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, 2019                                                   

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 800 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 every Interactive Data File required to be submitted 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. The registrant has one class of common stock (no par value) with 98,613,714 shares outstanding at May 6, 2019.

Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, No par value	FFBC	The NASDAQ Stock Market LLC

FIRST FINANCIAL BANCORP.

INDEX

	Page No.
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets - March 31, 2019 (unaudited) and December 31, 2018	1
Consolidated Statements of Income - Three Months Ended March 31, 2019 and 2018 (unaudited)	2
Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2019 and 2018 (unaudited)	3
Consolidated Statements of Changes in Shareholders’ Equity - Three Months Ended March 31, 2019 and 2018 (unaudited)	4
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2019 and 2018 (unaudited)	5
Notes to Consolidated Financial Statements (unaudited)	6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	49
Item 4 - Controls and Procedures	49
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings	50
Item 1A - Risk Factors	50
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 6 - Exhibits	52
Signatures	53

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 Management's Discussion and Analysis of Financial Condition and Results of Operations.

AFS	Available-for-sale	FASB	Financial Accounting Standards Board
ALLL	Allowance for loan and lease losses	FDIC	Federal Deposit Insurance Corporation
AOCI	Accumulated other comprehensive income	FHLB	Federal Home Loan Bank
ASC	Accounting standards codification	First Financial	First Financial Bancorp.
ASU	Accounting standards update	Form 10-K	First Financial Bancorp. Annual Report on Form 10-K
ATM	Automated teller machine	FRB	Federal Reserve Bank
Bank	First Financial Bank	GAAP	U.S. Generally Accepted Accounting Principles
Basel III	Basel Committee regulatory capital reforms, Third Basel Accord	HTM	Held-to-maturity
Bp/bps	Basis point(s)	Insignificant	Less than $0.1 million
BOLI	Bank Owned Life Insurance	IRLC	Interest Rate Lock Commitment
CAM	Common Area Maintenance	MSFG	MainSource Financial Group, Inc.
CDs	Certificates of deposit	N/A	Not applicable
C&I	Commercial & industrial	NII	Net interest income
CRE	Commercial real estate	OREO	Other real estate owned
Company	First Financial Bancorp.	PCA	Prompt corrective action
DDA	Demand Deposit Account	ROU	Right-of-use
ERM	Enterprise risk management	SEC	U.S. Securities and Exchange Commission
EVE	Economic value of equity	Topic 842	FASB ASC Topic 842, Leasing
Fair Value Topic	FASB ASC Topic 820, Fair Value Measurement	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, 2019			December 31, 2018
	(Unaudited)
Assets
Cash and due from banks	$	169,004		$	236,221
Interest-bearing deposits with other banks	50,224			37,738
Investment securities available-for-sale, at fair value (amortized cost $3,096,085 at March 31, 2019 and $2,792,326 at December 31, 2018)	3,113,811			2,779,255
Investment securities held-to-maturity (fair value $153,075 at March 31, 2019 and $424,118 at December 31, 2018)	158,305			429,328
Other investments	115,731			115,660
Loans held for sale	8,217			4,372
Loans and leases
Commercial & industrial	2,543,427			2,514,661
Lease financing	95,573			93,415
Construction real estate	458,113			548,935
Commercial real estate	3,802,179			3,754,681
Residential real estate	975,120			955,646
Home equity	797,118			817,282
Installment	90,689			93,212
Credit card	46,982			46,382
Total loans and leases	8,809,201			8,824,214
Less:  Allowance for loan and lease losses	56,722			56,542
Net loans and leases	8,752,479			8,767,672
Premises and equipment	210,676			215,652
Goodwill	879,727			880,251
Other intangibles	38,571			40,805
Accrued interest and other assets	577,518			479,706
Total assets	$	14,074,263		$	13,986,660
Liabilities
Deposits
Interest-bearing demand	$	2,235,036		$	2,307,071
Savings	3,100,894			3,167,325
Time	2,309,810			2,173,564
Total interest-bearing deposits	7,645,740			7,647,960
Noninterest-bearing	2,488,157			2,492,434
Total deposits	10,133,897			10,140,394
Federal funds purchased	95,015			183,591
FHLB short-term borrowings	952,400			857,100
Total short-term borrowings	1,047,415			1,040,691
Long-term debt	546,423			570,739
Total borrowed funds	1,593,838			1,611,430
Accrued interest and other liabilities	216,109			156,587
Total liabilities	11,943,844			11,908,411
Shareholders' equity
Common stock - no par value
Authorized - 160,000,000 shares; Issued - 104,281,794 shares in 2019 and 2018	1,622,554			1,633,256
Retained earnings	626,408			600,014
Accumulated other comprehensive loss	(19,635		)	(44,408		)
Treasury stock, at cost, 5,667,922 shares in 2019 and 6,387,508 shares in 2018	(98,908		)	(110,613		)
Total shareholders' equity	2,130,419			2,078,249
Total liabilities and shareholders' equity	$	14,074,263		$	13,986,660

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,
	2019			2018
Interest income
Loans and leases, including fees	$	123,056		$	74,920
Investment securities
Taxable	24,235			13,670
Tax-exempt	4,258			1,657
Total interest on investment securities	28,493			15,327
Other earning assets	210			107
Total interest income	151,759			90,354
Interest expense
Deposits	19,243			10,298
Short-term borrowings	5,960			2,663
Long-term borrowings	5,041			1,581
Total interest expense	30,244			14,542
Net interest income	121,515			75,812
Provision for loan and lease losses	14,083			2,303
Net interest income after provision for loan and lease losses	107,432			73,509
Noninterest income
Service charges on deposit accounts	8,903			5,039
Trust and wealth management fees	4,070			3,954
Bankcard income	5,586			3,394
Client derivative fees	1,704			1,757
Net gain from sales of loans	1,890			588
Net gain (loss) on sales/transfers of investment securities	(178		)	0
Other	4,852			2,206
Total noninterest income	26,827			16,938
Noninterest expenses
Salaries and employee benefits	47,912			31,102
Net occupancy	6,630			4,497
Furniture and equipment	3,416			2,040
Data processing	5,127			3,672
Marketing	1,606			801
Communication	728			459
Professional services	2,252			2,198
State intangible tax	1,310			765
FDIC assessments	950			894
Intangible assets amortization	2,045			280
Other	6,523			5,580
Total noninterest expenses	78,499			52,288
Income before income taxes	55,760			38,159
Income tax expense	9,921			7,653
Net income	$	45,839		$	30,506
Net earnings per common share - basic	$	0.47		$	0.49
Net earnings per common share - diluted	$	0.47		$	0.49
Cash dividends declared per share	$	0.22		$	0.19
Average common shares outstanding - basic	97,926,088			61,654,686
Average common shares outstanding - diluted	98,436,311			62,180,744

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,
	2019		2018
Net income	$	45,839	$	30,506
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on debt securities arising during the period	23,505		(9,830		)
Change in retirement obligation	290		323
Unrealized gain (loss) on derivatives	72		156
Other comprehensive income (loss)	23,867		(9,351		)
Comprehensive income	$	69,706	$	21,155
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				Retained			Accumulated other comprehensive			Treasury stock
	Shares	Amount			Earnings			income (loss)			Shares		Amount			Total
Balance at January 1, 2018	68,730,731	$	573,109		$	491,847		$	(20,390	)	(6,661,644	)	$	(113,902	)	$	930,664
Impact of cumulative effect of change in accounting principles					5,093			(5,093		)						0
Net income					30,506											30,506
Other comprehensive income (loss)								(9,351		)						(9,351		)
Cash dividends declared:
Common stock at $0.19 per share					(11,797		)									(11,797		)
Warrant exercises		(24		)							1,428		24			0
Exercise of stock options, net of shares purchased		(65		)							11,800		202			137
Restricted stock awards, net of forfeitures		(3,517		)							131,508		1,389			(2,128		)
Share-based compensation expense		1,954														1,954
Balance at March 31, 2018	68,730,731	$	571,457		$	515,649		$	(34,834	)	(6,516,908	)	$	(112,287	)	$	939,985
Balance at January 1, 2019	104,281,794	$	1,633,256		$	600,014		$	(44,408	)	(6,387,508	)	$	(110,613	)	$	2,078,249
Impact of cumulative effect of change in accounting principles					2,221			906								3,127
Net income					45,839											45,839
Other comprehensive income (loss)								23,867								23,867
Cash dividends declared:
Common stock at $0.22 per share					(21,666		)									(21,666		)
Warrant exercises		(7,830		)							452,134		7,830			0
Exercise of stock options, net of shares purchased		(264		)							20,424		354			90
Restricted stock awards, net of forfeitures		(5,604		)							247,028		3,521			(2,083		)
Share-based compensation expense		2,996														2,996
Balance at March 31, 2019	104,281,794	$	1,622,554		$	626,408		$	(19,635	)	(5,667,922	)	$	(98,908	)	$	2,130,419

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,
	2019			2018
Operating activities
Net income	$	45,839		$	30,506
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses	14,083			2,303
Depreciation and amortization	6,489			3,076
Stock-based compensation expense	2,996			1,954
Pension expense (income)	375			(156		)
Net amortization (accretion) on investment securities	2,649			2,801
Net (gain) loss on sales of investment securities	178			0
Originations of loans held for sale	(41,227		)	(22,383		)
Net gains from sales of loans held for sale	(1,890		)	(588		)
Proceeds from sales of loans held for sale	39,273			24,542
Deferred income taxes	12,625			(1,736		)
Amortization of operating leases	1,826			0
Payments for operating leases	(1,823		)	0
Decrease (increase) cash surrender value of life insurance	(1,534		)	786
Decrease (increase) in interest receivable	(3,109		)	(1,687		)
(Decrease) increase in interest payable	322			(1,013		)
Decrease (increase) in other assets	(30,168		)	15,414
(Decrease) increase in other liabilities	(8,908		)	(1,491		)
Net cash provided by (used in) operating activities	37,996			52,328
Investing activities
Proceeds from sales of securities available-for-sale	0			0
Proceeds from calls, paydowns and maturities of securities available-for-sale	95,114			52,252
Purchases of securities available-for-sale	(143,290		)	(77,037		)
Proceeds from calls, paydowns and maturities of securities held-to-maturity	2,398			19,718
Net decrease (increase) in interest-bearing deposits with other banks	(12,486		)	23,774
Net decrease (increase) in loans and leases	438			(89,526		)
Proceeds from disposal of other real estate owned	183			2,222
Purchases of premises and equipment	(1,268		)	(4,979		)
Net cash provided by (used in) investing activities	(58,911		)	(73,576		)
Financing activities
Net (decrease) increase in total deposits	(6,379		)	115,458
Net (decrease) increase in short-term borrowings	6,724			(156,233		)
Payments on long-term debt	(25,187		)	0
Proceeds from FHLB borrowings	0			50,000
Cash dividends paid on common stock	(21,550		)	(22,183		)
Proceeds from exercise of stock options	90			137
Net cash provided by (used in) financing activities	(46,302		)	(12,821		)
Cash and due from banks
Change in cash and due from banks	(67,217		)	(34,069		)
Cash and due from banks at beginning of period	236,221			150,650
Cash and due from banks at end of period	$	169,004		$	116,581

See Notes to Consolidated Financial Statements.

5

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

NOTE 1:  BASIS OF PRESENTATION

The Consolidated Financial Statements of First Financial Bancorp., a financial holding company principally serving Ohio, Indiana, Kentucky and Illinois, 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. Accordingly, they may not include all of the information and accompanying notes necessary to constitute a complete set of financial statements required by GAAP and should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  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, 2018 has been derived from the audited financial statements in the Company’s 2018 Form 10-K.

NOTE 2:  RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS

Accounting Guidance Adopted in 2019

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 where the Bank is the lessee, except for short-term leases that are subject to an accounting policy election, were recorded on the balance sheet by establishing a lease liability and corresponding ROU asset. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. As the Company elected the transition option provided in ASU No. 2018-11, the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). The Company also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component and the option not to recognize ROU assets and lease liabilities that arise from short-term leases. The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of ROU assets. The guidance in this ASU became effective January 1, 2019 at which time the Company recorded on the Consolidated Balance Sheet an ROU asset of $60.2 million and a lease liability of $65.8 million. For further detail, see Note 7 – Leases.

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 amended 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 became effective in January 1, 2019 and did not have a material impact on the Consolidated Financial Statements.

6

In August 2017, the FASB issued an update (ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities) to better align financial reporting for hedging activities with the economic objectives of those activities. This update aligns certain aspects of hedge documentation, effectiveness assessments, accounting and disclosures and expands permissible hedge strategies as of the date of adoption. The guidance in this ASU became effective January 1, 2019. Upon adoption, the Company reclassified $268.7 million of HTM securities to AFS, resulting in a $0.2 million loss in the Consolidated Statement of Income.

Accounting Guidance Issued But Not Yet Adopted

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 collectibility 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.

First Financial currently expects as of January 1, 2020 to recognize a one-time cumulative effect adjustment to increase the ALLL with an offsetting reduction to the retained earnings component of equity. In December 2018, the federal bank regulatory agencies approved a final rule that modifies their regulatory capital rules and provides institutions the option to phase in over a three-year period any day-one regulatory capital effects of this update. First Financial has formed an internal management committee and engaged a third party vendor to assist with the transition to the guidance set forth in this update. The committee is currently evaluating the impact of this update on First Financial’s Consolidated Financial Statements, but the ALLL is expected to increase upon adoption since the allowance will be required to cover the full expected life of the portfolio. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the loan and lease portfolio at the time of adoption. Management is currently evaluating the preliminary modeling results, including a qualitative framework to account for the drivers of credit losses that are not captured by the quantitative model. 

In August 2018, the FASB issued an update (ASU No. 2018-13, Disclosure Framework: Changes to the Disclosure Requirements for Fair Value Measurement) which eliminates, adds and modifies certain disclosure requirements for fair value measurements.  Under the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.  The update is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted.  This update is not expected to have a material impact on the Company’s Consolidated Financial Statements.

NOTE 3:  INVESTMENTS

For the three months ended March 31, 2019 and March 31, 2018, there were no sales of AFS securities and therefore no associated gains or losses. In conjunction with the adoption of ASU 2017-12 in the first quarter of 2019, First Financial reclassified $268.7 million of HTM securities to AFS resulting in a $0.2 million realized loss recorded in the Consolidated Statement of Income.

7

The following is a summary of HTM and AFS investment securities as of March 31, 2019:

	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	$	99	$	0	$	(1	)	$	98
Securities of U.S. government agencies and corporations	0		0		0			0		30,880		74		(355		)	30,599
Mortgage-backed securities - residential	24,937		72		(671		)	24,338		557,730		4,566		(3,449		)	558,847
Mortgage-backed securities - commercial	109,826		0		(4,414		)	105,412		464,611		1,821		(2,988		)	463,444
Collateralized mortgage obligations	11,936		0		(429		)	11,507		919,486		9,214		(3,067		)	925,633
Obligations of state and other political subdivisions	11,606		440		(228		)	11,818		542,265		12,496		(504		)	554,257
Asset-backed securities	0		0		0			0		502,018		1,180		(1,790		)	501,408
Other securities	0		0		0			0		78,996		853		(324		)	79,525
Total	$	158,305	$	512	$	(5,742	)	$	153,075	$	3,096,085	$	30,204	$	(12,478	)	$	3,113,811

The following is a summary of HTM and AFS investment securities as of December 31, 2018:

	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	$	99	$	0	$	(2	)	$	97
Securities of U.S. government agencies and corporations	0		0		0			0		32,095		57		(233		)	31,919
Mortgage-backed securities - residential	25,565		0		(1,045		)	24,520		565,071		691		(7,163		)	558,599
Mortgage-backed securities - commercial	147,780		258		(4,385		)	143,653		423,797		819		(3,581		)	421,035
Collateralized mortgage obligations	12,540		0		(633		)	11,907		928,586		4,319		(6,158		)	926,747
Obligations of state and other political subdivisions	243,443		1,954		(1,359		)	244,038		257,300		2,554		(1,429		)	258,425
Asset-backed securities	0		0		0			0		511,430		611		(2,810		)	509,231
Other securities	0		0		0			0		73,948		358		(1,104		)	73,202
Total	$	429,328	$	2,212	$	(7,422	)	$	424,118	$	2,792,326	$	9,409	$	(22,480	)	$	2,779,255

The following table provides a summary of investment securities by contractual maturity as of March 31, 2019, except for residential and commercial mortgage-backed securities, 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	$	0	$	0	$	18,503	$	18,522
Due after one year through five years	0		0		52,079		52,547
Due after five years through ten years	4,247		4,579		162,531		165,532
Due after ten years	7,359		7,239		419,127		427,878
Mortgage-backed securities - residential	24,937		24,338		557,730		558,847
Mortgage-backed securities - commercial	109,826		105,412		464,611		463,444
Collateralized mortgage obligations	11,936		11,507		919,486		925,633
Asset-backed securities	0		0		502,018		501,408
Total	$	158,305	$	153,075	$	3,096,085	$	3,113,811

8

Unrealized 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, 2019 or December 31, 2018.

As of March 31, 2019, the Company's investment securities portfolio consisted of 1,395 securities, of which 303 were in an unrealized loss position. As of December 31, 2018, the Company's investment securities portfolio consisted of 1,417 securities, of which 504 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, 2019
	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	$	0	$	0		$	98	$	(1	)	$	98	$	(1	)
Securities of U.S. Government agencies and corporations	6,046		(77		)	13,946		(278		)	19,992		(355		)
Mortgage-backed securities - residential	12,585		(322		)	239,305		(3,798		)	251,890		(4,120		)
Mortgage-backed securities - commercial	140,670		(264		)	195,282		(7,138		)	335,952		(7,402		)
Collateralized mortgage obligations	90,610		(431		)	212,286		(3,065		)	302,896		(3,496		)
Obligations of state and other political subdivisions	12,080		(30		)	42,954		(702		)	55,034		(732		)
Asset-backed securities	224,565		(1,325		)	48,376		(465		)	272,941		(1,790		)
Other securities	8,636		(78		)	7,545		(246		)	16,181		(324		)
Total	$	495,192	$	(2,527	)	$	759,792	$	(15,693	)	$	1,254,984	$	(18,220	)

	December 31, 2018
	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	$	0	$	0		$	97	$	(2	)	$	97	$	(2	)
Securities of U.S. Government agencies and corporations	0		0			16,777		(233		)	16,777		(233		)
Mortgage-backed securities - residential	186,029		(935		)	264,795		(7,273		)	450,824		(8,208		)
Mortgage-backed securities - commercial	147,754		(369		)	232,363		(7,597		)	380,117		(7,966		)
Collateralized mortgage obligations	194,795		(1,546		)	240,514		(5,245		)	435,309		(6,791		)
Obligations of state and other political subdivisions	62,805		(299		)	86,644		(2,489		)	149,449		(2,788		)
Asset-backed securities	336,437		(2,312		)	37,105		(498		)	373,542		(2,810		)
Other securities	33,752		(884		)	4,570		(220		)	38,322		(1,104		)
Total	$	961,572	$	(6,345	)	$	882,865	$	(23,557	)	$	1,844,437	$	(29,902	)

9

For further detail on the fair value of investment securities, see Note 16 – 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. 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 primarily provides loans that are secured by commissions and cash collateral 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 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, 2019
	Commercial		Real Estate				Lease
(Dollars in thousands)	& industrial		Construction		Commercial		financing		Total
Pass	$	2,443,488	$	457,508	$	3,720,197	$	92,527	$	6,713,720
Special Mention	36,936		0		25,935		365		63,236
Substandard	63,003		605		56,047		2,681		122,336
Doubtful	0		0		0		0		0
Total	$	2,543,427	$	458,113	$	3,802,179	$	95,573	$	6,899,292

10

(Dollars in thousands)	Residential real estate		Home equity		Installment		Credit card		Total
Performing	$	958,185	$	790,893	$	90,515	$	46,827	$	1,886,420
Nonperforming	16,935		6,225		174		155		23,489
Total	$	975,120	$	797,118	$	90,689	$	46,982	$	1,909,909

	As of December 31, 2018
	Commercial		Real Estate				Lease
(Dollars in thousands)	& industrial		Construction		Commercial		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

(Dollars in thousands)	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

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

11

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

	As of March 31, 2019
(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	$	917	$	7,797	$	8,255	$	16,969	$	2,521,040	$	2,538,009	$	5,418	$	2,543,427	$	23
Lease financing	0		0		0		0		95,573		95,573		0		95,573		0
Construction real estate	0		598		0		598		457,323		457,921		192		458,113		0
Commercial real estate	1,695		1,103		13,462		16,260		3,738,962		3,755,222		46,957		3,802,179		0
Residential real estate	3,329		1,495		4,326		9,150		933,896		943,046		32,074		975,120		0
Home equity	2,960		1,046		2,702		6,708		787,129		793,837		3,281		797,118		0
Installment	317		30		84		431		89,837		90,268		421		90,689		0
Credit card	193		206		155		554		46,428		46,982		0		46,982		155
Total	$	9,411	$	12,275	$	28,984	$	50,670	$	8,670,188	$	8,720,858	$	88,343	$	8,809,201	$	178

	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

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 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.

12

First Financial had 201 TDRs totaling $35.9 million at March 31, 2019, including $22.8 million on accrual status and $13.1 million 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 $1.4 million related to TDRs at March 31, 2019. Additionally, as of March 31, 2019, $7.5 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year.

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 classified as nonaccrual. First Financial had no commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2018, the ALLL included reserves of $1.5 million related to TDRs, and $7.9 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, 2019 and 2018:

	Three months ended
	March 31, 2019					March 31, 2018
(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	5	$	7,637	$	7,661	4	$	928	$	913
Construction real estate	0	0		0		0	0		0
Commercial real estate	6	1,323		1,232		2	72		72
Residential real estate	5	458		458		2	93		93
Home equity	1	17		17		0	0		0
Installment	0	0		0		0	0		0
Total	17	$	9,435	$	9,368	8	$	1,093	$	1,078

For TDRs identified during the three months ended March 31, 2019 and 2018, there were no chargeoffs for the portion of TDRs determined to be uncollectible.

The following table provides information on how TDRs were modified during the three months ended March 31, 2019 and 2018:

	Three months ended
	March 31,
(Dollars in thousands)	2019		2018
Extended maturities	$	2,877	$	888
Adjusted interest rates	5,284		52
Combination of rate and maturity changes	508		0
Forbearance	557		0
Other (1)	142		138
Total	$	9,368	$	1,078

⁽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 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.

13

For the three months ended March 31, 2019, there were two TDR relationships for $6.9 million, for which there was a payment default during the period that occurred within twelve months of the loan modification. 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.

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, 2019		December 31, 2018
Impaired loans
Nonaccrual loans (1)
Commercial & industrial	$	19,263	$	30,925
Lease financing	301		22
Construction real estate	7		9
Commercial real estate	21,082		20,500
Residential real estate	13,052		13,495
Home equity	5,581		5,580
Installment	170		169
Nonaccrual loans	59,456		70,700
Accruing troubled debt restructurings	22,817		16,109
Total impaired loans	$	82,273	$	86,809

⁽¹⁾ Nonaccrual loans include nonaccrual TDRs of $13.1 million and $22.4 million as of March 31, 2019 and December 31, 2018, respectively.

	Three months ended
	March 31,
(Dollars in thousands)	2019		2018
Interest income effect on impaired loans
Gross amount of interest that would have been recorded under original terms	$	1,613	$	802
Interest included in income
Nonaccrual loans	335		80
Troubled debt restructurings	236		124
Total interest included in income	571		204
Net impact on interest income	$	1,042	$	598

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.

14

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

	As of March 31, 2019						As of December 31, 2018
(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	$	30,142	$	46,215	$	0	$	36,694	$	42,561	$	0
Lease financing	301		301		0		22		22		0
Construction real estate	8		25		0		9		26		0
Commercial real estate	22,708		29,530		0		23,513		31,375		0
Residential real estate	16,637		19,237		0		17,297		19,975		0
Home equity	6,225		7,232		0		6,351		7,461		0
Installment	174		310		0		174		563		0
Total	76,195		102,850		0		84,060		101,983		0
Loans with an allowance recorded
Commercial & industrial	3,282		3,282		738		939		939		667
Lease financing	0		0		0		0		0		0
Construction real estate	0		0		0		0		0		0
Commercial real estate	2,498		3,579		651		1,509		1,509		461
Residential real estate	298		298		31		301		301		32
Home equity	0		0		0		0		0		0
Installment	0		0		0		0		0		0
Total	6,078		7,159		1,420		2,749		2,749		1,160
Total
Commercial & industrial	33,424		49,497		738		37,633		43,500		667
Lease financing	301		301		0		22		22		0
Construction real estate	8		25		0		9		26		0
Commercial real estate	25,206		33,109		651		25,022		32,884		461
Residential real estate	16,935		19,535		31		17,598		20,276		32
Home equity	6,225		7,232		0		6,351		7,461		0
Installment	174		310		0		174		563		0
Total	$	82,273	$	110,009	$	1,420	$	86,809	$	104,732	$	1,160

15

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

	Three months ended
	March 31, 2019				March 31, 2018
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded
Commercial & industrial	$	33,418	$	279	$	7,867	$	26
Lease financing	162		0		41		0
Construction real estate	9		0		28		1
Commercial real estate	23,111		103		21,400		99
Residential real estate	16,967		86		6,503		47
Home equity	6,288		38		4,214		20
Installment	174		1		281		0
Total	80,129		507		40,334		193
Loans with an allowance recorded
Commercial & industrial	2,111		43		204		0
Lease financing	0		0		0		0
Construction real estate	0		0		0		0
Commercial real estate	2,004		19		1,739		3
Residential real estate	300		2		1,051		7
Home equity	0		0		101		1
Installment	0		0		0		0
Total	4,415		64		3,095		11
Total
Commercial & industrial	35,529		322		8,071		26
Lease financing	162		0		41		0
Construction real estate	9		0		28		1
Commercial real estate	25,115		122		23,139		102
Residential real estate	17,267		88		7,554		54
Home equity	6,288		38		4,315		21
Installment	174		1		281		0
Total	$	84,544	$	571	$	43,429	$	204

Lease financing. The Company prospectively applied Topic 842 in the first quarter of 2019. First Financial originates both sales-type and direct financing leases, and the Company manages and reviews lease residuals in accordance with its credit policies. Sales-type lease contracts contain the ability to purchase the underlying equipment at lease maturity and profit or loss is recognized at lease commencement.  Direct financing leases are generally three to five years in length and may be extended at maturity, however, early cancellation may result in a fee to the borrower.  For direct financing leases, the net unearned income is deferred and amortized over the life of the lease.  Income recognized in first quarter of 2019 related to the implementation of Topic 842 was insignificant.

16

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

Changes in OREO were as follows:

	Three months ended
	March 31,
(Dollars in thousands)	2019			2018
Balance at beginning of period	$	1,401		$	2,781
Additions
Commercial & industrial	0			170
Residential real estate	504			459
Total additions	504			629
Disposals
Commercial & industrial	(22		)	(2,104		)
Residential real estate	(161		)	(118		)
Total disposals	(183		)	(2,222		)
Valuation adjustment
Commercial & industrial	0			(97		)
Residential real estate	(57		)	(26		)
Total valuation adjustment	(57		)	(123		)
Balance at end of period	$	1,665		$	1,065

NOTE 5:  ALLOWANCE FOR LOAN AND LEASE LOSSES

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.

Changes in the ALLL by loan category were as follows:

	Three months ended March 31, 2019
							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	$	18,746		$	1,130		$	3,413		$	21,048		$	4,964		$	5,348		$	362		$	1,531		$	56,542
Provision for loan and lease losses	13,268			343			(683		)	493			125			185			19			333			14,083
Gross charge-offs	(12,328		)	(100		)	0			(1,214		)	(82		)	(468		)	(49		)	(341		)	(14,582		)
Recoveries	240			0			63			73			36			185			48			34			679
Total net charge-offs	(12,088		)	(100		)	63			(1,141		)	(46		)	(283		)	(1		)	(307		)	(13,903		)
Ending allowance for loan and lease losses	$	19,926		$	1,373		$	2,793		$	20,400		$	5,043		$	5,250		$	380		$	1,557		$	56,722

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	Three months ended March 31, 2018
							Real Estate
(Dollars in thousands)	Commercial & industrial			Lease financing			Construction		Commercial			Residential			Home equity			Installment			Credit card			Total
Allowance for loan and lease losses:
Balance at beginning of period	$	17,598		$	675		$	3,577	$	20,930		$	4,683		$	4,935		$	307		$	1,316		$	54,021
Provision for loan and lease losses	889			(49		)	690		815			114			(294		)	(49		)	187			2,303
Loans charged off	(885		)	0			0		(2,176		)	(96		)	(242		)	(16		)	(254		)	(3,669		)
Recoveries	436			0			0		752			26			429			48			34			1,725
Total net charge-offs	(449		)	0			0		(1,424		)	(70		)	187			32			(220		)	(1,944		)
Ending allowance for loan and lease losses	$	18,038		$	626		$	4,267	$	20,321		$	4,727		$	4,828		$	290		$	1,283		$	54,380
	As of March 31, 2019
							Real Estate
(Dollars in thousands)	Commercial & industrial			Lease financing			Construction		Commercial			Residential			Home equity			Installment			Credit card			Total
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	738		$	0		$	0	$	651		$	31		$	0		$	0		$	0		$	1,420
Collectively evaluated for impairment	19,188			1,373			2,793		19,749			5,012			5,250			380			1,557			55,302
Ending allowance for loan and lease losses	$	19,926		$	1,373		$	2,793	$	20,400		$	5,043		$	5,250		$	380		$	1,557		$	56,722
Loans
Individually evaluated for impairment	$	33,424		$	301		$	8	$	25,206		$	16,935		$	6,225		$	174		$	0		$	82,273
Collectively evaluated for impairment	2,510,003			95,272			458,105		3,776,973			958,185			790,893			90,515			46,982			8,726,928
Total loans	$	2,543,427		$	95,573		$	458,113	$	3,802,179		$	975,120		$	797,118		$	90,689		$	46,982		$	8,809,201

	As of December 31, 2018
					Real Estate
(Dollars in thousands)	Commercial & industrial		Lease financing		Construction		Commercial		Residential		Home equity		Installment		Credit card		Total
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	667	$	0	$	0	$	461	$	32	$	0	$	0	$	0	$	1,160
Collectively evaluated for impairment	18,079		1,130		3,413		20,587		4,932		5,348		362		1,531		55,382
Ending allowance for loan and lease losses	$	18,746	$	1,130	$	3,413	$	21,048	$	4,964	$	5,348	$	362	$	1,531	$	56,542
Loans
Individually evaluated for impairment	$	37,633	$	22	$	9	$	25,022	$	17,598	$	6,351	$	174	$	0	$	86,809
Collectively evaluated for impairment	2,477,028		93,393		548,926		3,729,659		938,048		810,931		93,038		46,382		8,737,405
Total loans	$	2,514,661	$	93,415	$	548,935	$	3,754,681	$	955,646	$	817,282	$	93,212	$	46,382	$	8,824,214

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.

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Changes in the carrying amount of goodwill for the three months ended March 31, 2019 and the year ended December 31, 2018 were as follows:

(Dollars in thousands)	March 31, 2019			December 31, 2018
Balance at beginning of year	$	880,251		$	204,084
Goodwill resulting from business combinations	(524		)	676,167
Balance at end of period	$	879,727		$	880,251

During 2018, First Financial recorded additions to goodwill resulting from the merger with MSFG of $676.2 million, and in the first quarter of 2019, First Financial recorded its final adjustments to goodwill associated related to the merger. For further detail on the merger with MSFG, see Note 17 - Business Combinations.

Goodwill 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, 2018 and no impairment was indicated.  As of March 31, 2019, 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, 2019 and December 31, 2018, First Financial had $38.6 million and $40.8 million, respectively, of other intangible assets included in Other intangibles in the Consolidated Balance Sheets, which primarily consist of core deposit intangibles.  Core deposit intangibles represent the estimated fair value of acquired customer deposit relationships on the date of acquisition and are amortized on an accelerated basis over their estimated useful lives. Core deposit intangibles were $35.8 million and $37.9 million as of March 31, 2019 and December 31, 2018, respectively. First Financial's core deposit intangibles have an estimated weighted average remaining life of 8.9 years. Amortization expense recognized on intangible assets for the three months ended March 31, 2019 and 2018 was $2.0 million and $0.3 million, respectively.

NOTE 7:  LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. First Financial is primarily the lessee in its leasing agreements, and substantially all of those agreements are for real estate property for branches, ATM locations and office space.

On January 1, 2019, the Company adopted Topic 842 and all subsequent updates that modified Topic 842. For First Financial, this update primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.

With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheets as an ROU asset and a corresponding lease liability. Substantially all of the Company's leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets.

The Company's right to use an asset over the life of a lease is recorded as a "right of use" asset in Accrued interest and other assets on the Consolidated Balance Sheet and was $59.0 million at March 31, 2019. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received. First Financial recorded a $64.6 million lease liability in Accrued interest and other liabilities on the Consolidated Balance Sheet at March 31, 2019.

The calculated amount of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of minimum lease payments. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.

Leases with an initial term of 12 months or less are not recorded on the balance sheet and First Financial recognizes lease expense for these leases on a straight-line basis over the term of the lease. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years or more. The exercise of renewal options on operating leases is at the Company's sole discretion, and certain leases may include options to purchase the leased property. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. First Financial does not enter into lease agreements which contain material residual value guarantees or material restrictive covenants.

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Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements and leases generally also include real estate taxes and CAM charges in the annual rental payments.

The components of lease expense were as follows:

	Three months ended
(dollars in thousands)	March 31, 2019
Operating lease cost	$	1,826
Short-term lease cost	1
Variable lease cost	597
Total operating lease cost	$	2,424

Future minimum commitments due under these lease agreements as of March 31, 2019 are as follows:

(dollars in thousands)	Operating leases
2019 (remaining nine months)	$	5,361
2020	7,070
2021	6,569
2022	6,238
2023	6,248
Thereafter	54,378
Total lease payments	85,864
Less imputed interest	21,255
Total	$	64,609

The lease term and discount rate at March 31, 2019 were as follows:

Operating leases
Weighted-average remaining lease term (years)	15.9
Weighted-average discount rate	3.5	%

Supplemental cash information at March 31, 2019 related to leases was as follows:

	Three months ended
(dollars in thousands)	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,823
ROU assets obtained in exchange for lease obligations
Operating leases	60,249

NOTE 8:  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 agreed to by the Bank and the client. To secure its liability to the client, the Bank is authorized to sell or repurchase U.S. Treasury, government agency and mortgage-backed securities.

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The following shows the remaining contractual maturity of repurchase agreements by collateral pledged:

(Dollars in thousands)	Overnight and continuous
Repurchase agreements
Mortgage-backed securities	$	15,243
Collateralized mortgage obligations	79,772
Total	$	95,015

Securities sold under agreements to repurchase are secured by securities with a carrying amount of $95.5 million and $85.5 million, as of March 31, 2019 and December 31, 2018, respectively.

First Financial had $952.4 million in short-term borrowings with the FHLB of at March 31, 2019 and $857.1 million as of December 31, 2018. 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 $30.0 million short-term credit facility with an unaffiliated bank that matures in September 2019. 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, 2019 and December 31, 2018, 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, 2019 and December 31, 2018.

First Financial had $546.4 million and $570.7 million of long-term debt as of March 31, 2019 and December 31, 2018, respectively, which included subordinated notes, FHLB long term advances and an interest free loan with a municipality.

The following is a summary of First Financial's long-term debt:

	March 31, 2019					December 31, 2018
(Dollars in thousands)	Amount			Average rate		Amount			Average rate
Subordinated notes	$	170,654		5.21	%	$	170,550		5.28	%
Unamortized debt issuance costs	(1,140		)	N/A		(1,185		)	N/A
FHLB borrowings	376,134			2.14	%	400,599			2.08	%
Capital loan with municipality	775			0.00	%	775			0.00	%
Total long-term debt	$	546,423		3.10	%	$	570,739		3.04	%

In 2015, First Financial issued $120.0 million of subordinated notes, which have a fixed interest rate of 5.125% payable semiannually and mature in August 2025. These notes are not redeemable by the Company, or callable by the holders of the notes prior to maturity. In addition, First Financial acquired $49.5 million of variable rate subordinated notes in the MSFG merger that were issued to previously formed trusts in exchange for the trust proceeds. Interest on the acquired subordinated notes is payable quarterly, in arrears, and the Company has the option to defer interest payments for a period not to exceed 20 consecutive quarters. The acquired subordinated notes mature 30 years after the date of original issuance and may be called at par following the 5 year anniversary of issuance. First Financial also acquired $8.4 million of 7.40% fixed rate private placement subordinated debt in conjunction with the MSFG merger that was issued in 2015 and matures in 2025. These notes are redeemable by the Company at par following the 5 year anniversary of issuance. 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.

In addition to subordinated notes, long-term debt included $376.1 million and $400.6 million of fixed rate FHLB long-term advances as of March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, long-term FHLB advances had a weighted average interest rate of 2.14%. These instruments are primarily utilized to reduce overnight liquidity risk and to mitigate interest rate sensitivity on the Consolidated Balance Sheets.

NOTE 9:  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

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reclassifications out of accumulated other comprehensive income (loss) are as follows:

	Three months ended March 31, 2019
	Total other comprehensive income												Total accumulated other comprehensive income (loss)
(Dollars in thousands)	Prior to reclass		Reclass from			Pre-tax		Tax effect			Net of tax		Beginning balance			Net activity		Cumulative effect of new standard		Ending balance
Unrealized gain (loss) on debt securities	$	29,725	$	(178	)	$	29,903	$	(6,398	)	$	23,505	$	(11,601	)	$	23,505	$	906	$	12,810
Unrealized gain (loss) on derivatives	93		0			93		(21		)	72		(217		)	72		0		(145		)
Retirement obligation	0		(375		)	375		(85		)	290		(32,590		)	290		0		(32,300		)
Total	$	29,818	$	(553	)	$	30,371	$	(6,504	)	$	23,867	$	(44,408	)	$	23,867	$	906	$	(19,635	)

	Three months ended March 31, 2018
	Total other comprehensive income															Total accumulated other comprehensive income (loss)
(Dollars in thousands)	Prior to reclass			Reclass from			Pre-tax			Tax effect			Net of tax			Beginning balance			Net activity			Cumulative effect of new standard			Ending balance
Unrealized gain (loss) on debt securities	$	(12,536	)	$	0		$	(12,536	)	$	2,706		$	(9,830	)	$	(182	)	$	(9,830	)	$	(190	)	$	(10,202	)
Unrealized gain (loss) on derivatives	202			0			202			(46		)	156			(577		)	156			(124		)	(545		)
Retirement obligation	0			(419		)	419			(96		)	323			(19,631		)	323			(4,779		)	(24,087		)
Total	$	(12,334	)	$	(419	)	$	(11,915	)	$	2,564		$	(9,351	)	$	(20,390	)	$	(9,351	)	$	(5,093	)	$	(34,834	)

The following table presents the activity reclassified from accumulated other comprehensive income into income during the three month periods ended March 31, 2019 and 2018, respectively:

	Amount reclassified from accumulated other comprehensive income (1)
	Three months ended
	March 31,
(Dollars in thousands)	2019			2018			Affected Line Item in the Consolidated Statements of Income
Realized gain (loss) on securities available-for-sale	$	(178	)	$	0		Net gain (loss) on sales of investments securities
Defined benefit pension plan
Amortization of prior service cost (2)	100			103			Other noninterest expense
Recognized net actuarial loss (2)	(475		)	(522		)	Other noninterest expense
Defined benefit pension plan total	(375		)	(419		)
Total reclassifications for the period, before tax	$	(553	)	$	(419	)

⁽¹⁾ Negative amounts are reductions to net income.

⁽²⁾ Included in the computation of net periodic pension cost (see Note 13 - Employee Benefit Plans for additional details).

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NOTE 10:  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 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.

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, 2019							December 31, 2018
				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	$	1,406,914	$	33,221	$	(5,580	)	$	1,359,990	$	17,402	$	(11,787	)
Matched interest rate swaps with counterparty	Accrued interest and other liabilities	1,406,914		5,580		(33,228		)	1,359,990		11,787		(17,401		)
Total		$	2,813,828	$	38,801	$	(38,808	)	$	2,719,980	$	29,189	$	(29,188	)

At March 31, 2019, the Company had a total counterparty notional amount outstanding of $1.4 billion, spread among thirteen counterparties, with an outstanding liability from these contracts of $27.1 million. At December 31, 2018, the Company had a total counterparty notional amount outstanding of $1.4 billion, spread among thirteen counterparties, with an outstanding liability from these contracts of $4.9 million.

First Financial monitors its derivative credit exposure to borrowers by monitoring the creditworthiness of the related loan customers through the Company's normal credit review processes. Additionally, the Company's ALLL Committee 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.

In connection with its use of derivative instruments, First Financial and its counterparties may be required to post cash collateral to offset the market position of the derivative instruments. 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.

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The following table discloses the gross and net amounts of client derivative liabilities recognized in the Consolidated Balance Sheets:

	March 31, 2019							December 31, 2018
(Dollars in thousands)	Gross amounts of recognized liabilities		Gross amounts offset in the Consolidated Balance Sheets			Net amounts of liabilities presented in the Consolidated Balance Sheets		Gross amounts of recognized liabilities		Gross amounts offset in the Consolidated Balance Sheets			Net amounts of liabilities presented in the Consolidated Balance Sheets
Client derivatives
Matched interest rate swaps with counterparty	$	38,808	$	(36,980	)	$	1,828	$	29,189	$	(14,577	)	$	14,612

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, 2019:

							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	$	1,406,914	6.1	$	27,641		4.70	%	4.80	%
Pay fixed, matched interest rate swaps with counterparty	1,406,914		6.1	(27,648		)	4.80	%	4.70	%
Total client derivatives	$	2,813,828	6.1	$	(7	)	4.75	%	4.75	%

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 $119.8 million as of March 31, 2019 and $138.4 million as of December 31, 2018. The fair value of these agreements is recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets and was $0.1 million at both March 31, 2019 and December 31, 2018.

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, 2019, the notional amount of the IRLCs was $32.8 million and the notional amount of forward commitments was $32.8 million. As of December 31, 2018, the notional amount of IRLCs was $20.8 million and the notional amount of forward commitments was $12.3 million. The fair value of these agreements was $0.1 million at March 31, 2019 and insignificant at December 31, 2018 and was recorded in Accrued interest and other assets on the Consolidated Balance Sheets.

NOTE 11:  COMMITMENTS AND CONTINGENCIES

First Financial offers a variety of financial instruments including 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 non-performance 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 incurred in letters of credit and outstanding loan commitments. First Financial had $0.8 million and $0.7 million of reserves for unfunded commitments recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, respectively.

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

24

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 $3.1 billion and $3.0 billion at March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, loan commitments with a fixed interest rate totaled $182.5 million while commitments with variable interest rates totaled $2.9 billion. At December 31, 2018, loan commitments with a fixed interest rate totaled $174.0 million while commitments with variable interest rates totaled $2.9 billion. First Financial's fixed rate loan commitments have interest rates ranging from 0.00% to 21.00% and maturities ranging from less than 1 year to 30 years for both March 31, 2019 and December 31, 2018.

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 letters of credit consist 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 aggregating $33.4 million and $32.7 million at March 31, 2019 and December 31, 2018, 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 $36.2 million and $39.4 million as of March 31, 2019 and December 31, 2018, respectively. The Company recognized tax credits of $1.6 million and $1.1 million for the three months ended March 31, 2019 and 2018, respectively. The Company recognized amortization expense which was included in income tax expense of $1.6 million and $1.3 million for the three months ended March 31, 2019 and 2018, respectively. First Financial had no affordable housing contingent commitments as of March 31, 2019 or December 31, 2018.

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 $3.7 million at March 31, 2019 and $3.9 million at December 31, 2018. The maximum exposure to loss related to these investments was $3.7 million at March 31, 2019 and $3.9 million at December 31, 2018, representing the Company’s investment balance and its unfunded commitments to invest additional amounts. Investments in historic tax credits resulted in insignificant tax credits for the three months ended March 31, 2019 and $0.1 million for the three months ended March 31, 2018.

Contingencies/Litigation. First Financial and its subsidiaries are engaged in various matters of litigation 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 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, 2019. 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, 2019 or December 31, 2018.

NOTE 12:  INCOME TAXES

For the first quarter 2019, income tax expense was $9.9 million, resulting in an effective tax rate of 17.8% compared with income tax expense of $7.7 million and an effective tax rate of 20.1% for the comparable period in 2018. The decrease in the effective tax rate is primarily due to favorable resolution of a state uncertain tax position, favorable tax reform guidance related to the treatment of acquired bank owned life insurance and stock compensation activity.

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At both March 31, 2019 and December 31, 2018, First Financial had $2.4 million and $2.9 million, respectively, 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 First Financial. 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, 2019 and December 31, 2018, 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 2014 have been closed and are no longer subject to U.S. federal income tax examinations. Tax years 2014 through 2018 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 2018 remain open to state and local examination in various jurisdictions.

NOTE 13:  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, 2019, or the year ended December 31, 2018, and does not expect to make cash contributions to the plan through the remainder of 2019. As a result of the plan’s actuarial projections, which included consideration of the impact of the merger with MSFG, First Financial recorded expense of $0.4 million for the three months ended March 31, 2019. Conversely, First Financial recorded income of $0.2 million for the three months ended March 31, 2018.

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)	2019			2018
Service cost	$	1,750		$	1,295
Interest cost	700			590
Expected return on assets	(2,450		)	(2,460		)
Amortization of prior service cost	(100		)	(103		)
Net actuarial loss	475			522
Net periodic benefit cost (income)	$	375		$	(156	)

NOTE 14:  REVENUE RECOGNITION

The majority of the Company's revenues come from interest income and other sources, including loans, leases, securities and derivatives, that are outside the scope of ASU No. 2014-09, Revenue from Contracts with Customers. The Company's services that fall within the scope of ASU 2019-09 are presented within Noninterest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of this guidance include service charges on deposits, trust and wealth management fees, bankcard income, gain/loss on the sale of OREO and investment brokerage fees.

Service charges on deposit accounts. The Company earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Similarly,

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overdraft fees are recognized at the point in time that the overdraft occurs as this corresponds with the Company's performance obligation. Service charges on deposit accounts are withdrawn from the customer's account balance.

Trust and wealth management fees. Trust and wealth management fees are primarily asset-based, but can also include flat fees based upon a specific service rendered, such as tax preparation services. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fees. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and wealth management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, as incurred.

Bankcard income. The Company earns interchange fees from cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized concurrent with the transaction processing services provided to the cardholder. Interchange income is presented on the Consolidated Statements of Income net of expenses. Gross interchange income for the first three months of 2019 was $8.5 million, which was partially offset by $2.9 million of expenses within Noninterest income. Gross interchange income for the first three months of 2018 was $5.4 million, which was partially offset by $2.0 million of expenses.

Other. Other noninterest income consists of other recurring revenue streams such as transaction fees, safe deposit rental income, insurance commissions, merchant referral income, gain (loss) on sale of OREO and brokerage revenue. Transaction fees primarily include check printing sales commissions, collection fees and wire transfer fees which arise from in-branch transactions. Safe deposit rental income arises from services charged to the customer on an annual basis and recognized upon receipt of payment. Insurance commissions are agent commissions earned by the Company and earned upon the effective date of the bound coverage. Merchant referral income is associated with a program whereby the Company receives a share of processing revenue that is generated from clients that were referred by First Financial to the service provider. Revenue is recognized at the point in time when the transaction occurs.

The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of the executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectibility of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

Brokerage revenue represents fees from investment brokerage services provided to customers by a third party provider. The Company receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The fees are recognized monthly and a receivable is recorded until commissions are paid the following month. Because the Company (i) acts as an agent in arranging the relationship between the customer and the third-party service provider and (ii) does not control the services rendered to the customers, investment brokerage fees are presented net of related costs.

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NOTE 15:  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)	2019		2018
Numerator
Net income available to common shareholders	$	45,839	$	30,506
Denominator
Basic earnings per common share - weighted average shares	97,926,088		61,654,686
Effect of dilutive securities
Employee stock awards	510,223		464,254
Warrants	0		61,804
Diluted earnings per common share - adjusted weighted average shares	98,436,311		62,180,744
Earnings per share available to common shareholders
Basic	$	0.47	$	0.49
Diluted	$	0.47	$	0.49

First Financial had no warrants outstanding to purchase the Company's common stock as of March 31, 2019. Warrants acquired in the MSFG merger were outstanding as of December 31, 2018 and were exercised in January 2019. At March 31, 2018, First Financial had warrants outstanding representing the right to purchase 101,808 shares of common stock at an exercise price of $12.11 per share and all unexercised warrants expired in December 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 of the Company's common shares, there were no antidilutive options at March 31, 2019 and March 31, 2018.  

NOTE 16:  FAIR VALUE DISCLOSURES

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 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:

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	Carrying		Estimated fair value
(Dollars in thousands)	value		Total		Level 1		Level 2		Level 3
March 31, 2019
Financial assets
Cash and short-term investments	$	219,228	$	219,228	$	219,228	$	0	$	0
Investment securities held-to-maturity	158,305		153,075		0		153,075		0
Other investments	115,731		N/A		N/A		N/A		N/A
Loans held for sale	8,217		8,217		0		8,217		0
Loans and leases	8,752,479		8,651,343		0		0		8,651,343
Accrued interest receivable	44,171		44,171		0		14,230		29,941
Financial liabilities
Deposits	10,133,897		10,117,317		0		10,117,317		0
Short-term borrowings	1,047,415		1,047,415		1,047,415		0		0
Long-term debt	546,423		538,743		0		538,743		0
Accrued interest payable	12,449		12,449		2,907		9,542		0

	Carrying		Estimated fair value
(Dollars in thousands)	value		Total		Level 1		Level 2		Level 3
December 31, 2018
Financial assets
Cash and short-term investments	$	273,959	$	273,959	$	273,959	$	0	$	0
Investment securities held-to-maturity	429,328		424,118		0		424,118		0
Other investments	115,660		N/A		N/A		N/A		N/A
Loans held for sale	4,372		4,372		0		4,372		0
Loans and leases	8,767,672		8,662,868		0		0		8,662,868
Accrued interest receivable	41,816		41,816		0		13,819		27,997
Financial liabilities
Deposits	10,140,394		10,113,475		0		10,113,475		0
Short-term borrowings	1,040,691		1,040,691		1,040,691		0		0
Long-term debt	570,739		557,933		0		557,933		0
Accrued interest payable	12,126		12,126		2,035		10,091		0

In accordance with our adoption of ASU 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at March 31, 2019 and December 31, 2018 represent an approximation of exit price, however, an actual exit price may differ.

The following methods, assumptions and valuation techniques were used by First Financial to measure different financial assets and liabilities at fair value on a recurring or nonrecurring basis.

Investment securities. Investment securities classified as 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.

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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 value 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.

Impaired loans. The fair value of 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, 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 recorded at fair value less costs to sell, with any difference between the fair value of the property and the carrying value of the loan recorded as a charge-off. If the fair value is higher than the carrying amount of the loan, the excess is recognized first as a recovery and then as noninterest income. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in noninterest expense. 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 differs from 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.

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.

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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, 2019
Assets
Derivatives	$	0	$	39,062	$	0	$	39,062
Investment securities available-for-sale	98		3,100,358		13,355		3,113,811
Total	$	98	$	3,139,420	$	13,355	$	3,152,873
Liabilities
Derivatives	$	0	$	38,985	$	0	$	38,985

	Fair value measurements using
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets/liabilities at fair value
December 31, 2018
Assets
Derivatives	$	0	$	29,543	$	0	$	29,543
Investment securities available-for-sale	97		2,764,443		14,715		2,779,255
Total	$	97	$	2,793,986	$	14,715	$	2,808,798
Liabilities
Derivatives	$	0	$	29,336	$	0	$	29,336

The following table presents a reconciliation for certain AFS securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2019. No AFS securities were measured at fair value on a recurring basis for the three months ended March 31, 2018.

	Three months ended
(dollars in thousands)	March 31, 2019
Beginning balance	$	14,715
Accretion (amortization)	7
Increase (decrease) in fair value	21
Settlements	(1,388		)
Ending balance	$	13,355

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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 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, 2019
Assets
Impaired loans	$	0	$	0	$	4,391
OREO	0		0		1,046

	Fair value measurements using
(Dollars in thousands)	Level 1		Level 2		Level 3
December 31, 2018
Assets
Impaired loans	$	0	$	0	$	1,320
OREO	0		0		1,089

NOTE 17:  BUSINESS COMBINATIONS

On April 1, 2018, the Company completed its acquisition of MainSource Financial Group, Inc. and its banking subsidiary, MainSource Bank. Therefore, results of MSFG have been included in the results of operations beginning on April 1, 2018. Under the terms of the merger agreement, shareholders of MSFG received 1.3875 common shares of First Financial common stock for each share of MSFG common stock, with cash paid in lieu of fractional shares. Including outstanding options and warrants to purchase MSFG common stock, the total purchase consideration was $1.1 billion and resulted in goodwill of $675.6 million. The goodwill arising from the acquisition largely reflected synergies and cost savings resulting from combining the operations of the companies. First Financial incurred merger related expenses related to the acquisition of MSFG of $1.7 million for the first quarter of 2019 and $37.8 million during the year ended December 31, 2018.

The acquisition provides additional revenue growth and diversification. The goodwill is not deductible for income tax purposes as the transaction was accounted for as a tax-free exchange. For further detail, see Note 6 – Goodwill and Other Intangible Assets.

The MainSource transaction was accounted for using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date, in accordance with FASB ASC Topic 805, Business Combinations. The fair value measurements of assets acquired and liabilities assumed were subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values became available.  The fair values of assets acquired and liabilities assumed are considered final as of March 31, 2019.

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The following table provides the purchase price calculation as of the acquisition date, identifiable assets purchased and liabilities assumed at their estimated fair value. As a condition of the merger, certain acquired assets and liabilities held for sale were divested subsequent to the closing of the merger. There was no gain or loss recorded in the Consolidated Statement of Income in conjunction with this divestiture.

(Dollars in thousands)	MainSource
Purchase consideration
Cash consideration	$	43
Stock consideration	1,043,424
Warrant consideration	14,460
Options consideration	1,577
Total purchase consideration	1,059,504
Assets acquired
Cash	71,806
Investment securities available-for-sale	900,935
Investment securities held-to-maturity	171,423
Other investments	28,763
Loans	2,792,572
Premises and equipment	98,814
Intangible assets	42,887
Other assets	167,829
Assets held for sale	127,775
Total assets acquired	4,402,804
Liabilities assumed
Deposits	3,263,920
Subordinated notes	49,027
FHLB advances	291,887
Other borrowings	205,620
Other liabilities	32,649
Liabilities held for sale	175,840
Total liabilities assumed	4,018,943
Net identifiable assets	383,861
Goodwill	$	675,643

The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired as of the acquisition date as the Company believes that all contractual cash flows will be collected. The fair value adjustments were determined using discounted cash flows. In conjunction with the MSFG merger, First Financial acquired non-impaired loans with a fair value and gross contractual amounts receivable of $2.8 billion and $2.9 billion on the date of acquisition.

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The following table presents supplemental pro forma information as if the MSFG acquisition had occurred at the beginning of 2017. The pro forma information includes adjustments for interest income on acquired loans, amortization of intangible assets arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, merger-related expenses incurred and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed date. The disclosures regarding the results of operations for MSFG subsequent to its acquisition date are omitted as this information is not practical to obtain.

	Twelve months ended
	December 31,
(Dollars in thousands, except per share data)	2018		2017
Pro Forma Condensed Combined Income Statement Information
Net interest income	$	484,915	$	454,579
Net income	221,122		130,402
Basic earnings per share	2.27		1.34
Diluted earnings per share	2.25		1.33

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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. Additionally, due to impact from the merger with MSFG in the second quarter of 2018, certain prior period comparisons may not be discussed in these statements as historical points of comparison are not presented on a combined pro forma basis unless otherwise noted.

SUMMARY

First Financial is a $14.1 billion financial holding company headquartered in Cincinnati, Ohio, that operates primarily in Ohio, Indiana, Kentucky and Illinois through its subsidiaries.  These subsidiaries include the Bank, an Ohio-chartered commercial bank, which operated 159 banking centers and 192 ATMs at March 31, 2019. First Financial provides banking and financial services products to business and retail clients through its six lines of business: Commercial, Retail Banking, Mortgage Banking, Wealth Management, 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. Wealth management had $2.6 billion in assets under management as of March 31, 2019 and provides the following services: wealth planning, portfolio management, trust and estate, brokerage and retirement planning.

MARKET STRATEGY

First Financial aims to develop a competitive advantage by utilizing a local market focus to provide superior service and build long-term relationships with clients while helping them achieve greater financial success. First Financial serves a combination of metropolitan and community markets in Ohio, Indiana, Kentucky and Illinois through its full-service banking centers, and provides financing to franchise owners and clients within the financial services industry throughout the United States. 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.  First Financial's investment in community markets is an important part of the Bank's core funding base and has historically provided stable, low-cost funding sources.  Additionally, First Financial may assess strategic acquisitions that provide product line extensions or additional industry verticals that compliment our existing business.

BUSINESS COMBINATIONS

In April 2018, the Company completed its acquisition of MainSource Financial Group, Inc. and its banking subsidiary, MainSource Bank. The merger positioned the combined company to better serve the complementary geographies of Ohio, Indiana, Kentucky and Illinois by creating a higher performing bank with greater scale and capabilities. Under the terms of the merger agreement, shareholders of MainSource received 1.3875 common shares of First Financial common stock for each share of MainSource common stock. Including outstanding options and warrants on MainSource common stock, total purchase consideration was $1.1 billion. In the merger, First Financial acquired total assets of $4.4 billion, loans of $2.8 billion and deposits of $3.3 billion, resulting in goodwill of $675.6 million.

The MainSource transaction was accounted for using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date, in accordance with FASB ASC Topic 805, Business Combinations.

See Note 17 – Business Combinations in the Notes to Consolidated Financial Statements for further discussion of the merger with MSFG.

OVERVIEW OF OPERATIONS

First quarter 2019 net income was $45.8 million and earnings per diluted common share were $0.47. This compares with first quarter 2018 net income of $30.5 million and earnings per diluted common share of $0.49.

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Return on average assets for the first quarter 2019 was 1.33% compared to 1.40% for the same period in 2018 and return on average shareholders’ equity for the first quarter 2019 was 8.88% compared to 13.31% for the first quarter 2018.

A discussion of First Financial's results of operations for three months ended March 31, 2019 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 these 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 21% 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.

	Three months ended
	March 31,
(Dollars in thousands)	2019			2018
Net interest income	$	121,515		$	75,812
Tax equivalent adjustment	1,523			718
Net interest income - tax equivalent	$	123,038		$	76,530
Average earning assets	$	12,163,751		$	8,087,848
Net interest margin (1)	4.05		%	3.80		%
Net interest margin (fully tax equivalent) (1)	4.10		%	3.84		%

⁽¹⁾ Calculated using annualized net interest income divided by average earning assets.

Net interest income for the first quarter 2019 was $121.5 million, and increased $45.7 million, or 60.3%, from first quarter 2018 net interest income of $75.8 million.  This increase was primarily driven by a $61.4 million, or 68.0%, increase in interest income, which was partially offset by a $15.7 million, or 108.0%, increase in interest expense.  Net interest income on a fully tax equivalent basis for the first quarter 2019 was $123.0 million compared to $76.5 million for the first quarter 2018.

Net interest margin on a fully tax equivalent basis increased 26 bps to 4.10% for the first quarter 2019 compared to 3.84% for the comparable quarter in 2018.  The increase in net interest margin was driven by higher earning asset yields, which more than offset higher funding costs. Higher earning asset yields resulted from higher interest rates and the impact from purchase accounting accretion while rising rates and shifts in funding mix drove higher funding costs during the period.

Higher interest income primarily resulted from a merger related increase in average earning assets from $8.1 billion in the first quarter 2018 to $12.2 billion in the first quarter 2019, as well as an increase in the yield on earning assets from 4.53% to 5.06% over those same periods. The increase in average earning assets included an increase in average loan balances of $2.8 billion, or 45.8%, and a $1.3 billion, or 64.3% increase in average investment security balances in the first quarter 2019 compared to the first quarter 2018. The yield on earning assets reflected recent increases in interest rates, the impact from purchase accounting and slower investment prepayment speeds.

Interest expense increased as a result of higher interest-bearing liability balances, as well as higher rates paid on deposits and borrowed funds during the period. Higher interest-bearing liabilities were driven by a $2.3 billion, or 42.7%, increase in average interest-bearing deposits from the first quarter 2018 as the merger-related increase in deposits and long-term debt coupled with the implementation of funding strategies aligned with the Company's post-merger balance sheet. The cost of interest-bearing deposits was 103 bps in first quarter of 2019 compared to 78 bps for the same period in the prior year as a result of rising interest rates and the post-merger deposit mix. The cost of borrowed funds increased from 1.99% during the first quarter 2018 to 2.81% for the first quarter 2019 as rising interest rates offset the favorable impact from a mix shift in borrowed funds.

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CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

	Quarterly Averages
	March 31, 2019					March 31, 2018
(Dollars in thousands)	Balance			Yield		Balance			Yield
Earning assets
Investments
Investment securities	$	3,355,732		3.44	%	$	2,042,781		3.04	%
Interest-bearing deposits with other banks	34,709			2.45	%	27,073			1.60	%
Gross loans (1)	8,773,310			5.69	%	6,017,994			5.05	%
Total earning assets	12,163,751			5.06	%	8,087,848			4.53	%
Nonearning assets
Allowance for loan and lease losses	(57,088		)			(55,016		)
Cash and due from banks	181,695					116,095
Accrued interest and other assets	1,664,193					681,249
Total assets	$	13,952,551				$	8,830,176
Interest-bearing liabilities
Deposits
Interest-bearing demand	$	2,269,948		0.50	%	$	1,415,603		0.37	%
Savings	3,115,557			0.76	%	2,450,697			0.64	%
Time	2,224,587			1.94	%	1,466,440			1.41	%
Total interest-bearing deposits	7,610,092			1.03	%	5,332,740			0.78	%
Borrowed funds
Short-term borrowings	1,017,121			2.38	%	740,506			1.46	%
Long-term debt	569,947			3.59	%	126,342			5.07	%
Total borrowed funds	1,587,068			2.81	%	866,848			1.99	%
Total interest-bearing liabilities	9,197,160			1.33	%	6,199,588			0.95	%
Noninterest-bearing liabilities
Noninterest-bearing demand deposits	2,457,587					1,570,572
Other liabilities	203,570					130,542
Shareholders' equity	2,094,234					929,474
Total liabilities and shareholders' equity	$	13,952,551				$	8,830,176
Net interest income	$	121,515				$	75,812
Net interest spread				3.73	%				3.58	%
Contribution of noninterest-bearing sources of funds				0.32	%				0.22	%
Net interest margin (2)				4.05	%				3.80	%
Tax equivalent adjustment				0.05	%				0.04	%
Net interest margin (fully tax equivalent) (2)				4.10	%				3.84	%

⁽¹⁾ Loans held for sale and nonaccrual loans 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.

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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, 2019
	Comparable quarter income variance
(Dollars in thousands)	Rate			Volume		Total
Earning assets
Investment securities	$	2,018		$	11,148	$	13,166
Interest-bearing deposits with other banks	57			46		103
Gross loans (1)	9,489			38,647		48,136
Total earning assets	11,564			49,841		61,405
Interest-bearing liabilities
Total interest-bearing deposits	3,186			5,759		8,945
Borrowed funds
Short-term borrowings	1,676			1,621		3,297
Long-term debt	(464		)	3,924		3,460
Total borrowed funds	1,212			5,545		6,757
Total interest-bearing liabilities	4,398			11,304		15,702
Net interest income	$	7,166		$	38,537	$	45,703

⁽¹⁾ Loans held for sale and nonaccrual loans are included in gross loans.

NONINTEREST INCOME

First quarter 2019 noninterest income was $26.8 million, increasing $9.9 million, or 58.4% from $16.9 million in the first quarter of 2018. This change resulted mostly from merger-driven increases. Service charges on deposit accounts increased $3.9 million, or 76.7%; other noninterest income increased $2.6 million, or 119.9%; bankcard income increased $2.2 million, or 64.6%; and net gains from the sale of loans increased $1.3 million, or 221.4%. Other noninterest income includes brokerage commissions, BOLI income and insurance commissions. First quarter 2019 noninterest income was in line with management's expectations for the Company's performance subsequent to the merger, although changes in mix are expected as certain income streams are subject to seasonal variance.

NONINTEREST EXPENSE

First quarter 2019 noninterest expense was $78.5 million compared to $52.3 million for the first quarter 2018. The $26.2 million increase from the comparable quarter in 2018 included increases across nearly all noninterest expense categories due to the scale created by the merger. Salaries and employee benefits increased $16.8 million, or 54.0%; net occupancy increased $2.1 million, or 47.4%; intangible assets expense increased $1.8 million, or 630.4%; data processing increased $1.5 million, or 39.6%; and furniture and equipment increased $1.4 million, or 67.5%. With the majority of merger-related activity complete, management remains focused on efficiency while also making strategic investments to support the Company's future growth.

INCOME TAXES

Income tax expense was $9.9 million for the first quarter of 2019, resulting in an effective tax rate of 17.8% compared to $7.7 million and 20.1% for the comparable period in 2018. The lower effective tax rate during 2019 is primarily due to favorable resolution of a state uncertain tax position, favorable tax reform guidance related to the treatment of acquired bank owned life insurance and stock compensation activity.

While the Company's effective tax rate may fluctuate from quarter to quarter due to tax jurisdiction changes, the level of tax-enhanced assets and tax credit investments, the full year effective tax rate for 2019 is expected to be approximately 19.5%.

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LOANS

Loans, excluding loans held for sale, totaled $8.8 billion as of March 31, 2019 and December 31, 2018 as an 8.4% increase in loan production activity from December 31, 2018 to March 31, 2019 was offset by prepayment activity.

First quarter 2019 average loans, excluding loans held for sale, increased $2.8 billion, or 45.9%, from the first quarter 2018.  Increases in average loan balances were primarily attributable to the merger as organic loan growth has slowed in recent periods with lower line utilization and elevated prepayments offsetting an increase in fundings.

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 had purchased impaired loans totaling $88.3 million at March 31, 2019 compared to $96.3 million at December 31, 2018. These balances exclude contractual interest not yet accrued.

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 a borrower's continued failure to adhere to contractual payment terms, 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.

Nonperforming assets were $83.9 million, or 60 bps as a percentage of total assets, at March 31, 2019 compared to $88.2 million and 63 bps as of December 31, 2018. The $4.3 million decrease was due to an $11.2 million decrease in nonaccrual balances partially offset by a $6.7 million increase in accruing TDRs and a $0.3 million increase in OREO balances during the period.

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 that are acquired are no longer classified as such.  Generally, if the acquired loan is performing under the current restructured terms, and there is no indication the borrower will not be able to continue paying, it would be classified as a purchased performing loan. If the restructured loan is below a current market rate for a loan with similar credit risks, the loan is generally classified as a purchased impaired loan. TDRs totaled $35.9 million at March 31, 2019, a decrease of $2.6 million, or 6.7%, from $38.5 million at December 31, 2018.

Classified assets, which are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse, increased to $142.0 million as of March 31, 2019 compared to $131.7 million at December 31, 2018. Classified assets as a percentage of total assets were 101 bps at March 31, 2019 compared to 94 bps as of December 31, 2018.

The following table details nonperforming, underperforming and classified assets, in addition to related credit quality ratios as of March 31, 2019 and the four previous quarters.

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	Three monhs ended
	2019			2018
(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	$	19,263		$	30,925		$	4,310		$	3,448		$	6,275
Lease financing	301			22			0			0			0
Construction real estate	7			9			10			24			26
Commercial real estate	21,082			20,500			20,338			21,593			16,878
Residential real estate	13,052			13,495			11,365			9,278			3,324
Home equity	5,581			5,580			6,018			5,820			3,484
Installment	170			169			327			299			296
Nonaccrual loans	59,456			70,700			42,368			40,462			30,283
Accruing troubled debt restructurings	22,817			16,109			20,313			21,839			14,943
Total nonperforming loans	82,273			86,809			62,681			62,301			45,226
Other real estate owned	1,665			1,401			1,918			1,853			1,065
Total nonperforming assets	83,938			88,210			64,599			64,154			46,291
Accruing loans past due 90 days or more	178			63			144			327			529
Total underperforming assets	$	84,116		$	88,273		$	64,743		$	64,481		$	46,820
Total classified assets	$	142,014		$	131,668		$	138,868		$	139,317		$	87,577
Credit quality ratios
Allowance for loan and lease losses to
Nonaccrual loans	95.40		%	79.97		%	136.22		%	133.65		%	179.57		%
Nonperforming loans	68.94		%	65.13		%	92.08		%	86.80		%	120.24		%
Total ending loans	0.64		%	0.64		%	0.65		%	0.61		%	0.89		%
Nonperforming loans to total loans	0.93		%	0.98		%	0.71		%	0.70		%	0.74		%
Nonperforming assets to
Ending loans, plus OREO	0.95		%	1.00		%	0.73		%	0.72		%	0.76		%
Total assets	0.60		%	0.63		%	0.47		%	0.46		%	0.52		%
Nonperforming assets, excluding accruing TDRs to
Ending loans, plus OREO	0.69		%	0.82		%	0.50		%	0.48		%	0.51		%
Total assets	0.43		%	0.52		%	0.32		%	0.30		%	0.35		%
Classified assets to total assets	1.01		%	0.94		%	1.00		%	1.00		%	0.98		%
(1) Nonaccrual loans include nonaccrual TDRs of $13.1 million, $22.4 million, $4.7 million, $5.9 million and $6.0 million as of March 31, 2019, December 31, 2018, September 30, 2018, June 30, 2018 and March 31, 2018, respectively.

INVESTMENTS

First Financial's investment portfolio totaled $3.4 billion, or 24.1% of total assets at March 31, 2019 and $3.3 billion, or 23.8% of total assets at December 31, 2018.  AFS securities totaled $3.1 billion at March 31, 2019 and $2.8 billion at December 31, 2018, while HTM securities totaled $158.3 million at March 31, 2019 and $429.3 million at December 31, 2018. The duration of the investment portfolio was 3.1 years as of March 31, 2019 and 3.3 years as of December 31, 2018. In conjunction with the adoption of ASU 2017-12, the Company reclassified $268.7 million of HTM securities to AFS during the first quarter of 2019.

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 enhance the overall performance of the portfolio.

At March 31, 2019, First Financial recorded a $12.8 million unrealized after-tax gain on debt securities as a component of equity in accumulated other comprehensive income and a $0.1 million unrealized gain on equity securities within other

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noninterest income. The total unrealized position on debt securities improved $24.4 million from an $11.6 million loss at December 31, 2018.

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 were $10.1 billion as of March 31, 2019 and December 31, 2018. Noninterest-bearing demand deposits decreased $4.3 million, or 0.2%, interest-bearing demand deposits decreased $72.0 million, or 3.1%, savings deposits decreased $66.4 million, or 2.1% and time deposits increased $136.2 million, or 6.3%, compared to December 31, 2018. Growth in brokered and retail CD balances offset seasonal declines in business DDA and public funds. Brokered CDs are periodically used by First Financial as an alternative to short and long-term borrowings.

Average deposits for the first quarter 2019 increased $3.2 billion, or 45.8%, to $10.1 billion from $6.9 billion for the comparable quarter of 2018. This increase was driven by the addition of $3.3 billion of deposits acquired in conjunction with the Company's merger with MSFG, net of branch divestitures.

Borrowed funds were $1.6 billion as of March 31, 2019 and December 31, 2018. First Financial utilizes short-term borrowings and longer-term advances from the FHLB as wholesale funding sources. First Financial had $952.4 million in short-term borrowings with the FHLB at March 31, 2019 and $857.1 million as of December 31, 2018. In addition to FHLB borrowings, short-term borrowings included fed funds purchased and repurchase agreements of $95.0 million and $183.6 million at March 31, 2019 and December 31, 2018, respectively.

Long-term debt, which included subordinated notes, FHLB long term advances and an interest free loan with a municipality, was $546.4 million and $570.7 million at March 31, 2019 and December 31, 2018, respectively. Outstanding subordinated debt totaled $169.5 million and $169.4 million as of March 31, 2019 and December 31, 2018, respectively, which included unamortized discounts of $7.2 million and $7.3 million. FHLB long-term advances declined to $376.1 million at March 31, 2019 from $400.6 million as of December 31, 2018 as the Company implemented post-merger funding strategies to manage liquidity and interest rate risk. First Financial's total remaining borrowing capacity from the FHLB was $520.8 million as of March 31, 2019.

See Note 8 – Borrowings in the Notes to Consolidated Financial Statements, for further discussion of First Financial's borrowed funds.

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.

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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 ability to access the credit markets and potentially increase borrowing costs, negatively impacting financial condition and liquidity. Key factors in maintaining high credit ratings include consistent and diverse earnings, strong credit quality and capital ratios, varied funding sources and disciplined liquidity monitoring procedures. The ratings of First Financial and the Bank at March 31, 2019 were as follows:

	First Financial Bancorp	First Financial Bank
Senior Unsecured Debt	BBB+	A-
Subordinated Debt	BBB	BBB+
Short-Term Debt	K2	K2
Deposit	N/A	A-
Short-Term Deposit	N/A	K2

For ease of borrowing execution, First Financial utilizes a blanket collateral agreement with the FHLB. First Financial pledged $5.7 billion of certain eligible residential, commercial and farm real estate loans, home equity lines of credit and government, agency and CMBS securities as collateral for borrowings from the FHLB as of March 31, 2019.  

First Financial maintains a short-term credit facility with an unaffiliated bank for $30.0 million that matures in September 2019. This facility can have a variable or fixed interest rate and, if needed, provides First Financial additional liquidity for various corporate activities, including the repurchase of First Financial shares and the payment of dividends to shareholders. As of March 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018.

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 AFS totaled $3.1 billion and $2.8 billion at March 31, 2019 and December 31, 2018, respectively.  HTM securities that are maturing within a short period of time can be an additional source of liquidity. As of March 31, 2019, the Company had no HTM securities maturing within one year. As of December 31, 2018, the Company had $0.8 million HTM securities maturing within one year. Other sources of liquidity include cash and due from banks, interest-bearing deposits with other banks and loans maturing within one year.

At March 31, 2019, in addition to liquidity on hand of $219.2 million, First Financial had unused and available overnight wholesale funding of $3.0 billion, or 21.3% of total assets, to fund loan and deposit activities, in addition to other general corporate requirements.

Certain restrictions exist regarding the Bank's ability to transfer funds to First Financial in the form of cash dividends, loans, other assets or advances and 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 $50.0 million for the first three months of 2019.  As of March 31, 2019, the Bank had retained earnings of $641.0 million, of which $136.7 million was available for distribution to First Financial without prior regulatory approval. Additionally, First Financial had $107.5 million in cash at the parent company as of March 31, 2019, which approximates the Company’s regular annual 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 $1.3 million and $5.0 million for the first three months of 2019 and 2018, 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.

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CAPITAL

Risk-Based Capital. The Board of Governors of the Federal Reserve System approved Basel III in order to strengthen the regulatory capital framework for all banking organizations, subject to a phase-in period for certain provisions. Basel III established and defined quantitative measures to ensure capital adequacy. These measures 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).

Basel III includes a minimum ratio of common equity tier 1 capital to risk-weighted assets of 7.0% at March 31, 2019 and 6.375% at December 31, 2018 and a capital conservation buffer of 2.5% of risk-weighted assets that began on January 1, 2016 at 0.625% and was fully phased-in on January 1, 2019. Further, the minimum ratio of Tier 1 capital to risk-weighted assets increased from 4.0% to 6.0% and all banks are subject to a 4.0% minimum leverage ratio. The required total risk-based capital ratio is 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 pay discretionary compensation to its employees.  The capital requirements also provide strict eligibility criteria for regulatory capital instruments and change the method for calculating risk-weighted assets in an effort to better identify riskier assets, such as highly volatile commercial real estate and nonaccrual loans.

Management believes, as of March 31, 2019, 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 have changed the Company's categorization. Total regulatory capital exceeded the minimum requirement by $387.0 million on a consolidated basis at March 31, 2019. 

The following tables present the actual and required capital amounts and ratios as of March 31, 2019 and December 31, 2018 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 of the period presented, and for 2018, the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules had 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				PCA requirement to be considered well capitalized
(Dollars in thousands)	Capital amount		Ratio		Capital amount		Ratio		Capital amount		Ratio
March 31, 2019
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	1,246,004	12.03	%	$	725,116	7.00	%	N/A		N/A
First Financial Bank	1,284,985		12.42	%	724,485		7.00	%	$	672,736	6.50	%
Tier 1 capital to risk-weighted assets
Consolidated	1,287,757		12.43	%	880,498		8.50	%	N/A		N/A
First Financial Bank	1,285,089		12.42	%	879,732		8.50	%	827,983		8.00	%
Total capital to risk-weighted assets
Consolidated	1,474,723		14.24	%	1,087,675		10.50	%	N/A		N/A
First Financial Bank	1,350,067		13.04	%	1,086,728		10.50	%	1,034,979		10.00	%
Leverage ratio
Consolidated	1,287,757		9.84	%	523,530		4.00	%	N/A		N/A
First Financial Bank	1,285,089		9.83	%	523,086		4.00	%	653,857		5.00	%

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	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, 2018
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	1,215,613	11.87	%	$	652,874	6.38	%	N/A		N/A		$	716,881	7.00	%
First Financial Bank	1,279,492		12.50	%	652,590		6.38	%	$	665,386	6.50	%	716,570		7.00	%
Tier 1 capital to risk-weighted assets
Consolidated	1,257,366		12.28	%	806,491		7.88	%	N/A		N/A		870,499		8.50	%
First Financial Bank	1,279,596		12.50	%	806,141		7.88	%	818,937		8.00	%	870,120		8.50	%
Total capital to risk-weighted assets
Consolidated	1,444,146		14.10	%	1,011,314		9.88	%	N/A		N/A		1,075,322		10.50	%
First Financial Bank	1,344,388		13.13	%	1,010,875		9.88	%	1,023,671		10.00	%	1,074,855		10.50	%
Leverage ratio
Consolidated	1,257,366		9.71	%	517,958		4.00	%	N/A		N/A		517,958		4.00	%
First Financial Bank	1,279,596		9.89	%	517,710		4.00	%	647,138		5.00	%	517,710		4.00	%

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

Shareholder Dividends. First Financial paid a dividend of $0.22 per common share on March 15, 2019 to shareholders of record as of March 1, 2019. Additionally, First Financial's board of directors authorized a dividend of $0.22 per common share, payable on June 17, 2019 to shareholders of record as of June 3, 2019.

Share Repurchases. In January 2019, First Financial's board of directors approved a stock repurchase plan in replacement of the plan approved in 2012. The 2019 plan authorizes the purchase of up to 5,000,000 shares of the Company's common stock. First Financial did not repurchase any shares under this plan during the three month period ending March 31, 2019. Therefore, at March 31, 2019, all 5,000,000 common shares remained available for repurchase under the 2019 plan.

ATM Offering. In March 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 current period.

Shareholders' Equity. Total shareholders’ equity was $2.1 billion at both March 31, 2019 and December 31, 2018.

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

RISK MANAGEMENT

First Financial manages risk through a structured ERM approach that routinely assesses the overall level of risk, identifies specific risks and evaluates specific actions to mitigate those risks. First Financial continues to enhance its risk management capabilities and has embedded risk awareness into the culture of the Company.  First Financial has identified the following types of risk that it monitors in its ERM framework: credit, market, operational, compliance, strategic, reputation, information technology, cyber, and legal.

For a full discussion of these risks, see the Enterprise Risk Management section in Management's Discussion and Analysis in First Financial’s 2018 Annual Report on Form 10-K. The sections that follow provide additional discussion related to credit risk and market risk.

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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.  

ALLL. The ALLL is a reserve accumulated on the Consolidated Balance Sheets through the recognition of the provision 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 $56.7 million as of March 31, 2019 and $56.5 million as of December 31, 2018. As a percentage of period-end loans, the ALLL was 0.64% as of March 31, 2019 and December 31, 2018. The ALLL is consistent with the Company's stable credit outlook and classified asset balances. A lower ALLL as a percentage of period end loans is consistent with GAAP for acquired loans as these loans are recorded at estimated fair value at the acquisition date with no carryover of the related ALLL. At March 31, 2019, the fair value of acquired MSFG loans included a $25.6 million credit adjustment.

The ALLL as a percentage of nonaccrual loans was 95.40% at March 31, 2019 and 79.97% at December 31, 2018. The ALLL as a percentage of nonperforming loans, including accruing TDRs, rose to 68.94% as of March 31, 2019 from 65.13% as of December 31, 2018 largely due to a $4.5 million decrease in nonperforming loans.

The Company recorded net charge-offs of $13.9 million, or 0.64% of average loans and leases on an annualized basis, in the first quarter 2019, compared to net charge-offs of $1.9 million, or 0.13% of average loans and leases on an annualized basis for the comparable quarter in 2018. Higher net charge-offs were driven by a $10.0 million charge-off during the period related to a single franchise lending relationship.

Provision expense is a product of the Company's ALLL model combined with net charge-off activity during the period. First quarter 2019 provision expense was $14.1 million compared to a provision of $2.3 million during the first quarter in 2018.

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

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The table that follows includes the activity in the ALLL for the quarterly periods presented.

	Three months ended
	2019			2018
(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	$	56,542		$	57,715		$	54,076		$	54,380		$	54,021
Provision for loan losses	14,083			5,310			3,238			3,735			2,303
Gross charge-offs
Commercial and industrial	12,328			6,060			232			4,356			885
Lease financing	100			0			0			0			0
Construction real estate	0			0			0			0			0
Commercial real estate	1,214			1,679			902			78			2,176
Residential real estate	82			80			145			101			96
Home equity	468			747			351			385			242
Installment	49			158			43			218			16
Credit card	341			392			390			684			254
Total gross charge-offs	14,582			9,116			2,063			5,822			3,669
Recoveries
Commercial and industrial	240			485			627			518			436
Lease financing	0			0			0			1			0
Construction real estate	63			0			146			0			0
Commercial real estate	73			1,681			786			887			752
Residential real estate	36			44			71			70			26
Home equity	185			274			419			187			429
Installment	48			94			351			82			48
Credit card	34			55			64			38			34
Total recoveries	679			2,633			2,464			1,783			1,725
Total net charge-offs	13,903			6,483			(401		)	4,039			1,944
Ending allowance for loan and lease losses	$	56,722		$	56,542		$	57,715		$	54,076		$	54,380
Net charge-offs to average loans and leases (annualized)
Commercial and industrial	1.95		%	0.92		%	(0.07		)%	0.64		%	0.10		%
Lease financing	0.45		%	0.00		%	0.00		%	0.00		%	0.00		%
Construction real estate	(0.05		)%	0.00		%	(0.10		)%	0.00		%	0.00		%
Commercial real estate	0.12		%	0.00		%	0.01		%	(0.08		)%	0.23		%
Residential real estate	0.02		%	0.02		%	0.03		%	0.01		%	0.06		%
Home equity	0.14		%	0.23		%	(0.03		)%	0.10		%	(0.16		)%
Installment	0.00		%	0.27		%	(1.22		)%	0.55		%	(0.32		)%
Credit card	2.62		%	2.76		%	2.68		%	5.54		%	1.90		%
Total net charge-offs	0.64		%	0.29		%	(0.02		)%	0.18		%	0.13		%

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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, which is the risk to earnings and the value of the Company's equity arising from changes in market interest rates. Interest rate risk arises in the normal course of business to the extent that there is a divergence between the amount of 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 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. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest-rate scenarios. First Financial uses EVE sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital.  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 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 in addition to 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 37% in its interest rate risk modeling as of March 31, 2019. First Financial also includes an assumption for the migration of non-maturity deposit balances into CDs for all upward rate scenarios beginning with the +100 bps 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, 2019, assuming immediate, parallel shifts in interest rates:

	% Change from base case for  immediate parallel changes in rates
	-100 bps		+100 bps		+200 bps
NII-Year 1	(6.13	)%	3.63	%	6.24	%
NII-Year 2	(7.36	)%	3.59	%	6.19	%
EVE	(4.55	)%	2.20	%	3.66	%

“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 policy limits set for the disclosed interest rate scenarios as of March 31, 2019. The projected results for NII and EVE reflected moderate asset sensitivity during the first quarter of 2019. The results reflect higher asset sensitivity compared to the linked quarter as modeled deposit betas were adjusted lower to reflect recent deposit pricing trends, as well as a slight shift in funding composition away from transactional deposits to term funding.  First Financial continues to manage its balance sheet with a bias toward neutrality or slight asset sensitivity while simultaneously balancing the potential earnings impact of this strategy.

First Financial continually evaluates the sensitivity of its interest rate risk position to modeling assumptions. The following table reflects First Financial’s estimated NII sensitivity profile as of March 31, 2019 assuming a 25% increase and a 25% reduction to the beta assumption on managed rate deposits:

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	Beta sensitivity (% change from base)
	+100 BP				+200 BP
	Beta 25% lower		Beta 25% higher		Beta 25% lower		Beta 25% higher
NII-Year 1	4.51	%	2.75	%	7.09	%	5.39	%
NII-Year 2	4.46	%	2.72	%	7.02	%	5.36	%

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 policies 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 2018 Annual Report.  There were no material changes to these accounting policies during the three months ended March 31, 2019.

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 in 2019, as well as the expected impact of accounting standards issued but not yet 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 Notes to the Consolidated Financial Statements and sections of Management’s Discussion and Analysis.

FORWARD-LOOKING STATEMENT

Certain statements contained in this report which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as ‘‘believes,’’ ‘‘anticipates,’’ “likely,” “expected,” “estimated,” ‘‘intends’’ and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. 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. Forward-looking statements are not historical facts but instead express only management’s beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management’s control. It is possible that actual results and outcomes may differ, possibly materially, from the anticipated results or outcomes indicated in these 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 possibility that any of the anticipated benefits of the Company’s merger with MainSource Financial Group, Inc. will not be realized or will not be realized

within the expected time period; (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, 2018, as well as our other filings with the SEC, which are available on the SEC website at www.sec.gov.

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All forward-looking statements included in this filing are made as of the date hereof and are based on information available at the time of the filing. Except as required by law, the Company does not assume any obligation to update any forward-looking statement.

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 Company'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, 2018.

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, 2018.

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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 2019.

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, 2019
Share repurchase program	0	$	0.00	0	5,000,000
Stock Plans	15,769	26.69		N/A	N/A
February 1 to February 28, 2019
Share repurchase program	0	$	0.00	0	5,000,000
Stock Plans	8,785	28.10		N/A	N/A
March 1 to March 31, 2019
Share repurchase program	0	$	0.00	0	5,000,000
Stock Plans	0	0.00		N/A	N/A
Total
Share repurchase program	0	$	0.00	0
Stock Plans	24,554	$	27.19	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 Amended and Restated 2012 Stock Plan (collectively referred to hereafter as the Stock Plan).  The table shows the number of shares purchased pursuant to the Stock Plan and the average price paid per share.  Under the Stock Plan, 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 will continue for 24 months following its adoption by the Board of Directors.  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
1/14/2019	5,000,000	0	None

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Item 6.         Exhibits

(a)	Exhibits:
Exhibit Number
3.1		Amended Articles of Incorporation of First Financial Bancorp (reflecting all amendments filed with the Ohio Secretary of State) [for purposes of SEC reporting compliance only - not filed with the Ohio Secretary of State] (filed as Exhibit 3.2 to the Form S-3 on July 31, 2014 and incorporated herein by reference) (File No. 333-197771).
3.2		Amended and Restated Regulations of First Financial Bancorp, amended as of July 28, 2015 (filed as Exhibit 3.1 to the Form 8-K filed on July 29, 2015 and incorporated herein by reference).
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, 2019, 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.*

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.

*    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/ James M. Anderson		/s/ Scott T. Crawley
James M. Anderson		Scott T. Crawley
Executive Vice President and Chief Financial Officer		First Vice President and Controller
		(Principal Accounting Officer)
Date	5/7/2019	Date	5/7/2019

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