NOTE 11: LOANS (covered)

All loans acquired in the Peoples and Irwin acquisitions were covered by loss sharing agreements with the FDIC, whereby the FDIC reimburses First Financial for the majority of the losses incurred. Additionally, these loans were recorded at their estimated fair value as of the acquisition date. Generally the determination of the fair value of the loans resulted in a significant write-down in the value of the loans, which was assigned to an accretable or nonaccretable difference, with the accretable difference to be recognized as interest income over the expected remaining term of the loan.

First Financial evaluates purchased loans for impairment in accordance with the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The cash flows expected to be collected on purchased loans are estimated based upon the expected remaining life of the underlying loans, which includes the effects of estimated prepayments. Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected. First Financial is accounting for the majority of purchased loans under FASB ASC Topic 310-30 except loans with revolving privileges, which are outside the scope of this guidance, and loans for which cash flows could not be estimated, which are accounted for under the cost recovery method. Purchased impaired loans were not classified as nonperforming assets at September 30, 2011 as the loans are considered to be performing under FASB ASC Topic 310-30. Therefore, interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows is being recognized on all purchased loans being accounted for under FASB ASC Topic 310-30.

The following table reflects the carrying value of all purchased impaired and nonimpaired covered loans:



	September 30, 2011						December 31, 2010
(Dollars in thousands)	Loans Accounted For Under FASB ASC Topic 310-30		Loans excluded from FASB ASC Topic 310-30 ⁽¹⁾		Total Purchased Loans		Loans Accounted For Under FASB ASC Topic 310-30		Loans Excluded From FASB ASC Topic 310-30 ⁽¹⁾		Total Purchased Loans
Commercial	$	209,163	$	14,719	$	223,882	$	295,600	$	38,439	$	334,039
Real estate - construction	25,893		0		25,893		42,743		0		42,743
Real estate - commercial	674,973		12,419		687,392		837,942		17,783		855,725
Real estate - residential	127,753		0		127,753		147,052		0		147,052
Installment	13,022		1,156		14,178		19,560		1,511		21,071
Home equity	4,764		63,133		67,897		7,241		66,454		73,695
Other covered loans	0		4,071		4,071		0		7,168		7,168
Total covered loans	$	1,055,568	$	95,498	$	1,151,066	$	1,350,138	$	131,355	$	1,481,493

(1) Includes loans with revolving privileges which are scoped out of FASB ASC Topic 310-30 and certain loans which First Financial elected to treat under the cost recovery method of accounting.

The outstanding balance of all loans accounted for under FASB ASC Topic 310-30, including contractual principal, interest, fees, and penalties, was $1.7 billion and $2.2 billion as of September 30, 2011 and December 31, 2010, respectively.

Changes in the carrying amount of accretable yield for loans accounted for under FASB ASC Topic 310-30 were as follows:



	Three Months Ended						Nine months ended
	September 30,						September 30,
(Dollars in thousands)	2011			2010			2011			2010
Balance at beginning of period ⁽¹⁾	$	421,781		$	514,436		$	509,945		$	623,669
Reclassification from non-accretable difference	17,311			81,067			50,517			81,067
Accretion	(31,168		)	(34,891		)	(97,447		)	(104,096		)
Other net activity ⁽²⁾	(4,878		)	(11,904		)	(59,969		)	(51,932		)
Balance at end of period	$	403,046		$	548,708		$	403,046		$	548,708

__________________________________________

(1) Excludes loans with revolving privileges which are scoped out of FASB Topic 310-30 and certain loans which First Financial elected to treat under the cost recovery method.

(2) Includes the impact of loan repayments and charge-offs.

First Financial reviewed its forecast of expected cash flows for loans accounted for under FASB ASC Topic 310-30 during the third quarter of 2011. The Company recognized improvement in the cash flow expectations related to certain loan pools resulting in the reclassification from nonaccretable to accretable difference during the third quarter of 2011 and 2010 of $17.3 million and $81.1 million, respectively and $50.5 million and $81.1 million for the nine months ended September 30, 2011 and 2010, respectively. These reclassifications resulted in yield adjustments on these loan pools on a prospective basis. The Company also recognized declines in the cash flow expectations of certain loan pools. Any decline in expected cash flows for a pool of loans is considered impairment and recorded as provision expense, and a related allowance for loan and lease losses on covered loans, on a discounted basis during the period. There were also loan pools that were impaired in prior periods but improved during the third quarter. This improvement was recorded as a recapture of prior period impairment which partially offset impairment recorded in the third quarter. For further detail on impairment and provision expense related to loans accounted for under FASB ASC Topic 310-30, see "Covered Loans" under Note 11 - Allowance for Loan and Lease Losses.

Covered 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.

Covered loan delinquency, excluding loans accounted for under FASB ASC Topic 310-30, 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	$	266	$	251	$	7,347	$	7,864	$	6,855	$	14,719	$	0
Real estate - commercial	579		0		3,754		4,333		8,086		12,419		0
Installment	0		0		0		0		1,156		1,156		0
Home equity	499		163		2,032		2,694		60,439		63,133		0
All other	42		10		77		129		3,942		4,071		68
Total	$	1,386	$	424	$	13,210	$	15,020	$	80,478	$	95,498	$	68



	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	$	880	$	419	$	13,764	$	15,063	$	23,376	$	38,439	$	0
Real estate - commercial	225		62		1,896		2,183		15,600		17,783		0
Installment	0		0		0		0		1,511		1,511		0
Home equity	656		443		1,424		2,523		63,931		66,454		0
All other	87		10		9		106		7,062		7,168		9
Total	$	1,848	$	934	$	17,093	$	19,875	$	111,480	$	131,355	$	9

Nonaccrual

Covered loans accounted for under FASB ASC Topic 310-30 are classified as performing, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or prospective yield adjustments.

Similar to uncovered loans, covered loans accounted for outside FASB ASC Topic 310-30 are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. Generally, these 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 when a loan is placed in nonaccrual status and any payments received reduce 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.

Information as to covered nonaccrual loans was as follows:



(Dollars in thousands)	September 30, 2011		December 31, 2010
Principal balance
Nonaccrual loans
Commercial	$	8,378	$	16,190
Real estate-commercial	3,782		2,074
Home equity	2,114		1,491
All other	9		0
Total	$	14,283	$	19,755



	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2011		September 30, 2011
Interest income effect
Gross amount of interest that would have been recorded under original terms	$	268	$	769
Interest included in income	8		49
Net impact on interest income	$	260	$	720

Impaired Loans

Covered loans placed in nonaccrual status, excluding loans accounted for under FASB ASC Topic 310-30, are considered impaired. First Financial’s investment in covered impaired loans, excluding loans accounted for under FASB ASC Topic 310-30, was as follows:



	As of September 30, 2011
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		YTD Interest Income Recognized		Quarterly Interest Income Recognized
Loans with no related allowance recorded:
Commercial	$	8,378	$	10,559	$	0	$	10,541	$	43	$	7
Real estate - commercial	3,782		4,547		0		2,583		1		0
Home equity	2,114		3,642		0		1,512		5		1
All other	9		21		0		7		0		0
Total	$	14,283	$	18,769	$	0	$	14,643	$	49	$	8



	As of December 31, 2010
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		YTD Interest Income Recognized
Loans with no related allowance recorded:
Commercial	$	16,190	$	18,346	$	0	$	12,324	$	316
Real estate - commercial	2,074		5,412		0		3,910		14
Installment	0		0		0		255		0
Home equity	1,491		3,137		0		1,597		68
Total	$	19,755	$	26,895	$	0	$	18,086	$	398

Credit Quality

For further discussion of First Financial's monitoring of credit quality for commercial and consumer loans, including discussion of the risk attributes noted below, please see Note 10 - Loans.

Covered 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	$	133,799	$	6,116	$	370,605
Special Mention	25,480		4,966		77,308
Substandard	55,429		14,811		235,316
Doubtful	9,174		0		4,163
Total	$	223,882	$	25,893	$	687,392



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other
Performing	$	127,753	$	14,178	$	65,783	$	4,071
Nonperforming	0		0		2,114		0
Total	$	127,753	$	14,178	$	67,897	$	4,071



	As of December 31, 2010
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial
Pass	$	225,088	$	14,021	$	476,140
Special Mention	35,768		5,743		106,057
Substandard	60,090		22,979		268,651
Doubtful	13,093		0		4,877
Total	$	334,039	$	42,743	$	855,725



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other
Performing	$	147,052	$	21,071	$	72,204	$	7,168
Nonperforming	0		0		1,491		0
Total	$	147,052	$	21,071	$	73,695	$	7,168

Covered 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 covered loans. These properties remain subject to loss share agreements whereby the FDIC reimburses First Financial for the majority of any losses incurred. 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 covered 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.

Changes in covered 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	$	35,257	$	12,916
Additions
Commercial	38,431		22,237
Residential	2,315		9,827
Total additions	40,746		32,064
Disposals
Commercial	20,940		4,744
Residential	6,992		4,536
Total disposals	27,932		9,280
Write-downs
Commercial	4,138		414
Residential	1,095		29
Total write-downs	5,233		443
Balance at end of period	$	42,838	$	35,257