthe year. During 2010, advances of $10.5 million, repayments of $15.3 million and increases of $0.2 million resulting from changes in personnel were made with respect to related party loans for an aggregate dollar amount outstanding of $37.4 million at December 31,2010. Loans serviced for others, which are not reported as assets, total $469.3 million and $460.3 miUion at year-end 2010 and 2009. Custodial escrow balances maintained in connection witii serviced loans were $ 1.93 million and S1.47 miUion at year-end 2010 and 2009. Activity for capitaUzed mortgage servicing rights (included in other assets) was as follows: (Dollar amounts in thousands) Servicing rights: Beginning of year Additions Amortized to expense End of year 2010 December 31, 2009 2008 $ $ 2,034 810 (764) 2,080 $ $ 1,604 1,294 (864) 2,034 $ $ 1,909 332 (637) 1,604 Third party valuations are conducted periodically for mortgage servicing rights. Based on these valuations, fair values were approximately $3.4 million and $3.0 million at year end 2010 and 2009. There was no valuation allowance in 2010 or 2009. Fair value for 2010 was determined using a discount rate of 9%i, prepayment speeds ranging from I60%i to 100%, depending on the stratification of the specific right Fair value at year end 2009 was determined using a discount rate of 9%, prepayment speeds ranging from 213%) to 700%), depending on the stratification ofthe specific right. Mortgage servicing rights are amortized over 8 years, the expected life ofthe sold loans. 6. ACQUISITION AND FDIC INDEMNIFICATION ASSET: 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 fiiU-service commercial bank headquartered in Danville, Illinois, that had failed and been placed in receivership with the FDIC. The acquisition consisted of assets worth a fair value of approximately $151.8 miUion, including $77.5 million of loans, $24.2 million of investment securities, $31.0 million of cash and cash equivalents and $146.3 mUUon of liabilities, including $145.7 milUon of deposits. A customer related core deposit intangible asset of $4.6 miUion was also recorded. In addition to the excess of liabilities over assets, the Bank received approximately$14.6 million in cash from the FDIC. Based upon the acquisition date fair values of the net assets acquired, no goodwiU was recorded. The transaction resulted in a gain of $5,1 million, which is included in non-interest income in the December 31, 2009 Consolidated Statement of Operations Under the loss-sharing agreement ("LSA"), the Bank will share in the losses on assets covered under the agreement (referred to as covered assets). On losses up to $29 miUion, the FDIC has agreed to reimburse the Bank for 80 percent ofthe losses. On losses exceeding $29 million, the FDIC has agreed to reimburse the Bank for 95 percent ofthe losses. The loss-sharing agreement is subject to foUowing servicing procedures as specified in the agreement with the FDIC. Loans acquired that are subject to the loss-sharing agreement with the FDIC are referred to as covered loans for disclosure purposes. Since the acquisition date the Bank has been reimbursed $13.1 milUon for losses and carrying expenses and currently carries a balance of $4.0 million. Included in the current balance is the estimate of $1.7 milUon for 80%i of the loans subject to the loss-sharing agreement identified in the allowance for loan loss evaluation as future potential losses. This $1.7 milUon flows to the 24 N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS 2010 ANNUAL REPORT income statement as a reduction ofthe provision for loan losses that was allocated to these loans. FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, appUes 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 310-30 prohibits cartying over or creating an allowance for loan losses upon initial recognition. The carrying amount of covered assets at December 31, 20l0and 2009, consisted of loans accoimted 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: (Dollar amounts in thousands) Loans Foreclosed Assets Total Covered Assets (Dollar amounts in thousands) Loans Foreclosed Assets Total Covered Assets ASC 310-30 Loans Non ASC 310- 30 Loans 10,948 35,485 10,948 35,485 Other $ $ 2,586 2,586 $ ASC 310-30 Loans 16,849 Non ASC 310- 30 Loans 55,025 $ 16,849 55,025 Other 1,256 1,256 2010 Total 46,433 2,586 49,019 2009 Total 71,874 1,256 73,130 The roUforward ofthe FDIC Indemnification asset is as follows: (Dollar amounts in thousands) Beginning balance Assessed value of intial indemnification asset Accretion Net changes in losses and expenses added Reimbursements from the FDIC TOTAL December 31, 2010 2009 $ $ 12,124 - 339 4,570 (13,056) 3,977 $ $ - 12,098 - 26 - 12,124 On the acquisition date, the preliminary estimate ofthe contractually required payments receivable for all FASB ASC310-30 loans acquired in the acquisition were $31.6 million, the cash flows expected to be collected were $18.4 million including interest, and the estimated fair value ofthe loans was $16.7 million. These amounts were determined based upon the estimated remaining life ofthe imderlying loans, which include the effects of estimated prepayments. At December 31, 2010, a majority of these loans were valued based on the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of underlying collateral and the timing and amount ofthe cash flows could not be reasonably estimated. There was a $1.5 million allowance for credit losses related to these loans at December 31, 2010. On the acquisition date, the preliminary estimate ofthe contractually required payments receivable for all non FASB ASC310-30 loans acquired in the acquisition was $58.4 million and the estimated fair value of the loans was $60.7 million. The impact to the Corporation from the amortization and accretion of premiums and discounts was immaterial. 7. ALLOWANCE FOR LOAN LOSSES: Changes in the allowance for loan losses are summarized as follows: (Dollar amounts in thousands) December 31, 2009 2010 2008 Balance at beginning of year Provision for loan losses * Recoveries of loans previously charged off Loans charged off BALANCE AT END OF YEAR $ 19,437 10,862 4,511 (12,474) $ 22,336 $ 16,280 11,870 2,948 (11,661) $ 19,437 $ 15,351 7,855 2,668 (9,594) $ 16,280 * Provision before reduction of $1,662 in 2010 for increases in the FDIC indemnification asset. 25 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present the allocation ofthe allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method at December 31, 2010: Allowance for Loan Losses: (Dollar amounts in thousands) Individually evaluated for impairment Collectively evaluated for impairment Acquired with deteriorated credit quality BALANCE AT END OF YEAR Loans (Dollar amounts in thousands) Individually evaluated for impairment Collectively evaluated for impairment Acquired with deteriorated credit quality BALANCE AT END OF YEAR Commercial Residential Consumer Unallocated Total 3,893 7,788 1,128 12,809 $ 625 1,897 351 2,873 4,551 2,103 4,551 2,103 Commercial Residential 2,770 $ 27,717 435,231 863,790 1,113 9,938 439,114 $ 901,445 Consumer 308,903 15_ 308,918 4,518 16,339 1,479 22,336 Total 30,487 i 1,607,924 11,066 g 1,649,477 The following table identifies loans classified as impaired. (Dollar amounts in thousands) Year-end loans with no allocated allowance for loan losses Year-end loans with allocated allowance for loan losses TOTAL December 31, 2010 11,890 25,629 37,519 2009 5,344 19,330 $ 24,674 Amount ofthe allowance for loan losses allocated 5,867 5,438 26 2010 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents loans individually evaluated for impairment by class ofloan. With no related allowance recorded: Commercial Commercial & Industrial Farmland Non Farm, Non Residential Agriculture All Other Commercial Residential First Liens Home Equity Junior Liens Muhifamily AU Other Residential Consumer Motor Vehicle All Other Consumer With an allowance recorded: Commercial Commercial & Industrial Farmland Non Farm, Non Residential Agriculture All Other Commercial Residential First Liens Home Equity Junior Liens Muhifamily All Other Residential Consumer Motor Vehicle All Other Consumer TOTAL Unpaid Principal Balance Recorded Investment Allowance for Loan Losses Allocated $ 8,935 $ 8,993 $ 2,955 2,955 - 0,933 10,996 1,508 9,442 9,442 3,255 1,577 1,577 1,910 1,910 1,129 638 1,129 638 128 533 443 - 37,519 $ 37,640 5,867 The table below presents non-performing loans. (Dollar amounts in thousands) Nonperforming loans: Loans past due over 90 days still on accmal Restractured loans Non-accraal loans December 31, 2010 2009 3,185 17,094 38,517 8,218 90 35,953 Covered loans included in loans past due over 90 days still on accmal are $377 thousand at December 31, 2010 and $4.4 miUion at December 31, 2009. Covered loans included in non-accraal loans are $8.7 million at December 31, 2010 and $7.5 million at December 31, 2009. Covered loans of $4.3 mUlion are deemed impaired at December 31, 2010 and have allowance for loan loss allocated to them of $1.3 million. On December 31, 2009 there were $6.1 milhon of covered loans deemed impaired that had an allowance for loan loss allocated to them of $82 thousand. Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. 27 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands) Average of impaired loans during the year Interest income recognized during impairment Cash-basis interest income recognized 2010 27,772 660 57 2009 $ 21,731 36 19 $ 2008 6,531 3 - The foUowing table presents the recorded investment in nonperforming loans by class of loans. (Dollar amounts in thousands) Commercial Commercial & Industrial Farmland Non Farm, Non Residential Agriculture All Other Commercial Residential First Liens Home Equify Junior Liens Multifamily All Other Residential Consumer Motor Vehicle All Other Consumer TOTAL Loans Past Due Over 90 Day Still Accming Restmctured Nonaccmal $ 1,462 - 506 - 158 971 45 66 - - $ 13,671 - - - - 2,605 - 928 - - $ 11,677 68 13,808 284 2,011 6,141 - 1,454 990 150 91 4 3,303 _ - 17,204 259 1,675 38,517 $ $ $ The Corporation has allocated $657 thousand and $0 of specific reserves to customers whose loan terms have been modified in tioubled debt resti^ctiirings as of December 31, 2010 and 2009. The Corporation has not committed to lend additional amounts as of December 31, 2010 and 2009 to customers with outstanding loans that are classified as troubled debt restmcturings. The following table presents the aging of the recorded investment in loans by past due category and class of loans. (Dollar amounts in thousands) Commercial Commercial & Industrial Farmland Non Farm, Non Residential Agriculture All Other Commercial Residential First Liens Home Equity Junior Liens Multifamily All Other Residential Consumer Motor Vehicle All Other Consumer TOTAL 30-59 Days Past Due 60-89 Days Past Due Greater than 90 days Past Due Total Past Due $ 2,619 63 761 55 - 5,405 78 287 706 144 $ 882 198 1,763 - 135 1,649 ll 165 - - $ 3,868 - 4,366 284 283 3,793 45 175 352 - $ 7,369 261 6,890 339 418 10,847 134 627 1,058 144 Current Total $ 405,319 71,672 260,685 85,275 63,217 $ 412,688 71,933 267,575 85,614 63,635 310,722 38,638 33,394 32,605 10,945 321,569 38,772 34,021 33,663 11,089 2,994 138 13,250 $ 378 23 5,204 91 6 13,263 3,463 167 $ 31,717 $ $ 279,029 26,259 $1,617,760 282,492 26,426 $1,649,477 28 2010 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Credit Quality Indicators: The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial infonnation, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credh risk. This analysis includes non-homogeneous loans, such as commercial loans, with an outstanding balance greater than $50 thousand. Any consumer loans outstanding to a borrower who had commercial loans analyzed will be similarly risk rated. This analysis is performed on a quarterly basis. The Corporation uses the following definitions for risk ratings: Special Mention: Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Substandard: Loans classified as substandard are inadequately protected by the current net worth and debt service capacity of the borrower or of any pledged collateral. These loans have a well-defined weakness or weaknesses which have clearly jeopardized repayment of principal and interest as originally intended. They are characterized by the distinct possibility that the institution will sustain some future loss ifthe deficiencies are not corrected. Doubtful: Loans classified as doubtful have all the weaknesses inherent in those graded substandard, with the added characteristic that the severity ofthe weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Furthermore, non-homogeneous loans which were not individually analyzed, but are 90+ days past due or on non-accraal are classified as substandard. Loans included in homogeneous pools, such as residential or consumer, may be classified as substandard due to 90+ days delinquency, non-accmal status, bankmptcy, or loan restracturing. Loans not meeting the criteria above that are analyzed individually as part ofthe above described process are considered to be pass rated loans. Loans listed as not rated are either less than $50 thousand or are included in groups of homogeneous loans. As ofDecember 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as foUows: (Dollar amounts in thousands) Commercial Commercial & Industrial Farmland Non Farm, Non Residential Agriculture All Other Commercial Residential First Liens Home Equity Junior Liens Multifamily All Other Residential Consumer Motor Vehicle All Other Consumer TOTAL Pass Special Mention Substandard Doubtful Not Rated Total $311,258 66,920 208,847 82,275 52,704 $ 26,956 1,535 29,399 602 6,188 $ 63,334 1,691 24,579 1,008 2,799 $ 93,887 8,641 4,796 22,678 1,349 6,201 4,447 107 8,516 - 7,495 427 1,733 1,255 26 2,910 68 3,364 284 468 2,944 23 167 990 - $ 6,977 109 544 154 1,134 $ 411,435 70,323 266,733 84,323 63,293 209,804 25,200 27,090 127 9,673 320,331 38,738 33,893 33,566 11,048 12,902 3,945 $ 870,202 331 64 $ 84,346 492 174 $ 105,013 29 42 $ 11,289 267,424 22,000 $ 570,236 281,178 26,225 $1,641,086 29 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. PREMISES AND EQUIPMENT: Premises and equipment are summarized as follows: (Dollar amounts in thousands) Land Building and leasehold improvements Fumiture and equipment Less accumulated depreciation TOTAL December 31, 2010 2009 $ 7,581 42,367 34,700 84,648 (49,957) $ 34,691 $ 7,305 41,964 33,520 82,789 (47,238) $ 35,551 Aggregate depreciation expense was $3.27 million, $3.25 million and $3.11 million for 2010, 2009 and 2008, respectively. 9. GOODWILL AND INTANGIBLE ASSETS: The Corporation completed its annual impairment testing of goodwill during the second quarter of 2010 and 2009. Management does not believe any amount of goodwill is impaired. Intangible assets subject to amortization at December 31, 2010 and 2009 are as follows: (Dollar amounts in thousands) Customer list intangible Core deposit intangible 2010 2009 Gross Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization $ $ $ 4,055 6,546 $ 3,222 3,231 $ 3,446 6,546 10,601 $ 6,453 $ 9,992 $ 2,912 2,164 5,076 In late December 2010 Forrest Sherer, Inc. paid $609 thousand to acquire an insurance agency. The only identifiable asset purchased was a customer list intangible of $609. Aggregate amortization expense was $1.38 million, $950 thousand and $425 thousand for 2010, 2009 and 2008, respectively. Estimated amortization expense for the next five years is as follows: 2011 $ 2012 2013 2014 2015 In thousands 1,059 801 666 468 337 10. DEPOSITS: Scheduled maturities of time deposits for the next five years are as follows: 2011 $ 2012 2013 2014 2015 382,466 145,184 69,904 41,782 12,583 30 2010 ANNUAL REPORT N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS 11. SHORT-TERM BORROWINGS: A summary ofthe carrying value ofthe Corporation's short-term bortowings at December 31,2010 and 2009 is presented below: (Dollar amounts in thousands) Federal funds purchased Repurehase-agreements Other short-term borrowings (Dollar amounts in thousands) Average amount outstanding Maximum amount outstanding at a month end Average interest rate during year Interest rate at year-end $ $ $ 2010 3,310 28,936 1,860 34,106 2010 39,753 47,209 0.82% 0.83% $ $ $ 2009 5,754 22,578 2,104 30,436 2009 53,930 95,568 1.00% 1.37% Federal funds purchased are generally due in one day and bear interest at market rates. Other borrowings, primarily note payable— U S. govemment, are due on demand, secured by a pledge of securities and bear interest at market rates. Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. The Corporation maintains possession of and control over these securities. 12. OTHER BORROWINGS: Other bortowings at December 31, 2010 and 2009 are summarized as follows: (Dollar amounts in thousands) FHLB advances City of Terre Haute, Indiana economic development revenue bonds TOTAL 2010 $ 125,793 -__ $ 125,793 2009 $ 326,137 6,600 $ 332,737 The aggregate minimum annual retirements of other borrowings are as foUows: 2011 2012 2013 2014 2015 Thereafter $ $ 2,050 20,000 56,000 45,000 2,000 743 125,793 The Corporation's subsidiary banks are members ofthe Federal Home Loan Bank (FHLB) of IndianapoUs and accordingly are permitted to obtain advances. The advances from the FHLB, aggregating $125.8 million at December 31,2010, and $326.1 milUon at December 31, 2009, accme interest, payable monthly, at annual rates, primarily fixed, varying from 3.1%i to 6.6% in 2010 and 3.2% to 6.6%> in 2009. The advances are due at various dates through August 2017. FHLB advances are, generally, due in full at maturity. They are secured by eUgible securities totaling $33.1 miUion at December 31, 2010, and $217.6 miUion at December 31, 2009, and a blanket pledge on real estate loan collateral. Based on this coUateral and the Corporation's holdings of FHLB stock, the Corporation is eUgible to borrow up to $227.7 milUon at year end 2010. Certain advances may be prepaid, without penalty, prior to maturity. The FFILB can adjust the interest rate from fixed to variable on certain advances, but those advances may then be prepaid, without penalty. The economic development revenue bonds (bonds) require periodic interest payments each year until maturity or redemption. The interest rate, which was 0.21% at December 31, 2009, is determined by a formula which considers rates for comparable bonds and is adjusted periodically. TUe bonds are collateralized by a first mortgage on the Corporation's headquarters building. The bonds mature December 1,2015, but were retired during 2010. 31 FIRST FINANCIAL CORPORATION N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS 13. INCOME TAXES: Income tax expense is summarized as foUows: (Dollar amounts in thousands) Federal: Currently payable Deferred State: Currently payable Deferred TOTAL 2010 2009 2008 $ 15,582 3 (4,850) 10,732 5 8,721 (1,574) 7,147 $ 12,238 (4,727) 7,511 2,325 (1,090) 1,235 $ 11,967 S 877 (469) 408 ; 7,555 $ 712 (420) 292 7,803 The reconciliation of income tax expense with the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes is summarized as follows: (Dollar amounts in thousands) Federal income taxes computed at the statutory rate Add (deduct) tax effect of: Tax exempt income State tax, net of federal benefit Affordable housing credits Other, net TOTAL 2010 J14,004 2009 $10,596 2008 511,400 (3,400) 803 - 560 $11,967 (3,521) 265 - 215 $7,555 (3,505) 189 (30) (251) $7,803 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2010 and 2009, are as follows: (Dollar amounts in thousands) Deferred tax assets: Other than temporary impairment Net unrealized losses on retirement plans Loan losses provision Deferred compensation Compensated absences Post-retirement benefits Other GROSS DEFERRED ASSETS Deferred tax liabilities: Net unrealized gains on securities available-for-sale Depreciation Federal Home Loan Bank stock dividends Mortgage servicing rights Pensions Deferred gain on acquisition Other GROSS DEFERRED LLA.B1LIT1ES NET DEFERRED TAX ASSETS (LL\BILITIES) 2010 2009 $ 5,995 8,512 9,315 8,035 723 1,971 1,333 35,884 S 4,486 7,236 7,717 7,118 633 1,785 1,288 30,263 (2,589) (1,578) (96) (827) (1,865) (666) (2,260) (9,881) $ 26,003 (2,290) (1,496) (456) (807) (2,385) (2,039) (1,704) (11,177) $ 19,086 32 N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS 2010 ANNUAL REPORT Unrecognized Tax Benefits — A reconciliation ofthe beginning and ending amount of unrecognized tax benefits is as follows: (Dollar amounts in thousands) Balance at January 1 Additions based on tax positions related to the current year Additions based on tax positions related to prior years Reductions for tax positions of prior years Reductions due to the statute of limitations Settlements Balance at December 31 2010 2009 2008 $ $ 660 113 181 - (53) - 901 $ $ 549 111 803 47 - - - 660 $ (291) - (10) 549 $ Of this totafi $901 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months. The total amount of interest and penalties recorded in the income statement for the years ended December 31, 2010, 2009 and 2008 was an expense increase of $43 and $9, and a reduction of $48, respectively. The amount accraed for interest and penalties at December 31, 2010, 2009 and 2008 was $ 116, $73 and $64, respectively. The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Indiana and Illinois. The Corporation is no longer subject to examination by taxing authorities for years before 2007. 14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Corporation is a party to financial instmments with off-balance-sheet risk in the nonnal course of business to meet the financing needs of its customers. These financial instmments include conditional commitments and commercial letters of credh. The financial instmments involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the financial statements. The Corporation's maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrament for commitments to make loans is limited generally by the contractual amount of those instraments. The Corporation follows the same credit policy to make such commitments as is foUowed for tUose loans recorded in the consolidated financial statements. Commitment and contingent liabilities are summarized as follows at December 31: (Dollar amounts in thousands) Home Equity Commercial Operating Lines Other Commitments TOTAL 2010 44,236 203,991 45,436 $ 293,663 2009 $ 43,385 206,294 40,480 $ 290,159 Commercial letters of credit 13,414 15,791 The majority ofcommercial operating lines and Uome equity lines are variable rate, while the majority of other commitments to fund loans are fixed rate. Since many commitments to make loans expire without being used, these amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise ofthe commitment is determined using management's credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. The approximate duration of these commitments is generally one year or less. Derivatives: The Corporation enters into derivative instraments for the benefit of its customers. At the inception of a derivative contract, the Corporation designates the derivative as an instrament with no hedging designation ("standalone derivative"). Changes in the fair value of derivatives are reported currently in eamings as non-interest income. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. First Financial Bank offers clients the ability on certain transactions to enter into interest rate swaps. Typically, these are pay fixed, receive floating swaps used in conjunction with commercial loans. These derivative contracts do not qualify for hedge accounting. The Bank hedges the exposure to these contracts by entering into offsetting contracts with substantiaUy matching terms. The notional amount of these interest rate swaps was $30.5 and $32.6 million at December 31, 2010 and 2009. The fair value of these conti-acts combined was zero, as gains offset losses. The gross gain and loss associated with these interest rate swaps was $1.3 milUon and ; thousand at December 31,2010 and 2009. 33 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RETIREMENT PLANS: Substantially all employees of the Corporation are covered by a retirement program that consists of a defined benefit plan and an employee stock ownership plan (ESOP). Plan assets consist primarily of the Corporation's stock and obhgations of U.S. Govemment agencies. Benefits under the defined benefit plan are actuarially determined based on an employee's service and compensation, as defined, and funded as necessary. Assets in the ESOP are considered in calculating the funding to the defined benefit plan required to provide such benefits. Any shortfall of benefits under the ESOP are to be provided by the defined benefit plan. The ESOP may provide benefits beyond those determined under the defined benefit plan. Contributions to the ESOP are determined by the Corporation's Board of Directors. The Corporation made contributions to the defmed benefit plan of $1.30 milhon, $1.20 miUion and $1.73 mdlion in 2010, 2009 and 2008. The Corporation contributed $1.35 miUion, $971 thousand and $1.28 million to the ESOP in 2010, 2009 and 2008. The Corporation uses a measurement date of December 31, 2010. Net periodic benefit cost and other amounts recognized in other comprehensive income included the following components: (Dollar amounts in thousands) Service cost - benefits eamed Interest cost on projected benefit obligation Expected return on plan assets Net amortization and deferral Net periodic pension cost Net loss (gain) during the period Amortization of prior service cost Amortization of unrecognized gain (loss) Total recognized in other comprehensive income (loss) $ 2010 2009 2008 $ 3,093 3,313 (3,400) 964 3,970 4,466 18 (982) 3,502 $ 3,100 3,296 (3,857) 625 3,164 4,762 29 (353) 4,438 3,031 2,908 (3,292) 711 3,358 - 18 (729) (711) Total recognized net periodic pension cost and other comprehensive income $ 7,472 $ 7,602 $ 2,647 The estimated net loss and prior service costs for the defmed benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $986 thousand and $166 thousand. The information below sets forth the change in projected benefit obUgation, reconcUiation of plan assets, and the funded status ofthe Corporation's retirement program. Actuarial present value of benefits is based on service to date and present pay levels. (Dollar aniounts in thousands) Change in benefit obligation: Benefit obligation at January 1 Service cost Interest cost Amendment Actuarial (gain) loss Benefits paid Benefit obligation at December 31 Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 Actual retum on plan assets Employer contributions Benefits paid Fair value of plan assets at December 31 $ 2010 2009 $ 55,914 3,093 3,313 2,315 4,820 (2,449) 67,006 42,199 6,070 2,644 (2,449) 48,464 56,476 3,100 3,296 - (4,672) (2,286) 55,914 47,892 (5,578) 2,171 (2,286) 42,199 Funded status at December 31 (plan assets less benefit obligation) $ (18,542) $ (13,715) 34 N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS 2010 ANNUAL REPORT Amounts recognized in accumulated other comprehensive income at December 31,2010 and 2009 consist ofi (Dollar amounts in thousands) Net loss (gain) Prior service cost (credit) 2010 2009 19,164 2,259 21,423 17,994 (74) 17,920 The accumulated benefit obligation for the defined benefit pension plan was $55,304 and $45,964 at year-end 2010 and 2009. Principal assumptions used: Discount rate Rate of increase in compensation levels Expected long-term rate of retum on plan assets 2010 2009 5.54% 3.75 8.00 5.96% 3.75 8.00 The expected long-term rate of return was estimated using market benchmarks for equities and bonds applied to the plan's target asset aUocation. Management estimated the rate by which plan assets would perform based on historical experience as adjusted for changes in asset allocations and expectations for fiiture retum on equities as compared to past periods. Plan Assets — The Corporation's pension plan weighted-average asset aUocation for the years 2010 and 2009 by asset category are as foUows: Pension Plan Target Allocation 2011 61-63% 33-36% 1-6% ESOP Target Allocation 2011 99-100% 0-0 0-1 Pension Pecentage of Plan Assets at December 31, ESOP Pecentage of Plan Assets at December 31, 2010 2009 2010 2009 64% 33% 3% 100%, 57% 35% 8% 100%) 100% 0% 0% 100% 100% 0% 0% 100% ASSET CATEGORY Equity securities Debt securities Other TOTAL Fair Value of Plan Assets — Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. It also 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 Corporation used the following methods and significant assumptions to estimate the fair value of each type of financial instalment: Equify, Debt, Investment Funds and Other Securities — The fair values for investinent securities are determined by quoted market prices, if available (Level I). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of simUar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair value ofthe plan assets at December 31,2010 and 2009, by asset category, is as follows: Fair Value Measurments at December 31, 2010 Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Obsevable Inputs (Level 2) Significant Obsevable Inputs (Level 3) Carrying Value $ $ 41,405 5,504 1,555 48,464 $ $ 41,405 - 1,555 42,960 $ $ $ $ 5,504 - 5,504 - - (Dollar amounts in thousands) Plan assets Equity securities Debt securities Investment Funds Total plan assets 35 N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS FIRST FINANCIAL CORPORATION Fair Value Measurments at December 31, 2009 Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Obsevable Inputs (Level 2) Significant Obsevable Inputs (Level 3) Carrying Value $ $ 32,583 8,133 1,483 42,199 $ $ 32,583 - 1,483 34,066 $ $ $ $ 8,133 - 8,133 - - (Dollar amounts in thousands) Plan assets Equity securities Debt securities Investment Funds Total plan assets The investment objective for the retirement program is to maximize total retum without exposure to undue risk. Asset allocation favors equities, with a target allocation of approximately 88%). This target includes the Corporation's ESOP, which is 100% invested in corporate stock. Other investment allocations include fixed income securities and cash. The plan is prohibited from investing in the following: private placement equity and debt transactions; letter stock and uncovered options; short-sale margin transactions and other specialized investment activity; and fixed income or interest rate futures. All other investments not prohibited by the plan are pemiitted. Equity securities include First Financial Corporation common stock in the amount of $29.7 milUon (61 percent of total plan assets) and $25.3 million (60 percent of total plan assets) at December 31, 2010 and 2009, respectively. Other equity securities are predominantly stocks in large cap U.S. companies. Contributions — The Corporation expects to contribute $4.9 million to its pension plan and $1.4 million to its ESOP in 2010. Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected: PENSION BENEFITS (Dollar amounts 2011 2012 2013 2014 2015 2016-2020 in thousands) 1,089 $ 1,294 1,351 1,693 1,959 12,887 Supplemental Executive Retirement Plan — The Corporation has estabUshed a Supplemental Executive Retirement Plan (SERP) for certain executive officers. The provisions ofthe SERP allow the Plan's participants who are also participants in the Corporation's defined benefit pension plan to receive supplemental retirement benefits to help recompense for benefits lost due to the imposition of IRS limitations on benefits under the Corporation's tax qualified defined benefit pension plan. Expenses related to the plan were $241 thousand in 2010 and $196 thousand in 2009. The plan is unfiinded and has a measurement date of December 31. The amounts recognized in other comprehensive income in the current year are as follows: (Dollar amounts in thousands) Net loss (gain) during the period Amortization of prior service cost Amortization of unrecognized gain (loss) Total recognized in other comprehensive income (loss) 2010 2009 2008 (90) (74) 66 (98) $ (74) (37) (111) $ (74) 5 (69) The Corporation has $1.3 mUlion and $1.2 million recognized in the balance sheet as a hability at December 31, 2010 and 2009. Amounts in accumulated other comprehensive income consist of $170 thousand net gain and $74 thousand in prior service cost at December 31, 2010 and $146 thousand net gain and $148 thousand in prior service cost at December 31, 2009. The estimated gain and prior service costs for the SERP that wiU be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $39 thousand and $74 thousand. 36 2010 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected: SERP BENEFITS (Dollar amounts on thousands) $ 2011 2012 2013 2014 2015 2016-2020 ~ 131 130 128 126 600 The Corporation also provides medical benefits to its employees subsequent to their retirement The Corporation uses a measurement date of December 31,2010. Accmed post-retirement benefits as of December 31,2010 and 2009 are as follows: (Dollar amounts in thousands) Change in benefit obligation: Benefit obligation at January 1 Service cost Interest cost Plan participants' contributions Actuarial (gain) loss Benefits paid Benefit obligation at December 31 Funded status at December 31 December 31, 2010 2009 $ $ $ $ 4,425 63 218 67 (273) 4,500 4,500 $ $ 4,248 109 240 26 16 (214) 4,425 4,425 Amounts recognized in accumulated other comprehensive income consist ofa net loss of $575 thousand and $180 thousand in transition obligation at December 31, 2010 and $410 thousand net loss and $241 thousand in ttansition obligation at December 31, 2009. The post-retirement benefits paid in 2010 and 2009 of $273 thousand and $214 thousand, respectively, were fully funded by company and participant contributions. The estimated ttansition obUgation for the post-rethement benefit plan that wiU be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $60 thousand. Weighted average assumptions at December 31: Discount rate Initial weighted health care cost trend rate Ultimate health care cost trend rate Year that the rate is assumed to stabilize and remain unchanged December 31, 2010 2009 5.54% 7.50 5.00 2014 5.25% 7.50 5.00 2013 37 FIRST FINANCIAL CORPORATION N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS Post-retirement health benefit expense included the following components: (Dollar amounts in thousands) Service cost Interest cost Amortization of transition obligation Recognized actuarial loss Net periodic benefit cost Net loss (gain) during the period Amortization of prior service cost Amortization of unrecognized gain (loss) Total recognized in other comprehensive income (loss) Total recognized net periodic benefit cost and other comprehensive income Years Ended December 31, 2010 2009 2008 $ 64 218 60 12 354 $ $ 70 240 60 - 370 $ 125 238 60 11 434 (60) (153) (213) $ 141 $ (60) (110) (170) $ 200 $ (60) (11) (71) 363 $ $ $ Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage- point change in the assumed health care cost trend rates would have the foUowing effects: (Dollar amounts in thousands) Effect on total of service and interest cost components Effect on post-retirement benefit obligation 1% Point Increase 1% Point Decrease 51 4 (47) (4) Contributions — The Corporation expects to contribute $210 thousand to its other post-retirement benefit plan in 2011. Estimated Future Payments — The following benefit payments, wbieU reflect expected future service, are expected: Post-Retirement Medical Benefits (Dollar amounts in thousands) 2011 2012 2013 2014 2015 2016-2020 233 247 249 255 263 1,390 38 2010 ANNUAL REPORT N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS 16. OTHER COMPREHENSIVE INCOME (LOSS): Other comprehensive income (loss) components and related taxes were as foUows: (Dollar amounts in thousands) Unrealized holding gains and (losses) on securities available-for-sale Change in unrealized gains (losses) on securities available-for-sale for which a portion of OTTI has been recognized in eamings Reclassification adjustments for (gains) and losses later recognized in income Reclassification adjustment for prior OTTI charges Net unrealized gains and (losses) Tax effect Other comprehensive income (loss) Unrecognized gains and (losses) on benefit plans Amortization of prior service cost included in net periodic pension cost Amortization of unrecognized gains (losses) included in net periodic pension cost Benefit plans, net Tax Effect Other comprehensive income (loss) December 31, 2009 2010 (6,291) $ 9,950 $ 2008 (19,580) 4,101 $ (2,599) $ 2,939 749 (300) 449 (4,376) 116 1,069 (3,191) 1,277 (1,914) 10,765 (5,555) 12,561 (5,025) 7,536 (4,762) 105 500 (4,157) 1,663 (2,494) $ $ $ $ $ $ 5,787 (13,793) 5,517 (8,276) 116 735 851 (340) 511 $ $ $ The following is a summary of tUe accumulated other comprehensive income balances, net of tax: (Dollar amounts in thousands) Unrealized gains (losses) on securities available-for-sale Unrealized loss on retirement plans TOTAL 17. REGULATORY MATTERS: Balance at 12/31/2009 3,434 (11,338) (7,904) Current Period Change 449 (1,914) (1,465) Balance at 12/31/2010 3,883 (13,252) (9,369) The Corporation and its bank afflliates are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary— actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Further, the Corporation's primary source of funds to pay dividends to shareholders is dividends from its subsidiary banks and compliance with these capital requirements can affect the ability ofthe Corporation and its banking afflliates to pay dividends. At December 31, 2010, approximately $27.2 million of undistributed eamings ofthe subsidiary banks, included in consohdated retained eamings, were available for distribution to the Corporation without regulatory approval. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and Banks must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, habilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's and Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures estabUshed by regulation to ensure capital adequacy requfre the Corporation and Banks to maintain minimum amounts and ratios of Total and Tier 1 Capital to risk-weighted assets, and of Tier 1 Capital to average assets. Management believes, as of December 31, 2010 and 2009, that the Corporation meets all capital adequacy requirements to which it is subj eet. As of December 31, 2010, 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 weU 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 banks' category. 39 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the actual and required capital amoimts and related ratios for the Corporation and First Financial Bank, N.A., at year-end 2010 and 2009. (Dollar amounts in thousands) Total risk-based capital Corporation-2010 Corporation - 2009 First Financial Bank - 2010 First Financial Bank - 2009 Tier I risk-based capital Corporation-2010 Corporation - 2009 First Financial Bank - 2010 First Financial Bank - 2009 Tier I leverage capital Corporation-2010 Corporation - 2009 First Financial Bank - 2010 First Financial Bank - 2009 Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount $341,965 $321,604 320,247 305,100 $319,629 $302,167 301,232 288,791 $319,629 $302,167 301,232 288,791 17.82% 16.44% 17.29% 16.09% $153,497 $156,502 148,185 151,688 16.66% 15.45% 16.26% 15.23% $76,748 $78,251 74,093 75,844 12.68% 12.01% 12.37% 11.86% $100,847 $100,630 97,420 97,393 8.00% 8.00% 8.00% 8.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% N/A N/A 185,231 189,611 N/A N/A 10.00% 10.00% N/A N/A 111,139 113,766 N/A N/A 6.00% 6.00% N/A N/A 121,776 121,742 N/A N/A 5.00% 5.00% 18. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS: The parent company's condensed balance sheets as of December 31, 2010 and 2009, and the related condensed statements of income and cash flows for each of the tiiree years in the period ended December 31,2010, are as follows: CONDENSED BALANCE SHEETS (Dollar amounts in thousands) ASSETS Cash deposits in affiliated banks Investments in subsidiaries Land and headquarters building, net Other Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Borrowings (including $1.0 million from subsidiary) Dividends payable Other liabihties TOTAL LL^BILITIES December 31, 2010 2009 $ $ $ 9,269 317,415 5,174 2,980 334,838 - 6,050 7,071 13,121 $ $ $ 9,005 305,380 5,349 6,710 326,444 7,636 5,908 6,417 19,961 Shareholders' Equity TOTAL LLA.B1L1TIES AND SHAREHOLDERS' EQUITY 321,717 334,838 _$, 306,483 326,444 $ 40 2010 ANNUAL REPORT N O T ES TO C O N S O L I D A T ED FINANCIAL S T A T E M E N TS CONDENSED STATEMENTS OF INCOME (Dollar amounts in thousands) Dividends from subsidiaries Other income Interest on borrowings Other operating expenses Income before income taxes and equity in undistributed eamings of subsidiaries Income tax benefit Income before equity in undistributed eamings of subsidiaries Equity in undistributed eamings of subsidiaries Net income CONDENSED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Equity in undistributed eamings Contribution of shares to ESOP Securities impairment loss recognized in eamings Securities (gains) losses Increase (decrease) in other liabilities (Increase) decrease in other assets NET CASH FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: Sales of securities available-for-sale Purchase of investment securities Purchase of fumiture and fixtures NET CASH FROM DSIVESTING ACTIVITIES CASH FLOWS FROM FDSIANCING ACTIVITIES: Principal payments on borrowings Purchase of treasury stock Dividends paid NET CASH FROM FINANCING ACTIVITES NET (DECREASE) INCREASE IN CASH CASH, BEGINNING OF YEAR CASH, END OF YEAR Supplemental disclosures of cash flow information: Cash paid during the year for: Interest Income taxes 41 Years Ended December 31, 2009 2010 16,400 ; 5 14,300 ! 816 (121) (3,462) 2008 i 14,836 1,010 (362) (3,342) 1,279 (70) (4,314) 13,295 1,248 14,543 13,501 $ 28,044 11,533 1,092 12,625 10,095 22,720 12,142 1,124 13,266 11,503 24,769 Years Ended December 31, 2009 2010 2008 $ 28,044 22,720 24,769 262 (13,501) 1,347 549 (1,048) 655 (832) 15,476 250 (10,095) 971 - - (167) 638 14,317 263 (11,503) 1,277 - - 638 1,010 16,454 4,999 02) (13) 4,974 - (19) (21) (40) - (928) (4) (932) (7,636) (610) (11,940) (20,186) 264 9,005 9,269 (616) (11,806) (12,422) 1,855 7,150 9,005 $ (2,400) (1,464) (11,548) (15,412) 110 7,040 7,150 87 15,713 $ $ 124 13,485 358 11,657 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. SELECTED QUARTERLY DATA (UNAUDITED): (Dollar amounts in thousands) March 31 June 30 September 30 December 31 Interest Income $ 31,192 $ 30,980 $ 31,186 $ 30,224 Interest Expense 7,911 $ 6,899 $ 6,533 $ 5,623 $ (Dollar amounts in thousands) Interest Income Interest Expense March 31 June 30 September 30 December 31 31,186 30,658 32,224 32,187 10,723 10,082 9,357 9,099 2010 Net Interest Income $ 23,281 $ 24,081 $ 24,653 $ 24,601 Provision For Loan Losses $ $ $ $ 2,430 2,190 2,390 2,190 2009 Net Interest Income Provision For Loan Losses 20,463 20,576 22,867 23,088 $ 2,830 2,860 3,690 2,490 Net Income $ 5,686 $ 7,713 $ 6,293 S 8,352 Net Income Per Share 0.43 $ 0.59 $ 0.48 $ 0.64 S Net Income Net Income Per Share 0.35 0.35 0.59 0.45 4,530 4,621 7,719 5,850 42 REPORT OF I N D E P E N D E NT REGISTERED PUBLIC ACCOUNTING FIRM 2010 ANNUAL REPORT To the Shareholders and Board of Directors of First Financial Corporation: We have audited the accompanying consolidated balance sheets of First Financial Corporation as o f D e c e m b er 31, 2010 and 2009 and the related consoUdated statements of income, changes in shareholders' equity, and cash flows for each o f t he three years in the period ended December 31, 2010. We also have audited First Financial Corporation's internal control over financial reporting as ofDecember 31, 2010, based on criteria estabUshed in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Tread-way Commission (COSO). First Financial Corporation's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibiUty is to express an opinion on these financial statements and an opinion on the company's internal control over financial reporting based on our audits. We conducted our audits in accordance -with the standards of the PubUc Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in aU material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overaU financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We beUeve that our audits provide a reasonable basis for our opinions. the transactions and dispositions of the assets of the company; (2) provide reasonable assurance A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabiUty of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those poUcies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect that transactions are recorded as necessary to permit preparation of financial statements in accordance with generaUy accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition ofthe company's assets that could have a material effect on the financial statements. Because of its inherent Umitations, internal control over financial reporting may not prevent or detect misstatements. i\lso, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of comphance with the poUcies or procedures may deteriorate. In our opinion, the consoUdated financial statements referred to above present fairly, in aU material respects, the financial position of First Financial Corporation as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2010, in conformity with accounting principles generaUy accepted in the United States of America. Also in our opinion First Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Intemal Control—Integrated Framework issued by the COSO. IndianapoUs, Indiana March 15, 2011 43 FIRST FINANCIAL CORPORATION MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of First Financial Corporation (the "Corporation") has prepared and is responsible for the preparation and accuracy ofthe consolidated financial statements and related financial information included in the Annual Report. The management of the Corporation is responsible for establishing and maintaining adequate intemal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Corporation's intemal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for extemal purposes in accordance with generally accepted accounting principles. The Corporation's intemal confrol over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe Corporation are being made only in accordance with authorizations of management and directors ofthe Corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition ofthe Corporation's assets that could have a material effect on the financial statements. Because ofits inherent limitations, intemal confrol over fmancial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to tUe risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the poUcies or procedures may deteriorate. Management assessed the Corporation's system of intemal confrol over fmancial reporting as of December 31, 2010, in relation to criteria for effective intemal confrol over financial reporting as described in "Intemal Control—Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2010, its system of intemal control over financial reporting is effective and meets the criteria ofthe "Intemal Control—^Integrated Framework." Crowe Horwath LLP, uidependent registered pubUc accounting firm, has issued a report dated March 15,2011 on the Corporation's intemal confrol over fmancial reporting. MANAGEMENT'S DISCUSSION AND ANALYSIS Management's discussion and analysis reviews the financial condition of First Financial Corporation at December 31, 2010 and 2009, and the results ofits operations for the three years ended December 31, 2010. Where appropriate, factors that may affect fiiture financial performance are also discussed. The discussion should be read in conjimction with the accompanying consolidated financial statements, related footnotes and selected financial data. A cautionary note about forward-looking statements: In its oral and written communication, First Financial Corporation from time to time includes forward-lookmg statements, within the meaning ofthe Private Securities Litigation Reform Act of 1995. Such forward- looking statements can include statements about estimated cost savings, plans and objectives for futirre operations and expectations about performance, as well as economic and market conditions and frends. They often can be identified by the use of words such as "expect," "may," "could," "intend," "project," "estimate," "beUeve" or "anticipate." First Financial Corporation may include forward-looking statements in filings with the Securities and Exchange Commission, in other written materials such as this Annual Report and m oral statements made by senior management to analysts, investors, representatives ofthe media and others. It is intended that these forward- looking statements speak only as of the date they are made, and First Financial Corporation undertakes no obUgation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence of imanticipated events. By their nature, forward-looking statements are based on assumptions and are subject to risks, uncertainties and other factors. Actual results may differ materially from those contained in the forward-looking statement. The discussion in this "Managements Discussion and Analysis of Results of Operations and Financial Condition" Usts some ofthe factors which could cause actual results to vary materially from those in any forward-looking statements. Other uncertainties which could affect First Financial Corporation's future performance include the effects of competition, technological changes and regulatory developments; changes in fiscal, monetary and tax poUcies; market, economic, operational, liquidity, credit and interest rate risks associated with Ffrst Financial Corporation's business; inflation; competition in the financial services industry; changes in general economic conditions, either nationally or regionally, resulting in, among other things, credit quality deterioration; and changes in securities markets. Investors should consider these risks, imcertainties and other factors in addition to those mentioned by Ffrst Financial Corporation in its other filings from time to time when considering any forward-looking statement 44 2010 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS First Financial Corporation (the Corporation) is a financial services company. The Corporation, which is headquartered in Terre Haute, Ind., offers a wide variety of financial services including commercial, mortgage and consumer lending, lease fmancing, trust account services, depositor services and insurance services through its three subsidiaries. At the close of business in 2010 the Corporation and its subsidiaries had 813 fiill-time equivalent employees. First Financial Bank is the largest bank in Vigo County, Ind. It operates 13 full-service banking branches within the coimty; five in Clay County, Ind.; one in Greene County, Ind.; three in Knox County, Ind.; five in Parke County, Ind.; one in Putnam County, hid., five in Sullivan County, Ind.; four in Vermillion County, Ind.; one in Clark Coimty, Ilk; one in Coles County, 111.; three in Crawford County, Ilk; one in Jasper County, Ilk; two in Lawrence County, Ilk; two in Richland County, III; six in Vermilion County, 111.; and one in Wayne County, 111. In addition to its branches, it has a main office in downtown Terre Haute and a 50,000-square-foot commercial building on South Third Street in Terre Haute, which serves as the Corporation's operations center and provides additional office space. Morris Plan has one office and is located in Vigo County. First Financial Bank and Morris Plan face competition from other financial institutions. These competitors consist of commercial banks, a mutual savings bank and other financial institutions, including consumer finance companies, insurance companies, brokerage firms and credit unions. The Corporation's business activities are centered in west-central Indiana and east-central Illinois. The Corporation has no foreign activities other than periodically investing available funds in time deposits held in foreign branches of domestic banks. Forrest Sherer Inc. is a premier regional supplier of insurance, surety and other financial products. The Fortest Sherer brand is well recognized in the Midwest, with more than 57 professionals and over 89 years of successful service to both businesses and households in their market area. The agency has representation agreements with more than 40 regional and national insurers to market their products of property and casualty insurance, surety bonds, employee benefit plans, life insurance and annuities. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as disclosures found elsewhere in this report are based upon First Financial Corporation's consolidated fmancial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the determination ofthe allowance for loan losses, securities valuation and goodwill. Actual results could differ from those estimates. Allowance for loan losses. The allowance for loan losses represents management's estimate of losses inherent in the existing loan portfoUo. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged offi net of recoveries. The allowance for loan losses is determuied based on management's assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic and nonperforming loans.Loans are considered impaired if, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest according to the contractual terms ofthe loan agreement. When a loan is deemed impaired, impairment is measured by using the fair value of underlying collateral, the present value ofthe future cash flows discounted at the effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses assumptions (e.g., discount rate) and methodologies (e.g., comparison to the recent selling price of similar assets) consistent with those that would be utiUzed by unrelated third parties. Changes in the financial condition of individual borrowers, economic conditions, historical loss experience, or the condition of the various markets in which collateral may be sold may affect the required level of the aUowance for loan losses and the associated provision for loan losses. Should cash flow assumptions or market conditions change, a different amount may be recorded for the allowance for loan losses and tUe associated provision for loan losses. Securities valuation. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. The Corporation obtains market values from a third party on a monthly basis in order to adjust the securities to fair value. Equity securities that do not have readily determinable fair values are carried at cost. Additionally, all securities are required to be written down to fair value when a decline in fair value is other than temporary; therefore, future changes in the fair value of securities could have a significant impact on the Corporation's operating results, hi determining whether a market value decline is other than temporary, management considers the reason for the decline, the extent ofthe decline, the duration ofthe decline and whether the Corporation intends to sell a security or is more likely tUan not to be required to sell a security before recovery of its amortized cost. Changes in credit ratings, financial condition of imderlying debtors, default experience and market Uquidity affect tUe conclusions on whether securities are other-than-temporarily impaired. Additional losses may be recorded through eamings for other than temporary impairment, should there be an adverse change in the expected cash flows for these investments. Goodwill. The carrying value of goodwiU requfres management to use estimates and assumptions about the fafr value ofthe reporting unit compared to its book value. An impairment analysis is prepared on an annual basis. Fafr values ofthe reporting units are detennined by an analysis which considers cash flows streams, profitability and estimated market values ofthe reporting unit. The majority ofthe Corporation's goodwiU is recorded at Forest Sherer, Inc. Management believes the accounting estimates related to the allowance for loan losses, valuation of investment securities and the valuation of goodwiU are "critical accounting estimates" because: (I) the estimates are highly susceptible to change from period to period because they require management to make assumptions concerning, among other factors, the changes in the types and volumes of the portfoUos, valuation assumptions, and economic conditions, and (2) the impact of recognizing an impairment or loan loss could have a material effect on the Corporation's assets reported on the balance sheet as well as net income. 45 RESULTS OF OPERATIONS - SUMMARY FOR 2 0 10 FIRST FINANCIAL CORPORATION COMPARISON OF 2010 TO 2009 Net income for 2010 was $28.0 million, or $2.14 per share. This represents a 23.4%) increase in net income and a 23.7%) increase in eamings per share, compared to 2009. Retum on assets at December 31, 2010 increased 16.8% to 1.11% compared to 0.95% at December 31,2009. NET INTEREST INCOME The principal source of the Corporation's eamings is net interest income, which represents the difference between interest eamed on loans and investments and the interest cost associated with deposits and other sources of fiinding .Net interest income was increased in 2010 to $96.6 milhon compared to $87.0 million in 2009. Total average interest eaming assets grew to $2.34 bilUon in 2010 from $2.24 bilUon in 2009. The tax-equivalent yield on these assets decreased to 5.50% in 2010 from 5.88% in 2009. Total average interest-bearing liabilities increased to $ 1.84 billion in 2010 from $ 1.77 billion in 2009. TUe average cost of tUese interest-bearing liabUities decreased to 1.47% in 2010 from 2.22% in 2009. The net interest margin increased from 4.13%) in 2009 to 4.35%) in 2010. This increase is primarily the result of the decreased costs of funding provided by interest-bearing habilities. Eaming asset yields decreased 38 basis points whUe the rate on interest- bearing Uabilities decreased by 75 basis points. The foUowing table sets forth the components of net interest income due to changes in volume and rate. The table information compares 2010 to 2009 and 2009 to 2008. (Dollar amounts in thousands) Interest earned on interest-eaming assets: Loans (1) (2) Taxable investment securities Tax-exempt investment securities (2) Federal funds sold Total interest income Interest paid on interest-bearing liabilities: Transaction accounts Time deposits Short-term borrowings Other borrowings Total interest expense Net interest income 2010 Compared to 2009 Increase (Decrease) Due to 2009 Compared to 2008 Increase (Decrease) Due to Volume Rate Volume/ Rate Total Volume Rate Volume/ Rate Total $4,473 ($3,340) ($156) $977 $7,709 ($11,526) ($884) ($4,701) (580) (3,672) 94 (4,158) (154) (2,408) 15 (2,547) 409 92 $4,394 (149) (7) ($7,168) (5) (42) ($109) 255 43 ($2,883) 256 (352) $7,459 (278) (455) ($14,667) (5) 315 ($559) (27) (492) ($7,767) 740 569 (110) (5,817) (4,618) $9,012 (1,579) (4,509) (133) (1,549) (7,770) $602 (380) (139) 27 525 33 ($142) (1,219) (4,079) (216) (6,841) (12,355) $9,472 306 1,188 469 (749) 1,214 $6,245 (6,679) (5,418) (692) (835) (13,624) ($1,043) (212) (279) (304) 33 (762) $203 (6,585) (4,509) (527) (1,551) (13,172) $5,405 (1) (2) For purposes of these computations, nonaccming loans are included in the daily average loan amoimts outstanding. Interest income includes the effect of tax equivalent adjustments using a federal tax rate of 35%. 46 RESULTS OF OPERATIONS - SUMMARY FOR 2 0 10 2010 ANNUAL REPORT PROVISION FOR LOAN LOSSES The provision for loan losses charged to expense is based upon credit loss experience and the results of a detailed analysis estimating an appropriate and adequate aUowance for loan losses. The analysis includes the evaluation of impaired loans as prescribed under Accounting Standards Codification (ASC-310), pooled loans as prescribed under ASC 450-10, and economic and other risk factors as outlined in various Joint Interagency Statements issued by the bank regulatory agencies. For the year ended December 31,2010, the gross provision for loan losses was $9.2 milUon net, a decrease of $2.7 million, or 22.5%), compared to 2009. The 2010 provision was reduced by $1.7 million for the offset of loans identified in the analysis of potential loan losses that are subject to the loss share agreement with the FDIC. Of those anticipated losses, 80%) can be reimbursed by the FDIC and the FDIC indemnification asset has a conesponding increase of $1.7 milUon for those anticipated losses. The decrease was the resuh of several components related to the analysis ofthe Corporation's Allowance for Loan and Lease Losses, including decreasing delinquencies. Net charge-offs for 2010 were $8.0 million as compared to $8.7 million for 2009 and $6.9 miUion for 2008. Non-accmal loans increased 7.13%) to $38.5 mUlion at December 31,2010 from $36.0 million at December 31,2009. Loans past due 90 days and still on accmal decreased 61.2%) to $3.2 million compared to $8.2 million at December 31, 2009 NON-INTEREST INCOME Non-interest income of $29.8 miUion increased $1.3 million from tUe $28.5 million eamed in 2009. This increase was despite the onetime events in 2009 ofthe gain on bargain purchase of $5.1 milUon and the gain on sale ofthe credit card portfolio of $2.5 milUon. They were offset by a reduction in losses recorded for other-than-temporarily impaired securities of $6.5 milUon along with gain from the sale of securities of $ 1.3 million. NON-INTEREST EXPENSES Non-interest expenses increased to $77.2 million for 2010 from $73.4 milUon for 2009. Salaries and employee benefits increased 6.2%) or $2.6 million. Approximately $1.5 million of this increase relates to a full year of salary and employee expense related to the First National Bank of Danville acquisition in 2009 that only reflected half a year of those costs. Occupancy and equipment expenses increased $294 thousand or 3.2%). Other expenses increased $1.3 milUon, with much ofthe increase related to loan coUection costs and expenses associated with increased usage of electronic banking products. INCOME TAXES The Corporation's federal income tax provision was $12.0 million in 2010 compared to a provision of $7.6 milUon in 2009. The overall effective tax rate in 2010 of 29.9%) compared to a 2009 effective rate of 25.0%) as nontaxable income decUned slightly and taxable income increased. COMPARISON OF 2009 TO 2008 Net income for 2009 was $22.7 million or $1.73 per share compared to $24.8 million in 2008 or $1.89 per share. This reduction in net income was the combination of other-than-temporary impairment of securities that reduced income $10 8 million before taxes that was reduced by increased gains from sale of loans of $4.0 million and the gain from the acquisition of a failed bank from the FDIC of $5.1 milUon, both also before taxes. Net interest income increased $5.5 milUon in 2009 compared to 2008 as total average interest-eaming assets increased $98.3 milUon and the tax-equivalent net interest margin increased to 4.13%) in 2009 from 4.06%) in 2008. This increase was primarily the result ofthe cost of fimding declining at a faster pace than the decline in the eamings on earning assets. The provision for loan losses increased $4.0 million from $7.9 miUion in 2008 to $11.9 miUion in 2009 as net charge-offs increased $1.8 milUon to $8.7 million in 2009 from $6.9 million in 2008. Net non-interest income and expense increased $3.8 milUon from 2008 to 2009. Non-interest expenses increased $6.9 milUon while non-interest income increased $3.1 miUion. The increase in non-interest income resulted primarily from the gain on acquisition of a failed financial institution from the FDIC of $5.1 million before taxes. The gain on loan sales was nearly offset by the increase in losses associated with other-than-temporary impairment of securities. The provision for income taxes fell $248 thousand million from 2008 to 2009 and the effective tax rate increased l%o in 2009 from 2008 as there was less tax exempt income. COMPARISON AND DISCUSSION OF 2010 BALANCE SHEET TO 2009 The Corporation's total assets decreased 2.7%) or $67.6 million at December 31, 2010, from a year earlier. Available-for-sale securities decreased $26.4 miUion at December 31,2010, from the previous year. Loans, net of uneamed income, increased by $8.4 milhon to $1.64 bilhon. Deposits increased by $113.3 million while borrowings decreased by $203.3 million. Total shareholders' equity increased $15.2 million to $321.7 million at December 31, 2010. Net income was partially offset by higher cUvidends and the continued repurchase of corporate stock. The Corporation increased purchases of treasury stock in 2010, acquiring 23,000 shares at a cost of $610 thousand compared to 22,000 shares during 2009 at a cost of $616 thousand. There were also 45,000 shares from the treasury with a value of $1.35 million that were contributed to the ESOP plan in 2010 compared to 35,000 shares with a value of $971 thousand in 2009. Following is an analysis ofthe components ofthe Corporation's balance sheet. 47 FIRST FINANCIAL CORPORATION FINANCIAL CONDITION - SUMMARY SECURITIES The Corporation's investment strategy seeks to maximize income from the investment portfolio wUUe using it as a risk management tool and ensuring safety of principal and capital. During 2010 the portfolio's balance decreased by 4.5%). The average Ufe ofthe portfoUo increased from 4.4 years in 2009 to 4.5 years in 2010. The portfolio stmcture will continue to provide cash flows to be reinvested during 2010. (Dollar amounts in thousands) U.S. govemment sponsored entity mortgage-backed securities and agencies (1) Collateralized mortgage obligations (1) States and political subdivisions Corporate obligations Total Equities TOTAL 1 year and less Balance Rate 1 to 5 years 5 to 10 years Balance Rate Balance Rate Over 10 Years Rate Balance 2010 Total $ 7 - 10,437 - 10,444 $ 19,780 - 35,444 - 55,224 8.00% 0.00% 2.21% 0.00% _ 2.21%' 0.00% $ 89,176 23 47,672 - 136,871 4.25% 0.00% 1.82% 2.69%" 0.00% $ 10,444 $ 55,224 $ 136,871 4.43% 9.78% 3.71% 0.00% _ 4.18%" 0.00% _ $ 195,672 94,434 63,987 2,190 356,283 2,024 $ 358,307 4.66% 4.26% 4.01% 0.09% _ 4.41% 0.00% $ 304,635 94,457 157,540 2,190 558,822 2,024 $ 560,846 (1) Distribution of maturities is based on the estimated life ofthe asset. (Dollar amounts in thousands) U.S. govemment sponsored entity mortgage-backed securities and agencies (1) Collateralized mortgage obligations (1) States and political subdivisions Corporate obligations Total Equities TOTAL I year and less Balance 1 to 5 years 5 to 10 years Rate Balance Rate Balance Rate Over 10 Years Rate Balance 2009 Total 2,062 7,060 9,122 0.61% $31,339 0.00% 7.10% 0.00% 5.63% [ 0.00% [ 37,980 7,072 76,391 4.20% $ 88,652 27 0.00% 44,066 7.52% 5.60% _ 5.98%" 0.00% _ 132,745 $ 9,122 $76,391 $ 132,745 4.53% $182,446 119,537 9.80% 59,627 6.54% 1,416 0.00% _ 363,026 5.20%" 5,962 0.00%' $368,988 5.21% $304,499 119,564 4.70% 6.48% 148,733 0.09% _ 8,488 5.23% 1 581,284 5,962 0.00%" $ 587,246 (') Distribution of maturities is based on the estimated average life ofthe asset. 48 2010 ANNUAL REPORT FINANCIAL CONDITION - SUMMARY LOAN PORTFOLIO Loans outstanding by major category as of December 31 for each ofthe last five years and the maturities at year end 2010 are set forth in the following analyses. (Dollar amounts in thousands) Loan Category Commercial Residential Consumer TOTAL 2010 2009 2008 2007 2006 $ 896,107 437,576 307,403 $ 1,641,086 $ 870,977 447,379. 314,561 $ 1,632,917 $ 720,281 436,388 303,123 $ 1,459,792 $ 717,556 449,554 263,091 $ 1,430,201 $ 674,515 462,556 257,070 $ 1,394,141 Credit card loans held-for-sale $ $ $ 12,800 $ 14,068 $ (Dollar amoimts in thousands) MATURITY DISTRIBUTION Commercial, financial and agricultural Within One Year After One But Within Five Years After Five Years Total $ 333,925 $ 483,890 $ 78,292 $ 896,107 TOTAL Residential Consumer TOTAL 437,576 307,403 1,641,086 $ Loans maturing after one year with: Fixed interest rates Variable interest rates TOTAL $ 129,750 354,140 483,890 $ $ 57,242 21,050 78,292 49 FIRST FINANCIAL CORPORATION FINANCIAL CONDITION - SUMMARY ALLOWANCE FOR LOAN LOSSES The activity in the Corporation's aUowance for loan losses is shown in the following analysis: (Dollar amounts in thousands) Amount of loans outstanding at December 31, 2010 2009 2008 2007 2006 $1,641,086 $1,632,917 $1,459,792 $1,430,201 $1 ,394,141 Average amount of loans by year $1,636,254 $1,563,274 $1,451,911 $1,409,051 $1 ,384,138 Allowance for loan losses at beginning of year $ 19,437 $ 16,280 $ 15,351 $ 16,169 $ 16,042 Loans charged off: Commercial Residential Consumer Total loans charged off Recoveries of loans previously charged offi Commercial Residential Consumer Total recoveries Net loans charged off Provision charged to expense * Balance at end of year Ratio of net charge-offs during period to average loans outstanding 7,099 872 4,503 12,474 2,319 258 1,934 4,511 7,963 10,862 22,336 $ 2,997 1,881 6,783 11,661 574 523 1,851 2,948 8,713 11,870 19,437 2,406 1,274 5,914 9,594 704 101 1,863 2,668 6,926 7,855 16,280 $ $ 3,438 1,026 5,712 10,176 389 139 2,250 2,778 7,398 6,580 15,351 $ 2,066 1,617 6,826 10,509 1,262 187 2,204 3,653 6,856 6,983 16,169 $ 0.49% 0.56% 0.48% 0.53% 0.50% * In 2010 the provision charged to expense was reduced by $1,662 for the increase to the FDIC Indemnification asset. The allowance is maintained at an amount management believes sufficient to absorb probable incurted losses in the loan portfolio. Monitoring loan quality and maintaining an adequate allowance is an ongoing process overseen by senior management and the loan review fiinction. On at least a quarterly basis, a formal analysis of the adequacy of the allowance is prepared and reviewed by management and the Board of Directors. This analysis serves as a point in time assessment of the level of the allowance and serves as a basis for provisions for loan losses. The loan quality monitoring process includes assigning loan grades and the use of a watch list to identify loans of concem. Included in the $1.6 billion of loans outstanding at December 31, 2010 are $46.4 miUion of covered loans. The analysis of the allowance for loan losses includes the allocation of specific amounts of the aUowance to individual problem loans, generally based on an analysis of the collateral securing those loans. Portions of the allowance are also allocated to loan portfolios, based upon a variety of factors including historical loss experience, trends in the type and volume of the loan portfoUos, frends in delinquent and non-performing loans, and economic trends affecting our market. These components are added together and compared to the balance ofour allowance at the evaluation date. The Corporation's unallocated aUowance position of $2.1 million at December 31, 2010 has increased from $0.6 million at December 31, 2009. Management has determined the unallocated allowance position to be reasonable based on the trend analysis ofthe loan portfoho. Non-performing loans of $58.8 million at December 31, 2010 increased from $44.3 miUion at December 31, 2009. Net charge-offs totaled $8.0 million compared to $8.7 miUion during 2009. While the net charge-off total declined, based on non-performing and delinquent loan frends, particularly in the residential portfolio, management increased the unallocated position in the aUowance. The table below presents the allocation ofthe aUowance to the loan portfolios at year-end. (Dollar amounts in thousands) Commercial Residential Consumer Unallocated TOTAL ALLOWANCE FOR LOAN LOSSES 2010 12,809 2,873 4,551 2,103 22,336 $ $ 50 Years Ended December 31, 2008 2009 2007 $ $ 12,218 1,546 5,032 641 19,437 $ S 9,963 1,485 4,483 349 16,280 $ $ 8,917 1,233 4,180 1,021 15,351 2006 9,043 1,364 5,762 - 16,169 $ $ FINANCIAL CONDITION - SUMMARY 2010 ANNUAL REPORT NONPERFORMING LOANS Management monitors the components and status of nonperforming loans as a part ofthe evaluation procedures used in determining the adequacy of the allowance for loan losses. It is the Corporation's policy to discontinue the accmal of interest on loans where, in managemenf s opfriion, serious doubt exists as to collectability. The amounts shown below represent non-accmal loans, loans which have been restmctured to provide for a reduction or deferral of interest or principal because of deterioration in the financial condition ofthe borrower and those loans which are past due more than 90 days where the Corporation continues to accme interest. In 2010 the increase in resOnctured loans mainly is due to five commercial loans totaling $14.9 million while the remainder is mostly smaller balance residential loans. The current economic envfronment has facilitated an tremendous increase in tUe use of restmctured loans as a means to decrease losses. (Dollar amounts in thousands) Non-accmal loans Resfructured loans Accming loans past due over 90 days 2010 38,517 17,094 3,185 58,796 2009 $ 35,953 90 8,218 $ 44,261 2008 $ 12,486 98 3,624 16,208 2007 2006 ^ 3 7,971 50 4,462 12,483 5 3 9,893 52 4,691 14,636 The ratio ofthe aUowance for loan losses as a percentage of nonperforming loans was 38%) at December 31, 2010, compared to 44%) in 2009. The ratio of nonperforming loans excluding covered loans was 69% at December 31,2010 and 60% at Deceniber 31,2009. There were $3.8 million of covered loans included in restmctured loans in 2010. The following loan categories comprise significant components ofthe nonperforming loans at December 31,2010 and 2009: (Dollar amounts in thousands) Non-accmal loans: Commercial loans Residential loans Consumer loans Past due 90 days or more: Commercial loans Residential loans Consumer loans (Dollar amounts in thousands) Non-accmal loans: Commercial loans Residential loans Consumer loans Past due 90 days or more: Commercial loans Residential loans Consumer loans 2010 2009 27,848 8,735 1,934 38,517 2,041 1,052 92 3,185 72% 23% 5% 100% 64% 33% 3% 100% $ $ $ $ 30,961 2,917 2,075 35,953 5,937 1,837 444 8,218 86% 8% 6% 100% 72% 22% 5% 100% Covered Loans (also included above) 2010 2009 7,353 1,394 - 8,747 313 64 - 377 84% 16% 0% 100% 83% 17% 0% 100% $ $ $ $ 7,396 168 - 7,564 4,113 292 2 4,407 98% 2% 0% 100% 93% 7% 0% 100% $ $ $ $ $ $ $ $ Management considers the present allowance to be appropriate and adequate to cover losses inherent in the loan portfolio based on the curtent economic environment. However, future economic changes cannot be predicted. Deteriorating economic conditions could result in an increase in the risk characteristics ofthe loan portfolio and an increase in the potential for loan losses. 51 FIRST FINANCIAL CORPORATION FINANCIAL CONDITION - SUMMARY DEPOSITS The information below presents the average amount of deposits and rates paid on those deposits for 2010, 2009 and 2008. (Dollar amounts in thousands) Non-interest-bearing demand deposits Interest-bearing demand deposits Savings deposits Time deposits: $100,000 or more Other time deposits TOTAL 2010 2009 2008 Amount Rate Amount Rate Amount Rate $ 300,760 330,168 540,370 214,266 483,294 $ 1,868,858 $ 280,668 280,338 421,412 0.23% 0.20% $ 236,628 247,017 433,179 0.40% 0.46% 1.85% 2.17%_ 194,576 482,193 $ 1,659,187 2.63% 2.77% _ 183,664 459,916 $ 1,560,404 1.11% 1.60% 3.67% 3.54% The maturities of certificates of deposit of $100 thousand or more outstanding at December 31,2010, are summarized as follows: 3 months or less Over 3 through 6 months Over 6 through 12 months Over 12 months TOTAL 50,585 30,274 54,879 79,763 215,501 OTHER BORROWINGS Advances from the Federal Home Loan Bank decreased to $125.8 million in 2010 compared to $326.1 million in 2009. The Asset/Liability Committee reviews these investments and fiinding sources and considers the related strategies on a weekly basis. See Interest Rate Sensitivity and Liquidity below for more infonnation. CAPITAL RESOURCES Bank regulatory agencies have estabUshed capital adequacy standards which are used extensively in their monitoring and control of the industry. These standards relate capital to level of risk by assigning different weightings to assets and certain off-balance- sheet activity. As shown in the footnote to the consolidated financiai statements ("Regulatory Matters"), die Corporation's capital exceeds the requirements to be considered well capitalized at December 31, 2010. First Financial Corporation's objective continues to be to maintain adequate capital to merit the confidence ofits customers and shareholders. To warrant this confidence, the Corporation's management maintains a capital position which they beUeve is sufficient to absorb unforeseen fmancial shocks without unnecessarily restricting dividends to its shareholders. The Corporation's dividend payout ratio for 2010 and 2009 was 43.1% and 52.0%, respectively. The Corporation expects to continue its pohcy of paying regular cash dividend.s, subject to fiiture eamings and regulatory restrictions and capital requirements. INTERESrRATESENSmvrrYAINDUQUIDnY Ffrst Financial Corporation has established risk measures, Umits and policy guidelines for managing interest rate risk and liquidity. Responsibility for management of these functions resides with the AssetUiability Committee. The primary goal ofthe Asset'Liability Committee is to maximize net interest income within the interest rate risk limits approved by the Board ofDfrectors. 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 Coiporation'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 eamings simulation and market value of equity sensitivity analysis. These tools allow management to quantify and monitor both short-and long-term exposure to interest rate risk. Simulation modeUng measures the effects of changes in interest rates, changes in the shape ofthe yield curve and the effects of embedded options on net interest income. This measure projects eamings in the various envfronments 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 precUct 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 overaU 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 sfrategy. 52 FINANCIAL CONDITION - SUMMARY 2010 ANNUAL REPORT The table below shows the Corporation's estimated sensitivity profile as ofDecember 31, 2010. The change m interest rates assumes a parallel shift in interest rates of 100 and 200 basis points. Given a 100 basis point increase in rates, net mterest income would increase 0.19%o over the next 12 months and increase 2.06% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 0.92%) over the next 12 months and decrease 2.27%) over the following 12 months. These estimates assume all rate changes occur ovemight and management takes no action as a resuh of this change. Basis Point Interest Rate Change Down 200 Down 100 Up 100 Up 200 Percentage Change in Net Interest Income 24 months -5.29% -2.27% 2.06% 5.54% 36 months -7.71% -3.39% 4.66% 10.65% 12 months -2.01% -0.92% 0.19% 2.22% Typical rate shock analysis does not reflect management's ability to react and thereby reduce the effects of rate changes, and represents a worst-case scenario. Liquidity Risk Liquidity is measured by the 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 deposhs. The Corporation has $9.1 million of investments that mature throughout the coming 12 months. The Corporation also anficipates $111.3 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $9.8 million in securities to be called within the next 12 months. CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS The Corporation has various financial obligations, including contractual obligations and commitments, that may require future cash payments. Contractual Obligations: The foUowing table presents, as ofDecember 31, 2010, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements. (Dollar amounts in thousands) Deposits without a stated maturity Consumer certificates of deposit Short-term borrowings Other borrowings Note Reference 10 11 One year or less $ 1,250,931 382,466 34,106 2,050 Payments Due in One year Three Years $ Three to Five Years $ Over Five Years $ 215,088 - 76,000 54,365 - 47,000 193 - 743 Total $ 1,250,931 652,112 34,106 125,793 Commitments: The foUowing table details the amount and expected maturities of significant commitments as ofDecember 31, 2010. Further discussion of these commitments is included in Note 13 to the consolidated financial statements. (Dollar amounts in thousands) Commitments to extend credit: Unused loan commitments Conimercial letters ofcredit Total Amoun One year or less Committed Over One Year 293,663 13,414 171,001 11,832 122,662 1,582 Commitments to extend credit, including loan commitments, standby and commercial letters ofcredit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon. OUTLOOK The Corporation's primary market is west-central Indiana and east-central Ihinois. The market is primarily driven by the retail, higher education and health care industries. Typically, this market does not expand or contract at rates that are experienced by both the state and national economies. It is not anticipated that labor conditions will improve dramatically in 2011, although a gradual improvement in both the labor markets and retail sales is anticipated. The Corporation anticipates limited growth opportunities in 2011. 53 FIRST FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET - AVERAGE BALANCES AND INTEREST RATES 2010 December 31, 2009 2008 Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate (Dollar amounts in thousands) ASSETS Interest-eaming assets: Loans (1) (2) Taxable investment securities Tax-exempt investments (2) Federal funds sold Total interest-eaming assets $ 1,636,254 469,945 194,011 40,934 2,341,144 96,786 18,597 13,415 59 128,857 5.92% 3.96% 6.91% 0.14% 5.50% $ 1,563,274 482,237 188,160 6,047 2,239,718 95,809 22,755 13,160 16 131,740 6.13% 4.72% 6.99% 0.26% 5.88% $ 1,451,911 485,194 184,574 19,729 2,141,408 100,510 25,303 13,188 507 139,508 6.92% 5.22% 7.15% 2.57% 6.51% Non-interest eaming assets: Cash and due from banks Premises and equipment, net Other assets Less allowance for loan losses TOTALS 57,940 35,001 102,780 (20,083) $ 2,516,782 65,069 32,470 79,419 (16,576) $ 2,400,100 = 58,676 32,524 64,952 (15,539) $ 2,282,021 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Transaction accounts Time deposhs Short-term borrowings Other borrowings Total interest-bearing $ 870,538 697,560 42,795 224,501 1,856 14,448 325 10,335 $ 0.21% 2.07% 0.76% 4.60% 701,750 676,769 53,743 339,460 3,075 18,469 541 17,176 0.44% 2.73% 1.01% 5.06% $ 680,196 643,580 37,352 353,598 9,660 23,036 1,068 18,726 1.42% 3.58% 2.86% 5.30% liabilities: 1,835,394 26,964 1.47% 1,771,722 39,261 2.22% 1,714,726 52,490 3.06% Non interest-bearing liabilities: Demand deposits Other Shareholders' equity TOTALS 300,760 59,461 2,195,615 321,167 $2,516,782 280,668 46,278 2,098,668 301,432 S 2,400,100 - : 236,628 43,045 1,994,399 - 287,622 $ 2,282,021 = Net interest eamings $ 101,893 $ 92,479 $ 87,018 Net yield on interest- eaming assets 4.35% 4.13% 4.06% (1) (2) For purposes of these computations, nonaccming loans are included in the daily average loan amounts outstanding. Interest income includes the effect of tax equivalent adjustments using a federal tax rate of 35%). 54 MARKET AND DIVIDEND INFORMATION 2010 ANNUAL REPORT At year-end 2010 shareholders owned 13,151,630 shares ofthe Corporation's common stock. The stock is traded on the NASDAQ Global Select Market tmder the symbol "THFF". On March 8, 2011, approximately 3,101 shareholders held our common stock. Historically, the Corporation has paid cash dividends semi-annually and currently expects that comparable cash dividends will continue to be paid in the futiire. The following table gives quarterly high and low trade prices and dividends per share during each quarter for 2010 and 2009. 2010 2009 Trade Price Low $26.00 $25.81 $25.31 $28.83 High $31.02 $30.89 $30.42 $36.46 Cash Dividends Declared $ $ 0.46 0.46 Trade Price Low $29.76 $31.51 $28.57 $26.90 High $41.16 $42.67 $33.52 $31.52 Cash Dividends Declared $ $ 0.45 0.45 Quarter ended March 31 June 30 September 30 December 31 First Fmancial Corporation Total Return Performance 200 175 -J = Fir'jt Financial L o r p o i a t i on 25 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 H 12/31/10 Index First Financial Corporation Russell 2000 SNL Bank $1B-$5B Period B i d i ng 12^1/05 100.00 100.00 100.00 12/31/06 134.88 118.37 115.72 12/31/07 111.22 116.51 84.29 12Q1/08 165.26 77.15 69.91 12/31/09 126.54 98.11 50.11 12/31/10 150.19 124.46 56.81 55 FIRST FINANCIAL CORPORATION Directors of First Financial Corporation and First Financial Bank Seated: William R. ICrieble, Norman L. Lowery, Donald E. Smith, Thomas T. Dinkel and Anton H. George Standing: B. GuiUe Cox Jr., Virginia L. Smith, WiUiam J. Voges, Gregory L. Gibson, W. Curtis Brighton and Ronald K. Rich C O R P O R A TE L E A D E R S H IP DIRECTORS First Financial Corporation and First Financial Bank W. Curtis Brighton B. Guille Cox Jr. Thomas T. Dinkel Anton Hulman George Gregory L. Gibson William R. Krieble Norman L. Lowery Ronald K. Rich Donald E. Smith Virginia L. Smith WiUiam J. Voges DIRECTORS The Morris Plan Company of Terre Haute David L. Bailey Jeffrey G. Belskus Thomas S. Clary Mark J. Fuson Norman D. Lowery James F. Nasser Jeffrey B. Smith DIRECTORS Forrest Sherer Inc. John W. Dinkel J. Barton Douglas Norman L. Lowery John S. Lukens David W. Marietta Dennis S. Michael Jerry R. Mueller Robert F. Prox III COMMUNITY DIRECTORS First Financial Bank, Clay Region David L. Barr Sam J. Emmert Max Gibson Rodger McHargue James E. Pell John P. Stelle COMMUNITY DIRECTORS First Financial Bank, Citizens Region Henry J. Antonini Michael A. Carty Robert DeVerter Danny F. Wesch Terri Williamson COMMUNITY DIRECTORS First Financial Bank, Community Region Norman D. Lowery Avery J. McKinney V. Bruce Walkup Jeffrey L. Wilson COMMUNITY DIRECTORS First Financial Bank, Crawford Region Jerry L. Bailey W. J. Chamblin Norman D. Lowery Steven A. McGahey V. Bruce Walkup COMMUNITY DIRECTORS First Financial Bank, Marshall Region Fred S. Barth Byron R. Calverr William F. Meehling Norman P. Yeley COMMUNITY DIRECTORS First Financial Bank, Parke Region James R. Bosley Thomas S. Clary Charles A. Cooper COMMUNITY DIRECTORS First Financial Bank, Sullivan Region Thomas S. Clary Robert F. Dukes Henry T. Smith Robert E. Springer V. Bruce Walkup FIRST BANKING CENTERS INDIANA Vigo County Terre Haute Main Office* One First Financial Plaza Sixth & Wabash 812-238-6000 Honey Creek Mall* U.8. 41 $outh 812-238-6000 Indiana State University* Hulman Memorial Union 812-238-6000 Industrial Park* 1749 East Industrial Drive 812-238-6000 Maple Avenue* 4065 Maple Avenue 812-238-6000 Meadows* 350 $outh 25th 8treet 812-238-6000 Plaza North* Ft. Harrison & Lafayette 812-238-6000 Seelyvllle* 9520 East U.S. 40 812-238-6000 Southland* 3005 South Seventh Street 812-238-6000 Springhill* 4500 U.S. 41 South 812-238-6000 Sycamore Terrace* 2425 South State Road 46 812-238-6000 West Terre Haute* 309 National Avenue 812-238-6000 Westminster Village 1120 East Davis Drive 812-238-6000 The Morris Plan Company of Terre Haute 817 Wabash Avenue 812-238-6063 Clay County Brazil* 7995 North State Road 59 812-443-4481 Brazil Downtown* 18 North Walnut 812-448-3357 Brazil Eastside* 2180 East National Avenue 812-448-8110 Clay City* 502-504 Main Street 812-939-2145 Poland* 8490 East State Road 42 812-986-2115 Greene County Worthington* 9 North Commercial Street 812-875-3021 Knox County Monroe City* 201 West First Street 812-743-5151 Sandborn 102 North Anderson Street 812-694-8462 Vincennes* 2707 North Sixth Street 812-882-4800 Parke County Rockville* 1311 North Lincoln Road 765-569-3171 Rockville Downtown* 120 East Ohio Street 765-569-3442 Marshall 10 South Main Street 765-597-2261 Montezuma* 232 East Crawford Street 765-245-2706 Rosedale 62 East Central Street 765-548-2266 Putnam County Greencastle* 101 South Warren Drive 765-653-4444 Sullivan County Sullivan* 15 South Main Street 812-268-3331 Carlisle* 8571 Old US 41 South 812-398-4100 Dugger 8100 East Main Street 812-648-2251 Farmersburg* 819 West Main Street 812-696-2106 Hymera 102 South Main Street 812-383-4933 Vermillion County Newport* 100 West Market Street 765-492-3321 Cayuga 211 Curtis Street 765-492-3391 Clinton* 221 South Main Street 765-832-3504 Clinton Crown Hill* 1775 East State Road 163 765-832-5546 I L L I N O IS Clark County Marshall* 215 North Michigan 217-826-6311 Coles County Charleston* 820 West Lincoln Avenue 217-345-4824 Crawford County Robinson* 108 West Main Street 618-544-8666 Robinson Motor Bank* (Drive-Through Only) 602 West Walnut Street 618-544-3355 Oblong* 301 East Main Street 618-592-4252 ©2011 First Financial Corporation Jasper County Newton* 601 West Jourdan Street 618-783-2022 Lawrence County Lawrenceville* 1601 State Street 618-943-3323 Sumner 211 South Christy 618-936-2321 Richland County OIney* 240 East Chestnut Street 618-395-8676 OIney* 1110 South West Street 618-395-2112 Vermilion County Danville* One Towne Centre 217-442-0362 Danville Motor Bank* (Drive-Through Only) 101 West Main Street 217-443-3519 Danville* 2750 North Vermilion Street 217-431-8750 Danville* 901 North Gilbert Street 217-431-3486 Danville* 421 South Gilbert Street 217-477-4512 Ridge Farm* 11 South State Street 217-247-2126 Westville* 101 East Main Street 217-267-2147 Wayne County Fairfield* 303 West Delaware 618-842-2145 *FirstPlus 24-hour ATM available at these locations A A.. 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