UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





WASHINGTON,
D.C.  20549





FORM
10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE





SECURITIES
EXCHANGE ACT OF 1934




For The
Quarterly Period Ended September 30,
2009





Commission
File Number 0-16759





FIRST FINANCIAL
CORPORATION


(Exact
name of registrant as specified in its charter)





INDIANA
                
                35-1546989(State
      or other jurisdiction
                
                (I.R.S.
      Employerincorporation
      or organization)
                
                Identification
      No.)





One First Financial Plaza, Terre Haute, IN
                          
                          47807(Address
      of principal executive office)
                          
                          (Zip
      Code)(812)238-6000(Registrant's
      telephone number, including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.


Yes x    No
 ̈.





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).




Yes  ̈    No
 ̈.





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





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈    No
 x.





As of
November 3, 2009, the registrant had outstanding 13,134,630 shares of common
stock, without par value.








FIRST
FINANCIAL CORPORATION


FORM
10-Q





INDEX


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


2





Part
I – Financial Information


Item
1. Financial Statements


FIRST
FINANCIAL CORPORATION


CONSOLIDATED
BALANCE SHEETS


(Dollar
amounts in thousands, except per share data)





September 30,
                        
                        
                        December 31,2009
                        
                        
                        2008(Unaudited)ASSETSCash
      and due from banks
                        
                        $
                        70,037
                        
                        
                        $
                        67,298Federal
      funds sold and short-term investments
                        
                        
                        3,000
                        
                        
                        
                        9,530Securities
      available-for-sale
                        
                        
                        605,223
                        
                        
                        
                        596,915Loans:Commercial,
      financial and agricultural
                        
                        
                        542,393
                        
                        
                        
                        499,636Real
      estate – construction
                        
                        
                        29,656
                        
                        
                        
                        26,137Real
      estate – mortgage
                        
                        
                        723,823
                        
                        
                        
                        628,027Installment
                        
                        
                        329,541
                        
                        
                        
                        302,977Lease
      financing
                        
                        
                        2,232
                        
                        
                        
                        1,8781,627,645
                        
                        
                        
                        1,458,655Less:Unearned
      Income
                        
                        
                        (81
                        )
                        
                        
                        (128
                        )Allowance
      for loan losses
                        
                        
                        (18,828
                        )
                        
                        
                        (16,280
                        )1,608,736
                        
                        
                        
                        1,442,247Credit
      card loans held-for-sale
                        
                        
                        12,352
                        
                        
                        
                        12,800Restricted
      Stock
                        
                        
                        28,348
                        
                        
                        
                        26,227Accrued
      interest receivable
                        
                        
                        12,706
                        
                        
                        
                        13,081Premises
      and equipment, net
                        
                        
                        32,464
                        
                        
                        
                        32,145Bank-owned
      life insurance
                        
                        
                        63,535
                        
                        
                        
                        62,107Goodwill
                        
                        
                        7,102
                        
                        
                        
                        7,102Other
      intangible assets
                        
                        
                        5,698
                        
                        
                        
                        1,512Other
      real estate owned
                        
                        
                        5,131
                        
                        
                        
                        3,200FDIC
      indemnification ssset
                        
                        
                        12,098
                        
                        
                        
                        -Other
      assets
                        
                        
                        34,483
                        
                        
                        
                        28,511TOTAL
      ASSETS
                        
                        $
                        2,500,913
                        
                        
                        $
                        2,302,675LIABILITIES
      AND SHAREHOLDERS’ EQUITYDeposits:Noninterest-bearing
                        
                        $
                        283,156
                        
                        
                        $
                        236,249Interest-bearing:Certificates
      of deposit of $100 or more
                        
                        
                        240,139
                        
                        
                        
                        211,107Other
      interest-bearing deposits
                        
                        
                        1,204,391
                        
                        
                        
                        1,116,1421,727,686
                        
                        
                        
                        1,563,498Short-term
      borrowings
                        
                        
                        80,792
                        
                        
                        
                        21,500Other
      borrowings
                        
                        
                        332,752
                        
                        
                        
                        385,153Other
      liabilities
                        
                        
                        50,460
                        
                        
                        
                        45,680TOTAL
      LIABILITIES
                        
                        
                        2,191,690
                        
                        
                        
                        2,015,831Shareholders’
      equityCommon
      stock, $.125 stated value per share;Authorized
      shares-40,000,000Issued
      shares-14,450,966Outstanding
      shares-13,116,630 in 2009 and 13,098,615 in 2008
                        
                        
                        1,806
                        
                        
                        
                        1,806Additional
      paid-in capital
                        
                        
                        68,654
                        
                        
                        
                        68,654Retained
      earnings
                        
                        
                        277,415
                        
                        
                        
                        263,115Accumulated
      other comprehensive income (loss)
                        
                        
                        (4,867
                        )
                        
                        
                        (12,946
                        )Treasury
      shares at cost-1,334,336 in 2009 and 1,352,351 in 2008
                        
                        
                        (33,785
                        )
                        
                        
                        (33,785
                        )TOTAL
      SHAREHOLDERS’ EQUITY
                        
                        
                        309,223
                        
                        
                        
                        286,844TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                        
                        $
                        2,500,913
                        
                        
                        $
                        2,302,675


See
accompanying notes.


3





FIRST
FINANCIAL CORPORAT ION


CONSOLIDATED
STATEMENTS OF INCOME


(Dollar
amounts in thousands, except per share data)





Three
      Months Ended
                    
                    
                    Nine
      Months EndedSeptember
      30,
                    
                    
                    September
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(unaudited)
                    
                    
                    (unaudited)
                    
                    
                    (unaudited)
                    
                    
                    (unaudited)INTEREST
      INCOME:Loans,
      including related fees
                    
                    $
                    24,332
                    
                    
                    $
                    24,799
                    
                    
                    $
                    69,969
                    
                    
                    $
                    75,256Securities:Taxable
                    
                    
                    5,712
                    
                    
                    
                    6,412
                    
                    
                    
                    17,699
                    
                    
                    
                    18,794Tax-exempt
                    
                    
                    1,672
                    
                    
                    
                    1,609
                    
                    
                    
                    4,961
                    
                    
                    
                    4,787Other
                    
                    
                    508
                    
                    
                    
                    554
                    
                    
                    
                    1439
                    
                    
                    
                    2,095TOTAL
      INTEREST INCOME
                    
                    
                    32,224
                    
                    
                    
                    33,374
                    
                    
                    
                    94,068
                    
                    
                    
                    100,932INTEREST
      EXPENSE:Deposits
                    
                    
                    5,012
                    
                    
                    
                    7,378
                    
                    
                    
                    16,789
                    
                    
                    
                    25,971Short-term
      borrowings
                    
                    
                    145
                    
                    
                    
                    290
                    
                    
                    
                    425
                    
                    
                    
                    857Other
      borrowings
                    
                    
                    4,200
                    
                    
                    
                    4,602
                    
                    
                    
                    12,948
                    
                    
                    
                    14,084TOTAL
      INTEREST EXPENSE
                    
                    
                    9,357
                    
                    
                    
                    12,270
                    
                    
                    
                    30,162
                    
                    
                    
                    40,912NET
      INTEREST INCOME
                    
                    
                    22,867
                    
                    
                    
                    21,104
                    
                    
                    
                    63,906
                    
                    
                    
                    60,020Provision
      for loan losses
                    
                    
                    3,690
                    
                    
                    
                    2,215
                    
                    
                    
                    9,380
                    
                    
                    
                    5,875NET
      INTEREST INCOME AFTER PROVISION FOR LOAN
      LOSSES
                    
                    
                    19,177
                    
                    
                    
                    18,889
                    
                    
                    
                    54,526
                    
                    
                    
                    54,145NON-INTEREST
      INCOME:Trust
      and financial services
                    
                    
                    1,174
                    
                    
                    
                    981
                    
                    
                    
                    3,120
                    
                    
                    
                    3,090Service
      charges and fees on deposit accounts
                    
                    
                    2,968
                    
                    
                    
                    3,157
                    
                    
                    
                    8,232
                    
                    
                    
                    8,937Other
      service charges and fees
                    
                    
                    1,871
                    
                    
                    
                    1,640
                    
                    
                    
                    5,055
                    
                    
                    
                    4,511Securities
      gains/(losses), net
                    
                    
                    -
                    
                    
                    
                    6
                    
                    
                    
                    2
                    
                    
                    
                    361Total
      Impairment Losses
                    
                    
                    (8,531
                    )
                    
                    
                    (6,145
                    )
                    
                    
                    (34,042
                    )
                    
                    
                    (6,145
                    )Loss
      recognized in other comprehensive loss
                    
                    
                    5,209
                    
                    
                    
                    -
                    
                    
                    
                    26,155
                    
                    
                    
                    -Insurance
      commissions
                    
                    
                    1,584
                    
                    
                    
                    1,556
                    
                    
                    
                    4,600
                    
                    
                    
                    4,752Gain
      on sales of mortgage loans
                    
                    
                    526
                    
                    
                    
                    184
                    
                    
                    
                    1,710
                    
                    
                    
                    594Gain
      on bargain purchase
                    
                    
                    5,409
                    
                    
                    
                    -
                    
                    
                    
                    5,409
                    
                    
                    
                    -Other
                    
                    
                    89
                    
                    
                    
                    61
                    
                    
                    
                    933
                    
                    
                    
                    1,630TOTAL
      NON-INTEREST INCOME
                    
                    
                    10,299
                    
                    
                    
                    1,440
                    
                    
                    
                    21,174
                    
                    
                    
                    17,730NON-INT
      EREST EXP ENSE:Salaries
      and employee benefits
                    
                    
                    10,619
                    
                    
                    
                    10,043
                    
                    
                    
                    30,813
                    
                    
                    
                    30,501Occupancy
      expense
                    
                    
                    1,171
                    
                    
                    
                    1,047
                    
                    
                    
                    3,290
                    
                    
                    
                    3,084Equipment
      expense
                    
                    
                    1,174
                    
                    
                    
                    1,185
                    
                    
                    
                    3,404
                    
                    
                    
                    3,424FDIC
      Insurance
                    
                    
                    692
                    
                    
                    
                    59
                    
                    
                    
                    2,599
                    
                    
                    
                    158Other
                    
                    
                    4,855
                    
                    
                    
                    4,169
                    
                    
                    
                    13,104
                    
                    
                    
                    11,990TOTAL
      NON-INTEREST EXPENSE
                    
                    
                    18,511
                    
                    
                    
                    16,503
                    
                    
                    
                    53,210
                    
                    
                    
                    49,157INCOME
      BEFORE INCOME TAXES
                    
                    
                    10,965
                    
                    
                    
                    3,826
                    
                    
                    
                    22,490
                    
                    
                    
                    22,718Provision
      for income taxes
                    
                    
                    3,246
                    
                    
                    
                    324
                    
                    
                    
                    5,620
                    
                    
                    
                    5,123NET
      INCOME
                    
                    $
                    7,719
                    
                    
                    $
                    3,502
                    
                    
                    $
                    16,870
                    
                    
                    $
                    17,595PER
      SHARE DATABasic
      and Diluted
                    
                    $
                    0.59
                    
                    
                    $
                    0.27
                    
                    
                    $
                    1.29
                    
                    
                    $
                    1.34Dividends
      Per Share
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    0.45
                    
                    
                    $
                    0.44Weighted
      average number of shares outstanding (in thousands)
                    
                    
                    13,117
                    
                    
                    
                    13,199
                    
                    
                    
                    13,117
                    
                    
                    
                    13,108


See
accompanying notes.


4





FIRST
FINANCIAL CORPORATION


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUIT Y


Three
Months Ended


September
30, 2009, and 2008


(Dollar
amounts in thousands, except per share data)


(Unaudited)





AccoumulatedOtherCommon
                        
                        
                        Additional
                        
                        
                        Retained
                        
                        
                        Comprehensive
                        
                        
                        TreasuryStock
                        
                        
                        Capital
                        
                        
                        Earnings
                        
                        
                        Income/(Loss)
                        
                        
                        Stock
                        
                        
                        TotalBalance,
      July 1, 2009
                        
                        $
                        1,806
                        
                        
                        $
                        68,654
                        
                        
                        $
                        269,696
                        
                        
                        $
                        (13,714
                        )
                        
                        $
                        (33,785
                        )
                        
                        $
                        292,657Comprehensive
      income:Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        7,719
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        7,719Change
      in net unrealized gains/(losses) on securities available
      for-sale
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        8,756
                        
                        
                        
                        -
                        
                        
                        
                        8,756Change
      in net unrealized gains/(losses) on retirement plans
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        91
                        
                        
                        
                        -
                        
                        
                        
                        91Total
      comprehensive income/(loss)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        16,566Balance,
      September 30, 2009
                        
                        $
                        1,806
                        
                        
                        $
                        68,654
                        
                        
                        $
                        277,415
                        
                        
                        $
                        (4,867
                        )
                        
                        $
                        (33,785
                        )
                        
                        $
                        309,223Balance,
      July 1, 2008
                        
                        $
                        1,806
                        
                        
                        $
                        68,212
                        
                        
                        $
                        258,341
                        
                        
                        $
                        (12,452
                        )
                        
                        $
                        (34,190
                        )
                        
                        $
                        281,717Comprehensive
      income:Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,502
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,502Change
      in net unrealized gains/(losses) on securities available
      for-sale
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (5,692
                        )
                        
                        
                        -
                        
                        
                        
                        (5,692
                        )Change
      in net unrealized gains/(losses) on retirement plans
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        128
                        
                        
                        
                        -
                        
                        
                        
                        128Total
      comprehensive income/(loss)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (2,062
                        )Balance,
      September 30, 2008
                        
                        $
                        1,806
                        
                        
                        $
                        68,212
                        
                        
                        $
                        261,843
                        
                        
                        $
                        (18,016
                        )
                        
                        $
                        (34,190
                        )
                        
                        $
                        279,655





See
accompanying notes.


5





FIRST
FINANCIAL CORPORATION


CONSOLIDATED
STATEMENT S OF SHAREHOLDERS’ EQUIT Y


Nine
Months Ended


September
30, 2009, and 2008


(Dollar
amounts in thousands, except per share data)


(Unaudited)





AccoumulatedOtherCommon
                        
                        
                        Additional
                        
                        
                        Retained
                        
                        
                        Comprehensive
                        
                        
                        TreasuryStock
                        
                        
                        Capital
                        
                        
                        Earnings
                        
                        
                        Income/(Loss)
                        
                        
                        Stock
                        
                        
                        TotalBalance,
      January 1, 2009
                        
                        $
                        1,806
                        
                        
                        $
                        68,654
                        
                        
                        $
                        263,115
                        
                        
                        $
                        (12,946
                        )
                        
                        $
                        (33,785
                        )
                        
                        $
                        286,844Comprehensive
      income:Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        16,870
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        16,870Change
      in net unrealized gains/(losses) on securities available
      for-sale
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        11,139
                        
                        
                        
                        -
                        
                        
                        
                        11,139Change
      in net unrealized gains/(losses) on retirement plans
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        273
                        
                        
                        
                        -
                        
                        
                        
                        273Total
      comprehensive income/(loss)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        28,282Cumulative
      Effect of change in accounting principle, adoption of ASC320-10-65-65, net
      of tax
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,333
                        
                        
                        
                        (3,333
                        )
                        
                        
                        -
                        
                        
                        
                        -Cash
      Dividends, $.45 per share
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (5,903
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (5,903
                        )Balance,
      September 30, 2009
                        
                        $
                        1,806
                        
                        
                        $
                        68,654
                        
                        
                        $
                        277,415
                        
                        
                        $
                        (4,867
                        )
                        
                        $
                        (33,785
                        )
                        
                        $
                        309,223Balance,
      January 1, 2008
                        
                        $
                        1,806
                        
                        
                        $
                        68,212
                        
                        
                        $
                        250,011
                        
                        
                        $
                        (5,181
                        )
                        
                        $
                        (33,156
                        )
                        
                        $
                        281,692Comprehensive
      income:Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        17,595
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        17,595Change
      in net unrealized gains/(losses) on securities available
      for-sale
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (13,219
                        )
                        
                        
                        -
                        
                        
                        
                        (13,219
                        )Change
      in net unrealized gains/(losses) on retirement plans
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        384
                        
                        
                        
                        -
                        
                        
                        
                        384Total
      comprehensive income/(loss)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        4,760Cash
      Dividends, $.44 per share
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (5,763
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (5,763
                        )Treasury
      stock purchase
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,034
                        )
                        
                        
                        (1,034
                        )Balance,
      September 30, 2008
                        
                        $
                        1,806
                        
                        
                        $
                        68,212
                        
                        
                        $
                        261,843
                        
                        
                        $
                        (18,016
                        )
                        
                        $
                        (34,190
                        )
                        
                        $
                        279,655




6





FIRST
FINANCIAL CORPORAT ION


CONSOLIDATED
STATEMENTS OF CASH FLOW S


(Dollar
amounts in thousands, except per share data)





Nine
      Months EndedSeptember
      30,2009
                
                
                2008(Unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Income
                
                $
                16,870
                
                
                $
                17,595Adjustments
      to reconcile net income to net cash provided by operating
      activities:Net
      amortization (accretion) of premiums and discounts on
      investments
                
                
                (2,018
                )
                
                
                (2,083
                )Net
      amortization (accretion) of premiums and discounts on
loans
                
                
                241
                
                
                
                -Provision
      for loan losses
                
                
                9,380
                
                
                
                5,875Securities
      (gains) losses
                
                
                7,887
                
                
                
                5,784Gain
      on purchase of business unit
                
                
                (5,409
                )
                
                
                -(Gain)
      loss on sale of other real estate
                
                
                90
                
                
                
                (41
                )Depreciation
      and amortization
                
                
                2,854
                
                
                
                2,618Other,
      net
                
                
                (6,680
                )
                
                
                (10,008
                )NET
      CASH FROM OPERATING ACTIVITIES
                
                
                23,215
                
                
                
                19,740CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from sales of securities available-for-sale
                
                
                -
                
                
                
                961Proceeds
      from sales of restricted stock
                
                
                -
                
                
                
                2,386Calls,
      maturities and principal reductions on securities
      available-for-sale
                
                
                89,911
                
                
                
                66,827Purchases
      of securities available-for-sale
                
                
                (65,683
                )
                
                
                (132,249
                )Loans
      made to customers, net of repayment
                
                
                (100,956
                )
                
                
                (56,544
                )Cash
      received from purchase of business unit
                
                
                30,977
                
                
                
                -Proceeds
      from sales of other real estate owned
                
                
                2,020
                
                
                
                1,506Net
      change in federal funds sold
                
                
                6,530
                
                
                
                (6,464
                )Additions
      to premises and equipment
                
                
                (2,739
                )
                
                
                (1,905
                )NET
      CASH FROM INVESTING ACTIVITIES
                
                
                (39,940
                )
                
                
                (125,482
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      change in deposits
                
                
                18,475
                
                
                
                (509
                )Net
      change in short-term borrowings
                
                
                59,292
                
                
                
                23,930Dividends
      paid
                
                
                (5,902
                )
                
                
                (5,785
                )Purchase
      of treasury stock
                
                
                -
                
                
                
                (1,034
                )Proceeds
      from other borrowings
                
                
                120,000
                
                
                
                283,500Repayments
      on other borrowings
                
                
                (172,401
                )
                
                
                (214,618
                )NET
      CASH FROM FINANCING ACTIVITIES
                
                
                19,464
                
                
                
                85,484NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                
                
                2,739
                
                
                
                (20,258
                )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                67,298
                
                
                
                70,082CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                70,037
                
                
                $
                49,824





See
accompanying notes.


7





FIRST
FINANCIAL CORPORATION


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The accompanying September 30, 2009 and
2008 consolidated financial statements are unaudited.  The December
31, 2008 consolidated financial statements are as reported in the First
Financial Corporation (the “Corporation”) 2008 annual report.  The
information presented does not include all information and footnotes required by
U.S. generally accepted accounting principles for complete financial statements.
The following notes should be read together with notes to the consolidated
financial statements included in the 2008 annual report filed with the
Securities and Exchange Commission as an exhibit to Form 10-K filed for the
fiscal year ended December 31, 2008.





1.  Significant Accounting
Policies





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


2. Allowance for Loan
Losses





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





September
      30,(Dollar amounts in
    thousands)
                    
                    2009
                    
                    
                    2008Balance
      at beginning of year
                    
                    $
                    16,280
                    
                    
                    $
                    15,351Provision
      for loan losses
                    
                    
                    9,380
                    
                    
                    
                    5,875Recoveries
      of loans previously charged off
                    
                    
                    1,675
                    
                    
                    
                    2,040Loans
      charged off
                    
                    
                    (8,507
                    )
                    
                    
                    (7,426
                    )BALANCE
      AT END OF PERIOD
                    
                    $
                    18,828
                    
                    
                    $
                    15,840





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





(000's)September
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008Impaired
      Loans with related allowance for loan losses calculated under ASC No.
      310
                    
                    $
                    20,729
                    
                    
                    $
                    16,959Impaired
      Loans with no related allowance for loan losses
                    
                    
                    7,110
                    
                    
                    
                    -$
                    27,839
                    
                    
                    $
                    16,959Amount
      of allowance allocated to impaired loans
                    
                    $
                    5,803
                    
                    
                    $
                    4,735




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


8





3. Securities


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





(000's)September
      30, 2009Amortized
                            
                            
                            Unrealized
                            
                            
                            UnrealizedCost
                            
                            
                            Gains
                            
                            
                            Losses
                            
                            
                            Fair ValueUnited
      States Government entity mortgage-backed securities
                            
                            $
                            4,280
                            
                            
                            $
                            32
                            
                            
                            $
                            0
                            
                            
                            $
                            4,312Mortgage
      Backed Securities - Residential
                            
                            
                            300,215
                            
                            
                            
                            15,485
                            
                            
                            
                            3
                            
                            
                            
                            315,697Mortgage
      Backed Securities - Commercial
                            
                            
                            168
                            
                            
                            
                            3
                            
                            
                            
                            -
                            
                            
                            
                            171Collateralized
      Mortgage Obligations
                            
                            
                            113,277
                            
                            
                            
                            3,305
                            
                            
                            
                            3
                            
                            
                            
                            116,579State
      and Municipal Obligations
                            
                            
                            146,292
                            
                            
                            
                            6,836
                            
                            
                            
                            185
                            
                            
                            
                            152,943Collateralized
      Debt Obligations
                            
                            
                            22,150
                            
                            
                            
                            -
                            
                            
                            
                            19,980
                            
                            
                            
                            2,170Other
      Securities
                            
                            
                            7,005
                            
                            
                            
                            145
                            
                            
                            
                            177
                            
                            
                            
                            6,973Equity
      Securities
                            
                            
                            5,665
                            
                            
                            
                            1,817
                            
                            
                            
                            1,104
                            
                            
                            
                            6,378$
                            599,052
                            
                            
                            $
                            27,623
                            
                            
                            $
                            21,452
                            
                            
                            $
                            605,223


(000's)December
      31, 2008Amortized
                    
                    
                    Unrealized
                    
                    
                    UnrealizedCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Fair ValueUnited
      States Government entity mortgage-backed
      securities
                    
                    $
                    148
                    
                    
                    $
                    6
                    
                    
                    $
                    0
                    
                    
                    $
                    154Mortgage
      Backed Securities - Commercial
                    
                    
                    185
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    185Mortgage
      Backed Securities - Residential
                    
                    
                    354,123
                    
                    
                    
                    11,179
                    
                    
                    
                    10
                    
                    
                    
                    365,292Collateralized
      Mortgage Obligations
                    
                    
                    68,838
                    
                    
                    
                    1,389
                    
                    
                    
                    -
                    
                    
                    
                    70,227State
      and Municipal Obligations
                    
                    
                    143,224
                    
                    
                    
                    2,439
                    
                    
                    
                    1,822
                    
                    
                    
                    143,841Collateralized
      Debt Obligations
                    
                    
                    22,177
                    
                    
                    
                    -
                    
                    
                    
                    20,341
                    
                    
                    
                    1,836Other
      Securities
                    
                    
                    9,409
                    
                    
                    
                    -
                    
                    
                    
                    612
                    
                    
                    
                    8,797Equity
      Securities
                    
                    
                    5,649
                    
                    
                    
                    2,097
                    
                    
                    
                    1,163
                    
                    
                    
                    6,583$
                    603,753
                    
                    
                    $
                    17,110
                    
                    
                    $
                    23,948
                    
                    
                    $
                    596,915




Contractual
maturities of debt securities at September 30, 2009 were as follows. Securities
not due at a single maturity or with no maturity date, primarily mortgage-backed
and equity securities are shown separately.





September 30, 2009Available-for-SaleAmortized
                          
                          
                          Fair(Dollar
      amounts in thousands)
                          
                          Cost
                          
                          
                          ValueDue
      in one year or less
                          
                          $
                          12,198
                          
                          
                          $
                          12,288Due
      after one but within five years
                          
                          
                          46,826
                          
                          
                          
                          48,684Due
      after five but within ten years
                          
                          
                          40,638
                          
                          
                          
                          42,881Due
      after ten years
                          
                          
                          193,342
                          
                          
                          
                          179,124293,004
                          
                          
                          
                          282,977Mortgage-backed
      securities and equities
                          
                          
                          306,048
                          
                          
                          
                          322,246TOTAL
                          
                          $
                          599,052
                          
                          
                          $
                          605,223




There
were no gains or losses realized by the Corporation on investment sales for the
nine months ended September 30, 2009 or during the year ended December 31,
2008.


9





The
following tables show the securities’ gross unrealized losses and fair value,
aggregated by investment category and length of time that
individual securities have been in continuous unrealized loss position, at
September 30, 2009 and December 31, 2008.


September
      30, 2009Less
      Than 12 Months
                      
                      
                      More
      Than 12 Months
                      
                      
                      
                      
                      
                      TotalUnrealized
                      
                      
                      
                      
                      
                      Unrealized
                      
                      
                      
                      
                      
                      Unrealized(Dollar
      amounts in thousands)
                      
                      Fair
      Value
                      
                      
                      Losses
                      
                      
                      Fair
      Value
                      
                      
                      Losses
                      
                      
                      Fair
      Value
                      
                      
                      LossesMortgage
      Backed Securities - Residential
                      
                      $
                      63
                      
                      
                      $
                      (1
                      )
                      
                      $
                      85
                      
                      
                      $
                      (2
                      )
                      
                      $
                      148
                      
                      
                      $
                      (3
                      )Mortgage
      Backed Securities - Commercial
                      
                      
                      12
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      12
                      
                      
                      
                      -Collateralized
      mortgage obligations
                      
                      
                      7,131
                      
                      
                      
                      (3
                      )
                      
                      
                      7
                      
                      
                      
                      0
                      
                      
                      
                      7,138
                      
                      
                      
                      (3
                      )State
      and municipal obligations
                      
                      
                      2,702
                      
                      
                      
                      (25
                      )
                      
                      
                      4,867
                      
                      
                      
                      (160
                      )
                      
                      
                      7,569
                      
                      
                      
                      (185
                      )Collateralized
      Debt Obligations
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      2,170
                      
                      
                      
                      (19,980
                      )
                      
                      
                      2,170
                      
                      
                      
                      (19,980
                      )Other
      Securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      822
                      
                      
                      
                      (177
                      )
                      
                      
                      822
                      
                      
                      
                      (177
                      )Equities
                      
                      
                      424
                      
                      
                      
                      (20
                      )
                      
                      
                      1,749
                      
                      
                      
                      (1,084
                      )
                      
                      
                      2,173
                      
                      
                      
                      (1,104
                      )Total
      temporarily impaired securities
                      
                      $
                      10,332
                      
                      
                      $
                      (49
                      )
                      
                      $
                      9,700
                      
                      
                      $
                      (21,403
                      )
                      
                      $
                      20,032
                      
                      
                      $
                      (21,452
                      )





December
      31, 2008Less
      Than 12 Months
                        
                        
                        More
      Than 12 Months
                        
                        
                        
                        
                        
                        TotalUnrealized
                        
                        
                        
                        
                        
                        Unrealized
                        
                        
                        
                        
                        
                        Unrealized(Dollar
      amounts in thousands)
                        
                        Fair
      Value
                        
                        
                        Losses
                        
                        
                        Fair
      Value
                        
                        
                        Losses
                        
                        
                        Fair
      Value
                        
                        
                        LossesMortgage
      Backed Securities - Residential
                        
                        $
                        1,599
                        
                        
                        $
                        (6
                        )
                        
                        $
                        84
                        
                        
                        $
                        (3
                        )
                        
                        $
                        1,819
                        
                        
                        $
                        (10
                        )Mortgage
      Backed Securities - Commercial
                        
                        $
                        136
                        
                        
                        $
                        (1
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        136
                        
                        
                        $
                        (1
                        )State
      and municipal obligations
                        
                        
                        51,011
                        
                        
                        
                        (1,797
                        )
                        
                        
                        321
                        
                        
                        
                        (25
                        )
                        
                        
                        51,332
                        
                        
                        
                        (1,822
                        )Collateralized
      Debt Obligations
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        4,239
                        
                        
                        
                        (20,341
                        )
                        
                        
                        4,239
                        
                        
                        
                        (20,341
                        )Other
      Securities
                        
                        
                        6,394
                        
                        
                        
                        (612
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        6,394
                        
                        
                        
                        (612
                        )Equities
                        
                        
                        1,668
                        
                        
                        
                        (1,163
                        )
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        1,668
                        
                        
                        
                        (1,163
                        )Total
      temporarily impaired securities
                        
                        $
                        60,808
                        
                        
                        $
                        (3,579
                        )
                        
                        $
                        4,644
                        
                        
                        $
                        (20,369
                        )
                        
                        $
                        65,588
                        
                        
                        $
                        (23,949
                        )




Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. The investment securities portfolio is evaluated for OTTI by
segregating the portfolio into two general segments and applying the appropriate
OTTI model. Investment securities classified as available for sale or
held-to-maturity are generally evaluated for OTTI under FASB ASC 320,Investments-Debt and Equity Securities.
However, certain purchased beneficial interests, including non-agency
mortgage-backed securities, asset-backed securities, and collateralized debt
obligations, that had credit ratings at the time of purchase of below AA are
evaluated using the model outlined in FASB ASC 325-40,Beneficial Interestsin Securitized Financial
Assets.




In
determining OTTI under the FASB ASC 320 model, management considers many
factors, including: (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the entity has the intent to sell
the security or more likely than not will be required to sell the security
before its anticipated recovery. The assessment of whether
an other-than-temporary decline exists involves a high degree of
subjectivity and judgment and is based on the information available to
management at a point in time.




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




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


10




Gross
unrealized losses on investment securities were $21.5 million as of
September 30, 2009 and $23.9 million as of December 31, 2008. A majority of
these losses represent negative adjustments to market value relative to the
illiquidity in the markets on the securities and not losses related to
the creditworthiness of the issuer. Unrealized losses on equity securities
relate to investments in bank stocks held at the holding
company.  Bank stock values have been negatively impacted by the
current economic environment and market pessimism. The largest part of this
unrealized loss ($704 or 64%) relates to the Corporations ownership of
stock in Fifth Third Corporation.  The stock price of this issuer
has improved since last quarter and supports that the decline in value in
temporary.  Based upon our review of the issuers, we do not
believe these investments to be other than temporarily impaired. Management
does not intend to sell these securities and it is not more likely than not
that we will be required to sell them before their anticipated recovery. A
significant portion of this relates to collateralized debt obligations that were
separately evaluated under FASB ASC 325-40, Beneficial Interests in Securitized
Financial Assets.





Based upon qualitative considerations,
such as a down grade in credit rating or further defaults of underlying issuers
during the quarter, and an analysis of expected cash flows, we determined that
three CDO’s  included in collateralized debt obligations were
other-than-temporarily impaired and wrote our investments in
those  CDO’s  totaling $8.79 million down to their present
value of expected cash flows through earnings of $5.46 million at September 30,
2009 to properly reflect credit losses associated those CDO’s. The issuers in
these securities are primarily banks, but some of the pools do include a limited
number of insurance companies. The Company uses the OTTI evaluation model to
compare the present value of expected cash flows to the previous estimate to
ensure there are no adverse changes in cash flows during the quarter. The OTTI
model considers the structure and term of the CDO and the financial condition of
the underlying issuers. Specifically, the model details interest rates,
principal balances of note classes and underlying issuers, the timing and amount
of interest and principal payments of the underlying issuers, and the allocation
of the payments to the note classes. Cash flows are projected using a forward
rate LIBOR curve, as these CDOs are variable rate instruments.  An
average rate is then computed using this same forward rate curve to determine an
appropriate discount rate (3 month LIBOR plus margin ranging from 160 to 180
basis points).  The current estimate of expected cash flows is based
on the most recent trustee reports and any other relevant market information
including announcements of interest payment deferrals or defaults of underlying
trust preferred securities. Assumptions used in the model include expected
future default rates and prepayments. We assume no recoveries on defaults and
treat all interest payment deferrals as defaults. In addition we use the model
to “stress” each CDO, or make assumptions more severe than expected activity, to
determine the degree to which assumptions could deteriorate before the CDO could
no longer fully support repayment of the Company’s note class.





Collateralized
debt obligations include two additional investments in CDOs consisting of pooled
trust preferred securities in which the issuers are primarily
banks.  One of these CDOs with an amortized cost of $2.3 million and a
fair value of $979.2 thousand is rated BAA1 and is the senior tranche, is not in
the scope of FASB ASC 325 and is not considered to be other-than-temporarily
impaired based on its credit quality.  The other CDO, totaling $14.4
million in book value and $900.9 thousand in fair value, is rated Ca and is
included in the scope of FASB ASC 325.  Previously, a $618.1 thousand
OTTI charge was taken on this security. At September 30, 2009, the FASB ASC 325
cash flow projections indicated no further adverse change in cash flows on this
CDO and the stress analyses continued to indicate that the collateral position
is more than sufficient to cover projected future
defaults.  Therefore, we believe the unrealized losses on this CDO
relate to market conditions and this investment is not considered
other-than-temporarily impaired as of September 30, 2009.




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





Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30,
                  
                  
                  September 30,Beginning
      balance
                  
                  $
                  4,565
                  
                  
                  $
                  0Amounts
      related to credit loss for which an other-than-temporary impairment was
      not previously recognized
                  
                  
                  -
                  
                  
                  
                  4,171Additions/SubtractionsAmounts
      realized for securities sold during the period
                  
                  
                  -
                  
                  
                  
                  -Amounts
      related to securities for which the company intends to sell or that it
      will be more likely than not that the company will be required to sell
      prior to recovery of amortized cost basis
                  
                  
                  -
                  
                  
                  
                  -Reductions
      for 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 which other-than-temporary
      was previously recognized
                  
                  
                  3,322
                  
                  
                  
                  3,716Ending
      balance
                  
                  $
                  7,887
                  
                  
                  $
                  7,887





11





4. Fair Value





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





Level
      1:
                  Quoted
      prices (unadjusted) of identical assets or liabilities in active markets
      that the entity has the ability to access as of the measurement
      date.Level
      2:
                  Significant
      other observable inputs other than Level I prices such as quoted prices
      for similar assets or liabilities; quoted prices in markets that are not
      active; or other inputs that are observable or can be corroborated by
      observable market data.Level
      3:
                  Significant
      unobservable inputs that reflect a reporting entity’s own assumptions
      about the assumptions that market participants would use in pricing an
      asset or
liability.





The fair
value of securities available for sale is determined by obtaining quoted prices
on nationally recognized securities exchanges (Level 1 inputs) or matrix
pricing, which is a mathematical technique widely used in the industry to value
debt securities without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities’ relationship to other
benchmark quoted securities (Level 2 inputs).





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





(000's)FairValueMeasurementsUsingSecurities
      available-for-sale (1)
                    
                    
                    September
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008Level
      1
                    
                    
                    $
                    2,647
                    
                    
                    $
                    2,827Level
      2
                    
                    
                    
                    596,675
                    
                    
                    
                    586,094Level
      3
                    
                    
                    
                    5,901
                    
                    
                    
                    7,994Carry
      ing Value
                    
                    
                    $
                    605,223
                    
                    
                    $
                    596,915





(1) The fair value of securities
reported using Level 1 inputs include U.S. Treasuries for which quoted market
prices for identical assets are readily available, and Level 3 inputs include
certain investments in bank equities and collateralized debt obligations for
which Level 1 and Level 2 inputs are not available.








The table below presents a
reconciliation and income statement classification of gains and losses for all
assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the three and nine months ended September 30,
2009 and 2008.





(000's)Fair
      Value Measurements Using SignificantUnobservable
      Inputs (Level 3)Three
      Months Ended
                    
                    
                    Nine
      Months EndedSeptember
      30,
                    
                    
                    September
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Beginning
      Balance
                    
                    $
                    6,679
                    
                    
                    $
                    31,833
                    
                    
                    $
                    7,994
                    
                    
                    $
                    33,745Total
      gains or losses (realized/unrealized)
                    
                    
                    (778
                    )
                    
                    
                    (3,427
                    )
                    
                    
                    (2,041
                    )
                    
                    
                    (5,101
                    )Purchase
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Settlements
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Pay
      downs and Maturities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (52
                    )
                    
                    
                    (238
                    )Transfers
      into Level 3
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Ending
      Balance
                    
                    $
                    5,901
                    
                    
                    $
                    28,406
                    
                    
                    $
                    5,901
                    
                    
                    $
                    28,406




12





Changes in unrealized gains and losses
recorded in earnings for the nine months ended September 30, 2009 for Level 3
assets and liabilities that are still held at September 30, 2009 were
approximately $7.9 million.





All impaired loans disclosed in
footnote 2 are valued at Level 3 and are carried at a fair value of $22.0
million, net of a valuation allowance of $5.8 million at September 30, 2009. At
December 31, 2008 impaired loans valued at Level 3 were carried at a fair value
of $12.2 million, net of a valuation allowance of $4.7 million. The impact to
the provision for loan losses was $2.4 million for the nine months ended
September 30, 2009, and was $3.7 million for the year ended December 31, 2008.
Fair value is measured based on the value of the collateral securing those
loans, and is determined using several methods. Generally the fair value of real
estate is determined based on appraisals by qualified licensed appraisers. If an
appraisal is not available, the fair value may be determined by using a cash
flow analysis, a broker’s opinion of value, the net present value of future cash
flows, or an observable market price from an active market. Fair value on non
real estate loans is determined using similar methods. In addition, business
equipment may be valued by using the net book value from the business’ financial
statements..





The
carrying amounts and estimated fair value of financial instruments at September
30, 2009 and December 31, 2008, are shown below.  Carrying amount is
the estimated fair value for cash and due from banks, federal funds sold,
short-term borrowings, accrued interest receivable and payable, demand deposits,
short-term debt and variable-rate loans or deposits that reprice frequently and
fully. Security fair values were described previously. For fixed-rate loans or
deposits, variable rate loans or deposits with infrequent repricing or repricing
limits, and for longer-term borrowings, fair value is based on discounted cash
flows using current market rates applied to the estimated life and credit risk.
Fair values of loans held for sale are based on market bids on the loans or
similar loans. It was not practicable to determine the fair value of Federal
Home Loan Bank stock due to restrictions placed on its
transferability.  Fair value of debt is based on current rates for
similar financing. The fair value of off-balance sheet items is not considered
material.





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





September
      30, 2009
                        
                        
                        December
      31, 2008Carrying
                        
                        
                        Fair
                        
                        
                        Carrying
                        
                        
                        Fair(Dollar amounts in
    thousands)
                        
                        Value
                        
                        
                        Value
                        
                        
                        Value
                        
                        
                        ValueCash
      and due from banks $
                        
                        
                        70,037
                        
                        
                        
                        70,037
                        
                        
                        
                        67,298
                        
                        
                        
                        67,298Federal
      funds sold
                        
                        
                        3,000
                        
                        
                        
                        3,000
                        
                        
                        
                        9,530
                        
                        
                        
                        9,530Securities
      available—for—sale
                        
                        
                        605,223
                        
                        
                        
                        605,223
                        
                        
                        
                        596,915
                        
                        
                        
                        596,915Loans,
      net *
                        
                        
                        1,621,088
                        
                        
                        
                        1,587,816
                        
                        
                        
                        1,455,047
                        
                        
                        
                        1,457,842Accrued
      interest receivable
                        
                        
                        12,706
                        
                        
                        
                        12,706
                        
                        
                        
                        13,081
                        
                        
                        
                        13,081Deposits
                        
                        
                        (1,727,686
                        )
                        
                        
                        (1,719,217
                        )
                        
                        
                        (1,563,498
                        )
                        
                        
                        (1,554,912
                        )Short—term
      borrowings
                        
                        
                        (80,792
                        )
                        
                        
                        (80,792
                        )
                        
                        
                        (21,500
                        )
                        
                        
                        (21,500
                        )Federal
      Home Loan Bank advances
                        
                        
                        (326,152
                        )
                        
                        
                        (338,058
                        )
                        
                        
                        (378,553
                        )
                        
                        
                        (390,296
                        )Other
      borrowings
                        
                        
                        (6,600
                        )
                        
                        
                        (6,600
                        )
                        
                        
                        (6,600
                        )
                        
                        
                        (6,600
                        )Accrued
      interest payable
                        
                        
                        (3,152
                        )
                        
                        
                        (3,152
                        )
                        
                        
                        (3,871
                        )
                        
                        
                        (3,871
                        )


*
includes credit card loans held for sale





5.  Short-Term
Borrowings


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





(000's)September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008Federal
      Funds Purchased
                    
                    $
                    54,229
                    
                    
                    $
                    1,111Repurchase
      Agreements
                    
                    
                    24,281
                    
                    
                    
                    19,405Note
      Payable - U.S. Government
                    
                    
                    2,282
                    
                    
                    
                    984$
                    80,792
                    
                    
                    $
                    21,500




6. Other
Borrowings





Other borrowings at period-end
are summarized as follows:





(000's)September 30,
                      
                      
                      December 31,2009
                      
                      
                      2008FHLB
      Advances
                      
                      $
                      326,152
                      
                      
                      $
                      378,553City
      of T erre Haute, Indiana economic development revenue
bonds
                      
                      
                      6,600
                      
                      
                      
                      6,600$
                      332,752
                      
                      
                      $
                      385,153




13




7. Components of Net Periodic
Benefit Cost




Three Months Ended September 30,
                  (000's)
                
                
                Nine Months Ended September 30,
                  (000's)Post-Retirement
                
                
                
                
                
                
                
                
                Post-RetirementPensionBenefits
                
                
                HealthBenefits
                
                
                PensionBenefits
                
                
                HealthBenefits2009
                
                
                2008
                
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Service
      cost
                
                $
                768
                
                
                $
                758
                
                
                $
                27
                
                
                $
                31
                
                
                $
                2,304
                
                
                $
                2,273
                
                
                $
                82
                
                
                $
                94Interest
      cost
                
                
                693
                
                
                
                727
                
                
                
                60
                
                
                
                60
                
                
                
                2,080
                
                
                
                2,181
                
                
                
                180
                
                
                
                179Expected
      return on plan assets
                
                
                (911
                )
                
                
                (823
                )
                
                
                -
                
                
                
                -
                
                
                
                (2,733
                )
                
                
                (2,469
                )
                
                
                -
                
                
                
                -Amortization
      of transition obligation
                
                
                -
                
                
                
                -
                
                
                
                15
                
                
                
                15
                
                
                
                -
                
                
                
                -
                
                
                
                45
                
                
                
                45Net
      amortization of prior service cost
                
                
                (5
                )
                
                
                (5
                )
                
                
                -
                
                
                
                -
                
                
                
                (14
                )
                
                
                (14
                )
                
                
                -
                
                
                
                -Net
      amortization of net (gain) loss
                
                
                116
                
                
                
                182
                
                
                
                0
                
                
                
                3
                
                
                
                347
                
                
                
                547
                
                
                
                0
                
                
                
                8Net
      Periodic Benefit Cost
                
                $
                661
                
                
                $
                839
                
                
                $
                102
                
                
                $
                109
                
                
                $
                1,984
                
                
                $
                2,518
                
                
                $
                307
                
                
                $
                326





Employer
Contributions





First Financial Corporation previously
disclosed in its financial statements for the year ended December 31, 2008 that
it expected to contribute $1.7 and $1.3 million respectively to its Pension Plan
and ESOP and $175,000 to the Post Retirement Health Benefits Plan in 2009.
Contributions of $800 thousand have been made through the first nine months of
2009 for the Pension Plan. Contributions of $158 thousand have been made through
the third quarter of 2009 for the Post Retirement Health Benefits
plan.





8. New accounting
standards





FASB
ASC No. 820-10, “Fair Value Measurements,” establishes a framework for
measuring fair value and expands disclosures about fair value measurements. This
Statement establishes a fair value hierarchy about the assumptions used to
measure fair value and clarifies assumptions about risk and the effect of a
restriction on the sale or use of an asset. The standard was effective for
fiscal years beginning after November 15, 2007. In February 2008, the
FASB issued new guidance impacting FASB ASC 820-10 (FASB Staff Position 157-2).
This staff position delays the effective date of FASB ASC 820-10 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years. The impact of adoption was not material. In April
2009, the FASB issued new guidance impacting FASB ASC 820, “Fair Value
Measurements,”(FASB Staff Position (FSP) 157-4, “Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly.”)
This FASB Staff Position provides additional guidance for estimating fair value
when the volume and level of activity for the asset or liability have
significantly decreased. It also includes guidance on identifying circumstances
that indicate a transaction is not orderly. This issue is effective for
reporting periods ending after June 15, 2009 and did not have a material
impact..


FASB
ASC 820-10-50 requires disclosures about fair value of financial instruments in
interim reporting periods of publicly traded companies that were previously only
required to be disclosed in annual financial statements.  The provisions of
ASC 820-10-50 were effective for the Company’s interim period ending on
June 30, 2009, and additional disclosures have been
included.


FASB
ASC 320-10 amends current other-than-temporary impairment guidance in GAAP for
debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements.  This guideance does not
amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities.  The provisions of
ASC 320-10 were effective for the Company’s interim period ending on
June 30, 2009. As a result, some losses on securities that were
recognized through earnings in prior periods were added back to retained
earnings at the beginning of the period to reflect only credit losses associated
with these investments and to account for the remaining OTTI as adjustments
through other comprehensive income.  The effects of adoption and
required disclosures can be found in Footnote 3.


In
May 2009, the FASB issued ASC No. 855-10 –Subsequent
Events.  FASB ASC No. 855-10 establishes the period after the balance
sheet date during which management shall evaluate events or transactions that
may occur for potential recognition or disclosure in the financial statements
and the circumstances under which an entity shall recognize events or
transactions that occur after the balance sheet date.  FASB ASC No.
855-10 also requires disclosure of the date through which subsequent events have
been evaluated.  The new standard becomes effective for interim and
annual periods ending after September 15, 2009.  The Company adopted
this standard for the interim reporting period ending June 30, 2009.  The
adoption of this statement did not have a material impact on the Company’s
consolidated financial position or results of operations.  These
financial statements consider events that occurred through November 6,
2009, the date the financial statements were issued.


14


FASB ASC 105-10–In June 2009, the FASB
issued FASB ASC 105-10, Generally Accepted Accounting Principles (Statement No.
168, “The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles”.  The new guidance replaces SFAS No. 162 and
establishes the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with generally accepted accounting principles ("GAAP").  Rules and
interpretative releases of the Securities and Exchange Commission under federal
securities laws are also sources of authoritative GAAP for SEC registrants.  The
new standard became effective for financial statements issued for interim and
annual periods ending after September 15, 2009.  The adoption of this statement
did not have a material impact on the Company’s consolidated financial position
or results of operations.Technical references to
generally accepted accounting principles included in the Notes to Consolidated
Financial Statements are provided under the new FASB ASC
structure.





FASB ASC 805—In
December 2007, the FASB issued new guidance impacting FASB ASC 805, Business Combinations(SFAS
No. 141(R) — Business Combinations). The new guidance establishes principles and
requirements for how an acquiring company (1) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree, (2) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase,
and (3) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The new standard became effective for the Company on January 1,
2009. See Note 9 to the consolidated financial statements for the impact on the
Company of adopting SFAS No. 141(R).





9.
Acquisitions





On July
2, 2009, the Bank entered into a purchase and assumption agreement with the
Federal Deposit Insurance Corporation (“FDIC”) to assume all of the deposits
(excluding brokered deposits) and certain assets of The First National Bank of
Danville., a full service commercial bank headquartered in Danville, Illinois
that had failed and been placed in receivership with the FDIC. The acquisition
consisted of assets with a fair value of approximately $151.8 million, including
$77.5 million of loans, $24.2 million of investment securities, $31.0 million of
cash and cash equivalents, and $146.3 million in liabilities, including $145.7
million of deposits. A customer-related core deposit intangible asset of $4.6
million was also recorded. In addition to the excess of liabilities over assets,
the Bank received approximately $14.6 million in cash from the FDIC and entered
into a loss sharing agreement with the FDIC. Under the loss sharing agreement,
the Bank will share in the losses on assets covered under the agreement
(referred to as covered assets). On losses up to $29 million, the FDIC has
agreed to reimburse the Bank for 80 percent of the losses. On losses exceeding
$29 million, the FDIC has agreed to reimburse the bank for 90 percent of the
losses. The loss sharing agreement is subject to following servicing procedures
as specified in the agreement with the FDIC. The expected reimbursements under
the loss sharing agreement were recorded as an indemnification asset at their
estimated fair value of $12.1million
on the acquisition date. Based upon the acquisition date fair values of the net
assets acquired, no goodwill was recorded. The transaction resulted in a gain of
$5.4 million, which is included in Non-Interest Income in the September 30, 2009
Consolidated Statement of Operations. Because of the short time period between
the July 2, 2009 closing of the transaction and the end of the Company’s fiscal
quarter on September 30, 2009, the Company continues to analyze its estimates of
the fair values of the loans acquired and the indemnification asset recorded.
The Company expects to finalize its analysis of these assets and, therefore,
adjustments to the recorded carrying values may occur. Pro forma income
statement information is not disclosed as the acquisition is immaterial to the
Corporation.





FASB ASC 310-30 “Loans and Debt
Securities Acquired with Deteriorated Credit Quality” applies to a loan with
evidence of deterioration of credit quality since origination, acquired by
completion of a transfer for which it is probable, at acquisition, that the
investor will be unable to collect all contractually required payments
receivable. FASB ASC 310-10 prohibits carrying over or creating an allowance for
loan losses upon initial recognition. The carrying amount of covered assets at
September 30, 2009, consisted of loans accounted for in accordance with FASB ASC
310-30, loans not subject to FASB ASC 310-30 and other assets as shown in the
following table:





ASC
      310-30
                  
                  
                  Non
      ASC 310-30Loans
                  
                  
                  Loans
                  
                  
                  Other
                  
                  
                  TotalLoans
                  
                  $
                  16,737
                  
                  
                  $
                  60,739
                  
                  
                  $
                  -
                  
                  
                  $
                  77,476Foreclosed
      Assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,478
                  
                  
                  
                  1,478Total
      Covered Assets
                  
                  $
                  16,737
                  
                  
                  $
                  60,739
                  
                  
                  $
                  1,478
                  
                  
                  $
                  78,954




On the
acquisition date, the preliminary estimate of the contractually required
payments receivable for all SOP 03 -3 loans acquired in the acquisition were
$31.6 million, the cash flows expected to be collected were $18.4 million
including interest, and the estimated fair value of the loans were $16.7
million. These amounts were determined based upon the estimated remaining life
of the underlying loans, which include the effects of estimated prepayments. At
September 30, 2009, a majority of these loans were valued based on the
liquidation value of the underlying collateral, because the expected cash flows
are primarily based on the liquidation of underlying collateral and the timing
and amount of the cash flows could not be reasonably estimated. There was no
allowance for credit losses related to these loans at September 30, 2009.
Because of the short time period between the closing of the transaction and
September 30, 2009, certain amounts related to the FASB ASC 310-30 loans are
preliminary estimates and changes in the carrying amount and accretable yield
for these loans from the acquisition date and September 30, 2009 were not
material. The Company expects to finalize its analysis of these loans and,
therefore, adjustments to the estimated amounts may occur.





On the
acquisition date, the preliminary estimate of the contractually required
payments receivable for all Non FASB ASC 310-30 loans acquired in the
acquisition were $58.4 million and the estimated fair value of the loans were
$60.7 million.


15





ITEMS
2.  and 3.  Management's Discussion and
Analysis of Financial Condition and Results of Operations and Quantitative and
Qualitative Disclosures About Market Risk





The purpose of this discussion is to
point out key factors in the Corporation’s recent performance compared with
earlier periods.  The discussion should be read in conjunction with
the financial statements beginning on page three of this report.  All
figures are for the consolidated entities.  It is presumed the readers
of these financial statements and of the following narrative have previously
read the Corporation’s annual report for 2008 filed as an exhibit to the
Corporation’s 10-K filed for the fiscal year ended December 31,
2008.





This Quarterly Report on Form 10-Q
contains forward-looking statements. Forward-looking statements provide current
expectations or forecasts of future events and are not guarantees of future
performance, nor should they be relied upon as representing management’s views
as of any subsequent date. The forward-looking statements are based on
management’s expectations and are subject to a number of risks and
uncertainties. Although management believes that the expectations reflected in
such forward-looking statements are reasonable, actual results may differ
materially from those expressed or implied in such statements. Risks and
uncertainties that could cause actual results to differ materially include,
without limitation, the Corporation’s ability to effectively execute its
business plans; changes in general economic and financial market conditions;
changes in interest rates; changes in the competitive environment; continuing
consolidation in the financial services industry; new litigation or changes in
existing litigation; losses, customer bankruptcy, claims and assessments;
changes in banking regulations or other regulatory or legislative requirements
affecting the Corporation’s business; and changes in accounting policies or
procedures as may be required by the Financial Accounting Standards Board or
other regulatory agencies. Additional information concerning factors that could
cause actual results to differ materially from those expressed or implied in the
forward-looking statements is available in the Corporation’s Annual Report on
Form 10-K for the year ended December 31, 2008, and subsequent filings with the
United States Securities and Exchange Commission (SEC). Copies of these filings
are available at no cost on the SEC’s Web site at www.sec.gov or on the
Corporation’s Web site at www.first-online.com. Management may elect to update
forward-looking statements at some future point; however, it specifically
disclaims any obligation to do so.





Critical Accounting
Policies





Certain of the Corporation’s accounting
policies are important to the portrayal of the Corporation’s financial condition
and results of operations, since they require management to make difficult,
complex or subjective judgments, some of which may relate to matters that are
inherently uncertain. Estimates associated with these policies are susceptible
to material changes as a result of changes in facts and
circumstances.  Facts and circumstances which could affect these
judgments include, without limitation, changes in interest rates, in the
performance of the economy or in the financial condition of
borrowers.  Management believes that its critical accounting policies
include determining the allowance for loan losses and the valuation of goodwill
and valuing investment securities. See further discussion of these critical
accounting policies in the 2008 Annual Report on Form 10-K.





Summary of Operating
Results





Net income for the three and nine
months ended September 30, 2009 was $7.72 and $16.87 million respectively
compared to $3.50 and $17.60 million for the same period of
2008.  Basic earnings per share increased to $0.59 for the third
quarter of 2009 compared to $0.27 for same period of 2008. Return on Assets and
Return on Equity were 1.26% and 10.25% respectively for the three months ended
September 30, 2009, compared to 0.61%and 4.94% for the three months ended
September 30, 2008.





The primary components of income and
expense affecting net income are discussed in the following
analysis.





Net Interest
Income





The Corporation's primary source of
earnings is net interest income, which is the difference between the interest
earned on loans and other investments and the interest paid for deposits and
other sources of funds.  Net interest income increased $1.76 million
in the three months ended September 30, 2009 to $22.9 million from $21.1 million
in the same period in 2008. The net interest margin for the first nine months of
2009  is 4.11% compared to 4.02% for the same period of 2008, a 2.2%
increase, driven by a greater decline in the costs of funding than the decline
in the income realized on earning assets.





Non-Interest
Income





Non-interest income for the three
months ended September 30, 2009 was $10.3 million compared to the $1.4 million
for the same period of 2008. During the quarter a gain on acquisition of
business of $5.4 million was recognized as discussed in Note 9. Non-interest
income was reduced by the other than temporary impairment loss on securities
which was $2.8 million less in the three months ended September 30, 2009 than
for the same period of 2008. Further discussion on OTTI is included in Note 3.
Mortgage loan sales for the Corporation as a result of the lower interest rate
environment has produced gains on sale of mortgage loans of $526 thousand, an
increase of $342 thousand in the third quarter of 2009 compared to the same
period of 2008.





Non-Interest
Expenses





The Corporation’s non-interest expense
for the quarter ended September 30, 2009 increased by $2.0 million compared to
the same periods in 2008 due to increased FDIC expenses of $633 thousand and
increased personnel and occupancy costs of $700 thousand associated in part with
the acquisition of the business unit discussed in Note 9.


16




Allowance for Loan
Losses





The Corporation’s provision for loan
losses increased $3.51 million for 2009 compared to the same period of
2008.  The provision was $9.38 million for the nine months ended
September 30, 2009, compared to $5.88 million for the same period of 2008, while
net charge-offs for the same periods increased by $1.45 million. The volume of
impaired and non-accrual loans both increased reflecting management’s
conservative approach to the recognition of problem credits as well as from the
acquisition of a failed financial institution from the FDIC. The specific
allocation of probable losses for these credits increased by $2.4 million. The
allowance for loan losses has increased from 1.12% of gross loans, or $16.3
million at December 31, 2008 to 1.16% of gross loans, or $18.8 million at
September 30, 2009. Based on management’s analysis of the current portfolio, an
evaluation that includes consideration of historical loss experience,
non-performing loans trends, and probable incurred losses on identified problem
loans, management believes the allowance is adequate.





Non-performing
Loans





Non-performing loans consist of (1)
non-accrual loans on which the ultimate collectability of the full amount of
interest is uncertain, (2) loans which have been renegotiated to provide for a
reduction or deferral of interest or principal because of a deterioration in the
financial position of the borrower, and (3) loans past due ninety days or more
as to principal or interest.  A summary of non-performing loans at
September 30, 2009 and December 31, 2008 follows:





(000's)September
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008Non-accrual
      loans
                    
                    $
                    37,918
                    
                    
                    $
                    12,486Restructured
      loans
                    
                    
                    115
                    
                    
                    
                    98Accruing
      loans past due over 90 days
                    
                    
                    7,809
                    
                    
                    
                    3,624$
                    45,842
                    
                    
                    $
                    16,208Ratio
      of the allowance for loan losses as a percentage of non-performing
      loans
                    
                    
                    41
                    %
                    
                    
                    100
                    %





The
following loan categories comprise significant components of the nonperforming
loans:





September
      30,
                              
                              
                              December
      31,2009
                              
                              
                              2008Non-accrual
      loans1-4
      family residential
                              
                              $
                              2,672
                              
                              
                              $
                              1,835Commercial
      loans
                              
                              
                              33,327
                              
                              
                              
                              9,210Installment
      loans
                              
                              
                              1,919
                              
                              
                              
                              1,441$
                              37,918
                              
                              
                              $
                              12,486Past
      due 90 days or more1-4
      family residential
                              
                              $
                              1,450
                              
                              
                              $
                              1,495Commercial
      loans
                              
                              
                              5,846
                              
                              
                              
                              1,582Installment
      loans
                              
                              
                              513
                              
                              
                              
                              547$
                              7,809
                              
                              
                              $
                              3,624





The
following table is information on the non-accrual loans at September 30, 2009
that were from the assumption of assets from The First National Bank of
Danville





(000's)September 30,2009Non-accrual
      loans1-4
      family residential
                                  
                                  $
                                  160Commercial
      loans
                                  
                                  
                                  6,983Installment
      loans
                                  
                                  
                                  -$
                                  7,143




17





Interest Rate Sensitivity
and Liquidity





First Financial Corporation has
established risk measures, limits and policy guidelines for managing interest
rate risk and liquidity.  Responsibility for management of these
functions resides with the Asset Liability Committee.  The primary
goal of the Asset Liability Committee is to maximize net interest income within
the interest rate risk limits approved by the Board of Directors.





Interest Rate
Risk





Management considers interest rate risk
to be the Corporation’s most significant market risk.  Interest rate
risk is the exposure to changes in net interest income as a result of changes in
interest rates.  Consistency in the Corporation’s net interest income
is largely dependent on the effective management of this risk.





The Asset Liability position is
measured using sophisticated risk management tools, including earning simulation
and market value of equity sensitivity analysis.  These tools allow
management to quantify and monitor both short-term and long-term exposure to
interest rate risk.  Simulation modeling measures the effects of
changes in interest rates, changes in the shape of the yield curve and the
effects of embedded options on net interest income.  This measure
projects earnings in the various environments over the next three
years.  It is important to note that measures of interest rate risk
have limitations and are dependent on various assumptions.  These
assumptions are inherently uncertain and, as a result, the model cannot
precisely predict the impact of interest rate fluctuations on net interest
income.  Actual results will differ from simulated results due to
timing, frequency and amount of interest rate changes as well as overall market
conditions.  The Committee has performed a thorough analysis of these
assumptions and believes them to be valid and theoretically
sound.  These assumptions are continuously monitored for behavioral
changes.





The Corporation from time to time
utilizes derivatives to manage interest rate risk.  Management
continuously evaluates the merits of such interest rate risk products but does
not anticipate the use of such products to become a major part of the
Corporation’s risk management strategy.





The table
below shows the Corporation’s estimated sensitivity profile as of September 30,
2009.  The change in interest rates assumes a parallel shift in
interest rates of 100 and 200 basis points.  Given a 100 basis point
increase in rates, net interest income would decrease 0.10% over the next 12
months and increase 1.04% over the following 12 months.  Given a 100
basis point decrease in rates, net interest income would increase 0.55% over the
next 12 months and increase 0.49% over the following 12 months.  These
estimates assume all rate changes occur overnight and management takes no action
as a result of this change.





Basis Point
                      
                      Percentage Change in Net Interest IncomeInterest Rate Change
                      
                      12months
                      
                      
                      24months
                      
                      
                      36monthsDown
      200
                      
                      
                      1.03
                      %
                      
                      
                      0.95
                      %
                      
                      
                      0.96
                      %Down
      100
                      
                      
                      0.55
                      
                      
                      
                      0.49
                      
                      
                      
                      0.50Up
      100
                      
                      
                      -0.10
                      
                      
                      
                      1.04
                      
                      
                      
                      3.29Up
      200
                      
                      
                      -1.09
                      
                      
                      
                      0.87
                      
                      
                      
                      5.31





Typical rate shock analysis does not
reflect management’s ability to react and thereby reduce the effect of rate
changes, and represents a worst-case scenario.





Liquidity
Risk


Liquidity is measured by each bank's
ability to raise funds to meet the obligations of its customers, including
deposit withdrawals and credit needs.  This is accomplished primarily
by maintaining sufficient liquid assets in the form of investment securities and
core deposits.  The Corporation has $12.7 million of investments that
mature throughout the coming 12 months.  The Corporation also
anticipates $152.6 million of principal payments from mortgage-backed
securities.  Given the current rate environment, the Corporation
anticipates $19.6 million in securities to be called within the next 12
months.  With these sources of funds, the Corporation currently
anticipates adequate liquidity to meet the expected obligations of its
customers.





Financial
Condition





Comparing the third quarter of 2009 to
the same period in 2008, loans, including credit card loans held-for-sale, net
of unearned discount are up 10.01% or $149.2 million. Deposits are up $198.5
million at September 30, 2009, a 13.0% increase from the balances at the same
time in 2008. Shareholders' equity increased $29.6 million from September 30,
2008. This financial performance increased book value per share 10.4% to $23.58
at September 30, 2009 from $21.35 at September 30, 2008. Book value per share is
calculated by dividing the total shareholders' equity by the number of shares
outstanding.





Capital
Adequacy





As of
September 30, 2009, the most recent notification from the respective regulatory
agencies categorized the subsidiary banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the banks must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the bank's
category.  Below are the capital ratios for the Corporation and lead
bank.


18





September 30,
                
                
                December 31, 2008
                
                
                To Be Well CapitalizedTotal
      risk-based capitalCorporation
                
                
                16.29
                %
                
                
                17.32
                %
                
                
                N/AFirst
      Financial Bank
                
                
                16.03
                %
                
                
                17.11
                %
                
                
                10.00
                %Tier
      I risk-based capitalCorporation
                
                
                15.33
                %
                
                
                16.40
                %
                
                
                N/AFirst
      Financial Bank
                
                
                15.20
                %
                
                
                16.34
                %
                
                
                6.00
                %Tier
      I leverage capitalCorporation
                
                
                12.40
                %
                
                
                12.72
                %
                
                
                N/AFirst
      Financial Bank
                
                
                12.24
                %
                
                
                12.64
                %
                
                
                5.00
                %




ITEM
4.  Controls
and Procedures





First Financial Corporation’s
management is responsible for establishing and maintaining effective disclosure
controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934.  As of September 30, 2009, an
evaluation was performed under the supervision and with the participation of
management, including the principal executive officer and principal financial
officer, of the effectiveness of the design and operation of the Corporation's
disclosure controls and procedures.  Based on that evaluation,
management, including the principal executive officer and principal financial
officer, concluded that the Corporation’s disclosure controls and procedures as
of September 30, 2009 were effective in ensuring material information required
to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed,
summarized, and reported on a timely basis.  Additionally, there was
no change in the Corporation's internal control over financial reporting that
occurred during the quarter ended September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, the Corporation's
internal control over financial reporting.




PART II – Other
Information




ITEM 1.
Legal
Proceedings.


There are no material pending legal
proceedings, other than routine litigation incidental to the business of the
Corporation or its subsidiaries, to which the Corporation or any of the
subsidiaries is a party or of which any of their respective property is
subject.  Further, there is no material legal proceeding in which any
director, officer, principal shareholder, or affiliate of the Corporation or any
of its subsidiaries, or any associate of such director, officer, principal
shareholder or affiliate is a party, or has a material interest, adverse to the
Corporation or any of its subsidiaries.





ITEM 1 A.
Risk
Factors.


There have been no material changes in
the risk factors from those disclosed in the Corporation’s 2008 Annual
Report on
Form 10-K.





ITEM
2.Unregistered
Sales of Equity Securities and Use of Proceeds.





(a) None.





(b) Not applicable.





(c) Purchases of Equity
Securities





The Corporation periodically acquires
shares of its common stock directly from shareholders in individually negotiated
transactions.  The Corporation has not adopted a formal policy or
adopted a formal program for repurchases of shares of its common
stock.  There were no shares purchased by the Corporation during the
quarter covered by this report.





ITEM 3.
Defaults upon Senior
Securities.





Not
applicable.





ITEM
4.  Submission of Matters to a Vote of Security
Holders





Not
applicable.




ITEM 5.
Other
Information.





Not
applicable.


19




ITEM
6.  Exhibits.





Exhibit No.: Description of
Exhibit:





3.1
            Amended
      and Restated Articles of Incorporation of First Financial Corporation,
      incorporated by reference to Exhibit 3(i) of the Corporation’s Form 10-Q
      filed for the quarter ended September 30,
2002.





3.2
            Code
      of By-Laws of First Financial Corporation, incorporated by reference to
      Exhibit 3(ii) of the Corporation’s Form 8-K filed on July 27,
      2009.





10.1
            Employment
      Agreement for Norman L. Lowery, dated March 25, 2009 and effective January
      1, 2009, incorporated by reference to Exhibit 10.1 of the Corporation Form
      10-Q filed for the quarter ended March 31,
2009.





10.2
            2001
      Long-Term Incentive Plan of First Financial Corporation, incorporated by
      reference to Exhibit 10.3 of the Corporation’s Form 10-Q filed for the
      quarter ended September 30, 2002.





10.3
            2009
      Schedule of Director Compensation, incorporated by reference to Exhibit
      10.3 of the Corporation’s Form 10-K filed for the fiscal year ended
      December 31, 2008.





10.4
            2009
      Schedule of Named Executive Officer Compensation, incorporated by
      reference to the Corporation’s Form 10-K filed for the fiscal year ended
      December 31, 2008.





31.1
            Sarbanes-Oxley
      Act 302 Certification for Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2009 by Principal Executive Officer, dated November 6,
      2009





31.2
            Sarbanes-Oxley
      Act 302 Certification for Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2009 by Principal Financial Officer, dated November 6,
      2009.





32.1
            Certification,
      dated November 6, 2009, of Principal Executive Officer and Principal
      Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act  of 2005 on Form 10-Q for the quarter ended September 30,
      2009.


20




SIGNATURES




Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.





FIRST FINANCIAL
  CORPORATION(Registrant)Date:
      November 6, 2009
              By /s/ Donald E. SmithDonald
      E. Smith, ChairmanDate:
      November 6, 2009
              By /s/ Norman L. LoweryNorman
      L. Lowery, Vice Chairman and CEODate:
      November 6, 2009
              By /s/ Michael A. CartyMichael
      A. Carty, Treasurer and
CFO


21





Exhibit No.: Description of
Exhibit:




Exhibit
Index




3.1
                Amended
      and Restated Articles of Incorporation of First Financial Corporation,
      incorporated by reference to Exhibit 3(i) of the Corporation’s Form 10-Q
      filed for the quarter ended September 30, 2002.3.2
                Code
      of By-Laws of First Financial Corporation, incorporated by reference to
      Exhibit 3(ii) of the Corporation’s Form 8-K filed on July 27,
      2009.10.1
                Employment
      Agreement for Norman L. Lowery, dated March 25, 2009 and effective January
      1, 2009, incorporated by reference to Exhibit 10.1 of the Corporation Form
      10-Q filed for the quarter ended March 31, 2009.10.2
                2001
      Long-Term Incentive Plan of First Financial Corporation, incorporated by
      reference to Exhibit 10.3 of the Corporation’s Form 10-Q filed for the
      quarter ended September 30, 2002.10.3
                2009
      Schedule of Director Compensation, incorporated by reference to Exhibit
      10.3 of the Corporation’s Form 10-K filed for the fiscal year ended
      December 31, 2008.10.4
                2009
      Schedule of Named Executive Officer Compensation, incorporated by
      reference to the Corporation’s Form 10-K filed for the fiscal year ended
      December 31, 2008.31.1
                Sarbanes-Oxley
      Act 302 Certification for Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2009 by Principal Executive Officer, dated November 6,
      200931.2
                Sarbanes-Oxley
      Act 302 Certification for Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2009 by Principal Financial Officer, dated November 6,
      2009.32.1
                Certification,
      dated November 6, 2009, of Principal Executive Officer and Principal
      Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act  of 2005 on Form 10-Q for the quarter ended September 30,
      2009.




22