Loans and Leases

First Financial offers clients a variety of commercial and consumer loan and lease products with various interest rates and payment terms. Commercial loan categories include C&I, CRE, 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, Kentucky and Illinois). 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 primarily to insurance agents and brokers that are secured by commissions and cash collateral accounts.

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 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 of 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 as 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 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 December 31, 2018
			Real Estate
(Dollars in thousands)	Commercial & industrial		Construction		Commercial		Lease financing		Total
Pass	$	2,432,834	$	548,323	$	3,664,434	$	90,902	$	6,736,493
Special Mention	24,594		603		38,653		0		63,850
Substandard	57,233		9		51,594		2,513		111,349
Doubtful	0		0		0		0		0
Total	$	2,514,661	$	548,935	$	3,754,681	$	93,415	$	6,911,692



	Residential real estate		Home Equity		Installment		Credit card		Total
Performing	$	939,936	$	811,108	$	93,038	$	46,382	$	1,890,464
Nonperforming	15,710		6,174		174		0		22,058
Total	$	955,646	$	817,282	$	93,212	$	46,382	$	1,912,522



	As of December 31, 2017
			Real Estate
(Dollars in thousands)	Commercial & industrial		Construction		Commercial		Lease 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



	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 due date of the scheduled payment.

Loan delinquency, including nonaccrual loans, was as follows:



	As of December 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	$	13,369	$	41	$	7,423	$	20,833	$	2,488,450	$	2,509,283	$	5,378	$	2,514,661	$	0
Lease financing	352		0		0		352		93,063		93,415		0		93,415		0
Construction real estate	0		0		0		0		548,687		548,687		248		548,935		0
Commercial real estate	6,279		1,158		12,644		20,081		3,682,455		3,702,536		52,145		3,754,681		0
Residential real estate	11,060		2,976		4,535		18,571		902,404		920,975		34,671		955,646		0
Home equity	5,245		1,228		2,578		9,051		804,835		813,886		3,396		817,282		0
Installment	420		37		145		602		92,128		92,730		482		93,212		0
Credit card	541		96		63		700		45,682		46,382		0		46,382		63
Total	$	37,266	$	5,536	$	27,388	$	70,190	$	8,657,704	$	8,727,894	$	96,320	$	8,824,214	$	63



	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 none of the principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual principal and interest.

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 196 TDRs totaling $38.5 million at December 31, 2018, including $16.1 million of loans on accrual status and $22.4 million of loans classified as nonaccrual. First Financial had no commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs, and the ALLL included reserves of $1.5 million related to TDRs as of December 31, 2018. For the years ended December 31, 2018, 2017 and 2016, First Financial charged off $0.9 million, $0.3 million and $0.5 million, respectively, for the portion of TDRs determined to be uncollectible. Additionally, as of December 31, 2018, approximately $7.9 million of the 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 of loans 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 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.

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 of loans classified as nonaccrual. First Financial had $0.9 million of commitments outstanding to lend additional funds to borrowers whose loan terms have 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 table provides information on loan modifications classified as TDRs during the years ended December 31, 2018, 2017 and 2016:



	Years ended December 31,
	2018					2017					2016
(Dollars in thousands)	Number of loans	Pre-modification loan balance		Period end balance		Number of loans	Pre-modification loan balance		Period end balance		Number of loans	Pre-modification loan balance		Period end balance
Commercial & industrial	17	$	23,943	$	23,890	7	$	5,724	$	5,661	18	$	3,402	$	3,508
Construction real estate	0	0		0		0	0		0		0	0		0
Commercial real estate	8	3,385		3,150		8	1,816		1,758		16	5,200		4,752
Residential real estate	13	1,148		1,073		6	416		315		5	840		787
Home equity	5	95		192		1	39		39		5	165		156
Installment	0	0		0		0	0		0		3	9		9
Total	43	$	28,571	$	28,305	22	$	7,995	$	7,773	47	$	9,616	$	9,212

The following table provides information on how TDRs were modified during the years ended December 31, 2018, 2017 and 2016:



	Years Ended December 31,
(Dollars in thousands)	2018		2017		2016
Extended maturities	$	4,093	$	3,261	$	2,571
Adjusted interest rates	52		2,767		0
Combination of rate and maturity changes	0		489		3,046
Forbearance	23,175		1,181		88
Other ⁽¹⁾	985		75		3,507
Total	$	28,305	$	7,773	$	9,212

⁽¹⁾ Other 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.

For the twelve months ended December 31, 2018, there was one TDR with an insignificant balance for which there was a payment default during the period that occurred within twelve months of the loan modification. For the twelve months ended December 31, 2017 and 2016, there was one TDR and four TDRs, respectively, with balances of $1.5 million and $0.3 million, respectively, 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, as of December 31:



(Dollars in thousands)	2018		2017		2016
Impaired loans
Nonaccrual loans ⁽¹⁾
Commercial & industrial	$	30,925	$	5,229	$	2,419
Lease financing	22		82		195
Construction real estate	9		29		0
Commercial real estate	20,500		10,616		6,098
Residential real estate	13,495		4,140		5,251
Home equity	5,580		3,743		3,400
Installment	169		243		367
Total nonaccrual loans	70,700		24,082		17,730
Accruing troubled debt restructurings	16,109		17,545		30,240
Total impaired loans	$	86,809	$	41,627	$	47,970

Interest income effect
Gross amount of interest that would have been recorded under original terms	$	4,656	$	3,397	$	2,848
Interest included in income
Nonaccrual loans	715		535		375
Troubled debt restructurings	642		710		876
Total interest included in income	1,357		1,245		1,251
Net impact on interest income	$	3,299	$	2,152	$	1,597

Commitments outstanding to borrowers with nonaccrual loans	$	200	$	0	$	0

⁽¹⁾ Nonaccrual loans include nonaccrual TDRs of $22.4 million, $6.4 million and $5.1 million as of December 31, 2018, 2017 and 2016, respectively.

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, excluding purchased impaired loans, is as follows:



	December 31, 2018						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	$	36,694	$	42,561	$	0	$	7,162	$	8,460	$	0
Lease financing	22		22		0		82		82		0
Construction real estate	9		26		0		29		60		0
Commercial real estate	23,513		31,375		0		18,423		20,837		0
Residential real estate	17,297		19,975		0		6,876		8,145		0
Home equity	6,351		7,461		0		4,356		5,399		0
Installment	174		563		0		255		422		0
Total	84,060		101,983		0		37,183		43,405		0

Loans with an allowance recorded
Commercial & industrial	939		939		667		169		169		169
Lease financing	0		0		0		0		0		0
Construction real estate	0		0		0		0		0		0
Commercial real estate	1,509		1,509		461		3,119		3,120		448
Residential real estate	301		301		32		1,056		1,063		160
Home equity	0		0		0		100		100		2
Installment	0		0		0		0		0		0
Total	2,749		2,749		1,160		4,444		4,452		779

Total
Commercial & industrial	37,633		43,500		667		7,331		8,629		169
Lease financing	22		22		0		82		82		0
Construction real estate	9		26		0		29		60		0
Commercial real estate	25,022		32,884		461		21,542		23,957		448
Residential real estate	17,598		20,276		32		7,932		9,208		160
Home equity	6,351		7,461		0		4,456		5,499		2
Installment	174		563		0		255		422		0
Total	$	86,809	$	104,732	$	1,160	$	41,627	$	47,857	$	779



	Years ended December 31,
	2018				2017				2016
(Dollars in thousands)	Average balance		Interest income recognized		Average balance		Interest income recognized		Average balance		Interest income recognized
Loans with no related allowance recorded
Commercial & industrial	$	14,498	$	360	$	13,167	$	280	$	13,619	$	309
Lease financing	21		0		112		4		150		3
Construction real estate	20		2		601		1		0		0
Commercial real estate	24,738		490		20,935		563		14,252		357
Residential real estate	11,359		301		7,616		196		7,752		199
Home equity	5,541		114		4,032		99		4,830		86
Installment	274		2		332		4		366		7
Total	56,451		1,269		46,795		1,147		40,969		961

Loans with an allowance recorded
Commercial & industrial	900		44		1,204		28		1,098		37
Lease financing	0		0		0		0		214		8
Construction real estate	0		0		0		0		0		0
Commercial real estate	1,402		18		2,634		40		7,792		211
Residential real estate	895		23		1,112		26		1,374		30
Home equity	80		3		101		4		101		4
Installment	0		0		0		0		0		0
Total	3,277		88		5,051		98		10,579		290

Total
Commercial & industrial	15,398		404		14,371		308		14,717		346
Lease financing	21		0		112		4		364		11
Construction real estate	20		2		601		1		0		0
Commercial real estate	26,140		508		23,569		603		22,044		568
Residential real estate	12,254		324		8,728		222		9,126		229
Home equity	5,621		117		4,133		103		4,931		90
Installment	274		2		332		4		366		7
Total	$	59,728	$	1,357	$	51,846	$	1,245	$	51,548	$	1,251

OREO. OREO is comprised of properties acquired by the Company primarily through the loan foreclosure or repossession process, or other resolution activities that result in partial or total satisfaction of problem loans.

Changes in OREO were as follows:



	Years ended December 31,
(Dollars in thousands)	2018			2017			2016
Balance at beginning of year	$	2,781		$	6,284		$	13,254
Additions
Commercial	1,269			1,732			1,850
Residential	1,913			2,387			1,022
Total additions	3,182			4,119			2,872
Disposals
Commercial	(2,967		)	(5,409		)	(6,993		)
Residential	(830		)	(1,574		)	(2,363		)
Total disposals	(3,797		)	(6,983		)	(9,356		)
Valuation adjustments
Commercial	(355		)	(439		)	(345		)
Residential	(410		)	(200		)	(141		)
Total valuation adjustments	(765		)	(639		)	(486		)
Balance at end of year	$	1,401		$	2,781		$	6,284