LOANS - EXCLUDING COVERED LOANS

First Financial offers clients a variety of commercial and consumer loan and lease products with various interest rates and payment terms. While lending activities are primarily concentrated in Ohio, Indiana and Kentucky, where the Bank currently operates banking centers, First Financial also provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector throughout the United States.

During the third quarter 2014, First Financial completed the mergers of The First Bexley Bank (First Bexley), Insight Bank (Insight) and Guernsey Bancorp, Inc (Guernsey). Loans acquired in connection with those mergers were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan and lease loss (ALLL). See Note 16 – Business Combinations for further detail.

First Financial also has loans that were previously acquired that are covered under loss sharing agreements. See Note 5 – Covered Loans for further detail.

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

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

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

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

Doubtful - First Financial assigns a doubtful rating to loans and leases with all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

The credit grades described above, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter.

First Financial considers repayment performance as the best indicator of credit quality for consumer loans. Consumer loans that have principal and interest payments that are past due by ninety days or more are generally classified as nonperforming. Additionally, consumer loans that have been modified in a troubled debt restructuring (TDR) are also classified as nonperforming.

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



	As of September 30, 2014
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Leasing		Total
Pass	$	1,262,525	$	188,144	$	1,867,535	$	71,314	$	3,389,518
Special Mention	23,592		3,830		26,917		1,902		56,241
Substandard	18,665		1,802		57,603		0		78,070
Doubtful	0		0		0		0		0
Total	$	1,304,782	$	193,776	$	1,952,055	$	73,216	$	3,523,829



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other		Total
Performing	$	419,862	$	47,163	$	413,518	$	35,925	$	916,468
Nonperforming	6,696		398		2,581		0		9,675
Total	$	426,558	$	47,561	$	416,099	$	35,925	$	926,143



	As of December 31, 2013
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Leasing		Total
Pass	$	991,161	$	78,872	$	1,422,215	$	80,135	$	2,572,383
Special Mention	23,053		65		23,832		0		46,950
Substandard	21,454		1,804		50,940		0		74,198
Doubtful	0		0		0		0		0
Total	$	1,035,668	$	80,741	$	1,496,987	$	80,135	$	2,693,531



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other		Total
Performing	$	344,325	$	46,559	$	373,472	$	35,592	$	799,948
Nonperforming	8,606		574		2,982		0		12,162
Total	$	352,931	$	47,133	$	376,454	$	35,592	$	812,110

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.

Loan delinquency, including loans classified as nonaccrual, was as follows:



	As of September 30, 2014
(Dollars in thousands)	30 – 59 days past due		60 – 89 days past due		> 90 days past due		Total past due		Current		Total		> 90 days past due and accruing
Loans
Commercial	$	2,063	$	333	$	1,727	$	4,123	$	1,300,659	$	1,304,782	$	0
Real estate - construction	0		0		223		223		193,553		193,776		0
Real estate - commercial	5,697		2,359		12,144		20,200		1,931,855		1,952,055		0
Real estate - residential	1,384		311		4,225		5,920		420,638		426,558		0
Installment	106		82		223		411		47,150		47,561		0
Home equity	1,043		553		951		2,547		413,552		416,099		0
Other	490		215		249		954		108,187		109,141		249
Total	$	10,783	$	3,853	$	19,742	$	34,378	$	4,415,594	$	4,449,972	$	249



	As of December 31, 2013
(Dollars in thousands)	30 - 59 days past due		60 - 89 days past due		> 90 days past due		Total past due		Current		Total		> 90 days past due and accruing
Loans
Commercial	$	2,016	$	161	$	7,136	$	9,313	$	1,026,355	$	1,035,668	$	0
Real estate - construction	0		0		223		223		80,518		80,741		0
Real estate - commercial	7,800		4,269		12,732		24,801		1,472,186		1,496,987		0
Real estate - residential	2,030		685		5,526		8,241		344,690		352,931		0
Installment	213		40		379		632		46,501		47,133		0
Home equity	985		292		1,648		2,925		373,529		376,454		0
Other	680		144		218		1,042		114,685		115,727		218
Total	$	13,724	$	5,591	$	27,862	$	47,177	$	3,458,464	$	3,505,641	$	218

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 ninety 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 such as insufficient collateral value. 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 may return to accrual status if collection of future principal and interest payments is no longer doubtful.

Troubled Debt Restructurings. A loan modification is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. The most common types of modifications include interest rate reductions, maturity extensions and modifications to principal amortization, including interest only structures. Modified terms are dependent upon the financial position and needs of the individual borrower. If the modification agreement is violated, the loan is 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.

First Financial had 246 TDRs totaling $26.6 million at September 30, 2014, including $13.4 million on accrual status and $13.2 million classified as nonaccrual. First Financial had an insignificant amount of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs at September 30, 2014. At September 30, 2014, the allowance for loan and lease losses included reserves of $2.9 million related to TDRs. For the three and nine months ended September 30, 2014, First Financial charged off $0.1 million and $0.9 million, respectively, for the portion of TDRs determined to be uncollectible. Additionally, at September 30, 2014, approximately $10.8 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year.

First Financial had 217 TDRs totaling $28.1 million at December 31, 2013, including $15.1 million of loans on accrual status and $13.0 million classified as nonaccrual. First Financial had an insignificant amount of commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2013, the allowance for loan and lease losses included reserves of $4.4 million related to TDRs. For the year ended December 31, 2013, First Financial charged off $2.8 million for the portion of TDRs determined to be uncollectible. At December 31, 2013, approximately $9.0 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 and nine months ended September 30, 2014 and 2013.



	Three months ended
	September 30, 2014					September 30, 2013
(Dollars in thousands)	Number of loans	Pre-modification loan balance		Period end balance		Number of loans	Pre-modification loan balance		Period end balance
Commercial	6	$	3,712	$	3,384	4	$	494	$	490
Real estate - construction	0	0		0		0	0		0
Real estate - commercial	2	375		373		10	2,502		2,493
Real estate - residential	7	322		264		3	387		367
Installment	3	6		6		3	34		33
Home equity	6	126		125		5	294		216
Total	24	$	4,541	$	4,152	25	$	3,711	$	3,599



	Nine months ended
	September 30, 2014					September 30, 2013
(Dollars in thousands)	Number of loans	Pre-modification loan balance		Period end balance		Number of loans	Pre-modification loan balance		Period end balance
Commercial	11	$	3,938	$	3,594	14	$	8,233	$	6,105
Real estate - construction	0	0		0		0	0		0
Real estate - commercial	11	2,583		2,453		17	4,752		4,719
Real estate - residential	30	1,712		1,527		33	2,356		2,178
Installment	6	21		19		14	188		115
Home equity	26	791		758		35	1,176		887
Total	84	$	9,045	$	8,351	113	$	16,705	$	14,004

The following table provides information on how TDRs were modified during the three and nine months ended September 30, 2014 and 2013.



	Three months ended				Nine months ended
	September 30,⁽²⁾				September 30,⁽²⁾
(Dollars in thousands)	2014		2013		2014		2013
Extended maturities	$	3,505	$	2,179	$	4,402	$	8,848
Adjusted interest rates	0		0		301		520
Combination of rate and maturity changes	402		613		1,643		850
Forbearance	0		0		320		0
Other ⁽¹⁾	245		807		1,685		3,786
Total	$	4,152	$	3,599	$	8,351	$	14,004

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

(2) Balances are as of period end

First Financial considers repayment performance as an indication of the effectiveness of the Company's loan modifications. Borrowers classified as a TDR that are ninety days or more past due on any principal or interest payments, or that prematurely terminate a restructured loan agreement without satisfying 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.

The following table provides information on TDRs for which there was a payment default during the period that occurred within twelve months of the loan modification:



	Three months ended
	September 30, 2014			September 30, 2013
(Dollars in thousands)	Number of loans	Period end balance		Number of loans	Period end balance
Commercial	0	$	0	1	$	29
Real estate - construction	0	0		0	0
Real estate - commercial	0	0		1	3
Real estate - residential	1	1		0	0
Installment	0	0		1	17
Home equity	0	0		2	54
Total	1	$	1	5	$	103



	Nine months ended
	September 30, 2014			September 30, 2013
(Dollars in thousands)	Number of loans	Period end balance		Number of loans	Period end balance
Commercial	1	$	143	4	$	4,882
Real estate - construction	0	0		0	0
Real estate - commercial	0	0		2	63
Real estate - residential	3	28		3	185
Installment	1	0		4	26
Home equity	3	92		5	64
Total	8	$	263	18	$	5,220

Impaired Loans. Loans classified as nonaccrual and loans modified as TDRs are considered impaired. The following table provides information on nonaccrual loans, TDRs and total impaired loans.



(Dollars in thousands)	September 30, 2014		December 31, 2013
Impaired loans
Nonaccrual loans⁽¹⁾
Commercial	$	6,486	$	7,934
Real estate-construction	223		223
Real estate-commercial	25,262		17,286
Real estate-residential	6,696		8,606
Installment	398		574
Home equity	2,581		2,982
Other	0		0
Nonaccrual loans ⁽¹⁾	41,646		37,605
Accruing troubled debt restructurings	13,369		15,094
Total impaired loans	$	55,015	$	52,699

(1) Nonaccrual loans include nonaccrual TDRs of $13.2 million and $13.0 million as of September 30, 2014 and December 31, 2013, respectively.



	Three months ended				Nine months ended
	September 30,				September 30,
(Dollars in thousands)	2014		2013		2014		2013
Interest income effect on impaired loans
Gross amount of interest that would have been recorded under original terms	$	838	$	1,142	$	2,342	$	3,399
Interest included in income
Nonaccrual loans	168		130		329		472
Troubled debt restructurings	110		115		320		316
Total interest included in income	278		245		649		788
Net impact on interest income	$	560	$	897	$	1,693	$	2,611

Commitments outstanding to borrowers with nonaccrual loans					$	0	$	0

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

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



	As of September 30, 2014
(Dollars in thousands)	Current balance		Contractual principal balance		Related allowance		Average current balance		YTD interest income recognized		Quarterly interest income recognized
Loans with no related allowance recorded
Commercial	$	6,581	$	7,981	$	0	$	6,095	$	97	$	44
Real estate - construction	223		443		0		223		0		0
Real estate - commercial	19,031		23,970		0		13,927		201		75
Real estate - residential	9,077		10,520		0		9,466		128		45
Installment	415		459		0		512		6		2
Home equity	3,009		3,968		0		3,018		40		15
Other	0		0		0		0		0		0
Total	38,336		47,341		0		33,241		472		181

Loans with an allowance recorded
Commercial	3,076		3,284		802		4,694		43		17
Real estate - construction	0		0		0		0		0		0
Real estate - commercial	11,372		12,467		3,338		10,229		102		69
Real estate - residential	2,130		2,190		368		2,106		30		10
Installment	0		0		0		0		0		0
Home equity	101		101		2		101		2		1
Other	0		0		0		0		0		0
Total	16,679		18,042		4,510		17,130		177		97

Total
Commercial	9,657		11,265		802		10,789		140		61
Real estate - construction	223		443		0		223		0		0
Real estate - commercial	30,403		36,437		3,338		24,156		303		144
Real estate - residential	11,207		12,710		368		11,572		158		55
Installment	415		459		0		512		6		2
Home equity	3,110		4,069		2		3,119		42		16
Other	0		0		0		0		0		0
Total	$	55,015	$	65,383	$	4,510	$	50,371	$	649	$	278



	As of December 31, 2013
(Dollars in thousands)	Current balance		Contractual principal balance		Related allowance		Average current balance		Interest income recognized
Loans with no related allowance recorded
Commercial	$	5,212	$	7,083	$	0	$	10,712	$	165
Real estate - construction	223		443		0		599		0
Real estate - commercial	12,355		16,431		0		16,563		380
Real estate - residential	10,291		12,087		0		10,225		152
Installment	642		663		0		463		6
Home equity	3,208		4,108		0		3,145		44
Other	0		0		0		148		0
Total	31,931		40,815		0		41,855		747

Loans with an allowance recorded
Commercial	7,013		8,353		2,080		5,047		71
Real estate - construction	0		0		0		726		7
Real estate - commercial	11,638		14,424		2,872		21,098		110
Real estate - residential	2,016		2,072		348		1,997		37
Installment	0		0		0		0		0
Home equity	101		101		2		101		2
Other	0		0		0		167		0
Total	20,768		24,950		5,302		29,136		227

Total
Commercial	12,225		15,436		2,080		15,759		236
Real estate - construction	223		443		0		1,325		7
Real estate - commercial	23,993		30,855		2,872		37,661		490
Real estate - residential	12,307		14,159		348		12,222		189
Installment	642		663		0		463		6
Home equity	3,309		4,209		2		3,246		46
Other	0		0		0		315		0
Total	$	52,699	$	65,765	$	5,302	$	70,991	$	974

OREO. Other real estate owned (OREO) is comprised of properties acquired by the Company through the loan foreclosure or repossession process, or other resolution activity that results in partial or total satisfaction of problem loans.

Changes in OREO were as follows:



	Three months ended				Nine months ended
	September 30,				September 30,
(Dollars in thousands)	2014		2013		2014		2013
Balance at beginning of period	$	13,370	$	11,798	$	19,806	$	12,526
Additions
Commercial	883		608		2,274		2,924
Residential	174		265		1,517		645
Total additions	1,057		873		3,791		3,569
Disposals
Commercial	2,197		500		10,243		2,382
Residential	77		154		505		805
Total disposals	2,274		654		10,748		3,187
Valuation adjustment
Commercial	772		71		1,310		632
Residential	65		142		223		472
Total valuation adjustment	837		213		1,533		1,104
Balance at end of period	$	11,316	$	11,804	$	11,316	$	11,804