LOANS - EXCLUDING COVERED LOANS

First Financial offers clients a variety of commercial and consumer loan and lease products with various interest rates and payment terms. Lending activities are primarily concentrated in Ohio, Indiana and Kentucky, where the Bank currently operates banking centers. Additionally, First Financial provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector throughout the United States.

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 financial 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 (TDR) are classified as nonperforming unless such loans have a sustained period of repayment performance of six months or greater and are reasonably assured of repayment in accordance with the restructured terms.

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



	As of March 31, 2013
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Total
Pass	$	832,181	$	79,735	$	1,318,714	$	2,230,630
Special Mention	36,758		65		42,128		78,951
Substandard	23,442		7,742		72,340		103,524
Doubtful	0		0		0		0
Total	$	892,381	$	87,542	$	1,433,182	$	2,413,105



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other		Total
Performing	$	321,965	$	53,168	$	362,884	$	85,525	$	823,542
Nonperforming	8,295		341		3,059		496		12,191
Total	$	330,260	$	53,509	$	365,943	$	86,021	$	835,733



	As of December 31, 2012
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Total
Pass	$	803,351	$	64,866	$	1,307,370	$	2,175,587
Special Mention	29,663		65		38,516		68,244
Substandard	28,019		8,586		71,122		107,727
Doubtful	0		0		0		0
Total	$	861,033	$	73,517	$	1,417,008	$	2,351,558



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other		Total
Performing	$	310,341	$	56,358	$	364,248	$	84,490	$	815,437
Nonperforming	7,869		452		3,252		496		12,069
Total	$	318,210	$	56,810	$	367,500	$	84,986	$	827,506

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 date of the scheduled payment.

Loan delinquency, including nonaccrual loans, was as follows:



	As of March 31, 2013
(Dollars in thousands)	30 – 59 days past due		60 – 89 days past due		> 90 days past due		Total past due		Current		Total		> 90 days past due and accruing
Loans
Commercial	$	1,471	$	208	$	4,025	$	5,704	$	886,677	$	892,381	$	0
Real estate - construction	354		0		890		1,244		86,298		87,542		0
Real estate - commercial	8,961		2,868		25,951		37,780		1,395,402		1,433,182		0
Real estate - residential	4,438		511		5,741		10,690		319,570		330,260		0
Installment	353		66		239		658		52,851		53,509		0
Home equity	1,051		484		1,857		3,392		362,551		365,943		0
Other	1,403		120		653		2,176		83,845		86,021		157
Total	$	18,031	$	4,257	$	39,356	$	61,644	$	3,187,194	$	3,248,838	$	157



	As of December 31, 2012
(Dollars in thousands)	30 - 59 days past due		60 - 89 days past due		> 90 days past due		Total past due		Current		Total		> 90 days past due and accruing
Loans
Commercial	$	1,770	$	832	$	4,197	$	6,799	$	854,234	$	861,033	$	0
Real estate - construction	0		0		892		892		72,625		73,517		0
Real estate - commercial	2,549		1,931		27,966		32,446		1,384,562		1,417,008		0
Real estate - residential	6,071		1,463		6,113		13,647		304,563		318,210		0
Installment	280		148		344		772		56,038		56,810		0
Home equity	1,311		869		1,440		3,620		363,880		367,500		0
Other	386		168		708		1,262		83,724		84,986		212
Total	$	12,367	$	5,411	$	41,660	$	59,438	$	3,119,626	$	3,179,064	$	212

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 ninety 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 on nonaccrual status. Any payments received while a loan is on 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 TDR 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 in the case of real estate.

TDRs are generally classified as nonaccrual for a minimum period of six months and may qualify for return to accrual status once they have demonstrated performance with the terms of the loan modification.

First Financial had 198 TDRs totaling $35.1 million at March 31, 2013, including $12.8 million on accrual status and $22.3 million classified as nonaccrual. First Financial had $2.7 million of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs. At March 31, 2013, the allowance for loan and lease losses included reserves of $4.2 million related to TDRs. For the three months ended March 31, 2013, First Financial charged off $0.9 million for the portion of TDRs determined to be uncollectible. Additionally, at March 31, 2013, approximately $4.9 million of the accruing TDRs have been performing in accordance with the restructured terms for more than one year.

First Financial had 145 TDRs totaling $25.0 million at December 31, 2012, including $10.9 million of loans on accrual status and $14.1 million classified as nonaccrual. First Financial had $3.5 million of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs. At December 31, 2012, the allowance for loan and lease losses included reserves of $3.0 million related to TDRs. For the year ended December 31, 2012, First Financial charged off $7.2 million for the portion of TDRs determined to be uncollectible. At December 31, 2012, approximately $2.7 million of the accruing TDRs had been performing in accordance with the restructured terms for more than one year.

The following tables provide information on loan modifications classified as TDRs during the three months ended March 31, 2013 and 2012.



	Three months ended
	March 31, 2013					March 31, 2012
(Dollars in thousands)	Number of loans	Pre-modification loan balance		Period end balance		Number of loans	Pre-modification loan balance		Period end balance
Commercial	6	$	7,568	$	7,561	8	$	4,505	$	4,496
Real estate - construction	0	0		0		0	0		0
Real estate - commercial	4	1,592		1,588		6	3,840		3,817
Real estate - residential	21	1,373		1,320		0	0		0
Installment	8	138		130		0	0		0
Home equity	24	801		798		0	0		0
Total	63	$	11,472	$	11,397	14	$	8,345	$	8,313

The following table provides information on how TDRs were modified during the three months ended March 31, 2013 and 2012.



	Three months ended
	March 31,⁽²⁾
(Dollars in thousands)	2013		2012
Extended maturities	$	8,481	$	6,854
Adjusted interest rates	568		0
Combination of rate and maturity changes	98		95
Forbearance	0		1,143
Other ⁽¹⁾	2,250		221
Total	$	11,397	$	8,313

(1) Other includes covenant modifications and other concessions or combination of concessions that do not consist of interest rate adjustments, forbearance, 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. A borrower that is ninety days or more past due on any principal or interest payments for a TDR, or who prematurely terminates a restructured loan agreement without satisfying the contractual principal balance (for example, in a deed-in-lieu arrangement), is considered to be in payment default of the terms of the TDR agreement.

The following table provides information on TDRs for which there was a payment default during the period that occurred within twelve months of the loan modification:



	March 31,
	2013			2012
(Dollars in thousands)	Number of Loans	Period End Balance		Number of Loans	Period End Balance
Commercial	2	$	85	0	$	0
Real estate - construction	0	0		0	0
Real estate - commercial	1	72		0	0
Real estate - residential	2	119		0	0
Installment	1	16		0	0
Home equity	1	54		0	0
Total	7	$	346	0	$	0

Impaired Loans. Loans placed in nonaccrual status and TDRs are considered impaired. The following table provides information on nonaccrual, TDRs and total impaired loans.



(Dollars in thousands)	March 31, 2013		December 31, 2012
Impaired loans
Nonaccrual loans
Commercial	$	4,044	$	10,562
Real estate-construction	945		950
Real estate-commercial	30,311		31,002
Real estate-residential	4,371		5,045
Installment	211		376
Home equity	1,750		2,499
Other	496		496
Nonaccrual loans	42,128		50,930
Troubled debt restructurings
Accruing	12,757		10,856
Nonaccrual	22,324		14,111
Total troubled debt restructurings	35,081		24,967
Total impaired loans	$	77,209	$	75,897



	Three months ended
	March 31,
(Dollars in thousands)	2013		2012
Interest income effect on impaired loans
Gross amount of interest that would have been recorded under original terms	$	1,122	$	1,330
Interest included in income
Nonaccrual loans	72		209
Troubled debt restructurings	243		83
Total interest included in income	315		292
Net impact on interest income	$	807	$	1,038

Commitments outstanding to borrowers with nonaccrual loans	$	2,691	$	0

First Financial individually reviews all impaired commercial loan relationships greater than $250,000, as well as consumer loan TDRs 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 expected cash flows, discounted using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.

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



	As of March 31, 2013
(Dollars in thousands)	Current Balance		Contractual Principal Balance		Related Allowance		Average Current Balance		YTD Interest Income Recognized
Loans with no related allowance recorded
Commercial	$	13,057	$	15,119	$	0	$	14,009	$	73
Real estate - construction	459		669		0		461		0
Real estate - commercial	17,620		23,114		0		16,701		112
Real estate - residential	9,751		11,472		0		9,487		35
Installment	412		451		0		432		2
Home equity	3,244		3,904		0		3,248		11
Other	326		326		0		326		0

Loans with an allowance recorded
Commercial	6,336		7,032		2,596		4,948		45
Real estate - construction	1,635		2,168		832		1,637		7
Real estate - commercial	22,150		25,035		6,352		23,082		21
Real estate - residential	1,948		1,997		290		1,952		9
Installment	0		0		0		0		0
Home equity	101		101		2		101		0
Other	170		170		92		170		0

Total
Commercial	19,393		22,151		2,596		18,957		118
Real estate - construction	2,094		2,837		832		2,098		7
Real estate - commercial	39,770		48,149		6,352		39,783		133
Real estate - residential	11,699		13,469		290		11,439		44
Installment	412		451		0		432		2
Home equity	3,345		4,005		2		3,349		11
Other	496		496		92		496		0
Total	$	77,209	$	91,558	$	10,164	$	76,554	$	315



	As of December 31, 2012
(Dollars in thousands)	Current Balance		Contractual Principal Balance		Related Allowance		Average Current Balance		Interest Income Recognized
Loans with no related allowance recorded
Commercial	$	14,961	$	17,269	$	0	$	9,337	$	215
Real estate - construction	462		672		0		3,857		15
Real estate - commercial	15,782		21,578		0		15,554		277
Real estate - residential	9,222		10,817		0		8,463		81
Installment	452		556		0		452		2
Home equity	3,251		4,132		0		2,423		19
Other	326		326		0		65		0

Loans with an allowance recorded
Commercial	3,560		4,252		1,151		5,350		161
Real estate - construction	1,640		2,168		838		5,033		81
Real estate - commercial	24,014		25,684		7,155		25,499		235
Real estate - residential	1,956		2,003		290		2,278		38
Installment	0		0		0		0		0
Home equity	101		101		2		81		1
Other	170		170		92		34		0

Total
Commercial	18,521		21,521		1,151		14,687		376
Real estate - construction	2,102		2,840		838		8,890		96
Real estate - commercial	39,796		47,262		7,155		41,053		512
Real estate - residential	11,178		12,820		290		10,741		119
Installment	452		556		0		452		2
Home equity	3,352		4,233		2		2,504		20
Other	496		496		92		99		0
Total	$	75,897	$	89,728	$	9,528	$	78,426	$	1,125

OREO. Other real estate owned (OREO) is comprised of properties acquired by the Company through the loan foreclosure or repossession process, or 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.

Changes in OREO were as follows:



	Three months ended
	March 31,
(Dollars in thousands)	2013		2012
Balance at beginning of period	$	12,526	$	11,317
Additions
Commercial	557		4,541
Residential	147		922
Total additions	704		5,463
Disposals
Commercial	241		462
Residential	294		299
Total disposals	535		761
Write-downs
Commercial	405		958
Residential	297		25
Total write-downs	702		983
Balance at end of period	$	11,993	$	15,036