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Investment Securities

3 Months Ended

Mar. 31, 2013

NOTE 2. 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 presents amortized cost, gross unrealized gains and losses and the estimated fair value of securities available for sale, securities held to maturity and nonmarketable securities.



	As of March 31, 2013								As of December 31, 2012

(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 US Government agencies and corporations	$	1,227	$	17	$	---	$	1,244	$	1,260	$	18	$	---	$	1,278
State and municipal obligations		13,378		35		150		13,263		13,460		84		61		13,483
Collateralized debt obligations		6,106		76		2,678		3,504		6,191		156		3,015		3,332
Mortgage-backed securities		143,543		1,956		191		145,308		72,527		1,928		151		74,304
Collateralized mortgage obligations		145,159		1,687		2,339		144,507		157,534		1,249		3,900		154,883
Other securities		5,656		1,281		166		6,771		5,609		1,089		180		6,518

Total securities available for sale	$	315,069	$	5,052	$	5,524	$	314,597	$	256,581	$	4,524	$	7,307	$	253,798


Securities held to maturity
State and municipal obligations	$	14,369	$	2,073	$	---	$	16,442	$	15,055	$	2,312	$	---	$	17,367
Certificates of deposit		500		---		---		500		500		---		---		500

Total securities held to maturity	$	14,869	$	2,073	$	---	$	16,942	$	15,555	$	2,312	$	---	$	17,867


Nonmarketable securities
Federal Home Loan Bank stock	$	14,674	$	---	$	---	$	14,674	$	16,343	$	---	$	---	$	16,343
Federal Reserve Bank stock		4,571		---		---		4,571		4,571		---		---		4,571

Total nonmarketable securities	$	19,245	$	---	$	---	$	19,245	$	20,914	$	---	$	---	$	20,914

Ownership of Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank of Richmond (“Federal Reserve”) stock is required for membership in these two systems. The carrying amount of FHLB and Federal Reserve stock is used to approximate the fair value of these securities as they are not readily marketable and are recorded at cost (par value).

The following table provides the names of issuers for whom First Financial has investment securities with a fair value totaling in excess of 10% of shareholders’ equity and the fair value and amortized cost of these investments. Securities issued by Bank of America Corp. and its subsidiaries are, for the most part, collateralized mortgage obligations (“CMOs”) and not backed by Bank of America Corp. All of these securities are available for sale.



	As of March 31, 2013						As of December 31, 2012

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

Issuer
Fannie Mae	$	114,151	$	115,311	37.8	%	$	41,795	$	42,665	14.2	%
Bank of America Corp.		39,208		38,923	12.8			41,913		40,964	13.7

Total	$	153,359	$	154,234			$	83,708	$	83,629

The amortized cost and fair value of investment securities 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 March 31, 2013

(in thousands)	Amortized Cost		Fair Value

Securities available for sale
Due within one year	$	1,013	$	1,019
Due after one year through five years		1,219		1,380
Due after five years through ten years		---		---
Due after ten years		21,480		18,599

Total		23,712		20,998

Mortgage-backed securities		143,543		145,308
Collateralized mortgage obligations		145,159		144,507
Other securities with no stated maturity		2,655		3,784

Total	$	315,069	$	314,597


Securities held to maturity
Due within one year	$	400	$	400
Due after one year through five years		100		100
Due after five years through ten years		1,986		2,057
Due after ten years		12,383		14,385

Total	$	14,869	$	16,942

Securities with a fair market value of $191.0 million at March 31, 2013 and $123.7 million at December 31, 2012 were pledged to secure public and certain customer deposits, repurchase agreements and advances from the FHLB and the Federal Reserve.

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. No securities held to maturity were in a loss position at March 31, 2013 or at December 31, 2012.



	Less than 12 Months						12 Months or Longer					Total

March 31, 2013 (dollars in thousands)	#		Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses

Securities available for sale
State and municipal obligations		3	$	6,767	$	150	---	$	---	$	---	3	$	6,767	$	150
Collateralized debt obligations		---		---		---	12		3,004		2,678	12		3,004		2,678
Mortgage-backed securities		3		25,950		191	---		---		---	3		25,950		191
Collateralized mortgage obligations		1		871		---	25		83,689		2,339	26		84,560		2,339
Other securities		---		---		---	1		830		166	1		830		166

Total		7	$	33,588	$	341	38	$	87,523	$	5,183	45	$	121,111	$	5,524


	Less than 12 Months						12 Months or Longer					Total

December 31, 2012 (dollars in thousands)	#		Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses

Securities available for sale
State and municipal obligations		2	$	6,038	$	61	---	$	---	$	---	2	$	6,038	$	61
Collateralized debt obligations		---		---		---	12		2,744		3,015	12		2,744		3,015
Mortgage-backed securities		3		26,186		150	1		454		1	4		26,640		151
Collateralized mortgage obligations		2		14,733		33	25		88,185		3,867	27		102,918		3,900
Other securities		---		---		---	2		1,815		180	2		1,815		180

Total		7	$	46,957	$	244	40	$	93,198	$	7,063	47	$	140,155	$	7,307

Other-Than-Temporary Impairment

Management evaluates securities for Other-than-temporary impairment losses on investment securities (“OTTI”) on at least a quarterly basis. In determining OTTI, investment securities are evaluated according to Accounting Standards Codification (“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 March 31, 2013, the majority of unrealized losses were related to trust preferred collateralized debt obligations (“CDOs”) and private-label CMOs as discussed below. For the quarter ended March 31, 2013, credit-related OTTI of $268 thousand related to CMOs was recorded in net impairment losses recognized in earnings in the Consolidated Statements of Income. The total carrying values of securities affected by credit-related OTTI represent 7.0% of the carrying value of First Financial’s investment portfolio at March 31, 2013, and are not considered to have a significant 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. See Note 10 to the Consolidated Financial Statements for additional information on fair value.

The following table provides information regarding the CDO portfolio.



(dollars in thousands)

										Quarter Ended March 31, 2013 OTTI ¹

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

ALESCO I	Pooled	B-1	$	520	$	327	$	193		$	---	$	---	$	---
ALESCO II	Pooled	B-1		345		320		25			---		---		---
MCAP III	Pooled	B		276		152		124			---		---		---
MCAP IX	Pooled	B-1		267		157		110			---		---		---
PRETZL IV	Pooled	MEZ		116		56		60			---		---		---
PRETZL XI	Pooled	B-1		821		306		515			---		---		---
PRETZL XII	Pooled	B-2		499		315		184			---		---		---
PRETZL XIII	Pooled	B-1		325		189		136			---		---		---
PRETZL XIV	Pooled	B-1		634		369		265			---		---		---
TRPREF II	Pooled	B		635		261		374			---		---		---
USCAP II	Pooled	B-1		947		303		644			---		---		---
USCAP III	Pooled	B-1		297		249		48			---		---		---
MCAP XVIII	Pooled	C-1		174		220		(46	)		---		---		---
PRETZL VII	Pooled	MEZ		250		280		(30	)		---		---		---

Subtotal - CDOs in a loss position				5,682		3,004		2,678			---		---		---

Total CDOs			$	6,106	$	3,504	$	2,602		$	---	$	---	$	---


		Dollar Basis						Constant Default Rate

	Lowest Rating	% Performing			% Deferrals / Defaults²							Discount Margin³

Name								High		Low

ALESCO I	C		83.93	%		16.07	%		0.76		0.39		11.70	%
ALESCO II	C		91.94			8.06			0.70		0.36		11.65
MCAP III	B		70.00			30.00			0.69		0.35		10.50
MCAP IX	CC		56.62			43.38			0.25		0.25		16.80
MCAP XVIII	C		71.00			29.00			0.33		0.25		11.05
PRETZL IV	CCC		72.93			27.07			0.25		0.25		11.00
PRETZL VII	C		51.08			48.92			0.84		0.43		16.80
PRETZL XI	C		68.21			31.79			0.25		0.25		11.60
PRETZL XII	C		67.45			32.55			0.39		0.25		11.62
PRETZL XIII	C		67.54			32.46			0.60		0.31		11.57
PRETZL XIV	C		63.97			36.03			0.36		0.25		11.57
TRPREF II	C		56.46			43.54			0.36		0.25		11.92
USCAP II	C		80.46			19.54			0.43		0.25		11.65
USCAP III	C		70.73			29.27			0.31		0.25		11.53

Subtotal - CDOs in a loss position			---			---

Total			68.74	%		31.26	%

¹ Recognized in other-than-temporary impairment on investment securities on the Consolidated Statements of Income

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

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 CMOs 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. A cash flow analysis is performed on each security in the CMO portfolio, regardless of the credit rating, to determine if the security has any OTTI. See Note 10 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 along with OTTI losses recorded as of and for the quarter ended March 31, 2013.




(dollars in thousands)	As of March 31, 2013					Quarter Ended March 31, 2013 OTTI

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

AAA	---	$	---	$	---	$	---	$	---	$	---
AA	1		11,010		36		---		---		---
A	6		15,068		372		---		---		---
BBB	8		18,068		458		---		---		---
Below investment grade	11		40,414		1,473		268		---		268

Total	26	$	84,560	$	2,339	$	268	$	---	$	268

The OTTI in the table above was related to one security with the following characteristics:




Description		2004 ARM Senior Support

		As of March 31, 2013

Credit rating		C
Rating agency		Moody’s
Twelve-month average loss severity		55.72%
Twelve-month average default rate		9.37
60 day or more delinquency rate		21.35


		As of December 31, 2012

Credit rating		C
Rating agency		Moody’s
Twelve-month average loss severity		50.53%
Twelve-month average default rate		11.05
60 day or more delinquency rate		20.56

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 March 31, 2013, 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.




	Quarter Ended March 31, 2013

(in thousands)	CDOs		CMOs		Other Securities		Total

Cumulative credit related losses recognized in earnings at beginning of period	$	5,823	$	1,971	$	1,100	$	8,894
Additions
Credit loss for which previous OTTI was recognized		---		268		---		268

Cumulative credit related losses recognized in earnings at end of period	$	5,823	$	2,239	$	1,100	$	9,162


	Quarter Ended March 31, 2012

	CDOs		CMOs		Other Securities		Total

Cumulative credit related losses recognized in earnings at beginning of period	$	5,782	$	1,509	$	1,100	$	8,391
Additions
Credit loss for which previous OTTI was recognized		41		28		---		69

Cumulative credit related losses recognized in earnings at end of period	$	5,823	$	1,537	$	1,100	$	8,460