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Section 1: 10-K (FORM 10-K)

Form 10-K
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-16759
FIRST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
     
INDIANA   35-1546989
(State of Incorporation)   (I.R.S. Employer Identification Number)
 
   
One First Financial Plaza    
Terre Haute, Indiana   47807
(Address of Registrant’s Principal Executive Offices)   (Zip Code)
(812) 238-6000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of Exchange on Which Registered
     
Common Stock, no par value   The NASDAQ Stock Market LLC
    (NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known-seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 shorter 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 þ No o
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act of 1934.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
As of June 30, 2010 the aggregate market value of the voting stock held by non-affiliates of the registrant based on the average bid and ask prices of such stock was $336,487,226. (For purposes of this calculation, the Corporation excluded the stock owned by certain beneficial owners and management and the Corporation’s Employee Stock Ownership Plan.)
Shares of Common Stock outstanding as of March 12, 2011—13,151,630 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2010 Annual Report to Shareholders are incorporated by reference into Parts I and II. Portions of the Definitive Proxy Statement for the First Financial Corporation Annual Meeting of Shareholders to be held April 20, 2011 are incorporated by reference into Part III.
 
 

 

 


 

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 Exhibit 10.1
 Exhibit 10.3
 Exhibit 10.4
 Exhibit 10.8
 Exhibit 10.9
 Exhibit 10.10
 Exhibit 13
 Exhibit 21
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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PART I
ITEM 1. BUSINESS
First Financial Corporation (the “Corporation”) is a financial holding company. The Corporation was originally organized as an Indiana corporation in 1984 to operate as a bank holding company. For more information on the Corporation’s business, please refer to the following sections of the 2010 Annual Report to Shareholders, which are incorporated by reference into this Form 10-K:
  1.  
The first 4 paragraphs of Management’s Discussion and Analysis on page 45.
 
  2.  
The first 5 paragraphs of Note 1 to the Consolidated Financial Statements on page 14.
Regulation and supervision
The Corporation and the Bank operate in highly regulated environments and are subject to supervision and regulation by several governmental regulatory agencies, including the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation (the “FDIC”). The laws and regulations established by these agencies are generally intended to protect depositors, not shareholders. Changes in applicable laws, regulations, governmental policies, income tax laws and accounting principles may have a material effect on the Corporation’s business and prospects. The following summary is qualified by reference to the statutory and regulatory provisions discussed.
Recent Developments
The Dodd-Frank Act. On July 21, 2010, financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act will likely result in dramatic changes across the financial regulatory system, some of which became effective immediately and some of which will not become effective until various future dates. Implementation of the Dodd-Frank Act will require many new rules to be issued by various federal regulatory agencies over the next several years. There will be a significant amount of uncertainty regarding the overall impact of this new law on the financial services industry until final rulemaking is complete. The ultimate impact of this law could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, and financial condition. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate. The Dodd-Frank Act also includes provisions that, among other things, will:
   
Centralize responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, responsible for implementing, examining, and enforcing compliance with federal consumer financial laws.
   
Create the Financial Stability Oversight Council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management, and other requirements as companies grow in size and complexity.
   
Require the OCC to seek to make its capital requirements for national banks, such as the Bank, countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.
   
Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks, such as the Bank, from availing themselves of such preemption.
   
Provide mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans and new disclosures. In addition, certain compensation for mortgage brokers based on certain loan terms will be restricted.

 

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Require financial institutions to make a reasonable and good faith determination that borrowers have the ability to repay loans for which they apply. If a financial institution fails to make such a determination, a borrower can assert this failure as a defense to foreclosure.
   
Require financial institutions to retain a specified percentage (5% or more) of certain non-traditional mortgage loans and other assets in the event that they seek to securitize such assets.
   
Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increase the floor on the size of the DIF, which generally will require an increase in the level of assessments for institutions with assets in excess of $10 billion.
   
Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for noninterest-bearing demand transaction accounts at all insured depository institutions.
   
Implement corporate governance revisions, including with regard to executive compensation, say on pay votes, proxy access by shareholders, and clawback policies which apply to all public companies, not just financial institutions.
   
Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts.
   
Amend the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.
   
Limit the hedging activities and private equity investments that may be made by various financial institutions.
As noted above, the Dodd-Frank Act requires that the federal regulatory agencies draft many new regulations which will implement the foregoing provisions as well as other provisions contained in the Dodd-Frank Act, the ultimate impact of which will not be known for some time.
S.A.F.E. Act Requirements. On July 28, 2010, the OCC jointly issued final rules with the Federal Reserve, the Office of Thrift Supervision, FDIC, Farm Credit Administration, and National Credit Union Administration which require residential mortgage loan originators who are employees of institutions regulated by the foregoing agencies, including national banks, to meet the registration requirements of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ( the “S.A.F.E. Act” ). The S.A.F.E. Act requires residential mortgage loan originators who are employees of regulated financial institutions to be registered with the Nationwide Mortgage Licensing System and Registry, a database created by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan originators by the states. Employees of regulated financial institutions are generally prohibited from originating residential mortgage loans unless they are registered. According to the final rule, due to various system modifications and enhancements required to make the existing system capable to accept Federal Registrants, the system was not able to accept Federal Registrants until January 31, 2011. The Bank must register its employees before July 31, 2011 to be in compliance with the final rule.

 

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THE CORPORATION
The Bank Holding Company Act. As a financial holding company, the Corporation is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and any additional information that the Federal Reserve may require.
Investments, Control, and Activities. With some limited exceptions, the BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before acquiring another bank holding company or acquiring more than five percent of the voting shares of a bank (unless it already owns or controls the majority of such shares).
The BHC Act restricts the Corporation’s non-banking activities to those which are determined by the Federal Reserve Board to be financial in nature, incidental to such financial activity, or complementary to a financial activity. The BHC Act does not place territorial restrictions on the activities of non-bank subsidiaries of financial holding companies. The Corporation’s banking subsidiaries are subject to limitations with respect to transactions with affiliates.
The Corporation is qualified as a financial holding company and as such is authorized to engage in, or acquire companies engaged in, a broader range of activities than are permitted for a bank holding company that is not qualified as a financial holding company. These activities include those that are determined to be “financial in nature,” including insurance underwriting, securities underwriting and dealing, and making merchant banking investments in commercial and financial companies. If any of our banking subsidiaries ceases to be “well capitalized” or “well managed” under applicable regulatory standards, the Federal Reserve may, among other things, place limitations on our ability to conduct these broader financial activities or, if the deficiencies persist, require us to divest the banking subsidiary. In addition, if any of our banking subsidiaries receives a rating of less than satisfactory under the Community Reinvestment Act of 1977 (“CRA”), we would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. Our banking subsidiaries currently meet these capital, management and CRA requirements.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve, as the regulatory authority for bank holding companies, has adopted capital adequacy guidelines for bank holding companies. Bank holding companies with assets in excess of $500 million must comply with the Federal Reserve’s risk-based capital guidelines which require a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities such as standby letters of credit) of 8%. At least half of the total required capital must be “Tier 1 capital”, consisting principally of common stockholders’ equity, non-cumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interest in the equity accounts of consolidated subsidiaries, less certain goodwill items. The remainder (“Tier 2 capital”) may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, cumulative perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a Tier 1 (leverage) capital ratio under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of 3% in the case of bank holding companies which have the highest regulatory examination ratings and are not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a ratio of at least 1% to 2% above the stated minimum.
Certain regulatory capital ratios for the Corporation as of December 31, 2010, are shown below:
         
Tier 1 Capital to Risk-Weighted Assets
    17.82 %
Total Risk Based Capital to Risk-Weighted Asset
    16.66 %
Tier 1 Leverage Ratio
    12.68 %
Dividends. The Federal Reserve’s policy is that a bank holding company experiencing earnings weakness should not pay cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.

 

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Source of Strength. In accordance with Federal Reserve policy, the Corporation is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which the Corporation might not otherwise do so.
THE BANK
General Regulatory Supervision. The Bank is a national bank organized under the laws of the United States of America and is subject to the supervision of the OCC, whose examiners conduct periodic examinations of national banks. The Bank must undergo regular on-site examinations by the OCC and must submit quarterly and annual reports to the OCC concerning its activities and financial condition.
The deposits of the Bank are insured by the DIF administered by the FDIC and are subject to the FDIC’s rules and regulations respecting the insurance of deposits. See “Deposit Insurance”.
Lending Limits. Under federal law, the total loans and extensions of credit by a national bank to a borrower outstanding at one time and not fully secured may not exceed 15 percent of the bank’s capital and unimpaired surplus. In addition, the total amount of outstanding loans and extensions of credit to any borrower outstanding at one time and fully secured by readily marketable collateral may not exceed 10 percent of the unimpaired capital and unimpaired surplus of the bank (this limitation is separate from and in addition to the above limitation). If a loan is secured by United States obligations, such as treasury bills, it is not subject to the bank’s legal lending limit.
Deposit Insurance. Due to the recent difficult economic conditions in the United States, deposit insurance per account owner was increased from $100,000 to $250,000 through December 31, 2013. The Dodd-Frank Act has now made this change in deposit insurance permanent and, as a result, each account owner’s deposits will be insured up to $250,000 by the FDIC.
In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program (“TLGP”) in October of 2008 by which, for a fee, non-interest bearing transaction accounts received unlimited FDIC insurance coverage through December 31, 2010 and certain senior unsecured debt issued by institutions and their holding companies would be guaranteed by the FDIC through December 31, 2012.
Under the Transaction Account Guarantee Program (“TAGP”), the FDIC provided unlimited deposit insurance coverage initially through December 31, 2009 for non-interest bearing transaction accounts (typically business checking accounts) and certain funds swept into non-interest bearing savings accounts. Institutions that participated in the TAGP paid a 10 basis points fee (annualized) on the balance of each covered account in excess of $250,000, while the additional deposit insurance was in place. The FDIC authorized an extension of the TAGP through December 31, 2010 for institutions participating in the original TAGP, unless an institution opted out of the extension period. During the extension period, fees increased to 15 to 25 basis points depending on an institution’s risk category for deposit insurance purposes. Importantly, the Dodd-Frank Act now provides for unlimited deposit insurance coverage on non-interest bearing transaction accounts, including Interest On Lawyer Trust Accounts but excluding interest-bearing NOW accounts, without an additional fee at insured institutions such as the Bank through December 31, 2012.
The TLGP also included the Debt Guarantee Program (“DGP”), under which the FDIC guarantees certain senior unsecured debt issued by FDIC-insured institutions and their holding companies. Under the DGP, upon a default by an issuer of FDIC-guaranteed debt, the FDIC will continue to make scheduled principal and interest payments on the debt. The unsecured debt must have been issued on or after October 14, 2008 and not later than October 31, 2009, and the guarantee is effective through the earlier of the maturity date (or mandatory conversion date) or December 31, 2012, although the debt may have a maturity date beyond December 31, 2012. Depending on the maturity of the debt, the nonrefundable DGP guarantee fee ranges from 50 to 100 basis points (annualized) for covered debt outstanding until the earlier of maturity or December 31, 2012. The FDIC also established an emergency debt guarantee facility through April 30, 2010 through which institutions that are unable to issue non-guaranteed debt to replace maturing senior unsecured debt because of market disruptions or other circumstances beyond their control may apply on a case-by-case basis to issue FDIC-guaranteed senior unsecured debt. The FDIC guarantee of any debt issued under this emergency facility would be subject to an annualized assessment rate equal to a minimum of 300 basis points. The Dodd-Frank Act also authorizes the FDIC to guarantee debt of solvent institutions and their holding companies in a manner similar to the DGP; however, the FDIC and the Federal Reserve must make a determination that there is a liquidity event that threatens the financial stability of the United States and the United States Department of the Treasury (“Treasury Department”) must approve the terms of the guarantee program.

 

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The Bank’s deposits are insured up to the applicable limits under the DIF. The FDIC maintains the DIF by assessing depository institutions an insurance premium. Pursuant to the Dodd-Frank Act, the FDIC is required to set a DIF reserve ratio of 1.35% of estimated insured deposits and is required to achieve this ratio by September 30, 2020. Also, the Dodd-Frank Act has eliminated the 1.50% ceiling on the reserve ratio and provides that the FDIC is no longer required to refund amounts in the DIF that exceed 1.50% of insured deposits.
Under the FDIC’s risk-based assessment system, insured institutions are required to pay deposit insurance premiums based on the risk that each institution poses to the DIF. An institution’s risk to the DIF is measured by its regulatory capital levels, supervisory evaluations, and certain other factors. An institution’s assessment rate depends upon the risk category to which it is assigned. As noted above, pursuant to the Dodd-Frank Act, the FDIC will calculate an institution’s assessment level based on its total average consolidated assets during the assessment period less average tangible equity (i.e., Tier 1 capital) as opposed to an institution’s deposit level which was the previous basis for calculating insurance assessments. Pursuant to the Dodd-Frank Act, institutions will be placed into one of four risk categories for purposes of determining the institution’s actual assessment rate. The FDIC will determine the risk category based on the institution’s capital position (well capitalized, adequately capitalized, or undercapitalized) and supervisory condition (based on exam reports and related information provided by the institution’s primary federal regulator).
Prior to the passage of the Dodd-Frank Act, assessments for FDIC deposit insurance ranged from 7 to 77 basis points per $100 of assessable deposits. On May 22, 2009, the FDIC imposed a special assessment of five basis points on each institution’s assets minus Tier 1 capital as of June 30, 2009, which was payable to the FDIC on September 30, 2009. The Bank expensed a total of $2.8 million in deposit insurance assessments in 2010. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. Also during 2009, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for FDIC deposit insurance. Collection of the prepayment amount does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments or receive a rebate of prepaid amounts not fully utilized after the collection of assessments due in June 2013. The amount of the Bank’s prepayment was $9.2 million.
In connection with the Dodd-Frank Act’s requirement that insurance assessments be based on assets, the FDIC has recently issued the final rule that provides that assessments be based on an institution’s average consolidated assets (less average tangible equity) as opposed to its deposit level. The FDIC has stated that the new assessment schedule, which will be effective as of April 1, 2011, should result in the collection of assessment revenue that is approximately revenue neutral compared to the current method of calculating assessments. Pursuant to this new rule, the assessment base will be larger than the current assessment base, but the new rates are lower than current rates, ranging from approximately 2.5 basis points to 45 basis points (depending on applicable adjustments for unsecured debt and brokered deposits) until such time as the FDIC’s reserve ratio equals 1.15%. Once the FDIC’s reserve ratio equals or exceeds 1.15%, the applicable assessment rates may range from 1.5 basis points to 40 basis points.
In addition to the FDIC insurance premiums, the Bank is required to make quarterly payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize a predecessor deposit insurance fund.

 

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On January 12, 2010, the FDIC announced that it would seek public comment on whether financial institutions with compensation plans that encourage risky behavior should be charged higher deposit assessment rates than such financial institutions would otherwise be charged.
Transactions with Affiliates and Insiders. Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the Bank is subject to limitations on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates (including the Corporation) and insiders and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. Compliance is also required with certain provisions designed to avoid the taking of low quality assets. The Bank is also prohibited from engaging in certain transactions with certain affiliates and insiders unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
Extensions of credit by the Bank to its executive officers, directors, certain principal shareholders, and their related interests must:
   
be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties; and
   
not involve more than the normal risk of repayment or present other unfavorable features.
The Dodd-Frank Act also included specific changes to the law related to the definition of a “covered transaction” in Sections 23A and 23B and limitations on asset purchases from insiders. With respect to the definition of a “covered transaction,” the Dodd-Frank Act now defines that term to include the acceptance of debt obligations issued by an affiliate as collateral for an institution’s loan or extension of credit to another person or company. In addition, a “derivative transaction” with an affiliate is now deemed to be a “covered transaction” to the extent that such a transaction causes an institution or its subsidiary to have a credit exposure to the affiliate. A separate provision of the Dodd-Frank Act states that an insured depository institution may not “purchase an asset from, or sell an asset to” a bank insider (or their related interests) unless (1) the transaction is conducted on market terms between the parties and (2) if the proposed transaction represents more than 10 percent of the capital stock and surplus of the insured institution, it has been approved in advance by a majority of the institution’s non-interested directors.
Dividends. Under federal law, the Bank may pay dividends from its undivided profits in an amount declared by its Board of Directors, subject to prior approval of the OCC if the proposed dividend, when added to all prior dividends declared during the current calendar year, would be greater than the current year’s net income and retained earnings for the previous two calendar years.
Federal law generally prohibits the Bank from paying a dividend to the Corporation if the Bank would thereafter be undercapitalized. The FDIC may prevent the Bank from paying dividends if the Bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. In addition, the Bank is subject to certain restrictions imposed by the Federal Reserve on extensions of credit to the Corporation, on investments in the stock or other securities of the Corporation, and in taking such stock or securities as collateral for loans.
Community Reinvestment Act. The CRA requires that the OCC evaluate the records of the Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank.
Capital Regulations. The OCC has adopted risk-based capital ratio guidelines to which the Bank is subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk.

 

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These guidelines divide a bank’s capital into two tiers. The first tier (Tier 1) includes common equity, certain non-cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary (Tier 2) capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Banks are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. The OCC may, however, set higher capital requirements when a bank’s particular circumstances warrant. Banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
In addition, the OCC established guidelines prescribing a minimum Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as specified in the guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3% for banks that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other banks are required to maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at least 1% to 2% basis points.
Certain actual regulatory capital ratios under the OCC’s risk-based capital guidelines for the Bank at December 31, 2010, are shown below:
         
Tier 1 Capital to Risk-Weighted Assets
    17.82 %
Total Risk-Based Capital to Risk-Weighted Assets
    16.66 %
Tier 1 Leverage Ratio
    12.68 %
The federal bank regulators, including the OCC, also have issued a joint policy statement to provide guidance on sound practices for managing interest rate risk. The statement sets forth the factors the federal regulatory examiners will use to determine the adequacy of a bank’s capital for interest rate risk. These qualitative factors include the adequacy and effectiveness of the bank’s internal interest rate risk management process and the level of interest rate exposure. Other qualitative factors that will be considered include the size of the bank, the nature and complexity of its activities, the adequacy of its capital and earnings in relation to the bank’s overall risk profile, and its earning exposure to interest rate movements. The interagency supervisory policy statement describes the responsibilities of a bank’s board of directors in implementing a risk management process and the requirements of the bank’s senior management in ensuring the effective management of interest rate risk. Further, the statement specifies the elements that a risk management process must contain.
The OCC has also issued final regulations further revising its risk-based capital standards to include a supervisory framework for measuring market risk. The effect of these regulations is that any bank holding company or bank which has significant exposure to market risk must measure such risk using its own internal model, subject to the requirements contained in the regulations, and must maintain adequate capital to support that exposure. These regulations apply to any bank holding company or bank whose trading activity equals 10% or more of its total assets, or whose trading activity equals $1 billion or more. Examiners may require a bank holding company or bank that does not meet the applicability criteria to comply with the capital requirements if necessary for safety and soundness purposes. These regulations contain supplemental rules to determine qualifying and excess capital, calculate risk-weighted assets, calculate market risk-equivalent assets and calculate risk-based capital ratios adjusted for market risk.
The Bank is also subject to the “prompt corrective action” regulations, promulgated under the Federal Deposit Insurance Corporation Improvement Act of 1991, which implement a capital-based regulatory scheme designed to promote early intervention for troubled banks. This framework contains five categories of compliance with regulatory capital requirements, including “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”. As of December 31, 2010, the Bank was qualified as “well capitalized.” It should be noted that a bank’s capital category is determined solely for the purpose of applying the “prompt corrective action” regulations and that the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects. The degree of regulatory scrutiny of a financial institution increases, and the permissible activities of the institution decrease, as it moves downward through the capital categories. Bank holding companies controlling financial institutions can be required to boost the institutions’ capital and to partially guarantee the institutions’ performance.

 

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USA Patriot Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) is intended to strengthen the ability of U.S. Law Enforcement to combat terrorism on a variety of fronts. The potential impact of the USA Patriot Act on financial institutions is significant and wide-ranging. The USA Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering and currency crimes, customer identification verification, cooperation among financial institutions, suspicious activities and currency transaction reporting.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. Among other requirements, the Sarbanes-Oxley Act established: (i) new requirements for audit committees of public companies, including independence and expertise standards; (ii) additional responsibilities regarding financial statements for the chief executive officers and chief financial officers of reporting companies; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for reporting companies regarding various matters relating to corporate governance, and (v) new and increased civil and criminal penalties for violation of the securities laws.
Troubled Asset Relief Program Initiatives to Address Financial and Economic Crises. The Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3, 2008. EESA gave the Treasury Department broad authority to address the then-current deterioration of the United States economy, to implement certain actions to help restore confidence, stability, and liquidity to United States financial markets, and to encourage financial institutions to increase their lending to clients and to each other. EESA authorized the Treasury Department to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities, and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a Troubled Asset Relief Program (“TARP”). The Treasury Department allocated $250 billion to the voluntary Capital Purchase Program (“CPP”) under TARP. TARP also included direct purchases or guarantees of troubled assets of certain financial institutions by the U.S. Government.
Under the CPP, the Treasury Department was authorized to purchase debt or equity securities from participating financial institutions. In connection therewith, each participating financial institution issued to the Treasury Department a warrant to purchase a certain number of shares of stock of the institution. During such time as the Treasury Department holds securities issued under the CPP, the participating financial institutions are required to comply with the Treasury Department’s standards for executive compensation and corporate governance and will have limited ability to increase the amounts of dividends paid on, or to repurchase, their common stock. The Corporation determined not to participate in the CPP.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the federal economic stimulus or economic recovery package, went into effect. ARRA includes a wide variety of programs intended to stimulate the United States economy and provide for extensive infrastructure, energy, health, and education needs. ARRA also imposes new executive compensation limits and corporate governance requirements on participants in the CPP in addition to those previously announced by the Treasury Department. Because the Corporation elected not to participate in the CPP, these limits and requirements do not apply to the Corporation.

 

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Other Regulations
Federal law extensively regulates other various aspects of the banking business such as reserve requirements. Current federal law also requires banks, among other things to make deposited funds available within specified time periods.
In addition, with certain exceptions, a bank and a subsidiary may not extend credit, lease or sell property or furnish any services or fix or vary the consideration for the foregoing on the condition that (i) the customer must obtain or provide some additional credit, property or services from, or to, any of them, or (ii) the customer may not obtain some other credit, property or service from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of credit extended.
Interest and other charges collected or contracted by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal and state laws applicable to credit transactions, such as the:
   
Truth-In-Lending Act and state consumer protection laws governing disclosures of credit terms and prohibiting certain practices with regard to consumer borrowers;
   
Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
   
Equal Credit Opportunity Act and other fair lending laws, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
   
Fair Credit Reporting Act of 1978 and Fair and Accurate Credit Transactions Act of 2003, governing the use and provision of information to credit reporting agencies;
   
Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies; and rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The deposit operations of the Bank also are subject to the:
   
Customer Information Security Guidelines. The federal bank regulatory agencies have adopted final guidelines (the “Guidelines”) for safeguarding confidential customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors, to create a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information; protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer; and implement response programs for security breaches.
   
Electronic Funds Transfer Act and Regulation E. The Electronic Funds Transfer Act, which is implemented by Regulation E, governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking service.
   
Gramm-Leach-Bliley Act, Fair and Accurate Credit Transactions Act. The Gramm-Leach-Bliley Act, the Fair and Accurate Credit Transactions Act, and the implementing regulations govern consumer financial privacy, provide disclosure requirements and restrict the sharing of certain consumer financial information with other parties.
The federal banking agencies have established guidelines which prescribe standards for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation fees and benefits, and management compensation. The agencies may require an institution which fails to meet the standards set forth in the guidelines to submit a compliance plan. Failure to submit an acceptable plan or adhere to an accepted plan may be grounds for further enforcement action.
As noted above, the new Bureau of Consumer Financial Protection will have authority for amending existing consumer compliance regulations and implementing new such regulations. In addition, the Bureau will have the power to examine the compliance of financial institutions with an excess of $10 billion in assets with these consumer protection rules. The Bank’s compliance with consumer protection rules will be examined by the OCC since the Bank does not meet this $10 billion asset level threshold.

 

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Enforcement Powers. Federal regulatory agencies may assess civil and criminal penalties against depository institutions and certain “institution-affiliated parties”, including management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs.
In addition, regulators may commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, regulators may issue cease-and-desist orders to, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the regulator to be appropriate.
Effect of Governmental Monetary Policies. The Corporation’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.
Available Information
The Corporation files annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be read and copied at the public reference facilities maintained by the Securities and Exchange Commission at the Public Reference Room, 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains reports, proxy statements, and other information. The Corporation’s filings are also accessible at no cost on the Corporation’s website at www.first-online.com.
ITEM 1A. RISK FACTORS
Difficult Conditions In The Capital Markets And The Economy Generally May Materially Adversely Affect Our Business And Results Of Operations.
Our results of operations are materially affected by conditions in the capital markets and the economy generally. The capital and credit markets have been experiencing extreme volatility and disruption for more than two years at unprecedented levels. In many cases, these markets have produced downward pressure on stock prices of, and credit availability to, certain companies without regard to those companies’ underlying financial strength.
Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining U.S. real estate market have contributed to increased volatility and diminished expectations for the economy and the capital and credit markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and national recession. In addition, the fixed-income markets are experiencing a period of extreme volatility which has negatively impacted market liquidity conditions. Initially, the concerns on the part of market participants were focused on the subprime segment of the mortgage-backed securities market. However, these concerns have since expanded to include a broad range of mortgage-and asset-backed and other fixed income securities, including those rated investment grade, the U.S. and international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes and sectors.

 

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Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial products could be adversely affected. Adverse changes in the economy could affect earnings negatively and could have a material adverse effect on our business, results of operations and financial condition.
The Soundness Of Other Financial Institutions Could Adversely Affect Us.
The ability of the Corporation to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led the market-wide liquidity problems and could lead to losses or defaults by the Corporation or by other institutions. Many of these transactions expose the Corporation to credit risk in the event of default of the Corporation’s counterparty or client. In addition, the Corporation’s credit risk may be adversely impacted when the collateral held by the Corporation cannot be realized upon or its liquidated price is not sufficient to recover the full amount of the financial instrument exposure. There is no assurance that any such losses would not materially and adversely affect the Corporation’s results of operations.
There Can Be No Assurance That Legislation Enacted To Help Stabilize The U.S. Financial System Will Be Effective In Doing So.
EESA was signed into law in 2008 in response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions. Pursuant to EESA, the Treasury Department was granted the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The Treasury Department announced the Capital Purchase Program under the EESA pursuant to which it has purchased and will continue to purchase senior preferred stock in participating financial institutions. The Corporation elected not to participate in the Capital Purchase Program.
On February 17, 2009, ARRA was signed into law. The purpose of ARRA is to make supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and state and local fiscal stabilization.
On July 21, 2010, the Dodd-Frank Act was signed into law. The purpose of the Dodd-Frank Act is to promote the financial stability of the United States by improving accountability and transparency in the financial system, to protect consumers from abusive financial services practices, and for other purposes. The provisions of the Dodd-Frank Act that are most likely to affect the Corporation are described elsewhere in this report.
There can be no assurance as to the actual impact that these legislative initiatives will have on the financial markets or on the Corporation. The failure of these programs to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect the Corporation’s business, financial condition, results of operations, access to credit or the trading price of the Corporation’s common stock.
We May Be Required To Pay Significantly Higher FDIC Premiums Or Special Assessments That Could Adversely Affect Our Earnings.
Market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. As a result, depository institutions participating in the insurance fund, including the Bank, may be required to pay significantly higher premiums or additional special assessments that could adversely affect our earnings. It is possible that the FDIC may impose additional special assessments in the future as part of its restoration plan.

 

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Future Growth Or Operating Results May Require The Corporation To Raise Additional Capital But That Capital May Not Be Available Or It May Be Dilutive.
The Corporation is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. To the extent the Corporation’s future operating results erode capital or the Corporation elects to expand through loan growth or acquisition it may be required to raise capital. The Corporation’s ability to raise capital will depend on conditions in the capital markets, which are outside of its control, and on the Corporation’s financial performance. Accordingly, the Corporation cannot be assured of its ability to raise capital when needed or on favorable terms. If the Corporation cannot raise additional capital when needed, it will be subject to increased regulatory supervision and the imposition of restrictions on its growth and business. These could negatively impact the Corporation’s ability to operate or further expand its operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on its financial condition and results of operations.
We May Not Be Able To Pay Dividends In The Future In Accordance With Past Practice.
The Corporation has traditionally paid a semi-annual dividend to common stockholders. The payment of dividends is subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on the Corporation’s earnings, capital requirements, financial condition and other factors considered relevant by the Corporation’s Board of Directors.
The Price Of The Corporation’s Common Stock May Be Volatile, Which May Result In Losses For Investors.
General market price declines or market volatility in the future could adversely affect the price of the Corporation’s common stock. In addition, the following factors may cause the market price for shares of the Corporation’s common stock to fluctuate:
   
announcements of developments related to the Corporation’s business;
   
fluctuations in the Corporation’s results of operations;
   
sales or purchases of substantial amounts of the Corporation’s securities in the marketplace;
   
general conditions in the Corporation’s banking niche or the worldwide economy;
   
a shortfall or excess in revenues or earnings compared to securities analysts’ expectations;
   
changes in analysts’ recommendations or projections; and
   
the Corporation’s announcement of new acquisitions or other projects.
The Corporation Is Subject To Interest Rate Risk.
Interest and fees on loans and securities, net of interest paid on deposits and borrowings, are a large part of the Corporation’s net income. Interest rates are key drivers of the Corporation’s net interest margin and subject to many factors beyond the control of management. As interest rates change, net interest income is affected. Rapid increases in interest rates in the future could result in interest expense increasing faster than interest income because of mismatches in financial instrument maturities. Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth. Decreases or increases in interest rates could have a negative effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore decrease net interest income.

 

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The Corporation Is Subject To Lending Risk.
There are inherent risks associated with the Corporation’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Corporation operates as well as those across Indiana, Illinois and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Corporation is also subject to various laws and regulations that affect its lending activities. Failure to comply with the applicable laws and regulations could subject the Corporation to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Corporation.
The Corporation’s Allowance for Possible Loan Losses May Be Insufficient.
The Corporation maintains an allowance for possible loan losses, which is a reserve established through a provision for possible loan losses charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for possible loan losses inherently involves a high degree of subjectivity and requires the Corporation to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Corporation’s control, may require an increase in the allowance for possible loan losses. In addition, bank regulatory agencies periodically review the Corporation’s allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for possible loan losses; the Corporation will need additional provisions to increase the allowance for possible loan losses. Any increase in the allowance for possible loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Corporation’s financial condition and results of operations.
If The Corporations Forecloses On Collateral Property, It May Be Subject To The Increased Costs Associated With Ownership Of Real Property, Resulting In Reduced Revenues And Earnings.
The Corporation may have to foreclose on collateral property to protect its investment and may thereafter own and operate such property, in which case it will be exposed to the risks inherent in the ownership of real estate. The amount that the Corporation as a mortgagee, may realize after a default is dependent upon factors outside of its control, including, but not limited to: (i) general or local economic conditions; (ii) neighborhood values; (iii) interest rates; (iv) real estate tax rates; (v) operating expenses of the mortgaged properties; (vi) environmental remediation liabilities; (vii) ability to obtain and maintain adequate occupancy of the properties; (viii) zoning laws; (ix) governmental rules, regulations and fiscal policies; and (x) acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes, insurance, and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the income earned from such property, and the Corporation may have to advance funds in order to protect its investment, or it may be required to dispose of the real property at a loss. These expenditures and costs could adversely affect the Corporation’s ability to generate revenues, resulting in reduced levels of profitability.
The Corporation Operates In a Highly Competitive Industry and Market Area.
The Corporation faces substantial competition in all areas of its operations from a variety of different competitors. Such competitors include banks and many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Corporation’s competitors have fewer regulatory constraints and may have lower cost structures.

 

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The Corporation’s ability to compete successfully depends on a number of factors, including, among other things:
   
The ability to develop, maintain and build upon long-term customer relationships based on top quality service, and safe, sound assets.
 
   
The ability to expand the Corporation’s market position.
 
   
The scope, relevance and pricing of products and services offered to meet customer needs and demands.
 
   
The rate at which the Corporation introduces new products and services relative to its competitors.
 
   
Customer satisfaction with the Corporation’s level of service.
 
   
Industry and general economic trends.
Failure to perform in any of these areas could significantly weaken the Corporation’s competitive position, which could adversely affect the Corporation’s growth and profitability, which, in turn, could have a material adverse effect on the corporation’s financial condition and results of operations.
We Operate In A Highly Regulated Industry And May Be Affected Adversely By Increased Regulatory Supervision And Scrutiny And Changes In Laws, Rules, And Regulations Affecting Financial Institutions.
The Bank, like other national banks, is currently subject to extensive regulation, supervision, and examination by the OCC and by the FDIC, the insurer of its deposits. The Corporation, like other financial holding companies, is currently subject to regulation and supervision by the Federal Reserve. This regulation and supervision governs the activities in which we may engage and are intended primarily for the protection of the deposit insurance fund administered by the FDIC and our clients and depositors rather than our shareholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets, determination of the level of our allowance for loan losses, and maintenance of adequate capital levels. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law and, given the recent financial crisis in the United States, the trend has been toward increased and more active oversight by regulators. Recently, pursuant to an agreement among various federal financial institution regulators, the FDIC’s authority to investigate banks was significantly expanded. Under the terms of this new agreement, the FDIC will have unlimited authority to make a special examination of any insured depository institution as necessary to determine the condition of such depository institution for insurance purposes. Accordingly, we expect an active supervisory and regulatory environment to continue.
In addition, as a result of ongoing challenges facing the United States economy, new laws and regulations regarding lending and funding practices and liquidity standards have been and may continue to be promulgated, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the issuance of formal or informal enforcement actions or orders. Accordingly, the regulations applicable to the banking industry continue to change and we cannot predict the effects of these changes on our business and profitability.
On July 21, 2010, the Dodd-Frank Act, a sweeping financial reform bill, was signed into law and will result in a number of new regulations that could significantly impact regulatory compliance costs and the operations of community banks. The Dodd-Frank Act includes, among other things, provisions establishing a Bureau of Consumer Financial Protection, which will have broad authority to develop and implement rules regarding most consumer financial products; provisions affecting corporate governance and executive compensation at all publicly-traded companies; provisions that would broaden the base for FDIC insurance assessments and permanently increase FDIC deposit insurance to $250,000; and new restrictions on how mortgage brokers and loan originators may be compensated. These provisions, or any other aspects of current proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities or change certain of our business practices, including our ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to our operations in order to comply, and could therefore also materially adversely affect our business, financial condition, and results of operations.

 

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In addition, like all U.S. companies who prepare their financial statements in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP” ), we are subject to changes in accounting rules and interpretations. We cannot predict what effect any presently contemplated or future changes in financial market regulation or accounting rules and interpretations will have on us. Any such changes may negatively affect our financial performance, our ability to expand our products and services, and our ability to increase the value of our business and, as a result, could be materially adverse to our shareholders. In addition, like other federally insured depository institutions, the Corporation and Bank prepare and publicly report additional financial information under Regulatory Accounting Principles and are similarly subject to changes in these rules and interpretations.
The Corporation’s Controls and Procedures May Fail or Be Circumvented.
Management regularly reviews and updates the Corporation’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Corporation’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation’s business, results of operations and financial condition.
The Corporation Is Dependent On Certain Key Management and Staff.
The Corporation relies on key personnel to manage and operate its business. The loss of key staff may adversely affect our ability to maintain and manage these portfolios effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in the Corporation’s net income.
The Corporation’s Information Systems May Experience an Interruption or Breach in Security.
The Corporation relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Corporation’s customer relationship management, general ledger, deposit, loan and other systems. While the Corporation has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, it they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Corporation’s information systems could damage the Corporation’s reputation, result in a loss of customer business, subject the Corporation to additional regulatory scrutiny, or expose the Corporation to civil litigation and possible financial liability, any of which could have a material adverse effect on the Corporation’s financial condition and results of operations.
The Corporation Continually Encounters Technological Change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Corporation’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation’s operations. Failure to successfully keep pace with the technological change affecting the financial services industry could have a material adverse impact on the Corporation’s business and, in turn, the Corporation’s financial condition and results of operations.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
First Financial Corporation is located in a four-story office building in downtown Terre Haute, Indiana that was first occupied in June 1988. It is leased to First Financial Bank N.A., a wholly-owned subsidiary (the “Bank”). The Bank also owns three other facilities in downtown Terre Haute. One is leased, one is available for lease and the third is a 50,000-square-foot building housing operations and administrative staff and equipment. In addition, the Bank holds in fee six other branch buildings. One of the branch buildings is a single-story 36,000-square-foot building which is located in a Terre Haute suburban area. Six other branch bank buildings are leased by the Bank. The expiration dates on five of the leases are May 31, 2011, February 14, 2011, August 31, 2011, December 31, 2012 and May 31, 2014. The sixth lease is on a month-to-month basis.
Facilities of the Corporation’s banking centers in Clay County include three offices in Brazil, Indiana and offices in Clay City and Poland, Indiana. All five buildings are held in fee.
Facilities of the Corporation’s banking centers in Vermillion County include two offices in Clinton, Indiana and offices in Cayuga and Newport, Indiana. All four buildings are held in fee.
Facilities of the Corporation’s banking centers in Sullivan County include offices in Sullivan, Carlisle, Dugger, Farmersburg and Hymera, Indiana. All five buildings are held in fee.
Facilities of the Corporation’s banking center in Greene County include an office in Worthington, Indiana. This building is held in fee.
Facilities of the Corporation’s banking centers in Knox County include offices in Monroe City, Sandborn and Vincennes, Indiana. All three buildings are held in fee.
Facilities of the Corporation’s banking centers in Parke County include two offices in Rockville, Indiana and offices in Marshall, Montezuma and Rosedale, Indiana. All five buildings are held in fee.
Facilities of the Corporation’s banking center in Putnam County include an office in Greencastle, Indiana. This building is held in fee.
Facilities of the Corporation’s banking centers in Crawford County include its main office and a drive-up facility in Robinson, Illinois and a branch facility in Oblong, Illinois. All three of the buildings are held in fee.
Facilities of the Corporation’s banking centers in Lawrence County include offices in Sumner and Lawrenceville, Illinois. Both of the buildings are held in fee.
Facilities of the Corporation’s banking center in Wayne County include an office in Fairfield, Illinois. This building is held in fee.
Facilities of the Corporation’s banking center in Jasper County include an office in Newton, Illinois. This building is held in fee.
Facilities of the Corporation’s banking center in Coles County include an office in Charleston, Illinois. This building is held in fee.
Facilities of the Corporation’s banking center in Clark County include an office in Marshall, Illinois. This building is held in fee.
Facilities of the Corporation’s banking center in Vermilion County include four offices in Danville, Illinois, an office in Westville, Illinois, and an office in Ridge Farm, Illinois. One of the buildings in Danville is leased and the lease expires on December 31, 2011 and the other five buildings are held in fee.
Facilities of the Corporation’s banking centers in Richland County include two offices in Olney, Illinois. One building is held in fee and the other building is leased. The expiration date on the lease is March 1, 2015.
The facility of the Corporation’s subsidiary, The Morris Plan Company, includes an office facility in Terre Haute, Indiana. The building is leased by The Morris Plan Company. The expiration date on the lease is October 31, 2020.
Facilities of the Corporation’s subsidiary, Forrest Sherer, Inc., include its main office and one satellite office in Terre Haute, Indiana. The buildings are held in fee by Forrest Sherer, Inc.

 

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ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings which involve the Corporation or its subsidiaries, other than ordinary routine litigation incidental to its business.
ITEM 4. (REMOVED AND RESERVED)
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
See “Market and Dividend Information” on page 55 of the 2010 Annual Report. That portion of the Annual Report is incorporated by reference into this Form 10-K.
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. Following is certain information regarding shares of common stock purchased by the Corporation during the quarter covered by this report.
                                 
                    (c)        
                    Total Number Of     (d)  
    (a)     (b)     Shares Purchased As Part     Maximum Number Of  
    Total Number Of     Average Price     Of Publicly Announced     Shares That May Yet Be  
    Shares Purchased     Paid Per Share     Plans Or Programs *     Purchased *  
October 1 – 31, 2010
                N/A       N/A  
November 1 – 30, 2010
                N/A       N/A  
December 1 – 31, 2010
                N/A       N/A  
                         
Total
                N/A       N/A  
                         
     
*  
The Corporation has not adopted a formal policy or program regarding repurchases of its shares of stock.
The Corporation contributed 45,000 shares of treasury stock to the ESOP in November of 2010.
ITEM 6. SELECTED FINANCIAL DATA
See “Five Year Comparison of Selected Financial Data” on page 9 of the 2010 Annual Report to Shareholders. That portion of the Annual Report is incorporated by reference into this Form 10-K.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
See “Management’s Discussion and Analysis” on pages 44 through 55 of the 2010 Annual Report to Shareholders. That portion of the Annual Report is incorporated by reference into this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Interest Rate Sensitivity and Liquidity” section of “Management’s Discussion and Analysis” on pages 52and 53 of the 2010 Annual Report to Shareholders. That portion of the Annual Report is incorporated by reference into this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See “Consolidated Balance Sheets” on page 10, “Consolidated Statements of Income” on page 11, “Consolidated Statements of Changes in Shareholders Equity” on page 12, “Consolidated Statements of Cash Flows” on page 13, and “Notes to Consolidated Financial Statements” on pages 14-42 of the 2010 Annual Report to Shareholders. “Report of Independent Registered Public Accounting Firm” can be found on page 43 of the 2010 Annual Report to Shareholders. Those portions of the Annual Report are incorporated by reference into this Form 10-K. Statistical disclosure by the Corporation includes the following information in the 2010 Annual Report to Shareholders, which is incorporated by reference into this Form 10-K:
  1.  
“Volume/Rate Analysis,” on page 46
 
  2.  
“Securities,” on page 48.
 
  3.  
“Loan Portfolio,” on page 49.
 
  4.  
“Allowance for Loan Losses,” on pages 50.
 
  5.  
“Nonperforming Loans,” on pages 51.
 
  6.  
“Deposits,” on page 52.
 
  7.  
“Consolidated Balance Sheet-Average Balances and Interest Rates,” on page 54.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation (the “Evaluation”), under the supervision and with the participation of our President and Chief Executive Officer (“CEO”), who serves as our principal executive officer, and Chief Financial Officer (“CFO”), who serves as our principal financial officer, of the effectiveness of our disclosure controls and procedures (“Disclosure Controls”). Based on the Evaluation, our CEO and CFO concluded that our Disclosure Controls are effective and designed to ensure that the information required to be included in our periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Controls Over Financial Reporting
There was no change in the Corporation’s internal control over financial reporting that occurred during the Corporation’s fourth fiscal quarter of 2010 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting and Attestation Report of the Registered Public Accounting Firm
See “Management’s Report on Internal Control Over Financial Reporting” on page 44 of the 2010 Annual Report to Shareholders and “Report of Independent Registered Public Accounting Firm” on page 43 of the 2010 Annual Report to Shareholders. That portion of the annual report is incorporated by reference in response to this Item 9A of the Form 10-K.
ITEM 9B. OTHER INFORMATION
The Corporation established the compensation to be paid to Directors for the year 2011 on December 21, 2010. These amounts are set forth on Exhibit 10.3 to this Form 10-K.
The Corporation established the compensation to be paid to Named Executive Officers for the year 2011 on December 21, 2010. These amounts are set forth on Exhibit 10.4 to this Form 10-K.
Effective December 1, 2010, the Corporation and the Bank (collectively, the “Employers”), entered into a new employment agreement (the “Agreement”) with Norman L. Lowery, Chief Executive Officer of the Corporation and President and Chief Executive Officer of the Bank. The Agreement supersedes the employment agreement dated March 26, 2010 between the Employers and Mr. Lowery.
Under the terms of the Agreement, the Employers have agreed to employ Mr. Lowery for an initial term of thirty-six (36) months in his current position as Chief Executive Officer of the Corporation and President and Chief Executive Officer of the Bank. The term of the Agreement shall automatically extend for an additional one-year term each year unless the disinterested members of the respective boards of directors of the Employers determine not to extend the Agreement.
Under the Agreement, Mr. Lowery is entitled to an annual base salary of $500,074.10, which may be increased from time to time as determined by the boards of directors of the Employers, and is entitled to participate in other bonus and fringe benefit plans available to other executive officers or employees of the Employers generally.

 

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If the Employers terminate Mr. Lowery’s employment for “just cause,” death or “disability” (as such terms are defined in the Agreement), then Mr. Lowery is entitled to receive the base salary, bonuses, vested rights, and other benefits due him through the date of his termination. Any benefits payable under insurance, health, retirement, bonus, incentive, performance or other plans as a result of his participation in such plans through such date of termination will be paid when and as due under those plans.
If the Employers terminate Mr. Lowery’s employment without just cause or if he terminates his employment for “good reason,” and such termination does not occur within 12 months after a “change in control” (as such terms are defined in the Agreement), then Mr. Lowery is entitled to receive an amount equal to the sum of his base salary and bonuses through the end of the then-current term of the Agreement. He would also receive cash reimbursements in an amount equal to his cost of obtaining all benefits which he would have been eligible to participate in or receive through the term of the Agreement.
If Mr. Lowery’s employment is terminated for other than just cause or is constructively discharged and this occurs within 12 months following a change in control, then Mr. Lowery is entitled to receive an amount equal to the greater of the compensation and benefits described in the previous paragraph if the termination did not occur within 12 months following a change in control; or, the product of 2.99 times the sum of (i) his base salary in effect as of the date of the change in control; (ii) an amount equal to the bonuses received by or payable to him in or for the calendar year prior to the year in which the change in control occurs; and (iii) cash reimbursements in an amount equal to his cost of obtaining for a period of three years, beginning on the date of termination, all benefits which he was eligible to participate in or receive. Mr. Lowery would also be entitled to the payment provided for in this paragraph if a change in control occurs that was not approved by a majority of the board of directors of the Corporation.
If Mr. Lowery qualifies as a “key employee” (as defined in the Agreement) at the time of his separation from service, then the Corporation may not make certain payments earlier than six months following the date of his separation from service (or, if earlier, the date of his death). In this event, payments to which Mr. Lowery would otherwise be entitled during the first six months following the date of his separation from service will be accumulated and paid to Mr. Lowery on the first day of the seventh month following his separation from service. Mr. Lowery is currently considered a “key employee” for this purpose.
If, as a result of a change in control, Mr. Lowery becomes entitled to any payments which are determined to be payments subject to Internal Revenue Code Section 280G, then his benefit will be equal to the greater of (i) his benefit under the Agreement reduced to the maximum amount payable such that when it is aggregated with payments and benefits under all other plans and arrangements it will not result in an “excess parachute payment” under Internal Revenue Code Section 280G, or (ii) his benefit under the Agreement after taking into account the amount of the excise tax imposed under Internal Revenue Code Section 280G due to the benefit payment.
The Agreement also includes standard confidentiality and non-solicit provisions and a non-compete provision pursuant to which Mr. Lowery is prohibited, during his employment and for a period of one year following his termination, from directly or indirectly competing against the Employers within a 30-mile radius of Terre Haute, Indiana.
The foregoing description is a summary only and is qualified in its entirety by the full text of the Agreement, which is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
In the fourth quarter, the Corporation adopted the First Financial Corporation 2010 Long-Term Incentive Compensation Plan (the “LTIP”) and the First Financial Corporation 2010 Short-Term Incentive Compensation Plan (the “STIP”) which provide for payment of cash awards to certain key employees, including our named executive officers, provided certain performance goals are met for a performance period under each plan. The performance goals for each plan are based upon weighted factors which are determined by the Compensation Committee based upon its assessment of what is important to the Corporation’s and the Bank’s overall performance and within the scope of control of the participant. Payouts for earned awards equal 80% of the respective target award for performance at threshold, 100% of the respective target award for performance at target, and 150% or 125% (depending on the participant’s position) of the respective target award for maximum performance. Under the LTIP, once an award has been earned, it will vest ratably over a three-year period and will be paid as it becomes vested. Under the STIP, once an award has been earned, it will be paid within 75 days of the date it is earned provided the participant is employed on that date. The foregoing description is a summary only and is qualified in its entirety by the full text of the plans, which are filed as a exhibits to this Form 10-K and are incorporated herein by reference.

 

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The Corporation approved the 2011 Short Term Incentive Compensation Plan on November 16, 2010. The Plan provides an opportunity for key employees to earn a cash bonus in 2011 based on the achievement of corporate, business unit, and/or individual performance objectives at threshold, target or maximum levels, as established by the Compensation Committee. The foregoing description is a summary only and is qualified in its entirety by the full text of the Plan, which is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under Item 10 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2010 fiscal year, which Proxy Statement will contain such information. The information required by Item 10 is incorporated herein by reference to such Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under Item 11 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2010 fiscal year, which Proxy Statement will contain such information. The information required by Item 11 is incorporated herein by reference to such Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under Item 12 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2010 fiscal year, which Proxy Statement will contain such information. The information required by Item 12 is incorporated herein by reference to such Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under Item 13 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2010 fiscal year, which Proxy Statement will contain such information. The information required by Item 13 is incorporated herein by reference to such Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under Item 14 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2010 fiscal year, which Proxy Statement will contain such information. The information required by Item 14 is incorporated herein by reference to such Proxy Statement.

 

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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1)  
The following consolidated financial statements of the Registrant and its subsidiaries are included in the 2010 Annual Report to Shareholders of First Financial Corporation attached:
Consolidated Balance Sheets—December 31, 2010 and 2009
Consolidated Statements of Income—Years ended December 31, 2010, 2009, and 2008
Consolidated Statements of Changes in Shareholders’ Equity—Years ended December 31, 2010, 2009, and 2008
Consolidated Statements of Cash Flows—Years ended December 31, 2010, 2009, and 2008
Notes to Consolidated Financial Statements
  (2)  
Schedules to the Consolidated Financial Statements required by Article 9 of Regulation S-X are not required, inapplicable, or the required information has been disclosed elsewhere.
 
  (3)  
Listing of Exhibits:
         
Exhibit Number   Description
  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 July 27, 2009
  10.1 *  
Employment Agreement for Norman L. Lowery, dated and effective December 1, 2010.
  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 *  
2011 Schedule of Director Compensation
  10.4 *  
2011 Schedule of Named Executive Officer Compensation
  10.5 *  
2005 Long-Term Incentive Plan of First Financial Corporation, incorporated by reference to Exhibit 10.7 of the Corporation’s Form 8-K filed September 4, 2007.
  10.6 *  
2005 Executives Deferred Compensation Plan, incorporated by reference to Exhibit 10.5 of the Corporation’s Form 8-K filed September 4, 2007.
  10.7 *  
2005 Executives Supplemental Retirement Plan, incorporated by reference to Exhibit 10.6 of the Corporation’s Form 8-K filed September 4, 2007.
  10.8 *  
First Financial Corporation 2010 Short-Term Incentive Compensation Plan.
  10.9 *  
First Financial Corporation 2010 Long-Term Incentive Compensation Plan.
  10.10 *  
First Financial Corporation 2011 Short Term Incentive Compensation Plan
  13    
Annual Report
  21    
Subsidiaries
  31.1    
Certification pursuant to Rule 13a-14(a) for Annual Report of Form 10-K by Principal Executive Officer
  31.2    
Certification pursuant to Rule 13a-14(a) for Annual Report of Form 10-K by Principal Financial Officer
  32.1    
Certification pursuant to 18 U.S.C. Section 1350 of Principal Executive Officer
  32.2    
Certification pursuant to 18 U.S.C. Section 1350 of Principal Financial Officer
     
*  
Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.
 
(b)  
Exhibits-Exhibits to (a) (3) listed above are attached to this report.
 
(c)  
Financial Statements Schedules-No schedules are required to be submitted. See response to ITEM 15(a) (2).

 

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
 
 
  /s/ Rodger A. McHargue    
  Rodger A. McHargue, Chief Financial Officer   
  (Principal Financial Officer and Principal Accounting Officer)   
Date: March 15, 2011

 

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
     
NAME   DATE
 
   
/s/ Donald E. Smith
 
Donald E. Smith, President and Director
  March 15, 2011 
 
   
/s/ Rodger a. McHargue
 
Rodger A. McHargue, Chief Financial Officer
  March 15, 2011 
(Principal Financial Officer and Principal Accounting Officer)
   
 
   
/s/ W. Curtis Brighton
 
W. Curtis Brighton, Director
  March 15, 2011 
 
   
/s/ B. Guille Cox, Jr.
  March 15, 2011
B. Guille Cox, Jr., Director
   
 
   
/s/ Thomas T. Dinkel
 
Thomas T. Dinkel, Director
  March 15, 2011 
 
   
/s/ Anton H. George
 
Anton H. George, Director
  March 15, 2011 
 
   
/s/ Gregory L. Gibson
 
Gregory L. Gibson, Director
  March 15, 2011 
 
   
/s/ Norman L. Lowery
 
Norman L. Lowery, Vice Chairman, CEO & Director
  March 15, 2011 
(Principal Executive Officer)
   
 
   
/s/ Ronald K. Rich
 
Ronald K. Rich, Director
  March 15, 2011 
 
   
/s/ Virginia L. Smith
 
Virginia L. Smith, Director
  March 15, 2011 
 
   
/s/ William J. Voges
 
William J. Voges, Director
  March 15, 2011 
 
   
/s/ William R. Krieble
 
William R. Krieble, Director
  March 15, 2011 

 

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EXHIBIT INDEX
         
Exhibit    
Number   Description
 
   
  10.1    
Employment Agreement for Norman L. Lowery, dated and effective December 1, 2010
       
 
  10.3    
2011 Schedule of Director Compensation
       
 
  10.4    
2011 Schedule of Named Executive Officers Compensation
       
 
  10.8    
First Financial Corporation 2010 Short-Term Incentive Compensation Plan.
       
 
  10.9    
First Financial Corporation 2010 Long-Term Incentive Compensation Plan.
       
 
  10.10    
First Financial Corporation 2011 Short Term Incentive Compensation Plan
       
 
  13    
Annual Report
       
 
  21    
Subsidiaries
       
 
  31.1    
Certification Pursuant to Rule 13a-14(a) for Annual Report of Form 10-K by Principal Executive Officer
       
 
  31.2    
Certification Pursuant to Rule 13a-14(a) for Annual Report of Form 10-K by Principal Financial Officer
       
 
  32.1    
Certification Pursuant to Rule 18 U.S.C. Section 1350 of Principal Executive Officer
       
 
  32.2    
Certification Pursuant to Rule 18 U.S.C. Section 1350 of Principal Financial Officer

 

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Section 2: EX-10.1 (EXHIBIT 10.1)

Exhibit 10.1
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the “Agreement”), entered into and effective as of the 1st day of December, 2010 (the “Effective Date”), by and between First Financial Bank, N.A. (the “Bank”), a national banking association organized under the laws of the United States of America, First Financial Corporation (the “Corporation”), a corporation formed under the laws of the State of Indiana and a financial holding company (jointly referred to herein as the “Company”) and Norman L. Lowery (the “Employee”), a resident of the State of Indiana.
WHEREAS, the Employee has heretofore been employed by the Bank as its President and Chief Executive Officer and by the Corporation as its Chief Executive Officer and has performed valuable services for both the Bank and the Corporation; and
WHEREAS, the Company desires to enter into this Agreement with the Employee in order to assure continuity of management and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties; and
WHEREAS, the parties desire, by this writing, to set forth the continuing employment relationship between the Company and the Employee.
NOW, THEREFORE, in consideration of the premises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Employee and the Company agree as follows:
1. Employment. The Employee is employed as the President and Chief Executive Officer of the Bank and as the Chief Executive Officer of the Corporation. The Employee shall render such administrative and management services for the Company as are currently rendered and as are currently performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of the Company. The Employee’s other duties shall be such as the boards of directors of the Bank or the Corporation may, from time to time, reasonably direct, including normal duties as an officer of the Bank and the Corporation. During the term of this Agreement, the Employee shall be nominated and elected to serve as a director of the Bank or of any successor to the Bank and shall be nominated to serve as a director of the Corporation.

 

 


 

2. Base Compensation. The Company agrees to pay the Employee during the term of this Agreement a base salary at the rate of $500,074.10 per annum, payable in cash not less frequently than monthly. Such base salary shall be effective and calculated commencing as of the Effective Date. The Company may consider and declare from time to time increases in the base salary it pays the Employee. Prior to a Change in Control (as hereinafter defined), the Company may also declare decreases in the base salary it pays the Employee if the operating results of the Company are significantly less favorable than those for the fiscal year ending December 31, 2009, and the Company makes similar decreases in the base salary it pays to other executive officers of the Company. After a Change in Control, the Company shall consider and declare salary increases in base salary based upon the following standards:
(a) Inflation;
(b) Adjustments to the base salaries of other senior management personnel;
(c) Past performance of the Employee; and
(d) The contribution which the Employee makes to the business and profits of the Company during the term of this Agreement.
3. Bonuses. The Employee shall participate in any year-end bonus granted to other employees. The Employee shall further participate in an equitable manner with all other senior management employees of the Company in any discretionary bonuses that the Company may award from time to time to senior management employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee’s right to participate in such discretionary bonuses.
4. Benefits.
(a) Participation in Retirement, Medical and Other Benefit Plans. During the term of this Agreement, the Employee shall be eligible to participate in the following benefit plans; group hospitalization, disability, health, dental, sick leave, retirement, supplemental retirement, pension, 401(k), employee stock ownership plan, and all other present or future qualified and/or nonqualified plans provided by the Company generally, or to executive officers of the Bank or the Corporation, which benefits, taken as a whole, must be at least as favorable as those in effect on the Effective Date, unless the continued operation of such plans or changes in the accounting, legal or tax treatment of such plans would adversely affect the Company’s operating results or financial condition in a material way, and the Company concludes that modifications to such plans are necessary to avoid such adverse effects and such modifications apply consistently to all employees participating in the affected plans. In addition, the Employee shall be eligible to participate in any fringe benefits which are or may become available to the Company’s senior management employees, including, for example, any stock option or incentive compensation (including, but not limited to the First Financial Corporation 2011 Omnibus Equity Incentive Plan (“2011 Omnibus Plan”)) or performance-based plans, any insurance programs (including, but not limited to, any group and executive life insurance programs), and any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. All the employee benefits referenced in this subsection 4(a) are collectively referred to hereinafter as “Employee Benefits.”

 

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(b) Benefits After Retirement. Upon retirement of the Employee at or after attaining age 65 (“Retirement Age”), during the term of this Agreement, the Company agrees to continue, at no greater cost to Employee than is generally allocated to all employees, full coverage for the Employee, his spouse and his children living in his household under the health, life and disability plans as adopted by the Company which shall be no less favorable than those in effect on the Effective Date of this Agreement. The Company agrees to continue such health coverage until both the Employee and his spouse are eligible for coverage by Medicare. When both the Employee and his spouse become eligible for Medicare coverage, the Company agrees to pay for supplemental coverage, at the best level available, for both the Employee and his spouse until the death of the Employee and his spouse. The Employee shall be entitled to a life insurance policy on his life, provided at the Company’s cost, in the maximum amount established by the Company’s group life insurance plan from time to time which amount shall be no less than the limit on the Effective Date of three times his annual salary (subject to a $350,000 maximum). The Employee shall also be entitled to an additional life insurance policy on his life in the amount established by the Company’s insurance program for executive officers from time to time. The Company shall continue to pay to the Employee the annual premiums, which are required to keep the life insurance policy in force, on behalf of the Employee pursuant to the Company’s insurance program for executive officers.
(c) Expenses and Membership. The Employee shall be reimbursed for all reasonable out-of-pocket business expenses which he shall incur in connection with his services under this Agreement, upon substantiation of such expenses in accordance with the policies of the Company. In addition, the Employee shall be reimbursed for all reasonable out-of-pocket expenses incurred by him to satisfy his continuing legal education requirements for his license to practice law in the State of Indiana. So long as the Employee is employed by the Company pursuant to this Agreement, the Employee shall be entitled to continue his memberships in the American, Indiana and Terre Haute Bar Associations, the American Association for Justice, the Indiana Trial Lawyers Association and the Country Club of Terre Haute, and the Company shall continue to pay or reimburse the Employee for the dues and assessments for such memberships.
(d) Automobile. So long as the Employee is employed by the Company pursuant to this Agreement, the Employee shall be entitled to continue to use a Company-owned automobile of commensurate quality and value as that used by him on the same terms and conditions in effect with respect to such use on the Effective Date of this Agreement. The Company shall provide and pay the premiums for full insurance coverage on the automobile. Such insurance coverage shall be no less than the coverage provided on the Effective Date of this Agreement. The Company shall also pay for the cost of operation, maintenance and repair of the automobile. All benefits referenced in this subsection 4(d) are collectively referred to hereinafter as “Automobile Benefits.”
(e) Vacation, Sick Leave and Disability. The Employee shall be entitled to 30 days vacation annually and shall be entitled to the same sick leave and disability leave as other executive employees. The Employee shall not receive any additional compensation on account of his failure to take a vacation or sick leave, and the Employee shall not accumulate unused vacation or sick leave from one fiscal year to the next, except in either case to the extent authorized by the Company or permitted for other executive employees.

 

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In addition to the aforesaid paid vacations, the Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment with the Company for such additional periods of time and for such valid and legitimate reasons as the Company may determine and to attend the continuing legal education seminars contemplated by subsection 4(c) hereof. Further, the Company may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as the board of directors of the Bank or the Company in its discretion may determine.
(f) Other Policies. All other matters relating to the employment of the Employee not specifically addressed in this Agreement shall be subject to the general policies regarding executive employees of the Company as in effect from time to time.
5. Term of Employment. The Company hereby employs the Employee, and the Employee hereby accepts such employment under the terms of this Agreement, for the period commencing on the Effective Date and ending 36 months thereafter (or such earlier date as is determined in accordance with Section 8). Additionally, on each annual anniversary of the Effective Date, the Employee’s term of employment shall be extended for an additional one-year period beyond the then effective expiration date, unless the boards of directors of the Bank and the Corporation determine in a duly adopted resolution that this Agreement shall not be extended. Only those disinterested members of the boards of directors of the Bank and the Corporation shall discuss and vote on any proposed resolution not to extend this Agreement. The initial term of this Agreement and all extensions thereof are hereinafter referred to individually and collectively as the “Term.”
6. Covenants.
(a) Loyalty.
(i) During the period of his employment hereunder and except for illnesses, reasonable vacation periods, and reasonable leaves of absence, the Employee shall devote all of his full business time, attention, skill and efforts to the faithful performance of his duties hereunder; provided, however, from time to time, the Employee may serve on the boards of directors of, and hold any other offices or positions in, companies or organizations, and may perform legal services either directly or as a result of an of counsel or analogous position with a law firm for clients which will not present any conflict of interest with the Bank or the Corporation or any of their subsidiaries or affiliates, or unfavorably affect the performance of Employee’s duties pursuant to this Agreement, or will not violate any applicable statute or regulation. “Full business time” is hereby defined as that amount of time usually devoted to like companies by similarly situated executive officers. During the term of his employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interests of the Company, or be gainfully employed in any other position or job other than as provided above.
(ii) Nothing contained in this Section shall be deemed to prevent or limit the Employee’s right to invest in the capital stock or other securities of any business dissimilar from that of the Company, or, solely as a passive or minority investor, in any business.

 

4


 

(b) Nonsolicitation. The Employee hereby understands and acknowledges that, by virtue of his position with the Company, he will have advantageous familiarity and personal contacts with the Company’s customers, wherever located, and the business, operations and affairs of the Company. Accordingly, while the Employee is employed by the Company and for a period of one year after the Employee’s Separation from Service (as defined in Section 8(h)(ii) of this Agreement) for any reason (whether with or without cause or whether by the Company or the Employee) or the expiration of the Term, the Employee shall not, directly or indirectly, or individually or jointly, (i) solicit any non-legal business of any party which is a customer of the Company at the time of such Separation from Service or any party which was a customer of the Company during the one year period immediately preceding such Separation from Service, (ii) request or advise any customers or suppliers of the Company to terminate, reduce, limit or change their business or relationship with the Company, or (iii) induce, request or attempt to influence any employee of the Company to terminate his employment with the Company, unless such actions are taken in connection with Employee engaging in the practice of law.
For purposes of this Agreement, the term “solicit” means any direct or indirect communication of any kind whatsoever, regardless of by whom initiated, which encourages or requests any person or entity, in any manner, to cease doing business with the Company.
(c) Noncompetition. During the period of his employment hereunder, and for a period of one year following the termination hereof, the Employee shall not, directly or indirectly:
(i) As owner, officer, director, stockholder, investor, proprietor, organizer or otherwise, engage in the same trade or business as the Company, as conducted on the date hereof, which would conflict with the interests of the Company or in a trade or business competitive with that of the Company, which would conflict with the interests of the Company, as conducted on the date hereof; or
(ii) Offer or provide employment (whether such employment is with the Employee or any other business or enterprise), either on a full-time or part-time or consulting basis, to any person who then currently is, or who within one (1) year prior to such offer or provision of employment has been, a management-level employee of the Bank or Corporation. This subsection 6(c)(ii) shall only apply in the event the Employee has a voluntary Separation from Service.

 

5


 

The restrictions contained in this paragraph upon the activities of the Employee following Separation from Service shall be limited to the following geographic areas (hereinafter referred to as “Restricted Geographical Area”):
(1) Terre Haute, Indiana; and
(2) The 30-mile radius of Terre Haute, Indiana.
Nothing contained in this Section 6 shall prevent or restrict the Employee from engaging in the practice of law, including within the Restricted Geographical Area. In addition, nothing contained in this subsection shall prevent or limit the Employee’s right to invest in the capital stock or other securities of any business dissimilar from that of the Bank or the Corporation, or, solely as a passive or minority investor, in any business.
If the Employee does not comply with the provisions of this Section, the one-year period of non-competition provided herein shall be tolled and deemed not to run during any period(s) of noncompliance, the intention of the parties being to provide one full year of non-competition by the Employee after the termination or expiration of this Agreement.
(d) Nondisclosure. The term “Confidential Information” as used herein shall mean any and all customer lists, computer hardware, software and related material, trade secrets (as defined in I.C. 24-2-3-2), know-how, skills, knowledge, ideas, knowledge of customer’s commercial requirements, pricing methods, sales and marketing techniques, dealer relationships and agreements, financial information, intellectual property, codes, research, development, research and development programs, processes, documentation, or devices used in or pertaining to the Company’s business (i) which relate in any way to the Company’s business, products or processes; or (ii) which are discovered, conceived, developed or reduced to practice by the Employee, either alone or with others either during the Term, at the Company’s expense, or on the Company’s premises.
(i) During the course of his services hereunder the Employee may become knowledgeable about, or become in possession of, Confidential Information. If such Confidential Information were to be divulged or become known to any competitor of the Company or to any other person outside the employ of the Company, or if the Employee were to consent to be employed by any competitor of the Company or to engage in competition with the Company, the Company would be irreparably harmed. In addition, the Employee has or may develop relationships with the Company’s customers which could be used to solicit the business of such customers away from the Company. The Company and the Employee have entered into this Agreement to guard against such potential harm.
(ii) The Employee shall not, directly or indirectly, use any Confidential Information for any purpose other than the benefit of the Company or communicate, deliver, exhibit or provide any Confidential Information to any person, firm, partnership, corporation, organization or entity, except as required in the normal course of the Employee’s service as a consultant or as an employee of the Company. The covenant contained in this subsection shall be binding upon the Employee during the Term and following the termination hereof until either (i) such Confidential Information becomes obsolete; or (ii) such Confidential Information becomes generally known in the Company’s trade or industry by means other than a breach of this covenant.
(iii) The Employee agrees that all Confidential Information and all records, documents and materials relating to such Confidential Information, shall be and remain the sole and exclusive property of the Company.

 

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(e) Remedies. The Employee agrees that the Company will suffer irreparable damage and injury and will not have an adequate remedy at law in the event of any breach by the Employee of any provision of this Section. Accordingly, in the event the Company seeks, under law or in equity, a temporary restraining order, permanent injunction or a decree of specific performance of the provisions of this Section, no bond or other security shall be required. The Company shall be entitled to recover from the Employee, reasonable attorneys’ fees and expenses incurred in any action wherein the Company successfully enforces any of the provisions of this Section against the breach or threatened breach of those provisions by the Employee. The remedies described in this Section are not exclusive and are in addition to all other remedies the Company may have at law, in equity, or otherwise.
(i) The Employee and the Company acknowledge and agree that in the event of the Employee’s Separation from Service for any reason whatsoever, the Employee can obtain other engagements or employment of a kind and nature similar to that contemplated herein outside the Restricted Geographical Area and that the issuance of an injunction to enforce the provisions of this Section will not prevent him from earning a livelihood.
(ii) The covenants on the part of the Employee contained in this Section are essential terms and conditions to the Company entering into this Agreement, and shall be construed as independent of any other provision in this Agreement.
(f) Surrender of Records. Upon the Employee’s Separation from Service for any reason, the Employee shall immediately surrender to the Company any and all computer hardware, software and related materials, records, notes, documents, forms, manuals, photographs, instructions, lists, drawings, blueprints, programs, diagrams or other written or printed material (including any and all copies made at any time whatsoever) in his possession or control which pertain to the business of the Company including any Confidential Information in the Employee’s personal notes, address books, calendars, rolodexes, personal data assistants, etc.
7. Standards. The Employee shall perform his duties under this Agreement in accordance with such reasonable standards as the Board may establish from time to time. The Company will provide the Employee with the working facilities and staff commensurate with his position or positions and necessary or advisable for him to perform his duties.

 

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8. Separation from Service and Termination Pay. Subject to Section 10 hereof, the Employee may experience a Separation from Service under the following circumstances:
(a) Death. The Employee shall experience a Separation from Service upon his death during the Term of this Agreement, in which event the Employee’s estate or designated beneficiaries shall be entitled to receive the base salary, bonuses, vested rights, and Employee Benefits due the Employee through the last day of the calendar month in which his death occurred. Any benefits payable under insurance, health, retirement, bonus, incentive, performance or other plans as a result of the Employee’s participation in such plans through such date shall be paid when and as due under those plans. If the Employee’s death occurs on or after Retirement Age, during the term of this Agreement, the Employee’s spouse and child living in his household at the time of his death shall be entitled to receive the health and disability benefits provided for under subsection 4(b) until the death of his spouse.
(b) Disability.
(i) The Company may terminate the Employee’s employment, resulting in a Separation from Service, as a result of the Employee’s Disability, in a manner consistent with the Company’s and the Employee’s rights and obligations under the Americans with Disabilities Act or other applicable state and federal laws concerning disability. For the purpose of this Agreement, “Disability” means the Employee is:
(1) Unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or
(2) By reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Employer.
(ii) During any period that the Employee shall receive disability benefits and to the extent that the Employee shall be physically and mentally able to do so, he shall furnish such information, assistance and documents so as to assist in the continued ongoing business of the Company.
(iii) In the event of the Employee’s Separation from Service due to Disability, the Employee shall be entitled to receive the base salary, bonuses, vested rights, and Employee Benefits due the Employee through his date of termination. Any benefits payable under insurance, health, retirement, bonus, incentive, performance or other plans as a result of the Employee’s participation in the plans through the date of termination shall be paid when and as due under those plans. If the Employee’s Separation from Service due to Disability occurs on or after Retirement Age, during the term of this Agreement, the Employee shall be entitled to the retirement benefits provided for under subsection 4(b) as described in that subsection.

 

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(c) Just Cause. The Company may, by written notice to the Employee, immediately terminate his employment at any time, resulting in a Separation from Service, for Just Cause. The Employee shall have no right to receive any base salary, bonuses or other Employee Benefits, except as provided by law, whatsoever, for any period after his Separation from Service for Just Cause. However, the vested rights of the Employee as of his Separation from Service shall not be affected. Any benefits payable under insurance, health, retirement, bonus, incentive, performance or other plans as a result of the Employee’s participation in such plans through such date of Separation of Service shall be paid when and as due under those plans. Separation from Service for “Just Cause” shall mean termination because of:
(i) An intentional act of fraud, embezzlement, theft, or personal dishonesty; willful misconduct, or breach of fiduciary duty involving personal profit by the Employee in the course of his employment or director service. No act or failure to act shall be deemed to have been intentional or willful if it was due primarily to an error in judgment or negligence. An act or failure to act shall be considered intentional or willful if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in the best interest of the Company;
(ii) Intentional wrongful damage by the Employee to the business or property of the Company, causing material harm to the Company;
(iii) Breach by the Employee of any confidentiality or non-disclosure agreement in effect from time to time with the Company;
(iv) Gross negligence or insubordination by the Employee in the performance of his duties; or
(v) Removal or permanent prohibition of the Employee from participating in the conduct of Bank’s affairs by an order issued under Section 8(e)(iv) or 8(g)(i) of the Federal Deposit Insurance Act, 12 USC 1818(e)(4) and (g)(1).
Notwithstanding the foregoing, in the event of Separation from Service for Just Cause there shall be delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the disinterested directors of the Bank and the Corporation at meetings of the boards called and held for that purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee’s counsel, to be heard before the boards), such meetings and the opportunity to be heard to be held prior to, or as soon as reasonably practicable following, termination, but in no event later than 60 days following such termination, finding that in the good faith opinion of the boards the Employee was guilty of conduct constituting Just Cause and specifying the particulars thereof in detail. If, following such meetings, the Employee is reinstated, he shall be entitled to receive the base salary, bonuses, all Employee Benefits, and all other fringe benefits provided for under this Agreement for the period following Separation from Service and continuing through reinstatement as though he was never terminated.

 

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(d) Without Just Cause. The Company may, by written notice to the Employee, immediately terminate his employment at any time, resulting in a Separation from Service, for a reason other than Just Cause, in which event the Employee shall be entitled to receive the following compensation and benefits (unless such Separation from Service occurs within the time period set forth in subsection 10(a) hereof, in which event the benefits and compensation provided for in Section 10 shall apply):
(i) The base salary provided pursuant to Section 2 hereof, as in effect on the date of Separation from Service, through the Expiration Date of this Agreement as determined pursuant to Section 5 hereof (including any renewal or extension of this Agreement) (the “Expiration Date”);
(ii) An amount equal to the bonuses received by or payable to the Employee in the calendar year prior to the calendar year of the Employee’s Separation from Service, for each year remaining through the Expiration Date; and
(iii) Cash reimbursement to the Employee in an amount equal to the cost to the Employee (demonstrated by submission to the Company of invoices, bills, or other proof of payment by the Employee) of (A) all health insurance premiums for the Employee, his spouse and child living in the Employee’s household and the best level Medicare supplement insurance available, and life insurance (all as described in subsection 4(b)); (B) all other Employee Benefits (all as defined in subsection 4(a) excluding benefits under the 2011 Omnibus Plan which will be made in accordance with the terms and conditions of that Plan); and (C) professional and club dues, the cost of Employee’s continuing legal education requirements (as described in subsection 4(c)), all Automobile Benefits (as defined in subsection 4(d)) and all other benefits which the Employee would otherwise have been eligible to participate in or receive, through the Expiration Date, based upon the benefit levels substantially equal to those provided for the Employee at the date of the Employee’s Separation from Service. The Employee shall also be entitled to receive an amount necessary to provide any cash payments received under this subsection 8(d)(iii) net of all income and payroll taxes that would not have been payable by the Employee had he continued participation in the benefit plan or program instead of receiving cash reimbursement.
Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under subsection 8(d) shall be reduced to the extent that on the date of the Employee’s Separation from Service, the present value of the benefits payable under subsection 8(d) exceeds any limitation on severance benefits that is imposed by the Office of the Comptroller of the Currency (the “OCC”) on such benefits.

 

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All amounts payable to the Employee under subsections 8(d)(i) and 8(d)(ii) shall be paid in one lump sum within ten days of such Separation from Service. All amounts payable to the Employee under subsection 8(d)(iii) shall be paid on the first day of each month following the Employee’s Separation from Service, in an amount equal to the total reimbursable amount (demonstrated by invoices, bills or other proof of payment submitted by the Employee). Such amounts must be submitted for reimbursement no later than the earlier of: (i) six months after the date such amounts are paid by the Employee; or (ii) March 15th of the year following the year in which the Employee paid the amount.
(e) Voluntary for Good Reason. The Employee may voluntarily Separate from Service under this Agreement at any time for Good Reason. In the event that the Employee has a Separation from Service for Good Reason, the Employee will first deliver to the Company a written notice which will (A) indicate the specific provisions of this Agreement relied upon for such Separation from Service, (B) set forth in reasonable detail the facts and circumstances claimed to provide a basis for such Separation from Service, and (C) describe the steps, actions, events or other items that must be taken, completed or followed by the Company to correct or cure the basis for such Separation from Service. The Company will then have 30 days following the effective date of such notice to fully correct and cure the basis for the Separation from Service. If the Company does not fully correct and cure the basis for the Employee’s Separation from Service within such 30-day period, then the Employee will have the right to Separate from Service with the Company for Good Reason immediately upon delivering to the Company a written Notice of Termination and without any further cure period. Notwithstanding the foregoing, the Company will be entitled to so correct and cure only a maximum of two times during any calendar year. The Employee shall thereupon be entitled to receive the same amount payable under subsections 8(d)(i) and (ii) hereof, within 30 days following his date of Separation from Service and under subsection 8(d)(iii) as provided in subsection 8(d).
For purposes of this Agreement, “Good Reason” means the occurrence of any of the following events, which has not been consented to in advance by the Employee in writing (unless such voluntary Separation from Service occurs within the time period set forth in subsection 10(b) hereof, in which event the benefits and compensation provided for in Section 10 shall apply):
(i) The requirement that the Employee perform his executive functions more than 30 miles from his Terre Haute, Indiana office;
(ii) A reduction of ten percent or more in the Employee’s base salary, unless part of an institution-wide reduction and similar to the reduction in the base salary of all other executive officers of the Company;
(iii) The removal of the Employee from participation in any incentive compensation or performance-based compensation plans or bonus plans unless the Company terminates participation in the plan or plans with respect to all other executive officers of the Company;

 

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(iv) A material failure by the Company to continue to provide the Employee with the base salary, bonuses or benefits provided for under subsections 4(a), (c), (d) and (e) of this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under those Sections or under any benefit plan or program in which the Employee now or hereafter becomes eligible to participate, or the taking of any action by the Company which would directly or indirectly reduce in a material manner any such benefits or deprive the Employee to a material degree of any such benefit enjoyed by him, unless part of an institution-wide reduction and applied similarly to all other executive officers of the Company:
(v) The assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced in Section 1;
(vi) A failure to elect or re-elect the Employee to the Bank’s board of directors or a failure on the part of the Corporation to honor its obligation to nominate Employee to the Corporation’s board of directors;
(vii) A material diminution or reduction in the Employee’s responsibilities or authority (including reporting responsibilities) in connection with his employment with the Company; or
(viii) A material reduction in the secretarial or administrative support of the Employee.
Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under this subsection shall be reduced to the extent that on the date of the Employee’s Separation from Service, the present value of the benefits payable under subsections 8(d)(i), (ii) and (iii) exceed any limitation on severance benefits that is imposed by the OCC on such benefits.
(f) Voluntary Separation from Service Prior to Retirement Age. Subject to subsection 4(b) and Section 10, the Employee may voluntarily Separate from Service with the Company during the term of this Agreement prior to attaining Retirement Age, upon at least 90 days’ prior written notice to the Company, in which case, effective as of the Separation from Service, the Employee shall receive only his base salary, bonuses, vested rights and benefits up to the date of his Separation from Service, such benefits to be paid when and as due under those plans (unless such Separation from Service occurs pursuant to subsection 10(b) hereof, in which event the benefits, bonuses and base salary provided for in subsection 10(a) shall apply).
(g) Termination or Suspension Under Federal Law.
(i) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Company’s affairs by an order issued under Sections 8(e)(iv) or 8(g)(i) of the Federal Deposit Insurance Act (“FDIA”) (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Company under this Agreement shall terminate, as of the effective date of the order, but vested rights of the Employee shall not be affected.

 

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(ii) If the Bank is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default; but the vested rights of the Employee shall not be affected.
(iii) All obligations under this Agreement shall terminate, except to the extent it is determined that the continuation of this Agreement is necessary for the continued operation of the Bank; (A) by the OCC or its designee, at the time that the Federal Deposit Insurance Corporation (“FDIC”) enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of FDIA; or (B) by the OCC, or its designee, at the time that the OCC or its designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the OCC to be in an unsafe or unsound condition. Such action shall not affect any vested rights of the Employee.
(iv) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA suspends and/or temporarily prohibits the Employee from participating in the conduct of the Bank’s affairs, the Bank’s obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. However, the vested rights of the Employee as of the date of suspension will not be affected. If the charges in the notice are dismissed, the Bank may in its discretion (A) pay the Employee all or part of the compensation withheld while its contract obligations were suspended, and (B) reinstate (in whole or in part) any of its obligations which were suspended.
(h) Separation from Service. If the Employee qualifies as a Key Employee (as defined in subsection 8(h)(i)) at the time of his Separation from Service (as defined in subsection 8(h)(ii)), the Company may not make a payment pursuant to subsections 8(d) (disregarding subsection 8(d)(iii)(A)), 8(e) or Section 10 (disregarding subsection 10(a)(1)(ii)(C)) earlier than six months following the date of the Employee’s Separation from Service (or, if earlier, the date of the Employee’s death) to the extent such a payment would constitute deferred compensation that is not exempt from the requirements of Code Section 409A or Treasury Regulations 1.409A-1 et. seq. Payments to which the Key Employee would otherwise be entitled during the first six months following the date of his Separation from Service will be accumulated and paid to the Employee on the first day of the seventh month following the Employee’s Separation from Service.
(i) Key Employee means an employee who is:
(1) An officer of the Bank or Corporation having annual compensation greater than $160,000;
(2) A five percent owner of the Corporation; or

 

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(3) A one percent owner of the Corporation having an annual compensation from the employer of more than $150,000.
The $160,000 amount in subsection 8(h)(i)(1) will be adjusted at the same time and in the same manner as under Code Section 415(d), except that the base period shall be the calendar quarter beginning July 1, 2001, and any increase under this sentence which is not a multiple of $5,000 shall be rounded to the next lower multiple of $5,000.
(ii) Separation from Service means the date on which the Employee dies, retires or otherwise experiences a “Termination of Employment” with the Company (as defined below). Provided, however, a Separation from Service does not occur if the Employee is on military leave, sick leave or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the Employee retains a right to reemployment with the Company under an applicable statute or by contract. For purposes of this subsection 8(h)(ii), a leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the Employee will return to perform services for the Bank or Corporation. If the period of leave exceeds six months and the Employee does not retain the right to reemployment under an applicable statute or by contract, the employment relationship is deemed to terminate on the first date immediately following such six-month period. Notwithstanding the foregoing, where a leave of absence is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where such impairment causes the Employee to be unable to perform the duties of his position of employment or any substantially similar position of employment, a 29-month period of absence may be substituted for such six-month period. The Employee shall incur a “Termination of Employment” for purposes of this subsection 8(h)(ii) when a termination of employment has occurred under Treasury Regulation 1.409A-1(h)(1)(ii).
9. No Mitigation. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment.
10. Change in Control.
(a) Change in Control; Involuntary Separation from Service.
(1) Notwithstanding any provision herein to the contrary, if the Employee’s employment under this Agreement is terminated by the Company, resulting in a Separation from Service, without the Employee’s prior written consent and for a reason other than Just Cause, in connection with or within 12 months after a Change in Control, as defined in subsection 10(a)(3), the Employee shall be paid (subject to subsection 10(a)(2)) the greater of:
(i) The total amount payable under subsection 8(d); or

 

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(ii) The product of 2.99 times the sum of: (A) his base salary in effect as of the date of the Change in Control; (B) an amount equal to the bonuses received by or payable to the Employee in the calendar year prior to the year in which the Change in Control occurs; and (C) cash reimbursement to the Employee in an amount equal to the cost to the Employee (demonstrated by submission to the Company of invoices, bills or other proof of payment by the Employee) of obtaining all Employee Benefits (all as defined in subsection 4(a) excluding benefits under the 2011 Omnibus Plan which will be paid in accordance with the terms and conditions of that plan), health insurance premiums for the Employee, his spouse and child living in the Employee’s household, best level Medicare supplement insurance available, life insurance (all as described in subsection 4(b)), professional and club dues, the cost of Employee’s continuing legal education requirements (all as described in subsection 4(c)), all Automobile Benefits (as defined in subsection 4(d)) and all other benefits which the Employee would otherwise have been eligible to participate in or receive, through the Expiration Date, based upon the benefit levels substantially equal to those that the Company provided for the Employee at the date of the Employee’s Separation from Service. The Employee shall also be entitled to receive an amount necessary to provide any cash payments received under this subsection 10(a)(1)(ii) net of all income and payroll taxes that would not have been payable by the Employee had he continued participation in the benefit plan or program instead of receiving cash reimbursement.
(2) To the extent payments that would be received based on the Employee’s Separation from Service in connection with a Change in Control, or within 12 months after a Change in Control would be considered “excess parachute payments” pursuant to the Code Section 280G, the benefit payment to the Employee under this Agreement, when combined with all other parachute payments to the Employee, shall be the greater of:
(i) the Employee’s benefit under the Agreement reduced to the maximum amount payable to the Employee such that when it is aggregated with payments and benefits under all other plans and arrangements it will not result in an “excess parachute payment;” or
(ii) the Employee’s benefit under the Agreement after taking into account the amount of the excise tax imposed on the Employee under Code Section 280G due to the benefit payment.
The determination of whether any reduction in the rights or payments under this Plan is to apply will be made by the Company in good faith after consultation with the Employee, and such determination will be conclusive and binding on the Employee. The Employee will cooperate in good faith with the Company in making such determination and providing the necessary information for this purpose.

 

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(3) “Change in Control” shall be deemed to have occurred if one of the following events takes place:
(i) Change in Ownership. A change in the ownership of the Bank or the Corporation occurs on the date that any person, or group of persons, as defined below, acquires ownership of stock of the Bank or the Corporation that, together with stock held by the person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of the Bank or the Corporation. However, if any person or group is considered to own more than 50 percent of the total fair market value or total voting power of the stock, the acquisition of additional stock by the same person or group is not considered to cause a change in the ownership of the Bank or the Corporation (or to cause a change in the effective control of the Bank or the Corporation as defined in subsection 10(a)(3)(ii)). An increase in the percentage of stock owned by any person or group, as a result of a transaction in which the Bank or the Corporation acquires its stock in exchange for property will be treated as an acquisition of stock for purposes of this subsection. This subsection only applies when there is a transfer of stock of the Bank or the Corporation (or issuance of stock of a corporation) and stock in the Bank or the Corporation remains outstanding after the transaction.
For purposes of subsections 10(a)(3)(i) and (ii), persons will not be considered to be acting as a group solely because they purchase or own stock of the Bank or the Corporation at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock or similar business transaction with the Bank or the Corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock or similar transaction, such shareholder is considered to be acting as a group with other shareholders only with respect to the ownership in that corporation before the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.
(ii) Change in the Effective Control. A change in the effective control of the Bank or the Corporation will occur when: (i) any person or group (as defined in subsection 10(a)(3)(i)) acquires, or has acquired during the 12-month period ending on the date of the most recent acquisition by such person(s), ownership of stock of the Bank or the Corporation possessing 30 percent or more of the total voting power; or (ii) a majority of members of the board of the Bank or the Corporation is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Bank’s or Corporation’s board prior to the date of the appointment or election. However, if any person or group is considered to effectively control the Bank or Corporation, the acquisition of additional control of the Bank or Corporation by the same person(s) is not considered to cause a change in the effective control.

 

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(iii) Change in the Ownership of a Substantial Portion of the Bank’s or Corporation’s Assets. A change in the ownership of a substantial portion of the Bank’s or Corporation’s assets occurs on the date that any person or group acquires, or has acquired during the 12-month period ending on the date of the most recent acquisition by such person(s), assets from the Bank or Corporation that have a total gross fair market value equal to or more than 40 percent of the total gross fair market value of all of the assets of the Bank or Corporation immediately prior to such acquisition(s). Gross fair market value means the value of the assets of the Bank or Corporation, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.
However, there is no Change in Control under this subsection when there is a transfer to an entity that is controlled by the shareholders of the Bank or Corporation immediately after the transfer. A transfer of assets by the Bank or Corporation is not treated as a change in the ownership of such assets if the assets are transferred to: (i) a shareholder of the Bank or Corporation (immediately before the asset transfer) in exchange for or with respect to its stock; (ii) an entity, 50 percent or more of the total value or voting power of which is owned, directly or indirectly, by the Bank or Corporation; (iii) a person, or group of persons, that owns, directly or indirectly, 50 percent or more of the total value or voting power of all the outstanding stock of the Bank or Corporation or (iv) an entity, at least 50 percent of the total value or voting power of which is owned, directly or indirectly, by a person described in (iii). For purposes of this subsection, except as otherwise provided, a person’s status is determined immediately after the transfer of the assets. For example, a transfer to a company in which the Bank or Corporation has no ownership interest before the transaction, but which is a majority-owned subsidiary of the Bank or Corporation after the transaction, is not treated as a change in the ownership of the assets of the transferor Bank or Corporation.
For purposes of this subsection 10(a)(3)(iii), persons will not be considered to be acting as a group solely because they purchase assets of the Bank or Corporation at the same time. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of assets, or similar business transaction with the Bank or Corporation. If a person, including an entity shareholder, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of assets, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only to the extent of the ownership in that corporation before the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

 

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Notwithstanding the foregoing, the acquisition of Bank or Corporation stock by any retirement plan sponsored by the Bank or an affiliate of the Bank will not constitute a Change in Control. Additionally, notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under subsection 10(a) shall be reduced to the extent that on the date of the Employee’s Separation from Service, the amount payable under subsection 10(a) exceeds any limitation on severance benefits that is imposed by the OCC.
(b) Change in Control; Voluntary for Good Reason. Notwithstanding any other provision of this Agreement to the contrary, the Employee may Separate from Service under this Agreement for Good Reason within 12 months following a Change in Control of the Bank or Corporation, as defined in subsection 10(a)(3). In the event that the Employee has a Separation from Service for Good Reason within 12 months following a Change in Control of the Bank or Corporation, the Employee will first deliver to the Company a written notice which will (A) indicate the specific provisions of this Agreement relied upon for such Separation from Service, (B) set forth in reasonable detail the facts and circumstances claimed to provide a basis for such Separation from Service, and (C) describe the steps, actions, events or other items that must be taken, completed or followed by the Company to correct or cure the basis for such Separation from Service. The Company will then have 30 days following the effective date of such notice to fully correct and cure the basis for the Separation from Service. If the Company does not fully correct and cure the basis for the Employee’s Separation from Service within such 30-day period, then the Employee will have the right to Separate from Service with the Company for Good Reason immediately upon delivering to the Company a written Notice of Termination and without any further cure period. Notwithstanding the foregoing, the Company will be entitled to so correct and cure only a maximum of two times during any calendar year.
The Employee shall thereupon be entitled to receive the payment described in subsections 10(a)(1), (2) and (3) of this Agreement, within 30 days. During such 30-day period, the Bank shall not allow the Employee’s participation in any Employee Benefits to lapse and shall continue to provide the Employee with the Automobile Benefits described in subsection 4(d), reimbursement or payment of professional and club dues, and the cost of the Employee’s continuing legal education requirements as described in subsection 4(c). In the event subsection 8(h) applies at the time of the Employee’s termination, the six-month suspension period shall not prevent the Employee from continuing to receive reimbursement of health insurance premiums for himself, his spouse and child living in the Employee’s household, Medicare supplement insurance and life insurance (all as described in subsection 4(b)) immediately following his Separation from Service, without regard to the six-month suspension applicable to cash payments and other benefit amounts.

 

18


 

For purposes of this subsection 10(b), “Good Reason” means, the occurrence of any of the following events, which has not been consented to in advance by the Employee in writing:
(i) The requirement that the Employee perform his principal executive functions more than 30 miles from his Terre Haute, Indiana office.
(ii) A reduction of ten percent or more in the Employee’s base salary as in effect on the date of the Change in Control or as the same may be changed by mutual agreement from time to time, unless part of an institution-wide reduction and similar to the reduction in the base salary of all other executive officers of the Company;
(iii) The removal of the Employee from participation in any incentive or performance-based compensation plans or bonus plans unless the Company terminates participation in the plan or plans with respect to all other executive officers of the Company;
(iv) A material failure by the Company to continue to provide the Employee with the base salary, bonuses or benefits provided for under subsections 4(a), (c), (d) and (e) of this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under those subsections or under any benefit plan or program in which the Employee now or hereafter becomes eligible to participate, or the taking of any action by the Company which would directly or indirectly reduce in a material manner any such benefits or deprive the Employee to a material degree of any such benefit enjoyed by him, unless part of an institution-wide reduction and applied similarly to all other executive officers of the Company;
(v) The assignment to the Employee of duties and responsibilities materially different from those normally associated with his position as referenced in Section 1;
(vi) A failure to elect or re-elect the Employee to the Bank’s board of directors or a failure on the part of the Corporation or its successor to honor any obligation to nominate Employee to the board of directors of the Corporation or its successor;
(vii) A material diminution or reduction in the Employee’s responsibilities or authority (including reporting responsibilities) in connection with his employment with the Company; or
(viii) A material reduction in the secretarial or administrative support of the Employee.

 

19


 

Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under subsection 10(b) shall be reduced to the extent that on the date of the Employee’s Separation from Service, the amount payable under subsection 10(b) exceeds any limitation on severance benefits that is imposed by the OCC.
(c) Compliance with 12 U.S.C. Section 1828(k). Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
(d) Trust.
(1) Within five business days before or after a Change in Control which was not approved in advance by a resolution of a majority of the directors of the Corporation, the Company shall (i) deposit, or cause to be deposited, in a grantor trust (the “Trust”), designed to conform with Revenue Procedure 92-64 (or any successor) and having a trustee independent of the Bank, an amount equal to the amounts which would be payable in a lump sum under subsections 10(a)(1), (2) and (3) hereof if those payment provisions become applicable, and (ii) provide the trustee of the Trust with a written direction to hold said amount and any investment return thereon in a segregated account for the benefit of the Employee, and to follow the procedures set forth in the next paragraph as to the payment of such amounts from the Trust.
(2) During the 12 consecutive month period following the date on which the Company makes the deposit referred to in the preceding paragraph, the Employee may provide the trustee of the Trust with a written notice requesting that the trustee pay to the Employee, in a single sum, the amount designated in the notice as being payable pursuant to subsections 10(a)(1), (2) and (3). Within three business days after receiving said notice, the trustee of the Trust shall send a copy of the notice to the Company via overnight and registered mail, return receipt requested. On the tenth business day after mailing said notice to the Company, the trustee of the Trust shall pay the Employee the amount designated therein in immediately available funds, unless prior thereto the Company provides the trustee with a written notice directing the trustee to withhold such payment. In the latter event, the trustee shall submit the dispute, within ten days of receipt of the notice from the Company, to non-appealable binding arbitration for a determination of the amount payable to the Employee pursuant to subsections 10(a)(1), (2) and (3), and the party responsible for the payment of the costs of such arbitration (which may include any reasonable legal fees and expenses incurred by the Employee) shall be determined by the arbitrator. The Company and the Employee shall choose the arbitrator to settle the dispute, and such arbitrator shall be bound by the rules of the American Arbitration Association in making his or her determination. If the Employee and the Company cannot agree on an arbitrator, then the arbitrator shall be selected under the rules of the American Arbitration Association. The Employee, the Company and the trustee shall be bound by the results of the arbitration and, within three days of the determination by the arbitrator, the trustee shall pay from the Trust the amounts required to be paid to the Employee and/or the Company, and in no event shall the trustee be liable to either party for making the payments as determined by the arbitrator.

 

20


 

(3) Upon the earlier of (i) any payment from the Trust to the Employee, or (ii) the date twelve months after the date on which the Company makes the deposit referred to in subsection 10(d)(1)(i), the trustee of the Trust shall pay to the Company the entire balance remaining in the segregated account maintained for the benefit of the Employee, if any. The Employee shall thereafter have no further interest in the Trust pursuant to this Agreement. However, the termination of the Trust shall not operate as a forfeiture or relinquishment of any of the Employee’s rights under the terms of this Agreement. Furthermore, in the event of a dispute under subsection 10(d)(2), the trustee of the Trust shall continue to hold, in trust, the deposit referred to in subsection 10(d)(1)(i) until a final decision is rendered by the arbitrator pursuant to subsection 10(d)(2).
(e) In the event that any dispute arises between the Employee and the Company as to the terms or interpretation of this Agreement or the obligations thereunder, including this Section, whether instituted by formal legal proceedings or submitted to arbitration pursuant to subsection 10(d)(2), including any action that the Employee takes to enforce the terms of this Section or to defend against any action taken by the Company, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys’ fees, arising from such dispute, proceedings or actions, provided that the Employee shall obtain a final judgment by a court of competent jurisdiction in favor of the Employee or, in the event of arbitration pursuant to subsection 10(d)(2), a determination is made by the arbitrator that the expenses should be paid by the Company. Such reimbursement shall be paid within ten days of Employee’s furnishing to the Company written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Employee.
Should the Employee fail to obtain a final judgment in favor of the Employee and a final judgment or arbitration decision is entered in favor of the Company and if decided by arbitration, the arbitrator, pursuant to subsection 10(d)(2), determines the Employee to be responsible for the Company’s expenses, then the Company shall be reimbursed for all costs and expenses, including reasonable attorneys’ fees arising from such dispute, proceedings or actions. Such reimbursement shall be paid within ten days of the Company furnishing to the Employee written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Company.
11. 2011 Omnibus Plan Awards. Any awards to the Employee under the 2011 Omnibus Plan that are outstanding at the time of a Separation from Service will be governed by the terms of the 2011 Omnibus Plan.

 

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12. Federal Income Tax Withholding. The Bank may withhold all federal and state income or other taxes from any benefit payable under this Agreement as shall be required pursuant to any law or governmental regulation or ruling.
13. Successors and Assigns.
(a) Company. This Agreement shall not be assignable by the Bank or Corporation, provided that this Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank or Corporation which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank or Corporation.
(b) Employee. Because the Company is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Company; provided, however, that nothing in this paragraph shall preclude (i) the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of the Employee or his estate from assigning any rights hereunder to the person or persons entitled thereunto.
(c) Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect.
14. Amendments. No amendments or additions to this Agreement shall be binding unless made in writing and signed by the Bank, the Corporation and the Employee, except as herein otherwise specifically provided.
15. Applicable Law. Except to the extent preempted by federal law, the laws of the State of Indiana, without regard to that State’s choice of law principles, shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise.
16. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. Should any particular covenant, provision or clause of this Agreement be held unreasonable or unenforceable for any reason, including without limitation, the time period, geographic area and/or scope of activity covered by such covenant, provision or clause, the Company and Employee acknowledge and agree that such covenant, provision or clause shall be given effect and enforced to whatever extent would be reasonable and enforceable under applicable law.
17. Entire Agreement. This Agreement: (a) supersedes all other understandings and agreements, oral or written, between the parties with respect to the subject matter of this Agreement; and (b) constitutes the sole agreement between the parties with respect to this subject matter; provided, however, that the benefit plans and arrangements referred to in this Agreement are not superseded or replaced unless this Agreement specifically so states and such benefit plans and arrangements may be set forth in separate plan documents stating their terms.

 

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18. Construction. The rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement.
19. Headings. The headings in this Agreement have been inserted solely for ease of reference and shall not be considered in the interpretation, construction or enforcement of this Agreement.
20. Notices. For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been given (a) if hand delivered, upon delivery to the party, or (b) if mailed, two days following deposit of the notice or communication with the United States Postal Service by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
     
If to the Employee:
  Norman L. Lowery
93 Allendale
Terre Haute, Indiana 47802
 
   
If to the Bank:
  First Financial Bank, N.A.
Attn: Chairman of the Board of Directors
One First Financial Plaza
P.O. Box 540
Terre Haute, Indiana 47808-0540
 
   
With a copy to (which will not constitute notice):
  Krieg DeVault LLP
Attn: Sharon B. Hearn, Esq.
One Indiana Square, Suite 2800
Indianapolis, Indiana 46204
 
   
If to First Financial Corporation:
  First Financial Corporation
Attn: Chairman of the Board of Directors
One First Financial Plaza
P.O. Box 540
Terre Haute, Indiana 47808-0540
 
   
With a copy to (which will not constitute notice):
  Krieg DeVault LLP
Attn: Sharon B. Hearn, Esq.
One Indiana Square, Suite 2800
Indianapolis, Indiana 46204

 

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or to such other address as either party hereto may have furnished to the other party in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
21. Waiver. The waiver by either party of a breach of any provision of this Agreement, or failure to insist upon strict compliance with the terms of this Agreement, shall not be deemed a waiver of any subsequent breach or relinquishment of any right or power under this Agreement.
22. Review and Consultation. Employee acknowledges and agrees he (a) has read this Agreement in its entirety prior to executing it, (b) understands the provisions and effects of this Agreement and (c) has consulted with such attorneys, accountants and financial or other advisors as he has deemed appropriate in connection with the execution of this Agreement. Employee understands, acknowledges and agrees that he has not received any advice, counsel or recommendation with respect to this Agreement from Employer’s attorneys.
IN WITNESS WHEREOF, the parties have executed this Agreement on this 1st day of December, 2010.
                 
ATTEST       FIRST FINANCIAL BANK, N.A.    
 
               
(s) Leticia E. Wright       (s) Rodger McHargue    
             
Title:
  Sr. Executive Assistant       Rodger A. McHargue, Secretary/Treasurer    
 
               
ATTEST       FIRST FINANCIAL CORPORATION    
 
               
(s) Rodger McHargue       (s) Donald E. Smith    
             
Title:
  Secretary       Donald E. Smith, President    
 
               
 
          EMPLOYEE    
 
               
 
          (s) Norman L. Lowery
 
Norman L. Lowery
   

 

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Section 3: EX-10.3 (EXHIBIT 10.3)

Exhibit 10.3
EXHIBIT 10.3 — Schedule of Director Compensation
Compensation of Directors. Each director of the Corporation is also a director of First Financial Bank (“FFB”), the lead subsidiary bank of the Corporation, and receives directors’ fees from each organization. For 2011 a director of the Corporation and FFB will receive a fee of $750 for each board meeting attended.
Non-employee directors also receive a fee for meetings attended of the Audit Committee of $1,000, the Compensation Committee of $1,000, the Governance/Nominating Committee of $500, and the Loan Discount Committee of $300. Each director also will receive from a quarterly director’s fee of $11,250. No non-employee director served as a director of any other subsidiary of the Corporation.
Directors of the Corporation and FFB who are not yet 70 years of age may participate in a deferred director’s fee program at each institution. Under this program, a director may defer $6,000 of his or her director’s fees each year over a five-year period. When the director reaches the age of 65 or age 70, the director may elect to receive payments over a ten-year period. The amount of the deferred fees is used to purchase an insurance product which funds these payments. Each year from the initial date of deferral until payments begin at age 65 or 70, the Corporation accrues a non-cash expense which will equal in the aggregate the amount of the payments to be made to the director over the ten-year period. The Corporation expects that the cash surrender value of the insurance policy will offset the amount of expenses accrued. If a director fails for any reason other than death to serve as a director during the entire five-year period, or the director fails to attend at least 60 regular or special meetings, the amount to be received at age 65 or 70, as applicable, will be pro-rated appropriately.
Directors also may receive compensation previously accrued under the Corporation’s 2005 Long-Term Incentive Plan, no other benefits may be accrued under this plan. Under this plan, directors received 90, 100 or 110 percent of the director’s “award amount” if the Corporation and FFB attained certain goals established by the Corporation’s Compensation Committee. See Exhibit 10.3 to this Form 10-K for a description of this plan.

 

 

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Section 4: EX-10.4 (EXHIBIT 10.4)

Exhibit 10.4
EXHIBIT 10.4 — Schedule of Named Executive Officers Compensation
On December 21, 2010, the Compensation Committee of First Financial Corporation (the “Corporation”) set the 2011 annual base salaries of the named executive officers. These amounts are set forth in the table below.
         
Name and Principal Position   2011 Base Salary  
Donald E. Smith
  $ 709,931  
President and Chairman of the Corporation; Chairman of First Financial Bank, NA
       
Norman L. Lowery
  $ 585,826  
Vice Chairman, CEO and Vice President of the Corporation; President and CEO of First Financial Bank, NA
       
Thomas S. Clary
  $ 182,206  
Senior Vice President and CCO of First Financial Bank, NA
       
Norman D. Lowery
  $ 180,400  
Vice President and COO of First Financial Bank, NA
       
Rodger A. McHargue
  $ 179,812  
CFO of the Corporation; Vice President and CFO of First Financial Bank, NA
       
Richard O. White
  $ 170,831  
Senior Vice President of First Financial Bank, NA
       

 

 

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Section 5: EX-10.8 (EXHIBIT 10.8)

Exhibit 10.8
Exhibit 10.8
FIRST FINANCIAL CORPORATION
2010 SHORT-TERM INCENTIVE COMPENSATION PLAN
(Effective January 1, 2010)
ARTICLE I
Introduction
1.1 Objective. The First Financial Corporation 2010 Short-Term Incentive Compensation Plan is designed to focus the efforts of key employees of the Company and its Subsidiaries on continued improvement in the profitability of the Company and its Subsidiaries with the objective of providing an adequate return to shareholders on their investment in the Company while at the same time assuring that Awards under the Plan, in combination with the Company’s other compensation programs: (a) provide Participants incentives that appropriately balance risk and reward; (b) are compatible with effective controls and risk-management; and (c) are supported by strong oversight of the Board as delegated to the Committee.
1.2 Administration of the Plan. The Plan will be administered by the Committee. The Committee will also (a) adopt such rules and regulations as are appropriate for the proper administration of the Plan in a manner that provides active and effective oversight of the Plan, and (b) make such determinations and take such actions in connection with the Plan as it deems necessary provided that the Committee may take action only upon the vote of a majority of its members. While the Committee may appoint individuals to act on its behalf in the administration of the Plan, it will have the sole, final and conclusive authority to administer, construe and interpret the Plan. The Committee’s determinations and interpretations will be final and binding on all persons, including the Company, its shareholders and persons having any interest in Awards. Any notice or document required to be given to or filed with the Committee will be properly given or filed if delivered or mailed, by certified mail, postage prepaid, to the Compensation Committee, First Financial Corporation Board of Directors, at P.O. Box 540, Terre Haute, Indiana, 47808.
1.3 Definitions. Whenever the initial letter of the following words or phrases is capitalized in the Plan, including any Supplements, they will have the respective meanings set forth below unless otherwise defined herein:
  (a)  
“Award” means the cash compensation awarded to a Participant pursuant to the Plan.
  (b)  
“Award Rate” means the amount of cash, expressed as a percentage of a Participant’s Base Salary as determined by the Committee.
  (c)  
“Base Salary” means the regular base salary and board of director fees actually paid by the Company or a Subsidiary to an employee while such employee is a Participant during the 2010 calendar year, exclusive of additional forms of compensation such as bonuses, other incentive payments, automobile allowances, tax gross-ups and other fringe benefits. Base Salary will include any salary deferral contributions made pursuant to Code Sections 401(k) and 125 and salary deferral contributions made to the First Financial Corporation 2005 Executives’ Deferred Compensation Plan.
  (d)  
“Board” means the Board of Directors of the Company.

 

 


 

  (e)  
“Cause” means:
  (i)  
An intentional act of fraud, embezzlement, theft or personal dishonesty; willful misconduct, or breach of fiduciary duty involving personal profit by the Participant in the course of his employment. No act or failure to act shall be deemed to have been intentional or willful if it was due primarily to an error in judgment or negligence. An act or failure to act shall be considered intentional or willful if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in the best interest of the Company or a Subsidiary;
  (ii)  
Intentional wrongful damage by the Participant to the business or property of the Company or a Subsidiary, causing material harm to the Company or a Subsidiary;
  (iii)  
Breach by the Participant of any confidentiality or non-disclosure agreement in effect from time to time with the Company or a Subsidiary;
  (iv)  
Gross negligence or insubordination by the Participant in the performance of his duties; or
  (v)  
Removal or permanent prohibition of the Participant from participating in the conduct of Company’s or a Subsidiary’s affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 USC 1818(e)(4) and (g)(1).
  (f)  
“Change in Control” means any of the following:
  (i)  
Change in Ownership. A change in the ownership of the Company or a Subsidiary occurs on the date that any person, or group of persons, as defined below, acquires ownership of stock of the Company or a Subsidiary that, together with stock held by the person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of the Company or a Subsidiary. However, if any person or group is considered to own more than 50 percent of the total fair market value or total voting power of the stock, the acquisition of additional stock by the same person or group is not considered to cause a change in the ownership of the Company or a Subsidiary (or to cause a change in the effective control of the Company or a Subsidiary as defined in subsection 1.3(f)(ii). An increase in the percentage of stock owned by any person or group, as a result of a transaction in which the Company or a Subsidiary acquires its stock in exchange for property will be treated as an acquisition of stock for purposes of this subsection 1.3(f)(i). This subsection 1.3(f)(i) only applies when there is a transfer of stock of the Company or a Subsidiary (or issuance of stock of a corporation) and stock in the Company or a Subsidiary remains outstanding after the transaction.

 

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For purposes of subsections 1.3(f)(i) and 1.3(f)(ii), persons will not be considered to be acting as a group solely because they purchase or own stock of the Company or a Subsidiary at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock or similar business transaction with the Company or a Subsidiary. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock or similar transaction, such shareholder is considered to be acting as a group with other shareholders only with respect to the ownership in that corporation before the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.
  (ii)  
Change in the Effective Control. A change in the effective control of the Company or a Subsidiary will occur when: (A) any person or group acquires, or has acquired during the 12-month period ending on the date of the most recent acquisition by such person(s), ownership of stock of the Company or a Subsidiary possessing 30 percent or more of the total voting power; or (B) a majority of members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. However, if any person or group is considered to effectively control the Company or a Subsidiary, the acquisition of additional control of the Company or a Subsidiary by the same person(s) is not considered to cause a change in the effective control.
  (iii)  
Change in the Ownership of a Substantial Portion of the Subsidiary’s or Company’s Assets. A change in the ownership of a substantial portion of the Company’s or a Subsidiary’s assets occurs on the date that any person or group acquires, or has acquired during the 12-month period ending on the date of the most recent acquisition by such person(s), assets from the Company or a Subsidiary that have a total gross fair market value equal to or more than 40 percent of the total gross fair market value of all of the assets of the Company or a Subsidiary immediately prior to such acquisition(s). Gross fair market value means the value of the assets of the Company or a Subsidiary, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

 

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However, there is no Change in Control under this subsection when there is a transfer to an entity that is controlled by the shareholders of the Company or a Subsidiary immediately after the transfer. A transfer of assets by the Company or a Subsidiary is not treated as a change in the ownership of such assets if the assets are transferred to: (A) a shareholder of the Company or a Subsidiary (immediately before the asset transfer) in exchange for or with respect to its stock; (B) an entity, 50 percent or more of the total value or voting power of which is owned, directly or indirectly, by the Company or a Subsidiary; (C) a person, or group of persons, that owns, directly or indirectly, 50 percent or more of the total value or voting power of all the outstanding stock of the Company or a Subsidiary or (D) an entity, at least 50 percent of the total value or voting power of which is owned, directly or indirectly, by a person described in (C). For purposes of this subsection 1.3(f)(iii), except as otherwise provided, a person’s status is determined immediately after the transfer of the assets. For example, a transfer to a corporation in which the Company or a Subsidiary has no ownership interest before the transaction, but which is a majority-owned subsidiary of the Company or a Subsidiary after the transaction, is not treated as a change in the ownership of the assets of the Company or a Subsidiary.
     
For purposes of this subsection 1.3(e)(iii), persons will not be considered to be acting as a group solely because they purchase assets of the Company or a Subsidiary at the same time. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of assets, or similar business transaction with the Company or a Subsidiary. If a person, including an entity shareholder, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of assets, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only to the extent of the ownership in that corporation before the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.
     
Notwithstanding the foregoing, the acquisition of Company or Subsidiary stock by any retirement plan sponsored by the Company or a Subsidiary or an affiliate of the Company or a Subsidiary will not constitute a Change in Control.
  (g)  
“Code” means the Internal Revenue Code of 1986, as amended.
  (h)  
“Company” means, unless otherwise stated, First Financial Corporation, organized and existing under the laws of the State of Indiana, or any successor (by merger, consolidation, purchase or otherwise) to such corporation which assumes the obligations of such corporation under the Plan and the Subsidiaries of the Company.
  (i)  
“Committee” means the Compensation Committee of the Board.
  (j)  
“Effective Date” means January 1, 2010, which is the effective date of the Plan.

 

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  (k)  
“Good Reason” means the occurrence of any of the following events, which has not been consented to in advance by the Participant in writing:
  (i)  
The requirement that the Participant move his personal residence;
  (ii)  
A reduction of ten percent or more in the Participant’s base salary, unless part of an institution-wide reduction and similar to the reduction in the base salary of all other similarly situated officers of the Company or a Subsidiary;
  (iii)  
The removal of the Participant from participation in any incentive compensation (including, but not limited to, the Plan) or performance-based compensation plans or bonus plans unless the Company terminates participation in the plan or plans with respect to all other similarly situated officers of the Company or a Subsidiary;
  (iv)  
The assignment to the Participant of duties and responsibilities materially different from those normally associated with his position; or
  (v)  
A material diminution or reduction in the Participant’s responsibilities or authority (including reporting responsibilities) in connection with his employment with the Company or a Subsidiary.
  (l)  
“Notice of Award” means the notice provided to a Participant which outlines the Award Rate, Performance Goals and other terms and conditions of their Award.
  (m)  
“Participant” means an individual who is employed by the Company and who is designated as a Participant by the Committee.
  (n)  
“Performance Goals” means the financial performance levels with respect to the Company and/or the Subsidiaries which must be met before an Award may be earned as set forth in a Notice of Award. The Performance Goals will be determined by the Committee utilizing the United States Treasury Department final “Guidance on Sound Incentive Compensation Policies” and any subsequent guidance hereafter provided by applicable statute, rule or regulation.
  (o)  
“Permanent and Total Disability” means a disability as determined under a long-term disability insurance policy sponsored by the Company or a Subsidiary.
  (p)  
“Plan” means the short-term incentive compensation plan contained in this instrument and any subsequent amendment to this instrument, which shall have been adopted by the Board or Committee known as the First Financial Corporation 2010 Short-Term Incentive Compensation Plan.
  (q)  
“Subsidiary” means First Financial Bank and such other subsidiary corporations of the Company which are designated by the Board or Committee as eligible to participate in the Plan.
ARTICLE II
Eligibility and Participation
Participation in the Plan is limited to those individuals who have been designated as Participants by resolution of the Committee. A Participant will become covered by the Plan effective as of the date on which the individual is designated a Participant by resolution of the Committee.

 

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ARTICLE III
Awards
3.1 Determination of Awards. The Committee shall determine (a) whether or not to make Awards, and (b) the terms and conditions of an Award. The Committee may take into account such factors as it determines in its discretion in determining the terms and conditions of an Award and the Award Rate. These factors may include, but are not limited to, the nature of the services rendered by the Participant, his or her current and potential contributions to the success of the Company, the Participant’s Base Salary, and such other factors as the Committee, in its sole discretion, considers relevant.
3.2 Communication of Awards. The Committee will communicate in writing to Participants in a Notice of Award the Award Rates, Performance Goals (and their respective weightings) and any requirements or other criteria with respect to an Award.
3.3 Considerations in Establishing Performance Goals. In determining appropriate Performance Goals for the 2010 calendar year and the relative weight accorded each Performance Goal, the Committee must:
  (a)  
Balance risk and financial results in a manner that does not encourage Participants to expose the Company and its Subsidiaries to imprudent risks;
  (b)  
Make such determination in a manner designed to ensure that Participant’ overall compensation is balanced and that the Awards are consistent with the policies and procedures of the Company and its Subsidiaries regarding such compensation arrangements; and
  (c)  
Monitor the success of the Performance Goals and weighting established in prior years, alone and in combination with other incentive compensation awarded to the same Participants, and make appropriate adjustments in future calendar years as needed so that payments appropriately incentivize Participants and appropriately reflect risk.
3.4 Components of Calculation. The Committee, in its sole discretion, will establish the following business criteria for calculating Awards to Participants with respect to the Company and the Subsidiaries:
  (a)  
The Performance Goals;
  (b)  
The relative weight accorded each Performance Goal; and
  (c)  
The threshold, target and maximum Award Rates for each Participant. The calculation of Awards will be made by interpolating within the interval between the target Award Rate and the threshold Award Rate and between the target Award Rate and the maximum Award Rate, and rounding to the nearest dollar.

 

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3.5 Earning of Awards.
  (a)  
An Award will be treated as earned to the extent:
  (i)  
the threshold, target or maximum Performance Goals are met; and
  (ii)  
the Participant is employed on the last day of the performance period.
  (b)  
In the event a Participant terminates employment before the end of the performance period, he will not earn any portion of his Award unless he terminates employment with the Company or a Subsidiary for one of the following reasons:
  (i)  
The Participant dies.
 
  (ii)  
The Participant’s incurs a Permanent and Total Disability.
 
  (iii)  
The Participant terminates employment on or after attaining age 65.
 
  (iv)  
The Participant terminates employment for Good Reason.
 
  (v)  
The Participant is terminated without Cause.
If at least the threshold Performance Goals are met but the Participant terminates employment due to one or more of the circumstances described in subsections 3.5(b)(i) through 3.5(b)(v), he will earn a pro rata portion of the Award that he would otherwise be entitled to for the 2010 calendar year. The Award will be calculated at the level attained based on the ratio that the number of days during the 2010 calendar year in which he was actually employed bears to 365.
3.6 Time and Form of Payment of Earned Awards.
  (a)  
Earned Awards will be paid in single sum in cash within 75 days after December 31, 2010. If a Participant is not employed by the Company or a Subsidiary on the date payment is made, he will forfeit his Award.
  (b)  
Notwithstanding subsection 3.6(a), in the event:
  (i)  
The Participant dies;
 
  (ii)  
The Participant incurs a Permanent and Total Disability;
 
  (iii)  
The Participant terminates employment on or after attaining age 65;
 
  (iv)  
The Participant terminates employment for Good Reason; or
 
  (v)  
The Participant’s employment is terminated without Cause,
     
he will not forfeit his earned Award. In such cases, a Participant will be 100 percent vested in his earned Award and payment will made within 30 days of the termination of employment.
  (c)  
In the event of a Change in Control, a Participant will be 100 percent vested in his earned Award and payment will be made as of the date of the Change in Control.

 

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3.7 Clawback of Awards. In the event the Company is required to prepare an accounting restatement due to the Company’s material noncompliance with any financial reporting requirement under securities laws, and the Company paid an Award to a Participant which was based on the erroneous data within three years preceding the date of the accounting restatement, then the Participant is required to repay the Company the excess which would have been paid to the Participant under the accounting restatement.
3.8 Withholding of Taxes. Each Participant will be solely responsible for, and the Company will withhold from any amounts payable under the Plan, all applicable federal, state, city and local income taxes and the Participant’s share of applicable employment taxes.
ARTICLE IV
Miscellaneous
4.1 Amendment or Termination. The Board or the Committee may, at any time, alter, amend, modify, suspend or terminate the Plan, but may not, except as provided in Section 3.7, without the consent of a Participant to whom an Award has been made, make any alteration which would adversely affect an Award previously granted under the Plan.
4.2 Employment Rights. The Plan does not constitute a contract of employment, and participation in the Plan will not give a Participant the right to be rehired or retained in the employ of the Company or any Subsidiary, nor will participation in the Plan give any Participant any right or claim to any benefit under the Plan, unless such right or claim exists under the terms of the Plan.
4.3 Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person relying thereon considers pertinent and reliable, and signed, made or presented by the proper party or parties.
4.4 Gender and Number. Where the context permits, words in the masculine gender will include the feminine gender, the plural will include the singular and the singular will include the plural.
4.5 Action by the Board or Committee. Any action required of or permitted by the Board or Committee under this Plan will be by resolution of the Board, the Committee or by a person or persons authorized by resolution of the Board or Committee.
4.6 Controlling Laws. Except to the extent superseded by laws of the United States, the laws of Indiana will be controlling in all matters relating to the Plan. The Plan and all Awards are intended to be exempt from the applicable provision of Code Section 409A. To the extent Code Section 409A applies, the Plan and all Awards intend to comply, and will be construed by the Board in a manner which complies with the applicable provisions of Code Section 409A. To the extent there is any conflict between a provision of the Plan or an Award and a provision of Code Section 409A, the applicable provision of Code Section 409A will control.
4.7 Mistake of Fact. Any mistake of fact or misstatement of fact will be corrected when it becomes known and proper adjustment made by reason thereof.

 

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4.8 Severability. In the event any provision of the Plan is held to be illegal or invalid for any reason, such illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and endorsed as if such illegal or invalid provision had never been contained in the Plan.
4.9 Effect of Headings. The descriptive headings of the Articles and Sections of the Plan are inserted for convenience of reference and identification only and do not constitute a part of the Plan for purposes of interpretation.
4.10 Nontransferability. No Award or Award payment will be transferable, except by the Participant’s will or the applicable laws of descent and distribution. During the Participant’s lifetime, his Award will be payable only to the Participant or his guardian or attorney-in-fact. The payment and any rights and privileges pertaining thereto may not be transferred, assigned, pledged or hypothecated by him in any way, whether by operation of law or otherwise and will not be subject to execution, attachment or similar process.
4.11 No Liability. No member of the Board or the Committee or any officer or Participant of the Company or Subsidiary will be personally liable for any action, omission or determination made in good faith in connection with the Plan. The Company will indemnify and hold harmless the members of the Committee, the Board and the officers and Participants of the Company and its Subsidiaries, and each of them, from and against any and all loss which results from liability to which any of them may be subjected by reason of any act or conduct (except willful misconduct or gross negligence) in their official capacities in connection with the administration of the Plan, including all expenses reasonably incurred in their defense, in case the Company fails to provide such defense. By participating in the Plan, each Participant agrees to release and hold harmless each of the Company, the Subsidiaries (and their respective directors, officers and employees), the Board and the Committee, from and against any tax or other liability, including without limitation, interest and penalties, incurred by the Participant in connection with his participation in the Plan.
4.12 Funding. All amounts payable under the Plan will be paid by the Company from its general assets. The Company is not required to segregate on its books or otherwise establish any funding procedure for any amount to be used for the payment of benefits under the Plan. The Company may, however, in its sole discretion, set funds aside in investments to meet its anticipated obligations under the Plan. Any such action or set-aside amount may not be deemed to create a trust of any kind between the Company and any Participant or beneficiary or to constitute the funding of any Plan benefits. Consequently, any person entitled to a payment under the Plan will have no rights against the assets of the Company greater than the rights of any other unsecured creditor of the Company.

 

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Section 6: EX-10.9 (EXHIBIT 10.9)

Exhibit 10.9
Exhibit 10.9
FIRST FINANCIAL CORPORATION
2010 LONG-TERM INCENTIVE COMPENSATION PLAN
(Effective January 1, 2010)

ARTICLE I
Introduction
1.1 Objective. The First Financial Corporation 2010 Long-Term Incentive Compensation Plan is designed to focus the efforts of key employees of the Company and its Subsidiaries on continued improvement in the profitability of the Company and its Subsidiaries with the objective of providing an adequate return to shareholders on their investment in the Company while at the same time assuring that Awards under the Plan, in combination with the Company’s other compensation programs: (a) provide Participants incentives that appropriately balance risk and reward; (b) are compatible with effective controls and risk-management; and (c) are supported by strong oversight of the Board as delegated to the Committee.
1.2 Administration of the Plan. The Plan will be administered by the Committee. The Committee will also (a) adopt such rules and regulations as are appropriate for the proper administration of the Plan in a manner that provides active and effective oversight of the Plan, and (b) make such determinations and take such actions in connection with the Plan as it deems necessary provided that the Committee may take action only upon the vote of a majority of its members. While the Committee may appoint individuals to act on its behalf in the administration of the Plan, it will have the sole, final and conclusive authority to administer, construe and interpret the Plan. The Committee’s determinations and interpretations will be final and binding on all persons, including the Company, its shareholders and persons having any interest in Awards. Any notice or document required to be given to or filed with the Committee will be properly given or filed if delivered or mailed, by certified mail, postage prepaid, to the Compensation Committee, First Financial Corporation Board of Directors, at P.O. Box 540, Terre Haute, Indiana, 47808.
1.3 Definitions. Whenever the initial letter of the following words or phrases is capitalized in the Plan, including any Supplements, they will have the respective meanings set forth below unless otherwise defined herein:
  (a)  
“Award” means the cash compensation awarded to a Participant pursuant to the Plan.
  (b)  
“Award Rate” means the amount of cash, expressed as a percentage of a Participant’s Base Salary as determined by the Committee.
  (c)  
“Base Salary” means the regular base salary and board of director fees actually paid by the Company or a Subsidiary to an employee while such employee is a Participant during calendar year 2010, exclusive of additional forms of compensation such as bonuses, other incentive payments, automobile allowances, tax gross-ups and other fringe benefits. Base Salary will include any board of director fees paid by the Company, Subsidiary or affiliate as well as salary deferral contributions made pursuant to Code Sections 401(k) and 125 and salary deferral contributions made to the First Financial Corporation 2005 Executives’ Deferred Compensation Plan.

 

 


 

  (d)  
“Board” means the Board of Directors of the Company.
 
  (e)  
“Cause” means:
  (i)  
An intentional act of fraud, embezzlement, theft or personal dishonesty; willful misconduct, or breach of fiduciary duty involving personal profit by the Participant in the course of his employment. No act or failure to act shall be deemed to have been intentional or willful if it was due primarily to an error in judgment or negligence. An act or failure to act shall be considered intentional or willful if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in the best interest of the Company or a Subsidiary;
  (ii)  
Intentional wrongful damage by the Participant to the business or property of the Company or a Subsidiary, causing material harm to the Company or a Subsidiary;
  (iii)  
Breach by the Participant of any confidentiality or non-disclosure agreement in effect from time to time with the Company or a Subsidiary;
  (iv)  
Gross negligence or insubordination by the Participant in the performance of his duties; or
  (v)  
Removal or permanent prohibition of the Participant from participating in the conduct of Company’s or a Subsidiary’s affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 USC 1818(e)(4) and (g)(1).
  (f)  
“Change in Control” means any of the following:
  (i)  
Change in Ownership. A change in the ownership of the Company or a Subsidiary occurs on the date that any person, or group of persons, as defined below, acquires ownership of stock of the Company or a Subsidiary that, together with stock held by the person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of the Company or a Subsidiary. However, if any person or group is considered to own more than 50 percent of the total fair market value or total voting power of the stock, the acquisition of additional stock by the same person or group is not considered to cause a change in the ownership of the Company or a Subsidiary (or to cause a change in the effective control of the Company or a Subsidiary as defined in subsection 1.3(f)(ii). An increase in the percentage of stock owned by any person or group, as a result of a transaction in which the Company or a Subsidiary acquires its stock in exchange for property will be treated as an acquisition of stock for purposes of this subsection 1.3(f)(i). This subsection 1.3(f)(i) only applies when there is a transfer of stock of the Company or a Subsidiary (or issuance of stock of a corporation) and stock in the Company or a Subsidiary remains outstanding after the transaction.

 

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For purposes of subsections 1.3(f)(i) and 1.3(f)(ii), persons will not be considered to be acting as a group solely because they purchase or own stock of the Company or a Subsidiary at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock or similar business transaction with the Company or a Subsidiary. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock or similar transaction, such shareholder is considered to be acting as a group with other shareholders only with respect to the ownership in that corporation before the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.
  (ii)  
Change in the Effective Control. A change in the effective control of the Company or a Subsidiary will occur when: (A) any person or group acquires, or has acquired during the 12-month period ending on the date of the most recent acquisition by such person(s), ownership of stock of the Company or a Subsidiary possessing 30 percent or more of the total voting power; or (B) a majority of members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. However, if any person or group is considered to effectively control the Company or a Subsidiary, the acquisition of additional control of the Company or a Subsidiary by the same person(s) is not considered to cause a change in the effective control.
  (iii)  
Change in the Ownership of a Substantial Portion of the Subsidiary’s or Company’s Assets. A change in the ownership of a substantial portion of the Company’s or a Subsidiary’s assets occurs on the date that any person or group acquires, or has acquired during the 12-month period ending on the date of the most recent acquisition by such person(s), assets from the Company or a Subsidiary that have a total gross fair market value equal to or more than 40 percent of the total gross fair market value of all of the assets of the Company or a Subsidiary immediately prior to such acquisition(s). Gross fair market value means the value of the assets of the Company or a Subsidiary, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.
However, there is no Change in Control under this subsection when there is a transfer to an entity that is controlled by the shareholders of the Company or a Subsidiary immediately after the transfer. A transfer of assets by the Company or a Subsidiary is not treated as a change in the ownership of such assets if the assets are transferred to: (A) a shareholder of the Company or a Subsidiary (immediately before the asset transfer) in exchange for or with respect to its stock; (B) an entity, 50 percent or more of the total value or voting power of which is owned, directly or indirectly,

 

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by the Company or a Subsidiary; (C) a person, or group of persons, that owns, directly or indirectly, 50 percent or more of the total value or voting power of all the outstanding stock of the Company or a Subsidiary or (D) an entity, at least 50 percent of the total value or voting power of which is owned, directly or indirectly, by a person described in (C). For purposes of this subsection 1.3(f)(iii), except as otherwise provided, a person’s status is determined immediately after the transfer of the assets. For example, a transfer to a corporation in which the Company or a Subsidiary has no ownership interest before the transaction, but which is a majority-owned subsidiary of the Company or a Subsidiary after the transaction, is not treated as a change in the ownership of the assets of the Company or a Subsidiary.
For purposes of this subsection 1.3(e)(iii), persons will not be considered to be acting as a group solely because they purchase assets of the Company or a Subsidiary at the same time. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of assets, or similar business transaction with the Company or a Subsidiary. If a person, including an entity shareholder, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of assets, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only to the extent of the ownership in that corporation before the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.
Notwithstanding the foregoing, the acquisition of Company or Subsidiary stock by any retirement plan sponsored by the Company or a Subsidiary or an affiliate of the Company or a Subsidiary will not constitute a Change in Control.
  (g)  
“Code” means the Internal Revenue Code of 1986, as amended.
  (h)  
“Company” means, unless otherwise stated, First Financial Corporation, organized and existing under the laws of the State of Indiana, or any successor (by merger, consolidation, purchase or otherwise) to such corporation which assumes the obligations of such corporation under the Plan and the Subsidiaries of the Company.
  (i)  
“Committee” means the Compensation Committee of the Board.
  (j)  
“Effective Date” means January 1, 2010, which is the effective date of the Plan.

 

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  (k)  
“Good Reason” means the occurrence of any of the following events, which has not been consented to in advance by the Participant in writing:
  (i)  
The requirement that the Participant move his personal residence;
  (ii)  
A reduction of ten percent or more in the Participant’s base salary, unless part of an institution-wide reduction and similar to the reduction in the base salary of all other similarly situated officers of the Company or a Subsidiary;
  (iii)  
The removal of the Participant from participation in any incentive compensation (including, but not limited to, the Plan) or performance-based compensation plans or bonus plans unless the Company terminates participation in the plan or plans with respect to all other similarly situated officers of the Company or a Subsidiary;
  (iv)  
The assignment to the Participant of duties and responsibilities materially different from those normally associated with his position; or
  (v)  
A material diminution or reduction in the Participant’s responsibilities or authority (including reporting responsibilities) in connection with his employment with the Company or a Subsidiary.
  (l)  
“Notice of Award” means the notice provided to a Participant which outlines the Award Rate, Performance Goals and other terms and conditions of their Award.
  (m)  
“Participant” means an individual who is employed by the Company and who is designated as a Participant by the Committee.
  (n)  
“Performance Goals” means the financial performance levels with respect to the Company and/or the Subsidiaries which must be met before an Award may be earned as set forth in a Notice of Award. The Performance Goals will be determined by the Committee utilizing the United States Treasury Department final “Guidance on Sound Incentive Compensation Policies” and any subsequent guidance hereafter provided by applicable statute, rule or regulation.
  (o)  
“Performance Period” means the period of time specified by the Committee during which an Award may be earned
  (p)  
“Permanent and Total Disability” means a disability as determined under a long-term disability insurance policy sponsored by the Company or a Subsidiary.
  (q)  
“Plan” means the long-term incentive compensation plan contained in this instrument and any subsequent amendment to this instrument, which shall have been adopted by the Board or Committee known as the First Financial Corporation 2010 Long-Term Incentive Compensation Plan.
  (r)  
“Retirement” or “Retires” means a Participant’s Termination of Service on or after attaining age 65 for reasons other than death or Permanent and Total Disability.
  (s)  
“Subsidiary” means First Financial Bank and such other subsidiary corporations of the Company which are designated by the Board or Committee as eligible to participate in the Plan.

 

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  (t)  
“Termination of Service” means the occurrence of any act or event or any failure to act, whether pursuant to an employment agreement or otherwise, that actually or effectively causes or results in a Participant ceasing, for whatever reason, to be an employee of the Company or a Subsidiary, including, but not limited to, death, Permanent and Total Disability, Retirement, termination by the Company or a Subsidiary of the Participant’s employment with the Company or a Subsidiary and voluntary resignation or termination by the Participant of his or her employment with the Company or a Subsidiary.
ARTICLE II
Eligibility and Participation
Participation in the Plan is limited to those individuals who have been designated as Participants by resolution of the Committee. A Participant will become covered by the Plan effective as of the date on which the individual is designated a Participant by resolution of the Committee.
ARTICLE III
Awards
3.1 Determination of Awards. The Committee shall determine (a) whether or not to make Awards, and (b) the terms and conditions of an Award. The Committee may take into account such factors as it determines in its discretion in determining the terms and conditions of an Award and the Award Rate. These factors may include, but are not limited to, the nature of the services rendered by the Participant, his or her current and potential contributions to the success of the Company, the Participant’s Base Salary, and such other factors as the Committee, in its sole discretion, considers relevant.
3.2 Communication of Awards. The Committee will communicate to Participants in a Notice of Award the Award Rates, Performance Goals (and their respective weightings) and any requirements or other criteria with respect to an Award.
3.3 Considerations in Establishing Performance Goals. In determining appropriate Performance Goals and the relative weight accorded each Performance Goal, the Committee must:
  (a)  
Balance risk and financial results in a manner that does not encourage Participants to expose the Company and its Subsidiaries to imprudent risks;
  (b)  
Make such determination in a manner designed to ensure that Participant’ overall compensation is balanced and that the Awards are consistent with the policies and procedures of the Company and its Subsidiaries regarding such compensation arrangements; and
  (c)  
Monitor the success of the Performance Goals and weighting, alone and in combination with other incentive compensation awarded to the same Participants, and make appropriate adjustments in future calendar years as needed so that payments appropriately incentivize Participants and appropriately reflect risk.

 

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3.4 Components of Calculation. The Committee, in its sole discretion, will establish the following business criteria for calculating Awards to Participants with respect to the Company and the Subsidiaries:
  (a)  
The Performance Goals;
 
  (b)  
The relative weight accorded each Performance Goal; and
  (c)  
The threshold, target and maximum Award Rates for each Participant. The calculation of Awards will be made by interpolating within the interval between the target Award Rate and the threshold Award Rate and between the target Award Rate and the maximum Award Rate, and rounding to the nearest dollar.
3.5 Earning of Awards.
  (a)  
An Award will be treated as earned to the extent:
  (i)  
The threshold, target or maximum Performance Goals are met; and
 
  (ii)  
The Participant is employed on the last day of the Performance Period.
  (b)  
In the event a Participant incurs a Termination of Service before the end of the Performance Period, he will not earn any portion of his Award unless his employment with the Company or a Subsidiary terminates for one of the following reasons:
  (i)  
The Participant dies.
 
  (ii)  
The Participant incurs a Termination of Service due to a Permanent and Total Disability.
 
  (iii)  
The Participant Retires.
 
  (iv)  
The Participant incurs a Termination of Service for Good Reason.
 
  (v)  
The Participant’s employment is terminated without Cause.
  (c)  
If at least the threshold Performance Goals are met but the Participant incurs a Termination of Service due to one or more of the circumstances described in subsections 3.5(b)(i) through 3.5(b)(v), he will earn a pro rata portion of the Award that he would otherwise be entitled to for calendar year 2010. The Award will be calculated at the level attained based on the ratio that the number of days during the 2010 calendar year in which he was actually employed bears to 365.

 

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3.6 Vesting of Earned Awards.
  (a)  
Except as set forth in subsection 3.6(b), a Participant will become vested in his or her earned awards in accordance with the following schedule provided he or she is employed on the applicable vesting date.
                 
Anniversary of   Vested     Forfeited  
Earning Date   Percentage     Percentage  
1st
    33 %     67 %
2nd
    66 %     34 %
3rd
    100 %     0 %
  (b)  
Notwithstanding subsection 3.6(a), in the event:
  (i)  
The Participant dies;
 
  (ii)  
The Participant incurs a incurs a Termination of Service due to a Permanent and Total Disability;
 
  (iii)  
The Participant Retires;
 
  (iv)  
The Participant incurs a Termination of Service for Good Reason; or
 
  (v)  
The Participant’s employment is terminated without Cause,
 
     
he will not forfeit his earned Award. In such cases, a Participant will be 100 percent vested in his earned Award and payment will made within 30 days of the date of Termination of Service.
  (c)  
In the event of a Change in Control, a Participant will be 100 percent vested in his earned Award and payment will be made as of the date of the Change in Control.
3.7 Time and Form of Payment of Vested Awards. Except as otherwise provided in Section 3.6, the vested portion of Awards will be paid in single sum in cash within 75 days after the time it becomes vested.
3.8 Clawback of Awards. In the event the Company is required to prepare an accounting restatement due to the Company’s material noncompliance with any financial reporting requirement under securities laws, and the Company paid an Award to a Participant which was based on the erroneous data within three years preceding the date of the accounting restatement, then the Participant is required to repay the Company the excess amount which would not have been paid to the Participant under the accounting restatement.
3.9 Withholding of Taxes. Each Participant will be solely responsible for, and the Company will withhold from any amounts payable under the Plan, all applicable federal, state, city and local income taxes and the Participant’s share of applicable employment taxes.

 

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ARTICLE IV
Miscellaneous
4.1 Amendment or Termination. The Board or the Committee may, at any time, alter, amend, modify, suspend or terminate the Plan, but may not, except as provided in Section 3.8, without the consent of a Participant to whom an Award has been made, make any alteration which would adversely affect an Award previously granted under the Plan.
4.2 Employment Rights. The Plan does not constitute a contract of employment, and participation in the Plan will not give a Participant the right to be rehired or retained in the employ of the Company or any Subsidiary, nor will participation in the Plan give any Participant any right or claim to any benefit under the Plan, unless such right or claim exists under the terms of the Plan.
4.3 Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person relying thereon considers pertinent and reliable, and signed, made or presented by the proper party or parties.
4.4 Gender and Number. Where the context permits, words in the masculine gender will include the feminine gender, the plural will include the singular and the singular will include the plural.
4.5 Action by the Board or Committee. Any action required of or permitted by the Board or Committee under this Plan will be by resolution of the Board, the Committee or by a person or persons authorized by resolution of the Board or Committee.
4.6 Controlling Laws. Except to the extent superseded by laws of the United States, the laws of Indiana will be controlling in all matters relating to the Plan. The Plan and all Awards are intended to be exempt from the applicable provisions of Code Section 409A. To the extent Code Section 409A applies, the Plan and all Awards intend to comply, and will be construed by the Board in a manner which complies with the applicable provisions of Code Section 409A. To the extent there is any conflict between a provision of the Plan or an Award and a provision of Code Section 409A, the applicable provision of Code Section 409A will control.
4.7 Mistake of Fact. Any mistake of fact or misstatement of fact will be corrected when it becomes known and proper adjustment made by reason thereof.
4.8 Severability. In the event any provision of the Plan is held to be illegal or invalid for any reason, such illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and endorsed as if such illegal or invalid provision had never been contained in the Plan.
4.9 Effect of Headings. The descriptive headings of the Articles and Sections of the Plan are inserted for convenience of reference and identification only and do not constitute a part of the Plan for purposes of interpretation.

 

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4.10 Nontransferability. No Award or Award payment will be transferable, except by the Participant’s will or the applicable laws of descent and distribution. During the Participant’s lifetime, his Award will be payable only to the Participant or his guardian or attorney-in-fact. The payment and any rights and privileges pertaining thereto may not be transferred, assigned, pledged or hypothecated by him in any way, whether by operation of law or otherwise and will not be subject to execution, attachment or similar process.
4.11 No Liability. No member of the Board or the Committee or any officer or Participant of the Company or Subsidiary will be personally liable for any action, omission or determination made in good faith in connection with the Plan. The Company will indemnify and hold harmless the members of the Committee, the Board and the officers and Participants of the Company and its Subsidiaries, and each of them, from and against any and all loss which results from liability to which any of them may be subjected by reason of any act or conduct (except willful misconduct or gross negligence) in their official capacities in connection with the administration of the Plan, including all expenses reasonably incurred in their defense, in case the Company fails to provide such defense. By participating in the Plan, each Participant agrees to release and hold harmless each of the Company, the Subsidiaries (and their respective directors, officers and employees), the Board and the Committee, from and against any tax or other liability, including without limitation, interest and penalties, incurred by the Participant in connection with his participation in the Plan.
4.12 Funding. All amounts payable under the Plan will be paid by the Company from its general assets. The Company is not required to segregate on its books or otherwise establish any funding procedure for any amount to be used for the payment of benefits under the Plan. The Company may, however, in its sole discretion, set funds aside in investments to meet its anticipated obligations under the Plan. Any such action or set-aside amount may not be deemed to create a trust of any kind between the Company and any Participant or beneficiary or to constitute the funding of any Plan benefits. Consequently, any person entitled to a payment under the Plan will have no rights against the assets of the Company greater than the rights of any other unsecured creditor of the Company.

 

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Section 7: EX-10.10 (EXHIBIT 10.10)

Exhibit 10.10
Exhibit 10.10
First Financial Corporation
2011 Short-Term Incentive Compensation Plan
(Effective as of January 1, 2011)
(LOGO)
Krieg DeVault LLP
One Indiana Square, Suite 2800
Indianapolis, IN 46204-2079

 

 


 

TABLE OF CONTENTS
         
ARTICLE I Introduction
    1  
 
       
1.1 Objective
    1  
1.2 Administration of the Plan
    1  
1.3 Definitions
    1  
 
       
ARTICLE II Eligibility and Participation
    3  
 
       
ARTICLE III Awards
    3  
 
       
3.1 Annual Determination of Awards
    3  
3.2 Communication of Awards
    3  
3.3 Considerations in Establishing Performance Goals
    3  
3.4 Components of Calculation
    4  
3.5 Earning of Awards
    4  
3.6 Time and Form of Payment of Earned Awards
    4  
3.7 Clawback of Awards
    4  
3.8 Withholding of Taxes
    4  
 
       
ARTICLE IV Miscellaneous
    4  
 
       
4.1 Amendment or Termination
    4  
4.2 Employment Rights
    4  
4.3 Evidence
    5  
4.4 Gender and Number
    5  
4.5 Action by the Board or Committee
    5  
4.6 Controlling Laws
    5  
4.7 Mistake of Fact
    5  
4.8 Severability
    5  
4.9 Effect of Headings
    5  
4.10 Nontransferability
    5  
4.11 No Liability
    6  
4.12 Funding
    6  

 

i


 

FIRST FINANCIAL CORPORATION
2011 SHORT-TERM INCENTIVE COMPENSATION PLAN
(Effective January 1, 2011)

ARTICLE I
Introduction
1.1 Objective. The First Financial Corporation 2011 Short-Term Incentive Compensation Plan is designed to focus the efforts of key employees of the Company and its Subsidiaries on continued improvement in the profitability of the Company and its Subsidiaries with the objective of providing an adequate return to shareholders on their investment in the Company while at the same time assuring that Awards under the Plan, in combination with the Company’s other compensation programs: (a) provide Participants incentives that appropriately balance risk and reward; (b) are compatible with effective controls and risk-management; and (c) are supported by strong oversight of the Board as delegated to the Committee.
1.2 Administration of the Plan. The Plan will be administered by the Committee. The Committee will also (a) adopt such rules and regulations as are appropriate for the proper administration of the Plan in a manner that provides active and effective oversight of the Plan, and (b) make such determinations and take such actions in connection with the Plan as it deems necessary provided that the Committee may take action only upon the vote of a majority of its members. While the Committee may appoint individuals to act on its behalf in the administration of the Plan, it will have the sole, final and conclusive authority to administer, construe and interpret the Plan. The Committee’s determinations and interpretations will be final and binding on all persons, including the Company, its shareholders and persons having any interest in Awards. Any notice or document required to be given to or filed with the Committee will be properly given or filed if delivered or mailed, by certified mail, postage prepaid, to the Compensation Committee, First Financial Corporation Board of Directors, at P.O. Box 540, Terre Haute, Indiana, 47808.
1.3 Definitions. Whenever the initial letter of the following words or phrases is capitalized in the Plan, including any Supplements, they will have the respective meanings set forth below unless otherwise defined herein:
  (a)  
“Award” means the cash compensation awarded to a Participant pursuant to the Plan.
  (b)  
“Award Rate” means the amount of cash, expressed as a percentage of a Participant’s Base Salary as determined by the Committee.
  (c)  
“Base Salary” means the regular base salary paid by the Company or a Subsidiary to an employee while such employee is a Participant during a calendar year, exclusive of additional forms of compensation such as bonuses, other incentive payments, automobile allowances, tax gross-ups and other fringe benefits. Base Salary will include any salary deferral contributions made pursuant to Code Sections 401(k) and 125.

 

1


 

  (d)  
“Board” means the Board of Directors of the Company.
 
  (e)  
“Code” means the Internal Revenue Code of 1986, as amended.
  (f)  
“Company” means, unless otherwise stated, First Financial Corporation, organized and existing under the laws of the State of Indiana, or any successor (by merger, consolidation, purchase or otherwise) to such corporation which assumes the obligations of such corporation under the Plan and the Subsidiaries of the Company.
 
  (g)  
“Committee” means the Compensation Committee of the Board.
  (h)  
“Effective Date” means January 1, 2011, which is the effective date of the Plan.
  (i)  
“Notice of Award” means the notice provided to a Participant which outlines the Award Rate, Performance Goals and other terms and conditions of their Award.
  (j)  
“Participant” means an individual who is employed by the Company and who is designated as a Participant by the Committee. The Committee may designate one or more tiers of participation under the Plan given an individual’s position with the Company or a Subsidiary.
  (k)  
“Performance Goals” means the financial performance levels with respect to the Company and/or the Subsidiaries which must be met during a Performance Period before an Award may be earned as set forth in a Notice of Award. The Performance Goals will be determined on an annual basis by the Committee utilizing the United States Treasury Department final “Guidance on Sound Incentive Compensation Policies” and any subsequent guidance hereafter provided by applicable statute, rule or regulation.
  (l)  
“Performance Period” means the period of time specified by the Committee during which an Award may be earned.
  (m)  
“Permanent and Total Disability” means a disability as determined under a long-term disability insurance policy sponsored by the Company or a Subsidiary.
  (n)  
“Plan” means the short-term incentive compensation plan contained in this instrument and any subsequent amendment to this instrument, which shall have been adopted by the Board or Committee known as the First Financial Corporation 2011 Short-Term Incentive Compensation Plan.
  (o)  
“Retirement” means a Participant’s Termination of Service on or after attaining age 65 for reasons other than death or Permanent and Total Disability.
  (p)  
“Subsidiary” means First Financial Bank and such other subsidiary corporations of the Company which are designated by the Board or Committee as eligible to participate in the Plan.

 

2


 

  (q)  
“Termination of Service” means the occurrence of any act or event or any failure to act, whether pursuant to an employment agreement or otherwise, that actually or effectively causes or results in a Participant ceasing, for whatever reason, to be an employee of the Company or a Subsidiary, including, but not limited to, death, Permanent and Total Disability, Retirement, termination by the Company or a Subsidiary of the Participant’s employment with the Company or a Subsidiary and voluntary resignation or termination by the Participant of his or her employment with the Company or a Subsidiary.
ARTICLE II
Eligibility and Participation
Participation in the Plan is limited to those individuals who have been designated as Participants by resolution of the Committee. A Participant will become covered by the Plan effective as of the date on which the individual is designated a Participant by resolution of the Committee.
ARTICLE III
Awards
3.1 Annual Determination of Awards. The Committee shall determine on an annual basis (a) whether or not to make Awards, and (b) the terms and conditions of an Award. The Committee may take into account such factors as it determines in its discretion in determining the terms and conditions of an Award and the Award Rate. These factors may include, but are not limited to, the nature of the services rendered by the Participant, his or her current and potential contributions to the success of the Company, the Participant’s Base Salary, and such other factors as the Committee, in its sole discretion, considers relevant.
3.2 Communication of Awards. The Committee will communicate in writing to Participants in a Notice of Award the Award Rates, Performance Period, Performance Goals (and their respective weightings) and any requirements or other criteria with respect to an Award.
3.3 Considerations in Establishing Performance Goals. In determining appropriate Performance Goals for each calendar year and the relative weight accorded each Performance Goal, the Committee must:
  (a)  
Balance risk and financial results in a manner that does not encourage Participants to expose the Company and its Subsidiaries to imprudent risks;
  (b)  
Make such determination in a manner designed to ensure that Participant’ overall compensation is balanced and that the Awards are consistent with the policies and procedures of the Company and its Subsidiaries regarding such compensation arrangements; and
  (c)  
Monitor the success of the Performance Goals and weighting established in prior years, alone and in combination with other incentive compensation awarded to the same Participants, and make appropriate adjustments in future calendar years as needed so that payments appropriately incentivize Participants and appropriately reflect risk.

 

3


 

3.4 Components of Calculation. For each Performance Period, the Committee, in its sole discretion, will establish the following business criteria for calculating Awards to Participants with respect to the Company and the Subsidiaries:
  (a)  
The Performance Goals;
  (b)  
The relative weight accorded each Performance Goal; and
  (c)  
The threshold, target and maximum Award Rates for each Participant. The calculation of Awards will be made by interpolating within the interval between the threshold Award Rate and the target Award Rate and between the target Award Rate and the maximum Award Rate, and rounding to the nearest dollar.
3.5 Earning of Awards. An Award will be treated as earned to the extent (a) the threshold, target or maximum Performance Goals are met; and (b) the Participant is employed on the last day of the Performance Period.
3.6 Time and Form of Payment of Earned Awards. Earned Awards will be paid in a single sum in cash within 75 days after the end of the Performance Period. If a Participant incurs a Termination of Service before the date payment is made, unless the Termination of Service is due to death, Permanent and Total Disability or Retirement, he will forfeit his Award.
3.7 Clawback of Awards. In the event the Company is required to prepare an accounting restatement due to the Company’s material noncompliance with any financial reporting requirement under securities laws, and the Company paid an Award to a Participant which was based on the erroneous data within three years preceding the date of the accounting restatement, then the Participant is required to repay the Company the excess amount which should not have been paid to the Participant under the accounting restatement.
3.8 Withholding of Taxes. Each Participant will be solely responsible for, and the Company will withhold from any amounts payable under the Plan, all applicable federal, state, city and local income taxes and the Participant’s share of applicable employment taxes.
ARTICLE IV
Miscellaneous
4.1 Amendment or Termination. The Board or the Committee may, at any time, alter, amend, modify, suspend or terminate the Plan, but may not, except as provided in Section 3.7, without the consent of a Participant to whom an Award has been made, make any alteration which would adversely affect an Award previously granted under the Plan.
4.2 Employment Rights. The Plan does not constitute a contract of employment, and participation in the Plan will not give a Participant the right to be rehired or retained in the employ of the Company or any Subsidiary, nor will participation in the Plan give any Participant any right or claim to any benefit under the Plan, unless such right or claim exists under the terms of the Plan.

 

4


 

4.3 Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person relying thereon considers pertinent and reliable, and signed, made or presented by the proper party or parties.
4.4 Gender and Number. Where the context permits, words in the masculine gender will include the feminine gender, the plural will include the singular and the singular will include the plural.
4.5 Action by the Board or Committee. Any action required of or permitted by the Board or Committee under this Plan will be by resolution of the Board, the Committee or by a person or persons authorized by resolution of the Board or Committee.
4.6 Controlling Laws. Except to the extent superseded by laws of the United States, the laws of Indiana will be controlling in all matters relating to the Plan. The Plan and all Awards are intended to be exempt from the applicable provision of Code Section 409A. To the extent Code Section 409A applies, the Plan and all Awards intend to comply, and will be construed by the Board or Committee, as the case may be, in a manner which complies with the applicable provisions of Code Section 409A. To the extent there is any conflict between a provision of the Plan or a Notice of Award and a provision of Code Section 409A, the applicable provision of Code Section 409A will control.
4.7 Mistake of Fact. Any mistake of fact or misstatement of fact will be corrected when it becomes known and proper adjustment made by reason thereof.
4.8 Severability. In the event any provision of the Plan is held to be illegal or invalid for any reason, such illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and endorsed as if such illegal or invalid provision had never been contained in the Plan.
4.9 Effect of Headings. The descriptive headings of the Articles and Sections of the Plan are inserted for convenience of reference and identification only and do not constitute a part of the Plan for purposes of interpretation.
4.10 Nontransferability. No Award or Award payment will be transferable, except by the Participant’s will or the applicable laws of descent and distribution. During the Participant’s lifetime, his Award will be payable only to the Participant or his guardian or attorney-in-fact. The payment and any rights and privileges pertaining thereto may not be transferred, assigned, pledged or hypothecated by him in any way, whether by operation of law or otherwise and will not be subject to execution, attachment or similar process.

 

5


 

4.11 No Liability. No member of the Board or the Committee or any officer or Participant of the Company or Subsidiary will be personally liable for any action, omission or determination made in good faith in connection with the Plan. The Company will indemnify and hold harmless the members of the Committee, the Board and the officers and Participants of the Company and its Subsidiaries, and each of them, from and against any and all loss which results from liability to which any of them may be subjected by reason of any act or conduct (except willful misconduct or gross negligence) in their official capacities in connection with the administration of the Plan, including all expenses reasonably incurred in their defense, in case the Company fails to provide such defense. By participating in the Plan, each Participant agrees to release and hold harmless each of the Company, the Subsidiaries (and their respective directors, officers and employees), the Board and the Committee, from and against any tax or other liability, including without limitation, interest and penalties, incurred by the Participant in connection with his participation in the Plan.
4.12 Funding. All amounts payable under the Plan will be paid by the Company from its general assets. The Company is not required to segregate on its books or otherwise establish any funding procedure for any amount to be used for the payment of benefits under the Plan. The Company may, however, in its sole discretion, set funds aside in investments to meet its anticipated obligations under the Plan. Any such action or set-aside amount may not be deemed to create a trust of any kind between the Company and any Participant or beneficiary or to constitute the funding of any Plan benefits. Consequently, any person entitled to a payment under the Plan will have no rights against the assets of the Company greater than the rights of any other unsecured creditor of the Company.

 

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Section 8: EX-13 (EXHIBIT 13)

Exhibit 13
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  
     
*  
2008 and 2007 include $12,800 and $14,068, respectively, of credit card loans that are held-for-sale

 


 

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  
 
           

 

10


 

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  
 
                 

 

11


 

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  
 
                                   

 

12


 

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  
 
                 

 

13


 

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.

 

14


 

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.

 

15


 

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.

 

16


 

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.

 

17


 

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 )                

 

18


 

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  

 

19


 

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  
 
                       

 

20


 

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  
 
           

 

21


 

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.

 

22


 

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  
 
           

 

23


 

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.

 

24


 

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  
 
                       
                                 
            Non ASC                
    ASC 310-30     310-30             2009  
(Dollar amounts in thousands)   Loans     Loans     Other     Total  
Loans
  $ 16,849     $ 55,025     $     $ 71,874  
Foreclosed Assets
                1,256       1,256  
 
                       
Total Covered Assets
  $ 16,849     $ 55,025     $ 1,256     $ 73,130  
 
                       
The rollforward of the FDIC Indemnification asset is as follows:
                 
    December 31,  
(Dollar amounts in thousands)   2010     2009  
Beginning balance
  $ 12,124     $  
Assessed value of intial indemnification asset
          12,098  
Accretion
    339        
Net changes in losses and expenses added
    4,570       26  
Reimbursements from the FDIC
    (13,056 )      
 
           
TOTAL
  $ 3,977     $ 12,124  
 
           
On the acquisition date, the preliminary estimate of the contractually required payments receivable for all FASB ASC310-30 loans acquired in the acquisition were $31.6 million, the cash flows expected to be collected were $18.4 million including interest, and the estimated fair value of the loans was $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 December 31, 2010, a majority of these loans were valued based on the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of underlying collateral and the timing and amount of the cash flows could not be reasonably estimated. There was a $1.5 million allowance for credit losses related to these loans at December 31, 2010. On the acquisition date, the preliminary estimate of the contractually required payments receivable for all non FASB ASC310-30 loans acquired in the acquisition was $58.4 million and the estimated fair value of the loans was $60.7 million. The impact to the Corporation from the amortization and accretion of premiums and discounts was immaterial.
7. ALLOWANCE FOR LOAN LOSSES:
Changes in the allowance for loan losses are summarized as follows:
                         
    December 31,  
(Dollar amounts in thousands)   2010     2009     2008  
 
                       
Balance at beginning of year
  $ 19,437     $ 16,280     $ 15,351  
Provision for loan losses *
    10,862       11,870       7,855  
Recoveries of loans previously charged off
    4,511       2,948       2,668  
Loans charged off
    (12,474 )     (11,661 )     (9,594 )
 
                 
BALANCE AT END OF YEAR
  $ 22,336     $ 19,437     $ 16,280  
 
                 
     
*  
Provision before reduction of $1,662 in 2010 for increases in the FDIC indemnification asset.

 

25


 

FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the allocation of the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method at December 31, 2010:
Allowance for Loan Losses:
                                         
(Dollar amounts in thousands)   Commercial     Residential     Consumer     Unallocated     Total  
Individually evaluated for impairment
  $ 3,893     $ 625     $     $     $ 4,518  
Collectively evaluated for impairment
    7,788       1,897       4,551       2,103       16,339  
Acquired with deteriorated credit quality
    1,128       351                   1,479  
 
                             
BALANCE AT END OF YEAR
  $ 12,809     $ 2,873     $ 4,551     $ 2,103     $ 22,336  
 
                             
 
                                       
Loans
                                       
 
                                       
(Dollar amounts in thousands)   Commercial     Residential     Consumer             Total  
Individually evaluated for impairment
  $ 27,717     $ 2,770     $             $ 30,487  
Collectively evaluated for impairment
    863,790       435,231       308,903               1,607,924  
Acquired with deteriorated credit quality
    9,938       1,113       15               11,066  
 
                               
BALANCE AT END OF YEAR
  $ 901,445     $ 439,114     $ 308,918             $ 1,649,477  
 
                               
The following table identifies loans classified as impaired.
                 
    December 31,  
(Dollar amounts in thousands)   2010     2009  
Year-end loans with no allocated allowance for loan losses
  $ 11,890     $ 5,344  
Year-end loans with allocated allowance for loan losses
    25,629       19,330  
 
           
TOTAL
  $ 37,519     $ 24,674  
 
           
 
               
Amount of the allowance for loan losses allocated
  $ 5,867     $ 5,438  

 

26


 

2010 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents loans individually evaluated for impairment by class of loan.
                         
                    Allowance  
    Unpaid             for Loan  
    Principal     Recorded     Losses  
    Balance     Investment     Allocated  
With no related allowance recorded:
                       
Commercial
                       
Commercial & Industrial
  $ 8,935     $ 8,993     $  
Farmland
                 
Non Farm, Non Residential
    2,955       2,955        
Agriculture
                 
All Other Commercial
                 
Residential
                       
First Liens
                 
Home Equity
                 
Junior Liens
                 
Multifamily
                 
All Other Residential
                 
Consumer
                       
Motor Vehicle
                 
All Other Consumer
                 
With an allowance recorded:
                       
Commercial
                       
Commercial & Industrial
    10,933       10,996       1,508  
Farmland
                 
Non Farm, Non Residential
    9,442       9,442       3,255  
Agriculture
                 
All Other Commercial
    1,577       1,577       128  
Residential
                       
First Liens
    1,910       1,910       533  
Home Equity
                 
Junior Liens
    1,129       1,129       443  
Multifamily
    638       638        
All Other Residential
                 
Consumer
                       
Motor Vehicle
                 
All Other Consumer
                 
 
                 
TOTAL
  $ 37,519     $ 37,640     $ 5,867  
 
                 
The table below presents non-performing loans.
                 
    December 31,  
(Dollar amounts in thousands)   2010     2009  
Nonperforming loans:
               
Loans past due over 90 days still on accrual
    3,185       8,218  
Restructured loans
    17,094       90  
Non-accrual loans
    38,517       35,953  
Covered loans included in loans past due over 90 days still on accrual are $377 thousand at December 31, 2010 and $4.4 million at December 31, 2009. Covered loans included in non-accrual loans are $8.7 million at December 31, 2010 and $7.5 million at December 31, 2009. Covered loans of $4.3 million are deemed impaired at December 31, 2010 and have allowance for loan loss allocated to them of $1.3 million. On December 31, 2009 there were $6.1 million of covered loans deemed impaired that had an allowance for loan loss allocated to them of $82 thousand. Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

27


 

FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         
(Dollar amounts in thousands)   2010     2009     2008  
Average of impaired loans during the year
  $ 27,772     $ 21,731     $ 6,531  
Interest income recognized during impairment
    660       36       3  
Cash-basis interest income recognized
    57       19        
The following table presents the recorded investment in nonperforming loans by class of loans.
                         
    Loans Past              
    Due Over              
    90 Day Still              
(Dollar amounts in thousands)   Accruing     Restructured     Nonaccrual  
Commercial
                       
Commercial & Industrial
  $ 1,462     $ 13,671     $ 11,677  
Farmland
                68  
Non Farm, Non Residential
    506             13,808  
Agriculture
                284  
All Other Commercial
    158             2,011  
Residential
                       
First Liens
    971       2,605       6,141  
Home Equity
    45              
Junior Liens
    66       928       1,454  
Multifamily
                990  
All Other Residential
                150  
Consumer
                       
Motor Vehicle
    91             259  
All Other Consumer
    4             1,675  
 
                 
TOTAL
  $ 3,303     $ 17,204     $ 38,517  
 
                 
The Corporation has allocated $657 thousand and $0 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010 and 2009. The Corporation has not committed to lend additional amounts as of December 31, 2010 and 2009 to customers with outstanding loans that are classified as troubled debt restructurings.
The following table presents the aging of the recorded investment in loans by past due category and class of loans.
                                                 
                    Greater                    
    30-59 Days     60-89 Days     than 90 days     Total              
(Dollar amounts in thousands)   Past Due     Past Due     Past Due     Past Due     Current     Total  
Commercial
                                               
Commercial & Industrial
  $ 2,619     $ 882     $ 3,868     $ 7,369     $ 405,319     $ 412,688  
Farmland
    63       198             261       71,672       71,933  
Non Farm, Non Residential
    761       1,763       4,366       6,890       260,685       267,575  
Agriculture
    55             284       339       85,275       85,614  
All Other Commercial
          135       283       418       63,217       63,635  
Residential
                                               
First Liens
    5,405       1,649       3,793       10,847       310,722       321,569  
Home Equity
    78       11       45       134       38,638       38,772  
Junior Liens
    287       165       175       627       33,394       34,021  
Multifamily
    706             352       1,058       32,605       33,663  
All Other Residential
    144                   144       10,945       11,089  
Consumer
                                               
Motor Vehicle
    2,994       378       91       3,463       279,029       282,492  
All Other Consumer
    138       23       6       167       26,259       26,426  
 
                                   
TOTAL
  $ 13,250     $ 5,204     $ 13,263     $ 31,717     $ 1,617,760     $ 1,649,477  
 
                                   

 

28


 

2010 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Quality Indicators:
The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial loans, with an outstanding balance greater than $50 thousand. Any consumer loans outstanding to a borrower who had commercial loans analyzed will be similarly risk rated. This analysis is performed on a quarterly basis. The Corporation uses the following definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and debt service capacity of the borrower or of any pledged collateral. These loans have a well-defined weakness or weaknesses which have clearly jeopardized repayment of principal and interest as originally intended. They are characterized by the distinct possibility that the institution will sustain some future loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those graded substandard, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values.
Furthermore, non-homogeneous loans which were not individually analyzed, but are 90+ days past due or on non-accrual are classified as substandard. Loans included in homogeneous pools, such as residential or consumer, may be classified as substandard due to 90+ days delinquency, non-accrual status, bankruptcy, or loan restructuring.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $50 thousand or are included in groups of homogeneous loans. As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
                                                 
            Special                          
(Dollar amounts in thousands)   Pass     Mention     Substandard     Doubtful     Not Rated     Total  
Commercial
                                               
Commercial & Industrial
  $ 311,258     $ 26,956     $ 63,334     $ 2,910     $ 6,977     $ 411,435  
Farmland
    66,920       1,535       1,691       68       109       70,323  
Non Farm, Non Residential
    208,847       29,399       24,579       3,364       544       266,733  
Agriculture
    82,275       602       1,008       284       154       84,323  
All Other Commercial
    52,704       6,188       2,799       468       1,134       63,293  
Residential
                                               
First Liens
    93,887       6,201       7,495       2,944       209,804       320,331  
Home Equity
    8,641       4,447       427       23       25,200       38,738  
Junior Liens
    4,796       107       1,733       167       27,090       33,893  
Multifamily
    22,678       8,516       1,255       990       127       33,566  
All Other Residential
    1,349             26             9,673       11,048  
Consumer
                                               
Motor Vehicle
    12,902       331       492       29       267,424       281,178  
All Other Consumer
    3,945       64       174       42       22,000       26,225  
 
                                   
TOTAL
  $ 870,202     $ 84,346     $ 105,013     $ 11,289     $ 570,236     $ 1,641,086  
 
                                   

 

29


 

FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PREMISES AND EQUIPMENT:
Premises and equipment are summarized as follows:
                 
    December 31,  
(Dollar amounts in thousands)   2010     2009  
Land
  $ 7,581     $ 7,305  
Building and leasehold improvements
    42,367       41,964  
Furniture and equipment
    34,700       33,520  
 
           
 
    84,648       82,789  
Less accumulated depreciation
    (49,957 )     (47,238 )
 
           
TOTAL
  $ 34,691     $ 35,551  
 
           
Aggregate depreciation expense was $3.27 million, $3.25 million and $3.11 million for 2010, 2009 and 2008, respectively.
9. GOODWILL AND INTANGIBLE ASSETS:
The Corporation completed its annual impairment testing of goodwill during the second quarter of 2010 and 2009. Management does not believe any amount of goodwill is impaired.
Intangible assets subject to amortization at December 31, 2010 and 2009 are as follows:
                                 
    2010     2009  
    Gross     Accumulated     Gross     Accumulated  
(Dollar amounts in thousands)   Amount     Amortization     Amount     Amortization  
 
                               
Customer list intangible
  $ 4,055     $ 3,222     $ 3,446     $ 2,912  
Core deposit intangible
    6,546       3,231       6,546       2,164  
 
                       
 
  $ 10,601     $ 6,453     $ 9,992     $ 5,076  
 
                       
In late December 2010 Forrest Sherer, Inc. paid $609 thousand to acquire an insurance agency. The only identifiable asset purchased was a customer list intangible of $609.
Aggregate amortization expense was $1.38 million, $950 thousand and $425 thousand for 2010, 2009 and 2008, respectively.
Estimated amortization expense for the next five years is as follows:
         
    In thousands  
2011
  $ 1,059  
2012
    801  
2013
    666  
2014
    468  
2015
    337  
10. DEPOSITS:
Scheduled maturities of time deposits for the next five years are as follows:
         
2011
  $ 382,466  
2012
    145,184  
2013
    69,904  
2014
    41,782  
2015
    12,583  

 

30


 

2010 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SHORT-TERM BORROWINGS:
A summary of the carrying value of the Corporation’s short-term borrowings at December 31, 2010 and 2009 is presented below:
                 
(Dollar amounts in thousands)   2010     2009  
Federal funds purchased
  $ 3,310     $ 5,754  
Repurchase-agreements
    28,936       22,578  
Other short-term borrowings
    1,860       2,104  
 
           
 
  $ 34,106     $ 30,436  
 
           
                 
(Dollar amounts in thousands)   2010     2009  
Average amount outstanding
  $ 39,753     $ 53,930  
Maximum amount outstanding at a month end
    47,209       95,568  
Average interest rate during year
    0.82 %     1.00 %
Interest rate at year-end
    0.83 %     1.37 %
Federal funds purchased are generally due in one day and bear interest at market rates. Other borrowings, primarily note payable—U.S. government, are due on demand, secured by a pledge of securities and bear interest at market rates. Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. The Corporation maintains possession of and control over these securities.
12. OTHER BORROWINGS:
Other borrowings at December 31, 2010 and 2009 are summarized as follows:
                 
(Dollar amounts in thousands)   2010     2009  
FHLB advances
  $ 125,793     $ 326,137  
City of Terre Haute, Indiana economic development revenue bonds
          6,600  
 
           
TOTAL
  $ 125,793     $ 332,737  
 
           
The aggregate minimum annual retirements of other borrowings are as follows:
         
2011
  $ 2,050  
2012
    20,000  
2013
    56,000  
2014
    45,000  
2015
    2,000  
Thereafter
    743  
 
     
 
  $ 125,793  
 
     
The Corporation’s subsidiary banks are members of the Federal Home Loan Bank (FHLB) of Indianapolis and accordingly are permitted to obtain advances. The advances from the FHLB, aggregating $125.8 million at December 31, 2010, and $326.1 million at December 31, 2009, accrue interest, payable monthly, at annual rates, primarily fixed, varying from 3.1% to 6.6% in 2010 and 3.2% to 6.6% in 2009. The advances are due at various dates through August 2017. FHLB advances are, generally, due in full at maturity. They are secured by eligible securities totaling $33.1 million at December 31, 2010, and $217.6 million at December 31, 2009, and a blanket pledge on real estate loan collateral. Based on this collateral and the Corporation’s holdings of FHLB stock, the Corporation is eligible to borrow up to $227.7 million at year end 2010. Certain advances may be prepaid, without penalty, prior to maturity. The FHLB can adjust the interest rate from fixed to variable on certain advances, but those advances may then be prepaid, without penalty.
The economic development revenue bonds (bonds) require periodic interest payments each year until maturity or redemption. The interest rate, which was 0.27% at December 31, 2009, is determined by a formula which considers rates for comparable bonds and is adjusted periodically. The bonds are collateralized by a first mortgage on the Corporation’s headquarters building. The bonds mature December 1, 2015, but were retired during 2010.

 

31


 

FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES:
Income tax expense is summarized as follows:
                         
(Dollar amounts in thousands)   2010     2009     2008  
Federal:
                       
Currently payable
  $ 15,582     $ 8,721     $ 12,238  
Deferred
    (4,850 )     (1,574 )     (4,727 )
 
                 
 
    10,732       7,147       7,511  
State:
                       
Currently payable
    2,325       877       712  
Deferred
    (1,090 )     (469 )     (420 )
 
                 
 
    1,235       408       292  
 
                 
TOTAL
  $ 11,967     $ 7,555     $ 7,803  
 
                 
The reconciliation of income tax expense with the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes is summarized as follows:
                         
(Dollar amounts in thousands)   2010     2009     2008  
Federal income taxes computed at the statutory rate
  $ 14,004     $ 10,596     $ 11,400  
Add (deduct) tax effect of:
                       
Tax exempt income
    (3,400 )     (3,521 )     (3,505 )
State tax, net of federal benefit
    803       265       189  
Affordable housing credits
                (30 )
Other, net
    560       215       (251 )
 
                 
TOTAL
  $ 11,967     $ 7,555     $ 7,803  
 
                 
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2010 and 2009, are as follows:
                 
(Dollar amounts in thousands)   2010     2009  
Deferred tax assets:
               
Other than temporary impairment
  $ 5,995     $ 4,486  
Net unrealized losses on retirement plans
    8,512       7,236  
Loan losses provision
    9,315       7,717  
Deferred compensation
    8,035       7,118  
Compensated absences
    723       633  
Post-retirement benefits
    1,971       1,785  
Other
    1,333       1,288  
 
           
GROSS DEFERRED ASSETS
    35,884       30,263  
 
           
 
               
Deferred tax liabilities:
               
Net unrealized gains on securities available-for-sale
    (2,589 )     (2,290 )
Depreciation
    (1,578 )     (1,496 )
Federal Home Loan Bank stock dividends
    (96 )     (456 )
Mortgage servicing rights
    (827 )     (807 )
Pensions
    (1,865 )     (2,385 )
Deferred gain on acquisition
    (666 )     (2,039 )
Other
    (2,260 )     (1,704 )
 
           
GROSS DEFERRED LIABILITIES
    (9,881 )     (11,177 )
 
           
NET DEFERRED TAX ASSETS (LIABILITIES)
  $ 26,003     $ 19,086  
 
           

 

32


 

2010 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unrecognized Tax Benefits — A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
                         
(Dollar amounts in thousands)   2010     2009     2008  
Balance at January 1
  $ 660     $ 549     $ 803  
Additions based on tax positions related to the current year
    113       111       47  
Additions based on tax positions related to prior years
    181                  
Reductions for tax positions of prior years
                (291 )
Reductions due to the statute of limitations
    (53 )            
Settlements
                (10 )
 
                 
Balance at December 31
  $ 901     $ 660     $ 549  
 
                 
Of this total, $901 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months.
The total amount of interest and penalties recorded in the income statement for the years ended December 31, 2010, 2009 and 2008 was an expense increase of $43 and $9, and a reduction of $48, respectively. The amount accrued for interest and penalties at December 31, 2010, 2009 and 2008 was $116, $73 and $64, respectively.
The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Indiana and Illinois. The Corporation is no longer subject to examination by taxing authorities for years before 2007.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include conditional commitments and commercial letters of credit. The financial instruments involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the financial statements. The Corporation’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans is limited generally by the contractual amount of those instruments. The Corporation follows the same credit policy to make such commitments as is followed for those loans recorded in the consolidated financial statements.
Commitment and contingent liabilities are summarized as follows at December 31:
                 
(Dollar amounts in thousands)   2010     2009  
Home Equity
  $ 44,236     $ 43,385  
Commercial Operating Lines
    203,991       206,294  
Other Commitments
    45,436       40,480  
 
           
TOTAL
  $ 293,663     $ 290,159  
 
           
 
               
Commercial letters of credit
  $ 13,414     $ 15,791  
The majority of commercial operating lines and home equity lines are variable rate, while the majority of other commitments to fund loans are fixed rate. Since many commitments to make loans expire without being used, these amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. The approximate duration of these commitments is generally one year or less.
Derivatives: The Corporation enters into derivative instruments for the benefit of its customers. At the inception of a derivative contract, the Corporation designates the derivative as an instrument with no hedging designation (“standalone derivative”). Changes in the fair value of derivatives are reported currently in earnings as non-interest income. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income.
First Financial Bank offers clients the ability on certain transactions to enter into interest rate swaps. Typically, these are pay fixed, receive floating swaps used in conjunction with commercial loans. These derivative contracts do not qualify for hedge accounting. The Bank hedges the exposure to these contracts by entering into offsetting contracts with substantially matching terms. The notional amount of these interest rate swaps was $30.5 and $32.6 million at December 31, 2010 and 2009. The fair value of these contracts combined was zero, as gains offset losses. The gross gain and loss associated with these interest rate swaps was $1.3 million and $889 thousand at December 31, 2010 and 2009.

 

33


 

FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RETIREMENT PLANS:
Substantially all employees of the Corporation are covered by a retirement program that consists of a defined benefit plan and an employee stock ownership plan (ESOP). Plan assets consist primarily of the Corporation’s stock and obligations of U.S. Government agencies. Benefits under the defined benefit plan are actuarially determined based on an employee’s service and compensation, as defined, and funded as necessary.
Assets in the ESOP are considered in calculating the funding to the defined benefit plan required to provide such benefits. Any shortfall of benefits under the ESOP are to be provided by the defined benefit plan. The ESOP may provide benefits beyond those determined under the defined benefit plan. Contributions to the ESOP are determined by the Corporation’s Board of Directors. The Corporation made contributions to the defined benefit plan of $1.30 million, $1.20 million and $1.73 million in 2010, 2009 and 2008. The Corporation contributed $1.35 million, $971 thousand and $1.28 million to the ESOP in 2010, 2009 and 2008.
The Corporation uses a measurement date of December 31, 2010.
Net periodic benefit cost and other amounts recognized in other comprehensive income included the following components:
                         
(Dollar amounts in thousands)   2010     2009     2008  
Service cost — benefits earned
  $ 3,093     $ 3,100     $ 3,031  
Interest cost on projected benefit obligation
    3,313       3,296       2,908  
Expected return on plan assets
    (3,400 )     (3,857 )     (3,292 )
Net amortization and deferral
    964       625       711  
 
                 
Net periodic pension cost
    3,970       3,164       3,358  
 
                       
Net loss (gain) during the period
    4,466       4,762        
Amortization of prior service cost
    18       29       18  
Amortization of unrecognized gain (loss)
    (982 )     (353 )     (729 )
 
                 
Total recognized in other comprehensive income (loss)
    3,502       4,438       (711 )
 
                 
 
Total recognized net periodic pension cost and other comprehensive income
  $ 7,472     $ 7,602     $ 2,647  
 
                 
The estimated net loss and prior service costs for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $986 thousand and $166 thousand.
The information below sets forth the change in projected benefit obligation, reconciliation of plan assets, and the funded status of the Corporation’s retirement program. Actuarial present value of benefits is based on service to date and present pay levels.
                 
(Dollar amounts in thousands)   2010     2009  
Change in benefit obligation:
               
Benefit obligation at January 1
  $ 55,914     $ 56,476  
Service cost
    3,093       3,100  
Interest cost
    3,313       3,296  
Amendment
    2,315        
Actuarial (gain) loss
    4,820       (4,672 )
Benefits paid
    (2,449 )     (2,286 )
 
           
Benefit obligation at December 31
    67,006       55,914  
 
           
 
               
Reconciliation of fair value of plan assets:
               
Fair value of plan assets at January 1
    42,199       47,892  
Actual return on plan assets
    6,070       (5,578 )
Employer contributions
    2,644       2,171  
Benefits paid
    (2,449 )     (2,286 )
 
           
Fair value of plan assets at December 31
    48,464       42,199  
 
           
 
               
Funded status at December 31 (plan assets less benefit obligation)
  $ (18,542 )   $ (13,715 )
 
           

 

34


 

2010 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts recognized in accumulated other comprehensive income at December 31, 2010 and 2009 consist of:
                 
(Dollar amounts in thousands)   2010     2009  
Net loss (gain)
  $ 19,164     $ 17,994  
Prior service cost (credit)
    2,259       (74 )
 
           
 
  $ 21,423     $ 17,920  
 
           
The accumulated benefit obligation for the defined benefit pension plan was $55,304 and $45,964 at year-end 2010 and 2009.
                 
Principal assumptions used:   2010     2009  
Discount rate
    5.54 %     5.96 %
Rate of increase in compensation levels
    3.75       3.75  
Expected long-term rate of return on plan assets
    8.00       8.00  
The expected long-term rate of return was estimated using market benchmarks for equities and bonds applied to the plan’s target asset allocation. Management estimated the rate by which plan assets would perform based on historical experience as adjusted for changes in asset allocations and expectations for future return on equities as compared to past periods.
Plan Assets — The Corporation’s pension plan weighted-average asset allocation for the years 2010 and 2009 by asset category are as follows:
                                                 
                    Pension     ESOP  
    Pension Plan     ESOP     Pecentage of Plan     Pecentage of Plan  
    Target Allocation     Target Allocation     Assets at December 31,     Assets at December 31,  
ASSET CATEGORY   2011     2011     2010     2009     2010     2009  
Equity securities
    61-63 %     99-100 %     64 %     57 %     100 %     100 %
Debt securities
    33-36 %     0-0       33 %     35 %     0 %     0 %
Other
    1-6 %     0-1       3 %     8 %     0 %     0 %
 
                                       
TOTAL
                    100 %     100 %     100 %     100 %
Fair Value of Plan Assets — Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Corporation used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Equity, Debt, Investment Funds and Other Securities — The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
The fair value of the plan assets at December 31, 2010 and 2009, by asset category, is as follows:
                                 
            Fair Value Measurments at  
            December 31, 2010 Using:  
            Quoted Prices     Significant        
            in Active     Other     Significant  
            Markets for     Obsevable     Obsevable  
    Carrying     Identical Assets     Inputs     Inputs  
(Dollar amounts in thousands)   Value     (Level 1)     (Level 2)     (Level 3)  
Plan assets
                               
Equity securities
  $ 41,405     $ 41,405     $     $  
Debt securities
    5,504             5,504        
Investment Funds
    1,555       1,555              
 
                       
Total plan assets
  $ 48,464     $ 42,960     $ 5,504     $  
 
                       

 

35


 

FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 
            Fair Value Measurments at  
            December 31, 2009 Using:  
            Quoted Prices     Significant        
            in Active     Other     Significant  
            Markets for     Obsevable     Obsevable  
    Carrying     Identical Assets     Inputs     Inputs  
(Dollar amounts in thousands)   Value     (Level 1)     (Level 2)     (Level 3)  
Plan assets
                               
Equity securities
  $ 32,583     $ 32,583     $     $  
Debt securities
    8,133             8,133        
Investment Funds
    1,483       1,483              
 
                       
Total plan assets
  $ 42,199     $ 34,066     $ 8,133     $  
 
                       
The investment objective for the retirement program is to maximize total return without exposure to undue risk. Asset allocation favors equities, with a target allocation of approximately 88%. This target includes the Corporation’s ESOP, which is 100% invested in corporate stock. Other investment allocations include fixed income securities and cash.
The plan is prohibited from investing in the following: private placement equity and debt transactions; letter stock and uncovered options; short-sale margin transactions and other specialized investment activity; and fixed income or interest rate futures. All other investments not prohibited by the plan are permitted.
Equity securities include First Financial Corporation common stock in the amount of $29.7 million (61 percent of total plan assets) and $25.3 million (60 percent of total plan assets) at December 31, 2010 and 2009, respectively. Other equity securities are predominantly stocks in large cap U.S. companies.
Contributions — The Corporation expects to contribute $4.9 million to its pension plan and $1.4 million to its ESOP in 2010.
Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected:
PENSION BENEFITS
(Dollar amounts in thousands)
         
   
2011
  $ 1,089  
2012
    1,294  
2013
    1,351  
2014
    1,693  
2015
    1,959  
2016-2020
    12,887  
Supplemental Executive Retirement Plan — The Corporation has established a Supplemental Executive Retirement Plan (SERP) for certain executive officers. The provisions of the SERP allow the Plan’s participants who are also participants in the Corporation’s defined benefit pension plan to receive supplemental retirement benefits to help recompense for benefits lost due to the imposition of IRS limitations on benefits under the Corporation’s tax qualified defined benefit pension plan. Expenses related to the plan were $241 thousand in 2010 and $196 thousand in 2009. The plan is unfunded and has a measurement date of December 31. The amounts recognized in other comprehensive income in the current year are as follows:
                         
(Dollar amounts in thousands)   2010     2009     2008  
Net loss (gain) during the period
  $ (90 )   $     $  
Amortization of prior service cost
    (74 )     (74 )     (74 )
Amortization of unrecognized gain (loss)
    66       (37 )     5  
 
                 
Total recognized in other comprehensive income (loss)
  $ (98 )   $ (111 )   $ (69 )
 
                 
The Corporation has $1.3 million and $1.2 million recognized in the balance sheet as a liability at December 31, 2010 and 2009. Amounts in accumulated other comprehensive income consist of $170 thousand net gain and $74 thousand in prior service cost at December 31, 2010 and $146 thousand net gain and $148 thousand in prior service cost at December 31, 2009. The estimated gain and prior service costs for the SERP that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $39 thousand and $74 thousand.

 

36


 

2010 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected:
SERP BENEFITS
(Dollar amounts on thousands)
         
   
2011
  $  
2012
    131  
2013
    130  
2014
    128  
2015
    126  
2016-2020
    600  
The Corporation also provides medical benefits to its employees subsequent to their retirement. The Corporation uses a measurement date of December 31, 2010. Accrued post-retirement benefits as of December 31, 2010 and 2009 are as follows:
                 
    December 31,  
(Dollar amounts in thousands)   2010     2009  
Change in benefit obligation:
               
Benefit obligation at January 1
  $ 4,425     $ 4,248  
Service cost
    63       109  
Interest cost
    218       240  
Plan participants’ contributions
    67       26  
Actuarial (gain) loss
          16  
Benefits paid
    (273 )     (214 )
 
           
Benefit obligation at December 31
  $ 4,500     $ 4,425  
 
           
 
               
Funded status at December 31
  $ 4,500     $ 4,425  
 
           
Amounts recognized in accumulated other comprehensive income consist of a net loss of $575 thousand and $180 thousand in transition obligation at December 31, 2010 and $410 thousand net loss and $241 thousand in transition obligation at December 31, 2009. The post-retirement benefits paid in 2010 and 2009 of $273 thousand and $214 thousand, respectively, were fully funded by company and participant contributions.
The estimated transition obligation for the post-retirement benefit plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $60 thousand.
Weighted average assumptions at December 31:
                 
    December 31,  
    2010     2009  
Discount rate
    5.54 %     5.25 %
Initial weighted health care cost trend rate
    7.50       7.50  
Ultimate health care cost trend rate
    5.00       5.00  
Year that the rate is assumed to stabilize and remain unchanged
    2014       2013  

 

37


 

FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Post-retirement health benefit expense included the following components:
                         
    Years Ended December 31,  
(Dollar amounts in thousands)   2010     2009     2008  
Service cost
  $ 64     $ 70     $ 125  
Interest cost
    218       240       238  
Amortization of transition obligation
    60       60       60  
Recognized actuarial loss
    12             11  
 
                 
Net periodic benefit cost
  $ 354     $ 370     $ 434  
 
                       
Net loss (gain) during the period
  $     $     $  
Amortization of prior service cost
    (60 )     (60 )     (60 )
Amortization of unrecognized gain (loss)
    (153 )     (110 )     (11 )
 
                 
Total recognized in other comprehensive income (loss)