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 June 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 loans:

	June 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	$	234,024	$	17,729	$	251,753	$	295,600	$	38,439	$	334,039
Real estate - construction		40,811		0		40,811		42,743		0		42,743
Real estate - commercial		714,240		12,645		726,885		837,942		17,783		855,725
Real estate - residential		134,131		0		134,131		147,052		0		147,052
Installment		13,989		1,208		15,197		19,560		1,511		21,071
Home equity		6,289		62,375		68,664		7,241		66,454		73,695
Other covered loans		0		5,289		5,289		0		7,168		7,168
Total covered loans	$	1,143,484	$	99,246	$	1,242,730	$	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 purchased impaired and nonimpaired loans accounted for under FASB ASC Topic 310-30, including contractual principal, interest, fees, and penalties, was $1.9 billion and $2.2 billion as of June 30, 2011 and December 31, 2010, respectively.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2011			2010			2011			2010
Balance at beginning of period (1)	$	461,290		$	573,381		$	509,945		$	623,669
Additions		0			0			0			0
Reclassification from non-accretable difference		11,229			0			33,206			0
Accretion		(31,818	)		(33,046	)		(66,279	)		(69,205	)
Other net activity (2)		(18,920	)		(25,899	)		(55,091	)		(40,028	)
Balance at end of period	$	421,781		$	514,436		$	421,781		$	514,436

(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 second quarter of 2011. The Company recognized improvement in the cash flow expectations related to certain loan pools resulting in the reclassification of $11.2 million from nonaccretable to accretable difference during the second quarter and $33.2 million for the six months ended June 30, 2011. These reclassifications resulted in yield adjustments on these loan pools on a prospective basis. There were no reclassifications from nonaccretable to accretable difference during the three and six months ended June 30, 2010. 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 second quarter. This improvement was recorded as a recapture of prior period impairment which partially offset impairment recorded in the second 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 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)	June 30, 2011		December 31, 2010
Principal balance
Nonaccrual loans
Commercial	$	8,733	$	16,190
Real estate-commercial		2,883		2,074
Home equity		1,157		1,491
All other		10		0
Total	$	12,783	$	19,755

	Three Months Ended		Six Months Ended
(Dollars in thousands)	June 30, 2011		June 30, 2011
Interest income effect
Gross amount of interest that would have been recorded under original terms	$	961	$	2,019
Interest included in income		54		163
Net impact on interest income	$	907	$	1,856

First Financial’s investment in covered impaired loans, excluding loans accounted for under FASB ASC Topic 310-30, was as follows:

	As of June 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	$	8,733	$	11,215	$	0	$	11,262	$	144	$	51
Real estate - commercial		2,883		3,634		0		2,183		2		0
Home equity		1,157		2,257		0		1,311		17		3
All other		10		10		0		7		0		0
Total	$	12,783	$	17,116	$	0	$	14,763	$	163	$	54

	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

Covered loan delinquency, excluding loans accounted for under FASB ASC Topic 310-30, 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	$	1,346	$	1,875	$	5,189	$	8,410	$	9,319	$	17,729	$	0
Real estate - commercial		1,408		29		2,841		4,278		8,367		12,645		0
Installment		0		0		0		0		1,208		1,208		0
Home equity		1,353		1,086		1,103		3,542		58,833		62,375		0
All other		159		5		10		174		5,115		5,289		0
Total	$	4,266	$	2,995	$	9,143	$	16,404	$	82,842	$	99,246	$	0

	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

Covered 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	$	159,323	$	7,453	$	384,580
Special Mention		28,341		13,019		79,563
Substandard		44,444		20,339		253,858
Doubtful		19,645		0		8,884
Total	$	251,753	$	40,811	$	726,885

(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other
Performing	$	134,131	$	15,197	$	67,507	$	5,289
Nonperforming		0		0		1,157		0
Total	$	134,131	$	15,197	$	68,664	$	5,289

	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:

	Six Months Ended		Full Year
(Dollars in thousands)	June 30, 2011		December 31, 2010
Balance at beginning of period	$	35,257	$	12,916
Additions
Commercial		21,732		22,237
Residential		1,825		9,827
Total additions		23,557		32,064
Disposals
Commercial		11,500		4,744
Residential		6,091		4,536
Total disposals		17,591		9,280
Write-downs
Commercial		3,524		414
Residential		1,012		29
Total write-downs		4,536		443
Balance at end of period	$	36,687	$	35,257