LOANS AND LEASES

First Financial offers clients a variety of commercial and consumer loan and lease products with distinct interest rates and payment terms. 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.

Lending activities are primarily concentrated in states where the Bank operates banking centers (Ohio, Indiana and Kentucky). First Financial also offers two nationwide 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.

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 September 30, 2017
	Commercial		Real Estate				Lease
(Dollars in thousands)	and industrial		Construction		Commercial		financing		Total
Pass	$	1,842,432	$	420,101	$	2,472,395	$	84,607	$	4,819,535
Special Mention	15,002		0		7,540		44		22,586
Substandard	28,659		840		43,452		1,363		74,314
Doubtful	0		0		0		0		0
Total	$	1,886,093	$	420,941	$	2,523,387	$	86,014	$	4,916,435



(Dollars in thousands)	Residential real estate		Home equity		Installment		Credit card		Total
Performing	$	469,320	$	490,263	$	43,396	$	44,646	$	1,047,625
Nonperforming	8,644		4,079		254		0		12,977
Total	$	477,964	$	494,342	$	43,650	$	44,646	$	1,060,602



	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.

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



	As of September 30, 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	$	2,175	$	205	$	4,680	$	7,060	$	1,875,376	$	1,882,436	$	3,657	$	1,886,093	$	0
Lease financing	76		0		0		76		85,938		86,014		0		86,014		0
Construction real estate	1,612		0		824		2,436		418,213		420,649		292		420,941		0
Commercial real estate	1,353		865		9,337		11,555		2,449,194		2,460,749		62,638		2,523,387		0
Residential real estate	661		0		3,244		3,905		434,114		438,019		39,945		477,964		0
Home equity	2,249		590		1,224		4,063		486,495		490,558		3,784		494,342		0
Installment	109		43		215		367		42,547		42,914		736		43,650		0
Credit card	281		136		84		501		44,145		44,646		0		44,646		84
Total	$	8,516	$	1,839	$	19,608	$	29,963	$	5,836,022	$	5,865,985	$	111,052	$	5,977,037	$	84



	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
Credit card	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.

First Financial had 230 TDRs totaling $28.8 million at September 30, 2017, including $19.7 million on accrual status and $9.1 million classified as nonaccrual. First Financial had $0.1 million of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs, and the ALLL included reserves of $0.9 million related to TDRs at September 30, 2017. For the three months ended September 30, 2017, the Company charged off $0.1 million for the portion of TDRs determined to be uncollectible. For the nine months ended September 30, 2017 and 2016, First Financial charged off $0.2 million and $0.5 million respectively, for the portion of TDRs determined to be uncollectible. Additionally, as of September 30, 2017, approximately $14.6 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 and nine months ended September 30, 2017 and 2016:



	Three months ended
	September 30, 2017					September 30, 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	1	$	45	$	37	6	$	1,045	$	1,159
Construction real estate	0	0		0		0	0		0
Commercial real estate	1	285		285		5	3,550		3,531
Residential real estate	6	416		315		0	0		0
Home equity	1	39		39		1	16		16
Installment	0	0		0		0	0		0
Total	9	$	785	$	676	12	$	4,611	$	4,706

	Nine months ended
	September 30, 2017					September 30, 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	7	$	5,724	$	5,661	16	$	3,172	$	3,290
Construction real estate	0	0		0		0	0		0
Commercial real estate	7	1,791		1,734		15	5,060		4,612
Residential real estate	6	416		315		2	282		247
Home equity	1	39		39		5	165		156
Installment	0	0		0		3	9		9
Total	21	$	7,970	$	7,749	41	$	8,688	$	8,314

The following table provides information on how TDRs were modified during the three and nine months ended September 30, 2017 and 2016:



	Three months ended				Nine months ended
	September 30,				September 30,
(Dollars in thousands)	2017		2016		2017		2016
Extended maturities	$	0	$	1,831	$	3,261	$	2,352
Adjusted interest rates	0		0		2,767		0
Combination of rate and maturity changes	285		2,744		465		2,906
Forbearance	354		0		1,181		88
Other ⁽¹⁾	37		131		75		2,968
Total	$	676	$	4,706	$	7,749	$	8,314

⁽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.

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 three or nine months ended September 30, 2017. For the three months ended September 30, 2016, there were no TDRs and for the nine months ended September 30, 2016, there were four TDRs with balances of $0.3 million, for which there was a payment default during the period that occurred within twelve months of the loan 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)	September 30, 2017		December 31, 2016
Impaired loans
Nonaccrual loans⁽¹⁾
Commercial and industrial	$	9,026	$	2,419
Lease financing	87		195
Construction real estate	824		0
Commercial real estate	12,244		6,098
Residential real estate	4,333		5,251
Home equity	3,364		3,400
Installment	240		367
Credit card	0		0
Nonaccrual loans ⁽¹⁾	30,118		17,730
Accruing troubled debt restructurings	19,692		30,240
Total impaired loans	$	49,810	$	47,970

⁽¹⁾ Nonaccrual loans include nonaccrual TDRs of $9.1 million and $5.1 million as of September 30, 2017 and December 31, 2016, respectively.



	Three months ended				Nine months ended
	September 30,				September 30,
(Dollars in thousands)	2017		2016		2017		2016
Interest income effect on impaired loans
Gross amount of interest that would have been recorded under original terms	$	761	$	705	$	2,735	$	2,173
Interest included in income
Nonaccrual loans	140		97		445		269
Troubled debt restructurings	168		224		563		665
Total interest included in income	308		321		1,008		934
Net impact on interest income	$	453	$	384	$	1,727	$	1,239

First Financial individually reviews all impaired commercial loan relationships greater than $250,000, as well as consumer loan TDRs greater than $250,000, 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.

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



	As of September 30, 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	$	12,146	$	12,718	$	0	$	12,134	$	12,713	$	0
Lease financing	87		87		0		195		195		0
Construction real estate	824		824		0		0		0		0
Commercial real estate	23,089		25,607		0		12,232		14,632		0
Residential real estate	7,581		8,935		0		8,412		9,648		0
Home equity	3,978		5,094		0		3,973		5,501		0
Installment	254		426		0		437		603		0
Total	47,959		53,691		0		37,383		43,292		0

Loans with an allowance recorded
Commercial and industrial	179		179		179		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	508		508		44		8,228		8,277		593
Residential real estate	1,063		1,068		160		1,189		1,189		179
Home equity	101		101		2		101		101		2
Installment	0		0		0		0		0		0
Total	1,851		1,856		385		10,587		10,638		1,324

Total
Commercial and industrial	12,325		12,897		179		13,203		13,784		550
Lease financing	87		87		0		195		195		0
Construction real estate	824		824		0		0		0		0
Commercial real estate	23,597		26,115		44		20,460		22,909		593
Residential real estate	8,644		10,003		160		9,601		10,837		179
Home equity	4,079		5,195		2		4,074		5,602		2
Installment	254		426		0		437		603		0
Total	$	49,810	$	55,547	$	385	$	47,970	$	53,930	$	1,324

First Financial's average impaired loans by class and interest income recognized by class was as follows:



	Three months ended
	September 30, 2017				September 30, 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	$	13,730	$	63	$	13,015	$	83
Lease financing	91		1		155		1
Construction real estate	950		0		0		0
Commercial real estate	23,187		147		14,363		98
Residential real estate	7,569		55		7,887		52
Home equity	3,791		26		4,635		23
Installment	290		1		460		2
Total	49,608		293		40,515		259

Loans with an allowance recorded
Commercial and industrial	1,832		2		1,228		8
Lease financing	0		0		536		0
Construction real estate	0		0		0		0
Commercial real estate	652		5		6,704		46
Residential real estate	1,067		7		1,299		7
Home equity	101		1		101		1
Installment	0		0		0		0
Total	3,652		15		9,868		62

Total
Commercial and industrial	15,562		65		14,243		91
Lease financing	91		1		691		1
Construction real estate	950		0		0		0
Commercial real estate	23,839		152		21,067		144
Residential real estate	8,636		62		9,186		59
Home equity	3,892		27		4,736		24
Installment	290		1		460		2
Total	$	53,260	$	308	$	50,383	$	321



	Nine months ended
	September 30, 2017				September 30, 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	$	14,669	$	259	$	13,990	$	232
Lease financing	120		3		138		2
Construction real estate	744		0		0		0
Commercial real estate	21,563		451		14,757		259
Residential real estate	7,801		147		7,587		147
Home equity	3,951		77		5,044		65
Installment	351		4		348		5
Total	49,199		941		41,864		710

Loans with an allowance recorded
Commercial and industrial	1,463		26		1,106		26
Lease financing	0		0		268		8
Construction real estate	0		0		0		0
Commercial real estate	2,513		18		7,684		163
Residential real estate	1,126		20		1,420		24
Home equity	101		3		101		3
Installment	0		0		0		0
Total	5,203		67		10,579		224

Total
Commercial and industrial	16,132		285		15,096		258
Lease financing	120		3		406		10
Construction real estate	744		0		0		0
Commercial real estate	24,076		469		22,441		422
Residential real estate	8,927		167		9,007		171
Home equity	4,052		80		5,145		68
Installment	351		4		348		5
Total	$	54,402	$	1,008	$	52,443	$	934

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						Nine months ended
	September 30,						September 30,
(Dollars in thousands)	2017			2016			2017			2016
Balance at beginning of period	$	5,961		$	10,031		$	6,284		$	13,254
Additions
Commercial and industrial	1,559			936			1,731			1,824
Residential real estate	235			303			2,313			594
Total additions	1,794			1,239			4,044			2,418
Disposals
Commercial and industrial	(3,684		)	(2,670		)	(5,291		)	(4,763		)
Residential real estate	(821		)	(66		)	(1,506		)	(2,145		)
Total disposals	(4,505		)	(2,736		)	(6,797		)	(6,908		)
Valuation adjustment
Commercial and industrial	(102		)	(186		)	(264		)	(332		)
Residential real estate	(32		)	(42		)	(151		)	(126		)
Total valuation adjustment	(134		)	(228		)	(415		)	(458		)
Balance at end of period	$	3,116		$	8,306		$	3,116		$	8,306

FDIC indemnification asset. 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. First Financial's FDIC indemnification asset balance was $8.2 million and $12.0 million as of September 30, 2017 and December 31, 2016, respectively.

The accounting for the FDIC indemnification asset is closely related to the accounting for the underlying, indemnified assets as well as the ongoing 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.