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EX-32.2 - EXHIBIT 32.2 - FIRST FINANCIAL BANCORP /OH/q1-2017331ex322.htm
EX-32.1 - EXHIBIT 32.1 - FIRST FINANCIAL BANCORP /OH/q1-2017331ex321.htm
EX-31.2 - EXHIBIT 31.2 - FIRST FINANCIAL BANCORP /OH/q1-2017331ex312.htm
EX-31.1 - EXHIBIT 31.1 - FIRST FINANCIAL BANCORP /OH/q1-2017331ex311.htm

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                                           March 31, 2017                                                   

OR

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 001-34762
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 Data 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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.

Large accelerated filer x
Accelerated filer o
 
 
Non-accelerated filer o
Smaller reporting company o
 
 
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 5/4/2017
Common stock, No par value
 
62,130,532




FIRST FINANCIAL BANCORP.

INDEX


 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Glossary of Abbreviations and Acronyms

First Financial has identified the following list of abbreviations and acronyms that are used in the Notes to Consolidated Financial Statements and the Management's Discussion and Analysis of Financial Condition and Results of Operations.

the Act
Private Securities Litigation Reform Act
 
Fair Value Topic
FASB ASC Topic 825, Financial Instruments
ALLL
Allowance for loan and lease losses
 
FDIC
Federal Deposit Insurance Corporation
ASC
Accounting standards codification
 
FHLB
Federal Home Loan Bank
ASU
Accounting standards update
 
First Financial
First Financial Bancorp.
ATM
Automated teller machine
 
Form 10-K
First Financial Bancorp. Annual Report on Form 10-K
Bank
First Financial Bank
 
GAAP
U.S. Generally Accepted Accounting Principles
Basel III
Basel Committee regulatory capital reforms, Third Basel Accord
 
IRLC
Interest Rate Lock Commitment
Bp/bps
Basis point(s)
 
N/A
Not applicable
CDs
Certificates of deposit
 
NII
Net interest income
Company
First Financial Bancorp.
 
Oak Street
Oak Street Holdings Corporation
ERM
Enterprise Risk Management
 
OREO
Other real estate owned
EVE
Economic value of equity
 
SEC
United States Securities and Exchange Commission
FASB
Financial Accounting Standards Board
 
TDR
Troubled debt restructuring
 
 
 
 
 





PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

 
March 31,
2017
 
December 31,
2016
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
117,914

 
$
121,598

Interest-bearing deposits with other banks
39,058

 
82,450

Investment securities available-for-sale, at fair value (amortized cost $1,223,188 at March 31, 2017 and $1,045,337 at December 31, 2016)
1,220,046

 
1,039,870

Investment securities held-to-maturity (fair value $732,024 at March 31, 2017 and $763,575 at December 31, 2016)
730,796

 
763,254

Other investments
50,996

 
51,077

Loans held for sale
7,657

 
13,135

Loans and leases
 
 
 
Commercial and industrial
1,779,635

 
1,781,948

Lease financing
88,888

 
93,108

Construction real estate
446,332

 
399,434

Commercial real estate
2,398,235

 
2,427,577

Residential real estate
486,601

 
500,980

Home equity
458,974

 
460,388

Installment
52,063

 
50,639

Credit card
43,354

 
43,408

Total loans and leases
5,754,082

 
5,757,482

Less:  Allowance for loan and lease losses
56,326

 
57,961

Net loans and leases
5,697,756

 
5,699,521

Premises and equipment
131,808

 
131,579

Goodwill and other intangibles
210,324

 
210,625

Accrued interest and other assets
324,815

 
324,858

Total assets
$
8,531,170

 
$
8,437,967

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Interest-bearing demand
$
1,494,892

 
$
1,513,771

Savings
2,284,821

 
2,142,189

Time
1,202,563

 
1,321,843

Total interest-bearing deposits
4,982,276

 
4,977,803

Noninterest-bearing
1,547,600

 
1,547,985

Total deposits
6,529,876

 
6,525,788

Federal funds purchased and securities sold under agreements to repurchase
52,484

 
120,212

Federal Home Loan Bank short-term borrowings
806,700

 
687,700

Total short-term borrowings
859,184

 
807,912

Long-term debt
119,629

 
119,589

Total borrowed funds
978,813

 
927,501

Accrued interest and other liabilities
142,416

 
119,454

Total liabilities
7,651,105

 
7,572,743

 
 
 
 
Shareholders' equity
 

 
 

Common stock - no par value
 

 
 

Authorized - 160,000,000 shares; Issued - 68,730,731 shares in 2017 and 2016
567,911

 
570,382

Retained earnings
451,073

 
437,188

Accumulated other comprehensive loss
(26,639
)
 
(28,443
)
Treasury stock, at cost, 6,596,446 shares in 2017 and 6,751,179 shares in 2016
(112,280
)
 
(113,903
)
Total shareholders' equity
880,065

 
865,224

Total liabilities and shareholders' equity
$
8,531,170

 
$
8,437,967


See Notes to Consolidated Financial Statements.


1


FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)

 
Three months ended
 
March 31,
 
2017
 
2016
Interest income
 
 
 
Loans, including fees
$
66,868

 
$
63,399

Investment securities
 
 
 
Taxable
11,608

 
11,373

Tax-exempt
1,353

 
1,162

Total interest on investment securities
12,961

 
12,535

Other earning assets
(1,001
)
 
(1,139
)
Total interest income
78,828

 
74,795

Interest expense
 
 
 
Deposits
6,925

 
5,530

Short-term borrowings
1,432

 
1,170

Long-term borrowings
1,539

 
1,540

Total interest expense
9,896

 
8,240

Net interest income
68,932

 
66,555

Provision for loan and lease losses
367

 
1,655

Net interest income after provision for loan and lease losses
68,565

 
64,900

Noninterest income
 
 
 
Service charges on deposit accounts
4,644

 
4,381

Trust and wealth management fees
3,747

 
3,440

Bankcard income
3,135

 
2,882

Client derivative fees
1,103

 
1,095

Net gains from sales of loans
1,216

 
1,181

Net gains on sales of investment securities
516

 
24

Other
3,003

 
2,509

Total noninterest income
17,364

 
15,512

Noninterest expenses
 
 
 
Salaries and employee benefits
31,750

 
29,615

Net occupancy
4,515

 
4,957

Furniture and equipment
2,177

 
2,213

Data processing
3,298

 
2,718

Marketing
510

 
1,065

Communication
447

 
481

Professional services
1,758

 
1,813

State intangible tax
721

 
639

FDIC assessments
932

 
1,132

Loss (gain) - other real estate owned
24

 
(190
)
Other
4,913

 
6,277

Total noninterest expenses
51,045

 
50,720

Income before income taxes
34,884

 
29,692

Income tax expense
10,470

 
9,878

Net income
$
24,414

 
$
19,814

Net earnings per common share - basic
$
0.40

 
$
0.32

Net earnings per common share - diluted
$
0.39

 
$
0.32

Cash dividends declared per share
$
0.17

 
$
0.16

Average common shares outstanding - basic
61,398,414

 
61,036,797

Average common shares outstanding - diluted
62,140,384

 
61,840,247


See Notes to Consolidated Financial Statements.

2



FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
 
 
 
 
Three months ended
 
March 31,
 
2017
 
2016
Net income
$
24,414

 
$
19,814

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gains (losses) on investment securities arising during the period
1,487

 
7,043

Change in retirement obligation
189

 
200

Unrealized gain (loss) on derivatives
128

 
128

Other comprehensive income (loss)
1,804

 
7,371

Comprehensive income
$
26,218

 
$
27,185

 
 
 
 
                   See Notes to Consolidated Financial Statements.


3


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
Balance at January 1, 2016
68,730,731

 
$
571,155

 
$
388,240

 
$
(30,580
)
 
(7,089,051
)
 
$
(119,439
)
 
$
809,376

Net income
 

 
 
 
19,814

 
 
 
 
 
 
 
19,814

Other comprehensive income (loss)
 
 
 
 
 
 
7,371

 
 
 
 
 
7,371

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock at $0.16 per share
 
 
 
 
(9,830
)
 
 
 
 
 
 
 
(9,830
)
Excess tax benefit on share-based compensation
 
 
105

 
 
 
 
 
 
 
 
 
105

Exercise of stock options, net of shares purchased
 
 
(85
)
 
 
 
 
 
9,937

 
167

 
82

Restricted stock awards, net of forfeitures
 
 
(4,685
)
 
 
 
 
 
203,410

 
3,347

 
(1,338
)
Share-based compensation expense
 
 
1,007

 
 
 
 
 
 
 
 
 
1,007

Balance at March 31, 2016
68,730,731

 
$
567,497

 
$
398,224

 
$
(23,209
)
 
(6,875,704
)
 
$
(115,925
)
 
$
826,587

Balance at January 1, 2017
68,730,731

 
$
570,382

 
$
437,188

 
$
(28,443
)
 
(6,751,179
)
 
$
(113,903
)
 
$
865,224

Net income
 
 
 
 
24,414

 
 
 
 
 
 
 
24,414

Other comprehensive income (loss)
 
 
 
 
 
 
1,804

 
 
 
 
 
1,804

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock at $0.17 per share
 
 
 
 
(10,529
)
 
 
 
 
 
 
 
(10,529
)
Warrant Exercises
 
 
(25
)
 
 
 
 
 
1,484

 
25

 
0

Exercise of stock options, net of shares purchased
 
 
(377
)
 
 
 
 
 
34,037

 
574

 
197

Restricted stock awards, net of forfeitures
 
 
(3,556
)
 
 
 
 
 
119,212

 
1,024

 
(2,532
)
Share-based compensation expense
 
 
1,487

 
 
 
 
 
 
 
 
 
1,487

Balance at March 31, 2017
68,730,731

 
$
567,911

 
$
451,073

 
$
(26,639
)
 
(6,596,446
)
 
$
(112,280
)
 
$
880,065


See Notes to Consolidated Financial Statements.

4


FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Three months ended
 
March 31,
 
2017
 
2016
Operating activities
 
 
 
Net income
$
24,414

 
$
19,814

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
367

 
1,655

Depreciation and amortization
3,260

 
3,287

Stock-based compensation expense
1,487

 
1,007

Pension expense (income)
(319
)
 
(225
)
Net amortization (accretion) on investment securities
2,176

 
1,911

Net gains on sales of investment securities
(516
)
 
(24
)
Originations of loans held for sale
(32,085
)
 
(42,935
)
Net gains from sales of loans held for sale
(1,216
)
 
(1,181
)
Proceeds from sales of loans held for sale
38,633

 
49,381

Deferred income taxes
75

 
0

Decrease (increase) cash surrender value of life insurance
(448
)
 
(493
)
Decrease (increase) in interest receivable
(1,735
)
 
(2,471
)
Decrease (increase) in indemnification asset
1,244

 
1,374

(Decrease) increase in interest payable
(1,424
)
 
(1,353
)
Decrease (increase) in other assets
957

 
(15,305
)
(Decrease) increase in other liabilities
(3,082
)
 
(3,923
)
Net cash provided by (used in) operating activities
31,788

 
10,519

 
 
 
 
Investing activities
 

 
 

Proceeds from sales of securities available-for-sale
22,239

 
42,696

Proceeds from calls, paydowns and maturities of securities available-for-sale
49,418

 
31,974

Purchases of securities available-for-sale
(219,761
)
 
(36,851
)
Proceeds from calls, paydowns and maturities of securities held-to-maturity
38,497

 
22,881

Purchases of securities held-to-maturity
(14,441
)
 
0

Net decrease (increase) in interest-bearing deposits with other banks
43,392

 
18,152

Net decrease (increase) in loans and leases
1,257

 
(117,755
)
Proceeds from disposal of other real estate owned
1,162

 
2,035

Purchases of premises and equipment
(3,066
)
 
(4,900
)
Net cash provided by (used in) investing activities
(81,303
)
 
(41,768
)
 
 
 
 
Financing activities
 

 
 

Net (decrease) increase in total deposits
4,088

 
(2,847
)
Net (decrease) increase in short-term borrowings
51,272

 
31,474

Cash dividends paid on common stock
(9,811
)
 
(9,760
)
Proceeds from exercise of stock options
282

 
111

Excess tax benefit on share-based compensation
0

 
105

Net cash provided by (used in) financing activities
45,831

 
19,083

 
 
 
 
Cash and due from banks
 

 
 

Change in cash and due from banks
(3,684
)
 
(12,166
)
Cash and due from banks at beginning of period
121,598

 
114,841

Cash and due from banks at end of period
$
117,914

 
$
102,675


See Notes to Consolidated Financial Statements.

5


FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

NOTE 1:  BASIS OF PRESENTATION

The Consolidated Financial Statements of First Financial Bancorp., 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. All significant intercompany transactions and accounts have been eliminated in consolidation.  Certain reclassifications of prior periods' amounts have been made to conform to current year presentation. Such reclassifications had no effect on net earnings.
   
The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes.  These estimates, assumptions and judgments are inherently subjective and may be susceptible to significant change.  Actual realized amounts could differ materially from these 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 Form 10-K for the year ended December 31, 2016.  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 it is suggested that these interim statements be read in conjunction with 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, 2016 has been derived from the audited financial statements in the Company’s 2016 Form 10-K.

NOTE 2:  RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS

In May 2014, the FASB issued an update (ASU 2014-09, Revenue from Contracts with Customers) which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under the revised standard, an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. Certain of the ASU’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities, such as sales of property, plant, and equipment; real estate; or intangible assets. The ASU also requires significantly expanded disclosures about revenue recognition. The provisions of ASU 2014-09 become effective for interim and annual reporting periods beginning after December 15, 2017. First Financial's revenue is balanced between net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new guidance, and noninterest income. First Financial is currently evaluating the impact of this update and does not anticipate that it will have a material impact on its Consolidated Financial Statements, however additional disclosures will be required.

In January 2016, the FASB issued an update (ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities) which requires entities to measure many equity investments at fair value and recognize changes in fair value in net income. This update does not apply to equity investments that result in consolidation, those accounted for under the equity method and certain others, and will eliminate use of the available for sale classification for equity securities while providing a new measurement alternative for equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient. The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. First Financial does not anticipate this update will have a material impact on its Consolidated Financial Statements.

In February 2016, the FASB issued an update (ASU 2016-02, Leases) which requires lessees to record most leases on their balance sheet and recognize leasing expenses in the income statement. Operating leases, except for short-term leases that are subject to an accounting policy election, will be recorded on the balance sheet for lessees by establishing a lease liability and corresponding right-of-use asset. The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. Given leases outstanding as of March 31, 2017, First Financial does not expect this ASU to have a material impact on the income statement, but does anticipate an increase in the

6


Company's assets and liabilities. Decisions to repurchase, modify or renew leases prior to the implementation date will impact this level of materiality.

In March 2016, the FASB issued an update (ASU 2016-05, Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships) which clarifies that the novation of a derivative contract in a hedge accounting relationship does not, in and of itself, require de-designation of that hedge accounting relationship. In the event of a novation, hedge accounting relationships could continue if all other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The guidance in this ASU became effective in the first quarter 2017 and did not have a material impact on the Consolidated Financial Statements.

In March 2016, the FASB issued an update (ASU 2016-06, Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments) which clarifies that an assessment of whether an embedded contingent put or call option is clearly and closely related to the debt host requires only an analysis of the four-step decision sequence in ASC 815-15-25-42. Entities are required to apply the guidance to existing debt instruments (or hybrid financial instruments that are determined to have a debt host) using a modified retrospective transition method as of the period of adoption. The guidance in this ASU became effective in the first quarter 2017 and did not have a material impact on the Consolidated Financial Statements.

In March 2016, the FASB issued an update (ASU 2016-07, Investments-Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting) which eliminates the requirement to retrospectively apply the equity method when an investment that had been accounted for utilizing another method qualifies for use of the equity method. The guidance in this ASU became effective in the first quarter 2017 and did not have a material impact on the Consolidated Financial Statements.

In March 2016, the FASB issued an update (ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting) which requires recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled (i.e., Additional Paid-in-Capital pools will be eliminated). The guidance in this ASU became effective in the first quarter 2017. Adoption of this guidance resulted in a $1.1 million reduction in income tax expense during the first quarter of 2017.

In June 2016, the FASB issued an update (ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments) which significantly changes how entities are required to measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This update will replace the current incurred loss approach for estimating credit losses with an expected loss model for instruments measured at amortized cost, including loans and leases. Expected credit losses are required to be based on amortized cost and reflect losses expected over the remaining contractual life of the asset. Management is expected to consider any available information relevant to assessing the collectability of contractual cash flows, such as information about past events, current conditions, voluntary prepayments and reasonable and supportable forecasts, when developing expected credit loss estimates.

In addition to the new framework for calculating the ALLL, this update requires allowances for available-for-sale debt securities rather than a reduction of the security's carrying amount under the current other-than-temporary impairment model. This update also simplifies the accounting model for purchased credit-impaired debt securities and loans and will require new and updated footnote disclosures.

The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for all entities for interim and annual reporting periods beginning after December 15, 2018. First Financial is currently evaluating the impact of this update on its Consolidated Financial Statements.

In August 2016, the FASB issued an update (ASU 2016-15 Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments) which may change how an entity classifies certain cash receipts and cash payments on its statement of cash flows to reduce diversity in practice. The update also provides guidance on when an entity should separate cash flows and classify them into more than one class and when an entity should classify the aggregate of those cash flows into a single class based on the predominance principle. The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. First Financial does not anticipate this update will have a material impact on its Consolidated Financial Statements.

In January 2017, the FASB issued an update (ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business) which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update also provides a

7


more robust framework to use in determining when a set of assets and activities is a business. The guidance in this ASU will become effective for annual reporting periods beginning after December 15, 2017, including interim periods within those periods, and should be applied prospectively on or after the effective date, with early adoption permitted. First Financial does not anticipate this update will have a material impact on its Consolidated Financial Statements.

In January 2017, the FASB issued an update (ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment) which simplifies the subsequent measurement of goodwill by eliminating Step 2 from goodwill impairment testing. This update requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with any loss recognized not to exceed the total amount of goodwill allocated to that reporting unit. Additionally, the update requires consideration of the income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable, and eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The guidance in this ASU will become effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017. First Financial does not anticipate this update will have a material impact on its Consolidated Financial Statements.

In March 2017, the FASB issued an update (ASU 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of the Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost) which requires disaggregation of the service cost component from the other components of net benefit cost. This update also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The guidance in this ASU will become effective for annual periods beginning after December 15, 2017, with early adoption permitted. First Financial does not anticipate this update will have a material impact on its Consolidated Financial Statements, but will result in updated disclosures.

In March 2017, the FASB issued an update (ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities) which amends the amortization period for certain purchased callable debt securities held at a premium and shortens the amortization period for the premium to the earliest call date rather than as an adjustment of yield over the contractual life of the instrument. This update more closely aligns the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities, as in most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates (that is, the security is trading at a premium) and price securities to maturity when the coupon is below market rates (that is, the security is trading at a discount) in anticipation that the borrower will act in its economic best interest in an attempt to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. The guidance in this ASU will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. First Financial is currently evaluating the impact of this update on its Consolidated Financial Statements.

NOTE 3:  INVESTMENTS

For the three months ended March 31, 2017, proceeds on the sale of $22.2 million of available-for-sale securities resulted in gains of $0.5 million. For the three months ended March 31, 2016, proceeds on the sale of $42.7 million of available-for-sale securities resulted in gains of $0.3 million and $0.3 million losses.

8



The following is a summary of held-to-maturity and available-for-sale investment securities as of March 31, 2017:
  
 
Held-to-maturity
 
Available-for-sale
(Dollars in thousands)
 
Amortized
cost
 
Unrecognized gain
 
Unrecognized loss
 
Fair
value
 
Amortized
cost
 
Unrealized
gain
 
Unrealized
loss
 
Fair
value
U.S. Treasuries
 
$
0

 
$
0

 
$
0

 
$
0

 
$
98

 
$
0

 
$
0

 
$
98

Securities of U.S. government agencies and corporations
 
12,522

 
0

 
(50
)
 
12,472

 
18,512

 
0

 
(67
)
 
18,445

Mortgage-backed securities - residential
 
191,301

 
2,204

 
(1,010
)
 
192,495

 
243,509

 
969

 
(2,855
)
 
241,623

Mortgage-backed securities - commercial
 
269,507

 
2,822

 
(1,923
)
 
270,406

 
159,575

 
294

 
(747
)
 
159,122

Collateralized mortgage obligations
 
181,505

 
1,155

 
(1,352
)
 
181,308

 
275,110

 
686

 
(2,177
)
 
273,619

Obligations of state and other political subdivisions
 
75,961

 
444

 
(1,062
)
 
75,343

 
104,741

 
1,711

 
(1,082
)
 
105,370

Asset-backed securities
 
0

 
0

 
0

 
0

 
347,118

 
869

 
(1,006
)
 
346,981

Other securities
 
0

 
0

 
0

 
0

 
74,525

 
1,039

 
(776
)
 
74,788

Total
 
$
730,796

 
$
6,625

 
$
(5,397
)
 
$
732,024

 
$
1,223,188

 
$
5,568

 
$
(8,710
)
 
$
1,220,046


The following is a summary of held-to-maturity and available-for-sale investment securities as of December 31, 2016:
  
 
Held-to-maturity
 
Available-for-sale
(Dollars in thousands)
 
Amortized
cost
 
Unrecognized gain
 
Unrecognized
loss
 
Fair
value
 
Amortized
cost
 
Unrealized
gain
 
Unrealized
loss
 
Fair
value
U.S. Treasuries
 
$
0

 
$
0

 
$
0

 
$
0

 
$
98

 
$
0

 
$
(1
)
 
$
97

Securities of U.S. government agencies and corporations
 
13,011

 
0

 
(110
)
 
12,901

 
7,056

 
0

 
(40
)
 
7,016

Mortgage-backed securities - residential
 
205,522

 
1,740

 
(1,166
)
 
206,096

 
184,960

 
1,175

 
(2,740
)
 
183,395

Mortgage-backed securities - commercial
 
278,728

 
3,254

 
(1,817
)
 
280,165

 
154,239

 
188

 
(826
)
 
153,601

Collateralized mortgage obligations
 
195,408

 
1,125

 
(1,476
)
 
195,057

 
232,701

 
634

 
(2,321
)
 
231,014

Obligations of state and other political subdivisions
 
70,585

 
117

 
(1,346
)
 
69,356

 
96,934

 
1,461

 
(1,514
)
 
96,881

Asset-backed securities
 
0

 
0

 
0

 
0

 
322,708

 
517

 
(2,013
)
 
321,212

Other securities
 
0

 
0

 
0

 
0

 
46,641

 
741

 
(728
)
 
46,654

Total
 
$
763,254

 
$
6,236

 
$
(5,915
)
 
$
763,575

 
$
1,045,337

 
$
4,716

 
$
(10,183
)
 
$
1,039,870


The following table provides a summary of investment securities by contractual maturity as of March 31, 2017, except for mortgage-backed securities, residential and commercial, collateralized mortgage obligations and asset-backed securities, which are shown as single totals, due to the unpredictability of the timing in principal repayments.
 
Held-to-maturity
 
Available-for-sale
(Dollars in thousands)
Amortized
cost
 
Fair
value
 
Amortized
cost
 
Fair
value
By Contractual Maturity:
 
 
 
 
 
 
 
Due in one year or less
$
207

 
$
207

 
$
1,199

 
$
1,203

Due after one year through five years
3,727

 
3,730

 
22,743

 
22,702

Due after five years through ten years
2,692

 
2,764

 
50,666

 
51,339

Due after ten years
81,857

 
81,114

 
123,268

 
123,457

Mortgage-backed securities - residential
191,301

 
192,495

 
243,509

 
241,623

Mortgage-backed securities - commercial
269,507

 
270,406

 
159,575

 
159,122

Collateralized mortgage obligations
181,505

 
181,308

 
275,110

 
273,619

Asset-backed securities
0

 
0

 
347,118

 
346,981

Total
$
730,796

 
$
732,024

 
$
1,223,188

 
$
1,220,046



9


Gains and losses on debt securities are generally due to fluctuations in 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 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 and payment performance, as well as 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 securities temporarily impaired prior to maturity or recovery of the recorded value. First Financial had no other than temporary impairment related to its investment securities portfolio as of March 31, 2017 or December 31, 2016.

As of March 31, 2017, the Company's investment securities portfolio consisted of 723 securities, of which 222 were in an unrealized loss position. As of December 31, 2016, the Company's investment securities portfolio consisted of 706 securities, of which 255 securities were in an unrealized loss position.

The following tables provide the fair value and gross unrealized losses on investment securities in an unrealized loss position, aggregated by investment category and the length of time the individual securities have been in a continuous loss position:
 
 
March 31, 2017
 
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in thousands)
 
Fair
value
 
Unrealized
loss
 
Fair
value
 
Unrealized
loss
 
Fair
value
 
Unrealized
loss
U.S. Treasuries
 
$
98

 
$
0

 
$
0

 
$
0

 
$
98

 
$
0

Securities of U.S. Government agencies and corporations
 
26,987

 
(117
)
 
0

 
0

 
26,987

 
(117
)
Mortgage-backed securities - residential
 
222,540

 
(3,597
)
 
9,283

 
(268
)
 
231,823

 
(3,865
)
Mortgage-backed securities - commercial
 
132,085

 
(1,300
)
 
62,069

 
(1,371
)
 
194,154

 
(2,671
)
Collateralized mortgage obligations
 
202,529

 
(2,659
)
 
34,359

 
(870
)
 
236,888

 
(3,529
)
Obligations of state and other political subdivisions
 
90,403

 
(2,055
)
 
11,484

 
(88
)
 
101,887

 
(2,143
)
Asset-backed securities
 
51,352

 
(429
)
 
64,705

 
(577
)
 
116,057

 
(1,006
)
Other securities
 
12,123

 
(370
)
 
15,479

 
(406
)
 
27,602

 
(776
)
Total
 
$
738,117

 
$
(10,527
)
 
$
197,379

 
$
(3,580
)
 
$
935,496

 
$
(14,107
)

 
 
December 31, 2016
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(Dollars in thousands)
 
value
 
loss
 
value
 
loss
 
value
 
loss
U.S. Treasuries
 
$
97

 
$
(1
)
 
$
0

 
$
0

 
$
97

 
$
(1
)
Securities of U.S. Government agencies and corporations
 
19,917

 
(150
)
 
0

 
0

 
19,917

 
(150
)
Mortgage-backed securities - residential
 
180,654

 
(3,621
)
 
9,890

 
(285
)
 
190,544

 
(3,906
)
Mortgage-backed securities - commercial
 
123,122

 
(1,200
)
 
65,007

 
(1,443
)
 
188,129

 
(2,643
)
Collateralized mortgage obligations
 
201,305

 
(2,882
)
 
42,314

 
(915
)
 
243,619

 
(3,797
)
Obligations of state and other political subdivisions
 
94,632

 
(2,710
)
 
12,023

 
(150
)
 
106,655

 
(2,860
)
Asset-backed securities
 
116,057

 
(764
)
 
92,629

 
(1,249
)
 
208,686

 
(2,013
)
Other securities
 
7,746

 
(237
)
 
21,357

 
(491
)
 
29,103

 
(728
)
Total
 
$
743,530

 
$
(11,565
)
 
$
243,220

 
$
(4,533
)
 
$
986,750

 
$
(16,098
)




10


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

NOTE 4:  LOANS AND LEASES

First Financial offers clients a variety of commercial and consumer loan and lease products with distinct interest rates and payment terms. Lending activities are primarily concentrated in states where the Bank currently operates banking centers (Ohio, Indiana and Kentucky). Additionally, First Financial has two national lending platforms, one that provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and another that provides loans secured by commissions and cash collateral accounts primarily to insurance agents and brokers. Commercial loan categories include commercial and industrial, commercial real estate, construction real estate and lease financing. Consumer loan categories include residential real estate, home equity, installment and credit card.

Credit Quality. To facilitate the monitoring of credit quality for commercial loans, and for purposes of determining an appropriate ALLL, First Financial utilizes the following categories of credit grades:

Pass - Higher quality loans that do not fit any of the other categories described below.

Special Mention - First Financial assigns a special mention rating to loans and leases with potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in First Financial's credit position at some future date.

Substandard - First Financial assigns a substandard rating to loans or leases that are inadequately protected by the current sound financial worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans and leases have well-defined weaknesses that jeopardize repayment of the debt. Substandard loans and leases are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not addressed.

Doubtful - First Financial assigns a doubtful rating to loans and leases with all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. 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 previously described are derived from standard regulatory rating definitions and are assigned upon initial approval of credit to borrowers and updated periodically thereafter.

First Financial considers repayment performance to be the best indicator of credit quality for consumer loans. Consumer loans that have principal and interest payments that are past due by 90 days or more are generally classified as nonperforming. Additionally, consumer loans that have been modified in a TDR are classified as nonperforming. Purchased impaired loans are not classified as nonperforming assets as the loans are considered to be performing under FASB ASC Topic 310-30.

Commercial and consumer credit exposure by risk attribute was as follows:
 
 
As of March 31, 2017
 
 
Commercial
 
Real Estate
 
Lease
 
 
(Dollars in thousands)
 
and industrial
 
Construction
 
Commercial
 
financing
 
Total
Pass
 
$
1,730,424

 
$
443,164

 
$
2,302,421

 
$
88,054

 
$
4,564,063

Special Mention
 
18,635

 
322

 
36,768

 
583

 
56,308

Substandard
 
30,576

 
2,846

 
59,046

 
251

 
92,719

Doubtful
 
0

 
0

 
0

 
0

 
0

Total
 
$
1,779,635

 
$
446,332

 
$
2,398,235

 
$
88,888

 
$
4,713,090



11


(Dollars in thousands)
 
Residential
real estate
 
Home equity
 
Installment
 
Credit card
 
Total
Performing
 
$
477,768

 
$
454,625

 
$
51,674

 
$
43,354

 
$
1,027,421

Nonperforming
 
8,833

 
4,349

 
389

 
0

 
13,571

Total
 
$
486,601

 
$
458,974

 
$
52,063

 
$
43,354

 
$
1,040,992


 
 
As of December 31, 2016
 
 
Commercial
 
Real Estate
 
Lease
 
 
(Dollars in thousands)
 
and industrial
 
Construction
 
Commercial
 
financing
 
Total
Pass
 
$
1,725,451

 
$
398,155

 
$
2,349,662

 
$
92,540

 
$
4,565,808

Special Mention
 
18,256

 
1,258

 
15,584

 
108

 
35,206

Substandard
 
38,241

 
21

 
62,331

 
460

 
101,053

Doubtful
 
0

 
0

 
0

 
0

 
0

Total
 
$
1,781,948

 
$
399,434

 
$
2,427,577

 
$
93,108

 
$
4,702,067


(Dollars in thousands)
 
Residential
real estate
 
Home equity
 
Installment
 
Credit card
 
Total
Performing
 
$
491,380

 
$
456,314

 
$
50,202

 
$
43,408

 
$
1,041,304

Nonperforming
 
9,600

 
4,074

 
437

 
0

 
14,111

Total
 
$
500,980

 
$
460,388

 
$
50,639

 
$
43,408

 
$
1,055,415


Delinquency. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the date of the scheduled payment.


12


Loan delinquency, including loans classified as nonaccrual, was as follows:
 
 
As of March 31, 2017
(Dollars in thousands)
 
30 – 59
days
past due
 
60 – 89
days
past due
 
> 90 days
past due
 
Total
past
due
 
Current
 
Subtotal
 
Purchased impaired
 
Total
 
> 90 days
past due
and still
accruing
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
3,407

 
$
3,269

 
$
1,271

 
$
7,947

 
$
1,767,241

 
$
1,775,188

 
$
4,447

 
$
1,779,635

 
$
0

Lease financing
 
0

 
0

 
0

 
0

 
88,888

 
88,888

 
0

 
88,888

 
0

Construction real estate
 
3,129

 
0

 
1,075

 
4,204

 
441,590

 
445,794

 
538

 
446,332

 
0

Commercial real estate
 
1,379

 
8,000

 
2,166

 
11,545

 
2,313,256

 
2,324,801

 
73,434

 
2,398,235

 
0

Residential real estate
 
920

 
171

 
2,218

 
3,309

 
437,737

 
441,046

 
45,555

 
486,601

 
0

Home equity
 
244

 
91

 
1,665

 
2,000

 
454,330

 
456,330

 
2,644

 
458,974

 
0

Installment
 
134

 
11

 
227

 
372

 
50,802

 
51,174

 
889

 
52,063

 
0

Credit card
 
253

 
146

 
96

 
495

 
42,859

 
43,354

 
0

 
43,354

 
96

Total
 
$
9,466

 
$
11,688

 
$
8,718

 
$
29,872

 
$
5,596,703

 
$
5,626,575

 
$
127,507

 
$
5,754,082

 
$
96


 
 
As of December 31, 2016
(Dollars in thousands)
 
30 – 59
days
past due
 
60 – 89
days
past due
 
> 90 days
past due
 
Total
past
due
 
Current
 
Subtotal
 
Purchased impaired
 
Total
 
> 90 days
past due
and still
accruing
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
1,257

 
$
208

 
$
1,339

 
$
2,804

 
$
1,773,939

 
$
1,776,743

 
$
5,205

 
$
1,781,948

 
$
0

Lease financing
 
137

 
0

 
115

 
252

 
92,856

 
93,108

 
0

 
93,108

 
0

Construction real estate
 
0

 
0

 
0

 
0

 
398,877

 
398,877

 
557

 
399,434

 
0

Commercial real estate
 
777

 
134

 
5,589

 
6,500

 
2,339,327

 
2,345,827

 
81,750

 
2,427,577

 
2,729

Residential real estate
 
821

 
37

 
2,381

 
3,239

 
450,631

 
453,870

 
47,110

 
500,980

 
0

Home equity
 
195

 
145

 
1,776

 
2,116

 
456,143

 
458,259

 
2,129

 
460,388

 
0

Installment
 
24

 
1

 
258

 
283

 
49,058

 
49,341

 
1,298

 
50,639

 
0

Other
 
457

 
177

 
142

 
776

 
42,632

 
43,408

 
0

 
43,408

 
142

Total
 
$
3,668

 
$
702

 
$
11,600

 
$
15,970

 
$
5,603,463

 
$
5,619,433

 
$
138,049

 
$
5,757,482

 
$
2,871


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 classified as nonaccrual due to the continued failure to adhere to contractual payment terms by the borrower, coupled with other pertinent factors. When a loan is classified as nonaccrual, the accrual of interest income is discontinued and previously accrued but unpaid interest is reversed. Any payments received while a loan is on nonaccrual status are applied as a reduction to the carrying value of the loan. A loan classified as nonaccrual may return to accrual status if collection of future principal and interest payments is no longer doubtful.

Purchased impaired loans 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 provision for loan and lease losses or prospective yield adjustments.

Troubled Debt Restructurings. A loan modification is considered a TDR when the borrower is experiencing financial difficulty and 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 managed by the Company’s credit administration group for resolution, which may result in foreclosure in the case of real estate.

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


13


First Financial had 236 TDRs totaling $37.8 million at March 31, 2017, including $29.9 million on accrual status and $7.8 million classified as nonaccrual. First Financial had $0.4 million of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs, and the ALLL included reserves of $1.4 million related to TDRs at March 31, 2017. For the three months ended March 31, 2017 and 2016, First Financial charged off $29 thousand and $0.2 million respectively, for the portion of TDRs determined to be uncollectible. Additionally, as of March 31, 2017, approximately $24.3 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year.

First Financial had 247 TDRs totaling $35.4 million at December 31, 2016, including $30.2 million of loans on accrual status and $5.1 million classified as nonaccrual. First Financial had $0.9 million of commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2016, the ALLL included reserves of $1.9 million related to TDRs, and $22.6 million of the accruing TDRs had been performing in accordance with the restructured terms for more than one year.

The following tables provide information on loan modifications classified as TDRs during the three months ended March 31, 2017 and 2016:
 
Three months ended
 
March 31, 2017
 
March 31, 2016
(Dollars in thousands)
Number of loans
 
Pre-modification loan balance
 
Period end balance
 
Number of loans
 
Pre-modification loan balance
 
Period end balance
Commercial and industrial
2

 
$
3,502

 
$
3,441

 
8

 
$
2,083

 
$
2,095

Construction real estate
0

 
0

 
0

 
0

 
0

 
0

Commercial real estate
0

 
0

 
0

 
1

 
42

 
42

Residential real estate
0

 
0

 
0

 
2

 
281

 
247

Home equity
0

 
0

 
0

 
4

 
149

 
140

Installment
0

 
0

 
0

 
2

 
7

 
7

Total
2

 
$
3,502

 
$
3,441

 
17

 
$
2,562

 
$
2,531


The following table provides information on how TDRs were modified during the three months ended March 31, 2017 and 2016:
 
Three months ended
 
March 31,
(Dollars in thousands)
2017
 
2016
Extended maturities
$
625

 
$
486

Adjusted interest rates
2,877

 
0

Combination of rate and maturity changes
0

 
162

Forbearance
0

 
0

Other (1)
0

 
1,883

Total
$
3,502

 
$
2,531

(1) Includes covenant modifications and other concessions, or combination of concessions, that do not consist of interest rate adjustments, forbearance and maturity extensions

First Financial considers repayment performance as an indication of the effectiveness of the Company's loan modifications. Borrowers that are 90 days or more past due on any principal or interest payments, or who prematurely terminate a restructured loan agreement without paying off the contractual principal balance (for example, in a deed-in-lieu arrangement), are considered to be in payment default of the terms of the TDR agreement.


14


For the three months ended March 31, 2017, there were no TDRs for which there was a payment default during the period that occurred within twelve months of the loan modification. For the comparable period in 2016, there were four TDRs with a balance of $0.3 million that experienced a payment default within twelve months of the modification.
 
 
 
 
 
 
 
 
 
Impaired Loans. Loans classified as nonaccrual and loans modified as TDRs are considered impaired. The following table provides information on impaired loans, excluding purchased impaired loans:
(Dollars in thousands)
 
March 31, 2017
 
December 31, 2016
Impaired loans
 
 
 
 
Nonaccrual loans (1)
 
 
 
 
Commercial and industrial
 
$
9,249

 
$
2,419

Lease financing
 
102

 
195

Construction real estate
 
1,075

 
0

Commercial real estate
 
14,324

 
6,098

Residential real estate
 
4,520

 
5,251

Home equity
 
3,571

 
3,400

Installment
 
322

 
367

Credit card
 
0

 
0

Nonaccrual loans (1)
 
33,163

 
17,730

Accruing troubled debt restructurings
 
29,948

 
30,240

Total impaired loans
 
$
63,111

 
$
47,970

(1) Nonaccrual loans include nonaccrual TDRs of $7.8 million and $5.1 million as of March 31, 2017 and December 31, 2016, respectively.

 
Three months ended
 
March 31,
(Dollars in thousands)
2017
 
2016
Interest income effect on impaired loans
 
 
 
Gross amount of interest that would have been recorded under original terms
$
816

 
$
754

Interest included in income
 
 
 
Nonaccrual loans
142

 
76

Troubled debt restructurings
226

 
232

Total interest included in income
368

 
308

Net impact on interest income
$
448

 
$
446


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 is necessary based on the borrower’s overall financial condition, resources and payment record, support from guarantors and the realizable value of any collateral. 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.


15


First Financial's investment in impaired loans was as follows:
 
 
As of March 31, 2017
 
As of December 31, 2016
(Dollars in thousands)
 
Current balance
 
Contractual
principal
balance
 
Related
allowance
 
Current balance
 
Contractual
principal
balance
 
Related
allowance
Loans with no related allowance recorded
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
19,080

 
$
20,250

 
$
0

 
$
12,134

 
$
12,713

 
$
0

Lease financing
 
102

 
102

 
0

 
195

 
195

 
0

Construction real estate
 
1,075

 
1,075

 
0

 
0

 
0

 
0

Commercial real estate
 
27,646

 
30,475

 
0

 
12,232

 
14,632

 
0

Residential real estate
 
7,653

 
8,941

 
0

 
8,412

 
9,648

 
0

Home equity
 
4,249

 
5,739

 
0

 
3,973

 
5,501

 
0

Installment
 
389

 
563

 
0

 
437

 
603

 
0

Total
 
60,194

 
67,145

 
0

 
37,383

 
43,292

 
0

 
 
 
 
 
 
 
 
 
 
 
 
 
Loans with an allowance recorded
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
1,118

 
1,118

 
332

 
1,069

 
1,071

 
550

Lease financing
 
0

 
0

 
0

 
0

 
0

 
0

Construction real estate
 
0

 
0

 
0

 
0

 
0

 
0

Commercial real estate
 
519

 
519

 
56

 
8,228

 
8,277

 
593

Residential real estate
 
1,180

 
1,182

 
179

 
1,189

 
1,189

 
179

Home equity
 
100

 
100

 
2

 
101

 
101

 
2

Installment
 
0

 
0

 
0

 
0

 
0

 
0

Total
 
2,917

 
2,919

 
569

 
10,587

 
10,638

 
1,324

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 

 
 

 
 

 
 
 
 
 
 
Commercial and industrial
 
20,198

 
21,368

 
332

 
13,203

 
13,784

 
550

Lease financing
 
102

 
102

 
0

 
195

 
195

 
0

Construction real estate
 
1,075

 
1,075

 
0

 
0

 
0

 
0

Commercial real estate
 
28,165

 
30,994

 
56

 
20,460

 
22,909

 
593

Residential real estate
 
8,833

 
10,123

 
179

 
9,601

 
10,837

 
179

Home equity
 
4,349

 
5,839

 
2

 
4,074

 
5,602

 
2

Installment
 
389

 
563

 
0

 
437

 
603

 
0

Total
 
$
63,111

 
$
70,064

 
$
569

 
$
47,970

 
$
53,930

 
$
1,324



16


First Financial's average impaired loans by class and interest income recognized by class was as follows:
 
 
 
 
 
 
 
 
 
Three months ended
 
March 31, 2017
 
March 31, 2016
(Dollars in thousands)
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Loans with no related allowance recorded
 
 
 
 
 
 
 
Commercial and industrial
$
15,607

 
$
109

 
$
14,965

 
$
74

Lease financing
149

 
1

 
122

 
0

Construction real estate
538

 
0

 
0

 
0

Commercial real estate
19,939

 
160

 
15,152

 
70

Residential real estate
8,033

 
46

 
7,287

 
46

Home equity
4,111

 
24

 
5,455

 
21

Installment
413

 
2

 
236

 
1

Total
48,790

 
342

 
43,217

 
212

 
 
 
 
 
 
 
 
Loans with an allowance recorded
 
 
 
 
 
 
 
Commercial and industrial
1,094

 
13

 
983

 
9

Lease financing
0

 
0

 
0

 
0

Construction real estate
0

 
0

 
0

 
0

Commercial real estate
4,374

 
5

 
8,663

 
77

Residential real estate
1,185

 
7

 
1,542

 
9

Home equity
101

 
1

 
101

 
1

Installment
0

 
0

 
0

 
0

Total
6,754

 
26

 
11,289

 
96

 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
Commercial and industrial
16,701

 
122

 
15,948

 
83

Lease financing
149

 
1

 
122

 
0

Construction real estate
538

 
0

 
0

 
0

Commercial real estate
24,313

 
165

 
23,815

 
147

Residential real estate
9,218

 
53

 
8,829

 
55

Home equity
4,212

 
25

 
5,556

 
22

Installment
413

 
2

 
236

 
1

Total
$
55,544

 
$
368

 
$
54,506

 
$
308




17


OREO. OREO consists of properties acquired by the Company primarily through the loan foreclosure or repossession process, or other resolution activity that results in partial or total satisfaction of problem loans.

Changes in OREO were as follows:
 
 
Three months ended
 
 
March 31,
(Dollars in thousands)
 
2017
 
2016
Balance at beginning of period
 
$
6,284

 
$
13,254

Additions
 
 
 
 
Commercial and industrial
 
122

 
786

Residential real estate
 
165

 
122

Total additions
 
287

 
908

Disposals
 
 

 
 
Commercial and industrial
 
(925
)
 
(200
)
Residential real estate
 
(237
)
 
(1,835
)
Total disposals
 
(1,162
)
 
(2,035
)
Valuation adjustment
 
 

 
 
Commercial and industrial
 
(46
)
 
(117
)
Residential real estate
 
(63
)
 
(71
)
Total valuation adjustment
 
(109
)
 
(188
)
Balance at end of period
 
$
5,300

 
$
11,939


The preceding table includes OREO subject to loss sharing agreements of $0.5 million and $38 thousand at March 31, 2017 and 2016, respectively.

FDIC indemnification asset. First Financial recorded an FDIC indemnification asset of $10.8 million and $12.0 million on the consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, respectively. The FDIC indemnification asset results from the loss sharing agreements entered into in conjunction with First Financial's FDIC-assisted transactions, and represents expected reimbursements from the FDIC for losses on covered assets.
 
 
 
 
 
 
The accounting for the FDIC indemnification asset is closely related to the accounting for the underlying, indemnified assets as well as the on-going assessment of the collectibility of the indemnification asset. The primary activities impacting the FDIC indemnification asset are FDIC claims, amortization, FDIC loss sharing income and accelerated discount. For a detailed discussion on the indemnification asset, please refer to the Loans and Leases note in the 2016 Form 10-K.

NOTE 5:  ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans and leases. Management maintains the ALLL at a level that it considers sufficient to absorb probable incurred loan and lease losses inherent in the portfolio. Management determines the adequacy of the ALLL 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.

The ALLL is increased by provision expense and decreased by charge-offs, net of recoveries of amounts previously charged-off. First Financial's policy is to charge-off all or a portion of a 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.

Covered/formerly covered loans. The majority of covered/formerly covered loans are purchased impaired loans, whereby First Financial is required to periodically re-estimate the expected cash flows on the loans. First Financial updated the valuations related to covered/formerly covered loans during the first quarter of 2017.


18


Changes in the allowance for loan and lease losses were as follows:
 
 
Three months ended
 
 
March 31,
(Dollars in thousands)
 
2017
 
2016
Changes in the allowance for loan and lease losses on loans, excluding covered/formerly covered loans
Balance at beginning of period
 
$
49,422

 
$
43,149

Provision for loan and lease losses
 
1,481

 
1,735

Loans charged-off
 
(2,514
)
 
(1,367
)
Recoveries
 
418

 
858

Balance at end of period
 
$
48,807

 
$
44,375

 
 
 
 
 
Changes in the allowance for loan and lease losses on covered/formerly covered loans
Balance at beginning of period
 
$
8,539

 
$
10,249

Provision for loan and lease losses
 
(1,114
)
 
(80
)
Loans charged-off
 
(236
)
 
(1,075
)
Recoveries
 
330

 
263

Balance at end of period
 
$
7,519

 
$
9,357

 
 
 
 
 
Changes in the allowance for loan and lease losses
 
 
 
Balance at beginning of period
 
$
57,961

 
$
53,398

Provision for loan and lease losses
 
367

 
1,655

Loans charged-off
 
(2,750
)
 
(2,442
)
Recoveries
 
748

 
1,121

Balance at end of period
 
$
56,326

 
$
53,732


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


19


Changes in the allowance for loan and lease losses by loan category were as follows:
  
 
Three months ended March 31, 2017
 
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
Commercial and industrial
 
Lease financing
 
Construction
 
Commercial
 
Residential
 
Home equity
 
Installment
 
Credit card
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
19,225

 
$
716

 
$
3,282

 
$
26,540

 
$
3,208

 
$
3,043

 
$
388

 
$
1,559

 
$
57,961

Provision for loan and lease losses
 
(596
)
 
(100
)
 
325

 
(2,566
)
 
2,329

 
805

 
9

 
161

 
367

Loans charged off
 
(1,743
)
 
0

 
0

 
(485
)
 
(61
)
 
(180
)
 
(49
)
 
(232
)
 
(2,750
)
Recoveries
 
262

 
0

 
0

 
256

 
9

 
106

 
71

 
44

 
748

Total net charge-offs
 
(1,481
)
 
0

 
0

 
(229
)
 
(52
)
 
(74
)
 
22

 
(188
)
 
(2,002
)
Ending allowance for loan and lease losses
 
$
17,148

 
$
616

 
$
3,607

 
$
23,745

 
$
5,485

 
$
3,774

 
$
419

 
$
1,532

 
$
56,326

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
Lease financing
 
Construction
 
Commercial
 
Residential
 
Home equity
 
Installment
 
Credit card
 
Total
Ending allowance balance attributable to loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
332

 
$
0

 
$
0

 
$
56

 
$
179

 
$
2

 
$
0

 
$
0

 
$
569

Collectively evaluated for impairment
 
16,816

 
616

 
3,607

 
23,689

 
5,306

 
3,772

 
419

 
1,532

 
55,757

Ending allowance for loan and lease losses
 
$
17,148

 
$
616

 
$
3,607

 
$
23,745

 
$
5,485

 
$
3,774

 
$
419

 
$
1,532

 
$
56,326

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
 

 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
20,198

 
$
102

 
$
1,075

 
$
28,165

 
$
8,833

 
$
4,349

 
$
389

 
$
0

 
$
63,111

Collectively evaluated for impairment
 
1,759,437

 
88,786

 
445,257

 
2,370,070

 
477,768

 
454,625

 
51,674

 
43,354

 
5,690,971

Total loans
 
$
1,779,635

 
$
88,888

 
$
446,332

 
$
2,398,235

 
$
486,601

 
$
458,974

 
$
52,063

 
$
43,354

 
$
5,754,082


 
 
Three months ended March 31, 2016
 
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
Commercial and industrial
 
Lease financing
 
Construction
 
Commercial
 
Residential
 
Home equity
 
Installment
 
Credit card
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
16,995

 
$
821

 
$
1,810

 
$
23,656

 
$
4,014

 
$
3,943

 
$
386

 
$
1,773

 
$
53,398

Provision for loan and lease losses
 
1,432

 
45

 
439

 
(420
)
 
8

 
185

 
(58
)
 
24

 
1,655

Loans charged off
 
(479
)
 
0

 
(3
)
 
(1,262
)
 
(45
)
 
(340
)
 
(73
)
 
(240
)
 
(2,442
)
Recoveries
 
222

 
0

 
26

 
442

 
63

 
188

 
99

 
81

 
1,121

Total net charge-offs
 
(257
)
 
0

 
23

 
(820
)
 
18

 
(152
)
 
26

 
(159
)
 
(1,321
)
Ending allowance for loan and lease losses
 
$
18,170

 
$
866

 
$
2,272

 
$
22,416

 
$
4,040

 
$
3,976

 
$
354

 
$
1,638

 
$
53,732

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
Real Estate
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
Commercial and industrial
 
Lease financing
 
Construction
 
Commercial
 
Residential
 
Home equity
 
Installment
 
Credit card
 
Total
Ending allowance balance attributable to loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
550

 
$
0

 
$
0

 
$
593

 
$
179

 
$
2

 
$
0

 
$
0

 
$
1,324

Collectively evaluated for impairment
 
18,675

 
716

 
3,282

 
25,947

 
3,029

 
3,041

 
388

 
1,559

 
56,637

Ending allowance for loan and lease losses
 
$
19,225

 
$
716

 
$
3,282

 
$
26,540

 
$
3,208

 
$
3,043

 
$
388

 
$
1,559

 
$
57,961

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
 

 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
13,203

 
$
195

 
$
0

 
$
20,460

 
$
9,601

 
$
4,074

 
$
437

 
$
0

 
$
47,970

Collectively evaluated for impairment
 
1,768,745

 
92,913

 
399,434

 
2,407,117

 
491,379

 
456,314

 
50,202

 
43,408

 
5,709,512

Total loans
 
$
1,781,948

 
$
93,108

 
$
399,434

 
$
2,427,577

 
$
500,980

 
$
460,388

 
$
50,639

 
$
43,408

 
$
5,757,482



20


NOTE 6:  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. The excess cost of the acquisition over the fair value of net assets acquired is recorded as goodwill. First Financial recorded no additions to goodwill during 2017 or 2016. First Financial had goodwill of $204.1 million as of March 31, 2017 and December 31, 2016, respectively.

Goodwill is not amortized, but is evaluated 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 most recent annual impairment test as of October 1, 2016 and no impairment was indicated.  As of March 31, 2017, no events or changes in circumstances indicated that the fair value of a reporting unit was below its carrying value.

Other intangible assets. As of March 31, 2017 and December 31, 2016, First Financial had $6.2 million and $6.5 million, respectively, of other intangible assets, which primarily consist of core deposit intangibles and are included in Goodwill and other intangibles in the Consolidated Balance Sheets.  Core deposit intangibles represent the estimated fair value of acquired customer deposit relationships. Core deposit intangibles are recorded at estimated fair value at the date of acquisition and are then amortized on an accelerated basis over their estimated useful lives. Core deposit intangibles were $4.2 million and $4.5 million as of March 31, 2017 and December 31, 2016, respectively. First Financial's core deposit intangibles have an estimated weighted average remaining life of 4.5 years. Amortization expense recognized on intangible assets for the three months ended March 31, 2017 and 2016 was $0.3 million and $0.4 million, respectively.

NOTE 7:  BORROWINGS

Short-term borrowings on the Consolidated Balance Sheets include repurchase agreements utilized for corporate sweep accounts with cash management account agreements in place, overnight advances from the FHLB and a short-term line of credit. All repurchase agreements are subject to terms and conditions of repurchase/security agreements between the Bank and the client. To secure it's liability to the client, the Bank is authorized to sell or repurchase U.S. Treasury, government agency and mortgage-backed securities.

First Financial had $806.7 million in short-term borrowings with the FHLB at March 31, 2017 and $687.7 million as of December 31, 2016. These short-term borrowings are used to manage normal liquidity needs and support the Company's asset and liability management strategies.

First Financial has a $15.0 million short-term credit facility with an unaffiliated bank that matures on May 29, 2017. This facility can have a variable or fixed interest rate and provides First Financial additional liquidity, if needed, for various corporate activities, including the repurchase of First Financial common stock and the payment of dividends to shareholders. As of March 31, 2017 and December 31, 2016, there was no outstanding balance. The credit agreement requires First Financial to comply with certain covenants including those related to asset quality and capital levels, and First Financial was in compliance with all covenants associated with this facility as of March 31, 2017 and December 31, 2016.

In 2015, First Financial issued $120.0 million of subordinated notes. The subordinated notes have a fixed interest rate of 5.125% payable semiannually and mature on August 25, 2025. These notes are not redeemable by the Company, or callable by the holders of the notes, prior to maturity. The subordinated notes are treated as Tier 2 capital for regulatory capital purposes and are included in Long-term debt on the Consolidated Balance Sheets.

Long-term debt also includes $0.3 million and $0.4 million of FHLB long-term advances as of March 31, 2017 and December 31, 2016, respectively. These instruments are primarily utilized to reduce overnight liquidity risk and to mitigate interest rate sensitivity on the Consolidated Balance Sheets.


21


The following is a summary of First Financial's long-term debt:
 
 
March 31, 2017
 
December 31, 2016
(Dollars in thousands)
 
Amount
 
Average rate
 
Amount
 
Average rate
Subordinated debt
 
$
120,000

 
5.13
%
 
$
120,000

 
5.13
%
Unamortized debt issuance costs
 
(1,493
)
 
N/A

 
(1,537
)
 
N/A

FHLB
 
347

 
1.45
%
 
351

 
1.43
%
Capital loan with municipality
 
775

 
0.00
%
 
775

 
0.00
%
Total long-term debt
 
$
119,629

 
5.15
%
 
$
119,589

 
5.15
%

NOTE 8:  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 reclassifications out of accumulated other comprehensive income (loss) are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2017
 
Total other comprehensive income
 
Total accumulated
other comprehensive income (loss)
(Dollars in thousands)
Prior to
Reclassification
 
Reclassification
from
 
Pre-tax
 
Tax-effect
 
Net of tax
 
Beginning Balance
 
Net Activity
 
Ending Balance
Unrealized gain (loss) on investment securities
$
2,832

 
$
516

 
$
2,316

 
$
(829
)
 
$
1,487

 
$
(4,549
)
 
$
1,487

 
$
(3,062
)
Unrealized gain (loss) on derivatives
203

 
0

 
203

 
(75
)
 
128

 
(1,091
)
 
128

 
(963
)
Retirement obligation
0

 
(335
)
 
335

 
(146
)
 
189

 
(22,803
)
 
189

 
(22,614
)
Total
$
3,035

 
$
181

 
$
2,854

 
$
(1,050
)
 
$
1,804

 
$
(28,443
)
 
$
1,804

 
$
(26,639
)
 
Three months ended March 31, 2016
 
Total other comprehensive income
 
Total accumulated
other comprehensive income (loss)
(Dollars in thousands)
Prior to
Reclassification
 
Reclassification
from
 
Pre-tax
 
Tax-effect
 
Net of tax
 
Beginning Balance
 
Net Activity
 
Ending Balance
Unrealized gain (loss) on investment securities
$
10,975

 
$
24

 
$
10,951

 
$
(3,908
)
 
$
7,043

 
$
(4,933
)
 
$
7,043

 
$
2,110

Unrealized gain (loss) on derivatives
202

 
0

 
202

 
(74
)
 
128

 
(1,599
)
 
128

 
(1,471
)
Retirement obligation
0

 
(317
)
 
317

 
(117
)
 
200

 
(24,048
)
 
200

 
(23,848
)
Total
$
11,177

 
$
(293
)
 
$
11,470

 
$
(4,099
)
 
$
7,371

 
$
(30,580
)
 
$
7,371

 
$
(23,209
)


22


The following table presents the activity reclassified from accumulated other comprehensive income into income during the three month periods ended March 31, 2017 and 2016, respectively:
 
 
Amount reclassified from
accumulated other comprehensive income
(1)
 
 
 
 
Three months ended
 
 
 
 
March 31,
 
 
(Dollars in thousands)
 
2017
 
2016
 
Affected Line Item in the Consolidated Statements of Income
Realized gains and losses on securities available-for-sale
 
$
516

 
$
24

 
Gains on sales of investments securities
Defined benefit pension plan
 
 
 
 
 
Amortization of prior service cost (2)
 
103

 
103

 
Salaries and employee benefits
Recognized net actuarial loss (2)
 
(438
)
 
(420
)
 
Salaries and employee benefits
Defined benefit pension plan total
 
(335
)
 
(317
)
 
 
Total reclassifications for the period, before tax
 
$
181

 
$
(293
)
 
 
(1) Negative amounts are reductions to net income.
(2) Included in the computation of net periodic pension cost (see Note 12 - Employee Benefit Plans for additional details).

NOTE 9:  DERIVATIVES

First Financial uses certain derivative instruments, including interest rate caps, floors and swaps, to meet the needs of its clients while managing the interest rate risk associated with certain transactions.  First Financial does not use derivatives for speculative purposes.

First Financial primarily utilizes interest rate swaps as a means to offer borrowers credit-based products that meet their needs. First Financial may also utilize interest rate swaps to manage the interest rate risk profile of the Company.

Interest rate payments are exchanged with counterparties based on the notional amount established in the interest rate agreement. As only interest rate payments are exchanged, the cash requirements and credit risk associated with interest rate swaps are significantly less than the notional amount and the Company’s credit risk exposure is limited to the market value of the instruments. First Financial manages this market value credit risk through counterparty credit policies, which 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 below all single counterparty and portfolio limits.

At March 31, 2017, the Company had a total counterparty notional amount outstanding of $697.1 million, spread among ten counterparties, with an outstanding liability from these contracts of $2.5 million. At December 31, 2016, the Company had a total counterparty notional amount outstanding of $677.8 million, spread among ten counterparties, with an outstanding liability from these contracts of $5.2 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 performs on all borrowers. Additionally, the Company monitors derivative credit risk exposure related to problem loans through the Company's ALLL 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.


23


Client Derivatives. First Financial utilizes interest rate swaps as a means to offer commercial borrowers fixed rate funding while providing the Company with floating rate assets.  The following table details the classification and amounts recognized in the Consolidated Balance Sheets for client derivatives:
  
 
 
 
March 31, 2017
 
December 31, 2016
 
 
 
 
 
 
Estimated fair value
 
 
 
Estimated fair value
(Dollars in thousands)
 
Balance sheet classification
 
Notional
amount
 
Gain
 
Loss
 
Notional
amount
 
Gain
 
Loss
Client derivatives - instruments associated with loans
 
 
 
 
 
 
 
 
 
 
 
 
Matched interest rate swaps with borrower
 
Accrued interest and other assets
 
$
697,051

 
$
7,211

 
$
(4,844
)
 
$
677,028

 
$
8,401

 
$
(4,158
)
Matched interest rate swaps with counterparty
 
Accrued interest and other liabilities
 
697,051

 
4,844

 
(7,214
)
 
677,028

 
4,158

 
(8,429
)
Total
 
 
 
$
1,394,102

 
$
12,055

 
$
(12,058
)
 
$
1,354,056

 
$
12,559

 
$
(12,587
)

In connection with its use of derivative instruments, First Financial and its counterparties are required to post cash collateral to offset the market position of the derivative instruments under certain conditions. First Financial maintains the right to offset these derivative positions with the collateral posted against them by or with the relevant counterparties. 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 assets or Accrued interest and other liabilities in the Consolidated Balance Sheets.

The following table discloses the gross and net amounts of liabilities recognized in the Consolidated Balance Sheets:
 
March 31, 2017
 
December 31, 2016
(Dollars in thousands)
Gross amounts of recognized liabilities
 
Gross amounts offset in the Consolidated Balance Sheets
 
Net amounts of assets presented in the Consolidated Balance Sheets
 
Gross amounts of recognized liabilities
 
Gross amounts offset in the Consolidated Balance Sheets
 
Net amounts of assets presented in the Consolidated Balance Sheets
Client derivatives
 
 
 
 
 
 
 
 
 
 
 
Matched interest rate swaps with counterparty
$
12,058

 
$
744

 
$
12,802

 
$
12,587

 
$
(462
)
 
$
12,125


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 March 31, 2017:
 
 
 
 
 
 
 
 
Weighted-average rate
(Dollars in thousands)
 
Notional
amount
 
Average
maturity
(years)
 
Fair
value
 
Receive
 
Pay
Client derivatives
 
 
 
 
 
 
 
 
 
 
Receive fixed, matched interest rate swaps with borrower
 
$
697,051

 
5.6
 
$
2,367

 
3.89
%
 
2.92
%
Pay fixed, matched interest rate swaps with counterparty
 
697,051

 
5.6
 
(2,370
)
 
2.92
%
 
3.89
%
Total client derivatives
 
$
1,394,102

 
5.6
 
$
(3
)
 
3.44
%
 
3.37
%

Credit Derivatives. In conjunction with participating interests in commercial loans, First Financial periodically enters into risk participation agreements with counterparties whereby First Financial assumes a portion of the credit exposure associated with an interest rate swap on the participated loan in exchange for a fee. Under these agreements, First Financial will make payments to the counterparty if the loan customer defaults on its obligation to perform under the interest rate swap contract with the counterparty. The total notional value of these agreements totaled $64.6 million as of March 31, 2017 and $64.9 million as of December 31, 2016. The fair value of these agreements was recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets and was $22 thousand and $29 thousand at March 31, 2017 and December 31, 2016, respectively.

Mortgage Derivatives. First Financial enters into IRLCs and forward commitments for the future delivery of mortgage loans to third party investors, which are considered derivatives. When borrowers secure an IRLC with First Financial and the loan is intended to be sold, First Financial will enter into forward commitments for the future delivery of the loans to third party investors in order to hedge against the effect of changes in interest rates impacting IRLCs and loans held for sale. At March 31, 2017, the notional amount of the IRLCs was $18.0 million and the notional amount of forward commitments was $17.5 million. As of December 31, 2016, the notional amount of IRLCs was $13.2 million and the notional amount of forward

24


commitments was $17.8 million. The fair value of these agreements was recorded on the Consolidated Balance Sheets in Accrued interest and other assets and was $0.2 million at March 31, 2017 and December 31, 2016.

NOTE 10:  COMMITMENTS AND CONTINGENCIES

First Financial offers a variety of financial instruments including standby letters of credit and outstanding commitments to extend credit to assist clients in meeting their requirement for liquidity and credit enhancement. GAAP does not require these financial instruments to be recorded in the Consolidated Financial Statements.

First Financial utilizes the same credit policies in issuing commitments and conditional obligations as it does for credit instruments recorded on the Consolidated Balance Sheets. First Financial’s exposure to credit loss in the event of nonperformance by the counterparty is represented by the contractual amounts of those instruments. First Financial utilizes the ALLL methodology to maintain a reserve that it considers sufficient to absorb probable incurred losses inherent in standby letters of credit and outstanding loan commitments and records the reserve within Accrued interest and other liabilities on the Consolidated Balance Sheets.

Loan commitments. Loan commitments are agreements to extend credit to a client, absent any violation of conditions established in the commitment agreement.  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.  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 $2.0 billion at March 31, 2017 and December 31, 2016. As of March 31, 2017, loan commitments with a fixed interest rate totaled $83.9 million while commitments with variable interest rates totaled $1.9 billion. The fixed rate loan commitments have interest rates ranging from 0.00% to 21.00% and maturities ranging from one year to 19 years.

Letters of credit. Letters of credit 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 issued letters of credit (including standby letters of credit) aggregating $18.8 million and $18.4 million at March 31, 2017 and December 31, 2016, respectively. Management conducts regular reviews of these instruments on an individual client basis.

Investments in affordable housing tax credits. First Financial has made investments in certain qualified affordable housing tax credits. These credits are an indirect federal subsidy that provide tax incentives to encourage investment in the development, acquisition and rehabilitation of affordable rental housing, and allow investors to claim tax credits and other tax benefits (such as deductions from taxable income for operating losses) on their federal income tax returns. The principal risk associated with qualified affordable housing investments is the potential for noncompliance with the tax code requirements, such as failure to rent property to qualified tenants, resulting in the unavailability or recapture of the tax credits and other tax benefits. Investments in affordable housing projects are accounted for under the proportional amortization method and are included in Accrued interest and other assets in the Consolidated Balance Sheets. First Financial's affordable housing commitments totaled $32.0 million and $32.7 million as of March 31, 2017 and December 31, 2016, respectively. The Company recognized tax credits of $0.8 million and $0.5 million related to its investments in affordable housing projects for the three months ended March 31, 2017 and 2016, respectively. The Company recognized amortization expense which was included in income tax expense of $1.0 million and $0.6 million for the three months ended March 31, 2017 and 2016, respectively. First Financial had no affordable housing contingent commitments as of March 31, 2017 or December 31, 2016.

Investments in historic tax credits. First Financial has noncontrolling financial investments in private investment funds and partnerships which are not consolidated. These investments may generate a return through the realization of federal and state income tax credits, as well as other tax benefits, such as tax deductions from net operating losses of the investments over a period of time. Investments in historic tax credits are accounted for under the equity method of accounting and are carried in Accrued interest and other assets on the Consolidated Balance Sheets. The Company’s recorded investment in these entities was approximately $4.9 million at both March 31, 2017 and December 31, 2016. The maximum exposure to loss related to these investments was $13.7 million at March 31, 2017 and December 31, 2016, respectively, representing the Company’s investment balance and its unfunded commitments to invest additional amounts. Investments in historic tax credits resulted in $0.1 million and $0.2 million of tax credits for the three months ended March 31, 2017 and March 31, 2016, respectively.


25


Contingencies/Litigation. First Financial and its subsidiaries are engaged in various matters of litigation, other assertions of improper or fraudulent loan practices or lending violations and other matters from time to time, and have a number of unresolved claims pending. Additionally, 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 are 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, First Financial believes that damages, if any, and other amounts relating to pending matters are not probable or cannot be reasonably estimated as of March 31, 2017. Reserves are established for these various matters of litigation, when appropriate, under FASB ASC Topic 450, Contingencies, based in part upon the advice of legal counsel. First Financial had no reserves related to litigation matters as of March 31, 2017 or December 31, 2016.

NOTE 11:  INCOME TAXES

For the first quarter 2017, income tax expense was $10.5 million, resulting in an effective tax rate of 30.0% compared with income tax expense of $9.9 million and an effective tax rate of 33.3% for the comparable period in 2016. The decrease in the effective tax rate relates primarily to the adoption of ASU 2016-09 regarding employee share-based compensation. ASU 2016-09, Compensation-Stock Compensation Improvements to Employee Share-Based Payment Accounting, became effective during the first quarter of 2017 and requires the recognition of the income tax effects of share-based awards through the income statement as a component income tax expense. First Financial recorded a $1.1 million tax benefit as a result of share awards vesting and exercised during the first quarter.

At December 31, 2016, First Financial had $2.4 million of unrecognized tax benefits, as determined in FASB ASC Topic 740-10, Income Taxes, that, if recognized, would favorably affect the effective income tax rate in future periods. The unrecognized tax benefits relate to state income tax exposures from taking tax positions where the Company believes it is likely that, upon examination, a state may take a position contrary to the position taken by the Company. The Company believes that resolution regarding our uncertain tax positions is reasonably possible within the next twelve months and could result in full, partial or no recognition of the benefit.

First Financial recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. At March 31, 2017 and December 31, 2016, the Company had no interest or penalties recorded.

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 2013 have been closed and are no longer subject to U.S. federal income tax examinations. Tax years 2013 through 2016 remain open to examination by the federal taxing authority.

First Financial is no longer subject to state and local income tax examinations for years prior to 2011.  Tax years 2011 through 2016 remain open to state and local examination in various jurisdictions.

NOTE 12:  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 the plan. Plan assets were primarily invested in fixed income and publicly traded equity mutual funds. The pension plan does not directly own any shares of First Financial common stock or any other First Financial security or product.

First Financial made no cash contributions to fund the pension plan during the three months ended March 31, 2017, or the year ended December 31, 2016, and does not expect to make cash contributions to the plan through the remainder of 2017. As a result of the plan’s actuarial projections, First Financial recorded income of $0.3 million and $0.2 million for the three months ended March 31, 2017 and 2016, respectively.


26


The following table sets forth information concerning amounts recognized in First Financial’s Consolidated Statements of Income related to the Company's pension plan:
 
 
Three months ended
 
 
March 31,
(Dollars in thousands)
 
2017
 
2016
Service cost
 
$
1,238

 
$
1,308

Interest cost
 
589

 
581

Expected return on assets
 
(2,481
)
 
(2,431
)
Amortization of prior service cost
 
(103
)
 
(103
)
Net actuarial loss
 
438

 
420

     Net periodic benefit (income) cost
 
$
(319
)
 
$
(225
)

NOTE 13:  EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per share:
 
 
Three months ended
 
 
March 31,
(Dollars in thousands, except per share data)
 
2017
 
2016
Numerator
 
 
 
 
Net income available to common shareholders
 
$
24,414

 
$
19,814

 
 
 
 
 
Denominator
 
 
 
 
Basic earnings per common share - weighted average shares
 
61,398,414

 
61,036,797

Effect of dilutive securities
 
 
 
 
Employee stock awards
 
674,589

 
705,779

Warrants
 
67,381

 
97,671

Diluted earnings per common share - adjusted weighted average shares
 
62,140,384

 
61,840,247

 
 
 
 
 
Earnings per share available to common shareholders
 
 
 
 
Basic
 
$
0.40

 
$
0.32

Diluted
 
$
0.39

 
$
0.32


Warrants to purchase 112,233 and 322,312 shares of the Company's common stock were outstanding as of March 31, 2017 and 2016, respectively. These warrants, each representing the right to purchase one share of common stock, no par value per share, have an exercise price of $12.12 and expire on December 23, 2018.

Stock options and warrants with exercise prices 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.  Using the end of period price, there were no antidilutive options at March 31, 2017 and March 31, 2016.  


27


NOTE 14:  FAIR VALUE DISCLOSURES

Fair Value Measurement
The fair value framework as disclosed in the 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 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 previously described are considered Level 3.

First Financial utilizes values provided by third-party pricing vendors to price the investment securities portfolio in accordance with the fair value hierarchy of the Fair Value Topic and reviews the pricing methodologies utilized by the pricing vendors to ensure that the fair value determination is consistent with the applicable accounting guidance.  First Financial’s pricing process includes a series of quality assurance activities where prices are compared to recent market conditions, historical prices and other independent pricing services.  Further, the Company periodically validates the fair values of a sample of securities in the portfolio by comparing the fair values to prices from other independent sources for the same or similar securities.  First Financial analyzes unusual or significant variances, conducts additional research with the pricing vendor, and if necessary, takes appropriate action based on its findings.  The results of the quality assurance process are incorporated into the selection of pricing providers by the portfolio manager.

Other investments. Other investments include holdings in FRB and FHLB stock, which are carried at cost due to the inability to determine the fair value as a result of restrictions placed on transferability.

Loans held for sale. Loans held for sale are carried at fair 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 market price or 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 and leases. The fair value of commercial and industrial, lease financing, 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 and leases 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 loans as Level 3 in the fair value hierarchy.

Impaired loans are specifically reviewed for purposes of determining the appropriate amount of impairment to be allocated to the ALLL.  Fair value is generally measured based on the value of the collateral securing the loans.  Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable.  The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent,

28


licensed third-party appraiser (Level 3). The value of business equipment is based on an outside appraisal, if deemed significant, or the net book value on the applicable borrower financial statements.  Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3).  Impaired loans 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.

OREO. Assets acquired through loan foreclosure are initially recorded at the lower of cost or fair value less costs to sell. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals and is updated at least annually. The Company classifies OREO in level 3 of the fair value hierarchy.

FDIC indemnification asset. Fair value of the FDIC indemnification asset is estimated using projected cash flows related to the loss sharing agreements based on expected reimbursements for losses and the applicable loss sharing percentages. The expected cash flows are discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. The five year period of loss protection expired for the majority of First Financial's non-single family assets effective October 1, 2014, and the ten year period of loss protection on all other covered loans and covered OREO expires October 1, 2019. The Company classifies the estimated fair value of the indemnification asset as Level 3 in the fair value hierarchy.

Accrued interest receivable and payable. The carrying amount of accrued interest receivable and accrued interest payable approximate their fair values and is aligned with the underlying assets or liabilities (Level 1, Level 2 or Level 3).

Deposits. The fair value of demand deposits, savings accounts and certain money-market deposits represents the amount payable on demand at the reporting date.  The carrying amounts for variable-rate CDs approximated their fair values at the reporting date.  The fair value of fixed-rate CDs is estimated using a discounted cash flow calculation which applies the interest rates currently offered for deposits of similar remaining maturities. 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 approximate their fair values.  The Company classifies the estimated fair value of short-term borrowings as Level 1 in the fair value hierarchy.

The fair value of long-term debt is estimated using a discounted cash flow calculation which utilizes the interest rates currently offered for borrowings of similar remaining maturities.  The Company classifies the estimated fair value of long-term debt as Level 2 in the fair value hierarchy.

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 at the reporting date, using primarily observable market inputs such as interest rate yield curves which represents the cost to terminate the swap if First Financial should choose to do so. Additionally, First Financial utilizes an internally-developed model to value the credit risk component of derivative assets and liabilities, which is recorded as an adjustment to the fair value of the derivative asset or liability on the reporting date. Derivative instruments are classified as Level 2 in the fair value hierarchy.

29


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
March 31, 2017
 
 
 
 
 
Financial assets
 
 
 
 
 
Cash and short-term investments
$
156,972

$
156,972

$
156,972

$
0

$
0

Investment securities held-to-maturity
730,796

732,024

0

732,024

0

Other investments
50,996

N/A

N/A

N/A

N/A

Loans held for sale
7,657

7,657

0

7,657

0

Loans and leases, net of ALLL
5,697,756

5,724,790

0

0

5,724,790

FDIC indemnification asset
10,773

6,031

0

0

6,031

Accrued interest receivable
19,500

19,500

0

6,633

12,867

 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
Deposits
 
 
 
 
 
Noninterest-bearing
$
1,547,600

$
1,547,600

$
0

$
1,547,600

$
0

Interest-bearing demand
1,494,892

1,494,892

0

1,494,892

0

Savings
2,284,821

2,284,821

0

2,284,821

0

Time
1,202,563

1,198,807

0

1,198,807

0

Total deposits
6,529,876

6,526,120

0

6,526,120

0

Short-term borrowings
859,184

859,184

859,184

0

0

Long-term debt
119,629

118,390

0

118,390

0

Accrued interest payable
3,625

3,625

680

2,945

0



30


 
Carrying
Estimated fair value
(Dollars in thousands)
value
Total
Level 1
Level 2
Level 3
December 31, 2016
 
 
 
 
 
Financial assets
 


 
 
Cash and short-term investments
$
204,048

$
204,048

$
204,048

$
0

$
0

Investment securities held-to-maturity
763,254

763,575

0

763,575

0

Other investments
51,077

N/A

N/A

N/A

N/A

Loans held for sale
13,135

13,135

0

13,135

0

Loans and leases, net of ALLL
5,699,521

5,754,845

0

0

5,754,845

FDIC indemnification asset
12,017

6,720

0

0

6,720

Accrued interest receivable
18,503

18,503

0

5,705

12,798

 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
Deposits
 

 

 
Noninterest-bearing
$
1,547,985

$
1,547,985

$
0

$
1,547,985

$
0

Interest-bearing demand
1,513,771

1,513,771

0

1,513,771

0

Savings
2,142,189

2,142,189

0

2,142,189

0

Time
1,321,843

1,316,333

0

1,316,333

0

Total deposits
6,525,788

6,520,278

0

6,520,278

0

Short-term borrowings
807,912

807,912

807,912

0

0

Long-term debt
119,589

117,878

0

117,878

0

Accrued interest payable
5,049

5,049

410

4,639

0


The financial assets and liabilities measured at fair value on a recurring basis in the consolidated financial statements were as follows:
 
 
Fair value measurements using
 
 
(Dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Assets/liabilities
at fair value
March 31, 2017
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Derivatives
 
$
0

 
$
12,301

 
$
0

 
$
12,301

Investment securities available-for-sale
 
8,764

 
1,211,282

 
0

 
1,220,046

Total
 
$
8,764

 
$
1,223,583

 
$
0

 
$
1,232,347

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Derivatives
 
$
0

 
$
12,111

 
$
0

 
$
12,111



31


 
 
Fair value measurements using
 
 
(Dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Assets/liabilities
at fair value
December 31, 2016
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Derivatives
 
$
0

 
$
12,922

 
$
0

 
$
12,922

Investment securities available-for-sale
 
8,711

 
1,031,159

 
0

 
1,039,870

Total
 
$
8,711

 
$
1,044,081

 
$
0

 
$
1,052,792

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Derivatives
 
$
0

 
$
12,725

 
$
0

 
$
12,725


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 fair value accounting or write-downs of individual assets.  The following table summarizes financial assets and liabilities measured at fair value on a nonrecurring basis.
 
 
Fair value measurements using
(Dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
March 31, 2017
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Impaired loans
 
$
0

 
$
0

 
$
1,249

OREO
 
0

 
0

 
4,098

 
 
Fair value measurements using
(Dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
December 31, 2016
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Impaired loans
 
$
0

 
$
0

 
$
8,154

OREO
 
0

 
0

 
3,921



32


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (MD&A)
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
(Unaudited)

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

SUMMARY

First Financial is an $8.5 billion bank holding company headquartered in Cincinnati, Ohio, and through its subsidiaries, operates primarily in Ohio, Indiana and Kentucky.  These subsidiaries include a commercial bank, First Financial Bank, with 103 banking centers and 126 ATMs. First Financial provides banking and financial services products to business and retail clients through its four lines of business: commercial and private banking, retail banking, investment commercial real estate and commercial finance. Commercial finance provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and commission-based financing, primarily to insurance agents and brokers, throughout the United States. Commercial and private banking includes wealth management, which provides wealth planning, portfolio management, trust and estate, brokerage and retirement plan services and had $2.5 billion in assets under management as of March 31, 2017.

MARKET STRATEGY AND BUSINESS COMBINATIONS

First Financial’s goal is to develop a competitive advantage by utilizing a local market focus to provide a superior level of service and build long-term relationships with clients in order to help them reach greater levels of financial success. First Financial serves a combination of metropolitan and non-metropolitan markets in Ohio, Indiana and Kentucky through its full-service banking centers, and provides financing throughout the United States to franchise owners and clients within the financial services industry. 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 intends to concentrate plans for future growth and capital investment within its current metropolitan markets, and will continue to evaluate additional growth opportunities in metropolitan markets located within, or in close proximity to, the Company's current geographic footprint. Additionally, First Financial may assess strategic acquisitions that provide product line extensions or additional industry verticals that compliment our existing business.  First Financial's investment in non-metropolitan markets has historically provided stable, low-cost funding sources and remains an important part of the Bank's core funding base. 

OVERVIEW OF OPERATIONS

First quarter 2017 net income was $24.4 million and earnings per diluted common share were $0.39. This compares with first quarter 2016 net income of $19.8 million and earnings per diluted common share of $0.32.
 
Return on average assets for the first quarter 2017 was 1.18% compared to 0.98% for the comparable period in 2016 and return on average shareholders’ equity was 11.36% and 9.70% for the first quarters of 2017 and 2016, respectively.

A discussion of First Financial's results of operations for the three months ended March 31, 2017 follows.

NET INTEREST INCOME

Net interest income, First Financial’s principal source of income, is the excess of interest received from earning assets, including loan-related fees, less interest paid on interest-bearing liabilities. The amount of net interest income is determined by the volume and mix of earning assets, the rates earned on such earning assets and the volume, mix and rates paid for the deposits and borrowed money that support the earning assets.

For analytical purposes, net interest income is also presented in the table that follows, adjusted to a tax equivalent basis assuming a 35.00% marginal tax rate. Net interest income is presented on a tax equivalent basis to consistently reflect income from tax-exempt assets, such as municipal loans and investments, in order to facilitate a comparison between taxable and tax-exempt amounts.  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 as these measures provide useful information to make peer comparisons.

33


 
Three months ended
 
March 31,
(Dollars in thousands)
2017
 
2016
Net interest income
$
68,932

 
$
66,555

Tax equivalent adjustment
1,225

 
1,052

Net interest income - tax equivalent
$
70,157

 
$
67,607

 
 
 
 
Average earning assets
$
7,695,717

 
$
7,398,013

 
 
 
 
Net interest margin (1)
3.63
%
 
3.62
%
Net interest margin (fully tax equivalent) (1)
3.70
%
 
3.68
%
(1) Calculated using annualized net interest income divided by average earning assets.

Net interest income for the first quarter 2017 was $68.9 million, increasing $2.4 million, or 3.6%, from first quarter 2016 net interest income of $66.6 million. Net interest income on a fully tax equivalent basis for the first quarter 2017 was $70.2 million compared to $67.6 million for the first quarter 2016, and net interest margin on a fully tax equivalent basis was 3.70% for the first quarter 2017 compared to 3.68% for the first quarter 2016.  The increase in net interest income for the first quarter 2017 as compared to the same period in 2016 was primarily driven by a $4.0 million, or 5.4%, increase in interest income, which was partially offset by a $1.7 million, or 20.1%, increase in interest expense.

Higher interest income resulted from an increase in average earning assets from $7.4 billion in the first quarter of 2016 to $7.7 billion in the first quarter of 2017, as well as an increase in the yield on earning assets over those same periods from 4.06% to 4.15%, respectively. The increase in average earning assets was due to an increase in average loan balances of $323.8 million, or 6.0%, in the first quarter 2017 compared to the first quarter 2016, primarily as a result of strong organic loan growth during 2016. The increase in yield was impacted by higher interest earned on loans, as well as investment securities, reflecting recent increases in interest rates and slower prepayment speeds.

Interest expense increased as average balances of interest-bearing deposits increased $193.5 million, or 4.1%, from the first quarter 2016, partially offset by a $97.5 million, or 10.3% decline in average short-term borrowings. Average interest-bearing deposit balances increased as a result of strong deposit generation efforts in recent quarters. The cost of funds related to interest-bearing deposits also negatively impacted net interest margin, as rising interest rates contributed to a 10 bp increase from 47 bps for the first quarter 2016 to 57 bps for the first quarter in 2017. Average short-term borrowing yields increased 18 bps to 0.68% for the first quarter 2017 from 0.50% in the first quarter of 2016.



34


CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
 
 
Quarterly Averages
  
 
March 31, 2017
 
March 31, 2016
(Dollars in thousands)
 
Balance
 
Yield
 
Balance
 
Yield
Earning assets
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
Investment securities
 
$
1,906,699

 
2.76
%
 
$
1,938,772

 
2.59
%
Interest-bearing deposits with other banks
 
40,985

 
0.80
%
 
24,291

 
0.53
%
Gross loans (1)
 
5,748,033

 
4.64
%
 
5,434,950

 
4.59
%
Total earning assets
 
7,695,717

 
4.15
%
 
7,398,013

 
4.06
%
 
 
 
 
 
 
 
 
 
Nonearning assets
 
 

 
 

 
 

 
 

Allowance for loan and lease losses
 
(58,461
)
 
 

 
(54,882
)
 
 

Cash and due from banks
 
115,719

 
 

 
117,782

 
 

Accrued interest and other assets
 
656,096

 
 

 
658,032

 
 

Total assets
 
$
8,409,071

 
 

 
$
8,118,945

 
 

 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 

 
 

 
 

 
 

Deposits
 
 

 
 

 
 

 
 

Interest-bearing demand
 
$
1,484,427

 
0.20
%
 
$
1,391,591

 
0.16
%
Savings
 
2,224,708

 
0.48
%
 
1,938,206

 
0.26
%
Time
 
1,233,631

 
1.17
%
 
1,419,456

 
1.05
%
   Total interest-bearing deposits
 
4,942,766

 
0.57
%
 
4,749,253

 
0.47
%
Borrowed funds
 
 
 
 
 
 
 
 
Short-term borrowings
 
848,721

 
0.68
%
 
946,186

 
0.50
%
Long-term debt
 
119,605

 
5.22
%
 
119,553

 
5.17
%
   Total borrowed funds
 
968,326

 
1.24
%
 
1,065,739

 
1.02
%
Total interest-bearing liabilities
 
5,911,092

 
0.68
%
 
5,814,992

 
0.57
%
 
 
 
 
 
 
 
 
 
Noninterest-bearing liabilities
 
 

 
 

 
 

 
 

Noninterest-bearing demand deposits
 
1,499,097

 
 

 
1,386,768

 
 

Other liabilities
 
127,667

 
 

 
95,597

 
 

Shareholders' equity
 
871,215

 
 

 
821,588

 
 

Total liabilities and shareholders' equity
 
$
8,409,071

 
 

 
$
8,118,945

 
 

 
 
 
 
 
 
 
 
 
Net interest income
 
$
68,932

 
 

 
$
66,555

 
 

 
 
 
 
 
 
 
 
 
Net interest spread
 
 

 
3.47
%
 
 

 
3.49
%
Contribution of noninterest-bearing sources of funds
 
 

 
0.16
%
 
 

 
0.13
%
Net interest margin (2)
 
 

 
3.63
%
 
 

 
3.62
%
 
 
 
 
 
 
 
 
 
Tax equivalent adjustment
 
 
 
0.07
%
 
 
 
0.06
%
 Net interest margin (fully tax equivalent) (2)
 
 
 
3.70
%
 
 
 
3.68
%
(1) Loans held for sale, nonaccrual loans, covered loans and indemnification asset are included in gross loans.
(2) The net interest margin exceeds the interest spread as noninterest-bearing funding sources, demand deposits, other liabilities and shareholders' equity also support earning assets.

35


RATE/VOLUME ANALYSIS

The impact on net interest income from changes in interest rates as well as the volume of interest-earning assets and interest-bearing liabilities is illustrated in the table below:
  
 
Changes for the three months ended March 31, 2017
 
 
Comparable quarter income variance
(Dollars in thousands)
 
Rate
 
Volume
 
Total
Earning assets
 
 
 
 
 
 
Investment securities
 
$
790

 
$
(364
)
 
$
426

Interest-bearing deposits with other banks
 
17

 
32

 
49

Gross loans (1)
 
666

 
2,892

 
3,558

Total earning assets
 
1,473

 
2,560

 
4,033

Interest-bearing liabilities
 
 
 
 
 
 

Total interest-bearing deposits
 
1,198

 
197

 
1,395

Borrowed funds
 
 
 
 
 
 

Short-term borrowings
 
444

 
(182
)
 
262

Long-term debt
 
15

 
(16
)
 
(1
)
Total borrowed funds
 
459

 
(198
)
 
261

Total interest-bearing liabilities
 
1,657

 
(1
)
 
1,656

Net interest income
 
$
(184
)
 
$
2,561

 
$
2,377

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

Noninterest income was $17.4 million and $15.5 million for the first quarters of 2017 and 2016, respectively. The increase in noninterest income from the comparable quarter in 2016 was due primarily to a $0.5 million, or 19.7%, increase in other noninterest income, a $0.5 million increase in net gains on sales of investment securities, a $0.3 million, or 8.9%, increase in trust and wealth management fees and a $0.3 million, or 6.0%, increase in service charges on deposit accounts.

The increase in other noninterest income in the first quarter of 2017 was primarily related to higher income received from limited partnership investments, and net gains on sales of investment securities increased in the first quarter of 2017 as the sale of $22.2 million of investment securities resulted in net gains of $0.5 million during the period. The increase in trust and wealth management fees was due to higher market valuations and increased sales volume in the first quarter of 2017, while the increase in service charges on deposit accounts resulted from higher deposit balances in 2017 reflecting organic growth in recent periods.

NONINTEREST EXPENSE

Noninterest expenses were $51.0 million and $50.7 million for the first quarters of 2017 and 2016, respectively. The $0.3 million, or 0.6%, increase from the comparable quarter in 2016 was primarily attributable to a $2.1 million, or 7.2%, increase in salaries and employee benefits and a $0.6 million, or 21.3%, increase in data processing expenses, which were partially offset by a $1.4 million, or 21.7%, decrease in other noninterest expenses, a $0.6 million, or 52.1%, decline in marketing expenses and a $0.4 million, or 8.9%, decrease in net occupancy expenses.

Salaries and employee benefits expense increased from $29.6 million in the first quarter of 2016 to $31.8 million in the first quarter of 2017 primarily as a result of a higher number of associates as well as elevated performance-based compensation, annual compensation adjustments and higher health care costs during the period. The increase in data processing expenses was primarily related to investments in data management and system upgrades, in addition to various other software license expenses. Lower other noninterest expenses were primarily driven by lower regulatory costs resulting from the 2016 charter conversion, modest gains related to facilities consolidations and a decline in the reserve for unfunded commitments. Marketing expenses declined mostly due to the timing of campaigns and projects, while occupancy expenses decreased as a result of elevated lease abandonment costs in the first quarter of 2016.


36


INCOME TAXES

Income tax expense was $10.5 million and $9.9 million and the effective tax rate was 30.0% and 33.3%, for the first quarters of 2017 and 2016, respectively. The lower effective tax rate during the first quarter of 2017 was primarily driven by a $1.1 million reduction in income tax expense during the period related to the adoption of ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which requires recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled.

While the Company's effective tax rate may fluctuate from quarter to quarter due to tax jurisdiction changes as well as the levels of tax-enhanced assets and tax credit investments, the overall effective tax rate for 2017 is expected to be approximately 31.5% - 32.5%.

LOANS

Loans, excluding loans held for sale, totaled $5.8 billion as of March 31, 2017, and declined $3.4 million, or 0.1%, compared to December 31, 2016.  The modest decline in loan balances from December 31, 2016 was primarily related to slower first quarter 2017 business activity and elevated payoffs from commercial and commercial real estate clients, related to business consolidation and real estate transactions as borrowers took advantage of the higher multiples buyers were willing to pay. Commercial real estate loans decreased $29.3 million, or 1.2%, residential real estate loans declined $14.4 million, or 2.9%, and lease financing decreased $4.2 million, or 4.5% during the first quarter. These declines were partially offset by an increase in construction real estate loans of $46.9 million, or 11.7%, primarily resulting from the funding of prior period originations.

First quarter 2017 average loans, excluding loans held for sale, increased $323.8 million, or 6.0%, from the first quarter of 2016.  The increase in average loans, excluding loans held for sale, was primarily the result of a $125.6 million, or 7.6%, increase in commercial and industrial loans, a $119.3 million, or 5.3%, increase in commercial real estate loans and a $91.4 million, or 28.3%, increase in construction real estate loans. Increases in average loan balances were attributable to strong organic loan growth during 2016.

Loans accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, are referred to as purchased impaired loans. First Financial accounts for the majority of loans acquired in FDIC transactions as purchased impaired loans, except for loans with revolving privileges, which are outside the scope of FASB ASC Topic 310-30, and loans for which cash flows could not be estimated, which are accounted for under the cost recovery method. Purchased impaired loans include loans previously covered under loss sharing agreements as well as loans that remain subject to FDIC loss sharing coverage. First Financial had purchased impaired loans totaling $127.5 million and $138.0 million, at March 31, 2017 and December 31, 2016, respectively. These balances exclude contractual interest not yet accrued.

Loans acquired in FDIC-assisted transactions covered under loss sharing agreements whereby the FDIC will reimburse First Financial for the majority of any losses incurred are referred to as covered loans. The Company's loss sharing agreements with the FDIC related to non-single family assets expired effective October 1, 2014, and the ten year period of loss protection on all other covered loans and covered OREO expires October 1, 2019. The three year period for sharing recoveries on non-single family loans expires on October 1, 2017. Covered loans decreased 1.3% to $91.9 million at March 31, 2017 from $93.1 million as of December 31, 2016.  Declines in covered loan balances were expected as there were no acquisitions of loans subject to loss sharing agreements during the period and the covered loan portfolio will continue to decline through payoffs, loan sales, charge-offs and termination or expiration of loss sharing coverage unless First Financial acquires additional loans subject to loss sharing agreements in the future.

ASSET QUALITY

Nonperforming assets consist of nonaccrual loans, accruing TDRs (collectively, nonperforming loans) and OREO. 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 classified as nonaccrual due to the continued failure to adhere to contractual payment terms by the borrower coupled with other pertinent factors. When a loan is classified as nonaccrual, the accrual of interest income is discontinued and previously accrued but unpaid interest is reversed.

Loans accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, are referred to as purchased impaired loans. Accordingly, purchased impaired loans 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 provision for loan and lease losses or prospective yield adjustments.

37



Nonperforming assets increased $14.2 million, or 26.1%, to $68.4 million at March 31, 2017 from $54.3 million as of December 31, 2016, due to a $15.1 million, or 31.6%, increase in nonperforming loans which was partially offset by a $1.0 million, or 15.7%, decline in OREO balances during the period. The increase in nonperforming assets during the first quarter of 2017 was primarily driven by two relationships downgraded to nonaccrual status, however, the Company believes both relationships are well secured.

Loans are classified as TDRs when borrowers are experiencing financial difficulties and concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. 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 restructured terms of the loan agreement. TDRs totaled $37.8 million at March 31, 2017, which is a $2.4 million, or 6.7%, increase from $35.4 million at December 31, 2016.

Classified assets, which are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse, totaled $114.6 million as of March 31, 2017 compared to $125.2 million at December 31, 2016. Loans 30-to-89 days past due increased to $21.2 million, or 0.37% of period end loans at March 31, 2017, as compared to $4.4 million, or 0.08%, at December 31, 2016, reflecting the increase in nonperforming loans.

The table that follows details nonperforming, underperforming and classified assets, in addition to related credit quality ratios as of March 31, 2017 and the four previous quarters.

38


 
 
Quarter ended
 
 
2017
 
2016
(Dollars in thousands)
 
Mar. 31,
 
Dec. 31,
 
Sep. 30,
 
June 30,
 
Mar. 31,
Nonperforming loans, nonperforming assets, and underperforming assets
Nonaccrual loans (1)
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
9,249

 
$
2,419

 
$
3,201

 
$
2,980

 
$
3,917

Lease financing
 
102

 
195

 
214

 
1,167

 
121

Construction real estate
 
1,075

 
0

 
0

 
0

 
0

Commercial real estate
 
14,324

 
6,098

 
5,985

 
8,750

 
8,577

Residential real estate
 
4,520

 
5,251

 
4,759

 
4,824

 
4,243

Home equity
 
3,571

 
3,400

 
3,815

 
4,123

 
5,036

Installment
 
322

 
367

 
327

 
433

 
113

Nonaccrual loans
 
33,163

 
17,730

 
18,301

 
22,277

 
22,007

Accruing troubled debt restructurings
 
29,948

 
30,240

 
32,164

 
28,022

 
30,127

Total nonperforming loans
 
63,111

 
47,970

 
50,465

 
50,299

 
52,134

Other real estate owned
 
5,300

 
6,284

 
7,577

 
9,302

 
11,939

Total nonperforming assets
 
68,411

 
54,254

 
58,042

 
59,601

 
64,073

Accruing loans past due 90 days or more
 
96

 
142

 
130

 
981

 
59

Total underperforming assets
 
$
68,507

 
$
54,396

 
$
58,172

 
$
60,582

 
$
64,132

Total classified assets
 
$
114,550

 
$
125,155

 
$
142,169

 
$
143,331

 
$
133,940

 
 

 

 
 
 
 
 
 
Credit quality ratios
Allowance for loan and lease losses to
 
 

Nonaccrual loans
 
169.85
%
 
326.91
%
 
314.84
%
 
254.56
%
 
244.16
%
Nonperforming loans
 
89.25
%
 
120.83
%
 
114.17
%
 
112.74
%
 
103.07
%
Total ending loans
 
0.98
%
 
1.01
%
 
1.00
%
 
0.99
%
 
0.98
%
Nonperforming loans to total loans
 
1.10
%
 
0.83
%
 
0.87
%
 
0.88
%
 
0.95
%
Nonperforming assets to
 
 
 
 
 
 
 
 
 
 
Ending loans, plus OREO
 
1.19
%
 
0.94
%
 
1.00
%
 
1.04
%
 
1.16
%
Total assets
 
0.80
%
 
0.64
%
 
0.69
%
 
0.72
%
 
0.78
%
Nonperforming assets, excluding accruing TDRs to
 
 
 
 
 
 
 
 
 
 
Ending loans, plus OREO
 
0.67
%
 
0.42
%
 
0.45
%
 
0.55
%
 
0.62
%
Total assets
 
0.45
%
 
0.28
%
 
0.31
%
 
0.38
%
 
0.41
%
Classified assets to total assets
 
1.34
%
 
1.48
%
 
1.70
%
 
1.72
%
 
1.63
%
(1) Nonaccrual loans include nonaccrual TDRs of $7.8 million, $5.1 million, $5.6 million, $8.0 million and $7.5 million as of March 31, 2017, December 31,2016, September 30, 2016, June 30, 2016 and March 31, 2016, respectively.

INVESTMENTS

First Financial's investment portfolio totaled $2.0 billion, or 23.5% of total assets, at March 31, 2017 and $1.9 billion, or 22.0% of total assets, at December 31, 2016.  Securities available-for-sale totaled $1.2 billion at March 31, 2017 and $1.0 billion at December 31, 2016, while held-to-maturity securities totaled $730.8 million at March 31, 2017 and $763.3 million at December 31, 2016.

The investment portfolio increased $147.6 million, or 8.0%, during the first three months of 2017, while the overall duration of the investment portfolio held constant at 3.2 years as of March 31, 2017 and December 31, 2016.

The Company invests in certain securities whose realization is dependent on future principal and interest repayments and thus carry credit risk. First Financial performs a detailed pre-purchase collateral and structural analysis on these securities and strategically invests in asset classes in which First Financial has expertise and experience, as well as a senior position in the capital structure. First Financial continuously monitors credit risk and geographic concentration risk in its evaluation of market opportunities that would enhance the overall performance of the portfolio.


39


First Financial recorded a $3.1 million unrealized after-tax loss on the investment portfolio as a component of equity in accumulated other comprehensive income at March 31, 2017. The total unrealized loss on the investment portfolio declined $1.5 million, or 32.7%, from a $4.5 million unrealized after-tax loss at December 31, 2016.

First Financial will continue to monitor loan and deposit demand, as well as balance sheet composition, capital sensitivity and the interest rate environment as it manages investment strategies in future periods.

DEPOSITS AND FUNDING

Total deposits as of March 31, 2017 were $6.5 billion, representing an increase of $4.1 million, or 0.1%, compared to December 31, 2016, as total interest-bearing deposits increased $4.5 million, or 0.1%, and total savings deposits increased $142.6 million, or 6.7%, while time deposit balances declined $119.3 million, or 9.0%, during the period.

Non-time deposit balances totaled $5.3 billion as of March 31, 2017, increasing $123.4 million, or 2.4%, compared to December 31, 2016, while time deposit balances declined as a result of the intentional runoff of higher-cost brokered CDs and seasonal activity.

Average deposits increased $305.8 million, or 5.0%, to $6.4 billion at March 31, 2017 from $6.1 billion at March 31, 2016 due to a $286.5 million, or 14.8%, increase in average savings deposits, a $112.3 million, or 8.1%, increase in average noninterest-bearing deposits and a $92.8 million, or 6.7%, increase in average interest-bearing deposits, partially offset by a $185.8 million, or 13.1%, decrease in average time deposits. Higher average deposit balances resulted from strong organic growth in recent periods.
 
Borrowed funds increased to $978.8 million at March 31, 2017 from $927.5 million at December 31, 2016. First Financial had $806.7 million in short-term borrowings with the FHLB at March 31, 2017 and $687.7 million as of December 31, 2016, which are used to manage normal liquidity needs and support the Company's asset and liability management strategies. In 2015, First Financial issued $120.0 million of subordinated notes. The subordinated notes have a fixed interest rate of 5.125% payable semiannually and mature on August 25, 2025. These notes are not redeemable by the Company or callable by the holders of the notes prior to maturity. The subordinated notes are treated as Tier 2 capital for regulatory capital purposes and are included in Long-term debt on the Consolidated Balance Sheets.

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, share repurchases, operating expenses and capital expenditures. 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. In addition to core deposit funding, First Financial also utilizes a variety of other short and long-term funding sources, which include subordinated notes, longer-term advances from the FHLB and its short-term line of credit.

As of March 31, 2017 and December 31, 2016, outstanding subordinated debt totaled $118.5 million, which included prepaid debt issuance costs of $1.5 million for each period. Long-term debt also included FHLB long-term advances of $0.3 million and $0.4 million as of March 31, 2017 and December 31, 2016, respectively as well as an interest-free $0.8 million capital loan outstanding with a municipality at March 31, 2017 and December 31, 2016.


40


Both First Financial and the Bank received investment grade credit ratings from Kroll Bond Rating Agency, Inc, an independent rating agency. These credit ratings impact the cost and availability of financing to First Financial, and a downgrade to these credit ratings could affect First Financial's or the Bank’s abilities to access the credit markets and potentially increase borrowing costs, which would negatively impact financial condition and liquidity. Key factors in maintaining high credit ratings include consistent and diverse earnings, strong credit quality and capital ratios, diverse funding sources and disciplined liquidity monitoring procedures. The ratings of First Financial and the Bank at March 31, 2017 were as follows:
 
First Financial Bancorp
First Financial Bank
Senior Unsecured Debt
BBB+
A-
Subordinated Debt
BBB
A-
Short-Term Debt
K2
BBB+
Deposit
N/A
K2
Short-Term Deposit
N/A
K2

For ease of borrowing execution, First Financial utilizes a blanket collateral agreement with the FHLB. First Financial pledged certain eligible residential, commercial and farm real estate loans, home equity lines of credit and government, agency and CMBS securities totaling $3.4 billion as collateral for borrowings from the FHLB as of March 31, 2017.  

First Financial maintains a short-term credit facility with an unaffiliated bank for $15.0 million that matures on May 29, 2017. This facility can have a variable or fixed interest rate and provides First Financial additional liquidity, if needed, for various corporate activities, including the repurchase of First Financial shares and the payment of dividends to shareholders. As of March 31, 2017 and December 31, 2016, there was no outstanding balance. The credit agreement requires First Financial to comply with certain covenants including those related to asset quality and capital levels, and First Financial was in compliance with all covenants associated with this line of credit as of March 31, 2017 and December 31, 2016.

First Financial's 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 $1.2 billion and $1.0 billion at March 31, 2017 and December 31, 2016, respectively.  Securities classified as held-to-maturity that are maturing within a short period of time are an additional source of liquidity and totaled $0.8 million and $1.0 million at March 31, 2017 and December 31, 2016, respectively.  Other types of assets such as cash and due from banks, interest-bearing deposits with other banks and loans maturing within one year, are also sources of liquidity.

At March 31, 2017, in addition to liquidity on hand of $157.0 million, First Financial had unused and available overnight wholesale funding of $2.0 billion, or 22.9% of total assets, to fund loan and deposit activities, as well as general corporate requirements.

Certain restrictions exist regarding the ability of First Financial’s subsidiary, First Financial Bank, to transfer funds to First Financial in the form of cash dividends, loans, other assets or advances.  The approval of the Bank's primary federal regulator is required to pay dividends in excess of regulatory limitations.  Dividends paid to First Financial from the Bank totaled $13.8 million for the first three months of 2017.  As of March 31, 2017, the Bank had retained earnings of $506.4 million of which $123.0 million was available for distribution to First Financial without prior regulatory approval. Additionally, First Financial had $55.7 million in cash at the parent company as of March 31, 2017, which approximates the Company’s annual regular shareholder dividend and operating expenses.

Share repurchases, if any, also impact First Financial's liquidity. For further information regarding share repurchases, see the Capital section that follows.

Capital expenditures, such as banking center expansions and technology investments were $3.1 million and $4.9 million for the first three months of 2017 and 2016, respectively. Management believes that sufficient liquidity exists to fund its future capital expenditure commitments.

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.


41


CAPITAL

Risk-Based Capital. The Board of Governors of the Federal Reserve System approved a final rule implementing changes intended to strengthen the regulatory capital framework for all banking organizations (Basel III) which became effective January 1, 2015, subject to a phase-in period for certain provisions. Basel III establishes and defines quantitative measures to ensure capital adequacy which require First Financial to maintain minimum amounts and ratios of Common Equity tier 1 capital, total and tier 1 capital to risk-weighted assets and tier 1 capital to average assets (leverage ratio).

The rule includes a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which began on January 1, 2016 at 0.625% and will be phased in over a four-year period, increasing by the same amount on each subsequent January 1, until fully phased-in on January 1, 2019. Further, Basel III increased the minimum ratio of tier 1 capital to risk-weighted assets from 4.0% to 6.0% and all banks are now subject to a 4.0% minimum leverage ratio. The required total risk-based capital ratio was unchanged. Failure to maintain the required common equity tier 1 capital conservation buffer will result in potential restrictions on a bank’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees. 

Management believes, as of March 31, 2017, that First Financial met all capital adequacy requirements to which it was subject.  To be categorized as well-capitalized, First Financial must maintain minimum Total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios as set forth in the table that follows. The Company's most recent regulatory notifications categorized First Financial as "well-capitalized" under the regulatory framework for prompt corrective action. There have been no conditions or events since those notifications that management believes has changed the Company's categorization.

The revised capital requirements also provide strict eligibility criteria for regulatory capital instruments, and the method for calculating risk-weighted assets includes identification of riskier assets which require higher capital allocations, such as highly volatile commercial real estate and nonaccrual loans. First Financial's tier 1 and total capital ratios increased from 10.46% and 13.10%, respectively, as of December 31, 2016 to 10.59% and 13.19% as of March 31, 2017. The increases in the Company's capital ratios were due primarily to $13.9 million, or 3.2% increase in retained earnings during the period. The leverage ratio increased to 8.69% at March 31, 2017 compared to 8.60% as of December 31, 2016 and the Company’s tangible common equity ratio increased from 7.96% at December 31, 2016 to 8.05% during the current quarter. All regulatory capital ratios exceeded the amounts necessary to be classified as “well capitalized,” and total regulatory capital exceeded the minimum requirement by $266.4 million on a consolidated basis at March 31, 2017


42


The following tables present the actual and required capital amounts and ratios as of March 31, 2017 and December 31, 2016 under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels based on the phase-in provisions of the Basel III Capital Rules as well as the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered "well capitalized" are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

 
 
Actual
 
Minimum capital
required - Basel III
current period
 
Required to be
considered well
capitalized - current period
 
Minimum capital
required - Basel III
fully phased-in
(Dollars in thousands)
 
Capital
amount
 
Ratio
 
Capital
amount
 
Ratio
 
Capital
amount
 
Ratio
 
Capital
amount
 
Ratio
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
Consolidated
 
$
716,678

 
10.59
%
 
$
389,007

 
5.75
%
 
N/A

 
N/A

 
$
473,574

 
7.00
%
First Financial Bank
 
759,342

 
11.25
%
 
388,265

 
5.75
%
 
$
438,908

 
6.50
%
 
472,671

 
7.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
Consolidated
 
716,782

 
10.59
%
 
490,487

 
7.25
%
 
N/A

 
N/A

 
575,054

 
8.50
%
First Financial Bank
 
759,446

 
11.25
%
 
489,552

 
7.25
%
 
540,195

 
8.00
%
 
573,957

 
8.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
892,161

 
13.19
%
 
625,794

 
9.25
%
 
N/A

 
N/A

 
710,360

 
10.50
%
First Financial Bank
 
823,755

 
12.20
%
 
624,600

 
9.25
%
 
675,244

 
10.00
%
 
709,006

 
10.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Leverage ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
716,782

 
8.69
%
 
329,881

 
4.00
%
 
N/A

 
N/A

 
329,881

 
4.00
%
First Financial Bank
 
759,446

 
9.21
%
 
329,759

 
4.00
%
 
412,199

 
5.00
%
 
329,759

 
4.00
%


43


The following table presents the actual and required capital amounts and ratios as of December 31, 2016 under the regulatory capital rules then in effect.
 
 
Actual
 
Minimum capital
required - Basel III
 
Required to be
considered well
capitalized
 
Minimum capital
required - Basel III
fully phased-in
(Dollars in thousands)
 
Capital
amount
 
Ratio
 
Capital
amount
 
Ratio
 
Capital
amount
 
Ratio
 
Capital
amount
 
Ratio
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
$
703,891

 
10.46
%
 
$
344,848

 
5.125
%
 
N/A

 
N/A

 
$
471,012

 
7.00
%
First Financial Bank
 
747,151

 
11.13
%
 
344,038

 
5.125
%
 
$
436,341

 
6.50
%
 
469,906

 
7.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
703,995

 
10.46
%
 
445,779

 
6.625
%
 
N/A

 
N/A

 
571,943

 
8.50
%
First Financial Bank
 
747,255

 
11.13
%
 
444,732

 
6.625
%
 
537,035

 
8.00
%
 
570,600

 
8.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
 
 
 
 
 
 

 
 

 
 

 
 
 
 
Consolidated
 
881,158

 
13.10
%
 
580,354

 
8.625
%
 
N/A

 
N/A

 
706,517

 
10.50
%
First Financial Bank
 
813,433

 
12.12
%
 
578,991

 
8.625
%
 
671,294

 
10.00
%
 
704,859

 
10.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Leverage ratio
 
 
 
 
 
 
 
 

 
 

 
 

 
 
 
 
Consolidated
 
703,995

 
8.60
%
 
327,605

 
4.00
%
 
N/A

 
N/A

 
327,605

 
4.00
%
First Financial Bank
 
747,255

 
9.13
%
 
327,436

 
4.00
%
 
409,295

 
5.00
%
 
327,436

 
4.00
%

First Financial generally seeks to balance the return of earnings to shareholders, through shareholder dividends and share repurchases, with capital retention to maintain adequate levels of capital and support the Company's growth plans, as well as share price considerations.

Shareholder Dividends. First Financial paid a dividend of $0.17 per common share on April 3, 2017 to shareholders of record as of March 2, 2017. Additionally, First Financial's board of directors authorized a dividend of $0.17 per common share for the next regularly scheduled dividend, payable on July 3, 2017 to shareholders of record as of June 2, 2017.

Share Repurchases. In October 2012, First Financial's board of directors approved a share repurchase plan under which the Company has the ability to repurchase up to 5,000,000 shares. First Financial did not repurchase any shares under this plan during the first three months of 2017 and 2016. At March 31, 2017, 3,509,133 common shares remained available for repurchase under the 2012 share repurchase plan.

ATM Offering. During the first quarter of 2017, First Financial initiated an "at-the-market" equity offering program to provide flexibility with respect to capital planning and to support future growth. First Financial was not active through the ATM program during the period.

Shareholders' Equity. Total shareholders’ equity at March 31, 2017 was $880.1 million compared to total shareholders’ equity at December 31, 2016 of $865.2 million.

For further detail, see the Consolidated Statements of Changes in Shareholders’ Equity.


44


RISK MANAGEMENT

First Financial manages risk through a structured 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 has, over time, embedded risk awareness as part of the culture of the Company.  First Financial has identified ten types of risk that it monitors in its ERM framework.  These risks include credit, market, operational, compliance, strategic, reputation, information technology, cyber, legal and environmental/external.

For a full discussion of these risks, see the Risk Management section in Management's Discussion and Analysis in First Financial’s 2016 Annual Report. The sections that follow provide additional discussion related to credit risk and market risk.

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, periodically reviewing and approving its credit exposures using credit policies and guidelines approved by the board of directors.  

Allowance for loan and lease losses. First Financial records a provision for loan and lease losses in the Consolidated Statements of Income to maintain the ALLL at a level considered sufficient to absorb probable incurred loan and lease losses inherent in the portfolio.

The ALLL was $56.3 million as of March 31, 2017 and $58.0 million as of December 31, 2016, and as a percentage of period-end loans, the ALLL was 0.98% as of March 31, 2017 compared to 1.01% as of December 31, 2016. The decline in the ALLL when compared to December 31, 2016 is consistent with the Company's stable overall credit outlook, and was the result of lower net charge-offs and classified asset balances as well as the decline in covered/formerly covered loans. Also impacting the decline in the ALLL was the downgrade of two relationships to nonaccrual status during the period. These downgrades resulted in no reserve as the relationships are considered well secured.

The ALLL as a percentage of nonaccrual loans was 169.85% at March 31, 2017 and 326.91% at December 31, 2016. The ALLL as a percentage of nonperforming loans, which include accruing TDRs, declined to 89.25% as of March 31, 2017 from 120.83% as of December 31, 2016 due to the decrease in the ALLL and a $15.1 million, or 31.6%, increase in nonperforming loans. The increase in nonperforming loans during the first quarter of 2017 was primarily driven by two relationships downgraded to nonaccrual status, however, the Company believes both relationships are well secured.

First quarter 2017 net charge-offs were $2.0 million, or 0.14% of average loans and leases on an annualized basis, compared to net charge-offs of $1.3 million, or 0.10% of average loans and leases on an annualized basis for the comparable quarter in 2016. The $0.7 million increase in net charge-offs from the comparable period in 2016 was primarily the result of higher commercial and industrial loan charge-offs and lower total recoveries, partially offset by a decline in commercial real estate loan charge-offs during the period.

Provision expense is a product of the Company's ALLL model, as well as net charge-off activity during the period. Provision expense was $0.4 million and $1.7 million during the first quarters of 2017 and 2016, respectively.

See Note 5 – Allowance for Loan and Lease Losses in the Notes to Consolidated Financial Statements, for further discussion of First Financial's ALLL.


45


The table that follows includes the activity in the ALLL for the quarterly periods presented.
 
Three months ended
 
2017
 
2016
(Dollars in thousands)
Mar. 31,
 
Dec. 31,
 
Sep. 30,
 
June 30,
 
Mar. 31,
Allowance for loan and lease loss activity
Balance at beginning of period
$
57,961

 
$
57,618

 
$
56,708

 
$
53,732

 
$
53,398

Provision for loan losses
367

 
2,761

 
1,687

 
4,037

 
1,655

Gross charge-offs
 
 
 
 
 
 
 
 
 
Commercial and industrial
1,743

 
1,590

 
296

 
265

 
479

Lease financing
0

 
0

 
0

 
0

 
0

Construction real estate
0

 
(2
)
 
64

 
28

 
3

Commercial real estate
485

 
990

 
1,135

 
1,596

 
1,262

Residential real estate
61

 
224

 
90

 
28

 
45

Home equity
180

 
232

 
475

 
398

 
340

Installment
49

 
60

 
223

 
30

 
73

Credit card
232

 
326

 
267

 
357

 
240

Total gross charge-offs
2,750

 
3,420

 
2,550

 
2,702

 
2,442

Recoveries
 
 
 
 
 
 
 
 
 
Commercial and industrial
262

 
186

 
327

 
420

 
222

Lease financing
0

 
0

 
0

 
1

 
0

Construction real estate
0

 
51

 
6

 
202

 
26

Commercial real estate
256

 
382

 
997

 
681

 
442

Residential real estate
9

 
54

 
38

 
81

 
63

Home equity
106

 
144

 
257

 
131

 
188

Installment
71

 
118

 
56

 
62

 
99

Credit card
44

 
67

 
92

 
63

 
81

Total recoveries
748

 
1,002

 
1,773

 
1,641

 
1,121

Total net charge-offs
2,002

 
2,418

 
777

 
1,061

 
1,321

Ending allowance for loan and lease losses
$
56,326

 
$
57,961

 
$
57,618

 
$
56,708

 
$
53,732

 
 
 
 
 
 
 
 
 
 
Net charge-offs to average loans and leases (annualized)
Commercial and industrial
0.34
 %
 
0.32
 %
 
(0.01
)%
 
(0.04
)%
 
0.06
 %
Lease financing
0.00
 %
 
0.00
 %
 
0.00
 %
 
0.00
 %
 
0.00
 %
Construction real estate
0.00
 %
 
(0.06
)%
 
0.06
 %
 
(0.20
)%
 
(0.03
)%
Commercial real estate
0.04
 %
 
0.10
 %
 
0.02
 %
 
0.16
 %
 
0.15
 %
Residential real estate
0.04
 %
 
0.13
 %
 
0.04
 %
 
(0.04
)%
 
(0.01
)%
Home equity
0.07
 %
 
0.08
 %
 
0.19
 %
 
0.23
 %
 
0.13
 %
Installment
(0.18
)%
 
(0.47
)%
 
1.40
 %
 
(0.29
)%
 
(0.25
)%
Credit card
1.73
 %
 
2.35
 %
 
1.64
 %
 
2.88
 %
 
1.55
 %
Total net charge-offs
0.14
 %
 
0.17
 %
 
0.05
 %
 
0.08
 %
 
0.10
 %




46


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 the Company's 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-priced 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 monitors the Company's interest rate risk position using income simulation models and EVE sensitivity analyses that capture both short-term and long-term interest rate risk exposure.  Income simulation involves forecasting 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.  For both NII and EVE modeling, First Financial leverages instantaneous parallel shocks to evaluate interest rate risk exposure across rising and falling rate scenarios. Additional scenarios evaluated include implied market forward rate forecasts and various non-parallel yield curve twists.

First Financial’s interest rate risk models are based on the contractual and assumed cash flows and repricing characteristics for all of the Company’s assets, liabilities and off-balance sheet exposure. A number of assumptions are also incorporated into the interest rate risk models, including prepayment behaviors and repricing spreads for assets as well as attrition and repricing rates for liabilities. Assumptions are primarily derived from behavior studies of the Company’s historical client base and are continually refined. Modeling the sensitivity of NII and EVE to changes in market interest rates is highly dependent on the assumptions incorporated into the modeling process.

Non-maturity deposit modeling is particularly dependent on the assumption for repricing sensitivity known as a beta. Beta is the amount by which First Financial’s interest bearing non-maturity deposit rates will increase when short-term interest rates rise. The Company utilized a weighted average deposit beta of 68% in its interest rate risk modeling as of March 31, 2017. First Financial also includes an assumption for the migration of non-maturity deposit balances into CDs for all upward rate scenarios beginning with the +200 BP scenario, thereby increasing deposit costs and reducing asset sensitivity.

Presented below is the estimated impact on First Financial’s NII and EVE position as of March 31, 2017, 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
(5.59
)%
 
1.64
 %
 
3.44
%
NII-Year 2
(8.25
)%
 
3.44
 %
 
7.00
%
EVE
(5.65
)%
 
(0.13
)%
 
0.84
%
(1) Because certain current interest rates are at or below 1.00%, the 100 bp 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.

“Risk-neutral” refers to the absence of a strong bias toward either asset or liability sensitivity. “Asset sensitivity” is when a company's interest-earning assets reprice more quickly or in greater quantities than interest-bearing liabilities. Conversely, “liability sensitivity” is when a company's interest-bearing liabilities reprice more quickly or in greater quantities than interest-earning assets. In a rising interest rate environment, asset sensitivity results in higher net interest income while liability sensitivity results in lower net interest income. In a declining interest rate environment, asset sensitivity results in lower net interest income while liability sensitivity results in higher net interest income.

First Financial was within all internal policy limits set for interest rate risk monitoring as of March 31, 2017. Projected results for NII became more asset sensitive during the first quarter of 2017 due to a greater mix of floating rate loan balances, coupled with the impact from recent interest rate increases resulting in a greater number of loans currently priced above the contractual floor rates. The projected results for EVE became less asset sensitive due to updated deposit discount rate assumptions. First Financial continues to manage its balance sheet with a bias toward asset sensitivity while simultaneously balancing the potential earnings impact of this strategy.


47


First Financial continually evaluates the sensitivity of its interest rate risk position to modeling assumptions. The table that follows reflects First Financial’s estimated NII sensitivity profile as of March 31, 2017 assuming both a 25% increase and decrease to the beta assumption on managed rate deposits:
 
Beta sensitivity (% change from base)
 
+100 BP
 
+200 BP
 
Beta 25% lower
 
Beta 25% higher
 
Beta 25% lower
 
Beta 25% higher
NII-Year 1
2.66
%
 
0.54
%
 
5.14
%
 
1.74
%
NII-Year 2
4.44
%
 
2.36
%
 
8.68
%
 
5.32
%

See the Net Interest Income section of Management’s Discussion and Analysis for further discussion.

CRITICAL ACCOUNTING POLICIES

First Financial’s Consolidated Financial Statements are prepared based on the application of the Company's accounting policies.  These policies require the reliance on estimates and assumptions.  Changes in underlying factors, assumptions or estimates could have a material impact on First Financial’s future financial condition and results of operations. In management’s opinion, certain accounting policies have a more significant impact than others on First Financial’s financial reporting.  For First Financial, these areas currently include accounting for the ALLL, 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 2016 Annual Report.  There were no material changes to these accounting policies during the three months ended March 31, 2017.

ACCOUNTING AND REGULATORY MATTERS

Note 2 - Recently Adopted and Issued Accounting Standards in the Notes to Consolidated Financial Statements, discusses new accounting standards adopted by First Financial during 2017 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

This Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not based on historical or current facts, but rather on our current beliefs, expectations, assumptions and projections about our business, the economy and other future conditions.   Forward-looking statements often include words such as ‘‘believes,’’ ‘‘anticipates,’’ “likely,” “expected,” ‘‘intends,’’ “could,” “should,” and other similar references to future periods.  Examples of forward-looking statements include, but are not limited to, statements we make about (i) our future operating or financial performance, including revenues, income or loss and earnings or loss per share, (ii) future common stock dividends, (iii) our capital structure, including future capital levels, (iv) our plans, objectives and strategies, and (v) the assumptions that underlie our forward-looking statements.

As with any forecast or projection, forward-looking statements are subject to inherent uncertainties, risks and changes in circumstances that may cause actual results to differ materially from those set forth in the forward-looking statements.  Important factors that could cause actual results to differ materially from those in our forward-looking statements include the following, without limitation: (i) economic, market, liquidity, credit, interest rate, operational and technological risks associated with the Company’s business; (ii) the effect of and changes in policies and laws or regulatory agencies, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and other legislation and regulation relating to the banking industry; (iii) management’s ability to effectively execute its business plans; (iv) mergers and acquisitions, including costs or difficulties related to the integration of acquired companies; (v) the Company’s ability to comply with the terms of loss sharing agreements with the FDIC; (vi) the effect of changes in accounting policies and practices; (vii) changes in consumer spending, borrowing and saving and changes in unemployment; (viii) changes in customers’ performance and creditworthiness; and (ix) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation.  Additional factors that may cause our actual results to differ materially from those described in our forward-looking statements can be found in the Form 10-K for the year ended December 31, 2016, as well as its other filings with the SEC, which are available on the SEC website at www.sec.gov.


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Forward-looking statements are meaningful only on the date when such statements are made.  We undertake no obligation to update any forward-looking statement to reflect events or circumstances that may arise after the date on which a forward-looking statement is made.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information contained in “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk” of this report is incorporated herein by reference in response to this item.


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.

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, 2016.

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, 2016.


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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 first quarter of 2017.

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
January 1 to January 31, 2017
 
 

 
 

 
 

 
 
Share repurchase program
 
0

 
$
0.00

 
0

 
3,509,133

Stock Plans
 
13,300

 
28.64

 
N/A

 
N/A

February 1 to February 28, 2017
 
 

 
 

 
 

 
 

Share repurchase program
 
0

 
$
0.00

 
0

 
3,509,133

Stock Plans
 
289

 
28.45

 
N/A

 
N/A

March 1 to March 31, 2017
 
 

 
 

 
 

 
 

Share repurchase program
 
0

 
$
0.00

 
0

 
3,509,133

Stock Plans
 
36,009

 
27.77

 
N/A

 
N/A

Total
 
 

 
 

 
 

 
 

Share repurchase program
 
0

 
$
0.00

 
0

 
 

Stock Plans
 
49,598

 
$
28.01

 
N/A

 
 


(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 1999 Stock Incentive Plan for Officers and Employees, Amended and Restated 2009 Non-Employee Director Stock Plan and 2012 Stock Plan (collectively referred to hereafter as the Stock Plans).  The table shows the number of shares purchased pursuant to the Stock Plans and the average price paid per share.  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 previously announced stock repurchase plan under which it is authorized to purchase shares of its common stock.  The plan has no expiration date.  The table that follows provides additional information regarding this plan.

Announcement
Date
 
Total Shares
Approved for
Repurchase
 
Total Shares
Repurchased
Under
the Plan
 
Expiration
Date
10/25/2012
 
5,000,000

 
1,490,867

 
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 March 31, 2017, formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (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.(1)

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. 001-34762.

(1)     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/ John M. Gavigan
 
/s/ Scott T. Crawley
John M. Gavigan
 
Scott T. Crawley
Senior Vice President and Chief Financial Officer
 
First Vice President and Controller
 
 
(Principal Accounting Officer)
 
 
 
 
 
 
 
 
 
 
Date
 
5/5/2017
 
Date
 
5/5/2017


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