Edgar Filing: FIRST FINANCIAL BANCORP /OH/

FFBC-Q2-10Q-2012.6.30

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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________

Commission file number 0-12379

FIRST FINANCIAL BANCORP.

(Exact name of registrant as specified in its charter)



Ohio		31-1042001
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

255 East Fifth Street, Suite 700 Cincinnati, Ohio		45202
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code (877) 322-9530

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x	Accelerated filer o

Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.



Class		Outstanding at August 3, 2012
Common stock, No par value		58,502,668

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FIRST FINANCIAL BANCORP.

INDEX



	Page No.

Part I-FINANCIAL INFORMATION

Item 1-Financial Statements

Consolidated Balance Sheets - June 30, 2012 (unaudited) and December 31, 2011	1

Consolidated Statements of Income - Three and Six Months Ended June 30, 2012 and 2011 (unaudited)	2

Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2012 and 2011 (unaudited)	3

Consolidated Statements of Changes in Shareholders’ Equity - Six Months Ended June 30, 2012 and 2011 (unaudited)	4

Consolidated Statements of Cash Flows - Six Months Ended June 30, 2012 and 2011 (unaudited)	5

Notes to Consolidated Financial Statements (unaudited)	6

Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3-Quantitative and Qualitative Disclosures about Market Risk	53

Item 4-Controls and Procedures	54

Part II-OTHER INFORMATION

Item 1-Legal Proceedings	55

Item 1A-Risk Factors	55

Item 2-Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 6-Exhibits	57

Signatures	58

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PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)



	June 30, 2012			December 31, 2011
	(Unaudited)
Assets
Cash and due from banks	$	126,392		$	149,653
Interest-bearing deposits with other banks	9,187			375,398
Investment securities available-for-sale, at market value (cost $706,703 at June 30, 2012 and $1,421,490 at December 31, 2011)	724,518			1,441,846
Investment securities held-to-maturity (market value $877,832 at June 30, 2012 and $2,893 at December 31, 2011)	873,538			2,664
Other investments	71,492			71,492
Loans held for sale	20,971			24,834
Loans:
Commercial	823,890			856,981
Real estate-construction	86,173			114,974
Real estate-commercial	1,321,446			1,233,067
Real estate-residential	292,503			287,980
Installment	61,590			67,543
Home equity	365,413			358,960
Credit card	31,486			31,631
Lease financing	30,109			17,311
Total loans, excluding covered loans	3,012,610			2,968,447
Less: Allowance for loan and lease losses	50,952			52,576
Net loans - uncovered	2,961,658			2,915,871
Covered loans	903,862			1,053,244
Less: Allowance for loan and lease losses	48,327			42,835
Net loans – covered	855,535			1,010,409
Net loans	3,817,193			3,926,280
Premises and equipment	142,744			138,096
Goodwill	95,050			95,050
Other intangibles	9,195			10,844
FDIC indemnification asset	146,765			173,009
Accrued interest and other assets	245,632			262,345
Total assets	$	6,282,677		$	6,671,511

Liabilities
Deposits:
Interest-bearing	$	1,154,852		$	1,317,339
Savings	1,543,619			1,724,659
Time	1,331,758			1,654,662
Total interest-bearing deposits	4,030,229			4,696,660
Noninterest-bearing	1,071,520			946,180
Total deposits	5,101,749			5,642,840
Federal funds purchased and securities sold under agreements to repurchase	73,919			99,431
Federal Home Loan Bank short-term borrowings	176,000			0
Total short-term borrowings	249,919			99,431
Long-term debt	75,120			76,544
Total borrowed funds	325,039			175,975
Accrued interest and other liabilities	139,101			140,475
Total liabilities	5,565,889			5,959,290

Shareholders' equity
Common stock - no par value
Authorized - 160,000,000 shares; Issued - 68,730,731 shares in 2012 and 2011	576,929			579,871
Retained earnings	331,315			331,351
Accumulated other comprehensive loss	(18,172		)	(21,490		)
Treasury stock, at cost, 10,217,338 shares in 2012 and 10,463,677 shares in 2011	(173,284		)	(177,511		)
Total shareholders' equity	716,788			712,221
Total liabilities and shareholders' equity	$	6,282,677		$	6,671,511

See Notes to Consolidated Financial Statements.

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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)



	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Interest income
Loans, including fees	$	63,390		$	71,929		$	129,826		$	145,945
Investment securities
Taxable	10,379			7,080			20,896			13,883
Tax-exempt	121			192			255			390
Total interest on investment securities	10,500			7,272			21,151			14,273
Other earning assets	(1,967		)	(1,384		)	(3,957		)	(2,338		)
Total interest income	71,923			77,817			147,020			157,880
Interest expense
Deposits	6,381			10,767			14,097			22,167
Short-term borrowings	37			49			49			94
Long-term borrowings	675			937			1,355			2,026
Subordinated debentures and capital securities	0			197			0			391
Total interest expense	7,093			11,950			15,501			24,678
Net interest income	64,830			65,867			131,519			133,202
Provision for loan and lease losses - uncovered	8,364			5,756			11,622			6,403
Provision for loan and lease losses - covered	6,047			23,895			18,998			49,911
Net interest income after provision for loan losses	50,419			36,216			100,899			76,888

Noninterest income
Service charges on deposit accounts	5,376			4,883			10,285			9,493
Trust and wealth management fees	3,377			3,507			7,168			7,432
Bankcard income	2,579			2,328			5,115			4,483
Net gains from sales of loans	1,132			854			2,072			1,843
FDIC loss sharing income	8,280			21,643			21,096			45,078
Accelerated discount on covered loans	3,764			4,756			7,409			10,539
Other	9,037			3,147			12,325			5,908
Total noninterest income	33,545			41,118			65,470			84,776

Noninterest expenses
Salaries and employee benefits	29,048			25,123			57,909			52,693
Net occupancy	5,025			4,493			10,407			11,353
Furniture and equipment	2,323			2,581			4,567			5,134
Data processing	2,076			1,453			3,977			2,691
Marketing	1,238			1,402			2,392			2,643
Communication	913			753			1,807			1,567
Professional services	2,151			3,095			4,298			5,322
State intangible tax	970			1,236			1,996			2,601
FDIC expense	1,270			1,152			2,433			3,273
Loss - Other real estate owned	313			163			1,309			3,485
Loss - Covered other real estate owned	1,233			2,621			2,525			5,733
Loss sharing expense	3,085			755			4,836			814
Other	7,814			7,670			14,781			12,978
Total noninterest expenses	57,459			52,497			113,237			110,287
Income before income taxes	26,505			24,837			53,132			51,377
Income tax expense	8,703			8,864			18,336			18,197
Net income	$	17,802		$	15,973		$	34,796		$	33,180

Net earnings per common share - basic	$	0.31		$	0.28		$	0.60		$	0.58
Net earnings per common share - diluted	$	0.30		$	0.27		$	0.59		$	0.57
Cash dividends declared per share	$	0.29		$	0.12		$	0.60		$	0.24
Average common shares outstanding - basic	57,933,281			57,694,792			57,864,269			57,642,970
Average common shares outstanding - diluted	58,958,279			58,734,662			58,921,689			58,722,448

See Notes to Consolidated Financial Statements.

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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)

	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011
Net income	$	17,802	$	15,973	$	34,796	$	33,180
Other comprehensive income, net of tax:
Unrealized gains on investment securities arising during the period	157		3,720		2,596		2,913
Change in retirement obligation	355		265		710		529
Unrealized gain on derivatives	0		379		0		391
Foreign currency exchange	3		66		12		309
Other comprehensive income	515		4,430		3,318		4,142
Comprehensive income	$	18,317	$	20,403	$	38,114	$	37,322

See Notes to Consolidated Financial Statements.

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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Dollars in thousands except per share data)

(Unaudited)




	Common Stock	Common Stock			Retained			Accumulated other comprehensive			Treasury stock
	Shares	Amount			earnings			income (loss)			Shares		Amount			Total
Balances at January 1, 2011	68,730,731	$	580,097		$	310,271		$	(12,044	)	(10,665,754	)	$	(180,930	)	$	697,394
Net income					33,180											33,180
Other comprehensive income								4,142								4,142
Cash dividends declared :
Common stock at $0.24 per share					(13,996		)									(13,996		)
Excess tax benefit on share-based compensation		156														156
Exercise of stock options, net of shares purchased		(228		)							12,808		217			(11		)
Restricted stock awards, net of forfeitures		(3,974		)							181,655		3,066			(908		)
Share-based compensation expense		1,805														1,805
Balances at June 30, 2011	68,730,731	$	577,856		$	329,455		$	(7,902	)	(10,471,291	)	$	(177,647	)	$	721,762
Balances at January 1, 2012	68,730,731	$	579,871		$	331,351		$	(21,490	)	(10,463,677	)	$	(177,511	)	$	712,221
Net income					34,796											34,796
Other comprehensive income								3,318								3,318
Cash dividends declared :
Common stock at $0.60 per share					(34,832		)									(34,832		)
Excess tax benefit on share-based compensation		348														348
Exercise of stock options, net of shares purchased		(914		)							57,604		977			63
Restricted stock awards, net of forfeitures		(4,318		)							188,735		3,250			(1,068		)
Share-based compensation expense		1,942														1,942
Balances at June 30, 2012	68,730,731	$	576,929		$	331,315		$	(18,172	)	(10,217,338	)	$	(173,284	)	$	716,788

See Notes to Consolidated Financial Statements.

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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



	Six months ended
	June 30,
	2012			2011
Operating activities
Net income	$	34,796		$	33,180
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses	30,620			56,314
Depreciation and amortization	7,669			5,779
Stock-based compensation expense	1,942			1,805
Pension income	(285		)	(700		)
Net amortization of premiums/accretion of discounts on investment securities	4,902			1,710
Originations of loans held for sale	(102,950		)	(59,692		)
Net gains from sales of loans held for sale	(2,072		)	(1,843		)
Proceeds from sales of loans held for sale	106,803			82,004
Deferred income taxes	(2,670		)	(6,643		)
Decrease in interest receivable	3,341			646
Decrease (increase) in cash surrender value of life insurance	2,039			(629		)
Increase in prepaid expenses	1,109			3,291
Decrease in indemnification asset	26,244			29,535
Decrease in accrued expenses	(2,932		)	(22,272		)
Decrease in interest payable	(993		)	(1,124		)
Other	4,928			5,614
Net cash provided by operating activities	112,491			126,975

Investing activities
Proceeds from calls, paydowns and maturities of securities available-for-sale	126,901			198,811
Purchases of securities available-for-sale	(331,300		)	(410,845		)
Proceeds from calls, paydowns and maturities of securities held-to-maturity	50,122			11,665
Net decrease in interest-bearing deposits with other banks	366,211			29,844
Net (increase) decrease in loans and leases, excluding covered loans	(62,600		)	14,756
Net decrease in covered assets	128,100			198,782
Proceeds from disposal of other real estate owned	22,537			18,947
Purchases of premises and equipment	(10,779		)	(4,613		)
Net cash provided by investing activities	289,192			57,347

Financing activities
Net decrease in total deposits	(541,091		)	(171,839		)
Net increase in short-term borrowings	150,488			45,449
Payments on long-term borrowings	(1,410		)	(26,611		)
Redemption of other long-term debt	0			(20,620		)
Cash dividends paid on common stock	(33,571		)	(12,748		)
Proceeds from exercise of stock options	292			60
Excess tax benefit on share-based compensation	348			156
Net cash used in financing activities	(424,944		)	(186,153		)

Cash and due from banks:
Net decrease in cash and due from banks	(23,261		)	(1,831		)
Cash and due from banks at beginning of period	149,653			105,981
Cash and due from banks at end of period	$	126,392		$	104,150

See Notes to Consolidated Financial Statements.

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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(Unaudited)

The consolidated financial statements for interim periods are unaudited; however, in the opinion of the management of First Financial Bancorp. (First Financial or the Company), all material adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation have been included.

NOTE 1: BASIS OF PRESENTATION

The Consolidated Financial Statements of First Financial, a bank holding company, principally serving Ohio, Indiana and Kentucky, include the accounts and operations of First Financial and its wholly-owned subsidiary – First Financial Bank, N.A. (First Financial Bank or the Bank). All significant intercompany transactions and accounts have been eliminated in consolidation. Certain reclassifications of prior periods’ amounts have been made to conform to the current period’s presentation and had no effect on net earnings.

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (GAAP) requires management to make estimates, assumptions and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual realized amounts could differ materially from those estimates.

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and serve to update the First Financial Bancorp. Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2011. These interim financial statements may not include all information and notes necessary to constitute a complete set of financial statements under GAAP applicable to annual periods and accordingly should be read in conjunction with the financial information contained in the Form 10-K. Management believes these unaudited consolidated financial statements reflect all adjustments of a normal recurring nature which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. The Consolidated Balance Sheet as of December 31, 2011, has been derived from the audited financial statements in the Company’s 2011 Form 10-K.

NOTE 2: RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS

In April 2011, the Financial Accounting Standards Board (FASB) issued an update (ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements), which simplified the accounting for arrangements such as repurchase and securities lending agreements. The collateral maintenance requirement will be eliminated from the assessment of effective control, which could result in more transactions being accounted for as secured borrowings rather than sales. The assessment of effective control will focus on a transferor's contractual rights and obligations, not the amount of collateral obtained to repurchase or redeem the transferred financial asset. Under the amended guidance, a transferor maintains effective control over transferred financial assets, and thus accounts for the transfer as a secured borrowing, if there is an agreement that both entitles and obligates the transferor to repurchase the financial assets before maturity and all of the conditions already described in FASB ASC Topic 860, Transfers and Servicing, are met. The provisions of ASU 2011-03 became effective for First Financial for the interim reporting period ended March 31, 2012. This update did not have a material impact on the Consolidated Financial Statements.

In May 2011, the FASB issued an update (ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs), which expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders' equity. The provisions of ASU 2011-04 became effective for First Financial for the interim reporting period ended March 31, 2012. For further detail see Note 14 – Fair Value Disclosures.

In June 2011, the FASB issued an update (ASU 2011-05, Presentation of Comprehensive Income), which revises the manner in which entities present comprehensive income in their financial statements. This update eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholders' equity. The amendments to the existing standard require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from OCI to net income, in both net income and OCI. The

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amendments to the existing standard do not change the current option for presenting components of OCI gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is presented or disclosed in the notes to the financial statements. Additionally, the standard does not affect the calculation or reporting of earnings per share. The provisions of ASU 2011-05 became effective for First Financial for the interim reporting period ended March 31, 2012. This update resulted in the inclusion of the Consolidated Statements of Comprehensive Income in the Consolidated Financial Statements.

In September 2011, the FASB issued an update (ASU 2011-08, Testing Goodwill for Impairment), to simplify the current two-step goodwill impairment test in FASB ASC Topic 350-20, Intangibles - Goodwill and Other: Goodwill. This update permits entities to first perform a qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If the entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it would then perform the first step of the goodwill impairment test; otherwise, no further impairment test would be required. The provisions of ASU 2011-08 became effective for First Financial for the interim reporting period ended March 31, 2012. This update did not have a material impact on the Consolidated Financial Statements.

In December 2011, the FASB issued an update (ASU 2011-11, Disclosures About Offsetting Assets and Liabilities), which creates new disclosure requirements about the nature of an entity's rights of offset and related arrangements associated with its financial instruments and derivative instruments. New disclosure requirements will be required for recognized financial and derivative instruments that are offset in accordance with the guidance in FASB ASC Topic 210-20-45, Balance Sheet - Offsetting - Other Presentation Matters, FASB ASC Topic 815-10-45, Derivatives and Hedging - Other Presentation Matters, or are subject to an enforceable master netting arrangement or similar agreement. Recognized assets and liabilities within the scope of this update include financial instruments such as derivatives, repurchase agreements, reverse repurchase agreements and securities lending and borrowing arrangements subject to master netting arrangements. An entity will be required to disclose information to enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on its financial position, including the effect or potential effect of rights of set-off associated with certain financial instruments and derivative instruments. This guidance is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance must be applied retrospectively for any period presented that begins before an entity's date of initial application. First Financial does not anticipate this update will have a material impact on its Consolidated Financial Statements.

NOTE 3: BUSINESS COMBINATIONS

On September 23, 2011, First Financial Bank completed the purchase of 16 Ohio-based retail banking centers from Liberty Savings Bank, FSB (Liberty) including $126.5 million of performing loans and $341.9 million of deposits at their estimated fair values. First Financial also acquired $3.8 million of fixed assets at estimated fair value and paid Liberty a $22.4 million net deposit premium. Assets acquired in this transaction are not subject to a loss share agreement. First Financial recorded $17.1 million of goodwill related to the Liberty banking center acquisition.

Loans acquired in conjunction with the Liberty banking center acquisition were evaluated for impairment in accordance with FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. First Financial determined that the acquired loans were not impaired and is accounting for them under FASB ASC Topic 310-20, Receivables-Nonrefundable Fees and Costs.

On December 2, 2011, First Financial Bank completed the purchase of 22 Indiana-based retail banking centers from Flagstar Bank, FSB (Flagstar) and assumed approximately $464.7 million of deposits at their estimated fair value. First Financial also acquired $6.6 million of fixed assets at estimated fair value and paid Flagstar a $22.5 million net deposit premium. Assets acquired in this transaction are not subject to a loss share agreement. First Financial recorded $26.1 million of goodwill related to the Flagstar banking center acquisition.

The Liberty and Flagstar banking center acquisitions were accounted for in accordance with FASB ASC Topic 805, Business Combinations. The fair values of assets and liabilities acquired in a business combination are subject to refinement for up to one year after the closing date of the acquisition (the measurement period) as information relative to closing date fair values becomes available.

NOTE 4: GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill. Assets and liabilities acquired in a business combination are recorded at their estimated fair values as of the acquisition date and are subject to refinement for up to one year as additional information relative to initial estimated fair value

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data becomes available. The excess cost of the acquisition over the fair value of net assets acquired is recorded as goodwill. First Financial recorded additions to goodwill in 2011 of $17.1 million related to the Liberty banking center acquisition and $26.1 million related to the Flagstar banking center acquisition. First Financial expects all the goodwill resulting from these acquisitions to be deductible for tax purposes.

Goodwill is not amortized, but is measured for impairment on an annual basis as of October 1 of each year or whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying value. First Financial performed its annual impairment test as of October 1, 2011, and no impairment was indicated. As of June 30, 2012, no events or changes in circumstances indicated that the fair value of a reporting unit was below its carrying value.

Other intangible assets. Other intangible assets consist primarily of core deposit intangibles. Core deposit intangibles are recorded at their estimated fair value as of the acquisition date and are then amortized on an accelerated basis over their estimated useful lives. First Financial recorded $4.0 million of core deposit intangibles associated with the Liberty banking center acquisition and $3.0 million of core deposit intangibles associated with the Flagstar banking center acquisition during 2011, contributing to a total of $9.9 million of core deposit intangibles as of December 31, 2011. As of June 30, 2012, core deposit intangibles were $8.6 million. First Financial's core deposit intangibles have an estimated weighted average remaining life of 8.3 years.

NOTE 5: COMMITMENTS AND CONTINGENCIES

In the normal course of business, First Financial offers a variety of financial instruments with off-balance-sheet risk to its clients to assist them in meeting their requirements for liquidity and credit enhancement. These financial instruments include standby letters of credit and outstanding commitments to extend credit. GAAP does not require these financial instruments to be recorded in the Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Changes in Shareholders’ Equity and Consolidated Statements of Cash Flows.

First Financial’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for standby letters of credit, and outstanding commitments to extend credit, is represented by the contractual amounts of those instruments. First Financial uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Letters of credit. These transactions are conditional commitments issued by First Financial to guarantee the performance of a client to a third party. First Financial’s portfolio of standby letters of credit consists primarily of performance assurances made on behalf of clients who have a contractual commitment to produce or deliver goods or services. The risk to First Financial arises from its obligation to make payment in the event of the client's contractual default to produce the contracted good or service to a third party. First Financial has issued letters of credit (including standby letters of credit) aggregating $16.8 million and $20.0 million at June 30, 2012, and December 31, 2011, respectively. Management conducts regular reviews of these instruments on an individual client basis.

Loan commitments. Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. First Financial evaluates each client’s creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by First Financial upon extension of credit, is based on management’s credit evaluation of the client. The collateral held varies, but may include securities, real estate, inventory, plant or equipment. First Financial had commitments outstanding to extend credit totaling $1.2 billion at June 30, 2012, and $1.2 billion at December 31, 2011.

First Financial utilizes the allowance for loan and lease losses methodology to maintain a reserve that it considers sufficient to absorb probable losses inherent in standby letters of credit and outstanding loan commitments.

Contingencies/Litigation. The Company and its subsidiaries are engaged in various matters of litigation, other assertions of improper or fraudulent loan practices or lending violations and other matters, and the Company has a number of unresolved claims pending. In addition, as part of the ordinary course of business, First Financial and its subsidiaries are parties to litigation involving claims to the ownership of funds in particular accounts, the collection of delinquent accounts, challenges to security interests in collateral and foreclosure interests, that is incidental to our regular business activities. While the ultimate liability with respect to these other litigation matters and claims cannot be determined at this time, the Company believes that damages, if any, and other amounts relating to pending matters are not likely to be material to its consolidated financial position or results of operations. Reserves are established for these various matters of litigation, when appropriate under FASB ASC

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Topic 450, Contingencies, based in part upon the advice of legal counsel.

NOTE 6: INVESTMENTS

The following is a summary of held-to-maturity and available-for-sale investment securities as of June 30, 2012.



	Held-to-Maturity									Available-for-Sale
(Dollars in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss			Market Value		Amortized Cost		Unrealized Gain		Unrealized Loss			Market Value
Securities of U.S. government agencies and corporations	$	21,080	$	259	$	0		$	21,339	$	25,773	$	344	$	0		$	26,117
Mortgage-backed securities	850,309		5,900		(2,135		)	854,074		622,251		16,823		(107		)	638,967
Obligations of state and other political subdivisions	2,149		270		0			2,419		7,571		93		(1		)	7,663
Other securities	0		0		0			0		51,108		879		(216		)	51,771
Total	$	873,538	$	6,429	$	(2,135	)	$	877,832	$	706,703	$	18,139	$	(324	)	$	724,518

The following is a summary of held-to-maturity and available-for-sale investment securities as of December 31, 2011.



	Held-to-Maturity								Available-for-Sale
	Amortized		Unrealized		Unrealized		Market		Amortized		Unrealized		Unrealized			Market
(Dollars in thousands)	Cost		Gain		Loss		Value		Cost		Gain		Loss			Value
Securities of U.S. government agencies and corporations	$	0	$	0	$	0	$	0	$	45,757	$	433	$	0		$	46,190
Mortgage-backed securities	90		2		0		92		1,344,015		21,394		(2,031		)	1,363,378
Obligations of state and other political subdivisions	2,574		227		0		2,801		9,270		121		(5		)	9,386
Other securities	0		0		0		0		22,448		530		(86		)	22,892
Total	$	2,664	$	229	$	0	$	2,893	$	1,421,490	$	22,478	$	(2,122	)	$	1,441,846

The following is a summary of investment securities by estimated maturity as of June 30, 2012.



	Held-to-Maturity				Available-for-Sale
(Dollars in thousands)	Amortized Cost		Market Value		Amortized Cost		Market Value
Due in one year or less	$	699	$	713	$	56,125	$	56,038
Due after one year through five years	602,928		603,210		548,361		562,663
Due after five years through ten years	208,808		211,892		69,761		71,627
Due after ten years	61,103		62,017		32,456		34,190
Total	$	873,538	$	877,832	$	706,703	$	724,518

The following tables present the age of gross unrealized loss and associated fair value by investment category.



	June 30, 2012
	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Mortgage-backed securities	$	245,450	$	(2,164	)	$	26,070	$	(78	)	$	271,520	$	(2,242	)
Obligations of state and other political subdivisions	0		0			401		(1		)	401		(1		)
Other securities	31,001		(216		)	17		0			31,018		(216		)
Total	$	276,451	$	(2,380	)	$	26,488	$	(79	)	$	302,939	$	(2,459	)

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	December 31, 2011
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Loss			Value		Loss			Value		Loss
Mortgage-backed securities	$	343,883	$	(1,938	)	$	29,562	$	(93	)	$	373,445	$	(2,031	)
Obligations of state and other political subdivisions	0		0			2,278		(5		)	2,278		(5		)
Other securities	9,133		(86		)	17		0			9,150		(86		)
Total	$	353,016	$	(2,024	)	$	31,857	$	(98	)	$	384,873	$	(2,122	)

Unrealized losses on debt securities are generally due to higher current market yields relative to the yields of the debt securities at their amortized cost.

All securities with unrealized losses are reviewed quarterly to determine if any impairment is considered other than temporary, requiring a write-down to fair market value. First Financial considers the percentage loss on a security, duration of the loss, average life or duration of the security, credit rating of the security, as well as payment performance and the Company's intent and ability to hold the security to maturity when determining whether any impairment is other than temporary. At this time First Financial does not intend to sell, and it is not more likely than not that the Company will be required to sell debt security issues temporarily impaired prior to maturity or recovery of book value.

For further detail on the fair value of investment securities, see Note 14 – Fair Value Disclosures.

NOTE 7: DERIVATIVES

The use of derivative instruments allows First Financial to meet the needs of its clients while managing the interest-rate risk associated with certain transactions. First Financial’s board of directors has authorized the use of certain derivative products, including interest rate caps, floors and swaps. First Financial does not use derivatives for speculative purposes and currently does not have any derivatives that are not designated as hedges.

The following table summarizes the derivative financial instruments utilized by First Financial by the nature of the underlying asset or liability:



	Fair Value Hedges
(Dollars in thousands)	June 30, 2012		December 31, 2011
Instruments associated with loans:
Total notional value	$	890,200	$	775,328

While authorized to use a variety of derivative products, First Financial primarily utilizes interest rate swaps as a means to offer borrowers credit-based products that meet their needs and may from time to time utilize interest rate swaps to manage the macro interest rate risk profile of the Company. These agreements establish the notional amount, or basis on which interest rate payments are exchanged with counterparties.

As only interest rate payments are exchanged, cash requirements and credit risk are significantly less than the notional amount and the Company’s credit risk exposure is limited to the market value of the instrument. First Financial manages this market value credit risk through borrower and counterparty credit policies. First Financial's counterparty credit policies require the Company to maintain a total derivative notional position of less than 35% of assets, total credit exposure of less than 3% of capital and no single counterparty credit risk exposure greater than $20.0 million. The Company is currently well below all single counterparty and portfolio limits. At June 30, 2012, the Company had a total counterparty notional amount outstanding of approximately $453.6 million, spread among eight counterparties, with an outstanding liability from these contracts of $28.3 million. At December 31, 2011, the Company had a total counterparty notional amount outstanding of approximately $396.4 million, spread among seven counterparties, with an outstanding liability from these contracts of $27.3 million.

First Financial’s exposure to credit loss, in the event of nonperformance by a borrower, is limited to the market value of the derivative instrument associated with that borrower. First Financial monitors its derivative credit exposure to borrowers by monitoring the creditworthiness of the related loan customers through the normal credit review processes the Company

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performs on all borrowers. Additionally, the Company monitors derivative credit risk exposure related to problem loans through the Company's allowance for loan and lease losses committee. First Financial considers the market value of a derivative instrument to be part of the carrying value of the related loan for these purposes as the borrower is contractually obligated to pay First Financial this amount in the event the derivative contract is terminated.

In connection with its use of derivative instruments, First Financial from time to time is required to post cash collateral with its counterparties to offset its market position. Derivative collateral balances were $23.5 million and $24.4 million at June 30, 2012, and December 31, 2011, respectively. First Financial classifies the derivative cash collateral outstanding with its counterparties as an adjustment to the fair value of the derivative contracts within accrued interest and other liabilities in the Consolidated Balance Sheets.

The following table summarizes the derivative financial instruments utilized by First Financial and their balances:



		June 30, 2012							December 31, 2011
				Estimated Fair Value							Estimated Fair Value
(Dollars in thousands)	Balance Sheet Classification	Notional Amount		Gain		Loss			Notional Amount		Gain		Loss
Fair Value Hedges
Pay fixed interest rate swaps with counterparty	Accrued interest and other liabilities	$	16,932	$	0	$	(2,079	)	$	17,456	$	0	$	(2,263	)
Matched interest rate swaps with borrower	Accrued interest and other assets	436,634		25,813		0			378,936		24,566		0
Matched interest rate swaps with counterparty	Accrued interest and other liabilities	436,634		0		(26,936		)	378,936		0		(25,860		)
Total		$	890,200	$	25,813	$	(29,015	)	$	775,328	$	24,566	$	(28,123	)

The following table details the derivative financial instruments, the average remaining maturities and the weighted-average interest rates being paid and received by First Financial at June 30, 2012:



							Weighted-Average Rate
(Dollars in thousands)	Notional Amount		Average Maturity (years)	Fair Value			Receive		Pay
Asset conversion swaps
Pay fixed interest rate swaps with counterparty	$	16,932	3.8	$	(2,079	)	2.21	%	6.73	%
Receive fixed, matched interest rate swaps with borrower	436,634		4.5	25,813			5.35	%	2.95	%
Pay fixed, matched interest rate swaps with counterparty	436,634		4.5	(26,936		)	2.95	%	5.35	%
Total swap portfolio	$	890,200	4.5	$	(3,202	)	4.11	%	4.20	%

The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. First Financial had no derivative instruments designated as cash flow hedges at June 30, 2012.

Fair Value Hedges. First Financial utilizes interest rate swaps as a means to offer commercial borrowers products that meet their needs, but are also designed to achieve First Financial’s desired interest rate risk profile at the time. The fair value hedge agreements generally involve the net receipt by First Financial of floating-rate amounts in exchange for net payments by First Financial, through its loan clients, of fixed-rate amounts over the life of the agreements without an exchange of the underlying principal or notional amount. This results in First Financial’s loan customers receiving fixed rate funding, while providing First Financial with a floating rate asset. The net interest receivable or payable on the interest rate swaps is accrued and recognized as an adjustment to the interest income or interest expense of the hedged item. The fair value of the interest rate swaps is included within accrued interest and other assets on the Consolidated Balance Sheets. The corresponding fair-value adjustment is also included on the Consolidated Balance Sheets in the carrying value of the hedged item. Derivative gains and losses not considered effective in hedging the change in fair value of the hedged item are recognized immediately in income.

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The following table details the location and amounts recognized for fair value hedges:



		Decrease to Interest Income
(Dollars in thousands)		Three Months Ended						Six Months Ended
Derivatives in fair value hedging relationships	Classification of change in fair value	June 30,						June 30,
		2012			2011			2012			2011
Interest Rate Contracts
Loans	Interest Income - Loans	$	(192	)	$	(236	)	$	(388	)	$	(471	)
Total		$	(192	)	$	(236	)	$	(388	)	$	(471	)

NOTE 8: BORROWINGS

Short-term borrowings on the Consolidated Balance Sheets includes overnight advances from the Federal Loan Home Bank (FHLB). First Financial had $176.0 million in short-term borrowings with the FHLB at June 30, 2012 as a result of managing the Company's normal liquidity needs and on-going deposit rationalization strategies.

Long-term debt on the Consolidated Balance Sheets consists of FHLB long-term advances and repurchase agreements utilizing investment securities pledged as collateral. These instruments are primarily utilized to reduce overnight liquidity risk and to mitigate interest rate sensitivity on the balance sheet. First Financial has $65.0 million in repurchase agreements which have remaining maturities of between one and four years and a weighted average rate of 3.50%. Securities pledged as collateral in conjunction with the repurchase agreements are included within investment securities available-for-sale on the Consolidated Balance Sheets.

The following is a summary of long-term debt:



	June 30, 2012				December 31, 2011
(Dollars in thousands)	Amount		Average Rate		Amount		Average Rate
Federal Home Loan Bank	$	10,120	3.80	%	$	11,544	3.80	%
National Market Repurchase Agreement	65,000		3.50	%	65,000		3.50	%
Total long-term debt	$	75,120	3.54	%	$	76,544	3.55	%

Under Federal Reserve Board guidelines, a company can issue qualifying debentures up to 25% of qualifying Tier I capital. First Financial has the capacity to issue approximately $162.3 million in additional qualifying debentures under these guidelines.

NOTE 9: 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, states 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.

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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 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. All other consumer loans and leases are classified as performing.

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



	As of June 30, 2012
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Total
Pass	$	769,837	$	70,832	$	1,207,757	$	2,048,426
Special Mention	30,583		412		34,497		65,492
Substandard	23,470		14,929		79,192		117,591
Doubtful	0		0		0		0
Total	$	823,890	$	86,173	$	1,321,446	$	2,231,509



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other		Total
Performing	$	285,883	$	61,271	$	363,132	$	61,595	$	771,881
Nonperforming	6,620		319		2,281		0		9,220
Total	$	292,503	$	61,590	$	365,413	$	61,595	$	781,101



	As of December 31, 2011
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Total
Pass	$	799,471	$	89,072	$	1,110,718	$	1,999,261
Special Mention	37,547		1,751		28,994		68,292
Substandard	19,435		24,151		93,355		136,941
Doubtful	528		0		0		528
Total	$	856,981	$	114,974	$	1,233,067	$	2,205,022



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other		Total
Performing	$	279,958	$	67,136	$	356,887	$	48,942	$	752,923
Nonperforming	8,022		407		2,073		0		10,502
Total	$	287,980	$	67,543	$	358,960	$	48,942	$	763,425

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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 due date of the scheduled payment.

Loan delinquency, including nonaccrual loans, was as follows:



	As of June 30, 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	$	948	$	77	$	6,385	$	7,410	$	816,480	$	823,890	$	0
Real estate - construction	1,968		2		6,872		8,842		77,331		86,173		0
Real estate - commercial	7,514		3,965		18,146		29,625		1,291,821		1,321,446		0
Real estate - residential	6,897		1,771		5,963		14,631		277,872		292,503		0
Installment	215		188		316		719		60,871		61,590		0
Home equity	1,357		712		2,026		4,095		361,318		365,413		0
All other	259		171		143		573		61,022		61,595		143
Total	$	19,158	$	6,886	$	39,851	$	65,895	$	2,946,715	$	3,012,610	$	143



	As of December 31, 2011
(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	$	2,964	$	96	$	7,473	$	10,533	$	846,448	$	856,981	$	0
Real estate - construction	47		0		17,004		17,051		97,923		114,974		0
Real estate - commercial	4,940		2,102		16,654		23,696		1,209,371		1,233,067		0
Real estate - residential	8,602		236		7,012		15,850		272,130		287,980		0
Installment	437		53		355		845		66,698		67,543		0
Home equity	1,304		246		1,637		3,187		355,773		358,960		0
All other	495		231		191		917		48,025		48,942		191
Total	$	18,789	$	2,964	$	50,326	$	72,079	$	2,896,368	$	2,968,447	$	191

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 90 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 troubled debt restructuring (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.

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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 90 TDRs totaling $20.1 million at June 30, 2012, including $9.9 million on accrual status and $10.2 million of loans classified as nonaccrual. First Financial had no commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs. At June 30, 2012, the allowance for loan and lease losses included reserves of $2.4 million related to TDRs. For the three and six months ended June 30, 2012, First Financial charged off $2.1 million and $4.7 million for the portion of TDRs determined to be uncollectible. Additionally, at June 30, 2012, approximately $1.8 million of the accruing TDRs have been performing in accordance with the restructured terms for more than one year.

First Financial had 78 TDRs totaling $22.1 million at December 31, 2011, including $4.0 million of loans on accrual status and $18.1 million of loans classified as nonaccrual. First Financial had no commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs. At December 31, 2011, the allowance for loan and lease losses included reserves of $4.3 million related to TDRs. At December 31, 2011, approximately $1.3 million of the accruing TDRs had been performing in accordance with the restructured terms for more than one year.

The following table provides information on loan modifications classified as TDRs during the three and six months ended June 30, 2012.



	Three Months Ended					Six Months Ended
	June 30, 2012					June 30, 2012
	Total TDRs					Total TDRs
(Dollars in thousands)	Number of Loans	Pre-Modification Loan Balance		Period End Balance		Number of Loans	Pre-Modification Loan Balance		Period End Balance
Commercial	2	$	66	$	66	10	$	4,571	$	4,562
Real estate - construction	0	0		0		0	0		0
Real estate - commercial	8	909		901		14	4,749		4,718
Real estate - residential	2	164		166		2	164		166
Installment	0	0		0		0	0		0
Home equity	0	0		0		0	0		0
Total	12	$	1,139	$	1,133	26	$	9,484	$	9,446

The following table provides information on how TDRs were modified during the three and six months ended June 30, 2012.



	June 30, 2012 ⁽²⁾
(Dollars in thousands)	Three Months Ended		Six Months Ended
Extended maturities	$	406	$	7,260
Adjusted interest rates	166		166
Combination of rate and maturity changes	468		563
Forbearance	93		1,236
Other ⁽¹⁾	0		221
Total	$	1,133	$	9,446

(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. First Financial considers a borrower that is 90 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), to be in payment default of the terms of the TDR agreement.

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There was one loan modification classified as a TDR in the last twelve months that experienced a payment default during the six months ended June 30, 2012. It was a commercial loan with a balance of $1.0 million as of June 30, 2012.

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)	June 30, 2012		December 31, 2011
Impaired loans
Nonaccrual loans
Commercial	$	12,065	$	7,809
Real estate-construction	7,243		10,005
Real estate-commercial	36,116		28,349
Real estate-residential	5,069		5,692
Installment	319		371
Home equity	2,281		2,073
Nonaccrual loans	63,093		54,299
Troubled debt restructurings
Accruing	9,909		4,009
Nonaccrual	10,185		18,071
Total troubled debt restructurings	20,094		22,080
Total impaired loans	$	83,187	$	76,379



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2012		2011		2012		2011
Interest income effect on impaired loans
Gross amount of interest that would have been recorded under original terms	$	1,259	$	1,304	$	2,589	$	2,713
Interest included in income
Nonaccrual loans	140		105		349		250
Troubled debt restructurings	148		84		231		166
Total interest included in income	288		189		580		416
Net impact on interest income	$	971	$	1,115	$	2,009	$	2,297

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 discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.

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



	As of June 30, 2012
(Dollars in thousands)	Current Balance		Contractual Principal Balance		Related Allowance		Average Current Balance		YTD Interest Income Recognized		Quarterly Interest Income Recognized
Loans with no related allowance recorded
Commercial	$	9,239	$	11,621	$	0	$	8,461	$	92	$	37
Real estate - construction	5,524		6,350		0		5,590		10		5
Real estate - commercial	17,362		21,842		0		15,161		102		67
Real estate - residential	7,930		9,096		0		8,203		35		19
Installment	432		461		0		470		1		0
Home equity	2,281		2,557		0		2,123		4		2

Loans with an allowance recorded
Commercial	8,907		9,972		3,179		5,305		87		72
Real estate - construction	3,001		5,109		1,261		7,292		59		14
Real estate - commercial	26,151		30,048		8,764		25,590		170		63
Real estate - residential	2,259		2,263		295		2,475		20		9
Installment	0		0		0		0		0		0
Home equity	101		101		2		67		0		0

Total
Commercial	18,146		21,593		3,179		13,766		179		109
Real estate - construction	8,525		11,459		1,261		12,882		69		19
Real estate - commercial	43,513		51,890		8,764		40,751		272		130
Real estate - residential	10,189		11,359		295		10,678		55		28
Installment	432		461		0		470		1		0
Home equity	2,382		2,658		2		2,190		4		2
Total	$	83,187	$	99,420	$	13,501	$	80,737	$	580	$	288

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	As of December 31, 2011
(Dollars in thousands)	Current Balance		Contractual Principal Balance		Related Allowance		Average Current Balance		Interest Income Recognized
Loans with no related allowance recorded
Commercial	$	6,351	$	8,387	$	0	$	7,337	$	62
Real estate - construction	6,289		11,129		0		5,657		2
Real estate - commercial	14,999		22,718		0		18,306		249
Real estate - residential	8,639		9,580		0		6,848		66
Installment	485		526		0		356		5
Home equity	2,073		2,206		0		2,337		10

Loans with an allowance recorded
Commercial	4,131		4,267		3,205		3,683		15
Real estate - construction	11,098		13,905		2,578		13,731		92
Real estate - commercial	19,521		26,357		6,441		15,484		225
Real estate - residential	2,692		2,705		313		3,630		37
Installment	0		0		0		15		1
Home Equity	101		101		2		81		3

Total
Commercial	10,482		12,654		3,205		11,020		77
Real estate - construction	17,387		25,034		2,578		19,388		94
Real estate - commercial	34,520		49,075		6,441		33,790		474
Real estate - residential	11,331		12,285		313		10,478		103
Installment	485		526		0		371		6
Home equity	2,174		2,307		2		2,418		13
Total	$	76,379	$	101,881	$	12,539	$	77,465	$	767

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.

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Changes in OREO were as follows:



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2012		2011		2012		2011
Balance at beginning of period	$	15,036	$	14,953	$	11,317	$	17,907
Additions
Commercial	808		1,087		5,349		1,087
Residential	992		1,483		1,914		2,193
Total additions	1,800		2,570		7,263		3,280
Disposals
Commercial	550		72		1,012		304
Residential	313		907		612		1,052
Total disposals	863		979		1,624		1,356
Write-downs
Commercial	182		197		1,140		3,341
Residential	103		34		128		177
Total write-downs	285		231		1,268		3,518
Balance at end of period	$	15,688	$	16,313	$	15,688	$	16,313

NOTE 10: COVERED LOANS

Loans acquired in Federal Deposit Insurance Corporation (FDIC)-assisted transactions are initially covered under loss sharing agreements whereby the FDIC will reimburse First Financial for the majority of any losses incurred and are referred to as covered loans.

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 its covered loans under FASB ASC Topic 310-30 except for 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. For purposes of applying the guidance under FASB ASC Topic 310-30, First Financial grouped acquired loans into pools based on common risk characteristics.

Purchased impaired loans are not classified as nonperforming assets 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 accounted for under FASB ASC Topic 310-30.

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The following table reflects the carrying value of all purchased impaired and nonimpaired covered loans:



	June 30, 2012						December 31, 2011
(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	$	133,165	$	8,844	$	142,009	$	182,625	$	13,267	$	195,892
Real estate - construction	15,333		0		15,333		17,120		0		17,120
Real estate - commercial	548,626		8,047		556,673		627,257		9,787		637,044
Real estate - residential	111,720		0		111,720		121,117		0		121,117
Installment	10,791		850		11,641		12,123		1,053		13,176
Home equity	3,330		59,832		63,162		4,146		60,832		64,978
Other covered loans	0		3,324		3,324		0		3,917		3,917
Total covered loans	$	822,965	$	80,897	$	903,862	$	964,388	$	88,856	$	1,053,244

(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 loans accounted for under FASB ASC Topic 310-30, including contractual principal, interest, fees and penalties, was $1.3 billion and $1.6 billion as of June 30, 2012 and December 31, 2011, respectively.

Changes in the carrying amount of accretable yield for 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)	2012			2011			2012			2011
Balance at beginning of period ⁽¹⁾	$	313,669		$	461,290		$	344,410		$	509,945
Reclassification from non-accretable difference	9,058			11,229			23,442			33,206
Accretion	(24,025		)	(31,818		)	(49,944		)	(66,279		)
Other net activity ⁽²⁾	(15,406		)	(18,920		)	(34,612		)	(55,091		)
Balance at end of period	$	283,296		$	421,781		$	283,296		$	421,781

(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

Credit Quality. For further discussion of First Financial's monitoring of credit quality for commercial and consumer loans, including discussion of the risk attributes noted below, please see Note 9 - Loans.

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Covered commercial and consumer credit exposure by risk attribute was as follows:



	As of June 30, 2012
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Total
Pass	$	74,047	$	2,363	$	277,046	$	353,456
Special Mention	18,490		3,325		63,192		85,007
Substandard	45,598		9,645		216,168		271,411
Doubtful	3,874		0		267		4,141
Total	$	142,009	$	15,333	$	556,673	$	714,015



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other		Total
Performing	$	111,720	$	11,641	$	61,614	$	3,309	$	188,284
Nonperforming	0		0		1,548		15		1,563
Total	$	111,720	$	11,641	$	63,162	$	3,324	$	189,847



	December 31, 2011
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Total
Pass	$	113,201	$	2,506	$	340,889	$	456,596
Special Mention	22,468		3,597		63,880		89,945
Substandard	52,103		11,017		230,870		293,990
Doubtful	8,120		0		1,405		9,525
Total	$	195,892	$	17,120	$	637,044	$	850,056



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other		Total
Performing	$	121,117	$	13,176	$	63,231	$	3,899	$	201,423
Nonperforming	0		0		1,747		18		1,765
Total	$	121,117	$	13,176	$	64,978	$	3,917	$	203,188

First Financial reviewed its forecast of expected cash flows for loans accounted for under FASB ASC Topic 310-30 during the first quarter of 2012. The Company recognized improvement in the cash flow expectations related to certain loan pools resulting in the reclassification from nonaccretable to accretable difference during the second quarter of 2012 and 2011 of $9.1 million and $11.2 million, respectively and $23.4 million and $33.2 million for the six months ended June 30, 2012, and 2011, respectively. These reclassifications resulted in yield adjustments on these loan pools on a prospective basis. 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. Improved cash flow expectations for loan pools that were impaired during prior periods is recorded first as a reversal of previously recorded impairment and then as an increase in prospective yield when all previously recorded impairment has been recaptured. 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 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.

Delinquency. 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.

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Covered loan delinquency, excluding loans accounted for under FASB ASC Topic 310-30, was as follows:



	As of June 30, 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	$	102	$	66	$	2,577	$	2,745	$	6,099	$	8,844	$	0
Real estate - commercial	0		195		867		1,062		6,985		8,047		0
Installment	0		0		0		0		850		850		0
Home equity	797		218		1,645		2,660		57,172		59,832		0
All other	27		16		80		123		3,201		3,324		65
Total	$	926	$	495	$	5,169	$	6,590	$	74,307	$	80,897	$	65



	As of December 31, 2011
(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	$	73	$	294	$	6,490	$	6,857	$	6,410	$	13,267	$	0
Real estate - commercial	184		0		1,870		2,054		7,733		9,787		0
Installment	0		0		0		0		1,053		1,053		0
Home equity	1,344		11		1,679		3,034		57,798		60,832		0
All other	10		6		125		141		3,776		3,917		107
Total	$	1,611	$	311	$	10,164	$	12,086	$	76,770	$	88,856	$	107

Nonaccrual. 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 or when principal or interest payments are 90 days or more past due. Generally, these loans are placed on 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 in nonaccrual status. Any payments received while a loan is in 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.

Information on covered nonaccrual loans, excluding loans accounted for under FASB ASC Topic 310-30, was as follows:



(Dollars in thousands)	June 30, 2012		December 31, 2011
Nonaccrual loans
Commercial	$	3,199	$	7,203
Real estate-commercial	1,523		2,192
Home equity	1,548		1,747
All other	15		18
Total	$	6,285	$	11,160

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	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2012		2011		2012		2011
Interest income effect on impaired loans
Gross amount of interest that would have been recorded under original terms	$	150	$	240	$	358	$	501
Interest included in income	13		14		61		41
Net impact on interest income	$	137	$	226	$	297	$	460

Impaired Loans. Covered loans placed in nonaccrual status, excluding loans accounted for under FASB ASC Topic 310-30, are considered impaired. 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, 2012
(Dollars in thousands)	Current Balance		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		YTD Interest Income Recognized		Quarterly Interest Income Recognized
Loans with no related allowance recorded:
Commercial	$	3,199	$	5,532	$	0	$	5,228	$	51	$	8
Real estate - commercial	1,523		3,424		0		2,064		9		5
Home equity	1,548		2,419		0		1,314		1		0
All other	15		15		0		16		0		0
Total	$	6,285	$	11,390	$	0	$	8,622	$	61	$	13



	As of December 31, 2011
(Dollars in thousands)	Current Balance		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded:
Commercial	$	7,203	$	10,152	$	0	$	9,873	$	47
Real estate - commercial	2,192		4,002		0		2,504		5
Installment	1,747		2,878		0		1,559		6
Home equity	18		18		0		9		0
Total	$	11,160	$	17,050	$	0	$	13,945	$	58

Covered OREO. Covered OREO is comprised of properties acquired by the Company through the loan foreclosure or repossession process, or other resolution activities that result 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 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.

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Changes in covered OREO were as follows:



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2012		2011		2012		2011
Balance at beginning of period	$	41,489	$	33,648	$	44,818	$	35,257
Additions
Commercial	2,349		10,535		5,099		21,732
Residential	62		944		2,686		1,825
Total additions	2,411		11,479		7,785		23,557
Disposals
Commercial	13,554		2,234		18,559		11,500
Residential	1,811		3,755		2,354		6,091
Total disposals	15,365		5,989		20,913		17,591
Write-downs
Commercial	2,332		1,439		5,416		3,524
Residential	795		1,012		866		1,012
Total write-downs	3,127		2,451		6,282		4,536
Balance at end of period	$	25,408	$	36,687	$	25,408	$	36,687

NOTE 11: ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans (excluding covered loans). For each reporting period, management maintains the allowance for loan and lease losses at a level that it considers sufficient to absorb probable loan and lease losses inherent in the portfolio. Management determines the adequacy of the allowance based on historical loss experience as well as other significant factors such as composition of the portfolio, economic conditions, geographic footprint, the results of periodic internal and external evaluations of delinquent, nonaccrual and classified loans and any other adverse situations that may affect a specific borrower's ability to repay (including the timing of future payments). This evaluation is inherently subjective as it requires utilizing material estimates that may be susceptible to significant change.

In the commercial portfolio, which includes time and demand notes, tax-exempt loans and commercial real estate loans, non-homogeneous loan relationships greater than $250,000 that are considered impaired or designated as a TDR are evaluated to determine the need for 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.

The allowance for non-impaired commercial loans and impaired commercial loan relationships less than $250,000 includes a process of estimating the probable losses inherent in the portfolio by category, based on First Financial's internal system of credit risk ratings and historical loss data. These estimates may also be adjusted for management's estimate of probable losses on specific loan types dependent upon trends in the values of the underlying collateral, delinquent and nonaccrual loans, prevailing economic conditions, changes in lending strategies and other influencing factors.

With the exception of loans modified as TDRs, consumer loans are evaluated as an asset type within a category (i.e., residential real estate, installment, etc.), as these loans exhibit homogeneous characteristics. The allowance for consumer loans which includes residential real estate, installment, home equity, credit card loans and overdrafts, is established by estimating losses inherent in each particular category of consumer loans. The estimate of losses is primarily based on historical loss rates for each category, as well as trends in delinquent and nonaccrual loans, prevailing economic conditions and other significant influencing factors. Consumer loan relationships modified as TDRs greater than $100,000 are individually reviewed to determine if a specific allowance is necessary.

There were no material changes to First Financial's accounting policies or methodology related to the allowance for loan and lease losses during the first six months of 2012.

First Financial's policy is to charge-off all or a portion of a commercial loan when, in management's opinion, it is unlikely to collect the principal amount owed in full either through payments from the borrower or from the liquidation of collateral.

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Changes in the allowance for loan and lease losses for the previous five quarters and year-to-date are presented in the table that follows:



	Three Months Ended															Six months ended
	2012						2011									June 30,
(Dollars in thousands)	June 30,			Mar. 31,			Dec. 31,			Sep. 30,			June 30,			2012			2011
Balance at beginning of period	$	49,437		$	52,576		$	54,537		$	53,671		$	53,645		$	52,576		$	57,235
Provision for loan losses	8,364			3,258			5,164			7,643			5,756			11,622			6,403
Loans charged off	(7,138		)	(6,822		)	(7,791		)	(7,174		)	(6,232		)	(13,960		)	(10,833		)
Recoveries	289			425			666			397			502			714			866
Balance at end of period	$	50,952		$	49,437		$	52,576		$	54,537		$	53,671		$	50,952		$	53,671
Allowance for loan and lease losses to total ending loans	1.69		%	1.67		%	1.77		%	1.86		%	1.92		%	1.69		%	1.92		%

Year-to-date changes in the allowance for loan and lease losses by loan category were as follows:



	Six Months Ended June 30, 2012
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Residential		Installment			Home Equity		Other		Total
Allowance for loan and lease losses:
Balance at beginning of period	$	10,289	$	4,424	$	18,228	$	4,994	$	1,659		$	10,751	$	2,231	$	52,576
Provision for loan and lease losses	1,263		544		6,966		1,271		(510		)	1,847		241		11,622
Gross charge-offs	2,315		2,504		6,055		795		176			1,559		556		13,960
Recoveries	120		0		181		37		198			52		126		714
Total net charge-offs	2,195		2,504		5,874		758		(22		)	1,507		430		13,246
Ending allowance for loan and lease losses	$	9,357	$	2,464	$	19,320	$	5,507	$	1,171		$	11,091	$	2,042	$	50,952
Ending allowance on loans individually evaluated for impairment	$	3,179	$	1,261	$	8,764	$	295	$	0		$	2	$	0	$	13,501
Ending allowance on loans collectively evaluated for impairment	6,178		1,203		10,556		5,212		1,171			11,089		2,042		37,451
Ending allowance for loan and lease losses	$	9,357	$	2,464	$	19,320	$	5,507	$	1,171		$	11,091	$	2,042	$	50,952
Loans, excluding covered loans
Ending balance of loans individually evaluated for impairment	$	16,326	$	8,318	$	39,075	$	2,920	$	0		$	101	$	0	$	66,740
Ending balance of loans collectively evaluated for impairment	807,564		77,855		1,282,371		289,583		61,590			365,312		61,595		2,945,870
Total loans, excluding covered loans	$	823,890	$	86,173	$	1,321,446	$	292,503	$	61,590		$	365,413	$	61,595	$	3,012,610

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	Twelve Months Ended December 31, 2011
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Residential			Installment			Home Equity		Other		Total
Allowance for loan and lease losses:
Balance at beginning of period	$	10,138	$	8,326	$	14,917	$	8,907		$	1,981		$	10,939	$	2,027	$	57,235
Provision for loan and lease losses	2,825		2,345		13,384		(2,407		)	(159		)	1,878		1,344		19,210
Gross charge-offs	3,436		6,279		10,382		1,551			526			2,183		1,441		25,798
Recoveries	762		32		309		45			363			117		301		1,929
Total net charge-offs	2,674		6,247		10,073		1,506			163			2,066		1,140		23,869
Ending allowance for loan and lease losses	$	10,289	$	4,424	$	18,228	$	4,994		$	1,659		$	10,751	$	2,231	$	52,576
Ending allowance on loans individually evaluated for impairment	$	3,205	$	2,578	$	6,441	$	313		$	0		$	2	$	0	$	12,539
Ending allowance on loans collectively evaluated for impairment	7,084		1,846		11,787		4,681			1,659			10,749		2,231		40,037
Ending allowance for loan and lease losses	$	10,289	$	4,424	$	18,228	$	4,994		$	1,659		$	10,751	$	2,231	$	52,576
Loans, excluding covered loans
Ending balance of loans individually evaluated for impairment	$	8,351	$	17,387	$	30,708	$	3,730		$	0		$	101	$	0	$	60,277
Ending balance of loans collectively evaluated for impairment	848,630		97,587		1,202,359		284,250			67,543			358,859		48,942		2,908,170
Total loans, excluding covered loans	$	856,981	$	114,974	$	1,233,067	$	287,980		$	67,543		$	358,960	$	48,942	$	2,968,447

Covered Loans. In accordance with the accounting guidance for business combinations, there was no allowance brought forward on covered loans as any credit deterioration evident in the loans at the time of acquisition was included in the determination of the fair value of the loans at the acquisition date.

The majority of covered loans are accounted for under FASB ASC Topic 310-30, whereby First Financial is required to periodically re-estimate the expected cash flows on the loans. Generally, a decline in expected cash flows for a pool of loans is referred to as 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. Estimated reimbursements due from the FDIC under loss share agreements related to any declines in expected cash flows for a pool of loans are recorded as noninterest income and an increase to the FDIC indemnification asset in the same period. Improvement in expected cash flows for a pool of loans, once any previously recorded impairment is recaptured, is recognized prospectively as an adjustment to the yield on the loans in the pool and a related adjustment to the yield on the FDIC indemnification asset.

First Financial performs periodic valuation procedures to re-estimate the expected cash flows on covered loans accounted for under FASB ASC Topic 310-30 and compare the present value of expected cash flows to the carrying value of the loans at the pool level. In order to estimate expected cash flows, First Financial specifically reviews a sample of these covered loans each period to assist in the determination of appropriate probability of default and loss given default assumptions to be applied to the remainder of the portfolio. The estimate of expected cash flows may also be adjusted for management's estimate of probable losses on specific loan types dependent upon trends in observable market and industry data, such as prepayment speeds and collateral values. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.

First Financial updated the valuation related to covered loans during the second quarter of 2012, and as a result of impairment in certain loan pools, recognized total provision expense of $6.0 million and realized net charge-offs of $3.9 million during the quarter, resulting in an allowance for covered loan losses of $48.3 million as of June 30, 2012. Additionally, the Company recognized loss share expenses of $4.3 million for the second quarter of 2012 and $7.4 million for the six months ended June 30, 2012 primarily related to attorney fees and losses on covered OREO during the period. The receivable due from the FDIC under loss share agreements related to the covered provision expense and losses on covered OREO of $8.3 million for the second quarter of 2012 and $21.1 million for the first six months of 2012 was recognized as FDIC loss sharing income and a corresponding increase to the FDIC indemnification asset.

For the second quarter of 2011, First Financial recognized provision expense on covered loans of $23.9 million related to net charge-offs of $4.4 million during the period. The related receivable due from the FDIC under loss share agreements related to these loans of $21.6 million for the second quarter of 2011 and $45.1 million for the first six months of 2011, was recognized as FDIC loss sharing income and a corresponding increase to the FDIC indemnification asset.

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First Financial recognized provision expense on covered loans of $19.0 million and $49.9 million for the first six months of 2012 and 2011, respectively, related to net charge-offs of $13.5 million and $15.4 million during the same periods of 2012 and 2011, respectively.

The allowance for loan and lease losses on covered loans is presented in the tables below:



	June 30, 2012
			Real Estate
(Dollars in thousands)	Commercial		Commercial		Residential		Installment		Total
Ending allowance on loans acquired with deteriorated credit quality (ASC 310-30)	$	18,187	$	26,835	$	2,589	$	716	$	48,327
Ending allowance on acquired loans outside the scope of ASC 310-30	0		0		0		0		0
Ending allowance on covered loans	$	18,187	$	26,835	$	2,589	$	716	$	48,327



	December 31, 2011
			Real Estate
(Dollars in thousands)	Commercial		Commercial		Residential		Installment		Total
Ending allowance on loans acquired with deteriorated credit quality (ASC 310-30)	$	19,160	$	21,930	$	1,396	$	349	$	42,835
Ending allowance on acquired loans outside the scope of ASC 310-30	0		0		0		0		0
Ending allowance on covered loans	$	19,160	$	21,930	$	1,396	$	349	$	42,835

Changes in the allowance for loan and lease losses on covered loans for the previous five quarters and year-to-date were as follows:



	Three Months Ended															Six Months Ended
	2012						2011									June 30,
(Dollars in thousands)	June 30,			Mar. 31,			Dec. 31,			Sep. 30,			June 30,			2012			2011
Balance at beginning of period	$	46,156		$	42,835		$	48,112		$	51,044		$	31,555		$	42,835		$	16,493
Provision for loan and lease losses	6,047			12,951			6,910			7,260			23,895			18,998			49,911
Loans charged-off	(5,163		)	(10,118		)	(13,513		)	(10,609		)	(7,456		)	(15,281		)	(21,482		)
Recoveries	1,287			488			1,326			417			3,050			1,775			6,122
Balance at end of period	$	48,327		$	46,156		$	42,835		$	48,112		$	51,044		$	48,327		$	51,044

NOTE 12: INCOME TAXES

First Financial’s effective tax rate for the second quarter of 2012 was 32.8% compared to 35.7% for the second quarter of 2011. The year-to-date effective tax rate through June 30, 2012 was 34.5% compared to 35.4% for the comparable period in 2011. The decrease in the effective tax rate during the second quarter 2012 was primarily due to a one-time provision to return adjustment related to state income taxes at the subsidiary level.

At June 30, 2012, and December 31, 2011, First Financial had no FASB ASC Topic 740-10 unrecognized tax benefits recorded. First Financial does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months.

First Financial recognizes interest and penalties on income tax assessments or income tax refunds in the Consolidated Financial Statements as a component of noninterest expense.

First Financial and its subsidiaries are subject to U.S. federal income tax as well as state and local income tax in several jurisdictions. Tax years prior to 2010 have been closed and are no longer subject to U.S. federal income tax examinations. The

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2009 tax year had been under examination by the federal taxing authority and was closed during the second quarter of 2012 with no material impact to the Company's financial position and results of operations as a result of this examination.

First Financial is no longer subject to state and local income tax examinations for years prior to 2008. Tax years 2008 through 2010 remain open to state and local examination in various jurisdictions.

NOTE 13: EMPLOYEE BENEFIT PLANS

First Financial sponsors a non-contributory defined benefit pension plan covering substantially all employees and uses a December 31 measurement date for its defined benefit pension plan.

First Financial made no cash contributions to fund the pension plan in 2011 and does not expect to make cash contributions to its pension plan in 2012. As a result of the plan’s funding status and related actuarial projections for 2012, First Financial recorded income in the first six months of 2012 of $0.3 million, compared to $0.7 million for the same period in 2011. Likewise, First Financial recorded $0.1 million and $0.4 million in the second quarter of 2012 and 2011, respectively.

The following table sets forth information concerning amounts recognized in First Financial’s Consolidated Balance Sheets and Consolidated Statements of Income:



	Three months ended						Six months ended
	June 30,						June 30,
(Dollars in thousands)	2012			2011			2012			2011
Service cost	$	833		$	825		$	1,665		$	1,650
Interest cost	690			675			1,380			1,350
Expected return on assets	(2,235		)	(2,275		)	(4,470		)	(4,550		)
Amortization of prior service cost	(105		)	(100		)	(210		)	(200		)
Net actuarial loss	675			525			1,350			1,050
Net periodic benefit income	$	(142	)	$	(350	)	$	(285	)	$	(700	)

Amounts recognized in accumulated other comprehensive income (loss):



	Three months ended						Six months ended
	June 30,						June 30,
(Dollars in thousands)	2012			2011			2012			2011
Net actuarial loss	$	675		$	525		$	1,350		$	1,050
Amortization of prior service cost	(105		)	(100		)	(210		)	(200		)
Deferred tax liabilities	(215		)	(160		)	(430		)	(321		)
Net amount recognized in accumulated other comprehensive income (loss)	$	355		$	265		$	710		$	529

First Financial also sponsors a defined contribution 401(k) thrift plan which covers substantially all employees. Participants may contribute up to 50.0% of their earnings into the plan, not to exceed applicable limitations prescribed by the Internal Revenue Service. Employer contributions to the Plan are equal to 100.0% of the participant's contribution up to 3.0% of the participant's eligible salary on a before-tax basis, and 50% of the participant's contribution on the next 2.0% of the participant's eligible salary on a before-tax basis, up to a maximum employer contribution of 4.00%. All First Financial matching contributions vest immediately. First Financial contributions to the 401(k) plan are at the discretion of the board of directors.

NOTE 14: FAIR VALUE DISCLOSURES

Fair Value Measurement

The fair value framework as disclosed in the Fair Value Measurements and Disclosure Topic of FASB ASC Topic 825, Financial Instruments (Fair Value Topic) includes a hierarchy which focuses on prioritizing the inputs used in valuation techniques. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or

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liabilities (Level 1), a lower priority to observable inputs other than quoted prices in active markets for identical assets and liabilities (Level 2), and the lowest priority to unobservable inputs (Level 3). When determining the fair value measurements for assets and liabilities, First Financial looks to active markets to price identical assets or liabilities whenever possible and classifies such items in Level 1. When identical assets and liabilities are not traded in active markets, First Financial looks to observable market data for similar assets and liabilities and classifies such items as Level 2. Certain assets and liabilities are not actively traded in observable markets and First Financial must use alternative techniques, based on unobservable inputs, to determine the fair value and classifies such items as Level 3. The level within the fair value hierarchy is based on the lowest level of input that is significant in the fair value measurement.

The following methods, assumptions, and valuation techniques were used by First Financial to measure different financial assets and liabilities at fair value and in estimating its fair value disclosures for financial instruments.

Cash and short-term investments. The carrying amounts reported in the Consolidated Balance Sheets for cash and short-term investments, such as federal funds sold, approximated the fair value of those instruments. The Company classifies cash and short-term investments in Level 1 of the fair value hierarchy.

Investment securities. Investment securities classified as trading and available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar investment securities. First Financial compiles prices from various sources who may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for the specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Any investment securities not valued based upon the methods above are considered Level 3.

First Financial utilizes information provided by a third-party investment securities portfolio manager in analyzing the investment securities portfolio in accordance with the fair value hierarchy of the Fair Value Topic. The portfolio manager’s evaluation of investment security portfolio pricing is performed using a combination of prices and data from other sources, along with internally developed matrix pricing models and assistance from the provider’s internal fixed income analysts and trading desk. The portfolio manager’s month-end pricing process includes a series of quality assurance activities where prices are compared to recent market conditions, previous evaluation prices and between the various pricing services. These processes produce a series of quality assurance reports on which price exceptions are identified, reviewed and where appropriate, securities are repriced. In the event of a materially different price, the portfolio manager will report the variance as a “price challenge” and review the pricing methodology in detail. The results of the quality assurance process are incorporated into the selection of pricing providers by the portfolio manager.

First Financial reviews the pricing methodologies utilized by the portfolio manager to ensure the fair value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy. Further, the Company validates the fair values for a sample of securities in the portfolio by comparing the fair values provided by the portfolio manager to prices from other independent sources for the same or similar securities. First Financial analyzes unusual or significant variances and conducts additional research with the portfolio manager, if necessary, and takes appropriate action based on its findings.

Loans held for sale. Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential real estate loans originated for sale to qualified third parties. Fair value is based on the contractual price to be received from these third parties, which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, First Financial records any fair value adjustments on a nonrecurring basis. Gains and losses on the sale of loans are recorded as net gains from sales of loans within noninterest income in the Consolidated Statements of Income.

Loans (excluding covered loans). The fair value of commercial, commercial real estate, residential real estate and consumer loans were estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or repricing frequency. The Company classifies the estimated fair value of uncovered loans as Level 3 in the fair value hierarchy.

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are valued at the lower of cost or market for purposes of determining the appropriate amount of impairment to be allocated to the allowance for loan and lease losses. Market value is generally measured based on the value of the collateral securing the

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loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser from outside of the Company (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable borrower financial statements if not considered significant. Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan and lease losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan and lease losses on the Consolidated Statements of Income.

Covered loans. Fair values for covered loans accounted for under FASB ASC Topic 310-30 were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company's assessment of risk inherent in the cash flow estimates. These covered loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. First Financial estimated the cash flows expected to be collected on these loans based upon the expected remaining life of the underlying loans, which includes the effects of estimated prepayments.

Fair values for covered loans accounted for outside of FASB ASC Topic 310-30 were estimated by discounting the estimated future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or repricing frequency. The carrying amount of accrued interest approximates its fair value.

These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. The Company classifies the estimated fair value of covered loans as Level 3 in the fair value hierarchy.

FDIC indemnification asset. The accounting for FDIC indemnification assets is closely related to the accounting for the underlying, indemnified assets. Fair value of the FDIC indemnification asset was estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. First Financial re-estimates the expected indemnification asset cash flows in conjunction with the periodic re-estimation of cash flows on covered loans accounted for under FASB ASC Topic 310-30. Improvements in cash flow expectations on covered loans generally result in a related decline in the expected indemnification cash flows while declines in cash flow expectations on covered loans generally result in an increase in expected indemnification cash flows.

The expected cash flows are discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. The Company classifies the estimated fair value of the indemnification asset as Level 3 in the fair value hierarchy.

Deposit liabilities. The fair value of demand deposits, savings accounts and certain money-market deposits was the amount payable on demand at the reporting date. The carrying amounts for variable-rate certificates of deposit approximated their fair values at the reporting date. The fair value of fixed-rate certificates of deposit was estimated using a discounted cash flow calculation which applies the interest rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest approximates its fair value. The Company classifies the estimated fair value of deposit liabilities as Level 2 in the fair value hierarchy.

Borrowings. The carrying amounts of federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings approximated their fair values. The Company classifies the estimated fair value of short-term borrowings as Level 1 of the fair value hierarchy.

The fair value of long-term debt was estimated using a discounted cash flow calculation which utilizes the interest rates currently offered for borrowings of similar remaining maturities. Third-party valuations were used for long-term debt with embedded options, such as call features. The Company classifies the estimated fair value of long-term debt as Level 2 in the fair value hierarchy.

Commitments to extend credit and standby letters of credit. Pricing of these financial instruments is based on the credit quality and relationship, fees, interest rates, probability of funding and compensating balance and other covenants or requirements. Loan commitments generally have fixed expiration dates, are variable rate and contain termination and other clauses which provide for relief from funding in the event that there is a significant deterioration in the credit quality of the client. Many loan commitments are expected to expire without being drawn upon. The rates and terms of the commitments to

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extend credit and the standby letters of credit are competitive with those in First Financial’s market area. The carrying amounts are reasonable estimates of the fair value of these financial instruments. Carrying amounts, which are comprised of the

unamortized fee income and, where necessary, reserves for any expected credit losses from these financial instruments, are immaterial.

Derivatives. The fair values of derivative instruments are based primarily on a net present value calculation of the cash flows related to the interest rate swaps using primarily observable market inputs such as interest rate yield curves. The discounted net present value calculated represents the cost to terminate the swap if First Financial should choose to do so on the applicable measurement date. Additionally, First Financial utilizes a vendor-developed, proprietary model to value the credit risk component of both the derivative assets and liabilities. The credit valuation adjustment is recorded as an adjustment to the fair value of the derivative asset or liability on the applicable measurement date. Derivative instruments are classified as Level 2 in the fair value hierarchy.

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The estimated fair values of First Financial’s financial instruments not measured at fair value on a recurring or nonrecurring basis in the consolidated financial statements were as follows:



	Carrying		Estimated Fair Value
(Dollars in thousands)	value		Total		Level 1		Level 2		Level 3
June 30, 2012
Financial assets
Cash and short-term investments	$	135,579	$	135,579	$	135,579	$	0	$	0
Investment securities held-to-maturity	873,538		877,832		0		877,832		0
Other investments	71,492		71,492		0		71,492		0
Loans held for sale	20,971		20,971		0		20,971		0
Loans, excluding covered loans	2,961,658		2,960,090		0		0		2,960,090
Covered loans	855,535		876,308		0		0		876,308
FDIC indemnification asset	146,765		129,485		0		0		129,485

Financial liabilities
Deposits
Noninterest-bearing	$	1,071,520	$	1,071,520	$	0	$	1,071,520	$	0
Interest-bearing demand	1,154,852		1,154,852		0		1,154,852		0
Savings	1,543,619		1,543,619		0		1,543,619		0
Time	1,331,758		1,336,579		0		1,336,579		0
Total deposits	5,101,749		5,106,570		0		5,106,570		0
Short-term borrowings	249,919		249,919		249,919		0		0
Long-term debt	75,120		79,365		0		79,365		0


	Carrying		Estimated Fair Value
(Dollars in thousands)	value		Total		Level 1		Level 2		Level 3
December 31, 2011
Financial assets
Cash and short-term investments	$	525,051	$	525,051	$	525,051	$	0	$	0
Investment securities held-to-maturity	2,664		2,893		0		2,893		0
Other investments	71,492		71,492		0		71,492		0
Loans held for sale	24,834		24,834		0		24,834		0
Loans, excluding covered loans	2,915,871		2,910,825		0		0		2,910,825
Covered loans	1,010,409		1,042,752		0		0		1,042,752
FDIC indemnification asset	173,009		151,114		0		0		151,114

Financial liabilities
Deposits
Noninterest-bearing	$	946,180	$	946,180	$	0	$	946,180	$	0
Interest-bearing demand	1,317,339		1,317,339		0		1,317,339		0
Savings	1,724,659		1,724,659		0		1,724,659		0
Time	1,654,662		1,664,457		0		1,664,457		0
Total deposits	5,642,840		5,652,635		0		5,652,635		0
Short-term borrowings	99,431		99,431		99,431		0		0
Long-term debt	76,544		81,168		0		81,168		0

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The following table summarizes financial assets and liabilities measured at fair value on a recurring basis in the consolidated financial statements at June 30, 2012:



	Fair Value Measurements Using
(Dollars in thousands)	Level 1		Level 2		Level 3		Netting Adjustments ⁽¹⁾			Assets/Liabilities at Fair Value
Assets
Derivatives	$	0	$	25,813	$	0	$	(25,813	)	$	0
Available-for-sale investment securities	130		724,388		0		0			724,518
Total	$	130	$	750,201	$	0	$	(25,813	)	$	724,518

Liabilities
Derivatives	$	0	$	29,015	$	0	$	(25,813	)	$	3,202

(1) Amounts represent the impact of legally enforceable master netting arrangements that allow First Financial to settle positive and negative positions and also cash collateral held with the same counterparties.

Certain financial assets and liabilities are measured at fair value on a nonrecurring basis. Adjustments to the fair market value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes financial assets and liabilities measured at fair value on a nonrecurring basis in the consolidated financial statements at June 30, 2012:



	Fair Value Measurements Using
(Dollars in thousands)	Level 1		Level 2		Level 3
Assets
Impaired loans ⁽¹⁾	$	0	$	0	$	28,612
OREO	0		0		4,056
Covered OREO	0		0		15,393

(1) Amounts represent the fair value of collateral for impaired loans allocated to the allowance for loan and lease losses. Fair values are determined using actual market prices (Level 1), independent third party valuations and borrower records, discounted as appropriate (Level 3).

NOTE 15: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to accumulated other comprehensive income (loss). The related tax effects allocated to other comprehensive income and accumulated other comprehensive income (loss) are as follows:



	June 30, 2012
	Transactions
(Dollars in thousands)	Pre-tax		Tax-effect			Net of tax		Balances Net of tax
Unrealized gains on investment securities	$	4,171	$	(1,575	)	$	2,596	$	15,265
Retirement obligation	1,140		(430		)	710		(33,426		)
Foreign currency translation	12		0			12		(11		)
Total	$	5,323	$	(2,005	)	$	3,318	$	(18,172	)

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	June 30, 2011
	Transactions
(Dollars in thousands)	Pre-tax		Tax-effect			Net of tax		Balances Net of tax
Unrealized gains on securities available-for-sale	$	4,680	$	(1,767	)	$	2,913	$	11,977
Unrealized gain on derivatives	628		(237		)	391		0
Retirement obligation	850		(321		)	529		(20,753		)
Foreign currency translation	309		0			309		874
Total	$	6,467	$	(2,325	)	$	4,142	$	(7,902	)

NOTE 16: EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per share:



	Three months ended				Six months ended
	June 30,				June 30,
(Dollars in thousands, except per share data)	2012		2011		2012		2011
Numerator for basic and diluted earnings per share -income available to common shareholders:
Net income	$	17,802	$	15,973	$	34,796	$	33,180
Dividends on preferred stock	0		0		0		0
Income available to common shareholders	$	17,802	$	15,973	$	34,796	$	33,180
Denominator for basic earnings per share - weighted average shares	57,933,281		57,694,792		57,864,269		57,642,970
Effect of dilutive securities —
Employee stock awards	915,301		945,250		936,550		974,958
Warrants	109,697		94,620		120,870		104,520
Denominator for diluted earnings per share - adjusted weighted average shares	58,958,279		58,734,662		58,921,689		58,722,448
Earnings per share available to common shareholders
Basic	$	0.31	$	0.28	$	0.60	$	0.58
Diluted	$	0.30	$	0.27	$	0.59	$	0.57

Stock options and warrants, where the exercise price was greater than the average market price of the common shares, were not included in the computation of net income per diluted share as they would have been antidilutive. These out-of-the-money options were 737,228 and 434,976 at June 30, 2012 and 2011, respectively.

Warrants to purchase 465,117 shares of the Company's common stock were outstanding as of June 30, 2012 and 2011. These warrants, each representing the right to purchase one share of common stock, no par value per share, have an exercise price of $12.54 and expire on December 23, 2018.

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ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (MD&A)

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

(Unaudited)

SUMMARY

First Financial Bancorp. (First Financial or the Company) is a $6.3 billion bank holding company headquartered in Cincinnati, Ohio. As of June 30, 2012 First Financial, through its subsidiaries, operated in Ohio, Indiana and Kentucky. These subsidiaries include a commercial bank, First Financial Bank, N.A. (First Financial Bank or the Bank) with 128 banking centers and 153 ATMs. First Financial conducts three primary activities through its bank subsidiary: commercial banking, retail banking and wealth management. First Financial Bank provides credit-based products, deposit accounts, corporate cash management support, and other services to commercial and retail clients. Additionally, the Bank conducts franchise lending by providing equipment and leasehold improvement financing for select franchisees and concepts in the quick service and casual dining restaurant sector throughout the United States. First Financial Wealth Management provides credit wealth planning, portfolio management, trust and estate, brokerage and retirement plan services.

First Financial acquired the banking operations of Peoples Community Bank (Peoples), and Irwin Union Bank and Trust Company and Irwin Union Bank, F.S.B. (collectively, Irwin), through Federal Deposit Insurance Corporation (FDIC)-assisted transactions in 2009. The acquisitions of the Peoples and Irwin franchises significantly expanded the First Financial footprint, opened new markets and strengthened the Company through the generation of additional capital.

In connection with the Peoples and Irwin FDIC-assisted transactions, First Financial entered into loss sharing agreements with the FDIC. Under the terms of these agreements the FDIC reimburses First Financial for a percentage of losses with respect to certain loans (covered loans) and other real estate owned (covered OREO) (collectively, covered assets). These agreements provide for loss protection on single-family, residential loans for a period of ten years and First Financial is required to share any recoveries of previously charged-off amounts for the same time period, on the same pro-rata basis with the FDIC. All other loans are provided loss protection for a period of five years and recoveries of previously charged-off loans must be shared with the FDIC for a period of eight years, again on the same pro-rata basis. The FDIC's obligation to reimburse First Financial for losses with respect to covered assets for all three assisted transactions began with the first dollar of loss incurred.

First Financial must follow specific servicing and resolution procedures, as outlined in the loss sharing agreements, in order to receive reimbursement from the FDIC for losses on covered assets. The Company has established separate and dedicated teams of legal, finance, credit and technology staff to execute and monitor all activity related to each agreement, including the required periodic reporting to the FDIC. First Financial services all covered assets with the same resolution practices and diligence as it does for the assets that are not subject to a loss sharing agreement.

Covered loans represent approximately 23% of First Financial’s loans at June 30, 2012.

MARKET STRATEGY

First Financial serves a combination of metropolitan and non-metropolitan markets in Ohio, Indiana and Kentucky through its full-service banking centers, while providing franchise lending services to borrowers throughout the United States. First Financial’s market selection process includes a number of factors, but markets are primarily chosen for their potential for growth and long-term profitability. First Financial’s goal is to develop a competitive advantage utilizing a local market focus, building long-term relationships with clients, helping them reach greater levels of success in their financial life and providing a superior level of service. First Financial intends to continue to concentrate future growth plans and capital investments in its metropolitan markets. Smaller markets have historically provided stable, low-cost funding sources to First Financial and remain an important part of its funding base. First Financial believes its historical strength in these markets should enable it to retain or improve its market share.

As part of the on-going evaluation of its banking center network, First Financial consolidated nine banking centers located in Ohio and Indiana and exited one Indiana market effective June 29, 2012 as had previously been announced during the first quarter 2012. In the second quarter 2012, First Financial also announced that it will be consolidating two additional Indiana-based banking centers and closing four other Indiana-based banking centers where the Company has a limited presence in August 2012. These banking center actions will allow the Company to focus additional resources in the Cincinnati, Dayton and Indianapolis metropolitan markets. Customer relationships related to the consolidated banking centers will be transferred to the nearest First Financial location where those customers will continue to receive the same high level of service.

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BUSINESS COMBINATIONS

On September 23, 2011, First Financial Bank, completed the purchase of 16 Ohio-based retail banking centers from Liberty Savings Bank, FSB (Liberty) including $126.5 million of performing loans and $341.9 million of deposits at their estimated fair values. First Financial also acquired $3.8 million of fixed assets at estimated fair value and paid Liberty a $22.4 million net deposit premium. Assets acquired in this transaction are not subject to a loss sharing agreement. First Financial recorded $17.1 million of goodwill related to the Liberty banking center acquisition.

On December 2, 2011, First Financial Bank completed the purchase of 22 Indiana-based retail banking centers from Flagstar Bank, FSB (Flagstar) and assumed approximately $464.7 million of deposits at their estimated fair value. First Financial also acquired $6.6 million of fixed assets at estimated fair value and paid Flagstar a $22.5 million net deposit premium. Assets acquired in this transaction are not subject to a loss sharing agreement. First Financial recorded $26.1 million of goodwill related to the Flagstar banking center acquisition.

The Liberty and Flagstar banking center acquisitions were accounted for in accordance with FASB ASC Topic 805, Business

Combinations. All acquired assets and liabilities, including identifiable intangible assets, were recorded at their estimated fair

values as of the date of acquisition. The fair values of assets and liabilities acquired in a business combination are subject to refinement for up to one year after the closing date of the acquisition (the measurement period) as information relative to closing date fair values becomes available.

OVERVIEW OF OPERATIONS

Reclassifications of prior period amounts, if applicable, have been made to conform to the current period’s presentation and had no effect on previously reported net income amounts or financial condition.

Second quarter 2012 net income was $17.8 million, and earnings per diluted share were $0.30. This compares with second quarter 2011 net income of $16.0 million and earnings per diluted share of $0.27.

For the six months ended June 30, 2012, net income was $34.8 million and earnings per diluted share were $0.59. This compares to net income of $33.2 million and earnings per diluted share of $0.57.

Return on average assets for the second quarter of 2012 was 1.13% compared to 1.03% for the comparable period in 2011 and 1.05% for the quarter ended March 31, 2012. Return on average shareholders’ equity for the second quarter of 2012 was 9.98% compared to 9.05% for the comparable period in 2011 and 9.67% for the quarter ended March 31, 2012.

Return on average assets for the first six months of 2012 was 1.09% compared to 1.07% for the same period in 2011. Return on average shareholders' equity was 9.83% and 9.54% for the same periods in 2012 and 2011, respectively.

A discussion of the first six months and second quarter of 2012 results of operations follows.

NET INTEREST INCOME

Net interest income, First Financial’s principal source of income, is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is also presented in the table that follows, adjusted to a tax equivalent basis assuming a 35% marginal tax rate for interest earned on tax-exempt assets such as municipal loans and investments. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully tax equivalent basis. Therefore, management believes these measures provide useful information to make peer comparisons.

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	Three Months Ended						Six months ended
	June 30,						June 30,
(Dollars in thousands)	2012			2011			2012			2011
Net interest income	$	64,830		$	65,867		$	131,519		$	133,202
Tax equivalent adjustment	216			240			434			478
Net interest income - tax equivalent	$	65,046		$	66,107		$	131,953		$	133,680

Average earning assets	$	5,813,267		$	5,733,604		$	5,881,709		$	5,752,807

Net interest margin *	4.49		%	4.61		%	4.50		%	4.67		%
Net interest margin (fully tax equivalent) *	4.50		%	4.62		%	4.51		%	4.69		%

* Margins are calculated using annualized net interest income divided by average earning assets.

Net interest income for the second quarter 2012 was $64.8 million, a decline of $1.0 million from second quarter 2011 net interest income of $65.9 million. Net interest income on a fully tax-equivalent basis for the second quarter 2012 was $65.0 million as compared to $66.1 million for the second quarter 2011. The decline in net interest income in the second quarter 2012 as compared to the second quarter 2011 was the result of a $5.9 million decline in total interest income partially offset by a $4.9 million decline in total interest expense. The decline in total interest income was driven by a decline in interest income and fees earned on loans primarily as a result of paydowns in the covered loan portfolio, partially offset by higher interest income earned on the investment portfolio. The average balance of investments increased $619.6 million, or 56.6%, from the second quarter of 2011 primarily related to the deployment of cash received from the Liberty and Flagstar banking center acquisitions that occurred late in 2011. The decline in total interest expense reflects the Company's continued deposit rationalization efforts.

For the six month period ended June 30, 2012, net interest income was $131.5 million, a decline of $1.7 million, from $133.2 million for the comparable period in 2011. Net interest income on a fully tax-equivalent basis for the six month period ended June 30, 2012, was $132.0 million as compared to $133.7 million for the comparable period in 2011. Similar to the quarterly year-over-year items discussed above, these declines were primarily related to lower covered loan balances and the reduced yield on the FDIC indemnification asset, partially offset by higher interest income from investments and lower funding costs.

Net interest margin was 4.49% for the second quarter 2012 as compared to 4.61% for the second quarter 2011. Net interest margin continued to benefit from the impact of deposit pricing and rationalization strategies as the average balance of interest-bearing deposits declined 4.4% and the cost of funds related to these deposits decreased 37 basis points from the comparable quarter in 2011. The improvement in deposit funding costs partially offset the continued negative impact of amortization and paydowns in the Company's high-yielding covered loan portfolio as well as the effect of lower yields earned on uncovered loans.

Net interest margin for the six month period ended June 30, 2012 declined 17 bps to 4.50% from 4.67% for the comparable period in 2011.

The majority of First Financial's covered loans are accounted for under FASB ASC Topic 310-30. As such, the Company is required to periodically update its forecast of expected cash flows from these loans. Impairment, as a result of a decrease in expected cash flows, is recognized in the period it is measured as provision expense and has no impact on net interest margin. Improvements in expected cash flows are recognized on a prospective basis through an upward adjustment to the yield earned on the portfolio. Impairment and improvement are both partially offset by the impact of changes in the value of the FDIC indemnification asset. Impairment is partially offset by an increase to the FDIC indemnification asset as a result of FDIC loss sharing income and has no impact on net interest margin. Improvement, which is reflected as a higher yield, is partially offset by a lower yield earned on the FDIC indemnification asset until the next periodic valuation of the loans and the indemnification asset. The weighted average yield of the acquired loan portfolio can also be subject to change as loans with higher yields pay down more quickly or slowly than loans with lower yields.

The Consolidated Average Balance Sheets and Net Interest Income Analysis that follows are presented on a GAAP basis.

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QUARTERLY CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS



	June 30, 2012							March 31, 2012							June 30, 2011
(Dollars in thousands)	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Earning assets
Investments:
Interest-bearing deposits with other banks	$	4,454		$	2	0.18	%	$	126,330		$	89	0.28	%	$	375,434		$	328	0.35	%
Investment securities	1,713,503			10,500		2.46	%	1,664,643			10,651		2.57	%	1,093,870			7,272		2.67	%
Gross loans including covered loans and indemnification asset ⁽¹⁾	4,095,310			61,421		6.02	%	4,159,178			64,357		6.21	%	4,264,300			70,217		6.60	%
Total earning assets	5,813,267			71,923		4.96	%	5,950,151			75,097		5.06	%	5,733,604			77,817		5.44	%

Nonearning assets
Cash and due from banks	121,114							123,634							118,829
Allowance for loan and lease losses	(98,317		)					(100,665		)					(94,202		)
Premises and equipment	143,261							140,377							115,279
Other assets	355,648							365,434							346,244
Total assets	$	6,334,973						$	6,478,931						$	6,219,754

Interest-bearing liabilities
Deposits:
Interest-bearing	$	1,192,868		$	316	0.11	%	$	1,285,196		437		0.14	%	$	1,130,503		808		0.29	%
Savings	1,610,411			464		0.12	%	1,682,507			615		0.15	%	1,636,821			1,838		0.45	%
Time	1,406,800			5,601		1.60	%	1,577,448			6,664		1.69	%	1,634,779			8,121		1.99	%
Short-term borrowings	159,681			37		0.09	%	85,891			12		0.06	%	95,297			49		0.21	%
Long-term borrowings	75,314			675		3.59	%	76,020			680		3.59	%	122,899			1,134		3.70	%
Total interest-bearing liabilities	4,445,074			7,093		0.64	%	4,707,062			8,408		0.72	%	4,620,299			11,950		1.04	%

Noninterest-bearing liabilities and shareholders' equity
Noninterest-bearing demand	1,044,405							931,347							734,674
Other liabilities	128,383							133,975							157,031
Shareholders' equity	717,111							706,547							707,750
Total liabilities and shareholders' equity	$	6,334,973						$	6,478,931						$	6,219,754
Net interest income				$	64,830						$	66,689						$	65,867

Net interest spread						4.32	%						4.34	%						4.40	%
Contribution of noninterest-bearing sources of funds						0.17	%						0.17	%						0.21	%
Net interest margin ⁽²⁾						4.49	%						4.51	%						4.61	%


(1)	Nonaccrual loans and loans held for sale are included in average balances.


(2)	Because noninterest-bearing funding sources, demand deposits, other liabilities and shareholders' equity also support earning assets, the net interest margin exceeds the interest spread.

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RATE/VOLUME ANALYSIS

The impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income is illustrated in the following tables.



	Changes for the Three Months Ended June 30, 2012
	Linked Qtr. Income Variance									Comparable Qtr. Income Variance
(Dollars in thousands)	Rate			Volume			Total			Rate			Volume			Total
Earning assets
Investment securities	$	(450	)	$	299		$	(151	)	$	(569	)	$	3,797		$	3,228
Other earning assets	(32		)	(55		)	(87		)	(159		)	(167		)	(326		)
Gross loans ⁽¹⁾	(1,978		)	(958		)	(2,936		)	(6,262		)	(2,534		)	(8,796		)
Total earning assets	(2,460		)	(714		)	(3,174		)	(6,990		)	1,096			(5,894		)
Interest-bearing liabilities
Total interest-bearing deposits	$	(827	)	$	(508	)	$	(1,335	)	$	(4,095	)	$	(291	)	$	(4,386	)
Borrowed funds
Short-term borrowings	8			17			25			(27		)	15			(12		)
Federal Home Loan Bank long-term debt	1			(6		)	(5		)	(18		)	(244		)	(262		)
Other long-term debt	0			0			0			(197		)	0			(197		)
Total borrowed funds	9			11			20			(242		)	(229		)	(471		)
Total interest-bearing liabilities	(818		)	(497		)	(1,315		)	(4,337		)	(520		)	(4,857		)
Net interest income	$	(1,642	)	$	(217	)	$	(1,859	)	$	(2,653	)	$	1,616		$	(1,037	)

(1) Loans held for sale, nonaccrual loans, covered loans and indemnification asset are included in gross loans.



	Changes for the Six Months Ended June 30
	Year-to-Date Income Variance
(Dollars in thousands)	Rate			Volume			Total
Earning assets
Investment securities	$	(878	)	$	7,756		$	6,878
Other earning assets	(156		)	(363		)	(519		)
Gross loans ⁽¹⁾	(10,227		)	(6,992		)	(17,219		)
Total earning assets	(11,261		)	401			(10,860		)
Interest-bearing liabilities
Total interest-bearing deposits	$	(7,944	)	$	(126	)	$	(8,070	)
Borrowed funds
Short-term borrowings	(57		)	12			(45		)
Federal Home Loan Bank long-term debt	(35		)	(636		)	(671		)
Other long-term debt	(391		)	0			(391		)
Total borrowed funds	(483		)	(624		)	(1,107		)
Total interest-bearing liabilities	(8,427		)	(750		)	(9,177		)
Net interest income	$	(2,834	)	$	1,151		$	(1,683	)

(1) Loans held for sale, nonaccrual loans, covered loans and indemnification asset are included in gross loans.

NONINTEREST INCOME

Second quarter 2012 noninterest income was $33.5 million, a $7.6 million or 18.4% decline from noninterest income of $41.1 million in the second quarter 2011. The decline in noninterest income from the comparable quarter in 2011 was due primarily to lower reimbursements from the FDIC on covered assets. This decline was partially offset by $5.0 million of other noninterest income associated with the settlement of litigation related to a subsidiary, as well as higher service charges on deposits and client derivative fees in the second quarter 2012. When losses are incurred on covered loans, the Company recognizes those credit losses as provision expense, while losses incurred on covered OREO are recognized as noninterest

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expense. Reimbursements due from the FDIC under loss sharing agreements related to these credit losses, referred to as loss sharing income, are recorded as noninterest income and were $8.3 million for the second quarter of 2012 and $21.6 million for the second quarter of 2011. The impact on earnings of this offsetting activity is the net effect of the credit losses and FDIC reimbursement, representing the Company’s proportionate share of the credit losses realized on covered assets.

While no material sales of covered loans occurred during the second quarter of 2012, covered loan activity continued to positively impact noninterest income due to prepayments. Accelerated discount is recognized when acquired loans, which are recorded on the Company’s balance sheet at an amount less than the unpaid principal balance, prepay at an amount greater than their recorded book value. Prepayments can occur either through customer driven payments before the maturity date or loan sales. The amount of discount attributable to the credit loss component of each loan varies and the recognized amount is offset by a related reduction in the FDIC indemnification asset. First Financial recognized accelerated discount on covered loans of $3.8 million for the second quarter of 2012 and $4.8 million for the second quarter of 2011.

For the six months ended June 30, 2012, noninterest income totaled $65.5 million compared to $84.8 million for the comparable year-over-year period. The $19.3 million or 22.8% decline in noninterest income from the comparable period in 2011 was primarily attributable to a $24.0 million decrease in FDIC loss sharing income and a $3.1 million decrease in accelerated discount on covered loans, offset by the $5.0 million of other noninterest income associated with the settlement of litigation related to a subsidiary in 2012.

NONINTEREST EXPENSE

Second quarter 2012 noninterest expense was $57.5 million compared with $52.5 million in the second quarter of 2011. The $5.0 million or 9.5% increase from the comparable quarter in 2011 was primarily attributable to a $3.9 million increase in salaries and employee benefits expense and a $2.3 million increase in loss sharing expense, offset by lower professional services expense and losses related to covered OREO. The increase in salaries and benefits expense was related to staff additions from the Liberty and Flagstar banking center acquisitions that occurred late in 2011 as well as $1.1 million of employee benefit and other exit costs primarily associated with the banking center consolidation plans announced in 2012. Loss sharing expense represents costs incurred to resolve problem covered assets and are partially reimbursed by the FDIC. The decline in professional services expense was primarily due to a $0.5 million decrease in litigation related expenses.

For the six months ended June 30, 2012, noninterest expense totaled $113.2 million compared to $110.3 million for the comparable year-over-year period. The increase of $3.0 million or 2.7% is primarily attributable to a $5.2 million increase in salaries and employee benefits expense as discussed above, a $1.3 million increase in data processing expense related to the implementation and maintenance of software utilized by the Bank, a $4.0 million increase in loss sharing expense and a $1.8 million increase in other noninterest expense primarily related to certain pension and trust-related costs. These increases were partially offset by a combined $5.4 million decrease in losses related to covered and uncovered OREO, a $1.0 million decrease in professional services expense due to lower litigation costs, a $0.9 million decrease in occupancy expense related to leases abandoned in exited markets during 2011, a $0.8 million decrease in FDIC assessments related to lower assessment rates beginning in mid-2011 and a $0.6 million decrease in state intangible tax expense.

INCOME TAXES

Income tax expense was $8.7 million and $8.9 million for the second quarters of 2012 and 2011, respectively. The effective tax rates for the second quarters of 2012 and 2011 were 32.8% and 35.7%, respectively. The decrease in the effective tax rate during the second quarter 2012 was primarily due to a one-time provision to return adjustment related to state income taxes at the subsidiary level.

Income tax expense for the six months ended June 30, 2012 and 2011 was $18.3 million and $18.2 million, respectively. The year-to-date effective tax rate through June 30, 2012 was 34.5% compared to 35.4% for the comparable period in 2011.

LOANS - EXCLUDING COVERED LOANS

Loans, excluding covered loans and loans held for sale, increased $44.2 million or 1.5% to $3.0 billion at June 30, 2012 from December 31, 2011. The increase in loan balances from December 31, 2011 was primarily related to an $88.4 million increase in commercial real estate loans and a $12.8 million increase in equipment lease financing balances, partially offset by a $61.9 million decline in commercial and construction real estate loan balances during the period. Loan demand remains a challenge in the Company’s strategic operating markets as a result of competition from other institutions as well as continued uncertainty in the economic environment.

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Second quarter 2012 average loans excluding covered loans and loans held for sale, increased $201.3 million or 7.3% from the second quarter of 2011. The increase in average loans excluding covered loans and loans held for sale was primarily the result of the $126.5 million of performing loans acquired in connection with the Liberty branch acquisition during the third quarter of 2011. Likewise, year-to-date average loans, excluding covered loans and loans held for sale, increased $178.0 million through June 30, 2012 from the comparable period in 2011.

LOANS - COVERED

Covered loans totaled $903.9 million at June 30, 2012, representing a $149.4 million or 14.2% decline compared to December 31, 2011. Declines in covered loan balances were expected as there were no acquisitions of loans subject to loss sharing agreements during the period. The covered loan portfolio will continue to decline through payoffs, loan sales, charge-offs and termination or expiration of loss share coverage unless First Financial acquires additional loans subject to loss sharing agreements in the future. Loans with coverage terminated, or removed, generally represent loans to primarily high quality borrowers involving a change in loan terms which caused the respective loans to no longer qualify for reimbursement from the FDIC in the event of credit losses.

As required under the loss-sharing agreements, First Financial must file monthly certifications with the FDIC on single-family residential loans and quarterly certifications on all other loans. To date, all certifications have been filed in a timely manner and without significant issues.

INVESTMENTS

First Financial's investment portfolio totaled $1.7 billion or 26.6% of total assets at June 30, 2012, compared with $1.5 billion or 22.7% of total assets at December 31, 2011. Securities available-for-sale at June 30, 2012, totaled $724.5 million, compared with $1.4 billion at December 31, 2011, while held-to-maturity securities totaled $873.5 million at June 30, 2012 compared to $2.7 million at December 31, 2012.

The investment portfolio increased $153.5 million, or 10.1%, during the first six months of 2012 as $331.3 million of purchases were partially offset by amortizations and paydowns in the portfolio. The increase in the investment portfolio was primarily related to the deployment of cash received in the Liberty and Flagstar banking center acquisitions late in 2011, as well as amortization and paydowns of both uncovered and covered loans as loan demand remains muted. First Financial purchased agency mortgage backed securities (MBSs) and, to a lesser extent, investment grade single issuer trust preferred securities, utilizing the same discipline and portfolio management philosophy as with past investment purchases including, but not limited to, avoidance of material credit risk and geographic concentration risk within the MBSs.

The overall duration of the investment portfolio decreased to 1.8 years as of June 30, 2012 from 2.4 years as of December 31, 2011 due to increased prepayment speeds resulting from the continued decline in interest rates. With regard to increased prepayment speeds and premium risk inherent in the investment portfolio, the Company has partially mitigated its refinancing and premium risk by capping the premium at which it has purchased securities and by selectively purchasing agency MBSs collateralized by assets less subject to refinancing in this interest rate environment.

During the first quarter 2012, the Company also reclassified securities, primarily agency MBSs, with a total book value of $915.5 million as of March 31, 2012 from available-for-sale to held-to-maturity. While market expectations are that the current, low interest rate environment will continue for the next several years, the increase in the Company's portfolio duration in recent periods had caused the price sensitivity of the portfolio to increase in rising interest rate scenarios. Further, declines in market values for available-for-sale securities could negatively impact shareholders' equity as these securities are carried at fair value with unrealized holding gains and losses recorded as other comprehensive income. The reclassification was executed to mitigate the impact of potential future price depreciation on other comprehensive income and the corresponding negative impact on shareholders' equity as held-to-maturity securities are carried at amortized cost. First Financial has the intent and ability to hold the transferred securities to maturity and does not expect this reclassification to affect its liquidity needs in future periods.

First Financial has recorded, as a component of equity in accumulated other comprehensive income, an unrealized after-tax gain on the investment portfolio of approximately $15.3 million at June 30, 2012, compared with $12.7 million at December 31, 2011.

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DEPOSITS AND FUNDING

Total deposits as of June 30, 2012 were $5.1 billion, a decrease of $541.1 million or 9.6% compared to December 31, 2011. The decrease in total deposits as compared to December 31, 2011 was primarily related to a decrease in total time deposit balances of $322.9 million, or 19.5%, as the Company continued to focus on reducing non-core relationship deposits in connection with its deposit rationalization strategies. Non-time deposit balances declined $218.2 million or 5.5% to $3.8 billion as of June 30, 2012, compared to December 31, 2011. This decline was driven by a $162.5 million decrease in interest-bearing demand deposits and a $181.0 million decrease in savings deposits as a result of repricing certain deposits acquired in the Flagstar banking center acquisition as well as the Company's recent banking center consolidation activities. Partially offsetting this activity was an increase of $125.3 million in core noninterest-bearing accounts during the first six months of 2012.

Average deposits declined to $5.3 billion at June 30, 2011 from $5.5 billion at December 31, 2011 primarily due to decreases in average interest-bearing demand deposits of $196.0 million and average time deposits of $217.1 million, partially offset by an increase in noninterest-bearing deposits of $183.5 million.

Borrowed funds increased to $325.0 million at June 30, 2012 from $176.0 million at December 31, 2011, due to a $176.0 million increase in First Financial's short-term borrowings with the Federal Home Loan Bank (FHLB) as a result of deposit attrition during the period from the Company's deposit rationalization strategies.

For further discussion of First Financial's borrowing capacity and liquidity management, see the Liquidity section of Management's Discussion and Analysis.

RISK MANAGEMENT

First Financial manages risk through a structured enterprise risk management (ERM) approach that routinely assesses the overall level of risk, identifies specific risks and evaluates the steps being taken to mitigate those risks. First Financial continues to enhance its risk management capabilities and the development of risk awareness as a component of the culture of the Company and the operating policies of its business lines. First Financial has identified nine types of risk that it monitors in its ERM framework. These risks include information technology, market, legal, strategic, reputation, credit, regulatory (compliance), operational and external/environmental.

For further discussion of these risks, see the Risk Management section of the Management's Discussion and Analysis of First Financial’s 2011 Annual Report and the information below.

CREDIT RISK

Credit risk represents the risk of loss due to failure of a customer or counterparty to meet its financial obligations in accordance with contractual terms. First Financial manages credit risk through its underwriting process and periodically reviewing and approving its credit exposures using credit policies and guidelines approved by its board of directors. Due to the significant differences in the accounting for covered loans and the loss sharing agreements with the FDIC, management believes that asset quality measures excluding covered loans are generally more meaningful. Therefore, management has included asset quality measures that exclude covered loans in the table in this section.

Allowance for loan and lease losses (excluding covered loans). Management maintains the allowance for loan and lease losses at a level that it considers sufficient to absorb probable loan and lease losses inherent in the portfolio. Management determines the adequacy of the allowance based on historical loss experience as well as other significant factors such as composition of the portfolio; economic conditions; geographic footprint; the results of periodic internal and external evaluations of delinquent, nonaccrual and classified loans; and any other adverse situations that may affect a specific borrower's ability to repay (including the timing of future payments). This evaluation is inherently subjective as it requires utilizing material estimates that may be susceptible to significant change. The evaluation of these factors is the responsibility of the Allowance for Loan and Lease Losses Committee, which is comprised of senior officers from the risk management, credit administration, finance and lending areas.

The allowance for uncovered loan and lease losses was $51.0 million as of June 30, 2012 compared to $52.6 million as of December 31, 2011. As a percentage of period-end loans, the allowance for loan and lease losses was 1.69% as of June 30, 2012 compared to 1.77% as of December 31, 2011. The allowance for uncovered loan and lease losses is the result of the Company's modeling efforts to estimate losses inherent in the portfolio and is influenced by migration trends within First Financial's loan rating classification scheme, the levels of nonperforming loans and the nature and timing of resolution strategies related to nonperforming loans, among other factors. The decline in the allowance for uncovered loan and lease losses from December 31, 2011 was primarily the result of continued positive migration trends in classified assets as well as the

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finalization of resolution strategies related to certain nonperforming loans during 2012.

Second quarter 2012 net charge-offs were $6.8 million or 0.93% of average loans and leases on an annualized basis, compared with $5.7 million or 0.83% of average loans and leases on an annualized basis for the comparable quarter in 2011. Significant items driving net charge-offs during the second quarter 2012 included $2.0 million related to the dispositions of a commercial real estate credit and a construction and land development credit and $1.2 million related to valuation adjustments of two commercial real estate credits.

For the six months ended June 30, 2012, net charge-offs were $13.2 million, or 0.90% of average loans and leases on an annualized basis, as compared to $10.0 million, or 0.72% of average loans and leases on an annualized basis for the six months ended June 30, 2011. Significant items driving net charge-offs for the six months ended June 30, 2012 include the second quarter 2012 charge-offs discussed above as well as a $1.7 million charge-off related to a commercial construction and land development credit, $1.1 million related to a hotel real estate loan and three commercial credits totaling $0.9 million in the aggregate in the first quarter 2012.

Provision expense related to uncovered loans and leases is a product of the Company's allowance for loan and lease losses model as well as net charge-off activity during the period. Second quarter 2012 provision expense related to uncovered loans and leases was $8.4 million as compared to $5.8 million during the comparable quarter in 2011. Provision expense related to uncovered loans and leases was $11.6 million and $6.4 million for the six months ended June 30, 2012 and 2011, respectively. Provision expense for the three and six months ended June 30, 2012 was impacted by the establishment of or addition to specific reserves totaling $6.1 million in the aggregate on three separate commercial and commercial real estate credits in the second quarter, partially offset by the continued migration trends in classified assets as well as the finalization of resolution strategies on certain loans during the period.

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The table that follows indicates the activity in the allowance for loan losses, excluding covered loans, for the quarterly periods presented.



	Three Months Ended															Six Months Ended
	2012						2011									June 30,
(Dollars in thousands)	June 30,			Mar. 31,			Dec. 31,			Sep. 30,			June 30,			2012			2011
Allowance for loan and lease loss activity
Balance at beginning of period	$	49,437		$	52,576		$	54,537		$	53,671		$	53,645		$	52,576		$	57,235
Provision for loan losses	8,364			3,258			5,164			7,643			5,756			11,622			6,403
Gross charge-offs
Commercial	1,129			1,186			1,742			879			383			2,315			815
Real estate-construction	717			1,787			2,105			1,771			1,213			2,504			2,403
Real estate-commercial	3,811			2,244			2,505			2,997			2,791			6,055			4,880
Real estate-residential	191			604			473			564			406			795			514
Installment	116			60			115			162			177			176			249
Home equity	915			644			488			510			923			1,559			1,185
All other	259			297			363			291			339			556			787
Total gross charge-offs	7,138			6,822			7,791			7,174			6,232			13,960			10,833
Recoveries
Commercial	48			72			348			92			222			120			322
Real estate-construction	0			0			5			0			27			0			27
Real estate-commercial	68			113			68			168			38			181			73
Real estate-residential	9			28			3			4			29			37			38
Installment	75			123			96			87			82			198			180
Home equity	28			24			71			9			12			52			37
All other	61			65			75			37			92			126			189
Total recoveries	289			425			666			397			502			714			866
Total net charge-offs	6,849			6,397			7,125			6,777			5,730			13,246			9,967
Ending allowance for loan and lease losses	$	50,952		$	49,437		$	52,576		$	54,537		$	53,671		$	50,952		$	53,671

Net charge-offs to average loans and leases (annualized)
Commercial	0.53		%	0.53		%	0.65		%	0.39		%	0.08		%	0.53		%	0.12		%
Real estate-construction	2.91		%	6.36		%	6.13		%	4.96		%	3.42		%	4.75		%	3.22		%
Real estate-commercial	1.18		%	0.69		%	0.80		%	0.98		%	0.97		%	0.94		%	0.85		%
Real estate-residential	0.25		%	0.81		%	0.64		%	0.86		%	0.58		%	0.53		%	0.36		%
Installment	0.26		%	(0.39		)%	0.11		%	0.47		%	0.58		%	(0.07		)%	0.21		%
Home equity	0.99		%	0.70		%	0.46		%	0.57		%	1.07		%	0.84		%	0.68		%
All other	1.46		%	1.88		%	2.47		%	2.46		%	2.68		%	1.66		%	3.36		%
Total net charge-offs	0.93		%	0.87		%	0.95		%	0.96		%	0.83		%	0.90		%	0.72		%

Allowance for loan and lease losses (covered loans). The majority of covered loans are accounted for under FASB ASC Topic 310-30, whereby First Financial is required to periodically re-estimate the expected cash flows on the loans. For purposes of applying the guidance under FASB ASC Topic 310-30, First Financial grouped acquired loans into pools based on common risk characteristics. A decline in expected cash flows for a pool of loans is referred to as 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. Estimated reimbursements due from the FDIC under loss sharing agreements related to any declines in expected loan cash flows are recorded as noninterest income and an increase to the FDIC indemnification asset in the same period. Improvement in expected cash flows for a pool of loans, once any previously recorded impairment is recaptured, is recognized prospectively as an adjustment to the yield on the loans in the pool and a related adjustment to the yield on the FDIC indemnification asset. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.

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The allowance for covered loan and lease losses was $48.3 million as of June 30, 2012 compared to $42.8 million as of December 31, 2011.

First Financial recognized total provision expense of $6.0 million and realized net charge-offs of $3.9 million for the three months ended June 30, 2012. The Company recognized total provision expense of $23.9 million and net charge-offs of $4.4 million for the three months ended June 30, 2011. For the six months ended June 30, 2012, First Financial recognized total provision expense of $19.0 million and net charge-offs of $13.5 million. The Company recognized total provision expense of $49.9 million and net charge-offs of $15.4 million for the six months ended June 30, 2011.

The Company also recognized loss sharing expenses of $3.1 million and losses on covered OREO of $1.2 million during the second quarter of 2012. Loss sharing expenses and losses on covered OREO were $0.8 million and $2.6 million, respectively, in the second quarter of 2011. Loss sharing expenses include attorney fees, taxes, insurance and other collection expenses related to the resolution of covered assets. First Financial recognized loss sharing expenses of $4.8 million and $0.8 million, and losses on covered OREO of $2.5 million and $5.7 million, for the six months ended June 30, 2012 and 2011, respectively.

The receivable due from the FDIC under loss sharing agreements related to covered provision expense, loss sharing expense and losses on covered OREO of $8.3 million and $21.6 million for the three months ended June 30, 2012 and 2011, respectively, was recognized as FDIC loss sharing income and corresponding increases to the FDIC indemnification asset in those periods. The receivable due from the FDIC under loss sharing agreements related to covered provision expense, loss sharing expense and losses on covered OREO of $21.1 million and $45.1 million or the six months ended June 30, 2012 and 2011, respectively, was recognized as FDIC loss sharing income and corresponding increases to the FDIC indemnification asset in those periods.



	Three Months Ended															Six Months Ended
	2012						2011									June 30,
(Dollars in thousands)	June 30,			Mar. 31,			Dec. 31,			Sep. 30,			June 30,			2012			2011
Balance at beginning of period	$	46,156		$	42,835		$	48,112		$	51,044		$	31,555		$	42,835		$	16,493
Provision for loan and lease losses	6,047			12,951			6,910			7,260			23,895			18,998			49,911
Loans charged-off	(5,163		)	(10,118		)	(13,513		)	(10,609		)	(7,456		)	(15,281		)	(21,482		)
Recoveries	1,287			488			1,326			417			3,050			1,775			6,122
Ending allowance for covered loan losses	$	48,327		$	46,156		$	42,835		$	48,112		$	51,044		$	48,327		$	51,044

Nonperforming/Underperforming Assets (excluding covered assets). Nonperforming loans totaled $83.2 million and nonperforming assets totaled $98.9 million as of June 30, 2012 compared with $76.4 million and $87.7 million, respectively, at December 31, 2011. Nonaccrual loans, including troubled debt restructurings (TDRs) classified as nonaccrual, totaled $73.3 million as of June 30, 2012 compared to $72.4 million as of December 31, 2011, representing a $0.9 million, or 1.3% increase as total additions modestly outweighed credits removed from nonaccrual status due to the finalization of resolution strategies, including transfers to OREO and net charge-offs. Included in the additions to total nonaccrual loans during the first quarter of 2012 was a single $10.8 million commercial real estate credit. TDRs classified as nonaccrual declined $7.9 million from December 31, 2011, driven primarily by the sale of a $4.4 million construction and land development credit during the second quarter 2012.

The second quarter 2012 allowance for loan and lease losses as a percentage of nonaccrual loans was 80.8% compared with 96.8% at December 31, 2011, while the allowance for loan and lease losses as a percentage of nonperforming loans was 61.3% at June 30, 2012, compared with 68.8% at December 31, 2011.

Total classified assets as of June 30, 2012 totaled $145.6 million compared to $162.4 million at December 31, 2011. Classified assets, which have declined for seven consecutive quarters, are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse.

Troubled Debt Restructurings (excluding covered loans). TDRs totaled $20.1 million at June 30, 2012, a $2.0 million decrease from December 31, 2011. Accruing TDRs increased $5.9 million from December 31, 2011, primarily in the first quarter, generally as a result of renewals and term extensions of performing, substandard-rated loans that are experiencing operating cash flow stress but have strong underlying collateral and guarantor support. TDRs classified as nonaccrual declined $7.9 million from December 31, 2011 as a result of the $4.4 million construction and land development credit that was sold during the second quarter 2012, as well as other transfers to OREO and charge-offs during 2012.

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Delinquent Loans (excluding covered loans). At June 30, 2012, loans 30-to-89 days past due increased to $26.0 million, or 0.86% of period end loans, as compared to $20.4 million, or 0.69%, at December 31, 2011. The increase in delinquent loans compared to December 31, 2011 primarily resulted from increased delinquencies in commercial real estate loans.

Other Real Estate Owned. At June 30, 2012, First Financial had OREO properties originating from uncovered loans totaling $15.7 million, compared with $11.3 million at December 31, 2011. OREO increased $4.4 million from December 31, 2011 to June 30, 2012 as additions of $7.3 million exceeded resolutions and valuation adjustments of $2.9 million during the period. Additions during the period primarily related to three land development relationships totaling $3.4 million in the aggregate which transferred to OREO in the first quarter 2012.

OREO originating from covered loans was $25.4 million at June 30, 2012, compared with $44.8 million at December 31, 2011. Covered OREO declined $19.4 million from December 31, 2011 to June 30, 2012 as additions of $7.8 million were offset by resolutions and valuation adjustments of $27.2 million during the period.

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The table that follows shows the categories that are included in nonperforming and underperforming assets, excluding covered assets, as of June 30, 2012, and the four previous quarters, as well as related credit quality ratios.



	Quarter Ended
	2012						2011
(Dollars in thousands)	June 30,			Mar. 31,			Dec. 31,			Sep. 30,			June 30,
Nonperforming loans, nonperforming assets, and underperforming assets
Nonaccrual loans
Commercial	$	12,065		$	5,936		$	7,809		$	10,792		$	9,811
Real estate - construction	7,243			7,005			10,005			13,844			13,237
Real estate - commercial	36,116			35,581			28,349			26,408			26,213
Real estate - residential	5,069			5,131			5,692			5,507			4,564
Installment	319			377			371			322			335
Home equity	2,281			1,915			2,073			2,277			2,376
Nonaccrual loans	63,093			55,945			54,299			59,150			56,536
Troubled debt restructurings (TDRs)
Accruing	9,909			9,495			4,009			4,712			3,039
Nonaccrual	10,185			17,205			18,071			12,571			14,443
Total TDRs	20,094			26,700			22,080			17,283			17,482
Total nonperforming loans	83,187			82,645			76,379			76,433			74,018
Other real estate owned (OREO)	15,688			15,036			11,317			12,003			16,313
Total nonperforming assets	98,875			97,681			87,696			88,436			90,331
Accruing loans past due 90 days or more	143			203			191			235			149
Total underperforming assets	$	99,018		$	97,884		$	87,887		$	88,671		$	90,480
Total classified assets	$	145,621		$	154,684		$	162,372		$	172,581		$	184,786

Credit quality ratios (excluding covered assets)
Allowance for loan and lease losses to
Nonaccrual loans	80.76		%	88.37		%	96.83		%	92.20		%	94.93		%
Nonaccrual loans plus nonaccrual TDRs	69.53		%	67.58		%	72.65		%	76.04		%	75.62		%
Nonperforming loans	61.25		%	59.82		%	68.84		%	71.35		%	72.51		%
Total ending loans	1.69		%	1.67		%	1.77		%	1.86		%	1.92		%
Nonperforming loans to total loans	2.76		%	2.79		%	2.57		%	2.60		%	2.65		%
Nonperforming assets to
Ending loans, plus OREO	3.27		%	3.28		%	2.94		%	3.00		%	3.22		%
Total assets, including covered assets	1.57		%	1.52		%	1.31		%	1.40		%	1.50		%
Nonperforming assets, excluding accruing TDRs to
Ending loans, plus OREO	2.94		%	2.96		%	2.81		%	2.84		%	3.11		%
Total assets, including covered assets	1.42		%	1.37		%	1.25		%	1.32		%	1.44		%

MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, foreign exchange rates, and equity prices. The primary source of market risk for First Financial is interest rate risk. Interest rate risk is the risk to earnings and the value of equity arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of First Financial’s interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, re-price or mature in specified periods. First Financial seeks to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. First Financial’s board of directors establishes policy limits with respect to interest rate risk and changes in the economic value of equity. First Financial’s Asset and Liability Committee (ALCO) oversees market risk management, monitoring risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital.

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Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective interest rate risk management begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk position given business activities, management objectives, market expectations and ALCO policy limits and guidelines.

LIQUIDITY

Liquidity management is the process by which First Financial manages the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost. These funding commitments include withdrawals by depositors, credit commitments to borrowers, shareholder dividends, expenses of its operations and capital expenditures. Liquidity is monitored and closely managed by ALCO, a group of senior officers from the lending, deposit gathering, finance, risk management and treasury areas. It is ALCO’s responsibility to ensure First Financial has the necessary level of funds available for normal operations as well as to maintain a contingency funding policy to ensure that liquidity stress events are quickly identified, and management plans to respond are in place. This is accomplished through the use of policies which establish limits and require measurements to monitor liquidity trends, including modeling and management reporting that identifies the amounts and costs of all available funding sources. These sources are periodically tested for funding availability.

Liquidity is derived primarily from deposit growth, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. First Financial’s most stable source of liability-funded liquidity for both long and short-term needs is deposit growth and retention of the core deposit base. The deposit base is diversified among individuals, partnerships, corporations, public entities and geographic markets. This diversification helps First Financial minimize dependence on large concentrations of funding sources.

Capital expenditures, such as banking center expansions and technology investments were $10.8 million and $4.6 million for the first six months of 2012 and 2011, respectively. Management believes that First Financial has sufficient liquidity to fund its future capital expenditure commitments.

As of June 30, 2012, First Financial had pledged certain eligible residential and farm real estate loans, home equity lines of credit, and government and agency securities, totaling $1.1 billion as collateral for borrowings from the Federal Home Loan Bank (FHLB). For ease of borrowing execution, First Financial utilizes a blanket collateral agreement with the FHLB.

First Financial utilizes its short-term line of credit and longer-term advances from the FHLB as funding sources. At June 30, 2012, the Company had $176.0 million in short-term borrowings from the FHLB. At December 31, 2011, the Company had no short-term borrowings from the FHLB. The increase in short-term borrowings at June 30, 2012 was related to deposit attrition during the period resulting from the Company's deposit rationalization strategies. At June 30, 2012, and December 31, 2011, total long-term borrowings from the FHLB were $10.1 million and $11.5 million, respectively. First Financial's total remaining borrowing capacity from the FHLB was $83.6 million at June 30, 2012.

The principal source of asset-funded liquidity is marketable investment securities, particularly those of shorter maturities. The market value of investment securities classified as available-for-sale totaled $724.5 million at June 30, 2012. Securities classified as held-to-maturity that are maturing within a short period of time are also a source of liquidity and totaled $0.7 million at June 30, 2012. In addition, other types of assets such as cash and due from banks, federal funds sold and securities purchased under agreements to resell, as well as loans maturing within one year, are sources of liquidity.

At June 30, 2012, in addition to liquidity on hand of $135.6 million, First Financial had unused and available overnight wholesale funding of $2.5 billion or 40.3% of total assets to fund new loans, any deposit runoff that may occur as a result of the Company's deposit rationalization efforts and from markets that the Company is exiting, or for general corporate requirements.

Certain restrictions exist regarding the ability of First Financial’s subsidiaries to transfer funds to First Financial in the form of cash dividends, loans, other assets or advances. The approval of the subsidiaries’ respective primary federal regulators is required for First Financial’s subsidiaries to pay dividends in excess of regulatory limitations. Dividends paid to First Financial from its subsidiaries totaled $35.5 million for the first six months of 2012. As of June 30, 2012, First Financial’s subsidiaries had retained earnings of $353.0 million of which $31.7 million was available for distribution to First Financial without prior regulatory approval. Additionally, First Financial had $114.1 million in cash as of June 30, 2012, which is approximately three times the Company’s annual base shareholder dividend (currently $0.60 per share) and operating expenses. Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on First Financial’s liquidity.

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Until its prepayment during the second quarter 2011, First Financial made quarterly interest payments on its junior subordinated debenture owed to its unconsolidated subsidiary trust. The trust preferred securities were redeemed on June 30, 2011, and therefore, there was no interest expense associated with the junior subordinated debentures for the last six months of 2011 or during 2012. For the three and six months ended June 30, 2011, interest expense related to this other long-term debt totaled $0.2 million and $0.4 million, respectively.

CAPITAL

Risk-Based Capital. First Financial and its subsidiary, First Financial Bank, are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate regulatory action.

Quantitative measures established by regulation to ensure capital adequacy require First Financial to maintain minimum amounts and ratios as defined by the regulations of Total and Tier 1 capital to risk-weighted assets and to average assets. Management believes, as of June 30, 2012, that First Financial met all capital adequacy requirements to which it was subject. At June 30, 2012, and December 31, 2011, regulatory notifications categorized First Financial as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, First Financial must maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since those notifications that management believes has changed the Company's category.

First Financial’s Tier I capital is comprised of total shareholders’ equity less unrealized gains and losses on investment securities available-for-sale accounted for under FASB ASC Topic 320, Investments-Debt and Equity Securities, and any amounts resulting from the application of FASB ASC Topic 715, Compensation-Retirement Benefits, that is recorded within accumulated other comprehensive income (loss), intangible assets, and any valuation related to mortgage servicing rights. Total risk-based capital consists of Tier I capital plus qualifying allowance for loan and lease losses and gross unrealized gains on equity securities.

For purposes of calculating the leverage ratio, average assets represents quarterly average assets less assets not qualifying for total risk-based capital including intangible assets and non-qualifying mortgage servicing rights and allowance for loan and lease losses.

Consolidated regulatory capital ratios at June 30, 2012, included the leverage ratio of 10.21%, Tier 1 ratio of 17.14%, and total capital ratio of 18.42%. All regulatory capital ratios exceeded the amounts necessary to be classified as “well capitalized,” and total regulatory capital exceeded the “minimum” requirement by $389.4 million, on a consolidated basis. First Financial’s tangible common equity ratio increased to 9.91% at June 30, 2012 as compared to 9.23% at December 31, 2011.

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The following table illustrates the actual and required capital amounts and ratios as of June 30, 2012 and December 31, 2011.



	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2012
Total capital to risk-weighted assets
Consolidated	$	688,401	18.42	%	$	299,034	8.00	%	N/A		N/A
First Financial Bank	584,357		15.65	%	298,629		8.00	%	$	373,286	10.00	%

Tier 1 capital to risk-weighted assets
Consolidated	640,644		17.14	%	149,517		4.00	%	N/A		N/A
First Financial Bank	529,426		14.18	%	149,314		4.00	%	223,972		6.00	%

Tier 1 capital to average assets
Consolidated	640,644		10.21	%	250,964		4.00	%	N/A		N/A
First Financial Bank	529,426		8.45	%	250,627		4.00	%	313,284		5.00	%



	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2011
Total capital to risk-weighted assets
Consolidated	$	683,255	18.74	%	$	291,632	8.00	%	N/A		N/A
First Financial Bank	578,042		15.89	%	290,992		8.00	%	$	363,740	10.00	%

Tier 1 capital to risk-weighted assets
Consolidated	636,836		17.47	%	145,816		4.00	%	N/A		N/A
First Financial Bank	524,363		14.42	%	145,496		4.00	%	218,244		6.00	%

Tier 1 capital to average assets
Consolidated	636,836		9.87	%	258,122		4.00	%	N/A		N/A
First Financial Bank	524,363		8.13	%	258,035		4.00	%	322,543		5.00	%

Shelf Registrations. On April 28, 2011, First Financial filed a shelf registration on Form S-3 with the Securities and Exchange Commission. This shelf registration allows First Financial to raise capital from time to time through the sale of various types of securities, subject to approval by the Company's board of directors.

Share Repurchases. First Financial had no share repurchase activity under publicly announced plans in 2012 or 2011.

CRITICAL ACCOUNTING POLICIES

First Financial’s Consolidated Financial Statements are prepared based on the application of accounting policies. These policies require the reliance on estimates and assumptions. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on First Financial’s future financial condition and results of operations. In management’s opinion, some of these areas have a more significant impact than others on First Financial’s financial reporting. For First Financial, these areas currently include accounting for the allowance for loan and lease losses (excluding

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covered loans), covered loans, the allowance for loan and lease losses - covered loans, the FDIC indemnification asset, goodwill, pension and income taxes. These accounting policies are discussed in detail in the Critical Accounting Policies section of Management’s Discussion and Analysis in First Financial’s 2011 Annual Report. There were no material changes to these accounting policies during the six months ended June 30, 2012.

ACCOUNTING AND REGULATORY MATTERS

Note 2 to the Consolidated Financial Statements discusses new accounting standards adopted by First Financial during 2012 and the expected impact of accounting standards recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affects financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of Management’s Discussion and Analysis and the Notes to the Consolidated Financial Statements.

FORWARD-LOOKING INFORMATION

Certain statements contained in this news release which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the Act). In addition, certain statements in future filings by First Financial with the SEC, in press releases, and in oral and written statements made by or with the approval of First Financial which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to, projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items, statements of plans and objectives of First Financial or its management or board of directors and statements of future economic performances and statements of assumptions underlying such statements. Words such as "believes," "anticipates," "likely," "expected," "intends," and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Management's analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties that may cause actual results to differ materially. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:


▪	management's ability to effectively execute its business plan;


▪	the risk that the strength of the United States economy in general and the strength of the local economies in which we conduct operations may continue to deteriorate resulting in, among other things, a further deterioration in credit quality or a reduced demand for credit, including the resultant effect on our loan portfolio, allowance for loan and lease losses and overall financial performance;


▪	U.S. fiscal debt and budget matters;


▪	the ability of financial institutions to access sources of liquidity at a reasonable cost;

▪

the impact of recent upheaval in the financial markets and the effectiveness of domestic and international governmental actions taken in response, and the effect of such governmental actions on us, our competitors and counterparties, financial markets generally and availability of credit specifically, and the U.S. and international economies, including potentially higher FDIC premiums arising from increased payments from FDIC insurance funds as a result of depository institution failures;


▪	the effect of and changes in policies and laws or regulatory agencies (notably the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act);


▪	the effect of the current low interest rate environment or changes in interest rates on our net interest margin and our loan originations and securities holdings;


▪	our ability to keep up with technological changes;


▪	failure or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers;


▪	our ability to comply with the terms of loss sharing agreements with the FDIC;


▪	mergers and acquisitions, including costs or difficulties related to the integration of acquired companies and the wind-down of non-strategic operations that may be greater than expected, such as the risks and uncertainties associated with the Irwin Mortgage Corporation bankruptcy proceedings and other acquired subsidiaries;


▪	the risk that exploring merger and acquisition opportunities may detract from management's time and ability to successfully manage our Company;


▪	expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, and deposit attrition, customer loss and revenue loss following completed acquisitions may be greater than expected;


▪	our ability to increase market share and control expenses;


▪	the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board and the SEC;

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▪	adverse changes in the securities, debt and/or derivatives markets;


▪	our success in recruiting and retaining the necessary personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services;


▪	monetary and fiscal policies of the Board of Governors of the Federal Reserve System (Federal Reserve) and the U.S. government and other governmental initiatives affecting the financial services industry;


▪	our ability to manage loan delinquency and charge-off rates and changes in estimation of the adequacy of the allowance for loan and lease losses; and


▪	the costs and effects of litigation and of unexpected or adverse outcomes in such litigation.

In addition, please refer to our Annual Report on Form 10-K for the year ended December 31, 2011, as well as our other filings with the SEC, for a more detailed discussion of these risks and uncertainties and other factors. Such forward-looking statements are meaningful only on the date when such statements are made, and First Financial undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such a statement is made to reflect the occurrence of unanticipated events.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, foreign exchange rates and equity prices. The primary source of market risk for First Financial is interest rate risk. Interest rate risk is the risk to earnings and the value of equity arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of First Financial's interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, re-price or mature in specified periods. First Financial seeks to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. First Financial's board of directors establishes policy limits with respect to interest rate risk. First Financial's Asset and Liability Committee (ALCO) oversees market risk management, monitoring risk measures, limits and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital.

Interest rate risk for First Financial's Consolidated Balance Sheets consists of repricing, option and basis risks. Repricing risk results from differences in the maturity, or repricing, of interest-bearing assets and liabilities. Option risk in financial instruments arises from embedded options such as loan prepayments, early withdrawal of certificates of deposits and calls on investments and debt instruments that are primarily driven by third party or client behavior. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in a narrowing of the net interest margin. Basis risk is also present in managed rate liabilities, such as interest-bearing checking accounts and savings accounts, where historical pricing relationships to market rates may change due to the level or directional change in market interest rates or competitive pressures.

The interest rate risk position is measured and monitored using income simulation models and economic value of equity (EVE) sensitivity analysis that capture both short-term and long-term interest rate risk exposure. Income simulation involves forecasting net interest income (NII) under a variety of interest rate scenarios including instantaneous shocks. First Financial uses EVE sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest-rate scenarios.

Presented below is the estimated impact on First Financial’s NII and EVE position as of June 30, 2012, assuming immediate, parallel shifts in interest rates:



	% Change from Base Case for Immediate Parallel Changes in Rates
	-100 BP ⁽¹⁾		+100 BP		+200 BP
NII-Year 1	(8.42	)%	0.42	%	3.72	%
NII-Year 2	(9.41	)%	2.66	%	7.23	%
EVE	(17.48	)%	2.94	%	7.98	%

(1)Because certain current interest rates are at or below 1.00%, the 100 basis point downward shock assumes that certain corresponding interest rates approach an implied floor that, in effect, reflects a decrease of less than the full 100 basis point downward shock.

Modeling the sensitivity of NII and EVE to changes in market interest rates is highly dependent on the assumptions incorporated into the modeling process. These assumptions are periodically reviewed in the context of balance sheet changes, product offerings, external economic factors and anticipated client behavior. First Financial modified its net interest income base-case scenario by assuming a static balance sheet utilizing market expectations of interest rates in forward periods during the first quarter 2012, whereas previously the Company's base-case scenario incorporated balance sheet growth while utilizing static interest rates. In addition, the Company internally evaluates the impact of yield curve twist scenarios (i.e. flattening, steepening and inversions of the yield curve) on NII and EVE. First Financial's projected results for earnings at risk and long-term EVE indicate the Company remains in a modestly asset-sensitive position, which is consistent with prior results. First Financial is managing its balance sheet with a bias toward asset sensitivity given the outlook for future interest rates.

The interest rate risk analysis provides a framework as to what First Financial's overall sensitivity is as of the Company's most recent reported position. Management strategies may impact future reporting periods, as our actual results may differ from simulated results due to the timing, magnitude and frequency of interest rate changes, the difference between actual experience, and the characteristics assumed, as well as changes in market conditions. Market based prepayment speeds are factored into the analysis for loan and securities portfolios. Deposit premiums and rate sensitivity for transactional deposit accounts are modeled based on both historical experience and external industry studies. Due to the current low interest rate environment,

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funding rates on deposit and wholesale funding instruments were not reduced below 0.0% in the down 100 basis points scenario. First Financial continues to refine the assumptions used in its interest rate risk modeling.

See also “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations—Net Interest Income.”

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15 of the Securities Exchange Act of 1934, that are designed to cause the material information required to be disclosed by First Financial in the reports it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized, and reported to the extent applicable within the time periods required by the Securities and Exchange Commission’s rules and forms. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

As of the end of the period covered by this report, First Financial performed an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

No changes were made to the Corporation’s internal control over financial reporting (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II-OTHER INFORMATION


Item 1.	Legal Proceedings.

Except as set forth below, there have been no material changes to the disclosure in response to "Part I - Item 3. Legal Proceedings" in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

With respect to the matter titled The Western and Southern Life Insurance Company, et al., vs. DLJ Mortgage Capital, Inc., et. al, Hamilton County, Ohio, Court of Common Pleas, Case No. A1105352, on April 10, 2012, plaintiffs voluntarily dismissed, without prejudice, the claims against IHE Funding Corporation II, a former Irwin Union Bank-related entity acquired by First Financial Bank from the FDIC as receiver for Irwin Union Bank and Trust Company. Plaintiffs did not dismiss claims against any other defendants. Because the claims were dismissed without prejudice, the plaintiffs are free to re-file an action at a later date.


Item 1A.	Risk Factors.

There are a number of factors that may adversely affect the Company's business, financial results, or stock price. See "Risk Factors" as disclosed in response to "Item 1A. to Part I - Risk Factors" of Form 10-K for the year ended December 31, 2011.

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Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds


(c)	The following table shows the total number of shares repurchased in the second quarter of 2012.

Issuer Purchases of Equity Securities



	(a)	(b)		(c)	(d)
Period	Total Number Of Shares Purchased ⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans ⁽²⁾	Maximum Number of Shares that may yet be purchased Under the Plans
April 1 to April 30, 2012
Share repurchase program	0	$	0.00	0	4,969,105
Director Fee Stock Plan	2,564	16.91		NA	NA
Stock Plans	5,126	17.70		NA	NA
May 1 to May 31, 2012
Share repurchase program	0	$	0.00	0	4,969,105
Director Fee Stock Plan	0	0.00		0	NA
Stock Plans	11,117	15.75		NA	NA
June 1 to June 30, 2012
Share repurchase program	0	$	0.00	0	4,969,105
Director Fee Stock Plan	0	0.00		0	NA
Stock Plans	0	0.00		0	NA
Total
Share repurchase program	0	$	0.00	0
Director Fee Stock Plan	2,564	$	16.91	NA
Stock Plans	16,243	$	16.36	NA

(1)

The number of shares purchased in column (a) and the average price paid per share in column (b) include the purchase of shares other than through publicly announced plans. The shares purchased other than through publicly announced plans were purchased pursuant to First Financial’s Director Fee Stock Plan, 1999 Stock Option Plan for Non-Employee Directors, 1999 Stock Incentive Plan for Officers and Employees, 2009 Employee Stock Plan, 2009 Non-Employee Director Stock Plan and First Financial Bancorp. 2012 Stock Plan (the last five plans are referred to hereafter as the Stock Plans). The table shows the number of shares purchased pursuant to those plans and the average price paid per share. The purchases for the Director Fee Stock Plan were made in open-market transactions. Under the Stock Plans, shares were purchased from plan participants at the then current market value in satisfaction of stock option exercise prices.


(2)	First Financial has one remaining previously announced stock repurchase plan under which it is currently authorized to purchase shares of its common stock. The plan has no expiration date. The table that follows provides additional information regarding this plan. No shares were repurchased under this plan in 2012.



Announcement Date	Total Shares Approved for Repurchase	Total Shares Repurchased Under the Plan	Expiration Date
1/25/2000	7,507,500	2,538,395	None

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Item 6. Exhibits



(a)	Exhibits:

Exhibit Number
31.1		Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.

31.2		Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.

32.1		Certification of Periodic Financial Report by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith.

32.2		Certification of Periodic Financial Report by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith.

101.1		Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2012, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements, as blocks of text and in detail*.

First Financial will furnish, without charge, to a security holder upon request a copy of the documents and will furnish any other Exhibit upon payment of reproduction costs. Unless as otherwise noted, documents incorporated by reference involve File No. 000-12379.


*	As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



		FIRST FINANCIAL BANCORP.
		(Registrant)

/s/ J. Franklin Hall		/s/ John M. Gavigan
J. Franklin Hall		John M. Gavigan
Executive Vice President, Chief Financial Officer		First Vice President and Corporate Controller
and Chief Operating Officer		(Principal Accounting Officer)

Date	8/7/2012	Date	8/7/2012