NOTE 11: ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans (excluding covered loans). For each reporting period, management maintains the allowance for loan and lease losses at a level that it considers sufficient to absorb probable loan and lease losses inherent in the portfolio. Management determines the adequacy of the allowance based on historical loss experience as well as other significant factors such as composition of the portfolio, economic conditions, geographic footprint, the results of periodic internal and external evaluations of delinquent, nonaccrual and classified loans and any other adverse situations that may affect a specific borrower's ability to repay (including the timing of future payments). This evaluation is inherently subjective as it requires utilizing material estimates that may be susceptible to significant change.

In the commercial portfolio, which includes time and demand notes, tax-exempt loans and commercial real estate loans, non-homogeneous loan relationships greater than $250,000 that are considered impaired or designated as a TDR are evaluated to determine the need for 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.

The allowance for non-impaired commercial loans and impaired commercial loan relationships less than $250,000 includes a process of estimating the probable losses inherent in the portfolio by category, based on First Financial's internal system of credit risk ratings and historical loss data. These estimates may also be adjusted for management's estimate of probable losses on specific loan types dependent upon trends in the values of the underlying collateral, delinquent and nonaccrual loans, prevailing economic conditions, changes in lending strategies and other influencing factors.

With the exception of loans modified as TDRs, consumer loans are evaluated as an asset type within a category (i.e., residential real estate, installment, etc.), as these loans exhibit homogeneous characteristics. The allowance for consumer loans which includes residential real estate, installment, home equity, credit card loans and overdrafts, is established by estimating losses inherent in each particular category of consumer loans. The estimate of losses is primarily based on historical loss rates for each category, as well as trends in delinquent and nonaccrual loans, prevailing economic conditions and other significant influencing factors. Consumer loan relationships modified as TDRs greater than $100,000 are individually reviewed to determine if a specific allowance is necessary.

There were no material changes to First Financial's accounting policies or methodology related to the allowance for loan and lease losses during the first nine months of 2012, however certain modifications were made to the estimation process in the third quarter of 2012 to place greater emphasis on quantitative factors such as historical loan losses and less emphasis on qualitative factors. This resulted in a shift in the allocation of the allowance between certain consumer and commercial loan types but had no significant impact on the total allowance for loan and lease losses at September 30, 2012.

First Financial's policy is to charge-off all or a portion of a commercial loan when, in management's opinion, it is unlikely to collect the principal amount owed in full either through payments from the borrower or from the liquidation of collateral.

Changes in the allowance for loan and lease losses for the previous five quarters and year-to-date are presented in the table that follows:



	Three Months Ended															Nine months ended
	2012									2011						September 30,
(Dollars in thousands)	Sep. 30,			June 30,			Mar. 31,			Dec. 31,			Sep. 30,			2012			2011
Balance at beginning of period	$	50,952		$	49,437		$	52,576		$	54,537		$	53,671		$	52,576		$	57,235
Provision for loan losses	3,613			8,364			3,258			5,164			7,643			15,235			14,046
Loans charged off	(5,804		)	(7,138		)	(6,822		)	(7,791		)	(7,174		)	(19,764		)	(18,007		)
Recoveries	431			289			425			666			397			1,145			1,263
Balance at end of period	$	49,192		$	50,952		$	49,437		$	52,576		$	54,537		$	49,192		$	54,537
Allowance for loan and lease losses to total ending loans	1.60		%	1.69		%	1.67		%	1.77		%	1.86		%	1.60		%	1.86		%

Year-to-date changes in the allowance for loan and lease losses by loan category were as follows:



	Nine Months Ended September 30, 2012
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Residential			Installment			Home Equity			Other		Total
Allowance for loan and lease losses:
Balance at beginning of period	$	10,289	$	4,424	$	18,228	$	4,994		$	1,659		$	10,751		$	2,231	$	52,576
Provision for loan and lease losses	1,645		2,322		15,324		(360		)	(1,050		)	(3,934		)	1,288		15,235
Gross charge-offs	3,655		2,684		8,791		1,360			310			1,939			1,025		19,764
Recoveries	322		0		219		70			270			83			181		1,145
Total net charge-offs	3,333		2,684		8,572		1,290			40			1,856			844		18,619
Ending allowance for loan and lease losses	$	8,601	$	4,062	$	24,980	$	3,344		$	569		$	4,961		$	2,675	$	49,192
Ending allowance on loans individually evaluated for impairment	$	1,713	$	853	$	8,816	$	290		$	0		$	2		$	0	$	11,674
Ending allowance on loans collectively evaluated for impairment	6,888		3,209		16,164		3,054			569			4,959			2,675		37,518
Ending allowance for loan and lease losses	$	8,601	$	4,062	$	24,980	$	3,344		$	569		$	4,961		$	2,675	$	49,192
Loans, excluding covered loans
Ending balance of loans individually evaluated for impairment	$	11,940	$	3,701	$	38,972	$	2,664		$	0		$	101		$	0	$	57,378
Ending balance of loans collectively evaluated for impairment	822,918		88,196		1,299,664		296,990			59,191			368,775			72,947		3,008,681
Total loans, excluding covered loans	$	834,858	$	91,897	$	1,338,636	$	299,654		$	59,191		$	368,876		$	72,947	$	3,066,059



	Twelve Months Ended December 31, 2011
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Residential			Installment			Home Equity		Other		Total
Allowance for loan and lease losses:
Balance at beginning of period	$	10,138	$	8,326	$	14,917	$	8,907		$	1,981		$	10,939	$	2,027	$	57,235
Provision for loan and lease losses	2,825		2,345		13,384		(2,407		)	(159		)	1,878		1,344		19,210
Gross charge-offs	3,436		6,279		10,382		1,551			526			2,183		1,441		25,798
Recoveries	762		32		309		45			363			117		301		1,929
Total net charge-offs	2,674		6,247		10,073		1,506			163			2,066		1,140		23,869
Ending allowance for loan and lease losses	$	10,289	$	4,424	$	18,228	$	4,994		$	1,659		$	10,751	$	2,231	$	52,576
Ending allowance on loans individually evaluated for impairment	$	3,205	$	2,578	$	6,441	$	313		$	0		$	2	$	0	$	12,539
Ending allowance on loans collectively evaluated for impairment	7,084		1,846		11,787		4,681			1,659			10,749		2,231		40,037
Ending allowance for loan and lease losses	$	10,289	$	4,424	$	18,228	$	4,994		$	1,659		$	10,751	$	2,231	$	52,576
Loans, excluding covered loans
Ending balance of loans individually evaluated for impairment	$	8,351	$	17,387	$	30,708	$	3,730		$	0		$	101	$	0	$	60,277
Ending balance of loans collectively evaluated for impairment	848,630		97,587		1,202,359		284,250			67,543			358,859		48,942		2,908,170
Total loans, excluding covered loans	$	856,981	$	114,974	$	1,233,067	$	287,980		$	67,543		$	358,960	$	48,942	$	2,968,447

Covered Loans. In accordance with the accounting guidance for business combinations, there was no allowance brought forward on covered loans as any credit deterioration evident in the loans at the time of acquisition was included in the determination of the fair value of the loans at the acquisition date.

The majority of covered loans are accounted for under FASB ASC Topic 310-30, whereby First Financial is required to periodically re-estimate the expected cash flows on the loans. Generally, a decline in expected cash flows for a pool of loans is referred to as 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. Estimated reimbursements due from the FDIC under loss share agreements related to any declines in expected cash flows for a pool of loans are recorded as noninterest income and an increase to the FDIC indemnification asset in the same period. Improvement in expected cash flows for a pool of loans, once any previously recorded impairment is recaptured, is recognized prospectively as an adjustment to the yield on the loans in the pool and a related adjustment to the yield on the FDIC indemnification asset.

First Financial performs periodic valuation procedures to re-estimate the expected cash flows on covered loans accounted for under FASB ASC Topic 310-30 and compare the present value of expected cash flows to the carrying value of the loans at the pool level. In order to estimate expected cash flows, First Financial specifically reviews a sample of these covered loans each period to assist in the determination of appropriate probability of default and loss given default assumptions to be applied to the remainder of the portfolio. The estimate of expected cash flows may also be adjusted for management's estimate of probable losses on specific loan types dependent upon trends in observable market and industry data, such as prepayment speeds and collateral values. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.

First Financial updated the valuation related to covered loans during the third quarter of 2012, and as a result of impairment in certain loan pools, recognized total provision expense of $6.6 million and realized net charge-offs of $6.1 million during the quarter, resulting in an allowance for covered loan losses of $48.9 million as of September 30, 2012. First Financial recognized provision expense on covered loans of $25.6 million and realized net charge-offs of $19.6 million for the first nine months of 2012. Additionally, the Company recognized loss share expenses of $3.6 million for the third quarter of 2012 and $10.9 million for the nine months ended September 30, 2012 primarily related to attorney fees and losses on covered OREO during the period. The receivable due from the FDIC under loss share agreements related to the covered provision expense and losses on covered OREO of $8.5 million for the third quarter of 2012 and $29.6 million for the first nine months of 2012 was recognized as FDIC loss sharing income and a corresponding increase to the FDIC indemnification asset.

For the third quarter of 2011, First Financial recognized provision expense on covered loans of $7.3 million related to net charge-offs of $10.2 million during the period. First Financial recognized provision expense on covered loans of $57.2 million and realized net charge-offs of $25.6 million for the first nine months of 2011. The related receivable due from the FDIC under loss share agreements related to these loans of $8.4 million for the third quarter of 2011 and $53.5 million for the first nine months of 2011, was recognized as FDIC loss sharing income and a corresponding increase to the FDIC indemnification asset.

The allowance for loan and lease losses on covered loans is presented in the tables below:



	September 30, 2012
			Real Estate
(Dollars in thousands)	Commercial		Commercial		Residential		Installment		Total
Ending allowance on loans acquired with deteriorated credit quality (ASC 310-30)	$	19,268	$	25,919	$	3,079	$	629	$	48,895
Ending allowance on acquired loans outside the scope of ASC 310-30	0		0		0		0		0
Ending allowance on covered loans	$	19,268	$	25,919	$	3,079	$	629	$	48,895



	December 31, 2011
			Real Estate
(Dollars in thousands)	Commercial		Commercial		Residential		Installment		Total
Ending allowance on loans acquired with deteriorated credit quality (ASC 310-30)	$	19,160	$	21,930	$	1,396	$	349	$	42,835
Ending allowance on acquired loans outside the scope of ASC 310-30	0		0		0		0		0
Ending allowance on covered loans	$	19,160	$	21,930	$	1,396	$	349	$	42,835

Changes in the allowance for loan and lease losses on covered loans for the previous five quarters and year-to-date were as follows:



	Three Months Ended															Nine months ended
	2012									2011						September 30,
(Dollars in thousands)	Sep. 30,			June 30,			Mar. 31,			Dec. 31,			Sep. 30,			2012			2011
Balance at beginning of period	$	48,327		$	46,156		$	42,835		$	48,112		$	51,044		$	42,835		$	16,493
Provision for loan and lease losses	6,622			6,047			12,951			6,910			7,260			25,620			57,171
Loans charged-off	(9,058		)	(5,163		)	(10,118		)	(13,513		)	(10,609		)	(24,339		)	(32,091		)
Recoveries	3,004			1,287			488			1,326			417			4,779			6,539
Balance at end of period	$	48,895		$	48,327		$	46,156		$	42,835		$	48,112		$	48,895		$	48,112