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..
I '
1-;fi
^i \