**FIRST FINANCIAL CORPORATION****CONSOLIDATED BALANCE SHEETS**           **December 31,** (Dollar amounts in thousands, except per share data) **2010**  **2009** ASSETS        Cash and due from banks $58,511  $84,371 Federal funds sold  5,104   21,576 Securities available-for-sale  560,846   587,246 Loans, net of allowance of $22,336 in 2010 and $19,437 in 2009  1,617,810   1,612,327 Restricted Stock  25,308   27,835 Accrued interest receivable  11,208   12,005 Premises and equipment, net  34,691   35,551 Bank-owned life insurance  66,112   64,057 Goodwill  7,102   7,102 Other intangible assets  4,148   4,916 Other real estate owned  6,325   5,885 FDIC Indemnification Asset  3,977   12,124 Other assets  49,953   43,727        TOTAL ASSETS $2,451,095  $2,518,722                 LIABILITIES AND SHAREHOLDERS’ EQUITY        Deposits:        Non-interest-bearing $304,101  $312,990 Interest-bearing:        Certificates of deposit of $100 or more  215,501   238,830 Other interest-bearing deposits  1,383,441   1,237,881           1,903,043   1,789,701 Short-term borrowings  34,106   30,436 Other borrowings  125,793   332,737 Other liabilities  66,436   59,365        TOTAL LIABILITIES  2,129,378   2,212,239          Shareholders’ equity        Common stock, $.125 stated value per share;        Authorized shares-40,000,000        Issued shares-14,450,966        Outstanding shares-13,151,630 in 2010 and 13,129,630 in 2009  1,806   1,806 Additional paid-in capital  68,944   68,739 Retained earnings  293,319   277,357 Accumulated other comprehensive income (loss)  (9,369)  (7,904)Less: Treasury shares at cost-1,299,336 in 2010 and 1,321,336in 2009  (32,983)  (33,515)                TOTAL SHAREHOLDERS’ EQUITY  321,717   306,483                 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $2,451,095  $2,518,722        
 
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**2010 ANNUAL REPORT****CONSOLIDATED STATEMENTS OF INCOME**               **Years Ended December 31,** (Dollar amounts in thousands, except per share data) **2010**  **2009**  **2008** INTEREST AND DIVIDEND INCOME:            Loans, including related fees $96,206  $94,930  $99,572 Securities:            Taxable  18,597   22,755   25,303 Tax-exempt  6,664   6,604   6,415 Other  2,115   1,966   2,664           TOTAL INTEREST AND DIVIDEND INCOME  123,582   126,255   133,954              INTEREST EXPENSE:            Deposits  16,306   21,544   32,696 Short-term borrowings  325   541   1,068 Other borrowings  10,335   17,176   18,726           TOTAL INTEREST EXPENSE  26,966   39,261   52,490                        NET INTEREST INCOME  96,616   86,994   81,464              Net Provision for loan losses  9,200   11,870   7,855                        NET INTEREST INCOME AFTERPROVISION FOR LOAN LOSSES  87,416   75,124   73,609              NON-INTEREST INCOME:            Trust and financial services  4,547   4,197   3,993 Service charges and fees on deposit accounts  10,342   11,082   11,889 Other service charges and fees  7,759   7,026   6,050 Securities gain, net  1,321   4   358 Other-than-temporary loss            Total impairment loss  (4,260)  (18,939)  (6,145)Loss recognized in other comprehensive income      8,170   —           Net impairment loss recognized in earnings  (4,260)  (10,769)  (6,145)Insurance commissions  6,759   6,464   6,688 Gain on sale of mortgage loans  2,206   2,291   817 Gain on sale of credit card loans  —   2,549   — Gain on bargain purchase  —   5,057   — Other  1,123   631   1,760           TOTAL NON-INTEREST INCOME  29,797   28,532   25,410 NON-INTEREST EXPENSES:            Salaries and employee benefits  44,887   42,259   41,287 Occupancy expense  4,707   4,534   4,182 Equipment expense  4,761   4,640   4,560 Federal Deposit Insurance  2,847   3,277   220 Other  20,000   18,671   16,198           TOTAL NON-INTEREST EXPENSE  77,202   73,381   66,447           INCOME BEFORE INCOME TAXES  40,011   30,275   32,572              Provision for income taxes  11,967   7,555   7,803           NET INCOME $28,044  $22,720  $24,769           EARNINGS PER SHARE:            BASIC AND DILUTED $2.14  $1.73  $1.89           Weighted average number of shares outstanding (inthousands)  13,120   13,119   13,110           
 
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**FIRST FINANCIAL CORPORATION****CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**                                       **Accumulated**                     **Other**       (Dollar amounts in thousands, except **Common**  **Additional**  **Retained**  **Comprehensive**  **Treasury**    per share data) **Stock**  **Capital**  **Earnings**  **Income/(Loss)**  **Stock**  **Total**                          **Balance, January 1, 2008** $1,806  $68,212  $250,011  $(5,181) $(33,156) $281,692                          Comprehensive income:                        Net income  —   —   24,769   —   —   24,769 Other comprehensive loss, net of tax:                        Change in net unrealized gains/losseson securities available-for-sale, net  —   —   —   (8,276)  —   (8,276)Change in unrealized gains/losses onpost-retirement benefits  —   —   —   511   —   511                         Total comprehensive income                      17,004 Contribution of 33,015 shares to ESOP  —   442   —   —   835   1,277 Treasury stock purchase (52,744 shares)  —   —   —   —   (1,464)  (1,464)Cash Dividends, $.89 per share  —   —   (11,665)  —   —   (11,665)                                            **Balance, December 31, 2008**  1,806   68,654   263,115   (12,946)  (33,785)  286,844                          Comprehensive income:                        Net income  —   —   22,720   —   —   22,720 Other comprehensive loss, net of tax:                        Change in net unrealized gains/losseson securities available-for-sale, net  —   —   —   10,869   —   10,869 Change in unrealized gains/losses onpost-retirement benefits  —   —   —   (2,494)  —   (2,494)                        Total comprehensive income                      31,095 Adjustment for adoption of other-thantemporary impairment guidance,net of tax (Note 1)          3,333   (3,333)      — Contribution of 35,000 shares to ESOP  —   85   —   —   886   971 Treasury stock purchase (22,000 shares)  —   —   —   —   (616)  (616)Cash Dividends, $.90 per share  —   —   (11,811)  —   —   (11,811)                                            **Balance, December 31, 2009**  1,806   68,739   277,357   (7,904)  (33,515)  306,483                          Comprehensive income:                        Net income  —   —   28,044   —   —   28,044 Change in net unrealizedgains/(losses) on securitiesavailable for-sale  —   —   —   449   —   449 Change in net unrealized gains/(losses) on retirement plans  —   —   —   (1,914)  —   (1,914)                        Total comprehensive income/(loss)                      26,579 Contribution of 45,000 shares to ESOP  —   205   —   —   1,142   1,347 Treasury stock purchase (23,000 shares)  —   —   —   —   (610)  (610)Cash Dividends, $.92 per share  —   —   (12,082)  —   —   (12,082)                                            **Balance, December 31, 2010** $1,806  $68,944  $293,319  $(9,369) $(32,983) $321,717                    
 
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**2010 ANNUAL REPORT****CONSOLIDATED STATEMENTS OF CASH FLOWS**               **Years Ended December 31,** (Dollar amounts in thousands, except per share data) **2010**  **2009**  **2008** CASH FLOWS FROM OPERATING ACTIVITIES:            Net Income $28,044  $22,720  $24,769 Adjustments to reconcile net income to net cashprovided by operating activities:            Net (accretion) amortization on securities  (840)  (2,442)  (2,874)Provision for loan losses  9,200   11,870   7,855 Securities impairment loss recognized in earnings  4,260   10,769   6,145 Securities (gains) losses  (1,321)  (4)  (358)Depreciation and amortization  4,643   4,199   3,535 Provision for deferred income taxes  (5,940)  (2,043)  (5,147)Net change in accrued interest receivable  797   1,076   617 Contribution of shares to ESOP  1,347   971   1,277 Gain on sale of mortgage loans  (2,206)  (2,291)  (817)Loss on sale of student loans  —   399   — Gain on sale of credit card loans  —   (2,549)  — Gain on purchase of business unit  —   (5,057)  — Loss on sales of other real estate  283   196   35 Other, net  10,293   (8,424)  1,494           NET CASH FROM OPERATING ACTIVITIES  48,560   29,390   36,531                        CASH FLOWS FROM INVESTING ACTIVITIES:            Sales of securities available-for-sale  12,248   —   1,063 Calls, maturities and principal reductions on securities available-for-sale  223,862   128,349   95,198 Purchases of securities available-for-sale  (211,062)  (88,532)  (151,863)Loans made to customers, net of payments  (132,997)  (265,976)  (76,216)Net change in federal funds sold  16,472   (12,046)  (5,329)Redemption of restricted stock  2,527   —   2,386 Cash received from sale of mortgage loans  116,462   146,625   36,910 Cash received from sale of student loans  —   13,347   — Cash received from sale of credit card loans  —   14,689   — Cash received (disbursed) from purchase of business unit  (609)  30,977   — Sale of other real estate  3,727   2,448   2,357 Additions to premises and equipment  (2,406)  (6,655)  (2,623)          NET CASH FROM INVESTING ACTIVITIES  28,224   (36,774)  (98,117)                       CASH FLOWS FROM FINANCING ACTIVITIES:            Net change in deposits  113,180   80,359   33,777 Net change in other short-term borrowings  3,670   8,936   (5,831)Dividends paid  (11,940)  (11,806)  (11,548)Purchases of treasury stock  (610)  (616)  (1,464)Proceeds from other borrowings  2,000   120,000   408,500 Repayments on other borrowings  (208,944)  (172,416)  (364,632)          NET CASH FROM FINANCING ACTIVITIES  (102,644)  24,457   58,802           NET CHANGE IN CASH AND CASH EQUIVALENTS  (25,860)  17,073   (2,784)CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR  84,371   67,298   70,082           CASH AND CASH EQUIVALENTS, END OF YEAR $58,511  $84,371  $67,298                        SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND NONCASH INFORMATION:            Cash paid for the year for:            Interest $28,051  $40,005  $54,168           Income Taxes $15,713  $13,485  $11,657           
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:****BUSINESS****Organization:**The consolidated financial statements of First Financial Corporationand its subsidiaries (the Corporation) include the parent company and its wholly-ownedsubsidiaries, First Financial Bank, N.A. of Vigo County, Indiana, The Morris Plan Company ofTerre Haute (Morris Plan), and Forrest Sherer Inc., a full-line insurance agency headquarteredin Terre Haute, Indiana. Inter-company transactions and balances have been eliminated.First Financial Bank also has two investment subsidiaries, Portfolio Management Specialists A(Specialists A) and Portfolio Management Specialists B (Specialists B), which were establishedto hold and manage certain assets as part of a strategy to better manage various income streamsand provide opportunities for capital creation as needed. Specialists A and Specialists Bsubsequently 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 million of securities and loans were owned by these subsidiaries. Specialists A,Specialists B, Global Portfolio Limited Partners and First Financial Real Estate LLC areincluded in the consolidated financial statements.The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide variety offinancial services including commercial, mortgage and consumer lending, lease financing, trustaccount services and depositor services through its four subsidiaries. The Corporation’s primarysource of revenue is derived from loans to customers, primarily middle-income individuals, andinvestment activities.The Corporation operates 54 branches in west-central Indiana and east-central Illinois. FirstFinancial Bank is the largest bank in Vigo County. It operates 13 full-service banking brancheswithin the county; five in Clay County, Indiana; one in Greene County, Indiana; three in KnoxCounty, Indiana; five in Parke County, Indiana; one in Putnam County, Indiana; five in SullivanCounty, Indiana; four in Vermillion County, Indiana; one in Clark County, Illinois; one in ColesCounty, Illinois; three in Crawford County, Illinois; one in Jasper County, Illinois; two inLawrence 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 anoperations center/office building in southern Terre Haute.**Regulatory Agencies:**First Financial Corporation is a multi-bank holding company and as such isregulated by various banking agencies. The holding company is regulated by the Seventh Districtof the Federal Reserve System. The national bank subsidiary is regulated by the Office of theComptroller of the Currency. The state bank subsidiary is jointly regulated by the state bankingorganization and the Federal Deposit Insurance Corporation.**SIGNIFICANT ACCOUNTING POLICIES****Use of Estimates:**To prepare financial statements in conformity with U.S. generallyaccepted accounting principles, management makes estimates and assumptions based on availableinformation. These estimates and assumptions affect the amounts reported in the financialstatements and disclosures provided, and actual results could differ. The allowance for loanlosses, carrying value of intangible assets, loan servicing rights, other-than-temporarysecurities impairment and the fair values of financial instruments are particularly subject tochange.**Cash Flows**: Cash and cash equivalents include cash and demand deposits with other financialinstitutions. Net cash flows are reported for customer loan and deposit transactions andshort-term borrowings.**Securities**: The Corporation classifies all securities as “available for sale.” Securities areclassified as available for sale when they might be sold before maturity. Securities availablefor 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 discountsare amortized on the level yield method without anticipating prepayments. Mortgage-backedsecurities are amortized over the expected life. Realized gains and losses on sales are based onthe amortized cost of the security sold. Management evaluates securities for other-thantemporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic ormarket conditions warrant such an evaluation.**Loans:**Loans that management has the intent and ability to hold for the foreseeablefuture until maturity or pay-off are reported at the principal balance outstanding, net ofunearned interest, purchase premiums and discounts, deferred loan fees and costs, and allowancefor loan losses. Loans held for sale are reported at the lower of cost or market, on anaggregate basis. Interest income is accrued on the unpaid principal balance and includesamortization of net deferred loan fees and costs over the loan term without anticipatingprepayments. The recorded investment in loans includes accrued interest receivable. Interestincome is not reported when full loan repayment is in doubt, typically when the loan is impairedor payments are significantly past due. Past-due status is based on the contractual terms of theloan.All interest accrued but not received for loans placed on nonaccrual is reversed againstinterest income. Interest received on such loans is accounted for on the cash-basis orcost-recovery method, until qualifying for return to accrual. Loans are returned to accrualstatus when all the principal and interest amounts contractually due are brought current andfuture payments are reasonably assured. In all cases, loans are placed on non-accrual orcharged-off if collection of principal or interest is considered doubtful.
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****Certain Purchased Loans:**The Corporation purchases individual loans and groups of loans,some of which have shown evidence of credit deterioration since origination. These purchasedloans are recorded at the amount paid, such that there is no carryover of the seller’s allowancefor loan losses. After acquisition, losses are recognized by an increase in the allowance forloan losses. Such purchased loans accounted for individually or aggregated into pools of loansbased 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 loanor pool, and the expected cash flows in excess of amount paid are recorded asinterest income over the remaining life of the loan or pool (accretable yield). The excess ofthe 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 presentvalue of expected cash flows is less than the carrying amount, a provision for loan loss isrecorded. If the present value of expected cash flows is greater than the carrying amount, it isrecognized as part of future interest income.**Concentration of Credit Risk:**Most of the Corporation’s business activity is with customerslocated within Vigo County. Therefore, the Corporation’s exposure to credit risk issignificantly affected by changes in the economy of the Vigo County area. A major economicdownturn 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 probableincurred credit losses. Loan losses are charged against the allowance when management believesthe uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are creditedto the allowance. Management estimates the allowance balance required using past loan lossexperience, the nature and volume of the portfolio, information about specific borrowersituations and estimated collateral values, economic conditions and other factors. Allocationsof the allowance may be made for specific loans, but the entire allowance is available for anyloan that, in management’s judgment, should be charged off. The allowance consists of specificand general components. The specific component relates to loans that are individually classifiedas impaired or loans otherwise classified as substandard or doubtful. The general componentcovers non-classified loans and is based on historical loss experience adjusted for currentfactors.A loan is impaired when full payment under the loan terms is not expected. Loans for which theterms have been modified, and for which the borrower is experiencing financial difficulties, areconsidered troubled debt restructurings and classified as impaired. Impairment is evaluated intotal for smaller-balance loans of similar nature such as residential mortgages and consumerloans, and on an individual basis for other loans. If a loan is impaired, a portion of theallowance is allocated so that the loan is reported, net, at the present value of estimatedfuture cash flows, using the loan’s existing rate, or at the fair value of collateral ifrepayment is expected solely from the collateral. Large groups of smaller balance homogeneousloans, such as consumer and residential real estate loans, are collectively evaluated forimpairment and, accordingly, they are not separately identified for impairment disclosures.The general component covers non-classified loans and is based on historical loss experienceadjusted for current factors. The historical loss experience is based on the actual losshistory experienced over the most recent four years, using a weighted average which places moreemphasis on the more current years within loss history window. This actual loss experience issupplemented with other current factors based on the risks present for each portfolio segment.These current factors include consideration of the following: levels of and trends indelinquent, 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 andother relevant staff; credit concentrations; value of underlying collateral for collateraldependent loans; and other external factors such as competition and legal and regulatoryrequirements. The following portfolio segments have been identified: commercial loans,residential loans and consumer loans. Overall, historical loss rates for the Corporation’sportfolio segments have remained low during this tough economic cycle. This is primarilyattributable to the Corporation’s conservative lending practices. Local economic conditions,including elevated unemployment rates, resulted in higher consumer loan delinquencies. Forthese reasons, consumer loans have the highest adjustments to the historical loss rate. Thesesame factors along with declining real estate values resulted in the residential loan portfoliosegment having the next highest level of adjustment to the historical loss rate. The commercialloan 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 andimpaired commercial loans. Commercial loans are generally well secured, which mitigates therisk of loss and has contributed to the low historical loss rate.**FDIC Indemnification Asset:**The FDIC indemnification asset results from the lossshare agreements in the 2009 FDIC-assisted transaction. The asset is measured separately fromthe related covered assets as they are not contractually embedded in the assets and are nottransferable with the assets should the Corporation choose to dispose of them. It representsthe acquisition date fair value of expected reimbursements from the FDIC which was determined tobe $12.1 million. Pursuant to the terms of the loss sharing agreement, covered loans and otherreal estate are subject to a stated loss threshold whereby the FDIC will reimburse theCorporation for up to 95% of losses incurred. These expected reimbursements do not includereimbursable amounts related to future covered expenditures. These cash flows are discounted toreflect a metric of uncertainty of the timing and receipt of the loss sharing reimbursement fromthe FDIC. This asset decreases when losses are realized and claims are paid by the FDIC or whencustomers repay their loans in full and expected losses do not occur. This asset also increaseswhen estimated future losses increase and decreases when estimated future losses decrease. Whenestimated future losses increase, the Corporation records a provision for loan losses andincreases its allowance for loan losses accordingly. The related increase in the FDICindemnification asset is recorded as an offset to the provision for loan losses. During 2010 and2009, the provision for loan losses was offset by $1,662 and $0 related to the increases in theFDIC indemnification asset.
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****Foreclosed Assets:**Assets acquired through or instead of loan foreclosures are initiallyrecorded at fair value less estimated selling costs when acquired, establishing a new costbasis. If fair value declines, a valuation allowance is recorded through expense. Costs afteracquisition are expensed.**Premises and Equipment:**Land is carried at cost. Premises and equipment are stated at cost lessaccumulated depreciation. Depreciation is computed over the useful lives of the assets, whichrange from 3 to 33 years for furniture and equipment and 5 to 39 years for buildings andleasehold improvements.**Restricted Stock:**Restricted stock includes Federal Home Loan Bank (FHLB) of Indianapolis andChicago and Federal Reserve stock. This restricted stock is carried at cost and periodicallyevaluated for impairment. Because this stock is viewed as a long-term investment, impairment isbased 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 throughsales of loans. When mortgage loans are sold, servicing rights are initially recorded at fairvalue with the income statement effect recorded in gains on sales of loans. Fair value is basedon market prices for comparable mortgage servicing contracts, when available, or alternatively,is based on third-party valuations that incorporate assumptions that market participants woulduse in estimating future net servicing income, such as the cost to service, the discount rate, ancillary income, prepayment speeds and defaultrates and losses. All classes of servicing assets are subsequently measured using theamortization method, which requires servicing rights to be amortized into non-interest income inproportion to, and over the period of, the estimated future net servicing income of theunderlying loans.Servicing assets are evaluated for impairment based upon the fair value of the rights ascompared to carrying amount. Impairment is determined by stratifying rights into groupings basedon 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 extentthat fair value is less than the carrying amount. If the Corporation later determines that allor a portion of the impairment no longer exists for a particular grouping, a reduction of theallowance may be recorded as an increase to income. Changes in valuation allowances are reportedwith Other Service Fees on the income statement. The fair values of servicing rights are subjectto significant fluctuations as a result of changes in estimated and actual prepayment speeds anddefault rates and losses.Servicing fee income, which is included in Other Service Fees on the income statement, is forfees earned for servicing loans.The fees are based on a contractual percentage of the outstanding principal or a fixed amountper loan and are recorded as income when earned. The amortization of mortgage servicing rightsis netted against loan servicing fee income. Servicing fees totaled $1,153 thousand, $958thousand and $901 thousand for the years ended December 31, 2010, 2009 and 2008. Late fees andancillary fees related to loan servicing are not material.**Transfers of Financial Assets:**Transfers of financial assets are accounted for assales, when control over the assets has been relinquished. Control over transferred assets isdeemed to be surrendered when the assets have been isolated from the Corporation, the transfereeobtains the right (free of conditions that constrain it from taking advantage of that right) topledge or exchange the transferred assets, and the Corporation does not maintain effectivecontrol over the transferred assets through an agreement to repurchase them before theirmaturity.**Bank-Owned Life Insurance:**The Corporation has purchased life insurance policies on certain keyexecutives. Bank-owned life insurance is recorded at its cash surrender value, or the amountthat can be realized. Income on the investments in life insurance is included in other interestincome.**Goodwill and Other Intangible Assets:**Goodwill resulting from business combinations prior toJanuary 1, 2009 represents the excess of the purchase price over the fair value of the netassets of businesses acquired. Goodwill resulting from business combinations after January 1,2009 represents the future economic benefits arising from other assets acquired that are notindividually identified and separately recognized. Goodwill and intangible assets acquired in apurchase business combination and determined to have an indefinite useful life are notamortized, but tested for impairment at least annually. The Corporation has selected May 31 asthe date to perform the annual impairment test. Intangible assets with definite useful lives areamortized over their estimated useful lives to their estimated residual values. Goodwill is theonly intangible asset with an indefinite life on our balance sheet.Other intangible assets consist of core deposit and acquired customer relationship intangibleassets arising from the whole bank, insurance agency and branch acquisitions. They are initiallymeasured at fair value and then are amortized on an accelerated basis over their estimateduseful lives, which are 12 and 10 years, respectively.**Long-Term Assets:**Premises and equipment and other long-term assets are reviewed for impairmentwhen events indicate their carrying amount may not be recoverable from future undiscounted cashflows. If impaired, the assets are recorded at fair value.**Benefit Plans:**Pension expense is the net of service and interest cost, return on plan assetsand amortization of gains and losses not immediately recognized. The amount contributed isdetermined by a formula as decided by the Board of Directors. Deferred compensation andsupplemental retirement plan expense allocates the benefits over years of service.**Employee Stock Ownership Plan:**Shares of treasury stock are issued to the ESOP and compensationexpense is recognized based upon the total market price of shares when contributed.**Deferred Compensation Plan:**A deferred compensation plan covers all directors. Under the plan,the Corporation pays each director, or their beneficiary, the amount of fees deferred plusinterest over 10 years, beginning when the director achieves age 65. A liability is accrued forthe 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 deferredcompensation liability of $2.6 million 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 a15-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 plangenerally do not begin until the earlier of January 1, 2015, or the January 1 immediatelyfollowing the year in which the participant reaches age 65. There was no compensation expenserelated to this plan for 2010 and the compensation expense for 2009and 2008 was $2.3 million and $2.0 million, resulting in a liability of $15.4 millionand $15.4 million as of year-end 2010 and 2009. In 2010 the Corporation adopted incentivecompensation plans for 2010 that also expired December 31, 2010. These plans are interim withthe intention of more developed plans starting in 2011. The plans were designed to reward keyofficers based on certain performance measures. The short-term plans will be paid out within75 days of December 31, 2010 and the long-term plan vests over a three year period and willpayout within 75 days of December 31, 2013. The compensation related to the three plans in2010 was $2.2 million and resulted in a liability of $2.2 million at December 31, 2010.
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****Income Taxes:**Income tax expense is the total of the current year income tax due orrefundable and the change in deferred tax assets and liabilities. Deferred tax assets andliabilities are the expected future tax amounts for the temporary differences betweencarrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. Avaluation allowance, if needed, reduces deferred tax assets to the amount expected to berealized.A tax position is recognized as a benefit only if it is “more likely than not” that the taxposition would be sustained in a tax examination, with a tax examination being presumed tooccur. 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 thannot” test, no tax benefit is recorded.The Corporation recognizes interest and/or penalties related to income tax matters in incometax expense.**Loan Commitments and Related Financial Instruments:**Financial instruments include creditinstruments, such as commitments to make loans and standby letters of credit, issued to meetcustomer financing needs. The face amount for these items represents the exposure to loss,before considering customer collateral or ability to repay. Such financial instruments arerecorded when they are funded.**Earnings Per Share:**Earnings per common share is net income divided by the weighted averagenumber of common shares outstanding during the period. The Corporation does not have anypotentially dilutive securities. Earnings and dividends per share are restated for stocksplits and dividends through the date of issue of the financial statements.**Comprehensive Income:**Comprehensive income consists of net income and other comprehensiveincome. Other comprehensive income includes unrealized gains and losses on securitiesavailable for sale and changes in the funded status of the retirement plans, which are alsorecognized as separate components of equity.**Loss Contingencies:**Loss contingencies, including claims and legal actions arising in theordinary course of business, are recorded as liabilities when the likelihood of loss isprobable and an amount of range of loss can be reasonably estimated. Management does notbelieve there are currently such matters that will have a material effect on the financialstatements.**Dividend Restriction:**Banking regulations require maintaining certain capital levels and maylimit the dividends paid by the bank to the holding company or by the holding company toshareholders.**Fair Value of Financial Instruments:**Fair values of financial instruments are estimated usingrelevant market information and other assumptions, as more fully disclosed in a separatenote. Fair value estimates involve uncertainties and matters of significant judgmentregarding interest rates, credit risk, prepayments and other factors, especially in theabsence of broad markets for particular items. Changes in assumptions or market conditionscould significantly affect the estimates.**Operating Segment:**While the Corporation’s chief decision-makers monitor the revenue streamsof the various products and services, the operating results of significant segments aresimilar and operations are managed and financial performance is evaluated on a corporate-widebasis. Accordingly, all of the Corporation’s financial service operations are considered bymanagement 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. 115-2and 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-temporaryfor debt securities. The requires an entity to assess whether it intends to sell, or it ismore likely than not that it will be required to sell, a security in an unrealized lossposition before recovery of its amortized cost basis. If either of these criteria is met, theentire difference between amortized cost and fair value is recognized as impairment throughearnings. For securities that do not meet the aforementioned criteria, the amount ofimpairment 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) OTTIrelated to credit loss, which must be recognized in the income statement. The *credit loss*isdetermined as the difference between the present value of the cash flows expected to becollected and the amortized cost basis. Additionally, disclosures about other-than-temporaryimpairments for debt and equity securities were expanded. ASC 320-10 was effective forinterim and annual reporting periods ending June 15, 2009, with early adoption permitted forperiods ending after March 15, 2009. At adoption, the Corporation reversed $3.3 million (netof 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 Whenthe Volume and Level of Activity for the Asset and Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly*(ASC 820-10). This FSP emphasizes that theobjective of a fair value measurement does not change even when market activity for the assetor liability has decreased significantly. Fair value is the price that would be received foran asset sold or paid to transfer a liability in an orderly transaction (that is, not aforced liquidation or distressed sale) between market participants at the measurement dateunder current market conditions. When observable transactions or quoted prices are notconsidered orderly, then little, if any, weight should be assigned to the indication of theasset or liability’s fair value. Adjustments to those transactions or prices would be neededto determine the appropriate fair value. The FSP, which was applied prospectively, waseffective for interim and annual reporting periods ending after June 15, 2009 with earlyadoption for periods ending after March 15, 2009. The effect of adopting this new guidancewas not material.
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****2. FAIR VALUES OF FINANCIAL INSTRUMENTS:**Accounting guidance establishes a fair value hierarchy which requires an entity tomaximize the use of observable inputs and minimize the use of unobservable inputs whenmeasuring fair value. The standard describes three levels of inputs that may be used to measurefair value:Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets thatthe entity 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 quotedprices for similar assets or liabilities; quoted prices in markets that are not active; orother inputs that are observable or can be corroborated by observable market data.Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptionsabout 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 onnationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is amathematical technique widely used in the industry to value debt securities without relyingexclusively on quoted prices for the specific securities but rather by relying on thesecurities’ relationship to other benchmark quoted securities (Level 2 inputs).For those securities that cannot be priced using quoted market prices or observable inputs, aLevel 3 valuation is determined. These securities are primarily trust preferred securities andcertain equity securities, which are priced using Level 3 due to current market illiquidity.The fair value of trust preferred securities is computed based upon discounted cash flowsestimated using payment, default and recovery assumptions. Cash flows are discounted atappropriate market rates, including consideration of credit spreads and illiquidity discounts.The fair value of equity securities is derived through consideration of trading activity, ifany, 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 marketvolatility.The fair value of derivatives is based on valuation models using observable market data as ofthe measurement date (Level 2 inputs).                   December 31, 2010   Fair Value Measurment Using (Dollar amounts in thousands) Level 1  Level 2  Level 3  Carrying Value U.S. Government entity mortgage-backedsecurities $—  $2,073  $—  $2,073 Mortgage-backed securities, residential  —   302,423   —   302,423 Mortgage-backed securities, commercial  —   139   —   139 Collateralized mortgage obligations  —   94,457   —   94,457 State and municipal obligations  —   157,540   —   157,540 Collateralized debt obligations  —   —   2,190   2,190 Corporate debt securities  —   —   —   — Equity Securities  506   —   1,518   2,024              TOTAL $506  $556,632  $3,708  $560,846              Derivative Assets     $1,311         Derivative Liabilities      (1,311)                           December 31, 2009   Fair Value Measurment Using (Dollar amounts in thousands) Level 1  Level 2  Level 3  Carrying Value U.S. Government entity mortgage-backedsecurities $—  $4,148  $—  $4,148 Mortgage-backed securities, residential  —   300,184   —   300,184 Mortgage-backed securities, commercial  —   168   —   168 Collateralized mortgage obligations  —   119,564   —   119,564 State and municipal obligations  —   148,733   —   148,733 Collateralized debt obligations  —   —   1,416   1,416 Corporate debt securities  —   7,072   —   7,072 Equity Securities  2,600   —   3,361   5,961              TOTAL $2,600  $579,869  $4,777  $587,246              Derivative Assets     $889         Derivative Liabilities      (889)        
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**The table below presents a reconciliation and income statement classification of gainsand losses for all assets measured at fair value on a recurring basis using significantunobservable inputs (Level 3) for the twelve months ended December 31, 2010 and 2009.           **Fair Value Measurments**   **Using Significant**   **Unobservable Inputs (Level 3)**   **2010**  **2009** Beginning balance, January 1 $4,777  $7,994 Total realized/unrealized gains or losses        Included in earnings  (4,260)  (10,769)Included in other comprehensive income  3,872   7,651 Settlements  (681)  (99)       Ending balance, December 31 $3,708  $4,777        Change in unrealized gains and losses recorded in earnings for the year ended December31, 2010 for Level 3 assets that are still held at December 31, 2010 was related to fair valuedeclines 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 millionat December 31, 2010 and at a fair value of $19.3 million, net of a valuation allowance of $5.4million at December 31, 2009. The impact to the provision for loan losses for the twelve monthsended 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 isdetermined using several methods. Generally, the fair value of real estate is determined basedon appraisals by qualified licensed appraisers. If an appraisal is not available, the fairvalue may be determined by using a cash flow analysis, a broker’s opinion of value, the netpresent value of future cash flows, or an observable market price from an active market. Fairvalue on non-real estate loans is determined using similar methods. Other real estate owned atDecember 31, 2010 with a value of $6.3 million was reduced $353 thousand for fair valueadjustment. At December 31, 2010 other real estate owned was comprised of $3.3 million fromcommercial loans and $3.0 million from residential loans. Other real estate owned at December31, 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.                   Allowance      Unpaid  for Loan      Principal  Losses    (Dollar amounts in thousands) Balance  Allocated  Fair Value Commercial            Commercial & Industrial $19,868  $1,508  $18,360 Farmland  —       — Non Farm, Non Residential  12,397   3,255   9,142 Agriculture  —         All Other Commercial  1,577   128   1,449 Residential            First Liens  1,910   533   1,377 Home Equity  —       — Junior Liens  1,129   443   686 Multifamily  638       638 All Other Residential  —       — Consumer            Motor Vehicle  —       — All Other Consumer  —       —           TOTAL $37,519  $5,867  $31,652 
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**The carrying amounts and estimated fair values of financial instruments are shown below.Carrying amount is the estimated fair value for cash and due from banks, federal funds sold,accrued interest receivable and payable, demand deposits, short-term and certain otherborrowings, and variable-rate loans or deposits that reprice frequently and fully. Security fairvalues are determined as previously described. It is not practicable to determine the fair valueof Federal Home Loan Bank stock due to restrictions placed on their transferability. For theFDIC indemnification asset the carrying value is the estimated fair value as it representsamounts to be received from the FDIC in the near term. For fixed-rate loans or deposits,variable rate loans or deposits with infrequent repricing or repricing limits, and forlonger-term borrowings, fair value is based on discounted cash flows using current market ratesapplied to the estimated life and credit risk. Fair values for impaired loans are estimatedusing discounted cash flow analysis or underlying collateral values. Fair value of debt is basedon current rates for similar financing. The fair value of off-balance sheet items is notconsidered material.The carrying amount and estimated fair value of assets and liabilities are presented in thetable below and were determined based on the above assumptions:                   **December 31,**   **2010**  **2009**   **Carrying**  **Fair**  **Carrying**  **Fair** (Dollar amounts in thousands) **Value**  **Value**  **Value**  **Value** Cash and due from banks $58,511  $58,511  $84,371  $84,371 Federal funds sold  5,104   5,104   21,576   21,576 Securities available-for-sale  560,846   560,846   587,246   587,246 Federal Home Loan Bank stock  23,654   N/A   26,181   N/A Loans, net  1,617,810   1,607,895   1,612,327   1,604,412 FDIC Indemnification Asset  3,977   3,977   12,124   12,124 Accrued interest receivable  11,208   11,208   12,005   12,005 Deposits  (1,903,043)  (1,909,874)  (1,789,701)  (1,798,059)Short-term borrowings  (34,106)  (34,106)  (30,436)  (30,436)Federal Home Loan Bankadvances  (125,793)  (128,881)  (326,137)  (337,847)Other borrowings  —   —   (6,600)  (6,600)Accrued interest payable  (2,041)  (2,041)  (3,127)  (3,127)**3. RESTRICTIONS ON CASH AND DUE FROM BANKS:**Certain affiliate banks are required to maintain average reserve balances with theFederal Reserve Bank that do not earn interest. The amount of those reserve balances wasapproximately $9.1 million and $8.2 million at December 31, 2010 and 2009, respectively.**4. SECURITIES:**The fair value of securities available-for-sale and related gross unrealized gains andlosses recognized in accumulated other comprehensive income were as follows:                   **December 31, 2010**   **Amortized**  **Unrealized**    (Dollar amounts in thousands) **Cost**  **Gains**  **Losses**  **Fair Value** U.S. Government entity mortgage-backedsecurities $2,027  $46  $—  $2,073 Mortgage-backed securities, residential  289,962   13,166   (705)  302,423 Mortgage-backed securities, commercial  136   3   —   139 Collateralized mortgage obligations  92,803   2,248   (594)  94,457 State and municipal obligations  152,633   5,318   (411)  157,540 Collateralized debt obligations  15,084   —   (12,894)  2,190 Equity Securities  1,729   295   —   2,024              TOTAL $554,374  $21,076  $(14,604) $560,846              
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**                   **December 31, 2009**   **Amortized**  **Unrealized**    (Dollar amounts in thousands) **Cost**  **Gains**  **Losses**  **Fair Value** U.S. Government entity mortgage-backedsecurities $4,103  $45  $—  $4,148 Mortgage-backed securities, residential  285,964   14,260   (40)  300,184 Mortgage-backed securities, commercial  162   6   —   168 Collateralized mortgage obligations  116,330   3,334   (100)  119,564 State and municipal obligations  143,039   5,926   (232)  148,733 Collateralized debt obligations  19,253   —   (17,837)  1,416 Corporate debt securities  7,004   257   (189)  7,072 Equity Securities  5,668   1,462   (1,169)  5,961              TOTAL $581,523  $25,290  $(19,567) $587,246              As of December 31, 2010, the Corporation does not have any securities from any issuer,other than the U.S. Government, with an aggregate book or fair value that exceeds ten percentof shareholders’ equity.Securities with a carrying value of approximately $227.3 million and $200.8 million atDecember 31, 2010 and 2009, respectively, were pledged as collateral for short-term borrowingsand for other purposes.Below is a summary of the gross gains and losses realized by the Corporation on investmentsales during the years ended December 31, 2010, 2009 and 2008, respectively.             (Dollar amounts in thousands) **2010**  **2009**  **2008** Proceeds $12,248  $—  $1,063 Gross gains  1,507   —   353 Gross losses  (213)  —   — Additional gains of $27 thousand in 2010, $4 thousand in 2009 and $5 thousand in 2008 resultedfrom redemption premiums on called securities.Contractual maturities of debt securities at year-end 2010 were as follows. Securities not dueat a single maturity or with no maturity date, primarily mortgage-backed and equitysecurities, are shown separately.           **Available-for-Sale**   **Amortized**  **Fair** (Dollar amounts in thousands) **Cost**  **Value** Due in one year or less $10,243  $10,437 Due after one but within five years  35,651   37,517 Due after five but within ten years  45,636   47,695 Due after ten years  171,017   160,611           262,547   256,260 Mortgage-backed securities and equities  291,827   304,586        TOTAL $554,374  $560,846        
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**The following tables show the securities’ gross unrealized losses and fair value,aggregated by investment category and length of time that individual securities have been incontinuous unrealized loss position, at December 31, 2010 and 2009.                           **December 31, 2010**   **Less Than 12 Months**  **More Than 12 Months**  **Total**       **Unrealized**      **Unrealized**      **Unrealized** (Dollar amounts in thousands) **Fair Value**  **Losses**  **Fair Value**  **Losses**  **Fair Value**  **Losses** Mortgage-backed securities,residential $35,024  $(705) $—  $—  $35,024  $(705)Collateralized mortgage obligations  25,338   (594)  —   —   25,338   (594)State and municipal obligations  19,372   (411)  —   —   19,372   (411)Collateralized debt obligations  —   —   2,190   (12,894)  2,190   (12,894)                   Total temporarily impairedsecurities $79,734  $(1,710) $2,190  $(12,894) $81,924  $(14,604)                                              **December 31, 2009**   **Less Than 12 Months**  **More Than 12 Months**  **Total**       **Unrealized**      **Unrealized**      **Unrealized** (Dollar amounts in thousands) **Fair Value**  **Losses**  **Fair Value**  **Losses**  **Fair Value**  **Losses** Mortgage-backed securities,residential $6,985  $(38) $47  $(2) $7,032  $(40)Collateralized mortgage obligations  6,094   (100)  —   —   6,094   (100)State and municipal obligations  6,594   (45)  4,841   (187)  11,435   (232)Collateralized debt obligations  —   —   1,416   (17,837)  1,416   (17,837)Corporate debt securities  —   —   811   (189)  811   (189)Equity securities  543   (280)  1,150   (889)  1,693   (1,169)                   Total temporarily impairedsecurities $20,216  $(463) $8,265  $(19,104) $28,481  $(19,567)                   The Corporation held 697 investment securities with an amortized cost greater than fairvalue as of December 31, 2010. The unrealized losses on mortgage-backed and state andmunicipal obligations represent negative adjustments to market value relative to the rate ofinterest 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 berequired to sell the securities prior to their anticipated recovery. Management believes thevalue will recover as the securities approach maturity or market rates change.Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on aquarterly basis, and more frequently when economic or market conditions warrant such anevaluation. The investment securities portfolio is evaluated for OTTI by segregating theportfolio into two general segments and applying the appropriate OTTI model.Investment securities classified as available-for-sale or held-to-maturity are generallyevaluated 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 thetime 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) thefinancial condition and near-term prospects of the issuer, (3) whether the market decline wasaffected by macroeconomic conditions, and (4) whether the entity has the intent to sell thesecurity or more likely than not will be required to sell the security before its anticipatedrecovery. The assessment of whether an other-than-temporary decline exists involves a highdegree of subjectivity and judgment and is based on the information available to management ata point in time.The second segment of the portfolio uses the OTTI guidance provided by FASB ASC-325 that isspecific 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 cashflows as estimated at the preceding evaluation date to the current expected remaining cashflows. An OTTI isdeemed to have occurred if there has been an adverse change in the remaining expected futurecash flows.When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends onwhether an entity intends to sell the security or it is more likely than not it will berequired to sell the security before recovery of its amortized cost basis, less anycurrent-period credit loss. If an entity intends to sell or it is more likely than not it willbe required to sell the security before recovery of its amortized cost basis, less anycurrent-period credit loss, the OTTI shall be recognized in earnings equal to the entiredifference between the investment’s amortized cost basis and its fair value at the balancesheet date. If an entity does not intend to sell the security and it is not more likely thannot that the entity will be required to sell the security before recovery of its amortized costbasis less any current-period loss, the OTTI shall be separated into the amount representingthe credit loss and the amount related to all other factors. The amount of the total OTTIrelated to the credit loss is determined based on the present value of cash flows expected tobe collected and is recognized in earnings. The amount of the total OTTI related to otherfactors is recognized in other comprehensive income, net of applicable taxes. The previousamortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basisof the investment.
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**Gross unrealized losses on investment securities were $14.6 million as of December 31,2010 and $19.6 million as of December 31, 2009. A majority of these losses represent negativeadjustments to fair value relative to the illiquidity in the markets on the securities and notlosses related to the creditworthiness of the issuer.A significant portion of the total unrealized losses relates to collateralized debt obligationsthat were separately evaluated under FASB ASC 325-40, *Beneficial Interests in SecuritizedFinancial Assets.*Based upon qualitative considerations, such as a downgrade in credit ratingor further defaults of underlying issuers during the year, and an analysis of expected cashflows, we determined that four CDOs included in collateralized debt obligations wereother-than-temporarily impaired. Those four CDO’s have a contractual balance of $28.3 millionat December 31, 2010 which has been reduced to $0.7 million by $0.3 million of interestpayments received, $15.1 million of cumulative OTTI charges recorded through earnings to date,including $3.7 million recorded in 2010 and $12.2 million recorded in other comprehensiveincome. The severity of the OTTI recorded varies by security, based on the analysis describedbelow, and ranges, at December 31, 2010 from 28% to 87%. The OTTI recorded in othercomprehensive income represents OTTI due to factors other than credit loss, mainly currentmarket illiquidity. These securities are collateralized by trust preferred securities issuedprimarily by bank holding companies, but certain pools do include a limited number of insurancecompanies. The market for these securities has become very illiquid, there are very few newissuances of trust preferred securities and the credit spreads implied by current prices haveincreased dramatically and remain very high, resulting in significant non-credit relatedimpairment. The Corporation uses the OTTI evaluation model to compare the present value ofexpected cash flows to the previous estimate to determine if there are adverse changes in cashflows during the year. The OTTI model considers the structure and term of the CDO and thefinancial condition of the underlying issuers. Specifically, the model details interest rates,principal balances of note classes and underlying issuers, the timing and amount of interestand principal payments of the underlying issuers, and the allocation of the payments to thenote classes. Cash flows are projected using a forward rate LIBOR curve, as these CDOs arevariable-rate instruments. An average rate is then computed using this same forward rate curveto determine an appropriate discount rate (3 month LIBOR plus margin ranging from 160 to 180basis points). The current estimate of expected cash flows is based on the most recent trusteereports and any other relevant market information, including announcements of interest paymentdeferrals or defaults of underlying trust preferred securities. Assumptions used in the modelinclude expected future default rates and prepayments. We assume no recoveries on defaults andtreat all interest payment deferrals as defaults. In addition we use the model to “stress” eachCDO, or make assumptions more severe than expected activity, to determine the degree to whichassumptions could deteriorate before the CDO could no longer fully support repayment of theCorporation’s note class.Collateralized debt obligations include one additional investment in a CDO consisting of pooledtrust preferred securties in which the issuers are primarily banks. This CDO, with an amortizedcost of $2.2 million and a fair value of $1.5 million, is currently rated BAA3 and is thesenior tranche, is not in the scope of FASB ASC 325 as it was rated high investment grade atpurchase, and is not considered to be other-than-temporarily impaired based on its creditquality. Its fair value is negatively impacted by the factors described above.Management has consistently used Standard & Poors pricing to value these investments. There area 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 awide range of estimates of fair value for these securities. The Standard & Poors pricing rangesfrom 1.38 to 3.49 while Moody’s Investor Service pricing ranges from 1.30 to 24.56, with othersfalling somewhere in between. We recognize that the Standard & Poors pricing utilized is likelya conservative estimate, but have been consistent in using this source and its estimate of fairvalue.Unrealized losses on equity securities at year end 2009 relate to investments in bank stocksheld at the holding company. Bank stock values have been negatively impacted by the currenteconomic environment and market pessimism. In 2009 the largest part of this unrealized loss($753 or 64%) relates to the Corporation’s ownership of stock in Fifth Third Corporation. In2010 the holdings of this issuer were liquidated along with a majority of the equity holdingsin order to retire debt. $549 thousand of OTTI was recognized on the stock of Fifth ThirdCorporation prior to its disposal.The table below presents a rollforward of the credit losses recognized in earnings for the yearended December 31, 2010:         (Dollar amounts in thousands) **2010**  **2009** Beginning balance, January 1, $11,359  $6,145 Amountsrelated to credit loss for which other-than-temporary impairment was not previously recognized  (549)  5,438 Amounts realized for securities sold during the period  —   — Reductionsfor increase in cash flows expected to be collected that are recognized over the remaining life of the security  —   — Increases to the amount related to the credit loss for whichother-than-temporary impairment was previously recognized  4,260   5,331 Adoption of new accounting guidance on OTTI  —   (5,555)       Ending balance, December 31, $15,070  $11,359        
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****5. LOANS:**Loans are summarized as follows:           **December 31,** (Dollar amounts in thousands) **2010**  **2009** Commercial $896,107  $870,977 Residential  437,576   447,379 Consumer  307,403   314,561        Total gross loans  1,641,086   1,632,917 Less: unearned income  (940)  (1,153)Allowance for loan losses  (22,336)  (19,437)       TOTAL $1,617,810  $1,612,327        Loans in the above summary include loans totaling $46.4 million that are subject to the FDICloss share arrangement (“covered loans”) discussed in footnote 6.The Corporation periodically sells residential mortgage loans it originates based on theoverall loan demand of the Corporation and the outstanding balances in the residential mortgageportfolio. At December 31, 2010 and 2009, loans held for sale included $3.4 million and $3.3million, respectively, and are included in the totals above.In the normal course of business, the Corporation’s subsidiary banks make loans to directorsand executive officers and to their associates. In 2010, the aggregate dollar amount of theseloans to directors and executive officers who held office amounted to $42.0 million at thebeginning of the year. During 2010, advances of $10.5 million, repayments of $15.3 million andincreases of $0.2 million resulting from changes in personnel were made with respect to relatedparty 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 $460.3million at year-end 2010 and 2009. Custodial escrow balances maintained in connection withserviced loans were $1.93 million and $1.47 million at year-end 2010 and 2009.Activity for capitalized mortgage servicing rights (included in other assets) was as follows:               **December 31,** (Dollar amounts in thousands) **2010**  **2009**  **2008** Servicing rights:            Beginning of year $2,034  $1,604  $1,909 Additions  810   1,294   332 Amortized to expense  (764)  (864)  (637)          End of year $2,080  $2,034  $1,604           Third party valuations are conducted periodically for mortgage servicing rights. Based on thesevaluations, fair values were approximately $3.4 million and $3.0 million at year end 2010 and2009. There was no valuation allowance in 2010 or 2009.Fair value for 2010 was determined using a discount rate of 9%, prepayment speeds ranging from160% to 700%, depending on the stratification of the specific right. Fair value at year end2009 was determined using a discount rate of 9%, prepayment speeds ranging from 213% to 700%,depending on the stratification of the specific right. Mortgage servicing rights are amortizedover 8 years, the expected life of the sold loans.**6. ACQUISITION AND FDIC INDEMNIFICATION ASSET:**On July 2, 2009, the Bank entered into a purchase and assumption agreement with theFederal Deposit Insurance Corporation (“FDIC”) to assume all of the deposits (excludingbrokered deposits) and certain assets of The First National Bank of Danville, a full-servicecommercial bank headquartered in Danville, Illinois, that had failed and been placed inreceivership with the FDIC. The acquisition consisted of assets worth a fair value ofapproximately $151.8 million, including $77.5 million of loans, $24.2 million of investmentsecurities, $31.0 million of cash and cash equivalents and $146.3 million of liabilities,including $145.7 million of deposits. A customer related core deposit intangible asset of $4.6million was also recorded. In addition to the excess of liabilities over assets, the Bankreceived approximately$14.6 million in cash from the FDIC. Based upon the acquisition date fairvalues of the net assets acquired, no goodwill was recorded. The transaction resulted in a gainof $5,1 million, which is included in non-interest income in the December 31, 2009 ConsolidatedStatement of Operations Under the loss-sharing agreement (“LSA”), the Bank will share in thelosses on assets covered under the agreement (referred to as covered assets). On losses up to$29 million, the FDIC has agreed to reimburse the Bank for 80 percent of the losses. On lossesexceeding $29 million, the FDIC has agreed to reimburse the Bank for 95 percent of the losses.The loss-sharing agreement is subject to following servicing procedures as specified in theagreement with the FDIC. Loans acquired that are subject to the loss-sharing agreement with theFDIC are referred to as covered loans for disclosure purposes. Since the acquisition date theBank has been reimbursed $13.1 million for losses and carrying expenses and currently carries abalance of $4.0 million. Included in the current balance is the estimate of $1.7 million for80% of the loans subject to the loss-sharing agreement identified in the allowance for loanloss evaluation as future potential losses. This $1.7 million flows to theincome statement as a reduction of the provision for loan losses that was allocated tothese loans.
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**FASB ASC 310-30, *Loans and Debt Securities Acquired with Deteriorated Credit Quality,*appliesto a loan with evidence of deterioration of credit quality since origination, acquired bycompletion of a transfer for which it is probable, at acquisition, that the investor will beunable to collect all contractually required payments receivable. FASB ASC 310-30 prohibitscarrying over or creating an allowance for loan losses upon initial recognition. The carryingamount of covered assets at December 31, 2010 and 2009, consisted of loans accounted for inaccordance with FASB ASC 310-30, loans not subject to FASB ASC 310-30 and other assets as shownin the following table:                       **Non ASC**          **ASC 310-30**  **310-30**      **2010** (Dollar amounts in thousands) **Loans**  **Loans**  **Other**  **Total** Loans $10,948  $35,485  $—  $46,433 Foreclosed Assets  —   —   2,586   2,586              Total Covered Assets $10,948  $35,485  $2,586  $49,019                                     **Non ASC**          **ASC 310-30**  **310-30**      **2009** (Dollar amounts in thousands) **Loans**  **Loans**  **Other**  **Total** Loans $16,849  $55,025  $—  $71,874 Foreclosed Assets  —   —   1,256   1,256              Total Covered Assets $16,849  $55,025  $1,256  $73,130              The rollforward of the FDIC Indemnification asset is as follows:           **December 31,** (Dollar amounts in thousands) **2010**  **2009** Beginning balance $12,124  $— Assessed value of intial indemnification asset  —   12,098 Accretion  339   — Net changes in losses and expenses added  4,570   26 Reimbursements from the FDIC  (13,056)  —        TOTAL $3,977  $12,124        On the acquisition date, the preliminary estimate of the contractually required paymentsreceivable for all FASB ASC310-30 loans acquired in the acquisition were $31.6 million, thecash flows expected to be collected were $18.4 million including interest, and the estimatedfair value of the loans was $16.7 million. These amounts were determined based upon theestimated remaining life of the underlying loans, which include the effects of estimatedprepayments. At December 31, 2010, a majority of these loans were valued based on theliquidation value of the underlying collateral, because the expected cash flows are primarilybased on the liquidation of underlying collateral and the timing and amount of the cash flowscould not be reasonably estimated. There was a $1.5 million allowance for credit losses relatedto these loans at December 31, 2010. On the acquisition date, the preliminary estimate of thecontractually required payments receivable for all non FASB ASC310-30 loans acquired in theacquisition was $58.4 million and the estimated fair value of the loans was $60.7 million. Theimpact to the Corporation from the amortization and accretion of premiums and discounts wasimmaterial.**7. ALLOWANCE FOR LOAN LOSSES:**Changes in the allowance for loan losses are summarized as follows:               **December 31,** (Dollar amounts in thousands) **2010**  **2009**  **2008**              Balance at beginning of year $19,437  $16,280  $15,351 Provision for loan losses *  10,862   11,870   7,855 Recoveries of loans previously charged off  4,511   2,948   2,668 Loans charged off  (12,474)  (11,661)  (9,594)          BALANCE AT END OF YEAR $22,336  $19,437  $16,280              * Provision before reduction of $1,662 in 2010 for increases in the FDIC indemnification asset.
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**The following tables present the allocation of the allowance for loan losses and therecorded investment in loans by portfolio segment and based on impairment method at December 31,2010:Allowance for Loan Losses:                     (Dollar amounts in thousands) Commercial  Residential  Consumer  Unallocated  Total Individually evaluated for impairment $3,893  $625  $—  $—  $4,518 Collectively evaluated for impairment  7,788   1,897   4,551   2,103   16,339 Acquired with deteriorated credit quality  1,128   351   —   —   1,479                 BALANCE AT END OF YEAR $12,809  $2,873  $4,551  $2,103  $22,336                                      Loans                                         (Dollar amounts in thousands) Commercial  Residential  Consumer      Total Individually evaluated for impairment $27,717  $2,770  $—      $30,487 Collectively evaluated for impairment  863,790   435,231   308,903       1,607,924 Acquired with deteriorated credit quality  9,938   1,113   15       11,066                  BALANCE AT END OF YEAR $901,445  $439,114  $308,918      $1,649,477                  The following table identifies loans classified as impaired.           **December 31,** (Dollar amounts in thousands) **2010**  **2009** Year-end loans with no allocated allowance for loan losses $11,890  $5,344 Year-end loans with allocated allowance for loan losses  25,629   19,330        TOTAL $37,519  $24,674                 Amount of the allowance for loan losses allocated $5,867  $5,438 
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**The following table presents loans individually evaluated for impairment by class of loan.                       Allowance   Unpaid      for Loan   Principal  Recorded  Losses   Balance  Investment  Allocated With no related allowance recorded:            Commercial            Commercial & Industrial $8,935  $8,993  $— Farmland  —   —   — Non Farm, Non Residential  2,955   2,955   — Agriculture  —   —   — All Other Commercial  —   —   — Residential            First Liens  —   —   — Home Equity  —   —   — Junior Liens  —   —   — Multifamily  —   —   — All Other Residential  —   —   — Consumer            Motor Vehicle  —   —   — All Other Consumer  —   —   — With an allowance recorded:            Commercial            Commercial & Industrial  10,933   10,996   1,508 Farmland  —   —   — Non Farm, Non Residential  9,442   9,442   3,255 Agriculture  —   —   — All Other Commercial  1,577   1,577   128 Residential            First Liens  1,910   1,910   533 Home Equity  —   —   — Junior Liens  1,129   1,129   443 Multifamily  638   638   — All Other Residential  —   —   — Consumer            Motor Vehicle  —   —   — All Other Consumer  —   —   —           TOTAL $37,519  $37,640  $5,867           The table below presents non-performing loans.           **December 31,** (Dollar amounts in thousands) **2010**  **2009** Nonperforming loans:        Loans past due over 90 days still on accrual  3,185   8,218 Restructured loans  17,094   90 Non-accrual loans  38,517   35,953 Covered loans included in loans past due over 90 days still on accrual are $377 thousand atDecember 31, 2010 and $4.4 million at December 31, 2009. Covered loans included in non-accrualloans are $8.7 million at December 31, 2010 and $7.5 million at December 31, 2009. Covered loansof $4.3 million are deemed impaired at December 31, 2010 and have allowance for loan lossallocated to them of $1.3 million. On December 31, 2009 there were $6.1 million of covered loansdeemed 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 collectivelyevaluated for impairment and individually classified impaired loans.
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**             (Dollar amounts in thousands) **2010**  **2009**  **2008** Average of impaired loans during the year $27,772  $21,731  $6,531 Interest income recognized during impairment  660   36   3 Cash-basis interest income recognized  57   19   — The following table presents the recorded investment in nonperforming loans by class of loans.               Loans Past         Due Over         90 Day Still       (Dollar amounts in thousands) Accruing  Restructured  Nonaccrual Commercial            Commercial & Industrial $1,462  $13,671  $11,677 Farmland  —   —   68 Non Farm, Non Residential  506   —   13,808 Agriculture  —   —   284 All Other Commercial  158   —   2,011 Residential            First Liens  971   2,605   6,141 Home Equity  45   —   — Junior Liens  66   928   1,454 Multifamily  —   —   990 All Other Residential  —   —   150 Consumer            Motor Vehicle  91   —   259 All Other Consumer  4   —   1,675           TOTAL $3,303  $17,204  $38,517           The Corporation has allocated $657 thousand and $0 of specific reserves to customers whose loanterms have been modified in troubled debt restructurings as of December 31, 2010 and 2009. TheCorporation has not committed to lend additional amounts as of December 31, 2010 and 2009 tocustomers with outstanding loans that are classified as troubled debt restructurings.The following table presents the aging of the recorded investment in loans by past due categoryand class of loans.                                   Greater            30-59 Days  60-89 Days  than 90 days  Total       (Dollar amounts in thousands) Past Due  Past Due  Past Due  Past Due  Current  Total Commercial                        Commercial & Industrial $2,619  $882  $3,868  $7,369  $405,319  $412,688 Farmland  63   198   —   261   71,672   71,933 Non Farm, Non Residential  761   1,763   4,366   6,890   260,685   267,575 Agriculture  55   —   284   339   85,275   85,614 All Other Commercial  —   135   283   418   63,217   63,635 Residential                        First Liens  5,405   1,649   3,793   10,847   310,722   321,569 Home Equity  78   11   45   134   38,638   38,772 Junior Liens  287   165   175   627   33,394   34,021 Multifamily  706   —   352   1,058   32,605   33,663 All Other Residential  144   —   —   144   10,945   11,089 Consumer                        Motor Vehicle  2,994   378   91   3,463   279,029   282,492 All Other Consumer  138   23   6   167   26,259   26,426                    TOTAL $13,250  $5,204  $13,263  $31,717  $1,617,760  $1,649,477                    
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****Credit Quality Indicators:**The Corporation categorizes loans into risk categories based on relevant information about theability of borrowers to service their debt such as: current financial information, historicalpayment experience, credit documentation, public information, and current economic trends, amongother factors. The Corporation analyzes loans individually by classifying the loans as tocredit risk. This analysis includes non-homogeneous loans, such as commercial loans, with anoutstanding balance greater than $50 thousand. Any consumer loans outstanding to a borrower whohad commercial loans analyzed will be similarly risk rated. This analysis is performed on aquarterly basis. The Corporation uses the following definitions for risk ratings:**Special Mention:**Loans classified as special mention have a potential weakness that deservesmanagement’s close attention. If left uncorrected, these potential weaknesses may result indeterioration of the repayment prospects for the loan or of the institution’s credit position atsome future date.**Substandard:**Loans classified as substandard are inadequately protected by the current networth and debt service capacity of the borrower or of any pledged collateral. These loans havea well-defined weakness or weaknesses which have clearly jeopardized repayment of principal andinterest as originally intended. They are characterized by the distinct possibility that theinstitution will sustain some future loss if the deficiencies are not corrected.**Doubtful:**Loans classified as doubtful have all the weaknesses inherent in those gradedsubstandard, with the added characteristic that the severity of the weaknesses makes collectionor 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 pastdue or on non-accrual are classified as substandard. Loans included in homogeneous pools, suchas residential or consumer, may be classified as substandard due to 90+ days delinquency,non-accrual status, bankruptcy, or loan restructuring.Loans not meeting the criteria above that are analyzed individually as part of the abovedescribed process are considered to be pass rated loans. Loans listed as not rated are eitherless than $50 thousand or are included in groups of homogeneous loans. As of December 31, 2010,and based on the most recent analysis performed, the risk category of loans by class of loans isas follows:                               Special             (Dollar amounts in thousands) Pass  Mention  Substandard  Doubtful  Not Rated  Total Commercial                        Commercial & Industrial $311,258  $26,956  $63,334  $2,910  $6,977  $411,435 Farmland  66,920   1,535   1,691   68   109   70,323 Non Farm, Non Residential  208,847   29,399   24,579   3,364   544   266,733 Agriculture  82,275   602   1,008   284   154   84,323 All Other Commercial  52,704   6,188   2,799   468   1,134   63,293 Residential                        First Liens  93,887   6,201   7,495   2,944   209,804   320,331 Home Equity  8,641   4,447   427   23   25,200   38,738 Junior Liens  4,796   107   1,733   167   27,090   33,893 Multifamily  22,678   8,516   1,255   990   127   33,566 All Other Residential  1,349   —   26   —   9,673   11,048 Consumer                        Motor Vehicle  12,902   331   492   29   267,424   281,178 All Other Consumer  3,945   64   174   42   22,000   26,225                    TOTAL $870,202  $84,346  $105,013  $11,289  $570,236  $1,641,086                    
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****8. PREMISES AND EQUIPMENT:**Premises and equipment are summarized as follows:           **December 31,** (Dollar amounts in thousands) **2010**  **2009** Land $7,581  $7,305 Building and leasehold improvements  42,367   41,964 Furniture and equipment  34,700   33,520           84,648   82,789 Less accumulated depreciation  (49,957)  (47,238)       TOTAL $34,691  $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 secondquarter 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:                   **2010**  **2009**   **Gross**  **Accumulated**  **Gross**  **Accumulated** (Dollar amounts in thousands) **Amount**  **Amortization**  **Amount**  **Amortization**                  Customer list intangible $4,055  $3,222  $3,446  $2,912 Core deposit intangible  6,546   3,231   6,546   2,164                $10,601  $6,453  $9,992  $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:       In thousands 2011 $1,059 2012  801 2013  666 2014  468 2015  337 **10. DEPOSITS:**Scheduled maturities of time deposits for the next five years are as follows:     2011 $382,466 2012  145,184 2013  69,904 2014  41,782 2015  12,583 
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****11. SHORT-TERM BORROWINGS:**A summary of the carrying value of the Corporation’s short-term borrowings at December31, 2010 and 2009 is presented below:         (Dollar amounts in thousands) **2010**  **2009** Federal funds purchased $3,310  $5,754 Repurchase-agreements  28,936   22,578 Other short-term borrowings  1,860   2,104          $34,106  $30,436                 (Dollar amounts in thousands) **2010**  **2009** Average amount outstanding $39,753  $53,930 Maximum amount outstanding at a month end  47,209   95,568 Average interest rate during year  0.82%  1.00%Interest rate at year-end  0.83%  1.37%Federal funds purchased are generally due in one day and bear interest at market rates. Otherborrowings, primarily note payable—U.S. government, are due on demand, secured by a pledge ofsecurities and bear interest at market rates. Substantially all repurchase agreementliabilities represent amounts advanced by various customers. Securities are pledged to coverthese liabilities, which are not covered by federal deposit insurance. The Corporationmaintains possession of and control over these securities.**12. OTHER BORROWINGS:**Other borrowings at December 31, 2010 and 2009 are summarized as follows:         (Dollar amounts in thousands) **2010**  **2009** FHLB advances $125,793  $326,137 City of Terre Haute, Indiana economic development revenue bonds  —   6,600        TOTAL $125,793  $332,737        The aggregate minimum annual retirements of other borrowings are as follows:     2011 $2,050 2012  20,000 2013  56,000 2014  45,000 2015  2,000 Thereafter  743       $125,793     The Corporation’s subsidiary banks are members of the Federal Home Loan Bank (FHLB) ofIndianapolis and accordingly are permitted to obtain advances. The advances from the FHLB,aggregating $125.8 million at December 31, 2010, and $326.1 million at December 31, 2009,accrue interest, payable monthly, at annual rates, primarily fixed, varying from 3.1% 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 eligible securitiestotaling $33.1 million at December 31, 2010, and $217.6 million at December 31, 2009, and ablanket pledge on real estate loan collateral. Based on this collateral and the Corporation’sholdings of FHLB stock, the Corporation is eligible to borrow up to $227.7 million at year end2010. Certain advances may be prepaid, without penalty, prior to maturity. The FHLB can adjustthe interest rate from fixed to variable on certain advances, but those advances may then beprepaid, without penalty.The economic development revenue bonds (bonds) require periodic interest payments each yearuntil maturity or redemption. The interest rate, which was 0.27% at December 31, 2009, isdetermined by a formula which considers rates for comparable bonds and is adjustedperiodically. The bonds are collateralized by a first mortgage on the Corporation’sheadquarters building. The bonds mature December 1, 2015, but were retired during 2010.
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****13. INCOME TAXES:**Income tax expense is summarized as follows:             (Dollar amounts in thousands) **2010**  **2009**  **2008** Federal:            Currently payable $15,582  $8,721  $12,238 Deferred  (4,850)  (1,574)  (4,727)             10,732   7,147   7,511 State:            Currently payable  2,325   877   712 Deferred  (1,090)  (469)  (420)             1,235   408   292           TOTAL $11,967  $7,555  $7,803           The reconciliation of income tax expense with the amount computed by applying the statutoryfederal income tax rate of 35% to income before income taxes is summarized as follows:             (Dollar amounts in thousands) **2010**  **2009**  **2008** Federal income taxes computed at the statutory rate $14,004  $10,596  $11,400 Add (deduct) tax effect of:            Tax exempt income  (3,400)  (3,521)  (3,505)State tax, net of federal benefit  803   265   189 Affordable housing credits  —   —   (30)Other, net  560   215   (251)          TOTAL $11,967  $7,555  $7,803           The tax effects of temporary differences that give rise to significant portions of the deferredtax assets and liabilities at December 31, 2010 and 2009, are as follows:         (Dollar amounts in thousands) **2010**  **2009** Deferred tax assets:        Other than temporary impairment $5,995  $4,486 Net unrealized losses on retirement plans  8,512   7,236 Loan losses provision  9,315   7,717 Deferred compensation  8,035   7,118 Compensated absences  723   633 Post-retirement benefits  1,971   1,785 Other  1,333   1,288        GROSS DEFERRED ASSETS  35,884   30,263                 Deferred tax liabilities:        Net unrealized gains on securities available-for-sale  (2,589)  (2,290)Depreciation  (1,578)  (1,496)Federal Home Loan Bank stock dividends  (96)  (456)Mortgage servicing rights  (827)  (807)Pensions  (1,865)  (2,385)Deferred gain on acquisition  (666)  (2,039)Other  (2,260)  (1,704)       GROSS DEFERRED LIABILITIES  (9,881)  (11,177)       NET DEFERRED TAX ASSETS (LIABILITIES) $26,003  $19,086        
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**Unrecognized Tax Benefits — A reconciliation of the beginning and ending amount ofunrecognized tax benefits is as follows:             (Dollar amounts in thousands) **2010**  **2009**  **2008** Balance at January 1 $660  $549  $803 Additions based on tax positions related to the current year  113   111   47 Additions based on tax positions related to prior years  181         Reductions for tax positions of prior years  —   —   (291)Reductions due to the statute of limitations  (53)  —   — Settlements  —   —   (10)          Balance at December 31 $901  $660  $549           Of this total, $901 represents the amount of unrecognized tax benefits that, if recognized,would favorably affect the effective income tax rate in future periods. The Corporation doesnot expect the total amount of unrecognized tax benefits to significantly increase or decreasein the next 12 months.The total amount of interest and penalties recorded in the income statement for the years endedDecember 31, 2010, 2009 and 2008 was an expense increase of $43 and $9, and a reduction of $48,respectively. The amount accrued for interest and penalties at December 31, 2010, 2009 and 2008was $116, $73 and $64, respectively.The Corporation and its subsidiaries are subject to U.S. federal income tax as well as incometax of the states of Indiana and Illinois. The Corporation is no longer subject to examinationby taxing authorities for years before 2007.**14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:**The Corporation is a party to financial instruments with off-balance-sheet risk in thenormal course of business to meet the financing needs of its customers. These financialinstruments include conditional commitments and commercial letters of credit. The financialinstruments involve to varying degrees, elements of credit and interest rate risk in excess ofamounts recognized in the financial statements. The Corporation’s maximum exposure to creditloss in the event of nonperformance by the other party to the financial instrument forcommitments to make loans is limited generally by the contractual amount of those instruments.The Corporation follows the same credit policy to make such commitments as is followed forthose loans recorded in the consolidated financial statements.Commitment and contingent liabilities are summarized as follows at December 31:         (Dollar amounts in thousands) **2010**  **2009** Home Equity $44,236  $43,385 Commercial Operating Lines  203,991   206,294 Other Commitments  45,436   40,480        TOTAL $293,663  $290,159                 Commercial letters of credit $13,414  $15,791 The majority of commercial operating lines and home equity lines are variable rate, while themajority of other commitments to fund loans are fixed rate. Since many commitments to makeloans expire without being used, these amounts do not necessarily represent future cashcommitments. Collateral obtained upon exercise of the commitment is determined usingmanagement’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 oneyear or less.**Derivatives:**The Corporation enters into derivative instruments for the benefit of itscustomers. At the inception of a derivative contract, the Corporation designates the derivativeas an instrument with no hedging designation (“standalone derivative”). Changes in the fairvalue of derivatives are reported currently in earnings as non-interest income. Net cashsettlements on derivatives that do not qualify for hedge accounting are reported innon-interest income.First Financial Bank offers clients the ability on certain transactions to enter into interestrate swaps. Typically, these are pay fixed, receive floating swaps used in conjunction withcommercial loans. These derivative contracts do not qualify for hedge accounting. The Bankhedges the exposure to these contracts by entering into offsetting contracts with substantiallymatching terms. The notional amount of these interest rate swaps was $30.5 and $32.6 million atDecember 31, 2010 and 2009. The fair value of these contracts combined was zero, as gainsoffset losses. The gross gain and loss associated with these interest rate swaps was $1.3million and $889 thousand at December 31, 2010 and 2009.
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****15. RETIREMENT PLANS:**Substantially all employees of the Corporation are covered by a retirement program thatconsists of a defined benefit plan and an employee stock ownership plan (ESOP). Plan assetsconsist primarily of the Corporation’s stock and obligations of U.S. Government agencies.Benefits under the defined benefit plan are actuarially determined based on an employee’sservice and compensation, as defined, and funded as necessary.Assets in the ESOP are considered in calculating the funding to the defined benefit planrequired to provide such benefits. Any shortfall of benefits under the ESOP are to be providedby the defined benefit plan. The ESOP may provide benefits beyond those determined under thedefined benefit plan. Contributions to the ESOP are determined by the Corporation’s Board ofDirectors. The Corporation made contributions to the defined benefit plan of $1.30 million,$1.20 million and $1.73 million in 2010, 2009 and 2008. The Corporation contributed $1.35million, $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 includedthe following components:             (Dollar amounts in thousands) **2010**  **2009**  **2008** Service cost — benefits earned $3,093  $3,100  $3,031 Interest cost on projected benefit obligation  3,313   3,296   2,908 Expected return on plan assets  (3,400)  (3,857)  (3,292)Net amortization and deferral  964   625   711           Net periodic pension cost  3,970   3,164   3,358              Net loss (gain) during the period  4,466   4,762   — Amortization of prior service cost  18   29   18 Amortization of unrecognized gain (loss)  (982)  (353)  (729)          Total recognized in other comprehensive income (loss)  3,502   4,438   (711)           Total recognized net periodic pension cost andother comprehensive income $7,472  $7,602  $2,647           The estimated net loss and prior service costs for the defined benefit pension plan that will beamortized from accumulated other comprehensive income into net periodic benefit cost over thenext fiscal year are $986 thousand and $166 thousand.The information below sets forth the change in projected benefit obligation, reconciliation ofplan assets, and the funded status of the Corporation’s retirement program. Actuarial presentvalue of benefits is based on service to date and present pay levels.         (Dollar amounts in thousands) **2010**  **2009** Change in benefit obligation:        Benefit obligation at January 1 $55,914  $56,476 Service cost  3,093   3,100 Interest cost  3,313   3,296 Amendment  2,315   — Actuarial (gain) loss  4,820   (4,672)Benefits paid  (2,449)  (2,286)       Benefit obligation at December 31  67,006   55,914                 Reconciliation of fair value of plan assets:        Fair value of plan assets at January 1  42,199   47,892 Actual return on plan assets  6,070   (5,578)Employer contributions  2,644   2,171 Benefits paid  (2,449)  (2,286)       Fair value of plan assets at December 31  48,464   42,199                 Funded status at December 31 (plan assets less benefit obligation) $(18,542) $(13,715)       
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**Amounts recognized in accumulated other comprehensive income at December 31, 2010 and 2009consist of:         (Dollar amounts in thousands) **2010**  **2009** Net loss (gain) $19,164  $17,994 Prior service cost (credit)  2,259   (74)         $21,423  $17,920        The accumulated benefit obligation for the defined benefit pension plan was $55,304 and $45,964at year-end2010 and 2009.         Principal assumptions used: **2010**  **2009** Discount rate  5.54%  5.96%Rate of increase in compensation levels  3.75   3.75 Expected long-term rate of return on plan assets  8.00   8.00 The expected long-term rate of return was estimated using market benchmarks for equities andbonds applied to the plan’s target asset allocation. Management estimated the rate by whichplan assets would perform based on historical experience as adjusted for changes in assetallocations and expectations for future return on equities as compared to past periods.**Plan Assets**— The Corporation’s pension plan weighted-average asset allocation for the years2010 and 2009 by asset category are as follows:                                   **Pension**  **ESOP**   **Pension Plan**  **ESOP**  **Pecentage of Plan**  **Pecentage of Plan**   **Target Allocation**  **Target Allocation**  **Assets at December 31,**  **Assets at December 31,** **ASSET CATEGORY** **2011**  **2011**  **2010**  **2009**  **2010**  **2009** Equity securities  61-63%  99-100%  64%  57%  100%  100%Debt securities  33-36%  0-0   33%  35%  0%  0%Other  1-6%  0-1   3%  8%  0%  0%                     TOTAL          100%  100%  100%  100%**Fair Value of Plan Assets**— Fair value is the exchange price that would be received foran asset in the principal or most advantageous market for the asset in an orderly transactionbetween market participants on the measurement date. It also establishes a fair value hierarchywhich requires an entity to maximize the use of observable inputs and minimize the use ofunobservable inputs when measuring fair value.The Corporation used the following methods and significant assumptions to estimate the fairvalue of each type of financial instrument:**Equity, Debt, Investment Funds and Other Securities**— The fair values for investmentsecurities are determined by quoted market prices, if available (Level 1). For securities wherequoted prices are not available, fair values are calculated based on market prices of similarsecurities (Level 2). For securities where quoted prices or market prices of similar securitiesare not available, fair values are calculated using discounted cash flows or other marketindicators (Level 3).The fair value of the plan assets at December 31, 2010 and 2009, by asset category, is asfollows:                       **Fair Value Measurments at**       **December 31, 2010 Using:**       **Quoted Prices**  **Significant**          **in Active**  **Other**  **Significant**       **Markets for**  **Obsevable**  **Obsevable**   **Carrying**  **Identical Assets**  **Inputs**  **Inputs** (Dollar amounts in thousands) **Value**  **(Level 1)**  **(Level 2)**  **(Level 3)** Plan assets                Equity securities $41,405  $41,405  $—  $— Debt securities  5,504   —   5,504   — Investment Funds  1,555   1,555   —   —              Total plan assets $48,464  $42,960  $5,504  $—              
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**                       **Fair Value Measurments at**       **December 31, 2009 Using:**       **Quoted Prices**  **Significant**          **in Active**  **Other**  **Significant**       **Markets for**  **Obsevable**  **Obsevable**   **Carrying**  **Identical Assets**  **Inputs**  **Inputs** (Dollar amounts in thousands) **Value**  **(Level 1)**  **(Level 2)**  **(Level 3)** Plan assets                Equity securities $32,583  $32,583  $—  $— Debt securities  8,133   —   8,133   — Investment Funds  1,483   1,483   —   —              Total plan assets $42,199  $34,066  $8,133  $—              The investment objective for the retirement program is to maximize total return without exposureto 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. Otherinvestment allocations include fixed income securities and cash.The plan is prohibited from investing in the following: private placement equity and debttransactions; letter stock and uncovered options; short-sale margin transactions and otherspecialized investment activity; and fixed income or interest rate futures. All otherinvestments not prohibited by the plan are permitted.Equity securities include First Financial Corporation common stock in the amount of $29.7million (61 percent of total plan assets) and $25.3 million (60 percent of total plan assets) atDecember 31, 2010 and 2009, respectively. Other equity securities are predominantly stocks inlarge 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 futureservice, are expected:**PENSION BENEFITS**(Dollar amounts in thousands)       2011 $1,089 2012  1,294 2013  1,351 2014  1,693 2015  1,959 2016-2020  12,887 **Supplemental Executive Retirement Plan**— The Corporation has established a SupplementalExecutive Retirement Plan (SERP) for certain executive officers. The provisions of the SERPallow the Plan’s participants who are also participants in the Corporation’s defined benefitpension plan to receive supplemental retirement benefits to help recompense for benefits lostdue to the imposition of IRS limitations on benefits under the Corporation’s tax qualifieddefined benefit pension plan. Expenses related to the plan were $241 thousand in 2010 and $196thousand in 2009. The plan is unfunded and has a measurement date of December 31. The amountsrecognized in other comprehensive income in the current year are as follows:             (Dollar amounts in thousands) **2010**  **2009**  **2008** Net loss (gain) during the period $(90) $—  $— Amortization of prior service cost  (74)  (74)  (74)Amortization of unrecognized gain (loss)  66   (37)  5           Total recognized in other comprehensive income (loss) $(98) $(111) $(69)          The Corporation has $1.3 million and $1.2 million recognized in the balance sheet as aliability at December 31, 2010 and 2009. Amounts in accumulated other comprehensive incomeconsist of $170 thousand net gain and $74 thousand in prior service cost at December 31, 2010and $146 thousand net gain and $148 thousand in prior service cost at December 31, 2009. Theestimated gain and prior service costs for the SERP that will be amortized from accumulatedother comprehensive income into net periodic benefit cost over the next fiscal year are $39thousand and $74 thousand.
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****Estimated Future Payments**— The following benefit payments, which reflect expectedfuture service, are expected:**SERP BENEFITS**(Dollar amounts on thousands)       2011 $— 2012  131 2013  130 2014  128 2015  126 2016-2020  600 The Corporation also provides medical benefits to its employees subsequent to their retirement.The Corporation uses a measurement date of December 31, 2010. Accrued post-retirement benefitsas of December 31, 2010 and 2009 are as follows:           **December 31,** (Dollar amounts in thousands) **2010**  **2009** Change in benefit obligation:        Benefit obligation at January 1 $4,425  $4,248 Service cost  63   109 Interest cost  218   240 Plan participants’ contributions  67   26 Actuarial (gain) loss  —   16 Benefits paid  (273)  (214)       Benefit obligation at December 31 $4,500  $4,425                 Funded status at December 31 $4,500  $4,425        Amounts recognized in accumulated other comprehensive income consist of a net loss of $575thousand and $180 thousand in transition obligation at December 31, 2010 and $410 thousand netloss and $241 thousand in transition obligation at December 31, 2009. The post-retirementbenefits paid in 2010 and 2009 of $273 thousand and $214 thousand, respectively, were fullyfunded by company and participant contributions.The estimated transition obligation for the post-retirement benefit plan that will be amortizedfrom accumulated other comprehensive income into net periodic benefit cost over the next fiscalyear is $60 thousand.Weighted average assumptions at December 31:           **December 31,**   **2010**  **2009** Discount rate  5.54%  5.25%Initial weighted health care cost trend rate  7.50   7.50 Ultimate health care cost trend rate  5.00   5.00 Year that the rate is assumed to stabilize and remain unchanged  2014   2013 
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**Post-retirement health benefit expense included the following components:               **Years Ended December 31,** (Dollar amounts in thousands) **2010**  **2009**  **2008** Service cost $64  $70  $125 Interest cost  218   240   238 Amortization of transition obligation  60   60   60 Recognized actuarial loss  12   —   11           Net periodic benefit cost $354  $370  $434              Net loss (gain) during the period $—  $—  $— Amortization of prior service cost  (60)  (60)  (60)Amortization of unrecognized gain (loss)  (153)  (110)  (11)          Total recognized in other comprehensive income (loss) $(213) $(170) $(71)          Total recognized net periodic benefit cost andother comprehensive income $141  $200  $363           Assumed health care cost trend rates have a significant effect on the amounts reported for thehealth care plans. A one-percentage-point change in the assumed health care cost trend rateswould have the following effects:           **1% Point**  **1% Point** (Dollar amounts in thousands) **Increase**  **Decrease** Effect on total of service and interest costcomponents $51  $(47)Effect on post-retirement benefit obligation  4   (4)**Contributions**— The Corporation expects to contribute $210 thousand to its otherpost-retirement benefit plan in 2011.**Estimated Future Payments**— The following benefit payments, which reflect expected futureservice, are expected:**Post-Retirement Medical Benefits**(Dollaramounts in thousands)     2011 $233 2012  247 2013  249 2014  255 2015  263 2016-2020  1,390 
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****16. OTHER COMPREHENSIVE INCOME (LOSS):**Other comprehensive income (loss) components and related taxes were as follows:               **December 31,** (Dollar amounts in thousands) **2010**  **2009**  **2008** Unrealized holding gains and (losses) on securities available-for-sale $(6,291) $9,950  $(19,580)Change in unrealized gains (losses) on securities available-for-salefor which a portion of OTTI has been recognized in earnings $4,101  $(2,599) $— Reclassification adjustments for (gains) and losses laterrecognized in income  2,939   10,765   5,787 Reclassification adjustment for prior OTTI charges      (5,555)  —           Net unrealized gains and (losses)  749   12,561   (13,793)Tax effect  (300)  (5,025)  5,517           Other comprehensive income (loss) $449  $7,536  $(8,276)                       Unrecognized gains and (losses) on benefit plans $(4,376) $(4,762) $— Amortization of prior service cost included in net periodic pensioncost  116   105   116 Amortization of unrecognized gains (losses) included in netperiodic pension cost  1,069   500   735           Benefit plans, net  (3,191)  (4,157)  851 Tax Effect  1,277   1,663   (340)          Other comprehensive income (loss) $(1,914) $(2,494) $511           The following is a summary of the accumulated other comprehensive income balances, net of tax:               **Balance**  **Current**  **Balance**   **at**  **Period**  **at** (Dollar amounts in thousands) **12/31/2009**  **Change**  **12/31/2010** Unrealized gains (losses) onsecurities available-for-sale $3,434  $449  $3,883 Unrealized loss on retirement plans  (11,338)  (1,914)  (13,252)          TOTAL $(7,904) $(1,465) $(9,369)          **17. REGULATORY MATTERS:**The Corporation and its bank affiliates are subject to various regulatory capitalrequirements administered by the federal banking agencies. Failure to meet minimum capitalrequirements can initiate certain mandatory—and possibly additional discretionary—actions byregulators that, if undertaken, could have a direct material effect on the Corporation’sfinancial statements.Further, the Corporation’s primary source of funds to pay dividends to shareholders isdividends from its subsidiary banks and compliance with these capital requirements can affectthe ability of the Corporation and its banking affiliates to pay dividends. At December 31,2010, approximately $27.2 million of undistributed earnings of the subsidiary banks, includedin consolidated retained earnings, were available for distribution to the Corporation withoutregulatory approval. Under capital adequacy guidelines and the regulatory framework for promptcorrective action, the Corporation and Banks must meet specific capital guidelines that involvequantitative measures of the Corporation’s assets, liabilities, and certain off-balance-sheetitems as calculated under regulatory accounting practices. The Corporation’s and Banks’ capitalamounts and classification are also subject to qualitative judgments by the regulators aboutcomponents, risk weightings and other factors.Quantitative measures established by regulation to ensure capital adequacy require theCorporation and Banks to maintain minimum amounts and ratios of Total and Tier I Capital torisk-weighted assets, and of Tier I Capital to average assets. Management believes, as ofDecember 31, 2010 and 2009, that the Corporation meets all capital adequacy requirements towhich it is subject.As of December 31, 2010, the most recent notification from the respective regulatory agenciescategorized the subsidiary banks as well capitalized under the regulatory framework for promptcorrective action. To be categorized as well capitalized, the banks must maintain minimum totalrisk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There areno conditions or events since that notification that management believes have changed thebanks’ category.
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**The following table presents the actual and required capital amounts and related ratiosfor the Corporation and First Financial Bank, N.A., at year-end 2010 and 2009.                                           **To Be Well Capitalized**           **For Capital**  **Under Promt Corrective**   **Actual**  **Adequacy Purposes**  **Action Provisions** (Dollar amounts in thousands) **Amount**  **Ratio**  **Amount**  **Ratio**  **Amount**  **Ratio** **Total risk-based capital**                        Corporation – 2010 $341,965   17.82% $153,497   8.00%  N/A   N/A Corporation – 2009 $321,604   16.44% $156,502   8.00%  N/A   N/A First Financial Bank – 2010  320,247   17.29%  148,185   8.00%  185,231   10.00%First Financial Bank – 2009  305,100   16.09%  151,688   8.00%  189,611   10.00%                         **Tier I risk-based capital**                        Corporation – 2010 $319,629   16.66% $76,748   4.00%  N/A   N/A Corporation – 2009 $302,167   15.45% $78,251   4.00%  N/A   N/A First Financial Bank – 2010  301,232   16.26%  74,093   4.00%  111,139   6.00%First Financial Bank – 2009  288,791   15.23%  75,844   4.00%  113,766   6.00%                         **Tier I leverage capital**                        Corporation – 2010 $319,629   12.68% $100,847   4.00%  N/A   N/A Corporation – 2009 $302,167   12.01% $100,630   4.00%  N/A   N/A First Financial Bank – 2010  301,232   12.37%  97,420   4.00%  121,776   5.00%First Financial Bank – 2009  288,791   11.86%  97,393   4.00%  121,742   5.00%**18. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS:**The parent company’s condensed balance sheets as of December 31, 2010 and 2009, and therelated condensed statements of income and cash flows for each of the three years in theperiod ended December 31, 2010, are as follows:CONDENSED BALANCE SHEETS           **December 31,** (Dollar amounts in thousands) **2010**  **2009** ASSETS        Cash deposits in affiliated banks $9,269  $9,005 Investments in subsidiaries  317,415   305,380 Land and headquarters building, net  5,174   5,349 Other  2,980   6,710        Total Assets $334,838  $326,444        LIABILITIES AND SHAREHOLDERS’ EQUITY        **Liabilities**        Borrowings (including $1.0 million from subsidiary) $—  $7,636 Dividends payable  6,050   5,908 Other liabilities  7,071   6,417        TOTAL LIABILITIES  13,121   19,961          **Shareholders’ Equity**  321,717   306,483        TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $334,838  $326,444        
 
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**2010 ANNUAL REPORT****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**CONDENSED STATEMENTS OF INCOME               **Years Ended December 31,** (Dollar amounts in thousands) **2010**  **2009**  **2008** Dividends from subsidiaries $16,400  $14,300  $14,836 Other income  1,279   816   1,010 Interest on borrowings  (70)  (121)  (362)Other operating expenses  (4,314)  (3,462)  (3,342)          Income before income taxes and equityin undistributed earnings of subsidiaries  13,295   11,533   12,142 Income tax benefit  1,248   1,092   1,124           Income before equity in undistributedearnings of subsidiaries  14,543   12,625   13,266 Equity in undistributed earnings ofsubsidiaries  13,501   10,095   11,503           Net income $28,044  $22,720  $24,769           CONDENSED STATEMENTS OF CASH FLOWS               **Years Ended December 31,** (Dollar amounts in thousands) **2010**  **2009**  **2008** CASH FLOWS FROM OPERATING ACTIVITIES:            Net Income $28,044  $22,720  $24,769 Adjustments to reconcile net income to net cashprovided by operating activities:            Depreciation and amortization  262   250   263 Equity in undistributed earnings  (13,501)  (10,095)  (11,503)Contribution of shares to ESOP  1,347   971   1,277 Securities impairment loss recognized in earnings  549   —   — Securities (gains) losses  (1,048)  —   — Increase (decrease) in other liabilities  655   (167)  638 (Increase) decrease in other assets  (832)  638   1,010           NET CASH FROM OPERATING ACTIVITIES  15,476   14,317   16,454              CASH FLOWS FROM INVESTING ACTIVITIES:            Sales of securities available-for-sale  4,999   —   — Purchase of investment securities  (12)  (19)  (928)Purchase of furniture and fixtures  (13)  (21)  (4)          NET CASH FROM INVESTING ACTIVITIES  4,974   (40)  (932)             CASH FLOWS FROM FINANCING ACTIVITIES:                         Principal payments on borrowings  (7,636)  —   (2,400)Purchase of treasury stock  (610)  (616)  (1,464)Dividends paid  (11,940)  (11,806)  (11,548)          NET CASH FROM FINANCING ACTIVITES  (20,186)  (12,422)  (15,412)NET (DECREASE) INCREASE IN CASH  264   1,855   110 CASH, BEGINNING OF YEAR  9,005   7,150   7,040           CASH, END OF YEAR $9,269  $9,005  $7,150                        Supplemental disclosures of cash flowinformation:            Cash paid during the year for:            Interest $87  $124  $358           Income taxes $15,713  $13,485  $11,657           
 
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**FIRST FINANCIAL CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****19. SELECTED QUARTERLY DATA(UNAUDITED):**                           **2010**           **Net**  **Provision**      **Net**   **Interest**  **Interest**  **Interest**  **For Loan**  **Net**  **Income** (Dollar amounts in thousands) **Income**  **Expense**  **Income**  **Losses**  **Income**  **Per Share** March 31 $31,192  $7,911  $23,281  $2,430  $5,686  $0.43 June 30 $30,980  $6,899  $24,081  $2,190  $7,713  $0.59 September 30 $31,186  $6,533  $24,653  $2,390  $6,293  $0.48 December 31 $30,224  $5,623  $24,601  $2,190  $8,352  $0.64                            **2009**           **Net**  **Provision**      **Net**   **Interest**  **Interest**  **Interest**  **For Loan**  **Net**  **Income** (Dollar amounts in thousands) **Income**  **Expense**  **Income**  **Losses**  **Income**  **Per Share** March 31 $31,186  $10,723  $20,463  $2,830  $4,530  $0.35 June 30 $30,658  $10,082  $20,576  $2,860  $4,621  $0.35 September 30 $32,224  $9,357  $22,867  $3,690  $7,719  $0.59 December 31 $32,187  $9,099  $23,088  $2,490  $5,850  $0.45 
 
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**2010 ANNUAL REPORT****REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**To the Shareholders and Board of Directors of First Financial Corporation:We have audited the accompanying consolidated balance sheets of First Financial Corporationas of December 31, 2010 and 2009 and the related consolidated statements of income, changesin shareholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2010. We also have audited First Financial Corporation’s internal control overfinancial reporting as of December 31, 2010, based on criteria established in *InternalControl—Integrated Framework*issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). First Financial Corporation’s management is responsible forthese financial statements, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying Management’s Report on Internal Control overFinancial Reporting. Our responsibility is to express an opinion on these financialstatements and an opinion on the company’s internal control over financial reporting based onour audits.We conducted our audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are free of materialmisstatement and whether effective internal control over financial reporting was maintainedin all material respects. Our audits of the financial statements included examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. Our audit of internal control overfinancial reporting included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing and evaluating thedesign and operating effectiveness of internal control based on the assessed risk. Our auditsalso included performing such other procedures as we considered necessary in thecircumstances. We believe that our audits provide a reasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition,use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or procedures maydeteriorate.In our opinion, the consolidated financial statements referred to above present fairly, inall material respects, the financial position of First Financial Corporation as of December31, 2010 and 2009, and the results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2010, in conformity with accounting principlesgenerally accepted in the United States of America. Also in our opinion First FinancialCorporation maintained, in all material respects, effective internal control over financialreporting as of December 31, 2010, based on criteria established in *Internal Control—Integrated Framework*issued by the COSO.