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Investment Securities

9 Months Ended

Jun. 30, 2011

Note 2. Investment Securities

The following table presents amortized cost, gross unrealized gains and losses, and estimated fair value on investment securities.




	As of June 30, 2011								As of September 30, 2010

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

Securities available for sale
Obligations of the U.S. Government agencies and corporations	$	1,860	$	27	$	—	$	1,887	$	2,021	$	28	$	—	$	2,049
State and municipal obligations		450		16		—		466		450		16		—		466
Collateralized debt obligations		7,385		—		4,031		3,354		7,780		—		4,363		3,417
Mortgage-backed securities		89,756		3,738		29		93,465		79,754		3,454		60		83,148
Collateralized mortgage obligations		313,029		5,656		4,145		314,540		303,088		10,277		1,268		312,097
Other securities		5,318		109		172		5,255		5,809		1,326		336		6,799

Total securities available for sale	$	417,798	$	9,546	$	8,377	$	418,967	$	398,902	$	15,101	$	6,027	$	407,976


Securities held to maturity
State and municipal obligations	$	21,070	$	1,904	$	2	$	22,972	$	21,623	$	2,350	$	1	$	23,972
Certificates of deposit		907		—		—		907		906		—		—		906

Total securities held to maturity	$	21,977	$	1,904	$	2	$	23,879	$	22,529	$	2,350	$	1	$	24,878


Nonmarketable securities
FHLB stock	$	37,626	$	—	$	—	$	37,626	$	42,867	$	—	$	—	$	42,867

Securities with a fair market value of $225.6 million at June 30, 2011 and $324.9 million at September 30, 2010 were pledged to secure public deposits, repurchase agreements and other liabilities. Except for obligations of the U.S. Government and its agencies, no holdings of any single issue exceeded 10% of consolidated shareholders’ equity at June 30, 2011 or September 30, 2010.

The amortized cost and estimated fair value of investment securities by contractual maturity are presented in the following table. Actual maturities may differ from contractual maturities, as borrowers have the right to call or prepay obligations with or without call or prepayment penalties.




	As of June 30, 2011

(in thousands)	Amortized Cost		Fair Value

Securities available for sale
Due within one year	$	146	$	146
Due after one year through five years		1,713		1,740
Due after five years through ten years		1,006		1,063
Due after ten years		12,148		8,013

		15,013		10,962
Mortgage-backed securities		89,756		93,465
Collateralized mortgage obligations		313,029		314,540

Total	$	417,798	$	418,967


Securities held to maturity
Due within one year	$	907	$	907
Due after five years through ten years		768		768
Due after ten years		20,302		22,204

Total	$	21,977	$	23,879

The following table presents gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.




	Less than 12 Months						12 Months or Longer						Total

June 30, 2011 (dollars in thousands)	#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses

Securities available for sale
Collateralized debt obligations		1	$	281	$	25		14	$	3,073	$	4,006		15	$	3,354	$	4,031
Mortgage-backed securities		—		—		—		1		577		29		1		577		29
Collateralized mortgage obligations		13		68,884		1,925		10		36,247		2,220		23		105,131		4,145
Other securities		—		—		—		1		823		172		1		823		172

Total		14	$	69,165	$	1,950		26	$	40,720	$	6,427		40	$	109,885	$	8,377


Securities held to maturity
State and municipal obligations		1	$	476	$	2		—	$	—	$	—		1	$	476	$	2


	Less than 12 Months						12 Months or Longer						Total

September 30, 2010 (dollars in thousands)	#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses

Securities available for sale
Collateralized debt obligations		1	$	292	$	14		14	$	3,125	$	4,349		15	$	3,417	$	4,363
Mortgage-backed securities		—		—		—		1		572		60		1		572		60
Collateralized mortgage obligations		11		44,214		130		8		39,280		1,138		19		83,494		1,268
Other securities		—		—		—		2		1,659		336		2		1,659		336

Total		12	$	44,506	$	144		25	$	44,636	$	5,883		37	$	89,142	$	6,027


Securities held to maturity
State and municipal obligations		1	$	769	$	1		—	$	—	$	—		1	$	769	$	1

Other-Than-Temporary Impairment (“OTTI”)

Management evaluates securities for OTTI on at least a quarterly basis. In determining OTTI, investment securities are evaluated according to Accounting Standards Codification (“ASC”) 320-10 and management considers many factors including: (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether First Financial has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and is based on information available to management on the assessment date. In assessing the recovery of value, the key factors reviewed include the length of time and the extent the fair value has been less than the carrying cost, adverse conditions, if any, specifically related to the security, industry or geographic area, historical and implied volatility of the fair value of the security, credit quality factors affecting the issuer or the underlying collateral, payment structure of the security, payment history of the security, changes to the credit rating of the security, recoveries or declines in value subsequent to the balance sheet date or any other relevant factors. Evaluations are performed on a more frequent basis as the degree to which fair value is below carrying cost or the length of time that the fair value has been continuously below carrying cost increases.

At June 30, 2011, the majority of unrealized losses were related to trust preferred collateralized debt obligations (“CDOs”) and private-label collateralized mortgage obligations (“CMOs”) as discussed below. For the nine months ended June 30, 2011, credit-related OTTI of $710 thousand was recorded in net impairment losses recognized in earnings in the Consolidated Statements of Operations. The components of the OTTI were: $454 thousand on CDOs and $256 thousand on CMOs. The total carrying value of securities affected by credit-related OTTI represent less than 2.1% of the carrying value of First Financial’s investment portfolio at June 30, 2011, and therefore have negligible impact on First Financial’s liquidity and capital positions.

Collateralized debt obligations

The CDO portfolio is collateralized primarily with trust preferred securities issued by other financial institutions. To determine the fair value, cash flow models for trust preferred CDOs provided by a third-party pricing service are utilized. The models estimate default vectors for the underlying issuers within each CDO security, estimate expected bank failures across the entire banking system to determine the impact on each CDO, and assign a risk rating to each individual issuer in the collateral pool. The individual risk ratings for the underlying securities in the pools were determined by a number of factors including Tier 1 capital ratio, return on assets, percent of nonperforming loans, percent of commercial and construction loans, and level of broker deposits for each underlying issuer. The risk ratings were used to determine an expected default vector for each CDO. The model assigns assumptions for constant default rate, loss severity, recovery lags, and prepayment assumptions, which were reviewed for reasonableness and consistency by management. The resulting projected cash flows were compared to book value to determine the amount of, if any, OTTI.

The following table provides information regarding the CDO portfolio characteristics and fiscal year-to-date OTTI losses.




Collateralized Debt Obligations at June 30, 2011 (in thousands)

									Nine Months Ended June 30, 2011 OTTI¹

Name	Single/ Pooled	Class/ Tranche	Amortized Cost		Fair Value		Unrealized Loss		Credit Portion		Other		Total

ALESCO I	Pooled	B-1	$	554	$	182	$	372	$	95	$	—	$	95
ALESCO II	Pooled	B-1		370		252		118		—		—		—
MCAP III	Pooled	B		430		225		205		—		—		—
MCAP IX	Pooled	B-1		449		173		276		—		—		—
MCAP XVIII	Pooled	C-1		179		84		95		—		—		—
PRETZL XI	Pooled	B-1		860		317		543		22		—		22
PRETZL XIII	Pooled	B-1		327		136		191		90		—		90
PRETZL IV	Pooled	MEZ		121		57		64		—		—		—
PRETZL VII	Pooled	MEZ		326		110		216		—		—		—
PRETZL XII	Pooled	B-2		592		317		275		—		—		—
PRETZL XIV	Pooled	B-1		672		193		479		202		—		202
PRETZLVI	Pooled	MEZ		513		404		109		32		—		32
TRPREF II	Pooled	B		706		291		415		13		—		13
USCAP II	Pooled	B-1		980		331		649		—		—		—
USCAP III	Pooled	B-1		306		282		24		—		—		—

TOTAL			$	7,385	$	3,354	$	4,031	$	454	$	—	$	454


			Dollar Basis
									Constant Default Rate
	Lowest Rating					% Deferrals / Defaults²									Discount Margin³
Name	Lowest Rating		% Performing			% Deferrals / Defaults²			High			Low			Discount Margin³

ALESCO I		C		64.16	%		35.84	%		1.72	%		0.25	%		11.70	%
ALESCO II		C		70.75			29.25			1.39			0.21			11.65
MCAP III		CC		70.43			29.57			0.61			0.09			10.50
MCAP IX		C		58.29			41.71			1.46			0.22			16.80
MCAP XVIII		C		65.52			34.48			1.37			0.20			11.05
PRETZL XI		C		68.87			31.13			1.46			0.21			11.60
PRETZL XIII		C		67.46			32.54			1.40			0.21			11.57
PRETZL IV		CC		72.93			27.07			3.20			0.47			11.00
PRETZL VII		C		32.16			67.84			0.34			0.05			16.80
PRETZL XII		C		67.31			32.69			0.79			0.12			11.62
PRETZL XIV		C		65.02			34.98			1.21			0.18			11.57
PRETZLVI		D		26.38			73.62			2.19			0.32			11.00
TRPREF II		C		61.19			38.81			1.41			0.21			11.92
US CAP II		C		78.82			21.18			0.66			0.10			11.65
USCAP III		C		71.51			28.49			0.61			0.09			11.53

Total				65.43	%		34.57	%



¹	Recognized in Impairment losses on investment securities on the Consolidated Statements of Operations
²	Represents percentage of the underlying trust preferred collateral not currently making dividend payments or issued by financial institutions that have been placed into receivership by the FDIC
³	Fair market value discount margin to LIBOR

The estimated fair value of these CDOs continues to be adversely affected by the elevated credit losses within the financial industry caused by the recession, continued uncertain economic conditions, high unemployment rates, and the weak national housing market, all of which have severely impacted the creditworthiness of the underlying issuers. As of June 30, 2011, management does not intend to sell these securities, nor is it more likely than not that it will be required to sell the securities before the amortized cost basis is recovered as First Financial has adequate other sources of liquidity.

Collateralized mortgage obligations

The CMO portfolio, which is mainly comprised of private-label, non-agency securities, was priced using fair value cash flow models. In making the determination of each CMO’s fair value, considerations were given to recent transaction volumes, price quotations and related price variability, available broker information, and market liquidity. Deterioration in value was due, in part, to forced sales and illiquid market conditions in which these securities trade; and accordingly, First Financial does not believe that these values accurately reflect the true fair value of these securities. A pricing model is utilized to estimate each security’s cash flow and adjusted price based on coupon, credit rating, constant prepayment rate, and required yields or spreads. If a private label security is rated below investment grade by a credit rating agency, a stress test is performed to determine if the security has any OTTI. See Note 7 to the Consolidated Financial Statements for additional information on fair value.

The following table presents the investment grades assigned by the rating agencies and OTTI losses for the CMO securities which were in a loss position at June 30, 2011.




Collateralized Mortgage Obligations at June 30, 2011 (in thousands)								Nine Months Ended June 30, 2011 OTTI¹

Moody/S&P Ratings		#		Fair Value		Unrealized Loss		Credit Portion		Other		Total

A			5	$	41,336	$	726	$	—	$	—	$	—
BBB			8		28,980		1,105		—		—		—
Below investment grade			10		34,815		2,314		256		—		256

Total			23	$	105,131	$	4,145	$	256	$	—	$	256


¹	Recognized in Impairment losses on investment securities on the Consolidated Statements of Operations

The OTTI in the table above was related to one private-label security with credit-related deterioration evidenced by the following metrics:




	June 30, 2011	September 30, 2010

Lowest Credit rating	C	Caa3
Rating agency	Dominion Bond Rating Service	Moody’s
Twelve-month average loss severity	47.38%	47.83%
Twelve-month average default rate	6.22	7.29
60 Dayor more delinquency rate	41.51	30.72

Based on First Financials’ policy, the credit rating in the table above reflects the lowest credit rating by any major rating agency. As of June 30, 2011, management does not intend to sell this security, nor is it more likely than not that it will be required to sell the security before the amortized cost basis is recovered as First Financial has adequate other sources of liquidity.

The following table presents the cumulative credit-related losses recognized in earnings.




		Three Months Ended June 30, 2011								Three Months Ended June 30, 2010

(in thousands)		CDOs		CMOs		Other Securities¹		Total		CDOs		CMOs		Other Securities		Total


Cumulative credit related losses recognized in earnings at March 31,		$	5,533	$	1,355	$	1,100	$	7,988	$	4,592	$	1,099	$	1,100	$	6,791
Additions
Credit loss for which no previous OTTI recognized			—		—		—		—		20		—		—		20
Credit loss for which previous OTTI recognized			54		—		—		54		291		—		—		291

Cumulative credit related losses recognized in earnings at June 30,		$	5,587	$	1,355	$	1,100	$	8,042	$	4,903	$	1,099	$	1,100	$	7,102


		Nine Months Ended June 30, 2011								Nine Months Ended June 30, 2010

		CDOs		CMOs		Other Securities¹		Total		CDOs		CMOs		Other Securities		Total

Cumulative credit related losses recognized in earnings at September 30,		$	5,133	$	1,099	$	1,100	$	7,332	$	3,731	$	748	$	—	$	4,479
Additions
Credit loss for which no previous OTTI recognized			—		—		—		—		100		—		1,100		1,200
Credit loss for which previous OTTI recognized			454		256		—		710		1,072		351		—		1,423

Cumulative credit related losses recognized in earnings at June 30,		$	5,587	$	1,355	$	1,100	$	8,042	$	4,903	$	1,099	$	1,100	$	7,102



¹	An impaired other security for which a $1.1 million OTTI charge was taken in a prior year was sold in the quarter ended March 31, 2011. A gain of $1.4 million was recognized in earnings during that quarter.