Exhibit 13

2010 ANNUAL REPORT

Five Year Comparison of Selected Financial Data

(Dollar amounts in thousands, except per share amounts)		2010				2009				2008				2007				2006
BALANCE SHEET DATA
Total assets		$	2,451,095			$	2,518,722			$	2,302,675			$	2,231,562			$	2,175,998
Securities			560,846				587,246				596,915				558,020				530,400
Loans, net of unearned fees*			1,640,146				1,631,764				1,471,327				1,443,067				1,392,755
Deposits			1,903,043				1,789,701				1,563,498				1,529,721				1,502,682
Borrowings			159,899				363,173				406,653				368,616				358,008
Shareholders’ equity			321,717				306,483				286,844				281,692				271,260
INCOME STATEMENT DATA
Interest income			123,582				126,255				133,954				137,734				130,832
Interest expense			26,966				39,261				52,490				62,961				57,129
Net interest income			96,616				86,994				81,464				74,773				73,703
Provision for loan losses			9,200				11,870				7,855				6,580				6,983
Other income			29,797				28,532				25,410				31,497				28,826
Other expenses			77,202				73,381				66,447				64,726				64,656
Net income			28,044				22,720				24,769				25,580				23,539
PER SHARE DATA:
Net Income			2.14				1.73				1.89				1.94				1.77
Cash dividends			0.92				0.90				0.89				0.87				0.85
PERFORMANCE RATIOS:
Net income to average assets			1.11	%			0.95	%			1.09	%			1.16	%			1.10	%
Net income to average shareholders’ equity			8.73				7.54				8.61				9.20				8.57
Average total capital to average assets			13.56				13.25				13.28				13.35				13.56
Average shareholders’ equity to average assets			12.76				12.56				12.60				12.64				12.79
Dividend payout			43.08				51.99				47.10				44.76				44.18

FIRST FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

		December 31,
(Dollar amounts in thousands, except per share data)		2010				2009
ASSETS
Cash and due from banks		$	58,511			$	84,371
Federal funds sold			5,104				21,576
Securities available-for-sale			560,846				587,246
Loans, net of allowance of $22,336 in 2010 and $19,437 in 2009			1,617,810				1,612,327
Restricted Stock			25,308				27,835
Accrued interest receivable			11,208				12,005
Premises and equipment, net			34,691				35,551
Bank-owned life insurance			66,112				64,057
Goodwill			7,102				7,102
Other intangible assets			4,148				4,916
Other real estate owned			6,325				5,885
FDIC Indemnification Asset			3,977				12,124
Other assets			49,953				43,727
TOTAL ASSETS		$	2,451,095			$	2,518,722
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing		$	304,101			$	312,990
Interest-bearing:
Certificates of deposit of $100 or more			215,501				238,830
Other interest-bearing deposits			1,383,441				1,237,881
			1,903,043				1,789,701
Short-term borrowings			34,106				30,436
Other borrowings			125,793				332,737
Other liabilities			66,436				59,365
TOTAL LIABILITIES			2,129,378				2,212,239
Shareholders’ equity
Common stock, $.125 stated value per share;
Authorized shares-40,000,000
Issued shares-14,450,966
Outstanding shares-13,151,630 in 2010 and 13,129,630 in 2009			1,806				1,806
Additional paid-in capital			68,944				68,739
Retained earnings			293,319				277,357
Accumulated other comprehensive income (loss)			(9,369	)			(7,904	)
Less: Treasury shares at cost-1,299,336 in 2010 and 1,321,336 in 2009			(32,983	)			(33,515	)
TOTAL SHAREHOLDERS’ EQUITY			321,717				306,483
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	2,451,095			$	2,518,722

2010 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF INCOME

		Years Ended December 31,
(Dollar amounts in thousands, except per share data)		2010				2009				2008
INTEREST AND DIVIDEND INCOME:
Loans, including related fees		$	96,206			$	94,930			$	99,572
Securities:
Taxable			18,597				22,755				25,303
Tax-exempt			6,664				6,604				6,415
Other			2,115				1,966				2,664
TOTAL INTEREST AND DIVIDEND INCOME			123,582				126,255				133,954
INTEREST EXPENSE:
Deposits			16,306				21,544				32,696
Short-term borrowings			325				541				1,068
Other borrowings			10,335				17,176				18,726
TOTAL INTEREST EXPENSE			26,966				39,261				52,490
NET INTEREST INCOME			96,616				86,994				81,464
Net Provision for loan losses			9,200				11,870				7,855
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			87,416				75,124				73,609
NON-INTEREST INCOME:
Trust and financial services			4,547				4,197				3,993
Service charges and fees on deposit accounts			10,342				11,082				11,889
Other service charges and fees			7,759				7,026				6,050
Securities gain, net			1,321				4				358
Other-than-temporary loss
Total impairment loss			(4,260	)			(18,939	)			(6,145	)
Loss recognized in other comprehensive income							8,170				—
Net impairment loss recognized in earnings			(4,260	)			(10,769	)			(6,145	)
Insurance commissions			6,759				6,464				6,688
Gain on sale of mortgage loans			2,206				2,291				817
Gain on sale of credit card loans			—				2,549				—
Gain on bargain purchase			—				5,057				—
Other			1,123				631				1,760
TOTAL NON-INTEREST INCOME			29,797				28,532				25,410
NON-INTEREST EXPENSES:
Salaries and employee benefits			44,887				42,259				41,287
Occupancy expense			4,707				4,534				4,182
Equipment expense			4,761				4,640				4,560
Federal Deposit Insurance			2,847				3,277				220
Other			20,000				18,671				16,198
TOTAL NON-INTEREST EXPENSE			77,202				73,381				66,447
INCOME BEFORE INCOME TAXES			40,011				30,275				32,572
Provision for income taxes			11,967				7,555				7,803
NET INCOME		$	28,044			$	22,720			$	24,769
EARNINGS PER SHARE:
BASIC AND DILUTED		$	2.14			$	1.73			$	1.89
Weighted average number of shares outstanding (in thousands)			13,120				13,119				13,110

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

														Accumulated
														Other
(Dollar amounts in thousands, except		Common				Additional				Retained				Comprehensive				Treasury
per share data)		Stock				Capital				Earnings				Income/(Loss)				Stock				Total
Balance, January 1, 2008		$	1,806			$	68,212			$	250,011			$	(5,181	)		$	(33,156	)		$	281,692
Comprehensive income:
Net income			—				—				24,769				—				—				24,769
Other comprehensive loss, net of tax:
Change in net unrealized gains/losses on securities available-for-sale, net			—				—				—				(8,276	)			—				(8,276	)
Change in unrealized gains/losses on post-retirement benefits			—				—				—				511				—				511
Total comprehensive income																							17,004
Contribution of 33,015 shares to ESOP			—				442				—				—				835				1,277
Treasury stock purchase (52,744 shares)			—				—				—				—				(1,464	)			(1,464	)
Cash Dividends, $.89 per share			—				—				(11,665	)			—				—				(11,665	)
Balance, December 31, 2008			1,806				68,654				263,115				(12,946	)			(33,785	)			286,844
Comprehensive income:
Net income			—				—				22,720				—				—				22,720
Other comprehensive loss, net of tax:
Change in net unrealized gains/losses on securities available-for-sale, net			—				—				—				10,869				—				10,869
Change in unrealized gains/losses on post-retirement benefits			—				—				—				(2,494	)			—				(2,494	)
Total comprehensive income																							31,095
Adjustment for adoption of other-than temporary impairment guidance, net of tax (Note 1)											3,333				(3,333	)							—
Contribution of 35,000 shares to ESOP			—				85				—				—				886				971
Treasury stock purchase (22,000 shares)			—				—				—				—				(616	)			(616	)
Cash Dividends, $.90 per share			—				—				(11,811	)			—				—				(11,811	)
Balance, December 31, 2009			1,806				68,739				277,357				(7,904	)			(33,515	)			306,483
Comprehensive income:
Net income			—				—				28,044				—				—				28,044
Change in net unrealized gains/(losses) on securities available for-sale			—				—				—				449				—				449
Change in net unrealized gains/ (losses) on retirement plans			—				—				—				(1,914	)			—				(1,914	)
Total comprehensive income/(loss)																							26,579
Contribution of 45,000 shares to ESOP			—				205				—				—				1,142				1,347
Treasury stock purchase (23,000 shares)			—				—				—				—				(610	)			(610	)
Cash Dividends, $.92 per share			—				—				(12,082	)			—				—				(12,082	)
Balance, December 31, 2010		$	1,806			$	68,944			$	293,319			$	(9,369	)		$	(32,983	)		$	321,717

2010 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Years Ended December 31,
(Dollar amounts in thousands, except per share data)		2010				2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	28,044			$	22,720			$	24,769
Adjustments to reconcile net income to net cash provided by operating activities:
Net (accretion) amortization on securities			(840	)			(2,442	)			(2,874	)
Provision for loan losses			9,200				11,870				7,855
Securities impairment loss recognized in earnings			4,260				10,769				6,145
Securities (gains) losses			(1,321	)			(4	)			(358	)
Depreciation and amortization			4,643				4,199				3,535
Provision for deferred income taxes			(5,940	)			(2,043	)			(5,147	)
Net change in accrued interest receivable			797				1,076				617
Contribution of shares to ESOP			1,347				971				1,277
Gain on sale of mortgage loans			(2,206	)			(2,291	)			(817	)
Loss on sale of student loans			—				399				—
Gain on sale of credit card loans			—				(2,549	)			—
Gain on purchase of business unit			—				(5,057	)			—
Loss on sales of other real estate			283				196				35
Other, net			10,293				(8,424	)			1,494
NET CASH FROM OPERATING ACTIVITIES			48,560				29,390				36,531
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of securities available-for-sale			12,248				—				1,063
Calls, maturities and principal reductions on securities available-for-sale			223,862				128,349				95,198
Purchases of securities available-for-sale			(211,062	)			(88,532	)			(151,863	)
Loans made to customers, net of payments			(132,997	)			(265,976	)			(76,216	)
Net change in federal funds sold			16,472				(12,046	)			(5,329	)
Redemption of restricted stock			2,527				—				2,386
Cash received from sale of mortgage loans			116,462				146,625				36,910
Cash received from sale of student loans			—				13,347				—
Cash received from sale of credit card loans			—				14,689				—
Cash received (disbursed) from purchase of business unit			(609	)			30,977				—
Sale of other real estate			3,727				2,448				2,357
Additions to premises and equipment			(2,406	)			(6,655	)			(2,623	)
NET CASH FROM INVESTING ACTIVITIES			28,224				(36,774	)			(98,117	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits			113,180				80,359				33,777
Net change in other short-term borrowings			3,670				8,936				(5,831	)
Dividends paid			(11,940	)			(11,806	)			(11,548	)
Purchases of treasury stock			(610	)			(616	)			(1,464	)
Proceeds from other borrowings			2,000				120,000				408,500
Repayments on other borrowings			(208,944	)			(172,416	)			(364,632	)
NET CASH FROM FINANCING ACTIVITIES			(102,644	)			24,457				58,802
NET CHANGE IN CASH AND CASH EQUIVALENTS			(25,860	)			17,073				(2,784	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			84,371				67,298				70,082
CASH AND CASH EQUIVALENTS, END OF YEAR		$	58,511			$	84,371			$	67,298
SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND NONCASH INFORMATION:
Cash paid for the year for:
Interest		$	28,051			$	40,005			$	54,168
Income Taxes		$	15,713			$	13,485			$	11,657

FIRST FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS

Organization: The consolidated financial statements of First Financial Corporation and its subsidiaries (the Corporation) include the parent company and its wholly-owned subsidiaries, First Financial Bank, N.A. of Vigo County, Indiana, The Morris Plan Company of Terre Haute (Morris Plan), and Forrest Sherer Inc., a full-line insurance agency headquartered in Terre Haute, Indiana. Inter-company transactions and balances have been eliminated.

First Financial Bank also has two investment subsidiaries, Portfolio Management Specialists A (Specialists A) and Portfolio Management Specialists B (Specialists B), which were established to hold and manage certain assets as part of a strategy to better manage various income streams and provide opportunities for capital creation as needed. Specialists A and Specialists B subsequently entered into a limited partnership agreement, Global Portfolio Limited Partners. Portfolio Management Specialists B also owns First Financial Real Estate, LLC. At December 31, 2010, $591.7 million of securities and loans were owned by these subsidiaries. Specialists A, Specialists B, Global Portfolio Limited Partners and First Financial Real Estate LLC are included in the consolidated financial statements.

The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide variety of financial services including commercial, mortgage and consumer lending, lease financing, trust account services and depositor services through its four subsidiaries. The Corporation’s primary source of revenue is derived from loans to customers, primarily middle-income individuals, and investment activities.

The Corporation operates 54 branches in west-central Indiana and east-central Illinois. First Financial Bank is the largest bank in Vigo County. It operates 13 full-service banking branches within the county; five in Clay County, Indiana; one in Greene County, Indiana; three in Knox County, Indiana; five in Parke County, Indiana; one in Putnam County, Indiana; five in Sullivan County, Indiana; four in Vermillion County, Indiana; one in Clark County, Illinois; one in Coles County, Illinois; three in Crawford County, Illinois; one in Jasper County, Illinois; two in Lawrence County, Illinois; two in Richland County, Illinois; six in Vermilion County, Illinois; and one in Wayne County, Illinois. It also has a main office in downtown Terre Haute and an operations center/office building in southern Terre Haute.

Regulatory Agencies: First Financial Corporation is a multi-bank holding company and as such is regulated by various banking agencies. The holding company is regulated by the Seventh District of the Federal Reserve System. The national bank subsidiary is regulated by the Office of the Comptroller of the Currency. The state bank subsidiary is jointly regulated by the state banking organization and the Federal Deposit Insurance Corporation.

SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan losses, carrying value of intangible assets, loan servicing rights, other-than-temporary securities impairment and the fair values of financial instruments are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash and demand deposits with other financial institutions. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings.

Securities: The Corporation classifies all securities as “available for sale.” Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value with unrealized holdings gains and losses, net of taxes, reported in other comprehensive income within shareholders’ equity.

Interest income includes amortization of purchase premium or discount. Premiums and discounts are amortized on the level yield method without anticipating prepayments. Mortgage-backed securities are amortized over the expected life. Realized gains and losses on sales are based on the amortized cost of the security sold. Management evaluates securities for other-than temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

Loans: Loans that management has the intent and ability to hold for the foreseeable future until maturity or pay-off are reported at the principal balance outstanding, net of unearned interest, purchase premiums and discounts, deferred loan fees and costs, and allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income is accrued on the unpaid principal balance and includes amortization of net deferred loan fees and costs over the loan term without anticipating prepayments. The recorded investment in loans includes accrued interest receivable. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are significantly past due. Past-due status is based on the contractual terms of the loan.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. In all cases, loans are placed on non-accrual or charged-off if collection of principal or interest is considered doubtful.

2010 ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain Purchased Loans: The Corporation purchases individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination. These purchased loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Such purchased loans accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit score, loan type and date of origination. The Corporation estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid are recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a provision for loan loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Concentration of Credit Risk: Most of the Corporation’s business activity is with customers located within Vigo County. Therefore, the Corporation’s exposure to credit risk is significantly affected by changes in the economy of the Vigo County area. A major economic downturn in this area would have a negative effect on the Corporation’s loan portfolio.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgages and consumer loans, and on an individual basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows, using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures.

The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The historical loss experience is based on the actual loss history experienced over the most recent four years, using a weighted average which places more emphasis on the more current years within loss history window. This actual loss experience is supplemented with other current factors based on the risks present for each portfolio segment. These current factors include consideration of the following: levels of and trends in delinquent, classified, and impaired loans; levels of and trends in charge-offs and recoveries; national and local economic trends and conditions; changes in lending policies and procedures; trends in volume and terms of loans; experience, ability, and depth of lending management and other relevant staff; credit concentrations; value of underlying collateral for collateral dependent loans; and other external factors such as competition and legal and regulatory requirements. The following portfolio segments have been identified: commercial loans, residential loans and consumer loans. Overall, historical loss rates for the Corporation’s portfolio segments have remained low during this tough economic cycle. This is primarily attributable to the Corporation’s conservative lending practices. Local economic conditions, including elevated unemployment rates, resulted in higher consumer loan delinquencies. For these reasons, consumer loans have the highest adjustments to the historical loss rate. These same factors along with declining real estate values resulted in the residential loan portfolio segment having the next highest level of adjustment to the historical loss rate. The commercial loan portfolio segment had the lowest level of adjustment to the historical loss rate. Adjustments were made for the increasing levels of and trends in delinquent, classified and impaired commercial loans. Commercial loans are generally well secured, which mitigates the risk of loss and has contributed to the low historical loss rate.

FDIC Indemnification Asset: The FDIC indemnification asset results from the loss share agreements in the 2009 FDIC-assisted transaction. The asset is measured separately from the related covered assets as they are not contractually embedded in the assets and are not transferable with the assets should the Corporation choose to dispose of them. It represents the acquisition date fair value of expected reimbursements from the FDIC which was determined to be $12.1 million. Pursuant to the terms of the loss sharing agreement, covered loans and other real estate are subject to a stated loss threshold whereby the FDIC will reimburse the Corporation for up to 95% of losses incurred. These expected reimbursements do not include reimbursable amounts related to future covered expenditures. These cash flows are discounted to reflect a metric of uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. This asset decreases when losses are realized and claims are paid by the FDIC or when customers repay their loans in full and expected losses do not occur. This asset also increases when estimated future losses increase and decreases when estimated future losses decrease. When estimated future losses increase, the Corporation records a provision for loan losses and increases its allowance for loan losses accordingly. The related increase in the FDIC indemnification asset is recorded as an offset to the provision for loan losses. During 2010 and 2009, the provision for loan losses was offset by $1,662 and $0 related to the increases in the FDIC indemnification asset.

FIRST FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Foreclosed Assets: Assets acquired through or instead of loan foreclosures are initially recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the useful lives of the assets, which range from 3 to 33 years for furniture and equipment and 5 to 39 years for buildings and leasehold improvements.

Restricted Stock: Restricted stock includes Federal Home Loan Bank (FHLB) of Indianapolis and Chicago and Federal Reserve stock. This restricted stock is carried at cost and periodically evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Servicing Rights: Servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on third-party valuations that incorporate assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, ancillary income, prepayment speeds and default rates and losses. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Corporation later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with Other Service Fees on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Servicing fee income, which is included in Other Service Fees on the income statement, is for fees earned for servicing loans.

The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $1,153 thousand, $958 thousand and $901 thousand for the years ended December 31, 2010, 2009 and 2008. Late fees and ancillary fees related to loan servicing are not material.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Bank-Owned Life Insurance: The Corporation has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Income on the investments in life insurance is included in other interest income.

Goodwill and Other Intangible Assets: Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are not individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Corporation has selected May 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from the whole bank, insurance agency and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated basis over their estimated useful lives, which are 12 and 10 years, respectively.

Long-Term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Benefit Plans: Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. The amount contributed is determined by a formula as decided by the Board of Directors. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.

Employee Stock Ownership Plan: Shares of treasury stock are issued to the ESOP and compensation expense is recognized based upon the total market price of shares when contributed.

Deferred Compensation Plan: A deferred compensation plan covers all directors. Under the plan, the Corporation pays each director, or their beneficiary, the amount of fees deferred plus interest over 10 years, beginning when the director achieves age 65. A liability is accrued for the obligation under these plans. The expense incurred for the deferred compensation for each of the last three years was $183 thousand, $184 thousand and $169 thousand, resulting in a deferred compensation liability of $2.6 million and $2.5 million as of year-end 2010 and 2009.

Incentive Plans: A long-term incentive plan provides for the payment of incentive rewards as a 15-year annuity to all directors and certain key officers. The plan expired December 31, 2009, and compensation expense is recognized over the service period. Payments under the plan generally do not begin until the earlier of January 1, 2015, or the January 1 immediately following the year in which the participant reaches age 65. There was no compensation expense related to this plan for 2010 and the compensation expense for 2009 and 2008 was $2.3 million and $2.0 million, resulting in a liability of $15.4 million and $15.4 million as of year-end 2010 and 2009. In 2010 the Corporation adopted incentive compensation plans for 2010 that also expired December 31, 2010. These plans are interim with the intention of more developed plans starting in 2011. The plans were designed to reward key officers based on certain performance measures. The short-term plans will be paid out within 75 days of December 31, 2010 and the long-term plan vests over a three year period and will payout within 75 days of December 31, 2013. The compensation related to the three plans in 2010 was $2.2 million and resulted in a liability of $2.2 million at December 31, 2010.

2010 ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.

Loan Commitments and Related Financial Instruments: Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Earnings Per Share: Earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. The Corporation does not have any potentially dilutive securities. Earnings and dividends per share are restated for stock splits and dividends through the date of issue of the financial statements.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in the funded status of the retirement plans, which are also recognized as separate components of equity.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount of range of loss can be reasonably estimated. Management does not believe there are currently such matters that will have a material effect on the financial statements.

Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect the estimates.

Operating Segment: While the Corporation’s chief decision-makers monitor the revenue streams of the various products and services, the operating results of significant segments are similar and operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all of the Corporation’s financial service operations are considered by management to be aggregated in one reportable operating segment, which is banking.

Adoption of New Accounting Standards: In April 2009, the FASB issued Staff Position No. 115-2 and No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (ASC 320-10), which amended existing guidance for determining whether impairment is other-than-temporary for debt securities. The requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the income statement. The credit loss is determined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary impairments for debt and equity securities were expanded. ASC 320-10 was effective for interim and annual reporting periods ending June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. At adoption, the Corporation reversed $3.3 million (net of tax) of previously recognized impairment charges, representing the non-credit portion.

In April 2009, the FASB issued Staff Position (FSP) No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (ASC 820-10). This FSP emphasizes that the objective of a fair value measurement does not change even when market activity for the asset or liability has decreased significantly. Fair value is the price that would be received for an asset sold or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. When observable transactions or quoted prices are not considered orderly, then little, if any, weight should be assigned to the indication of the asset or liability’s fair value. Adjustments to those transactions or prices would be needed to determine the appropriate fair value. The FSP, which was applied prospectively, was effective for interim and annual reporting periods ending after June 15, 2009 with early adoption for periods ending after March 15, 2009. The effect of adopting this new guidance was not material.

FIRST FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. FAIR VALUES OF FINANCIAL INSTRUMENTS:

Accounting guidance establishes a fair value hierarchy which requires an entity 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 1 prices such as such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair value of securities available-for-sale is determined by obtaining quoted prices on 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 and certain equity securities, which are priced using Level 3 due to current market illiquidity. The fair value of trust preferred securities is computed based upon discounted cash flows estimated using payment, default and recovery assumptions. Cash flows are discounted at appropriate market rates, including consideration of credit spreads and illiquidity discounts. The fair value of equity securities is derived through consideration of trading activity, if any, review of financial statements, industry trends and the valuation of comparative issuers. Due to current market conditions, as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs).

		December 31, 2010
		Fair Value Measurment Using
(Dollar amounts in thousands)		Level 1				Level 2				Level 3				Carrying Value
U.S. Government entity mortgage-backed securities		$	—			$	2,073			$	—			$	2,073
Mortgage-backed securities, residential			—				302,423				—				302,423
Mortgage-backed securities, commercial			—				139				—				139
Collateralized mortgage obligations			—				94,457				—				94,457
State and municipal obligations			—				157,540				—				157,540
Collateralized debt obligations			—				—				2,190				2,190
Corporate debt securities			—				—				—				—
Equity Securities			506				—				1,518				2,024
TOTAL		$	506			$	556,632			$	3,708			$	560,846
Derivative Assets						$	1,311
Derivative Liabilities							(1,311	)

		December 31, 2009
		Fair Value Measurment Using
(Dollar amounts in thousands)		Level 1				Level 2				Level 3				Carrying Value
U.S. Government entity mortgage-backed securities		$	—			$	4,148			$	—			$	4,148
Mortgage-backed securities, residential			—				300,184				—				300,184
Mortgage-backed securities, commercial			—				168				—				168
Collateralized mortgage obligations			—				119,564				—				119,564
State and municipal obligations			—				148,733				—				148,733
Collateralized debt obligations			—				—				1,416				1,416
Corporate debt securities			—				7,072				—				7,072
Equity Securities			2,600				—				3,361				5,961
TOTAL		$	2,600			$	579,869			$	4,777			$	587,246
Derivative Assets						$	889
Derivative Liabilities							(889	)

2010 ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 twelve months ended December 31, 2010 and 2009.

		Fair Value Measurments
		Using Significant
		Unobservable Inputs (Level 3)
		2010				2009
Beginning balance, January 1		$	4,777			$	7,994
Total realized/unrealized gains or losses
Included in earnings			(4,260	)			(10,769	)
Included in other comprehensive income			3,872				7,651
Settlements			(681	)			(99	)
Ending balance, December 31		$	3,708			$	4,777

Change in unrealized gains and losses recorded in earnings for the year ended December 31, 2010 for Level 3 assets that are still held at December 31, 2010 was related to fair value declines recorded as other-than-temporary impairment. Impaired loans disclosed in footnote 7, which are measured for impairment using the fair value of collateral, are valued at Level 3. They are carried at a fair value of $31.6 million, net of a valuation allowance of $5.9 million at December 31, 2010 and at a fair value of $19.3 million, net of a valuation allowance of $5.4 million at December 31, 2009. The impact to the provision for loan losses for the twelve months ended December 31, 2010 and December 31, 2009 was $750 thousand and $1.7 million, respectively. Fair value is measured based on the value of the collateral securing those loans and is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified 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. Other real estate owned at December 31, 2010 with a value of $6.3 million was reduced $353 thousand for fair value adjustment. At December 31, 2010 other real estate owned was comprised of $3.3 million from commercial loans and $3.0 million from residential loans. Other real estate owned at December 31, 2009 with a value of $5.9 million was reduced $164 thousand for fair value adjustment.

The following table presents loans identified as impaired by class of loans as of December 31, 2020.

						Allowance
		Unpaid				for Loan
		Principal				Losses
(Dollar amounts in thousands)		Balance				Allocated				Fair Value
Commercial
Commercial & Industrial		$	19,868			$	1,508			$	18,360
Farmland			—								—
Non Farm, Non Residential			12,397				3,255				9,142
Agriculture			—
All Other Commercial			1,577				128				1,449
Residential
First Liens			1,910				533				1,377
Home Equity			—								—
Junior Liens			1,129				443				686
Multifamily			638								638
All Other Residential			—								—
Consumer
Motor Vehicle			—								—
All Other Consumer			—								—
TOTAL		$	37,519			$	5,867			$	31,652

FIRST FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The carrying amounts and estimated fair values of financial instruments are shown below. Carrying amount is the estimated fair value for cash and due from banks, federal funds sold, accrued interest receivable and payable, demand deposits, short-term and certain other borrowings, and variable-rate loans or deposits that reprice frequently and fully. Security fair values are determined as previously described. It is not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on their transferability. For the FDIC indemnification asset the carrying value is the estimated fair value as it represents amounts to be received from the FDIC in the near term. For fixed-rate loans or deposits, variable rate loans or deposits with infrequent repricing or repricing limits, and for longer-term borrowings, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is not considered material.

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

		December 31,
		2010								2009
		Carrying				Fair				Carrying				Fair
(Dollar amounts in thousands)		Value				Value				Value				Value
Cash and due from banks		$	58,511			$	58,511			$	84,371			$	84,371
Federal funds sold			5,104				5,104				21,576				21,576
Securities available-for-sale			560,846				560,846				587,246				587,246
Federal Home Loan Bank stock			23,654				N/A				26,181				N/A
Loans, net			1,617,810				1,607,895				1,612,327				1,604,412
FDIC Indemnification Asset			3,977				3,977				12,124				12,124
Accrued interest receivable			11,208				11,208				12,005				12,005
Deposits			(1,903,043	)			(1,909,874	)			(1,789,701	)			(1,798,059	)
Short-term borrowings			(34,106	)			(34,106	)			(30,436	)			(30,436	)
Federal Home Loan Bank advances			(125,793	)			(128,881	)			(326,137	)			(337,847	)
Other borrowings			—				—				(6,600	)			(6,600	)
Accrued interest payable			(2,041	)			(2,041	)			(3,127	)			(3,127	)

3. RESTRICTIONS ON CASH AND DUE FROM BANKS:

Certain affiliate banks are required to maintain average reserve balances with the Federal Reserve Bank that do not earn interest. The amount of those reserve balances was approximately $9.1 million and $8.2 million at December 31, 2010 and 2009, respectively.

4. SECURITIES:

The fair value of securities available-for-sale and related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

		December 31, 2010
		Amortized				Unrealized
(Dollar amounts in thousands)		Cost				Gains				Losses				Fair Value
U.S. Government entity mortgage-backed securities		$	2,027			$	46			$	—			$	2,073
Mortgage-backed securities, residential			289,962				13,166				(705	)			302,423
Mortgage-backed securities, commercial			136				3				—				139
Collateralized mortgage obligations			92,803				2,248				(594	)			94,457
State and municipal obligations			152,633				5,318				(411	)			157,540
Collateralized debt obligations			15,084				—				(12,894	)			2,190
Equity Securities			1,729				295				—				2,024
TOTAL		$	554,374			$	21,076			$	(14,604	)		$	560,846

2010 ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		December 31, 2009
		Amortized				Unrealized
(Dollar amounts in thousands)		Cost				Gains				Losses				Fair Value
U.S. Government entity mortgage-backed securities		$	4,103			$	45			$	—			$	4,148
Mortgage-backed securities, residential			285,964				14,260				(40	)			300,184
Mortgage-backed securities, commercial			162				6				—				168
Collateralized mortgage obligations			116,330				3,334				(100	)			119,564
State and municipal obligations			143,039				5,926				(232	)			148,733
Collateralized debt obligations			19,253				—				(17,837	)			1,416
Corporate debt securities			7,004				257				(189	)			7,072
Equity Securities			5,668				1,462				(1,169	)			5,961
TOTAL		$	581,523			$	25,290			$	(19,567	)		$	587,246

As of December 31, 2010, the Corporation does not have any securities from any issuer, other than the U.S. Government, with an aggregate book or fair value that exceeds ten percent of shareholders’ equity.

Securities with a carrying value of approximately $227.3 million and $200.8 million at December 31, 2010 and 2009, respectively, were pledged as collateral for short-term borrowings and for other purposes.

Below is a summary of the gross gains and losses realized by the Corporation on investment sales during the years ended December 31, 2010, 2009 and 2008, respectively.

(Dollar amounts in thousands)		2010				2009				2008
Proceeds		$	12,248			$	—			$	1,063
Gross gains			1,507				—				353
Gross losses			(213	)			—				—

Additional gains of $27 thousand in 2010, $4 thousand in 2009 and $5 thousand in 2008 resulted from redemption premiums on called securities.

Contractual maturities of debt securities at year-end 2010 were as follows. Securities not due at a single maturity or with no maturity date, primarily mortgage-backed and equity securities, are shown separately.

		Available-for-Sale
		Amortized				Fair
(Dollar amounts in thousands)		Cost				Value
Due in one year or less		$	10,243			$	10,437
Due after one but within five years			35,651				37,517
Due after five but within ten years			45,636				47,695
Due after ten years			171,017				160,611
			262,547				256,260
Mortgage-backed securities and equities			291,827				304,586
TOTAL		$	554,374			$	560,846

FIRST FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables show the securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2010 and 2009.

		December 31, 2010
		Less Than 12 Months								More Than 12 Months								Total
						Unrealized								Unrealized								Unrealized
(Dollar amounts in thousands)		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Mortgage-backed securities, residential		$	35,024			$	(705	)		$	—			$	—			$	35,024			$	(705	)
Collateralized mortgage obligations			25,338				(594	)			—				—				25,338				(594	)
State and municipal obligations			19,372				(411	)			—				—				19,372				(411	)
Collateralized debt obligations			—				—				2,190				(12,894	)			2,190				(12,894	)
Total temporarily impaired securities		$	79,734			$	(1,710	)		$	2,190			$	(12,894	)		$	81,924			$	(14,604	)

		December 31, 2009
		Less Than 12 Months								More Than 12 Months								Total
						Unrealized								Unrealized								Unrealized
(Dollar amounts in thousands)		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Mortgage-backed securities, residential		$	6,985			$	(38	)		$	47			$	(2	)		$	7,032			$	(40	)
Collateralized mortgage obligations			6,094				(100	)			—				—				6,094				(100	)
State and municipal obligations			6,594				(45	)			4,841				(187	)			11,435				(232	)
Collateralized debt obligations			—				—				1,416				(17,837	)			1,416				(17,837	)
Corporate debt securities			—				—				811				(189	)			811				(189	)
Equity securities			543				(280	)			1,150				(889	)			1,693				(1,169	)
Total temporarily impaired securities		$	20,216			$	(463	)		$	8,265			$	(19,104	)		$	28,481			$	(19,567	)

The Corporation held 697 investment securities with an amortized cost greater than fair value as of December 31, 2010. The unrealized losses on mortgage-backed and state and municipal obligations represent negative adjustments to market value relative to the rate of interest paid on the securities and not losses related to the creditworthiness of the issuer. Management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery. Management believes the value will recover as the securities approach maturity or market rates change.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model.

Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC 320, Investments—Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets.

In determining OTTI under the FASB ASC-320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. The assessment of whether 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 purchase beneficial interests that, on the purchase date, were rated below AA. Under the FASB ASC-325 model, the Corporation compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected 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.

2010 ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Gross unrealized losses on investment securities were $14.6 million as of December 31, 2010 and $19.6 million as of December 31, 2009. A majority of these losses represent negative adjustments to fair value relative to the illiquidity in the markets on the securities and not losses related to the creditworthiness of the issuer.

A significant portion of the total unrealized losses relates to collateralized debt obligations that were separately evaluated under FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets. Based upon qualitative considerations, such as a downgrade in credit rating or further defaults of underlying issuers during the year, and an analysis of expected cash flows, we determined that four CDOs included in collateralized debt obligations were other-than-temporarily impaired. Those four CDO’s have a contractual balance of $28.3 million at December 31, 2010 which has been reduced to $0.7 million by $0.3 million of interest payments received, $15.1 million of cumulative OTTI charges recorded through earnings to date, including $3.7 million recorded in 2010 and $12.2 million recorded in other comprehensive income. The severity of the OTTI recorded varies by security, based on the analysis described below, and ranges, at December 31, 2010 from 28% to 87%. The OTTI recorded in other comprehensive income represents OTTI due to factors other than credit loss, mainly current market illiquidity. These securities are collateralized by trust preferred securities issued primarily by bank holding companies, but certain pools do include a limited number of insurance companies. The market for these securities has become very illiquid, there are very few new issuances of trust preferred securities and the credit spreads implied by current prices have increased dramatically and remain very high, resulting in significant non-credit related impairment. The Corporation uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine if there are adverse changes in cash flows during the year. The OTTI model considers the 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 Corporation’s note class.

Collateralized debt obligations include one additional investment in a CDO consisting of pooled trust preferred securties in which the issuers are primarily banks. This CDO, with an amortized cost of $2.2 million and a fair value of $1.5 million, is currently rated BAA3 and is the senior tranche, is not in the scope of FASB ASC 325 as it was rated high investment grade at purchase, and is not considered to be other-than-temporarily impaired based on its credit quality. Its fair value is negatively impacted by the factors described above.

Management has consistently used Standard & Poors pricing to value these investments. There are a number of other pricing sources available to determine fair value for these investments. These sources utilize a variety of methods to determine fair value. The result is a wide range of estimates of fair value for these securities. The Standard & Poors pricing ranges from 1.38 to 3.49 while Moody’s Investor Service pricing ranges from 1.30 to 24.56, with others falling somewhere in between. We recognize that the Standard & Poors pricing utilized is likely a conservative estimate, but have been consistent in using this source and its estimate of fair value.

Unrealized losses on equity securities at year end 2009 relate to investments in bank stocks held at the holding company. Bank stock values have been negatively impacted by the current economic environment and market pessimism. In 2009 the largest part of this unrealized loss ($753 or 64%) relates to the Corporation’s ownership of stock in Fifth Third Corporation. In 2010 the holdings of this issuer were liquidated along with a majority of the equity holdings in order to retire debt. $549 thousand of OTTI was recognized on the stock of Fifth Third Corporation prior to its disposal.

The table below presents a rollforward of the credit losses recognized in earnings for the year ended December 31, 2010:

(Dollar amounts in thousands)		2010				2009
Beginning balance, January 1,		$	11,359			$	6,145
Amounts related to credit loss for which other-than-temporary impairment was not previously recognized			(549	)			5,438
Amounts realized for securities sold during the period			—				—
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 impairment was previously recognized			4,260				5,331
Adoption of new accounting guidance on OTTI			—				(5,555	)
Ending balance, December 31,		$	15,070			$	11,359

FIRST FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. LOANS:

Loans are summarized as follows:

		December 31,
(Dollar amounts in thousands)		2010				2009
Commercial		$	896,107			$	870,977
Residential			437,576				447,379
Consumer			307,403				314,561
Total gross loans			1,641,086				1,632,917
Less: unearned income			(940	)			(1,153	)
Allowance for loan losses			(22,336	)			(19,437	)
TOTAL		$	1,617,810			$	1,612,327

Loans in the above summary include loans totaling $46.4 million that are subject to the FDIC loss share arrangement (“covered loans”) discussed in footnote 6.

The Corporation periodically sells residential mortgage loans it originates based on the overall loan demand of the Corporation and the outstanding balances in the residential mortgage portfolio. At December 31, 2010 and 2009, loans held for sale included $3.4 million and $3.3 million, respectively, and are included in the totals above.

In the normal course of business, the Corporation’s subsidiary banks make loans to directors and executive officers and to their associates. In 2010, the aggregate dollar amount of these loans to directors and executive officers who held office amounted to $42.0 million at the beginning of the year. During 2010, advances of $10.5 million, repayments of $15.3 million and increases of $0.2 million resulting from changes in personnel were made with respect to related party loans for an aggregate dollar amount outstanding of $37.4 million at December 31, 2010.

Loans serviced for others, which are not reported as assets, total $469.3 million and $460.3 million at year-end 2010 and 2009. Custodial escrow balances maintained in connection with serviced loans were $1.93 million and $1.47 million at year-end 2010 and 2009.

Activity for capitalized mortgage servicing rights (included in other assets) was as follows:

		December 31,
(Dollar amounts in thousands)		2010				2009				2008
Servicing rights:
Beginning of year		$	2,034			$	1,604			$	1,909
Additions			810				1,294				332
Amortized to expense			(764	)			(864	)			(637	)
End of year		$	2,080			$	2,034			$	1,604

Third party valuations are conducted periodically for mortgage servicing rights. Based on these valuations, fair values were approximately $3.4 million and $3.0 million at year end 2010 and 2009. There was no valuation allowance in 2010 or 2009.

Fair value for 2010 was determined using a discount rate of 9%, prepayment speeds ranging from 160% to 700%, depending on the stratification of the specific right. Fair value at year end 2009 was determined using a discount rate of 9%, prepayment speeds ranging from 213% to 700%, depending on the stratification of the specific right. Mortgage servicing rights are amortized over 8 years, the expected life of the sold loans.

6. ACQUISITION AND FDIC INDEMNIFICATION ASSET:

On July 2, 2009, the Bank entered into a purchase and assumption agreement with 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 worth 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 of 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. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded. The transaction resulted in a gain of $5,1 million, which is included in non-interest income in the December 31, 2009 Consolidated Statement of Operations Under the loss-sharing agreement (“LSA”), the Bank will share in the losses on assets covered under the agreement (referred to as covered assets). On losses up to $29 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 95 percent of the losses. The loss-sharing agreement is subject to following servicing procedures as specified in the agreement with the FDIC. Loans acquired that are subject to the loss-sharing agreement with the FDIC are referred to as covered loans for disclosure purposes. Since the acquisition date the Bank has been reimbursed $13.1 million for losses and carrying expenses and currently carries a balance of $4.0 million. Included in the current balance is the estimate of $1.7 million for 80% of the loans subject to the loss-sharing agreement identified in the allowance for loan loss evaluation as future potential losses. This $1.7 million flows to the income statement as a reduction of the provision for loan losses that was allocated to these loans.

2010 ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 310-30 prohibits carrying over or creating an allowance for loan losses upon initial recognition. The carrying amount of covered assets at December 31, 2010 and 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:

						Non ASC
		ASC 310-30				310-30								2010
(Dollar amounts in thousands)		Loans				Loans				Other				Total
Loans		$	10,948			$	35,485			$	—			$	46,433
Foreclosed Assets			—				—				2,586				2,586
Total Covered Assets		$	10,948			$	35,485			$	2,586			$	49,019