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LOANS AND LEASES

3 Months Ended

Mar. 31, 2018

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 accounts primarily to insurance agents and brokers that are secured by commissions and cash collateral.

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, 2018
	Commercial		Real Estate				Lease
(Dollars in thousands)	& industrial		Construction		Commercial		financing		Total
Pass	$	1,911,912	$	482,679	$	2,502,882	$	80,489	$	4,977,962
Special Mention	5,228		11,947		6,422		0		23,597
Substandard	26,601		39		34,747		1,128		62,515
Doubtful	0		0		0		0		0
Total	$	1,943,741	$	494,665	$	2,544,051	$	81,617	$	5,064,074



(Dollars in thousands)	Residential real estate		Home equity		Installment		Credit card		Total
Performing	$	461,409	$	479,470	$	38,942	$	46,472	$	1,026,293
Nonperforming	7,175		4,173		306		0		11,654
Total	$	468,584	$	483,643	$	39,248	$	46,472	$	1,037,947



	As of December 31, 2017
	Commercial		Real Estate				Lease
(Dollars in thousands)	& industrial		Construction		Commercial		financing		Total
Pass	$	1,882,464	$	467,687	$	2,446,999	$	88,078	$	4,885,228
Special Mention	6,226		0		4,436		0		10,662
Substandard	24,053		43		38,656		1,269		64,021
Doubtful	0		0		0		0		0
Total	$	1,912,743	$	467,730	$	2,490,091	$	89,347	$	4,959,911



(Dollars in thousands)	Residential real estate		Home equity		Installment		Credit card		Total
Performing	$	463,459	$	489,148	$	41,331	$	46,691	$	1,040,629
Nonperforming	7,932		4,456		255		0		12,643
Total	$	471,391	$	493,604	$	41,586	$	46,691	$	1,053,272

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 March 31, 2018
(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 & industrial	$	1,399	$	4,857	$	1,323	$	7,579	$	1,933,461	$	1,941,040	$	2,701	$	1,943,741	$	0
Lease financing	943		0		0		943		80,674		81,617		0		81,617		0
Construction real estate	0		0		0		0		494,389		494,389		276		494,665		0
Commercial real estate	236		3,317		12,255		15,808		2,475,106		2,490,914		53,137		2,544,051		0
Residential real estate	497		341		1,359		2,197		427,689		429,886		38,698		468,584		0
Home equity	1,395		508		2,000		3,903		476,446		480,349		3,294		483,643		0
Installment	284		74		271		629		38,018		38,647		601		39,248		0
Credit card	459		228		529		1,216		45,256		46,472		0		46,472		529
Total	$	5,213	$	9,325	$	17,737	$	32,275	$	5,971,039	$	6,003,314	$	98,707	$	6,102,021	$	529



	As of December 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 & industrial	$	755	$	1,657	$	5,078	$	7,490	$	1,901,821	$	1,909,311	$	3,432	$	1,912,743	$	0
Lease financing	485		0		0		485		88,862		89,347		0		89,347		0
Construction real estate	234		0		0		234		467,216		467,450		280		467,730		0
Commercial real estate	1,716		201		8,777		10,694		2,419,969		2,430,663		59,428		2,490,091		0
Residential real estate	526		811		1,992		3,329		430,500		433,829		37,562		471,391		0
Home equity	2,716		394		1,753		4,863		485,127		489,990		3,614		493,604		0
Installment	179		29		205		413		40,529		40,942		644		41,586		0
Credit card	285		87		62		434		46,257		46,691		0		46,691		62
Total	$	6,896	$	3,179	$	17,867	$	27,942	$	5,880,281	$	5,908,223	$	104,960	$	6,013,183	$	62

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 204 TDRs totaling $21.0 million at March 31, 2018, including $14.9 million on accrual status and $6.0 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, and the ALLL included reserves of $2.0 million related to TDRs at March 31, 2018. For the three months ended March 31, 2018, First Financial charged off $0.1 million for the portion of TDRs determined to be uncollectible. Additionally, as of March 31, 2018, approximately $13.3 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year.

First Financial had 214 TDRs totaling $23.9 million at December 31, 2017, including $17.5 million of loans on accrual status and $6.4 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, 2017, the ALLL included reserves of $1.3 million related to TDRs, and $17.2 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, 2018 and 2017:



	Three months ended
	March 31, 2018					March 31, 2017
(Dollars in thousands)	Number of loans	Pre-modification loan balance		Period end balance		Number of loans	Pre-modification loan balance		Period end balance
Commercial & industrial	4	$	928	$	913	2	$	3,502	$	3,441
Construction real estate	0	0		0		0	0		0
Commercial real estate	2	72		72		0	0		0
Residential real estate	2	93		93		0	0		0
Home equity	0	0		0		0	0		0
Installment	0	0		0		0	0		0
Total	8	$	1,093	$	1,078	2	$	3,502	$	3,441

The following table provides information on how TDRs were modified during the three months ended March 31, 2018 and 2017:



	Three months ended
	March 31,
(Dollars in thousands)	2018		2017
Extended maturities	$	888	$	674
Adjusted interest rates	52		2,767
Combination of rate and maturity changes	0		0
Forbearance	0		0
Other ⁽¹⁾	138		0
Total	$	1,078	$	3,441

⁽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 months ended March 31, 2018 or March 31, 2017.

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, 2018		December 31, 2017
Impaired loans
Nonaccrual loans⁽¹⁾
Commercial & industrial	$	6,275	$	5,229
Lease financing	0		82
Construction real estate	26		29
Commercial real estate	16,878		10,616
Residential real estate	3,324		4,140
Home equity	3,484		3,743
Installment	296		243
Nonaccrual loans	30,283		24,082
Accruing troubled debt restructurings	14,943		17,545
Total impaired loans	$	45,226	$	41,627

⁽¹⁾ Nonaccrual loans include nonaccrual TDRs of $6.0 million and $6.4 million as of March 31, 2018 and December 31, 2017, respectively.



	Three months ended
	March 31,
(Dollars in thousands)	2018		2017
Interest income effect on impaired loans
Gross amount of interest that would have been recorded under original terms	$	802	$	816
Interest included in income
Nonaccrual loans	80		142
Troubled debt restructurings	124		226
Total interest included in income	204		368
Net impact on interest income	$	598	$	448

First Financial individually reviews all impaired commercial loan relationships, 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, 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 March 31, 2018						As of December 31, 2017
(Dollars in thousands)	Current balance		Contractual principal balance		Related allowance		Current balance		Contractual principal balance		Related allowance
Loans with no related allowance recorded
Commercial & industrial	$	8,571	$	8,777	$	0	$	7,162	$	8,460	$	0
Lease financing	0		0		0		82		82		0
Construction real estate	26		58		0		29		60		0
Commercial real estate	24,377		28,871		0		18,423		20,837		0
Residential real estate	6,130		7,282		0		6,876		8,145		0
Home equity	4,072		4,884		0		4,356		5,399		0
Installment	306		469		0		255		422		0
Total	43,482		50,341		0		37,183		43,405		0

Loans with an allowance recorded
Commercial & industrial	239		317		100		169		169		169
Lease financing	0		0		0		0		0		0
Construction real estate	0		0		0		0		0		0
Commercial real estate	359		359		26		3,119		3,120		448
Residential real estate	1,045		1,045		160		1,056		1,063		160
Home equity	101		101		2		100		100		2
Installment	0		0		0		0		0		0
Total	1,744		1,822		288		4,444		4,452		779

Total
Commercial & industrial	8,810		9,094		100		7,331		8,629		169
Lease financing	0		0		0		82		82		0
Construction real estate	26		58		0		29		60		0
Commercial real estate	24,736		29,230		26		21,542		23,957		448
Residential real estate	7,175		8,327		160		7,932		9,208		160
Home equity	4,173		4,985		2		4,456		5,499		2
Installment	306		469		0		255		422		0
Total	$	45,226	$	52,163	$	288	$	41,627	$	47,857	$	779

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



	Three months ended
	March 31, 2018				March 31, 2017
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded
Commercial & industrial	$	7,867	$	26	$	15,607	$	109
Lease financing	41		0		149		1
Construction real estate	28		1		538		0
Commercial real estate	21,400		99		19,939		160
Residential real estate	6,503		47		8,033		46
Home equity	4,214		20		4,111		24
Installment	281		0		413		2
Total	40,334		193		48,790		342

Loans with an allowance recorded
Commercial & industrial	204		0		1,094		13
Lease financing	0		0		0		0
Construction real estate	0		0		0		0
Commercial real estate	1,739		3		4,374		5
Residential real estate	1,051		7		1,185		7
Home equity	101		1		101		1
Installment	0		0		0		0
Total	3,095		11		6,754		26

Total
Commercial & industrial	8,071		26		16,701		122
Lease financing	41		0		149		1
Construction real estate	28		1		538		0
Commercial real estate	23,139		102		24,313		165
Residential real estate	7,554		54		9,218		53
Home equity	4,315		21		4,212		25
Installment	281		0		413		2
Total	$	43,429	$	204	$	55,544	$	368

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)	2018			2017
Balance at beginning of period	$	2,781		$	6,284
Additions
Commercial & industrial	170			122
Residential real estate	459			165
Total additions	629			287
Disposals
Commercial & industrial	(2,104		)	(925		)
Residential real estate	(118		)	(237		)
Total disposals	(2,222		)	(1,162		)
Valuation adjustment
Commercial & industrial	(97		)	(46		)
Residential real estate	(26		)	(63		)
Total valuation adjustment	(123		)	(109		)
Balance at end of period	$	1,065		$	5,300

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.

In the first quarter of 2018, First Financial received a settlement payment from the FDIC finalizing the termination of its loss sharing agreements. Therefore, First Financial had no FDIC indemnification asset balance as of March 31, 2018. All future recoveries, gains, losses and expenses related to assets previously covered under loss sharing agreements will be fully recognized by First Financial. As of December 31, 2017, the FDIC indemnification asset balance was $1.9 million.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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