NOTE 10: LOANS (excluding covered loans)

Commercial loans are made to all types of businesses for a variety of purposes. First Financial works with businesses to meet their shorter term working capital needs while also providing long-term financing for their business plans. Credit risk is managed through standardized loan policies, established and authorized credit limits, centralized portfolio management and the diversification of market area and industries. The overall strength of the borrower is evaluated through the credit underwriting process and includes a variety of analytical activities including the review of historical and projected cash flows, historical financial performance, financial strength of the principals and guarantors, and collateral values, where applicable. First Financial also offers lease and equipment financing through a wholly-owned subsidiary of First Financial Bank, First Financial Equipment Finance LLC (First Equipment Finance), primarily in its principal markets. First Equipment Finance delivers financing solutions to small and mid-size companies in various industries with significant diversity in the types of underlying equipment.

Additionally, First Financial's commercial lending activities include equipment and leasehold improvement financing for franchisees, principally quick service and casual dining restaurants, through its wholly-owned subsidiary First Franchise Capital Corporation (First Franchise). The underwriting of these loans incorporates basic credit proficiencies combined with knowledge of select franchise concepts to measure the creditworthiness of proposed multi-unit borrowers. The focus is on a limited number of concepts that have sound economics, low closure rates, and brand awareness within specified local, regional, or national markets. Loan terms for equipment are generally up to 84 months fully amortizing and up to 180 months on real estate.

Commercial real estate loans are secured by a mortgage lien on the real property. The credit underwriting for both owner-occupied and investor income producing real estate loans includes detailed market analysis, historical and projected cash flow analysis, appropriate equity margins, assessment of lessees and lessors, type of real estate and other analysis. Risk of loss is managed by adherence to standard loan policies that establish certain levels of performance prior to the extension of a loan to the borrower. Market diversification within First Financial’s service area, as well as a diversification by industry, are other means by which the risk of loss is managed by First Financial.

The majority of residential real estate loans originated by the Bank conforms to secondary market underwriting standards and is sold within a short timeframe to unaffiliated third parties, including the future servicing rights to the loans. The credit underwriting standards adhere to a certain level of documentation, verifications, valuation, and overall credit performance of the borrower.

Consumer loans are primarily loans made to individuals. Types of loans include new and used vehicle loans, second mortgages on residential real estate, and unsecured loans. Risk elements in the consumer loan portfolio are primarily focused on the borrower’s cash flow and credit history, key indicators of the ability to repay. A certain level of security is provided through liens on automobile titles and second mortgage liens, where applicable. Economic conditions that affect consumers in First Financial’s markets have a direct impact on the credit quality of these loans. Higher levels of unemployment, lower levels of income growth and weaker economic growth are factors that may adversely impact consumer loan credit quality.

Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate. Home equity lines of credit are generally governed by the same lending policies and subject to the same credit risk as described previously for residential real estate loans.

Delinquency

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment.

Loan delinquency, including nonaccrual loans, was as follows:



	As of September 30, 2011
	30 – 59 Days past due		60 – 89 Days past due		> 90 days past due		Total Past due		Current		Total		> 90 days past due and still accruing
Loans
Commercial	$	2,019	$	852	$	10,436	$	13,307	$	809,245	$	822,552	$	0
Real estate - construction	4,000		6,254		12,197		22,451		114,200		136,651		0
Real estate - commercial	4,316		1,569		15,731		21,616		1,180,419		1,202,035		0
Real estate - residential	7,827		1,362		6,757		15,946		284,219		300,165		0
Installment	275		86		207		568		69,466		70,034		0
Home equity	1,112		258		1,765		3,135		359,784		362,919		0
All other	265		163		235		663		42,642		43,305		235
Total	$	19,814	$	10,544	$	47,328	$	77,686	$	2,859,975	$	2,937,661	$	235



	As of December 31, 2010
	30 - 59 days past due		60 - 89 days past due		> 90 days past due		Total past due		Current		Total		> 90 days past due and still accruing
Loans
Commercial	$	2,241	$	1,573	$	11,684	$	15,498	$	784,755	$	800,253	$	0
Real estate - construction	1,754		3,782		8,973		14,509		149,034		163,543		0
Real estate - commercial	3,202		3,979		16,435		23,616		1,116,315		1,139,931		0
Real estate - residential	7,671		1,930		5,127		14,728		254,445		269,173		0
Installment	456		48		120		624		69,087		69,711		0
Home equity	1,260		392		2,166		3,818		337,492		341,310		0
All other	366		176		370		912		31,260		32,172		370
Total	$	16,950	$	11,880	$	44,875	$	73,705	$	2,742,388	$	2,816,093	$	370

Nonaccrual

Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful or when principal or interest payments are 90 days or more past due. Generally, loans are placed in nonaccrual status due to the continued failure to adhere to contractual payment terms by the borrower coupled with other pertinent factors, such as, insufficient collateral value. The accrual of interest income is discontinued and previously accrued, but unpaid interest is reversed when a loan is placed in nonaccrual status. Any payments received while a loan is in nonaccrual status are applied as a reduction to the carrying value of the loan. A loan may be placed back on accrual status if all contractual payments have been received and collection of future principal and interest payments is no longer doubtful.

Troubled Debt Restructurings

A loan modification is considered a troubled debt restructuring (TDR), also referred to as a restructured loan, when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. The most common types of modifications include interest rate reductions, maturity extensions, and modifications to principal amortization including interest only structures. Modified terms are dependent upon the financial position and needs of the individual borrower. If the modification agreement is violated, the loan is handled by the Company’s credit administration group for resolution, which may result in foreclosure.

Restructured loans are generally classified as nonaccrual for a minimum period of six months. Restructured loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement.

First Financial had 79 restructured loans totaling approximately $17.3 million at September 30, 2011. $4.7 million of restructured loans were on accrual status and $12.6 million were classified as nonaccrual at September 30, 2011. At September 30, 2011, the allowance for loan and lease losses included reserves of $1.7 million related to TDRs. For the three and nine months ended September 30, 2011, First Financial charged off $1.5 million, and $1.7 million, respectively, for the portion of restructured loans determined to be uncollectible.

At September 30, 2011, approximately $1.6 million of the accruing TDRs have been performing in accordance with the restructured terms for more than one year.

The following table provides information on loans restructured during the three and nine months ended September 30, 2011.



	September 30, 2011
	Three Months Ended			Nine Months Ended
	Total TDRs			Total TDRs
(Dollars in thousands)	Number of Loans	Pre-Modification Loan Balance	Period End Balance	Number of Loans	Pre-Modification Loan Balance	Period End Balance
Commercial	1	$44	$44	7	$388	$354
Real estate - construction	0	0	0	0	0	0
Real estate - commercial	2	467	206	10	1,431	1,016
Real estate - residential	3	242	245	13	1,295	1,301
Installment	0	0	0	2	114	111
Home equity	0	0	0	1	101	101
Total	6	$753	$495	33	$3,329	$2,883

The following table provides information on how restructured loans were modified during the three and nine months ended September 30, 2011.



	September 30, 2011⁽²⁾
(Dollars in thousands)	Three Months Ended	Nine Months Ended
Extended Maturities	$249	$1,445
Adjusted Interest Rates	114	271
Combination of Rate and Maturity Changes	132	1,056
Other ⁽¹⁾	0	111
Total	$495	$2,883

__________________________________________

(1) Other includes covenant modifications, forbearance and other concessions or combination of concessions that do not consist of interest rate adjustments and maturity extensions.

(2) Balances are as of period end.

First Financial considers repayment performance as an indication of the effectiveness of the Company's loan modifications. First Financial considers a borrower that is 90 days or more past due on any principal or interest payments for a restructured loan, or who prematurely terminates a restructured loan agreement without paying off the contractual principal balance (for example, in a deed-in-lieu arrangement), to be in payment default of the terms of the restructured loan.

The following tables provide information on restructured loans for which there was a payment default during the period that occurred within twelve months of the loan modification.



	September 30, 2011
	Three Months Ended		Nine Months Ended
(Dollars in thousands)	Number of Loans	Period End Balance	Number of Loans	Period End Balance
Commercial	0	$0	0	$0
Real estate - construction	0	0	0	0
Real estate - commercial	1	112	2	1,031
Real estate - residential	2	255	2	255
Installment	0	0	0	0
Home equity	0	0	0	0
Total	3	$367	4	$1,286

First Financial individually reviews all restructured commercial loan relationships greater than $250,000, and all restructured consumer loan relationships greater than $100,000, to determine if a specific allowance based on the borrower’s overall financial condition, resources and payment record, support from guarantors, and the realizable value of any collateral is necessary. Specific allowances are based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.

Impaired Loans

Loans placed in nonaccrual status and restructured loans are considered impaired. The following table provides information on nonaccrual, restructured, and impaired loans:



(Dollars in thousands)	September 30, 2011		December 31, 2010
Principal balance
Nonaccrual loans
Commercial	$	10,792	$	13,729
Real estate-construction	13,844		12,921
Real estate-commercial	26,408		28,342
Real estate-residential	5,507		4,607
Installment	322		150
Home equity	2,277		2,553
Total nonaccrual loans	59,150		62,302
Restructured loans
Accruing	4,712		3,508
Nonaccrual	12,571		14,105
Total restructured loans	17,283		17,613
Total impaired loans	$	76,433	$	79,915



	September 30, 2011
(Dollars in thousands)	Three Months Ended		Nine months ended
Interest income effect
Gross amount of interest that would have been recorded under original terms	$	1,390	$	4,103
Interest included in income
Nonaccrual loans	108		358
Restructured loans	49		215
Total interest included in income	157		573
Net impact on interest income	$	1,233	$	3,530

In the commercial portfolio, management reviews all impaired loan relationships in excess of $250,000 to determine if a specific allowance based on the borrower’s overall financial condition, resources and payment record, support from guarantors, and the realizable value of any collateral is necessary.

Specific allowances are based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Interest income for impaired loans is recorded on a cash basis during the period the loan is considered impaired after recovery of principal is reasonably assured.

First Financial's investment in impaired loans was as follows:



	As of September 30, 2011
(Dollars in thousands)	Current Balance		Contractual Principal Balance		Related Allowance		Average Current Balance		YTD Interest Income Recognized		Quarterly Interest Income Recognized
Loans with no related allowance recorded:
Commercial	$	6,758	$	8,197	$	0	$	7,583	$	44	$	17
Real estate - construction	5,515		8,130		0		5,500		2		1
Real estate - commercial	19,268		25,985		0		19,133		205		73
Real estate - residential	8,464		9,152		0		6,401		51		14
Installment	433		468		0		323		4		2
Home equity	2,277		2,372		0		2,403		7		3

Loans with an allowance recorded:
Commercial	4,388		6,148		2,820		3,571		0		0
Real estate - construction	14,576		18,110		4,615		14,389		88		0
Real estate - commercial	12,288		18,371		3,809		14,475		143		38
Real estate - residential	2,365		2,371		270		3,864		26		9
Installment	0		0		0		19		1		0
Home equity	101		101		2		76		2		0

Total:
Commercial	11,146		14,345		2,820		11,154		44		17
Real estate - construction	20,091		26,240		4,615		19,889		90		1
Real estate - commercial	31,556		44,356		3,809		33,608		348		111
Real estate - residential	10,829		11,523		270		10,265		77		23
Installment	433		468		0		342		5		2
Home equity	2,378		2,473		2		2,479		9		3
Total	$	76,433	$	99,405	$	11,516	$	77,737	$	573	$	157



	As of December 31, 2010
(Dollars in thousands)	Current Balance		Contractual Principal Balance		Related Allowance		Average Current Balance		Interest Income Recognized
Loans with no related allowance recorded:
Commercial	$	9,375	$	12,008	$	0	$	7,432	$	228
Real estate - construction	4,925		8,458		0		9,935		98
Real estate - commercial	17,431		21,660		0		14,113		804
Real estate - residential	5,854		6,447		0		6,611		84
Installment	150		179		0		336		6
Home equity	2,553		3,345		0		2,188		74

Loans with an allowance recorded:
Commercial	4,354		6,090		2,017		10,423		77
Real estate - construction	14,407		18,261		3,716		11,063		378
Real estate - commercial	16,693		19,799		4,347		13,391		392
Real estate - residential	4,173		4,264		336		2,727		152

Total:
Commercial	13,729		18,098		2,017		17,855		305
Real estate - construction	19,332		26,719		3,716		20,998		476
Real estate - commercial	34,124		41,459		4,347		27,504		1,196
Real estate - residential	10,027		10,711		336		9,338		236
Installment	150		179		0		336		6
Home equity	2,553		3,345		0		2,188		74
Total	$	79,915	$	100,511	$	10,416	$	78,219	$	2,293

Credit Quality

To facilitate the monitoring of credit quality for commercial loans, and for purposes of determining an appropriate allowance for loan and lease losses, First Financial utilizes the following categories of credit grades:

Pass - Higher quality loans that do not fit any of the other categories described below.

Special Mention - First Financial assigns a Special Mention rating to loans and leases with potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in First Financial's credit position at some future date.

Substandard - First Financial assigns a substandard rating to loans or leases that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans and leases have well-defined weaknesses that jeopardize repayment of the debt. Substandard loans and leases are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not addressed.

Doubtful - First Financial assigns a doubtful rating to loans and leases with all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

The credit grades described above, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter.

First Financial considers repayment performance as the best indicator of credit quality for consumer loans. Consumer loans that have principal and interest payments that are past due by ninety days or more are generally classified as nonperforming. Additionally, consumer loans that have been modified in a troubled debt restructuring are classified as nonperforming unless such loans have a sustained repayment performance of six months or greater and are reasonably assured of repayment in accordance with the restructured terms. All other consumer loans and leases are classified as performing.

Commercial and consumer credit exposure by risk attribute was as follows:



	As of September 30, 2011
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial
Pass	$	763,262	$	107,475	$	1,062,751
Special Mention	33,836		1,698		45,032
Substandard	25,263		27,478		94,252
Doubtful	191		0		0
Total	$	822,552	$	136,651	$	1,202,035



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other
Performing	$	292,695	$	69,601	$	360,642	$	43,305
Nonperforming	7,470		433		2,277		0
Total	$	300,165	$	70,034	$	362,919	$	43,305



	As of December 31, 2010
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial
Pass	$	731,932	$	115,988	$	979,023
Special Mention	36,453		4,829		63,618
Substandard	31,557		42,726		97,290
Doubtful	311		0		0
Total	$	800,253	$	163,543	$	1,139,931



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other
Performing	$	262,654	$	69,561	$	338,757	$	32,172
Nonperforming	6,519		150		2,553		0
Total	$	269,173	$	69,711	$	341,310	$	32,172

Other real estate owned is comprised of properties acquired by the Bank through the loan foreclosure or repossession process, or any other resolution activity that results in partial or total satisfaction of problem loans. The acquired properties are recorded at the lower of cost, or fair value less estimated costs of disposal (net realizable value), upon acquisition. Losses arising at the time of acquisition of such properties are charged against the allowance for loan and lease losses. Subsequent write-downs in the carrying value of OREO properties are expensed as incurred. Improvements to the properties may be capitalized if the improvements contribute to the overall value of the property, but may not be capitalized in excess of the net realizable value of the property.

During the first three months of 2011, First Financial recognized a reduction in the estimated value of vacant land obtained from a commercial real estate developer of $3.1 million. This property was subsequently sold during the third quarter of 2011 at a $0.3 million gain. Changes in other real estate owned were as follows:



	Nine Months Ended		Full Year
(Dollars in thousands)	September 30, 2011		December 31, 2010
Balance at beginning of period	$	17,907	$	4,145
Additions
Commercial	1,328		17,520
Residential	2,609		1,130
Total additions	3,937		18,650
Disposals
Commercial	3,909		2,315
Residential	2,345		1,674
Total disposals	6,254		3,989
Write-downs
Commercial	3,341		727
Residential	246		172
Total write-downs	3,587		899
Balance at end of period	$	12,003	$	17,907