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.

Commercial lending activities include equipment and leasehold improvement financing for franchisees, principally quick service and casual dining restaurants. 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.

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.

Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. 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 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.

Loans placed in nonaccrual status, including restructured loans in nonaccrual status, are considered to be impaired. Information as to nonaccrual, restructured, and impaired loans was as follows:

(Dollars in thousands)	June 30, 2011			December 31, 2010
Principal balance
Nonaccrual loans
Commercial	$	9,811		$	13,729
Real estate-construction		13,237			12,921
Real estate-commercial		26,213			28,342
Real estate-residential		4,564			4,607
Installment		335			150
Home equity		2,376			2,553
Total nonaccrual loans		56,536			62,302
Restructured loans		17,482			17,613
Total		74,018			79,915
Less: restructured loans - accruing		(3,039	)		(3,508	)
Total impaired loans	$	70,979		$	76,407

	June 30, 2011
(Dollars in thousands)	Three Months Ended		Six Months Ended
Interest income effect
Gross amount of interest that would have been recorded under original terms	$	1,304	$	2,713
Interest included in income
Nonaccrual loans		105		250
Restructured loans		84		166
Total interest included in income		189		416
Net impact on interest income	$	1,115	$	2,297

Loans placed in nonaccrual status are considered to be impaired. 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 June 30, 2011
(Dollars in thousands)	Recorded Investment		Contractual Principal Balance		Related Allowance		Average Recorded Investment		YTD Interest Income Recognized		Quarterly Interest Income Recognized
Loans with no related allowance recorded:
Commercial	$	6,706	$	8,146	$	0	$	7,858	$	27	$	15
Real estate - construction		5,638		12,238		0		5,494		1		0
Real estate - commercial		18,586		24,353		0		19,088		132		68
Real estate - residential		5,857		6,334		0		5,713		10		5
Installment		448		461		0		287		3		2
Home equity		2,375		2,483		0		2,444		4		2

Loans with an allowance recorded:
Commercial		3,112		4,590		1,528		3,299		0		0
Real estate - construction		13,908		16,481		4,387		14,327		88		35
Real estate - commercial		13,453		18,401		4,021		15,204		105		39
Real estate - residential		795		807		93		874		10		4
Installment		0		0		0		26		0		0
Home equity		101		101		2		67		1		1

Total:
Commercial		9,818		12,736		1,528		11,157		27		15
Real estate - construction		19,546		28,719		4,387		19,821		89		35
Real estate - commercial		32,039		42,754		4,021		34,292		237		107
Real estate - residential		6,652		7,141		93		6,587		20		9
Installment		448		461		0		313		3		2
Home equity		2,476		2,584		2		2,511		5		3
Total	$	70,979	$	94,395	$	10,031	$	74,681	$	381	$	171

	As of December 31, 2010
(Dollars in thousands)	Recorded Investment		Contractual Principal Balance		Related Allowance		Average Recorded Investment		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		665		757		122		1,434		23

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		6,519		7,204		122		8,045		107
Installment		150		179		0		336		6
Home equity		2,553		3,345		0		2,188		74
Total	$	76,407	$	97,004	$	10,202	$	76,926	$	2,164

Loan delinquency, including nonaccrual loans, was as follows:

	As of June 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	$	2,683	$	2,835	$	8,741	$	14,259	$	784,293	$	798,552	$	0
Real estate - construction		2,146		0		13,213		15,359		127,323		142,682		0
Real estate - commercial		10,260		2,008		15,523		27,791		1,116,577		1,144,368		0
Real estate - residential		5,644		1,901		5,306		12,851		243,937		256,788		0
Installment		214		98		181		493		63,306		63,799		0
Home equity		917		383		1,894		3,194		341,263		344,457		0
All other		340		218		149		707		37,801		38,508		149
Total	$	22,204	$	7,443	$	45,007	$	74,654	$	2,714,500	$	2,789,154	$	149

	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

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

	As of June 30, 2011
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial
Pass	$	739,569	$	108,989	$	989,787
Special Mention		30,334		2,708		57,711
Substandard		28,450		30,985		96,870
Doubtful		199		0		0
Total	$	798,552	$	142,682	$	1,144,368

(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other
Performing	$	250,136	$	63,351	$	341,981	$	38,508
Nonperforming		6,652		448		2,476		0
Total	$	256,788	$	63,799	$	344,457	$	38,508

	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 six 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. Changes in other real estate owned were as follows:

	Six Months Ended		Full Year
(Dollars in thousands)	June 30, 2011		December 31, 2010
Balance at beginning of period	$	17,907	$	4,145
Additions
Commercial		1,087		17,520
Residential		2,193		1,130
Total additions		3,280		18,650
Disposals
Commercial		304		2,315
Residential		1,052		1,674
Total disposals		1,356		3,989
Write-downs
Commercial		3,341		727
Residential		177		172
Total write-downs		3,518		899
Balance at end of period	$	16,313	$	17,907