Summary of FIRST FINANCIAL CORP /IN/

ITEMS 2. and 3. Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk
The purpose of this discussion is to point out key factors in the Corporation's recent performance compared with earlier periods. The discussion should be read in conjunction with the financial statements beginning on page three of this report. All figures are for the consolidated entities. It is presumed the readers of these financial statements and of the following narrative have previously read the Corporation's annual report for 2008.
This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date. The forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, the Corporation's ability to effectively execute its business plans; changes in general economic and financial market conditions; changes in interest rates; changes in the competitive environment; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or legislative requirements affecting the Corporation's business; and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements is available in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2008, and subsequent filings with the United States Securities and Exchange Commission (SEC). Copies of these filings are available at no cost on the SEC's Web site at www.sec.gov or on the Corporation's Web site at www.first-online.com. Management may elect to update forward-looking statements at some future point; however, it specifically disclaims any obligation to do so.
Critical Accounting Policies Certain of the Corporation's accounting policies are important to the portrayal of the Corporation's financial condition and results of operations, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and the valuation of goodwill. See further discussion of these critical accounting policies in the 2008 Annual Report on Form 10-K.
Summary of Operating Results Net income for the three months ended March 31, 2009 was $4.53 million compared to $6.95 million for the same period of 2008. Basic earnings per share decreased to $0.35 for the first quarter of 2009 compared to $0.53 for 2008. Return on Assets and return on Equity were 0.79% and 6.17% respectively, compared to 1.23%and 9.62% for the three months ended March 31, 2008.
The primary components of income and expense affecting net income are discussed in the following analysis.
Net Interest Income
The Corporation's primary source of earnings is net interest income, which is the difference between the interest earned on loans and other investments and the interest paid for deposits and other sources of funds. Net interest income increased to $20.5 million in the first three months of 2009 from $19.0 million in the same period in 2008, an 8.0% increase. The net interest margin increased to 4.03% in 2009 from 3.85% in 2008, a 4.7% increase, driven by a greater decline in the costs of funding than the decline in the income realized on earning assets.
Non-Interest Income
Non-interest income for the quarter was $4.7 million compared to $8.6 million for the first quarter of 2008. The decrease was largely due to the aforementioned other-than-temporary impairment charge. The Corporation chose to fully recognize the losses related to certain collateralized debit obligations (CDO's). The Corporation did not choose early adoption of the Financial Accounting Standards Board's revised pronouncements and staff positions because of the confusing e income statement presentation which would have reflected losses on the above mentioned CDO's in excess of the cost. Non-interest income was also less due to the recognition of a gain on VISA stock included in the first three months of 2008.

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Non-Interest Expenses
The Corporation's non-interest expense for the quarter ended March 31, 2009 compared to the same period in 2008 increased by $274 thousand or 1.7%. FDIC insurance increased for the three months ended March 31, 2009, as compared to the three months ended March 31, 2008. The increase in 2009 is due to an overall increase in the assessment by the FDIC effective January 1, 2009. Insurance assessments range from 0.12% to 0.50% of total deposits for the first quarter 2009 assessment period only. The first quarter 2009 final assessment rate will not be finalized by the FDIC until the end of June 2009. All expense recorded is an estimate of the actual assessment rate. Effective April 1, 2009, insurance assessments will range from 0.07% to 0.78%, depending on an institution's risk classification, as well as its unsecured debt, secured liability and brokered deposits. In addition, under an interim rule, the FDIC proposes to impose a 20 basis point emergency special assessment on insured depository institutions on June 30, 2009. The emergency special assessment would be collected on September 30, 2009. The interim rule also authorizes the FDIC to impose an additional emergency special assessment after June 30, 2009, of up to 10 basis points, if necessary to maintain public confidence in federal deposit insurance. Income tax expense for the quarter of $1.1 million was 50% less than the first quarter of 2008 as income before tax was less and the effective tax rate decreased from 24.9% to 20.3% as tax exempt income was a higher proportion of total income for the quarter.
Allowance for Loan Losses
The Corporation's provision for loan losses increased $905 thousand for the first three months of 2009 compared to the same period of 2008. Net charge-offs for the first three months of 2009 were higher by $248 thousand and the volume of impaired and non-performing loans both increased. The allowance for loan losses has increased from 1.11% of gross loans, or $16.3 million at December 31, 2008 to 1.15% of gross loans, or $17.0 million at March 31, 2009. Based on management's analysis of the current portfolio, an evaluation that includes consideration of historical loss experience, non-performing loans trends, and probable incurred losses on identified problem loans, management believes the allowance is adequate.
Non-performing Loans
Non-performing loans consist of (1) non-accrual loans on which the ultimate collectability of the full amount of interest is uncertain, (2) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower, and (3) loans past due ninety days or more as to principal or interest. At December 31, 2008 there were a significant volume of loans that were identified as impaired that were not initially put on non-accrual. These loans were put on non-accrual in the first quarter of 2009. A summary of non-performing loans at March 31, 2009 and December 31, 2008 follows:

                                                                    (000's)
                                                         March 31,        December 31,
                                                           2009               2008
Non-accrual loans                                       $    24,183      $       12,486
Restructured loans                                               97                  98
Accruing loans past due over 90 days                          5,173               3,624

                                                        $    29,453      $       16,208


Ratio of the allowance for loan losses as a
percentage of non-performing loans                               58 %               100 %

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

                                                    (000's)
                                          March 31,       December 31,
                                            2009              2008
              Non-accrual loans
              1-4 family residential     $     2,348     $        1,835
              Commercial loans                20,310              9,210
              Installment loans                1,525              1,441

                                         $    24,183     $       12,486


              Past due 90 days or more
              1-4 family residential     $     1,036     $        1,495
              Commercial loans                 3,740              1,582
              Installment loans                  397                547

                                         $     5,173     $        3,624

Interest Rate Sensitivity and Liquidity
First Financial Corporation has established risk measures, limits and policy guidelines for managing interest rate risk and liquidity. Responsibility for management of these functions resides with the Asset Liability Committee. The primary goal of the Asset Liability Committee is to maximize net interest income within the interest rate risk limits approved by the Board of Directors. Interest Rate Risk
Management considers interest rate risk to be the Corporation's most significant market risk. Interest rate risk is the exposure to changes in net interest income as a result of changes in interest rates. Consistency in the Corporation's net interest income is largely dependent on the effective management of this risk.
The Asset Liability position is measured using sophisticated risk management tools, including earning simulation and market value of equity sensitivity analysis. These tools allow management to quantify and monitor both short-term and long-term exposure to interest rate risk. Simulation modeling measures the effects of changes in interest rates, changes in the shape of the yield curve and the effects of embedded options on net interest income. This measure projects earnings in the various environments over the next three years. It is important to note that measures of interest rate risk have limitations and are dependent on various assumptions. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of interest rate fluctuations on net interest income. Actual results will differ from simulated results due to timing, frequency and amount of interest rate changes as well as overall market conditions. The Committee has performed a thorough analysis of these assumptions and believes them to be valid and theoretically sound. These assumptions are continuously monitored for behavioral changes.
The Corporation from time to time utilizes derivatives to manage interest rate risk. Management continuously evaluates the merits of such interest rate risk products but does not anticipate the use of such products to become a major part of the Corporation's risk management strategy.
The table below shows the Corporation's estimated sensitivity profile as of March 31, 2009. The change in interest rates assumes a parallel shift in interest rates of 100 and 200 basis points. Given a 100 basis point increase in rates, net interest income would increase 0.21% over the next 12 months and increase 1.84% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would increase 2.12% over the next 12 months and increase 2.09% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this change.

         Basis Point                Percentage Change in Net Interest Income
         Interest Rate Change     12 months          24 months         36 months
         Down 200                        2.83 %            2.80 %            2.76 %
         Down 100                        2.12              2.09              2.06
         Up 100                          0.21              1.84              4.06
         Up 200                         -0.62              2.46              7.04

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

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Liquidity Risk
Liquidity is measured by each bank's ability to raise funds to meet the obligations of its customers, including deposit withdrawals and credit needs. This is accomplished primarily by maintaining sufficient liquid assets in the form of investment securities and core deposits. The Corporation has $12.9 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $185.2 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $33.9 million in securities to be called within the next 12 months. With these sources of funds, the Corporation currently anticipates adequate liquidity to meet the expected obligations of its customers. Financial Condition
Comparing the first quarter of 2009 to the same period in 2008, net loans are up 4.1% or $57.5 million. Deposits are down $11.3 million at March 31, 2009, a 0.7% decrease from the balances at the same time in 2008 primarily from reduced public funds deposits. The investment portfolio and federal funds sold declined by $51.6 million. Shareholders' equity increased $2.7 million. The financial performance increased book value per share 0.8% to $22.56 at March 31, 2009 from $22.38 at March 31, 2008. Book value per share is calculated by dividing the total shareholders' equity by the number of shares outstanding. Capital Adequacy
As of March 31, 2009, the most recent notification from the respective regulatory agencies categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the bank's category. Below are the capital ratios for the Corporation and lead bank.

                                                   March 31, 2009        December 31, 2008        To Be Well Capitalized

Total risk-based capital
Corporation                                                  17.78 %                  17.32 %                         N/A
First Financial Bank                                         17.54 %                  17.11 %                       10.00 %

Tier I risk-based capital
Corporation                                                  16.81 %                  16.40 %                         N/A
First Financial Bank                                         16.72 %                  16.34 %                        6.00 %

Tier I leverage capital
Corporation                                                  12.89 %                  12.72 %                         N/A
First Financial Bank                                         12.79 %                  12.64 %                        5.00 %

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