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Investment Securities

12 Months Ended

Sep. 30, 2011

NOTE 3. Investment Securities

The investment securities portfolio is comprised of securities that, at purchase, are rated in one of the four highest rating categories by at least one nationally recognized investment rating service, and where available, are rated by two rating services. The following table presentsamortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities available for sale, and securities held to maturity and nonmarketable securities.




	As of September 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	$	1,826	$	37	$	---	$	1,863	$	2,021	$	28	$	---	$	2,049
State and municipal obligations		450		31		---		481		450		16		---		466
Collateralized debt obligations		7,127		---		4,053		3,074		7,780		---		4,363		3,417
Mortgage-backed securities		85,306		3,668		17		88,957		79,754		3,454		60		83,148
Collateralized mortgage obligations		306,525		8,117		2,129		312,513		303,088		10,277		1,268		312,097
Other securities		5,431		70		281		5,220		5,809		1,326		336		6,799

Total securities available for sale	$	406,665	$	11,923	$	6,480	$	412,108	$	398,902	$	15,101	$	6,027	$	407,976


Securities Held to Maturity
State and municipal obligations	$	20,863	$	2,491	$	---	$	23,354	$	21,623	$	2,350	$	1	$	23,972
Certificates of deposit		808		---		---		808		906		---		---		906

Total securities held to maturity	$	21,671	$	2,491	$	---	$	24,162	$	22,529	$	2,350	$	1	$	24,878


Nonmarketable securities

FHLB stock	$	35,782	$	---	$	---	$	35,782	$	42,867	$	---	$	---	$	42,867

The following table provides the names of issuers for whom First Financial has investment securities totaling in excess of 10% of stockholders’ equity and the fair value and amortized cost of these investments as of September 30, 2011. All of these securities are available for sale.




(in thousands)	Amortized Cost		Fair Value		% of Shareholders Equity

Issuer
Ginnie Mae	$	95,138	$	97,772		36.4	%
Freddie Mac		31,477		32,583		12.1
Wells Fargo		36,186		37,115		13.8
Bank of America		33,919		33,737		12.6

Total	$	196,720	$	201,207

The amortized cost and fair value of investments available for sale, exclusive of mortgage-backed securities and collateralized mortgage obligations, at September30, 2011, by contractual maturity are shown below. Expected 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 September 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		1,680		1,717
Due after five years through ten years		1,005		950
Due after ten years		12,003		7,825

		14,834		10,638
Mortgage-backed securities		85,306		88,957
Collateralized mortgage obligations		306,525		312,513

Total	$	406,665	$	412,108


Securities Held to Maturity
Due within one year	$	408	$	408
Due after one year through five years		400		400
Due after five years through ten years		1,520		1,591
Due after ten years		19,343		21,763

Total	$	21,671	$	24,162

Securities with a fair market value of $217.2 million at September 30, 2011 and $324.9 million at September 30, 2010, were pledged to secure public and certain customer deposits, repurchase agreements and advances from the Federal Home Loan Bank (“FHLB”) of Atlanta. Proceeds from the sale of investment securities available for sale totaled $2.2 million, less than $100 thousand, and $19.7 million in fiscal 2011, fiscal 2010, and fiscal 2009, respectively.

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

September 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	$	256	$	50		14	$	2,818	$	4,003		15	$	3,074	$	4,053
Mortgage-backed securities		---		---		---		1		581		17		1		581		17
Collateralized mortgage obligations		5		39,299		529		14		37,215		1,600		19		76,514		2,129
Other securities		2		1,930		76		1		790		205		3		2,720		281

Total		8	$	41,485	$	655		30	$	41,404	$	5,825		38	$	82,889	$	6,480


	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

Management evaluates securities for OTTI on at least a quarterly basis. In determining OTTI, investment securities are evaluated according to ASC 320 Investments – Debt and Equity Securities 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 September 30, 2011, the majority of unrealized losses were related to trust preferred collateralized debt obligations (“CDOs”) and, to a lesser degree, private-label collateralized mortgage obligations (“CMOs”) as discussed below. For the year ended September 30, 2011, credit-related OTTI of $879 thousand was recorded in net impairment losses recognized in earnings in the Consolidated Statements of Operations. The components of the OTTI were: $623 thousand on CDOs and $256 thousand on CMOs. The total carrying value of securities affected by credit-related OTTI represent 1.9% of the carrying value of First Financial’s investment portfolio at September 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 in pooled issuances. 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 brokered 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 OTTI, if any.

The following table provides information regarding the CDO portfolio characteristics and fiscal 2011 OTTI losses.

Collateralized Debt Obligations at September 30, 2011

(in thousands)


									Year Ended September 30, 2011 OTTI¹

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

ALESCO I	Pooled	B-1	$	516	$	183	$	333	$	95	$	---	$	95
ALESCO II	Pooled	B-1		371		284		87		---		---		---
MCAP III	Pooled	B		430		213		217		---		---		---
MCAP IX	Pooled	B-1		305		81		224		144		---		144
MCAP XVIII	Pooled	C-1		179		64		115		---		---		---
PRETZL XI	Pooled	B-1		855		294		561		22		---		22
PRETZL XIII	Pooled	B-1		324		128		196		90		---		90
PRETZL IV	Pooled	MEZ		121		55		66		---		---		---
PRETZL VII	Pooled	MEZ		327		107		220		---		---		---
PRETZL XII	Pooled	B-2		551		294		257		---		---		---
PRETZL XIV	Pooled	B-1		662		151		511		208		---		208
PRETZL VI	Pooled	MEZ		513		399		114		32		---		32
TRPREF II	Pooled	B		688		266		422		31		---		31
USCAP II	Pooled	B-1		979		299		680		1		---		1
USCAP III	Pooled	B-1		306		256		50		---		---		---

Total			$	7,127	$	3,074	$	4,053	$	623	$	---	$	623


		Dollar Basis

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

ALESCO I	C		64.16	%		35.84	%		1.40	%		0.25	%		11.70	%
ALESCO II	C		70.75			29.25			1.59			0.27			11.65
MCAP III	CC		70.43			29.57			2.27			0.38			10.50
MCAP IX	D		50.05			49.95			1.39			0.25			16.80
MCAP XVIII	C		65.52			34.48			1.67			0.28			11.05
PRETZL XI	C		70.74			29.26			1.35			0.25			11.60
PRETZL XIII	C		67.46			32.54			1.62			0.27			11.57
PRETZL IV	CC		72.93			27.07			2.92			0.49			11.00
PRETZL VII	C		33.92			66.08			2.08			0.35			16.80
PRETZL XII	C		67.31			32.69			0.72			0.25			11.62
PRETZL XIV	C		63.34			36.66			1.23			0.25			11.57
PRETZL VI	D		26.38			73.62			2.00			0.34			11.00
TRPREF II	C		61.19			38.81			1.52			0.26			11.92
US CAP II	C		78.82			21.18			1.12			0.25			11.65
USCAP III	C		71.51			28.49			0.74			0.25			11.53

Total			65.16	%		34.84	%



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 recent 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 September 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 comprised of agency and non-agency securities, was priced using discounted cash flow models. In making the determination of each CMO’s fair value, consideration was given to recent transaction volumes, price quotations and related price volatility, available broker information, and market conditions. A pricing model is utilized to estimate each security’s cash flow and adjusted price based on coupon, credit rating, estimated default rate, 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 17 to the Consolidated Financial Statements for additional information on fair value.

The following table presents the investment grades assigned by the rating agencies for CMO securities which were in a loss position at September 30, 2011 along with OTTI losses recorded during the year ended September 30, 2011.



(dollars in thousands)	As of September 30, 2011					Year Ended September 30, 2011 OTTI¹

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

A	3	$	30,551	$	341	$	---	$	---	$	---
BBB	9		21,923		615		---		---		---
Below investment grade	7		24,040		1,173		256		---		256

Total	19	$	76,514	$	2,129	$	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:



	September 30,

	2011		2010

Credit rating Rating agency	C Dominion Bond Rating Service		Caa3 Moody’s
Twelve-month average loss severity	45.12	%	47.83	%
Twelve-month average default rate	4.98		7.29
60 day or more delinquency rate	45.08		30.72

Based on First Financial’s policy, the credit rating displayed in the above table reflects the lowest credit rating by the major rating agencies. As of September 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.




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

	As of and for the Year Ended September 30, 2011								As of and for the Year Ended September 30, 2010


Cumulative credit related losses recognized in earnings at beginning of period	$	5,133	$	1,099	$	1,100	$	7,332	$	3,731	$	748	$	---	$	4,479
Additions
Credit loss for which no previous OTTI was recognized¹		---		---		---		---		241		---		1,100		1,341
Credit loss for which previous OTTI was recognized		623		256		---		879		1,161		351		---		1,512

Cumulative credit related losses recognized in earnings at end of period	$	5,756	$	1,355	$	1,100	$	8,211	$	5,133	$	1,099	$	1,100	$	7,332



¹ An impaired other security for which a $1.1 million OTTI charge was taken in a prior year was sold during the year ended September 30,2011. Again of $1.4 million was recognized in earnings during the year ended September 30, 2011.