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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.  20549

FORM 10-Q


☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended                                           March 31, 2021                                                   

OR

☐ 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 /OH/
(Exact name of registrant as specified in its charter)
Ohio31-1042001
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)
255 East Fifth Street, Suite 800Cincinnati,Ohio45202
(Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code:  (877) 322-9530

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol Name of each exchange on which registered
Common stock, No par valueFFBC The NASDAQ Stock Market LLC

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   ☒    No ☐

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   ☒    No  ☐

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 ☒Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Exchange Act).
Yes  ☐ No   ☒

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 97,281,532 shares outstanding at May 5, 2021.

Table of Contents
FIRST FINANCIAL BANCORP.

INDEX

 Page No.
  
 
  
 
  
  
  
  
  
  
  
 
  
  
  
  
  


Table of Contents
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.
ABLAsset backed lendingForm 10-KFirst Financial Bancorp. Annual Report on Form 10-K
ACLAllowance for credit lossesFRBFederal Reserve Bank
AFSAvailable-for-saleGAAPU.S. Generally Accepted Accounting Principles
AllowanceCollectively or individually, Allowance for credit lossesHTMHeld-to-maturity
AOCIAccumulated other comprehensive incomeInsignificantLess than $0.1 million
ASCAccounting standards codificationIRLCInterest rate lock commitment
ASUAccounting standards updateLGDLoss Given Default
BankFirst Financial BankMD&A
Management's Discussion and Analysis of Financial Condition and Results of Operations
Basel IIIBasel Committee regulatory capital reforms, Third Basel AccordMSFGMainSource Financial Group, Inc.
BGF or BannockburnBannockburn Global Forex, LLCN/ANot applicable
Bp/bpsBasis point(s)NIINet interest income
BOLIBank owned life insuranceOBSOff-balance sheet
CARES ActCoronavirus Aid, Relief, and Economic Security ActOREOOther real estate owned
CDsCertificates of depositPCAPrompt corrective action
C&ICommercial & industrialPCDPurchased credit deteriorated
CRECommercial real estatePCIPurchase credit impaired
CompanyFirst Financial Bancorp.PDProbability of default
DDADemand deposit accountPPPPaycheck Protection Program
Dodd-FrankDodd–Frank Wall Street Reform and Consumer Protection ActPPPLFPaycheck Protection Program Liquidity Facility
EADExposure at DefaultR&SReasonable and Supportable
ERMEnterprise risk managementROURight-of-use
EVEEconomic value of equitySECU.S. Securities and Exchange Commission
Fair Value TopicFASB ASC Topic 820, Fair Value MeasurementSOFRSecured Overnight Financing Rate
FASBFinancial Accounting Standards BoardTopic 842FASB ASC Topic 842, Leasing
FDICFederal Deposit Insurance CorporationTDRTroubled debt restructuring
FHLBFederal Home Loan BankTTCThrough the cycle
FRBFederal Reserve BankUSDUnited States dollars
First FinancialFirst Financial Bancorp.



Table of Contents
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31,
2021		December 31,
2020
 (Unaudited) 
Assets  
Cash and due from banks$210,191 $231,054 
Interest-bearing deposits with other banks19,180 20,305 
Investment securities available-for-sale, at fair value (amortized cost $3,698,779 at March 31, 2021 and $3,330,029 at December 31, 2020)
3,753,763 3,424,580 
Investment securities held-to-maturity (fair value $124,294 at March 31, 2021 and $136,698 at December 31, 2020)
121,945 131,687 
Other investments131,814 133,198 
Loans held for sale, at fair value34,590 41,103 
Loans and leases
Commercial & industrial3,044,825 3,007,509 
Lease financing66,574 72,987 
Construction real estate642,709 636,096 
Commercial real estate4,396,582 4,307,858 
Residential real estate946,522 1,003,086 
Home equity709,667 743,099 
Installment82,421 81,850 
Credit card44,669 48,485 
Total loans and leases9,933,969 9,900,970 
Less: Allowance for credit losses169,923 175,679 
Net loans and leases9,764,046 9,725,291 
Premises and equipment204,537 207,211 
Goodwill937,771 937,771 
Other intangibles61,984 64,552 
Accrued interest and other assets935,250 1,056,382 
Total assets$16,175,071 $15,973,134 
Liabilities  
Deposits  
Interest-bearing demand$2,914,761 $2,914,787 
Savings4,006,181 3,680,774 
Time1,731,757 1,872,733 
Total interest-bearing deposits8,652,699 8,468,294 
Noninterest-bearing3,995,370 3,763,709 
Total deposits12,648,069 12,232,003 
Federal funds purchased and securities sold under agreements to repurchase181,387 166,594 
Long-term debt583,722 776,202 
Total borrowed funds765,109 942,796 
Accrued interest and other liabilities502,951 516,265 
Total liabilities13,916,129 13,691,064 
Shareholders' equity  
Common stock - no par value  
Authorized - 160,000,000 shares; Issued - 104,281,794 shares in 2021 and 20201,633,137 1,638,947 
Retained earnings745,220 720,429 
Accumulated other comprehensive income (loss)18,101 48,664 
Treasury stock, at cost, 6,764,101 shares in 2021 and 6,259,865 shares in 2020
(137,516)(125,970)
Total shareholders' equity2,258,942 2,282,070 
Total liabilities and shareholders' equity$16,175,071 $15,973,134 

See Notes to Consolidated Financial Statements.
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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended
March 31,
 20212020
Interest income
Loans and leases, including fees$98,931 $115,775 
Investment securities
Taxable18,607 19,005 
Tax-exempt5,043 4,582 
Total interest on investment securities23,650 23,587 
Other earning assets28 142 
Total interest income122,609 139,504 
Interest expense
Deposits4,333 16,365 
Short-term borrowings67 5,087 
Long-term borrowings4,333 3,770 
Total interest expense8,733 25,222 
Net interest income113,876 114,282 
Provision for credit losses - loans and leases 3,450 23,880 
Provision for credit losses - unfunded commitments 538 1,568 
Net interest income after provision for credit losses109,888 88,834 
Noninterest income
Service charges on deposit accounts7,146 8,435 
Trust and wealth management fees4,398 4,469 
Bankcard income3,128 2,698 
Client derivative fees1,556 3,105 
Foreign exchange income10,757 9,966 
Net gain from sales of loans9,454 2,831 
Net gain (loss) on sales/transfers of investment securities(166)(59)
Unrealized gain (loss) on equity securities112 (98)
Other3,937 4,037 
Total noninterest income40,322 35,384 
Noninterest expenses
Salaries and employee benefits61,253 54,822 
Net occupancy5,704 6,104 
Furniture and equipment3,969 4,053 
Data processing7,287 6,389 
Marketing1,361 1,220 
Communication838 890 
Professional services1,450 2,275 
State intangible tax1,202 1,516 
FDIC assessments1,349 1,405 
Intangible assets amortization2,479 2,792 
Other5,614 8,200 
Total noninterest expenses92,506 89,666 
Income before income taxes57,704 34,552 
Income tax expense10,389 5,924 
Net income$47,315 $28,628 
Net earnings per common share - basic$0.49 $0.29 
Net earnings per common share - diluted$0.48 $0.29 
Average common shares outstanding - basic96,873,940 97,736,690 
Average common shares outstanding - diluted97,727,527 98,356,214 
See Notes to Consolidated Financial Statements.
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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Three months ended
March 31,
20212020
Net income$47,315 $28,628 
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on debt securities arising during the period(30,968)(1,863)
Change in retirement obligation405 328 
Other comprehensive income (loss) (30,563)(1,535)
Comprehensive income$16,752 $27,093 
                   See Notes to Consolidated Financial Statements.

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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
(Unaudited)
 Common StockRetainedAccumulated other comprehensiveTreasury stock 
 SharesAmountEarningsincome (loss)SharesAmountTotal
Balance at January 1, 2020104,281,794 $1,640,771 $711,249 $13,323 (5,790,796)$(117,638)$2,247,705 
Impact of cumulative effect of adoption of new accounting principles(56,882)(56,882)
Net income 28,628 28,628 
Other comprehensive income (loss)(1,535)(1,535)
Cash dividends declared:
Common stock at $0.23 per share(22,342)(22,342)
Purchase of common stock(880,000)(16,686)(16,686)
Exercise of stock options, net of shares purchased(140)10,405 212 72 
Restricted stock awards, net of forfeitures(8,218)347,555 7,104 (1,114)
Share-based compensation expense1,537 1,537 
Balance at March 31, 2020104,281,794 $1,633,950 $660,653 $11,788 (6,312,836)$(127,008)$2,179,383 
Balance at January 1, 2021104,281,794 $1,638,947 $720,429 $48,664 (6,259,865)$(125,970)$2,282,070 
Net income47,315 47,315 
Other comprehensive income (loss)(30,563)(30,563)
Cash dividends declared:
Common stock at $0.23 per share(22,524)(22,524)
Purchase of common stock(840,115)(17,982)(17,982)
Exercise of stock options, net of shares purchased(36)3,468 70 34 
Restricted stock awards, net of forfeitures(8,616)332,411 6,366 (2,250)
Share-based compensation expense2,842 2,842 
Balance at March 31, 2021104,281,794 $1,633,137 $745,220 $18,101 (6,764,101)$(137,516)$2,258,942 

See Notes to Consolidated Financial Statements.
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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended
March 31,
 20212020
Operating activities  
Net income$47,315 $28,628 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses3,988 25,448 
Depreciation and amortization8,233 8,464 
Stock-based compensation expense2,842 1,537 
Pension expense (income)850 400 
Net amortization (accretion) on investment securities9,136 3,981 
Net (gain) loss on sales of investment securities166 59 
Unrealized (gain) loss from equity securities(112)98 
Originations of loans held for sale(206,222)(111,112)
Net gains from sales of loans held for sale(9,454)(2,831)
Proceeds from sales of loans held for sale220,374 100,288 
Deferred income taxes3,303 2,975 
Amortization of operating leases1,851 2,020 
Payments for operating leases(1,790)(1,288)
Decrease (increase) cash surrender value of life insurance(479)(198)
Decrease (increase) in interest receivable(777)(878)
(Decrease) increase in interest payable(518)(2,197)
Decrease (increase) in other assets117,134 (362,717)
(Decrease) increase in other liabilities(48,806)181,099 
Net cash provided by (used in) operating activities147,034 (126,224)
Investing activities  
Proceeds from sales of securities available-for-sale50,451 29,922 
Proceeds from calls, paydowns and maturities of securities available-for-sale279,426 151,629 
Purchases of securities available-for-sale(665,723)(234,589)
Proceeds from calls, paydowns and maturities of securities held-to-maturity10,799 6,186 
Purchases of securities held-to-maturity(1,000)0 
Purchases of other investment securities(992)(18,659)
Proceeds from calls, paydowns and maturities of other securities2,488 0 
Net decrease (increase) in interest-bearing deposits with other banks1,125 (14,123)
Net decrease (increase) in loans and leases(40,390)(105,697)
Proceeds from disposal of other real estate owned433 900 
Purchases of premises and equipment(2,717)(5,805)
Net cash provided by (used in) investing activities(366,100)(190,236)
Financing activities  
Net (decrease) increase in total deposits416,066 425,329 
Net (decrease) increase in short-term borrowings14,793 81,543 
Payments on long-term debt(192,508)(90,066)
Cash dividends paid on common stock(22,200)(22,531)
Treasury stock purchase(17,982)(16,686)
Proceeds from exercise of stock options34 72 
Net cash provided by (used in) financing activities198,203 377,661 
Cash and due from banks  
Change in cash and due from banks(20,863)61,201 
Cash and due from banks at beginning of period231,054 200,691 
Cash and due from banks at end of period$210,191 $261,892 
Supplemental disclosures
Interest paid$9,252 $27,420 
Income taxes paid, net of refunds$147 $72 
See Notes to Consolidated Financial Statements.
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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)

NOTE 1:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

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, 2020.  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, 2020 has been derived from the audited financial statements in the Company’s 2020 Form 10-K.

Use of estimates. 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.

COVID-19. In the majority of 2020 and the first quarter of 2021, First Financial's operations and financial results were significantly impacted by the COVID-19 pandemic. The spread of COVID-19 has caused significant economic disruption throughout the United States as state and local governments issued stay at home orders and temporarily closed non-essential businesses. The full financial impact from the pandemic is unknown at this time, however prolonged disruption from the pandemic may adversely impact several industries within the Company's geographic footprint and impair the ability of First Financial's customers to fulfill their contractual obligations to the Company. This could cause First Financial to experience a material adverse effect on business operations, asset valuations, financial condition and results of operations. Material adverse impacts may include all or a combination of valuation impairments on First Financial's intangible assets, investments, loans, mortgage servicing rights or counter-party risk derivatives.
NOTE 2:  ACCOUNTING STANDARDS RECENTLY ADOPTED OR ISSUED

Standards Adopted in 2021

During the first quarter of 2021, the Company adopted ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplified the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and added new requirements with the intention of simplifying and clarifying existing guidance. This update did not have a material impact on the Company’s Consolidated Financial Statements.

Standards Adopted in 2020

On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the previously required incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities that management does not intend to sell or believes that it is more likely than not they will be required to sell. The Company adopted ASC 326 using the modified retrospective method for all financial
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assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $56.9 million as of January 1, 2020 for the cumulative effect of adopting ASC 326. As detailed in the following table, the transition adjustment included a $61.5 million increase to ACL, a $12.2 million increase in the ACL for unfunded commitments and a $16.8 million decrease in deferred tax liabilities.

The Company adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as purchased credit impaired and accounted for under ASC 310-30. In accordance with the standard, First Financial did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption.

In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. First Financial is adopting the capital transition relief over the five year permissible period.

The impact of adopting ASC 326 was as follows:
January 1, 2020
(dollars in thousands)As Reported under ASC 326Pre-ASC 326Impact of ASC 326 Adoption
Assets
Loans
Commercial and industrial$28,485 $18,584 $9,901 
Lease financing1,089971118
Construction real estate13,9602,38111,579
Commercial real estate47,69723,57924,118
Residential real estate10,7895,2995,490
Home equity13,2174,7878,430
Installment1,193392801
Credit card2,7251,6571,068
Allowance for credit losses on loans$119,155 $57,650 $61,505 
Liabilities
Deferred tax liability$16,252 $33,030 $(16,778)
Allowance for credit losses on OBS credit exposures12,74058512,155


NOTE 3:  INVESTMENTS

For the three months ended March 31, 2021, there were sales of $52.1 million of AFS securities with $0.6 million of gross realized gains and $0.7 million of gross realized losses. For the three months ended March 31, 2020, there were $29.9 million sales of AFS securities with no gross realized gains and $0.1 million of gross realized losses.

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The following is a summary of HTM and AFS investment securities as of March 31, 2021:
  
Held-to-maturityAvailable-for-sale
(Dollars in thousands)Amortized
cost		Unrecognized gainUnrecognized lossFair
value		Amortized
cost		Unrealized
gain		Unrealized
loss		Fair
value
U.S. Treasuries$0 $0 $0 $0 $10,257 $3 $0 $10,260 
Mortgage-backed securities - residential 0 0 0 0 784,407 12,488 (11,255)785,640 
Mortgage-backed securities - commercial 63,481 2,034 0 65,515 591,629 7,096 (3,680)595,045 
Collateralized mortgage obligations17,580 109 (411)17,278 661,322 17,796 (2,404)676,714 
Obligations of state and other political subdivisions9,634 1,001 0 10,635 971,325 38,835 (8,541)1,001,619 
Asset-backed securities0 0 0 0 601,836 4,075 (1,190)604,721 
Other securities31,250 82 (466)30,866 78,003 1,949 (188)79,764 
Total$121,945 $3,226 $(877)$124,294 $3,698,779 $82,242 $(27,258)$3,753,763 

The following is a summary of HTM and AFS investment securities as of December 31, 2020:
  
Held-to-maturityAvailable-for-sale
(Dollars in thousands)Amortized
cost		Unrecognized gainUnrecognized
loss		Fair
value		Amortized
cost		Unrealized
gain		Unrealized
loss		Fair
value
U.S. Treasuries$0 $0 $0 $0 $99 $4 $0 $103 
Securities of U.S. government agencies and corporations0 0 0 0 60 0 0 60 
Mortgage-backed securities - residential 13,990 197 0 14,187 704,482 15,938 (237)720,183 
Mortgage-backed securities - commercial 71,737 3,485 0 75,222 584,125 10,395 (3,584)590,936 
Collateralized mortgage obligations5,799 79 0 5,878 634,418 21,148 (445)655,121 
Obligations of state and other political subdivisions9,911 1,239 0 11,150 856,054 46,755 (291)902,518 
Asset-backed securities0 0 0 0 478,539 4,158 (826)481,871 
Other securities30,250 11 0 30,261 72,252 1,544 (8)73,788 
Total$131,687 $5,011 $0 $136,698 $3,330,029 $99,942 $(5,391)$3,424,580 

The following table provides a summary of investment securities by contractual maturity as of March 31, 2021, 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-maturityAvailable-for-sale
(Dollars in thousands)Amortized
cost		Fair
value		Amortized
cost		Fair
value
By Contractual Maturity:
Due in one year or less$0 $0 $14,781 $14,963 
Due after one year through five years0 0 56,598 58,309 
Due after five years through ten years37,135 37,662 184,348 192,197 
Due after ten years3,749 3,839 803,858 826,174 
Mortgage-backed securities - residential 0 0 784,407 785,640 
Mortgage-backed securities - commercial 63,481 65,515 591,629 595,045 
Collateralized mortgage obligations17,580 17,278 661,322 676,714 
Asset-backed securities0 0 601,836 604,721 
Total$121,945 $124,294 $3,698,779 $3,753,763 

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 exists, requiring a write-down to fair value. For securities in an unrealized loss position, the Company first assesses
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whether it intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

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. The Company recorded no reserves on investment securities for the three months ended March 31, 2021 or the twelve months ended December 31, 2020.

As of March 31, 2021, the Company's investment securities portfolio consisted of 1,402 securities, of which 223 were in an unrealized loss position. As of December 31, 2020, the Company's investment securities portfolio consisted of 1,351 securities, of which 94 were in an unrealized loss position.

Primarily all of First Financial’s HTM debt securities are issued by U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. The remainder of the Company's HTM securities are non-agency collateralized mortgage obligations and obligations of state and other political subdivisions which currently carry ratings no lower than A+. There were no HTM securities on nonaccrual status or past due as of March 31, 2021 or December 31, 2020. Therefore, the Company did not record an allowance for credit losses for these securities as of March 31, 2021 or December 31, 2020.

The following tables provide the fair value and gross unrealized losses on investment securities in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by investment category and the length of time the individual securities have been in a continuous loss position:
 March 31, 2021
 Less than 12 months12 months or moreTotal
(Dollars in thousands)Fair
value		Unrealized
loss		Fair
value		Unrealized
loss		Fair
value		Unrealized
loss
U.S. Treasuries$0 $0 $0 $0 $0 $0 
Securities of U.S. Government agencies and corporations0 0 0 0 0 0 
Mortgage-backed securities - residential 482,754 (11,255)0 0 482,754 (11,255)
Mortgage-backed securities - commercial 60,681 (1,665)57,196 (2,015)117,877 (3,680)
Collateralized mortgage obligations142,823 (2,815)1 0 142,824 (2,815)
Obligations of state and other political subdivisions318,750 (8,527)22,104 (14)340,854 (8,541)
Asset-backed securities160,329 (970)36,344 (220)196,673 (1,190)
Other securities34,096 (654)0 0 34,096 (654)
Total$1,199,433 $(25,886)$115,645 $(2,249)$1,315,078 $(28,135)
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 December 31, 2020
 Less than 12 months12 months or moreTotal
(Dollars in thousands)Fair
value		Unrealized
loss		Fair
value		Unrealized
loss		Fair
value		Unrealized
loss
U.S. Treasuries$0 $0 $0 $0 $0 $0 
Securities of U.S. Government agencies and corporations0 0 0 0 0 0 
Mortgage-backed securities - residential57,872 (237)0 0 57,872 (237)
Mortgage-backed securities - commercial169,825 (986)48,158 (2,598)217,983 (3,584)
Collateralized mortgage obligations49,161 (445)1 0 49,162 (445)
Obligations of state and other political subdivisions60,008 (291)0 0 60,008 (291)
Asset-backed securities84,749 (435)68,967 (391)153,716 (826)
Other securities4,992 (8)0 0 4,992 (8)
Total$426,607 $(2,402)$117,126 $(2,989)$543,733 $(5,391)

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 diverse 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.

In accordance with the CARES Act and the 2021 Consolidated Appropriations Act, First Financial participated in offering PPP loans to its customers. These loans provide a direct incentive for small businesses to keep their workers on the payroll and to maintain their operations during the COVID-19 pandemic. PPP loans are eligible to be forgiven provided certain conditions are met. As of March 31, 2021, First Financial had $690.0 million in PPP loans, net of unearned fees of $21.9 million. As of December 31, 2020, First Financial had $594.6 million in PPP loans, net of unearned fees of $13.7 million.

Credit Quality. To facilitate the monitoring of credit quality for commercial loans, 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, lease or 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
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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.

The following table sets forth the Company's loan portfolio at March 31, 2021 by risk attribute and origination date:
(Dollars in thousands)20212020201920182017PriorTerm TotalRevolvingTotal
Commercial & industrial
Pass$366,213 $978,739 $421,400 $268,946 $193,605 $223,038 $2,451,941 $484,869 $2,936,810 
Special mention0 4,012 6,521 15,318 5,520 14,225 45,596 7,444 53,040 
Substandard4 781 18,440 1,592 19,498 6,514 46,829 8,146 54,975 
Doubtful0 0 0 0 0 0 0 0 0 
Total$366,217 $983,532 $446,361 $285,856 $218,623 $243,777 $2,544,366 $500,459 $3,044,825 
Lease financing
Pass$5,144 $23,238 $13,968 $12,055 $6,148 $5,554 $66,107 $0 $66,107 
Special mention026200002620262 
Substandard0300154482050205 
Doubtful000000000 
Total$5,144 $23,503 $13,968 $12,055 $6,302 $5,602 $66,574 $0 $66,574 
Construction real estate
Pass$2,020 $111,299 $313,468 $119,471 $23,109 $13,616 $582,983 $26,549 $609,532 
Special mention0 0 621 18,203 0 640 19,464 0 19,464 
Substandard0 0 13,713 0 0 0 13,713 0 13,713 
Doubtful0 0 0 0 0 0 0 0 0 
Total$2,020 $111,299 $327,802 $137,674 $23,109 $14,256 $616,160 $26,549 $642,709 
Commercial real estate - investor
Pass$133,166 $496,717 $1,040,587 $404,440 $367,020 $604,733 $3,046,663 $60,055 $3,106,718 
Special mention155 1,884 17,738 15,440 54,438 69,864 159,519 49 159,568 
Substandard0 6,203 11,739 35,233 7,000 21,105 81,280 121 81,401 
Doubtful0 0 0 0 0 0 0 0 0 
Total$133,321 $504,804 $1,070,064 $455,113 $428,458 $695,702 $3,287,462 $60,225 $3,347,687 
Commercial real estate - owner
Pass$25,535 $197,722 $156,909 $138,347 $126,865 $296,748 $942,126 $34,262 $976,388 
Special mention0 4,533 1,859 2,582 8,098 24,559 41,631 59 41,690 
Substandard63 649 9,964 13,169 3,006 3,928 30,779 38 30,817 
Doubtful0 0 0 0 0 0 0 0 0 
Total$25,598 $202,904 $168,732 $154,098 $137,969 $325,235 $1,014,536 $34,359 $1,048,895 
Residential real estate
Performing$40,728 $281,000 $212,472 $103,366 $54,096 $250,183 $941,845 $0 $941,845 
Nonperforming0 194 521 150 376 3,436 4,677 0 4,677 
Total$40,728 $281,194 $212,993 $103,516 $54,472 $253,619 $946,522 $0 $946,522 
Home equity
Performing$10,325 $56,532 $18,679 $15,669 $10,278 $45,639 $157,122 $549,459 $706,581 
Nonperforming0 0 60 99 65 259 483 2,603 3,086 
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(Dollars in thousands)20212020201920182017PriorTerm TotalRevolvingTotal
Total$10,325 $56,532 $18,739 $15,768 $10,343 $45,898 $157,605 $552,062 $709,667 
Installment
Performing$4,883 $19,420 $13,567 $9,569 $7,462 $4,209 $59,110 $23,154 $82,264 
Nonperforming10 40 40 11 7 14 122 35 157 
Total$4,893 $19,460 $13,607 $9,580 $7,469 $4,223 $59,232 $23,189 $82,421 
Credit cards
Performing$0 $0 $0 $0 $0 $555 $555 $43,683 $44,238 
Nonperforming0 0 0 0 0 0 0 431 431 
Total$0 $0 $0 $0 $0 $555 $555 $44,114 $44,669 
Grand Total$588,246 $2,183,228 $2,272,266 $1,173,660 $886,745 $1,588,867 $8,693,012 $1,240,957 $9,933,969 

The following table sets forth the Company's loan portfolio at December 31, 2020 by risk attribute and origination date:
(Dollars in thousands)20202019201820172016PriorTerm TotalRevolvingTotal
Commercial & industrial
Pass$1,141,163 $460,210 $296,221 $208,077 $122,686 $138,307 $2,366,664 $502,286 $2,868,950 
Special mention24,668 10,281 18,118 6,893 6,668 6,090 72,718 10,470 83,188 
Substandard6,709 2,370 8,022 26,565 5,124 1,192 49,982 5,389 55,371 
Doubtful0 0 0 0 0 0 0 0 0 
Total$1,172,540 $472,861 $322,361 $241,535 $134,478 $145,589 $2,489,364 $518,145 $3,007,509 
Lease financing
Pass$22,916 $22,397 $12,942 $6,967 $4,802 $2,368 $72,392 $0 $72,392 
Special mention290000002900290 
Substandard50018012003050305 
Doubtful000000000 
Total$23,211 $22,397 $12,942 $7,147 $4,922 $2,368 $72,987 $0 $72,987 
Construction real estate
Pass$96,410 $259,524 $182,625 $23,185 $24,786 $426 $586,956 $19,671 $606,627 
Special mention0 621 18,203 9,984 661 0 29,469 0 29,469 
Substandard0 0 0 0 0 0 0 0 0 
Doubtful0 0 0 0 0 0 0 0 0 
Total$96,410 $260,145 $200,828 $33,169 $25,447 $426 $616,425 $19,671 $636,096 
Commercial real estate - investor
Pass$515,950 $1,011,898 $427,077 $378,536 $286,587 $361,403 $2,981,451 $56,398 $3,037,849 
Special mention0 17,463 15,534 44,426 32,408 43,704 153,535 559 154,094 
Substandard6,198 2,043 22,497 7,067 68 14,724 52,597 0 52,597 
Doubtful0 0 0 0 0 0 0 0 0 
Total$522,148 $1,031,404 $465,108 $430,029 $319,063 $419,831 $3,187,583 $56,957 $3,244,540 
Commercial real estate - owner
Pass$185,692 $162,480 $147,236 $125,275 $128,755 $211,519 $960,957 $36,721 $997,678 
Special mention4,292 11,380 2,891 8,230 3,017 19,384 49,194 59 49,253 
Substandard668 504 7,054 5,496 306 2,321 16,349 38 16,387 
Doubtful0 0 0 0 0 0 0 0 0 
Total$190,652 $174,364 $157,181 $139,001 $132,078 $233,224 $1,026,500 $36,818 $1,063,318 
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(Dollars in thousands)20202019201820172016PriorTerm TotalRevolvingTotal
Residential real estate
Performing$290,277 $241,601 $115,747 $64,220 $60,094 $224,281 $996,220 $0 $996,220 
Nonperforming321 429 673 643 87 4,713 6,866 0 6,866 
Total$290,598 $242,030 $116,420 $64,863 $60,181 $228,994 $1,003,086 $0 $1,003,086 
Home equity
Performing$60,967 $20,200 $17,445 $11,308 $9,744 $41,571 $161,235 $577,609 $738,844 
Nonperforming0 0 0 39 28 138 205 4,050 4,255 
Total$60,967 $20,200 $17,445 $11,347 $9,772 $41,709 $161,440 $581,659 $743,099 
Installment
Performing$21,584 $15,614 $11,041 $8,812 $1,954 $3,185 $62,190 $19,479 $81,669 
Nonperforming15 53 23 35 17 36 179 2 181 
Total$21,599 $15,667 $11,064 $8,847 $1,971 $3,221 $62,369 $19,481 $81,850 
Credit cards
Performing$0 $0 $0 $0 $0 $0 $0 $47,845 $47,845 
Nonperforming0 0 0 0 0 0 0 640 640 
Total$0 $0 $0 $0 $0 $0 $0 $48,485 $48,485 
Grand Total$2,378,125 $2,239,068 $1,303,349 $935,938 $687,912 $1,075,362 $8,619,754 $1,281,216 $9,900,970 

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.

Loan delinquency, including loans classified as nonaccrual, was as follows:
 As of March 31, 2021
(Dollars in thousands)30 – 59
days
past due		60 – 89
days
past due		> 90 days
past due		Total
past
due		CurrentTotal> 90 days
past due
and still
accruing
Loans       
Commercial & industrial$358 $1,577 $3,728 $5,663 $3,039,162 $3,044,825 $0 
Lease financing0 0 0 0 66,574 66,574 0 
Construction real estate0 0 0 0 642,709 642,709 0 
Commercial real estate-investor1,926 0 16,489 18,415 3,329,272 3,347,687 0 
Commercial real estate-owner50 373 285 708 1,048,187 1,048,895 0 
Residential real estate1,584 596 2,498 4,678 941,844 946,522 0 
Home equity972 355 1,758 3,085 706,582 709,667 0 
Installment116 12 29 157 82,264 82,421 0 
Credit card215 122 94 431 44,238 44,669 92 
Total$5,221 $3,035 $24,881 $33,137 $9,900,832 $9,933,969 $92 
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 As of December 31, 2020
(Dollars in thousands)30 – 59
days
past due		60 – 89
days
past due		> 90 days
past due		Total
past
due		CurrentTotal> 90 days
past due
and still
accruing
Loans       
Commercial & industrial$6,532 $0 $1,861 $8,393 $2,999,116 $3,007,509 $0 
Lease financing0 0 0 0 72,987 72,987 0 
Construction real estate0 0 0 0 636,096 636,096 0 
Commercial real estate-investor136 0 24,422 24,558 3,219,982 3,244,540 0 
Commercial real estate-owner6,480 174 400 7,054 1,056,264 1,063,318 0 
Residential real estate2,809 370 3,687 6,866 996,220 1,003,086 0 
Home equity1,483 835 1,937 4,255 738,844 743,099 0 
Installment94 35 51 180 81,670 81,850 0 
Credit card303 163 174 640 47,845 48,485 169 
Total$17,837 $1,577 $32,532 $51,946 $9,849,024 $9,900,970 $169 

For PCD assets, the delinquency status was determined individually for each loan in accordance with the individual loan's contractual repayment terms.

Nonaccrual. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful or when principal or interest payments are 90 days or more past due. Generally, loans are classified as nonaccrual due to the continued failure to adhere to contractual payment terms by the borrower, coupled with other pertinent factors. When a loan is classified as nonaccrual, the accrual of interest income is discontinued and previously accrued but unpaid interest is reversed. Any payments received while a loan is on nonaccrual status are applied as a reduction to the carrying value of the loan. A loan classified as nonaccrual may return to accrual status if none of the principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual principal and interest.

Troubled Debt Restructurings. A loan modification is considered a TDR when the borrower is experiencing financial difficulty and a concession is 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. In accordance with the CARES Act, performing loans that demonstrated limited signs of credit deterioration, but were modified to provide borrowers relief during the COVID-19 pandemic were not considered to be TDR as of March 31, 2021 or December 31, 2020.

TDRs are generally classified as nonaccrual for a minimum period of six months and may qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement.

First Financial had 173 TDRs totaling $32.5 million at March 31, 2021, including $11.6 million on accrual status and $20.9 million classified as nonaccrual. First Financial had $0.3 million of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs, and the ACL included reserves of $8.0 million related to TDRs at March 31, 2021. Additionally, as of March 31, 2021, $5.2 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year.

First Financial had 155 TDRs totaling $21.8 million at December 31, 2020, including $7.1 million of loans on accrual status and $14.7 million classified as nonaccrual. First Financial had $0.3 million commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2020, the ACL included reserves of $8.8 million related to TDRs, and $5.0 million of the accruing TDRs had been performing in accordance with the restructured terms for more than one year.

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The following tables provide information on loan modifications classified as TDRs during the three months ended March 31, 2021 and 2020:
Three months ended
March 31, 2021March 31, 2020
(Dollars in thousands)Number of loansPre-modification loan balancePeriod end balanceNumber of loansPre-modification loan balancePeriod end balance
Commercial & industrial4 $3,206 $3,070 2 $11,383 $11,383 
Construction real estate0 0 0 0 0 0 
Commercial real estate7 10,015 9,046 0 0 0 
Residential real estate10 1,023 1,000 14 1,129 1,073 
Home equity1 14 14 4 186 186 
Installment0 0 0 1 26 15 
Total22 $14,258 $13,130 21 $12,724 $12,657 

For TDRs identified during the three months ended March 31, 2021, there were insignificant chargeoffs for the portion of TDRs determined to be uncollectible. For TDRs identified during the three months ended March 31, 2020, there were $0.4 million of 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, 2021 and 2020:
Three months ended
March 31,
(Dollars in thousands)20212020
Extended maturities$0 $0 
Adjusted interest rates0 0 
Combination of rate and maturity changes0 0 
Forbearance6,163 1,008 
Other (1)
6,967 11,649 
Total$13,130 $12,657 
(1) Includes covenant modifications and other concessions, or combination of concessions, that do not consist of interest rate adjustments, forbearance and maturity extensions

First Financial considers repayment performance as an indication of the effectiveness of the Company's loan modifications. Borrowers that are 90 days or more past due on any principal or interest payments, or who prematurely terminate a restructured loan agreement without paying off the contractual principal balance, are considered to be in default of the terms of the TDR agreement.

For both three month periods ended March 31, 2021 and 2020, there were no TDR relationships for which there was a payment default during the period that occurred within twelve months of the loan modifications.

As stated in the CARES Act and subsequently modified by the Consolidated Appropriations Act, loan modifications in response to COVID-19 executed on loans that was not more than 30 days past due as of December 31, 2019 and executed between March 1, 2020, and the earlier of 60 days after the date of termination of the National Emergency or January 1, 2022 are not required to be reported as TDR.

As of March 31, 2021, the Company's loan portfolio included $251.1 million of active loan modifications made under the guidance of the CARES Act that were not classified as TDR. These modifications included $225.8 million of borrowers making interest only payments and $25.3 million of modifications deferring full principal and interest payments. Active modifications were concentrated in hotel and franchise loans, which were $153.0 million and $44.1 million respectively as of March 31, 2021, or 60.9% and 17.6% of the total active modifications at March 31, 2021. Total active deferrals were comprised of 67 commercial loans with balances of $248.4 million and 25 consumer loans with balances of $2.7 million as of March 31, 2021.
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As of December 31, 2020, the Company's loan portfolio included $320.2 million of active loan modifications made under the guidance of the CARES Act that were not classified as TDR. These modifications included $291.5 million of borrowers making interest only payments at year end, and full principal and interest deferrals of $28.7 million. Active modifications as of December 31, 2020 were primarily hotel and franchise loans, which were $186.2 million and $44.3 million respectively, or 58.2% and 13.8% of the total active modifications at December 31, 2020. As of December 31, 2020, the Company's loan portfolio included 90 commercial loans with balances of $312.5 million and 53 consumer loans with balances of $7.7 million modified in response to COVID-19 that are not considered TDRs.
Nonperforming Loans. Loans classified as nonaccrual and loans modified as TDRs are considered nonperforming. The following table provides information on nonperforming loans:
March 31, 2021December 31, 2020
(Dollars in thousands)Nonaccrual loans with a related ACLNonaccrual loans with no related ACLTotal nonaccrualNonaccrual loans with a related ACLNonaccrual loans with no related ACLTotal nonaccrual
Nonaccrual loans (1)
  
Commercial & industrial$12,505 $12,436 $24,941 $18,711 $10,519 $29,230 
Lease financing0 0 0 0 0 0 
Construction real estate0 0 0 0 0 0 
Commercial real estate18,402 26,112 44,514 6,957 27,725 34,682 
Residential real estate0 11,359 11,359 251 11,350 11,601 
Home equity0 4,286 4,286 0 5,076 5,076 
Installment0 146 146 0 163 163 
Total nonaccrual loans$30,907 $54,339 $85,246 $25,919 $54,833 $80,752 
(1) Nonaccrual loans include nonaccrual TDRs of $20.9 million and $14.7 million as of March 31, 2021 and December 31, 2020, respectively.

Three months ended
March 31,
(Dollars in thousands)20212020
Interest income effect on nonperforming loans
Gross amount of interest that would have been recorded under original terms$1,487 $1,306 
Interest included in income
Nonaccrual loans483 167 
Troubled debt restructurings86 235 
Total interest included in income569 402 
Net impact on interest income$918 $904 

First Financial individually reviews all nonperforming loan relationships greater than $250,000 to determine if an individually evaluated allowance is necessary based on the borrower’s overall financial condition, resources and payment record, support from guarantors and the realizable value of any collateral. Individually evaluated 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.

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A loan is considered to be collateral dependent when the borrower is experiencing financial difficulty and the repayment is expected to be provided substantially through the operation or sale of collateral. The following table presents the amortized cost basis of collateral dependent loans by class of loan.
March 31, 2021
Type of Collateral
(Dollar in thousands)Business
assets		Commercial real estateEquipmentLandResidential real estateOtherTotal
Class of loan
Commercial & industrial$22,215 $1,874 $417 $0 $0 $435 $24,941 
Commercial real estate-investor025,115 0 6,198 214 0 31,527 
Commercial real estate-owner5,8426,779 0 40 326 0 12,987 
Residential real estate00 0 0 11,359 0 11,359 
Home equity00004,286 0 4,286 
Installment00000 146 146 
Total$28,057 $33,768 $417 $6,238 $16,185 $581 $85,246 
December 31, 2020
Type of Collateral
(Dollar in thousands)Business
assets		Commercial real estateEquipmentLandResidential real estateOtherTotal
Class of loan
Commercial & industrial$30,961 $6,130 $2,608 $865 $0 $4,892 $45,456 
Commercial real estate-investor020,212 661 5,537 872 0 27,282 
Commercial real estate-owner5,8423,495 0 42 344 0 9,723 
Residential real estate00 0 0 11,601 0 11,601 
Home equity00005,076 0 5,076 
Installment00000 163 163 
Total$36,803 $29,837 $3,269 $6,444 $17,893 $5,055 $99,301 

Lease financing. 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.

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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)20212020
Balance at beginning of period$1,287 $2,033 
Additions
Commercial & industrial0 247 
Residential real estate0 146 
Total additions0 393 
Disposals 
Commercial & industrial(246)(179)
Residential real estate(187)(721)
Total disposals(433)(900)
Valuation adjustment 
Commercial & industrial0 0 
Residential real estate0 (59)
Total valuation adjustment0 (59)
Balance at end of period$854 $1,467 

NOTE 5:  ALLOWANCE FOR CREDIT LOSSES

Allowance for credit losses - loans and leases. The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The ACL 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 a guarantor or from the liquidation of collateral. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable on loans and leases, which totaled $38.2 million and $37.7 million as of March 31, 2021 and December 31, 2020, respectively, is excluded from the estimate of credit losses. 

Management estimates the allowance balance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience paired with economic forecasts provides the basis for the quantitatively modeled estimation of expected credit losses. First Financial adjusts its quantitative model, as necessary, to reflect conditions not already considered by the quantitative model. These adjustments are commonly known as the Qualitative Framework.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the ACL using the following methods:

Commercial and industrial – C&I loans include revolving lines of credit and term loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, leasehold improvements or other projects. C&I loans are generally underwritten individually and secured with the assets of the Company and/or the personal guarantee of the business owners. C&I loans also include ABL, equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and commission-based loans to insurance agents and brokers. ABL transactions typically involve larger commercial clients and are secured by specific assets, such as inventory, accounts receivable, machinery and equipment. In the franchise lending space, First Financial focuses on a limited number of restaurant concepts that have sound economics, low closure rates and strong brand awareness within specified local, regional or national markets. Within the insurance lending platform, First Financial serves insurance agents and brokers that are looking to maximize their book-of-business value and grow their agency business.

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Current period default rates are utilized in the modeling of the ACL for C&I loans, and are adjusted for forecasted changes in the treasury term spread and market volatility index. Changes in current period defaults or forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.

Lease financing – Lease financing consists of lease transactions for the acquisition of both new and used business equipment for commercial clients. Lease products may include tax leases, finance leases, lease lines of credit and interim funding. The credit underwriting for lease transactions includes detailed analysis of the lessee's industry and business model, nature of the equipment, equipment resale values, historical and projected cash flow analysis, secondary sources of repayment and guarantor support in addition to other considerations.

The ACL model for leases sources expected default rates from the C&I portfolio model. Therefore, changes in forecasted expectations for the treasury term spread and market volatility index could result in volatility in the Company's ACL in future periods.

Construction real estate – Real estate construction loans are term loans to individuals, companies or developers used for the construction or development of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Generally, these loans are for construction projects that have been pre-sold, pre-leased or have secured permanent financing, as well as loans to real estate companies with significant equity invested in the project. An independent credit team underwrites construction real estate loans, which are managed by experienced lending officers and monitored through the construction phase by a centralized funding desk that manages loan disbursements.

The construction ACL model is adjusted for forecasted changes in rental vacancy rates in the Bank's geographic footprint and the housing price index. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.

Commercial real estate - owner & investor – Commercial real estate loans consist of term loans secured by a mortgage lien on real estate properties such as apartment buildings, office and industrial buildings and retail shopping centers. Additionally, the Company's franchise lending activities discussed in the "Commercial and Industrial" section often include the financing of real estate in addition to equipment. The credit underwriting for both owner-occupied and investor income producing real estate loans includes detailed market analysis, historical and projected cash flow analysis, appropriate equity margins, assessment of lessees and lessors, environmental risks and the type, age, condition and location of real estate, among other factors.

First Financial models owner-occupied and investor CRE separately when determining the ACL. For owner occupied CRE, current period default rates are utilized in the modeling, and are adjusted for forecasted changes in the BAA bond spread, national rental vacancy rates and the consumer confidence index. Current period default rates are also utilized in the modeling of investor CRE loans, and are adjusted for forecasted changes in the BAA bond spread, multifamily building permits within the Bank’s geographic footprint and national rental vacancy rates. Changes in current period defaults and forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.

Residential real estate – Residential real estate loans represent loans to consumers for the financing of a residence. These loans generally have a 15 to 30 year term and a fixed interest rate, but may have a shorter term to maturity with an adjustable interest rate. In most cases, these loans are extended to borrowers to finance their primary residence. First Financial sells residential real estate loan originations into the secondary market on both servicing retained and servicing released bases. Residential real estate loans are generally underwritten to secondary market lending standards, utilizing underwriting processes that rely on empirical data to assess credit risk as well as analysis of the borrower's ability to repay their obligations, credit history, the amount of any down payment and the market value or other characteristics of the property. First Financial also offers a residential mortgage product that features similar borrower credit characteristics but a more streamlined underwriting process than typically required to sell to government-sponsored enterprises and thus is retained on the Consolidated Balance Sheets.

The residential real estate ACL model is adjusted for forecasted changes in the housing price index, housing starts within the Bank’s geographic footprint and national single-family existing home sales. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.

Home equity – Home equity lending includes both home equity loans and revolving lines of credit secured by a first or second lien on the borrower’s residence. Home equity lending underwriting considerations include the borrower's credit history as well as to debt-to-income and loan-to-value policy limits.

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The home equity ACL model is adjusted for forecasted changes in the consumer credit growth rate within the Bank’s geographic footprint and the working-age labor participation rate. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.

Installment – Installment lending consists of consumer loans not secured by real estate, including loans secured by automobiles and unsecured personal loans.

The ACL model for installment loans sources expected default rates from the residential real estate and home equity portfolio models and is paired with installment specific LGD rates. Changes in forecasted expectations for the consumer credit growth rate within the Bank’s geographic footprint, the working-age labor participation rate, the housing price index, housing starts within the Bank’s geographic footprint and national existing single-family existing home sales could result in volatility in the Company's ACL in future periods.

Credit card – Credit card lending consists of secured and unsecured revolving lines of credit to consumer and business customers. Credit card lines are generally available for an indefinite period of time as long as the borrower's credit characteristics do not materially or adversely change, but lines are unconditionally cancellable by the Company at any time.

The ACL model for credit card loans sources expected default rates from the residential real estate and home equity portfolio models and is paired with credit card specific LGD rates. Changes in forecasted expectations for the consumer credit growth rate within the Bank’s geographic footprint, the working-age labor participation rate, the housing price index, housing starts within the Bank’s geographic footprint and national existing single-family existing home sales could result in volatility in the Company's ACL in future periods.

The Company utilized the final Moody's March baseline forecast as its R&S forecast in the quantitative model, which included consideration of the impact from both the COVID-19 pandemic and the related government stimulus response. For reasonableness, the Company also considered the impact to the model from alternative, more adverse economic forecasts, slower prepayment speeds and increased default rates. These alternative analyses were utilized to inform the Company's qualitative adjustments. Additionally, First Financial considered its credit exposure to certain industries believed to be at risk for future credit stress related to the COVID-19 pandemic, such as franchise, hotel and investor commercial real estate lending when making qualitative adjustments to the ACL model.

First Financial's ACL is influenced by loan volumes, risk rating migration or delinquency status, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.  For the three months ended March 31, 2021, the ACL declined slightly due to improvements in economic forecasts and the Company's improved credit outlook.

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Changes in the allowance by loan category were as follows:
  
Three months ended March 31, 2021
(Dollars in thousands)Commercial & industrialLease financingConstruction real estateCommercial real estateResidential real estateHome equityInstallmentCredit cardTotal
Allowance for credit losses:        
Beginning balance$51,454 $995 $21,736 $76,795 $8,560 $11,869 $1,215 $3,055 $175,679 
Provision for credit losses1,258 20 1,000 2,929 (855)(675)22 (249)3,450 
Loans charged off(7,910)0 (2)(1,250)(1)(611)(36)(222)(10,032)
Recoveries337 0 0 195 44 177 34 39 826 
Total net charge-offs(7,573)0 (2)(1,055)43 (434)(2)(183)(9,206)
Ending allowance for credit losses$45,139 $1,015 $22,734 $78,669 $7,748 $10,760 $1,235 $2,623 $169,923 
 Three months ended March 31, 2020
(Dollars in thousands)Commercial & industrialLease financingConstruction real estateCommercial real estateResidential real estateHome equityInstallmentCredit cardTotal
Allowance for credit losses:        
Beginning balance, prior to adoption of ASC 326$18,584 $971 $2,381 $23,579 $5,299 $4,787 $392 $1,657 $57,650 
Impact of adopting ASC 3269,901 118 11,579 24,118 5,490 8,430 801 1,068 61,505 
Provision for credit losses16,016 405 (449)5,227 558 1,538 75 510 23,880 
Loans charged off(1,091)0 0 (4)(115)(267)(61)(311)(1,849)
Recoveries2,000 0 0 234 52 339 31 43 2,699 
Total net charge-offs909 0 0 230 (63)72 (30)(268)850 
Ending allowance for credit losses$45,410 $1,494 $13,511 $53,154 $11,284 $14,827 $1,238 $2,967 $143,885 

Allowance for credit losses - unfunded commitments. First Financial estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life consistent with the Company's ACL methodology for loans and leases.

The ACL on unfunded commitments was $13.0 million as of March 31, 2021 and $12.5 million as of December 31, 2020. Additionally, First Financial recorded provision for credit losses on unfunded commitments of $0.5 million and $1.6 million for the three month periods ended March 31, 2021 and 2020, respectively.

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 of the purchase price of the acquisition over the fair value of net assets acquired is recorded as goodwill.

Changes in the carrying amount of goodwill for the three months ended March 31, 2021 and March 31, 2020 were as follows:
Three months ended
March 31,
(Dollars in thousands)20212020
Balance at beginning of period$937,771 $937,771 
Goodwill resulting from business combinations0 0 
Balance at end of period$937,771 $937,771 

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, 2020 and no impairment was indicated. As of March 31, 2021, no events or changes in circumstances indicated that the fair value of a reporting unit was below its carrying value.

Other intangible assets. Other intangible assets consist primarily of core deposit, customer list and other miscellaneous intangibles.

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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. First Financial's core deposit intangibles have an estimated weighted average remaining life of 6.8 years.

First Financial recorded a $39.4 million customer list intangible asset in conjunction with the Bannockburn merger to account for the obligation or advantage on the part of either the Company or the customer to continue the pre-existing relationship subsequent to the merger. The customer list intangible asset is amortized on a straight-line basis over its estimated useful life of 11 years.

Other miscellaneous intangibles include purchase commissions, non-compete agreements and trade name intangibles. Other intangible assets are included in Other intangibles in the Consolidated Balance Sheets.  

Amortization expense recognized on intangible assets for the three months ended March 31, 2021 and March 31, 2020 was $2.5 million and $2.8 million, respectively.

The gross carrying amount and accumulated amortization of other intangible assets at March 31, 2021 and December 31, 2020 were as follows:
(Dollars in thousands)March 31, 2021December 31, 2020
Gross
carrying
amount		Accumulated
amortization		Gross
carrying
amount		Accumulated
amortization
Amortized intangible assets
Core deposit intangibles$51,031 $(28,834)$51,031 $(27,524)
Customer list39,420 (5,674)39,420 (4,778)
Other10,146 (4,105)10,113 (3,710)
Total$100,597 $(38,613)$100,564 $(36,012)

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 or office space.

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

With the adoption of Topic 842, operating lease agreements were required to be recognized on the Consolidated Balance Sheets as an ROU asset and a corresponding lease liability. 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 Sheets and was $57.7 million and $63.9 million at March 31, 2021 and December 31, 2020, respectively. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received. First Financial recorded a $67.7 million and $71.7 million lease liability in Accrued interest and other liabilities on the Consolidated Balance Sheet at March 31, 2021 and December 31, 2020, respectively.

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 was based upon the remaining lease term as of that date.

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
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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.

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 common area maintenance charges in the annual rental payments.

The components of lease expense were as follows:
Three months ended
March 31,
(Dollars in thousands)20212020
Operating lease cost$1,851 $2,020 
Short-term lease cost29 41 
Variable lease cost679 641 
Total operating lease cost$2,559 $2,702 

Future minimum commitments due under these lease agreements as of March 31, 2021 are as follows:
(Dollars in thousands)Operating leases
2021 (remaining nine months)$5,036 
20226,850 
20236,952 
20246,647 
20256,038 
Thereafter53,150 
Total lease payments84,673 
Less imputed interest17,009 
Total$67,664 

The weighted average remaining lease term and discount rate for the Company's operating leases were as follows:
March 31, 2021December 31, 2020
Operating leases
Weighted-average remaining lease term13.8 years15.1 years
Weighted-average discount rate2.95 %3.07 %

Supplemental cash information at March 31, 2021 and 2020 related to leases was as follows:
Three months ended
March 31,
(Dollars in thousands)20212020
Cash paid for amounts included in the measurement of lease liabilities 
Operating cash flows from operating leases$1,790 $1,288 
ROU assets obtained in exchange for lease obligations
Operating leases5,761 8,862 

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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, federal funds purchased, 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.

The following shows the remaining contractual maturity of repurchase agreements by collateral pledged:
(Dollars in thousands)Overnight and continuous
Repurchase agreements
Mortgage-backed securities$88,964 
Collateralized mortgage obligations40,423 
Total$129,387 

Securities sold under agreements to repurchase were secured by securities with a carrying amount of $129.7 million and $126.7 million as of March 31, 2021 and December 31, 2020, respectively.

First Financial had $181.4 million federal funds purchased at March 31, 2021 and $166.6 million as of December 31, 2020. The Company had no short-term borrowings with the FHLB at March 31, 2021 or December 31, 2020. These short-term borrowings are used to manage normal liquidity needs and support the Company's asset and liability management strategies.

First Financial had $583.7 million and $776.2 million of long-term debt as of March 31, 2021 and December 31, 2020 respectively, which included FRB borrowings, subordinated notes, FHLB long term advances and an interest free loan with a municipality.

First Financial participates in the PPPLF, which is a program created by the FRB to extend credit to eligible financial institutions that originate PPP loans. The bank had outstanding PPPLF advances of $270.9 million and $435.0 million as of March 31, 2021 and December 31, 2020, respectively, with an average interest rate of 35 basis points for both periods. These borrowings are secured by pledged PPP loans and prepay in conjunction with reductions in the principal balances of those loans.

The following is a summary of First Financial's long-term debt:
 March 31, 2021December 31, 2020
(Dollars in thousands)AmountAverage rateAmountAverage rate
FRB borrowings$270,874 0.35 %$434,982 0.35 %
FHLB borrowings0 0.00 %19,971 1.43 %
Subordinated notes312,906 4.82 %321,384 4.86 %
Unamortized debt issuance costs(2,673)N/A(2,770)N/A
Lease liability1,840 3.81 %1,860 3.81 %
Capital loan with municipality775 0.00 %775 0.00 %
Total long-term debt$583,722 2.76 %$776,202 2.25 %

In April 2020, First Financial issued $150.0 million of fixed to floating rate subordinated notes. These subordinated notes have an initial fixed interest rate of 5.25% to, but excluding, May 15, 2025, payable semi-annually in arrears. From, and including, May 15, 2025, the interest rate on the subordinated notes will reset quarterly to a floating rate per annum equal to a benchmark rate, which is expected to be the then-current three-month term SOFR, plus 509 basis points, payable quarterly in arrears. The subordinated notes mature on May 15, 2030. These notes are redeemable by the Company in whole or in part beginning with the interest payment date of May 15, 2025.

In 2015, First Financial issued $120.0 million of subordinated notes, which have a fixed interest rate of 5.13% 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
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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. These 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 6.00% fixed rate private placement subordinated debt in conjunction with the MSFG merger that was issued in 2015 and matured in 2025. These notes were redeemable by the Company at par following the 5 year anniversary of issuance. These subordinated notes were redeemed by the Company in the first quarter of 2021. 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 $20.0 million of fixed rate FHLB long-term advances as of December 31, 2020. This FHLB long-term debt matured in the first quarter of 2021, and as a result, as of March 31, 2021, the Company had no long-term FHLB advances. 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 reclassifications out of accumulated other comprehensive income (loss) are as follows:
 Three months ended March 31, 2021
 Total other comprehensive income (loss)Total accumulated
other comprehensive income (loss)
(Dollars in thousands)Prior to
reclass		Reclass
from		Pre-taxTax effectNet of taxBeginning balanceNet activityEnding balance
Unrealized gain (loss) on debt securities$(39,658)$(166)$(39,492)$8,524 $(30,968)$73,576 $(30,968)$42,608 
Retirement obligation0 (525)525 (120)405 (24,912)405 (24,507)
Total$(39,658)$(691)$(38,967)$8,404 $(30,563)$48,664 $(30,563)$18,101 
 Three months ended March 31, 2020
 Total other comprehensive income (loss)Total accumulated
other comprehensive income (loss)
(Dollars in thousands)Prior to
reclass		Reclass
from		Pre-taxTax effectNet of taxBeginning balanceNet activityEnding balance
Unrealized gain (loss) on debt securities$(2,434)$(59)$(2,375)$512 $(1,863)$41,264 $(1,863)$39,401 
Retirement obligation0 (425)425 (97)328 (27,941)328 (27,613)
Total$(2,434)$(484)$(1,950)$415 $(1,535)$13,323 $(1,535)$11,788 

The following table presents the activity reclassified from accumulated other comprehensive income into income during the three month periods ended March 31, 2021 and 2020, respectively:
Amount reclassified from
accumulated other comprehensive income (loss)
Three months ended
March 31,
(Dollars in thousands)20212020Affected Line Item in the Consolidated Statements of Income
Realized gain (loss) on securities available-for-sale$(166)$(59)Net gain (loss) on sales of investments securities
Defined benefit pension plan
Amortization of prior service cost (1)
100 100 Other noninterest expense
Recognized net actuarial loss (1)
(625)(525)Other noninterest expense
Defined benefit pension plan total(525)(425)
Total reclassifications for the period, before tax$(691)$(484)
(1) 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, swaps and foreign exchange contracts, to meet the needs of its clients while managing the interest and currency rate risk associated with certain transactions.  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 does not use derivatives for speculative purposes.

First Financial manages market value credit risk through counterparty credit policies including a review of total derivative notional position to total assets, total credit exposure to total capital and counterparty credit exposure risk.

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.

At March 31, 2021, for the interest rate derivatives, the Company had a total counterparty notional amount outstanding of $2.3 billion, spread among twenty counterparties, with an estimated fair value of $98.9 million. At December 31, 2020, the Company had interest rate derivatives with a total counterparty notional amount outstanding of $2.3 billion, spread among twenty counterparties, with an estimated fair value of $182.3 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 ACL Committee monitors derivative credit risk exposure related to problem loans through the Company's ACL 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.

Foreign exchange contracts. First Financial may enter into foreign exchange derivative contracts for the benefit of commercial customers to hedge their exposure to foreign currency fluctuations. Similar to the hedging of interest rate risk from interest rate derivative contracts, First Financial also enters into foreign exchange contracts with major financial institutions to economically hedge a substantial portion of the exposure from client driven foreign exchange activity. These derivatives are classified as free-standing instruments with the revaluation gain or loss recorded in Foreign exchange income in the Consolidated Statements of Income. The Company has risk limits and internal controls in place to help ensure excessive risk is not being taken in providing this service to customers. These controls include an independent determination of currency volatility and credit equivalent exposure on these contracts, counterparty credit approvals and country limits performed by independent risk management. At March 31, 2021, the Company had total counterparty notional amount outstanding of $4.6 billion spread among five counterparties, with an estimated fair value of $31.9 million. At December 31, 2020, the Company had total counterparty notional amounts outstanding of $3.6 billion spread among six counterparties, with an estimated fair value of $33.1 million.

In connection with its use of foreign exchange contracts, 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.

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The following table details the classification and amounts of client derivatives and foreign exchange contracts recognized in the Consolidated Balance Sheets:
  
 March 31, 2021December 31, 2020
 Estimated fair valueEstimated fair value
(Dollars in thousands)Balance sheet classificationNotional
amount		GainLossNotional
amount		GainLoss
Client derivatives - instruments associated with loans      
Matched interest rate swaps with borrowerAccrued interest and other assets$2,326,382 $111,765 $(10,317)$2,300,336 $184,777 $(107)
Matched interest rate swaps with counterpartyAccrued interest and other liabilities2,326,382 10,317 (111,874)2,300,336 107 (184,884)
Foreign exchange contracts
Matched foreign exchange contracts with customers
Accrued interest and other assets4,606,916 68,291 (36,409)3,637,509 60,366 (27,249)
Match foreign exchange contracts with counterparty
Accrued interest and other liabilities4,606,916 36,409 (68,291)3,637,509 27,249 (60,366)
Total $13,866,596 $226,782 $(226,891)$11,875,690 $272,499 $(272,606)

The following table discloses the gross and net amounts of client derivatives and foreign exchange contracts recognized in the Consolidated Balance Sheets:
March 31, 2021December 31, 2020
(Dollars in thousands)Gross amounts of recognized liabilitiesGross amounts offset in the Consolidated Balance SheetsNet amounts of liabilities (assets) presented in the Consolidated Balance SheetsGross amounts of recognized liabilitiesGross amounts offset in the Consolidated Balance SheetsNet amounts of liabilities (assets) presented in the Consolidated Balance Sheets
Client derivatives
Matched interest rate swaps with counterparty$122,191 $(249,003)$(126,812)$184,991 $(385,088)$(200,097)
Foreign exchange contracts with counterparty104,700 (10,253)94,447 87,615 (17,392)70,223 
Total$226,891 $(259,256)$(32,365)$272,606 $(402,480)$(129,874)

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, 2021:
(Dollars in thousands)Notional
amount		Average
maturity
(years)		Fair
value
Client derivatives-interest rate contracts   
Receive fixed, matched interest rate swaps with borrower$2,326,382 6.1$101,448 
Pay fixed, matched interest rate swaps with counterparty2,326,382 6.1(101,557)
Client derivatives-foreign exchange contracts
Foreign exchange contracts-pay USD
$4,606,916 0.631,882 
Foreign exchange contracts-receive USD
$4,606,916 0.6(31,882)
Total client derivatives$13,866,596 2.4$(109)

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 $250.5 million as of March 31, 2021 and $242.4 million as of December 31, 2020. The fair value of these agreements is recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets and was $0.2 million at March 31, 2021 and $0.3 million at December 31, 2020.

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 IRLCs with First Financial and the loans are 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,
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2021, the notional amount of the IRLCs was $125.2 million and the notional amount of forward commitments was $114.8 million. As of December 31, 2020, the notional amount of IRLCs was $114.2 million and the notional amount of forward commitments was $112.6 million. The fair value on these agreements was $0.6 million and $2.7 million at March 31, 2021 and December 31, 2020, respectively, and were 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 loan commitments and letters of 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 was represented by the contractual amounts of those instruments. Effective January 1, 2020, First Financial adopted ASC 326, at which time First Financial estimated expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life consistent with the Company's ACL methodology for loans and leases. Adjustments to the reserve for unfunded commitments are recorded in Provision for credit losses - unfunded commitments in the Consolidated Statements of Income. First Financial had $13.0 million and $12.5 million of reserves for unfunded commitments recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets at March 31, 2021 and December 31, 2020, 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 will expire without being fully drawn upon, the total 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 $3.7 billion at March 31, 2021 and $3.4 billion at December 31, 2020. As of March 31, 2021, loan commitments with a fixed interest rate totaled $127.3 million while commitments with variable interest rates totaled $3.6 billion. At December 31, 2020, loan commitments with a fixed interest rate totaled $123.6 million while commitments with variable interest rates totaled $3.3 billion. First Financial's fixed rate loan commitments have interest rates ranging from 0.00% to 21.00% for both March 31, 2021 and December 31, 2020 and have maturities ranging from less than one year to 30.0 years for March 31, 2021 and less than one year to 30.8 years for December 31, 2020.

The following table presents by type First Financial's active loan balances and related obligations to extend credit:
March 31, 2021December 31, 2020
(dollars in thousands)Unfunded commitmentLoan balanceUnfunded commitmentLoan balance
Commercial & industrial$1,335,354 $3,044,825 $1,270,765 $3,007,509 
Lease financing8,66366,574072,987
Construction real estate347,676642,709374,008636,096
Commercial real estate-investor167,6543,347,687139,7543,244,540
Commercial real estate-owner42,8091,048,89551,6371,063,318
Residential real estate32,256946,52228,8951,003,086
Home equity777,786709,667762,406743,099
Installment17,64482,42118,22981,850
Credit card212,23044,669207,36548,485
Total$2,942,072 $9,933,969 $2,853,059 $9,900,970 

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
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issued letters of credit aggregating $36.4 million and $36.1 million at March 31, 2021 and December 31, 2020, 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 indirect federal subsidies that provide tax incentives to encourage investment in the acquisition, development, 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 $44.8 million and $47.5 million as of March 31, 2021 and December 31, 2020, respectively. First Financial recognized tax credits of $2.2 million and $1.9 million for the three months ended March 31, 2021 and 2020, respectively. The Company recognized amortization expense, which was included in income tax expense, of $2.0 million and $2.1 million for the three months ended March 31, 2021 and 2020, respectively. First Financial had no affordable housing contingent commitments as of March 31, 2021 or December 31, 2020.

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 $3.5 million at March 31, 2021 and $3.6 million at December 31, 2020. The maximum exposure to loss related to these investments was $3.9 million at March 31, 2021 and $4.0 million at December 31, 2020, representing the Company’s investment balance and its unfunded commitments to invest additional amounts. Investments in historic tax credits resulted in $0.1 million of tax credits for each of the three months ended March 31, 2021 and March 31, 2020, respectively.

Investments in renewable energy tax credits. First Financial has noncontrolling financial investments in renewable energy projects 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 renewable energy tax credits are accounted for under the equity method of accounting and are included in Accrued interest and other assets on the Consolidated Balance Sheets. The Company’s recorded investment in renewable energy projects was approximately $15.2 million and $5.2 million at March 31, 2021 and December 31, 2020, respectively. The maximum exposure to loss related to these investments was $14.3 million and $7.7 million at March 31, 2021 and December 31, 2020, respectively, representing the Company’s investment balance and its unfunded commitments to invest additional amounts.

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, 2021. 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, 2021 or December 31, 2020.

NOTE 12:  INCOME TAXES

For the first three months of 2021, income tax expense was $10.4 million, resulting in an effective tax rate of 18.0% compared with income tax expense of $5.9 million and an effective tax rate of 17.1% for the comparable period in 2020. The increase in the effective tax rate is primarily due to higher pre-tax income in the first quarter of 2021 as compared to the first quarter of 2020. Also, in the first quarter of 2020, the Company recorded the tax benefit of the carryback of certain net operating losses as allowed under the CARES Act, which contributed to a lower effective tax rate in the quarter.
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At both March 31, 2021 and December 31, 2020, First Financial had $1.9 million of unrecognized tax benefits, as determined under FASB ASC Topic 740-10, Income Taxes, that if recognized would favorably impact the effective income tax rate in future periods. The unrecognized tax benefits relate to state income tax exposures 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, 2021 and December 31, 2020, 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 2017 have been closed and are no longer subject to U.S. federal income tax examinations. Tax years 2017 through 2020 remain open to examination by the federal taxing authority.

With limited exception, First Financial is no longer subject to state and local income tax examinations for years prior to 2017.

NOTE 13:  EMPLOYEE BENEFIT PLANS

First Financial sponsors a non-contributory defined benefit pension plan which covers substantially all employees and uses a December 31 measurement date for the plan. Plan assets are 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, 2021, or the year ended December 31, 2020, and does not expect to make cash contributions to the plan through the remainder of 2021.

As a result of the plan’s actuarial projections, First Financial recorded expense as set forth in the following table. The amounts are recognized in First Financial’s Consolidated Statements of Income related to the Company's pension plan.
Three months ended
March 31,
(Dollars in thousands)20212020
Service cost$2,350 $1,850 
Interest cost525 600 
Expected return on assets(2,550)(2,475)
Amortization of prior service cost(100)(100)
Net actuarial loss625 525 
     Net periodic benefit cost (income)$850 $400 

NOTE 14:  REVENUE RECOGNITION

The majority of the Company’s revenues come from sources that are outside of the scope of ASU 2014-09, Revenue from Contracts with Customers. Income sources that are outside of this standard include income earned on loans, leases, securities, derivatives and foreign exchange The Company's services that fall within the scope of ASU 2014-09 are presented within Noninterest income and are recognized as revenue when 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 revenues from its deposit customers for transaction-based fees, account maintenance fees and overdraft fees. 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, 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 deposit account.

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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 quarter of 2021 was $5.7 million, which was partially offset by $3.0 million of expenses within Noninterest income. Similarly, gross interchange income for the first quarter of 2020 was $5.7 million, which was partially offset by $3.0 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 fees 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.
NOTE 15:  EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share:
Three months ended
March 31,
(Dollars in thousands, except per share data)20212020
Numerator
Net income available to common shareholders$47,315 $28,628 
Denominator
Weighted average shares outstanding for basic earnings per common share96,873,940 97,736,690 
Effect of dilutive securities
Employee stock awards853,587 619,524 
Adjusted weighted average shares for diluted earnings per common share97,727,527 98,356,214 
Earnings per share available to common shareholders
Basic$0.49 $0.29 
Diluted$0.48 $0.29 
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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, 2021 and March 31, 2020.  

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:
CarryingEstimated fair value
(Dollars in thousands)valueTotalLevel 1Level 2Level 3
March 31, 2021
Financial assets
Cash and short-term investments$229,371 $229,371 $229,371 $0 $0 
Investment securities held-to-maturity121,945 124,294 0 124,294 0 
Other investments131,814 131,814 949 121,457 9,408 
Loans and leases9,764,046 9,767,354 0 0 9,767,354 
Accrued interest receivable51,520 51,520 0 13,299 38,221 
Financial liabilities
Deposits
Deposits12,648,069 12,652,266 0 12,652,266 0 
Short-term borrowings181,387 181,387 181,387 0 0 
Long-term debt583,722 581,177 0 581,177 0 
Accrued interest payable5,723 5,723 0 5,723 0 
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CarryingEstimated fair value
(Dollars in thousands)valueTotalLevel 1Level 2Level 3
December 31, 2020
Financial assets
Cash and short-term investments$251,359 $251,359 $251,359 $0 $0 
Investment securities held-to-maturity131,687 136,698 0 136,698 0 
Other investments133,198 133,198 837 122,953 9,408 
Loans and leases9,725,291 9,743,497 0 0 9,743,497 
Accrued interest receivable50,903 50,903 0 13,221 37,682 
Financial liabilities
Deposits12,232,003 12,238,058 0 12,238,058 0 
Short-term borrowings166,594 166,594 166,594 0 0 
Long-term debt776,202 774,674 0 774,674 0 
Accrued interest payable6,240 6,240 14 6,226 0 

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.

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.

Loans held for sale. The fair value of the Company’s residential mortgage loans held for sale is determined on a recurring basis based on quoted prices for similar loans in active markets, and therefore, is classified as a Level 2 measurement.

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 and foreign exchange contracts 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.

Collateral dependent loans. Collateral dependent loans carried at fair value have been partially charged-off or receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is generally based on real estate appraisals, a calculation of enterprise value or a valuation of business assets including equipment, inventory and accounts receivable. These loans had a principal amount of $30.9 million and $45.3 million at March 31, 2021 and December 31, 2020, respectively, with a valuation allowance of $10.2 million and $13.5 million at March 31, 2021 and December 31, 2020, respectively.

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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). These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and the client’s business, resulting in a Level 3 fair value classification. Collateral dependent loans are evaluated on a quarterly basis for additional write-downs and are adjusted accordingly.

Enterprise value is defined as imputed value for the entire underlying business. To determine an appropriate range of enterprise value, FFB relies on a standardized set of valuation methodologies that take into account future projected cash flows, market based multiples as well as asset values. Valuations involve both quantitative and qualitative considerations and professional judgments concerning differences in financial and operating characteristics in addition to other factors that may impact values over time (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).  

The fair value of collateral dependent loans is measured at fair value on a nonrecurring basis.  Any fair value adjustments are recorded in the period incurred as provision for credit 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 establishing a new cost basis. 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.

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 1Level 2Level 3Assets/liabilities
at fair value
March 31, 2021
Assets    
Investment securities available-for-sale$10,260 $3,703,825 $39,678 $3,753,763 
Loans held for sale0 34,590 0 34,590 
Interest rate derivative contracts0 122,156 0 122,156 
Foreign exchange derivative contracts0 104,700 0 104,700 
Total$10,260 $3,965,271 $39,678 $4,015,209 
Liabilities    
Interest rate derivative contracts$0 $122,592 $0 $122,592 
Foreign exchange derivative contracts0 104,700 0 104,700 
Total$0 $227,292 $0 $227,292 
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 Fair value measurements using
(Dollars in thousands)Level 1Level 2Level 3Assets/liabilities
at fair value
December 31, 2020
Assets    
Investment securities available-for-sale$103 $3,383,902 $40,575 $3,424,580 
Loans held for sale0 41,103 0 41,103 
Interest rate derivative contracts0 185,032 0 185,032 
Foreign exchange derivative contracts0 87,615 0 87,615 
Total$103 $3,697,652 $40,575 $3,738,330 
Liabilities    
Interest rate derivative contracts$0 $186,124 $0 $186,124 
Foreign exchange derivative contracts$0 $87,615 $0 $87,615 
Total$0 $273,739 $0 $273,739 

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, 2021 and March 31, 2020.
Three months ended
March 31,
(dollars in thousands)20212020
Beginning balance$40,575 $9,190 
Accretion (amortization)(9)16 
Increase (decrease) in fair value12 (30)
Settlements(900)35,074 
Ending balance$39,678 $44,250 

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 1Level 2Level 3
March 31, 2021
Assets   
Collateral dependent loans
Commercial$0 $0 $10,732 
Commercial real estate0 0 9,986 
OREO0 0 54 
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 Fair value measurements using
(Dollars in thousands)Level 1Level 2Level 3
December 31, 2020
Assets   
Collateral dependent loans
Commercial$0 $0 $25,367 
Commercial real estate0 0 6,432 
OREO0 0 54 

Fair value option. First Financial may elect to report most financial instruments and certain other items at fair value on an instrument-by instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made.

The Company elected the fair value option for residential mortgage loans held for sale. This election allows for a more effective offset of the changes in fair values of the loans held for sale and the derivative financial instruments used to financially hedge them without having to apply complex hedge accounting requirements. The fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets.

The aggregate fair value of the Company’s residential mortgage loans held for sale as of March 31, 2021 and December 31, 2020 was $34.6 million and $41.1 million, respectively. The aggregate unpaid principal balance of the Company’s residential mortgage loans held for sale as of March 31, 2021 and December 31, 2020 was $30.3 million and $35.5 million, respectively. The resulting difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected was $4.3 million and $5.6 million as of March 31, 2021 and December 31, 2020, respectively.

Changes in the estimated fair value of residential mortgage loans held for sale are reported as a component of Net gain from sales of loans in the Company’s Consolidated Statements of Income. For the three months ended March 31, 2021 and 2020, the net loss from the change in fair value of the Company’s residential mortgage loans held for sale was $1.3 million and $0.9 million, respectively.

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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.

EXECUTIVE SUMMARY

First Financial Bancorp. is a $16.2 billion financial holding company headquartered in Cincinnati, Ohio, which operates through its subsidiaries primarily in Ohio, Indiana, Kentucky and Illinois. These subsidiaries include First Financial Bank, an
Ohio-chartered commercial bank, which operated 143 full service banking centers as of March 31, 2021. 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 $3.1 billion in assets under management as of March 31, 2021 and provides the following
services: financial planning, investment management, trust administration, estate settlement, brokerage services 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 long-term profitability and growth.  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.  Additionally, First Financial may assess strategic acquisitions that provide product line extensions or additional industry verticals that compliment its existing business and diversify its product suite and revenue streams. 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. 

COVID-19 CONSIDERATIONS

The Company's operations and financial results for the majority of 2020 and the first quarter of 2021 were substantially influenced by the COVID-19 pandemic. The Company updated operating protocols to continuously provide virtually all banking services while prioritizing the health and safety of both its clients and associates. Banking centers offered drive through services without interruption, while lobbies were fully open or accessible to clients via appointment, conditional to virus trends at any point in time. Sales associates, support teams and management largely worked remotely; however, associates located in the Company's corporate offices and operations centers began to gradually return to those locations at reduced capacity levels in the third quarter of 2020. In addition, the Company has remained focused on enhancing remote, mobile and online processes to better support a bank anytime anywhere environment.

To assist clients during the pandemic, the Company implemented distinct COVID-19 relief programs to provide payment deferrals and fee waivers, in addition to suspending vehicle repossessions and residential property foreclosures. Additionally, the Company actively monitored the actions of federal and state governments to proactively assist clients and ensure awareness of each financial assistance program available.

The Bank underwent a significant level of cross training and redeployment of associate resources to rapidly meet the influx of
client requests in response to the passage of the CARES Act, the establishment of the Paycheck Protection Program and the
approval of the Consolidated Appropriations Act. The Company's response to the PPP resulted in successes in providing
customer relief, and as of March 31, 2021, the Company had outstanding PPP loans totaling $690.0 million in balances, net of $21.9 million of unearned fees.

Further, as of March 31, 2021, the Company provided relief to borrowers adversely impacted by the pandemic through payment deferrals on $248.4 million of commercial loans and $2.7 million of consumer loans. As stated in the CARES Act, and
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subsequently amended by the Consolidated Appropriations Act, loan modifications in response to COVID-19 that were executed on a loan that was not more than 30 days past due as of December 31, 2019 and executed between March 1, 2020, and the earlier of 60 days after the date of termination of the National Emergency or January 1, 2022 are not required to be reported as TDR.

OVERVIEW OF OPERATIONS

First quarter 2021 net income was $47.3 million and earnings per diluted common share were $0.48. This compares with first quarter 2020 net income of $28.6 million and earnings per diluted common share of $0.29.
Return on average assets for the first quarter 2021 was 1.20% compared to 0.79% for the same period in 2020, and return on average shareholders’ equity for the first quarter 2021 was 8.44% compared to 5.21% for the first quarter 2020.
A discussion of First Financial's operating results for the three months ended March 31, 2021 follows.

NET INTEREST INCOME

First Financial’s principal source of income is net interest income, which is the excess of interest received from earning assets, including loan-related fees and purchase accounting accretion, 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 such assets and the volume, mix and rates paid for the deposits and borrowed money that support the earning assets. Earning assets consist of interest-bearing loans to customers as well as marketable investment securities.

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 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)20212020
Net interest income$113,876 $114,282 
Tax equivalent adjustment1,652 1,624 
Net interest income - tax equivalent$115,528 $115,906 
Average earning assets$13,781,760 $12,375,698 
Net interest margin (1)
3.35 %3.71 %
Net interest margin (fully tax equivalent) (1)
3.40 %3.77 %
(1) Calculated using annualized net interest income divided by average earning assets.

Net interest income for the first quarter of 2021 was $113.9 million, a decrease of $0.4 million, or 0.4%, from first quarter 2020 net interest income of $114.3 million.  This change was primarily driven by a $16.9 million, or 12.1%, decrease in interest income, partially offset by a $16.5 million, or 65.4%, decrease in interest expense.  Net interest income on a fully tax equivalent basis for the first quarter 2021 was $115.5 million compared to $115.9 million for the first quarter 2020.

Net interest margin on a fully tax equivalent basis for the first quarter of 2021 was 3.40%, a decrease of 37 bps compared to the same period in 2020 as interest rates declined and accretion on acquired loans continued to moderate.

Interest income decreased $16.9 million, or 12.1%, in the first quarter of 2021 when compared to the same quarter in 2020 as a 91 bp decrease in the yield on earning assets more than offset the impact of higher earning asset balances. The declining yield on earning assets resulted from a reduction in the fed funds target rate in response to the pandemic. Average earning assets increased to $13.8 billion in the first quarter 2021 from $12.4 billion in the same quarter of 2020 as loan balances grew largely due to PPP activity and a larger investment securities portfolio, which grew as the Company deployed excess balance sheet liquidity.
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Interest expense decreased $16.5 million, or 65.4%, in the first quarter of 2021 when compared to the comparable quarter in 2020 due to lower rates paid on deposits, a shift in funding mix and the Company's deliberate management of funding costs. Lower interest rates led to a decline in the cost of interest-bearing deposits, which was 0.21% in the first quarter of 2021 compared to 0.86% for the same period in the prior year. The cost of borrowed funds decreased to 2.01% for the first quarter of 2021 from 2.05% during the first quarter of 2020, reflecting the decline in interest rates and a shift to FRB long term borrowings, which were used to fund PPP activity and carry a relatively modest interest rate of 0.35%.
CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Year-to-Date Averages
  March 31, 2021March 31, 2020
(Dollars in thousands)BalanceYieldBalanceYield
Earning assets
Investments
Investment securities$3,782,993 2.54 %$3,115,723 3.04 %
Interest-bearing deposits with other banks46,912 0.24 %39,332 1.45 %
Gross loans (1)
9,951,855 4.03 %9,220,643 5.04 %
Total earning assets13,781,760 3.61 %12,375,698 4.52 %
Nonearning assets
Allowance for credit losses(177,863)(121,126)
Cash and due from banks232,275 235,696 
Accrued interest and other assets2,206,482 2,034,154 
Total assets$16,042,654 $14,524,422 
Interest-bearing liabilities
Deposits
Interest-bearing demand$2,948,682 0.07 %$2,418,193 0.45 %
Savings3,815,314 0.13 %2,976,518 0.45 %
Time1,767,826 0.60 %2,196,080 1.88 %
   Total interest-bearing deposits8,531,822 0.21 %7,590,791 0.86 %
Borrowed funds
Short-term borrowings251,705 0.11 %1,353,858 1.51 %
Long-term debt634,674 2.77 %381,909 3.96 %
   Total borrowed funds886,379 2.01 %1,735,767 2.05 %
Total interest-bearing liabilities9,418,201 0.38 %9,326,558 1.08 %
Noninterest-bearing liabilities
Noninterest-bearing demand deposits3,840,046 2,643,240 
Other liabilities511,658 344,891 
Shareholders' equity2,272,749 2,209,733 
Total liabilities and shareholders' equity$16,042,654 $14,524,422 
Net interest income$113,876 $114,282 
Net interest spread3.23 %3.44 %
Contribution of noninterest-bearing sources of funds0.12 %0.27 %
Net interest margin (2)
3.35 %3.71 %
Tax equivalent adjustment0.05 %0.06 %
 Net interest margin (fully tax equivalent) (2)
3.40 %3.77 %
(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, 2021
 Comparable quarter income variance
(Dollars in thousands)RateVolumeTotal
Earning assets
Investment securities$(3,892)$3,955 $63 
Interest-bearing deposits with other banks(118)4 (114)
Gross loans (1)
(23,094)6,250 (16,844)
Total earning assets(27,104)10,209 (16,895)
Interest-bearing liabilities 
Total interest-bearing deposits(12,467)435 (12,032)
Borrowed funds 
Short-term borrowings(4,723)(297)(5,020)
Long-term debt(1,134)1,697 563 
Total borrowed funds(5,857)1,400 (4,457)
Total interest-bearing liabilities(18,324)1,835 (16,489)
Net interest income
$(8,780)$8,374 $(406)
(1) Loans held for sale and nonaccrual loans are included in gross loans.
NONINTEREST INCOME

First quarter 2021 noninterest income was $40.3 million, increasing $4.9 million, or 14.0%, compared to $35.4 million for the first quarter of 2020. This increase was driven by higher gains on sales of loans, increased foreign exchange income, and higher bankcard income. These increases were partially offset by lower client derivative fees and service charges on deposits. Net gains from sales of loans increased $6.6 million, or 233.9%, to $9.5 million due to higher mortgage origination activity driven by low interest rates, while bankcard income increased $0.4 million, or 15.9%, compared to the first quarter of 2020 as client spending habits increased amid the easing of pandemic-related concerns. Foreign exchange income increased $0.8 million from the comparable period in 2020 due to increased customer demand for currency transactions in the first quarter of 2021. Service charges on deposit accounts decreased $1.3 million, or 15.3%, in the first quarter of 2021 as deposit balances grew significantly due to customers retaining stimulus payments and tax refunds. Demand for back to back swaps slowed in the first quarter of 2021 as loan growth moderated, resulting in a $1.5 million, or 49.9%, decrease in client derivative fees compared to the same quarter in 2020.

NONINTEREST EXPENSE

First quarter 2021 noninterest expense was $92.5 million, increasing $2.8 million, or 3.2%, compared to $89.7 million for the first quarter of 2020 primarily due to higher salary and benefit expenses and data processing costs, which were partially offset by lower professional services and other noninterest expenses. Salaries and employee benefits of $61.3 million increased $6.4 million, or 11.7%, driven by higher incentive compensation tied to increased fee income, annual compensation adjustments, $1.3 million of severance costs and higher health care costs. Data processing expenses increased $0.9 million, or 14.1%, to $7.3 million in the first quarter of 2021 compared to 2020 as the Company continued to make strategic investments to enhance its digital capabilities. Professional services decreased $0.8 million, or 36.3%, due to a reimbursement of previously expensed legal fees received in the first quarter of 2021 and elevated IT consulting costs in the first quarter of 2020, while other noninterest expenses decreased $2.6 million, or 31.5%, in the first quarter of 2021 from the comparable quarter in 2020 due to a $1.0 million charitable donation made in 2020 at at the inception of the pandemic and lower travel expenses in 2021 due to the pandemic.

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INCOME TAXES

First quarter 2021 income tax expense was $10.4 million, resulting in an effective tax rate of 18.0%. This compared to an income tax expense of $5.9 million and an effective tax rate of 17.1% for the first quarter of 2020. The increase in the effective tax rate in 2021 is primarily due to higher pre-tax income in the period, in addition to the Company recording the tax benefit of the carryback of certain net operating losses as allowed under the CARES Act in the first quarter of 2020.

The Company's effective tax rate may fluctuate from quarter to quarter due to changes in tax jurisdictions, tax-enhanced assets and tax credit investments.

LOANS

Loans, excluding Loans held for sale, totaled $9.9 billion as of March 31, 2021 and December 31, 2020. While total loan balances were relatively unchanged in 2021, commercial real estate loans increased $88.7 million, or 2.1% to $4.4 billion, and C&I loans increased $37.3 million, or 1.2%, to $3.0 billion. These increases were offset by a $56.6 million, or 5.6%, decline in residential real estate loans to $946.5 million and a $33.4 million, or 4.5%, decline in HELOC loans to $709.7 million. First quarter 2021 average loans, excluding loans held for sale, increased $714.7 million, or 7.8%, from the first quarter of 2020 primarily due to PPP activity.

OFF-BALANCE SHEET ARRANGEMENTS

Off-balance sheet arrangements include commitments to extend credit and financial guarantees.  Loan commitments are agreements to extend credit to a client absent any violation of any condition established in the commitment agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  First Financial had commitments outstanding to extend credit, totaling $3.7 billion and $3.4 billion at March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021, loan commitments with a fixed interest rate totaled $127.3 million while commitments with variable interest rates totaled $3.6 billion. Comparatively, as of December 31, 2020, loan commitments with a fixed interest rate totaled $123.6 million while commitments with variable interest rates totaled $3.3 billion The fixed rate loan commitments have interest rates ranging from 0% to 21% for both March 31, 2021 and December 31, 2020. The fixed rate loan commitments have maturities ranging from less than 1 year to 30.0 years at March 31, 2021 and less than 1 year to 30.8 years at December 31, 2020.

Letters of credit are conditional commitments issued by First Financial to guarantee the performance of a client to a third party.  First Financial’s portfolio of letters of credit consists primarily of performance assurances made on behalf of clients who have a contractual commitment to produce or deliver goods or services.  First Financial has issued letters of credit aggregating $36.4 million and $36.1 million at March 31, 2021 and December 31, 2020, respectively. Management conducts regular reviews of these instruments on an individual client basis.

First Financial is a party in risk participation transactions of interest rate swaps, which had total notional amount of $250.5 million and $242.4 million at March 31, 2021 and December 31, 2020, respectively.

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 $97.7 million, or 0.60% of total assets, at March 31, 2021 compared to $89.1 million, or 0.56% of total assets, at December 31, 2020, an increase of $8.6 million, or 9.6%. This increase was driven by the downgrade of two relationships to nonaccrual 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 totaled $32.5 million at March 31, 2021, which represents an increase of $10.6 million, or 48.6%, from $21.8 million at December 31, 2020. This increase was driven primarily by two relationships which were classified as TDRs subsequent to modifications made during the period.
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Classified assets, which are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse, totaled $196.8 million as of March 31, 2021 compared to $142.0 million at December 31, 2020. Classified assets were 122 bps as a percentage of total assets at March 31, 2021, compared to 89 bps as of December 31, 2020. The $54.8 million, or 38.6%, increase in Classified assets compared to the linked quarter was primarily driven by COVID related credit rating downgrades during the period.

The following table details nonperforming, underperforming and classified assets, in addition to related credit quality ratios as of March 31, 2021 and the four previous quarters.
 Three months ended
 20212020
(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$24,941 $29,230 $34,686 $33,906 $21,126 
Lease financing0 0 1,092 1,353 222 
Construction real estate0 0 0 0 0 
Commercial real estate44,514 34,682 24,521 14,002 10,050 
Residential real estate11,359 11,601 12,104 12,813 11,163 
Home equity4,286 5,076 5,374 5,604 5,821 
Installment146 163 153 201 145 
Nonaccrual loans85,246 80,752 77,930 67,879 48,527 
Accruing troubled debt restructurings 11,608 7,099 7,759 8,377 22,206 
Total nonperforming loans96,854 87,851 85,689 76,256 70,733 
Other real estate owned854 1,287 1,643 1,872 1,467 
Total nonperforming assets97,708 89,138 87,332 78,128 72,200 
Accruing loans past due 90 days or more92 169 79 124 120 
Total underperforming assets$97,800 $89,307 $87,411 $78,252 $72,320 
Total classified assets$196,782 $142,021 $134,002 $125,543 $124,510 
Credit quality ratios
Allowance for loan and lease losses to 
Nonaccrual loans199.33%217.55%216.28%233.74%296.51 %
Nonperforming loans175.44%199.97%196.69%208.06%203.42 %
Total ending loans1.71%1.77%1.65%1.56%1.55 %
Nonperforming loans to total loans0.97%0.89%0.84%0.75%0.76 %
Nonperforming assets to
Ending loans, plus OREO0.98%0.90%0.86%0.77%0.78 %
Total assets0.60%0.56%0.55%0.49%0.48 %
Nonperforming assets, excluding accruing TDRs to
Ending loans, plus OREO0.87%0.83%0.78%0.68%0.54 %
Total assets0.53%0.51%0.50%0.44%0.33 %
Classified assets to total assets1.22%0.89%0.84%0.79%0.83 %
(1) Nonaccrual loans include nonaccrual TDRs of $20.9 million, $14.7 million, $29.3 million, $32.7 million and $18.4 million as of March 31, 2021, December 31, 2020, September 30, 2020, June 30, 2020 and March 31, 2020, respectively.

INVESTMENTS

First Financial's investment portfolio totaled $4.0 billion, or 24.8% of total assets, at March 31, 2021 and $3.7 billion, or 23.1% of total assets, at December 31, 2020.  AFS securities totaled $3.8 billion at March 31, 2021 and $3.4 billion at December 31, 2020, while HTM securities totaled $121.9 million at March 31, 2021 and $131.7 million at December 31, 2020. The increase in the investment securities portfolio was a result of the Company deploying excess balance sheet liquidity resulting from an
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increase in deposits during the period. The effective duration of the investment portfolio increased to 3.8 years at March 31, 2021 from 3.2 years as of December 31, 2020, primarily due to the increase in the size of the portfolio and the moderation of prepayment speeds on MBS during the period.

The Company invests in certain securities whose realization is dependent on future principal and interest repayments, thus carrying credit risk. Prior to purchase, First Financial performs a detailed 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, 2021, the Company's Consolidated Financial Statements reflected a $42.6 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 noninterest income. Comparatively, the Company's Consolidated Financial Statements reflected a $73.6 million unrealized after-tax gain on debt securities as a component of equity in accumulated other comprehensive income and a $9.0 million unrealized gain on equity securities within other noninterest income as of December 31, 2020. The decline in unrealized gains was driven by a decline in bond prices in the first quarter driven by a significant rise in interest rates.
First Financial will continue to monitor loan demand and deposit activity, as well as balance sheet composition, capital sensitivity and the interest rate environment when considering future investment strategies.

DEPOSITS AND FUNDING

Total deposits were $12.6 billion as of March 31, 2021 and $12.2 billion as of December 31, 2020. This change was driven by a $325.4 million, or 8.8%, increase in savings deposits and a $231.7 million, or 6.2%, increase in noninterest bearing demand deposits, which were partially offset by a decrease of $141.0 million, or 7.5%, in time deposits. The increase in total deposits was attributed to increased consumer savings rates resulting from customers retaining stimulus payments, PPP loan proceeds and tax refunds.

Average deposits for the first quarter 2021 increased $2.1 billion, or 20.9%, to $12.4 billion from $10.2 billion for the comparable quarter of 2020. This increase was driven by a $1.2 billion, or 45.3%, increase in average noninterest-bearing deposits; an $838.8 million, or 28.2%, increase in average savings deposits; and a $530.5 million, or 21.9%, increase in average interest-bearing demand deposits, partially offset by a $428.3 million, or 19.5%, decrease in average time deposits.
Borrowed funds were $765.1 million as of March 31, 2021 compared to $942.8 million as of December 31, 2020. First Financial may utilize short-term borrowings and long-term advances from the FHLB as wholesale funding sources.

First Financial had no short-term borrowings with the FHLB at March 31, 2021 or December 31, 2020. Short-term borrowings included fed funds purchased and repurchase agreements of $181.4 million and $166.6 million at March 31, 2021 and December 31, 2020, respectively.

Long-term debt, which included FRB and FHLB long-term advances, subordinated notes and an interest free loan with a municipality, was $583.7 million and $776.2 million at March 31, 2021 and December 31, 2020, respectively. The Company had $270.9 million of FRB advances included in long-term borrowings as of March 31, 2021 from the PPPLF. The PPPLF was established by the Federal Reserve to supply a source of liquidity and term financing to financial institutions participating in the PPP. These borrowings carry a 0.35% interest rate and are secured by the Company's PPP loans. First Financial had no FHLB long-term advances at March 31, 2021 as the Company utilized the PPPLF and implemented other funding strategies to manage liquidity and interest rate risk. FHLB long-term advances were $20.0 million as of December 31, 2020. First Financial's total remaining borrowing capacity from the FHLB was $1.7 billion as of March 31, 2021.

Outstanding subordinated debt totaled $310.2 million as of March 31, 2021 and $318.6 million as of December 31, 2020. The decline in subordinated debt resulted from the Company redeeming $8.4 million of 6.00% fixed rate private placement subordinated debt that had been acquired in conjunction with the MSFG merger.

The Company issued $150.0 million of fixed to floating rate subordinated notes in the second quarter of 2020. These subordinated notes have an initial fixed interest rate of 5.25% to, but excluding May 15, 2025, payable semi-annually in arrears. From, and including, May 15, 2025, the interest rate on the subordinated notes will reset quarterly to a floating rate per annum equal to a benchmark rate, which is expected to be the then-current three-month term SOFR, plus 509 basis points, payable quarterly in arrears. The subordinated notes mature on May 15, 2030. These notes are redeemable by the Company in whole or
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in part beginning with the interest payment date of May 15, 2025. 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.

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, and access to wholesale funding sources.

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 FRB and FHLB and its short-term line of credit.

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, diverse funding sources and disciplined liquidity monitoring procedures. The ratings of First Financial and the Bank at March 31, 2021 were as follows:
First Financial BancorpFirst Financial Bank
Senior Unsecured DebtBBB+A-
Subordinated DebtBBBBBB+
Short-Term DebtK2K2
DepositN/AA-
Short-Term DepositN/AK2

For ease of borrowing execution, First Financial utilizes a blanket collateral agreement with the FHLB. First Financial pledged $6.3 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, 2021.  

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 $3.8 billion and $3.4 billion at March 31, 2021 and December 31, 2020, respectively.  HTM securities that are maturing within a short period of time can be an additional source of liquidity. As of both March 31, 2021 and December 31, 2020, the Company had no HTM securities maturing within one year.

Other sources of liquidity include cash and due from banks plus interest-bearing deposits with other banks. At March 31, 2021, these balances totaled $229.4 million, and First Financial had unused and available overnight wholesale funding sources of $4.6 billion, or 28.5% 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 $35.0 million for the first three months of 2021.  As of March 31, 2021, the Bank had retained earnings of $713.0 million, of which $132.0 million was available for distribution to First Financial without prior regulatory approval. As an additional source of liquidity, First Financial had $156.6 million in cash at the parent company as of March 31, 2021.

Share repurchases also impact First Financial's liquidity. For further information regarding share repurchases, see the Capital section that follows.

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Capital expenditures, such as banking center expansions and technology investments, were $2.7 million and $5.8 million for the first three months of 2021 and 2020, 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.

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 both March 31, 2021 and December 31, 2020 and includes a fully phased-in capital conservation buffer of 2.5% of risk-weighted assets. Further, the minimum ratio of Tier 1 capital to risk-weighted assets is 8.5% and all banks are subject to a 4.0% minimum leverage ratio. The required Total risk-based capital ratio is 10.5%. Failure to maintain the required Common equity Tier 1 capital 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.

First Financial's tier 1 capital was 12.19% at March 31, 2021 and 12.20% at December 31, 2020, while the total capital ratio decreased to 15.41% from 15.55%. The leverage ratio decreased to 9.34% at March 31, 2021 compared to 9.55% as of December 31, 2020, while the Company’s tangible common equity ratio decreased to 8.22% at March 31, 2021 from 8.47% at December 31, 2020. The slight decline in the Company's capital ratios was primarily due to lower other comprehensive income, which was driven by lower unrealized gains on the Company's AFS securities at March 31, 2021.

As of March 31, 2021, management believes that First Financial met all capital adequacy requirements to which it was subject.  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 $554.8 million on a consolidated basis at March 31, 2021. 

The following tables present the actual and required capital amounts and ratios as of March 31, 2021 and December 31, 2020 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. 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.
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 ActualMinimum capital
required - Basel III		PCA requirement to be
considered well
capitalized
(Dollars in thousands)Capital
amount		RatioCapital
amount		RatioCapital
amount		Ratio
March 31, 2021      
Common equity Tier 1 capital to risk-weighted assets
Consolidated$1,334,882 11.81 %$791,281 7.00 %N/AN/A
First Financial Bank1,471,665 13.03 %790,670 7.00 %$734,193 6.50 %
Tier 1 capital to risk-weighted assets
Consolidated1,377,892 12.19 %960,841 8.50 %N/AN/A
First Financial Bank1,471,769 13.03 %960,099 8.50 %903,623 8.00 %
Total capital to risk-weighted assets
Consolidated1,741,755 15.41 %1,186,921 10.50 %N/AN/A
First Financial Bank1,575,805 13.95 %1,186,005 10.50 %1,129,528 10.00 %
Leverage ratio
Consolidated1,377,892 9.34 %590,170 4.00 %N/AN/A
First Financial Bank1,471,769 9.98 %589,596 4.00 %736,995 5.00 %
 ActualMinimum capital
required - Basel III		PCA requirement to be
considered well
capitalized
(Dollars in thousands)Capital
amount		RatioCapital
amount		RatioCapital
amount		Ratio
December 31, 2020      
Common equity tier 1 capital to risk-weighted assets
Consolidated$1,325,922 11.82 %$785,338 7.00 %N/AN/A
First Financial Bank1,452,403 12.95 %784,807 7.00 %$728,749 6.50 %
Tier 1 capital to risk-weighted assets     
Consolidated1,368,818 12.20 %953,625 8.50 %N/AN/A
First Financial Bank1,452,507 12.96 %952,980 8.50 %896,922 8.00 %
Total capital to risk-weighted assets   
Consolidated1,744,802 15.55 %1,178,007 10.50 %N/AN/A
First Financial Bank1,560,457 13.92 %1,177,211 10.50 %1,121,153 10.00 %
Leverage ratio   
Consolidated1,368,818 9.55 %573,526 4.00 %N/AN/A
First Financial Bank1,452,507 10.14 %573,094 4.00 %716,367 5.00 %

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 $0.23 per common share on March 15, 2021 to shareholders of record as of March 1, 2021. Additionally, First Financial's board of directors authorized a dividend of $0.23 per common share, payable on June 15, 2021 to shareholders of record as of June 1, 2021.

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Share repurchases. In January 2021, First Financial's board of directors approved a stock repurchase plan, replacing the plan approved in 2019. The 2021 plan authorizes the purchase of up to 5,000,000 shares of the Company's common stock. First Financial repurchased 840,115 shares at an average market price of $21.40 under this plan during the three month period ending March 31, 2021. At March 31, 2021, 4,159,885 common shares remained available for repurchase under the 2021 plan.

Shareholders' equity. Total shareholders’ equity was $2.3 billion at both March 31, 2021 and December 31, 2020.

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 (composed of interest rate, liquidity, capital, foreign exchange and financial risk), 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 2020 Annual Report on Form 10-K. The sections that follow provide additional discussion related to credit risk and market risk.

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.  

ACL. The ACL is a reserve accumulated on the Consolidated Balance Sheets through the recognition of the provision for credit losses. First Financial records provision expense in the Consolidated Statements of Income to maintain the ACL at a level considered sufficient to absorb expected credit losses for financial assets in the portfolio over their expected remaining lives with consideration given to current and forward looking information.

The ACL on loans and leases was $169.9 million as of March 31, 2021 and $175.7 million as of December 31, 2020. As a percentage of period-end loans, the ACL was 1.71% as of March 31, 2021 and 1.77% as of December 31, 2020. The slight decline in ACL was primarily driven by improvements in economic forecasts and the Company's improved credit outlook.

The Company utilized the Moody's March baseline forecast as its R&S forecast in the quantitative model, which included consideration of the impact from both the COVID-19 pandemic and the related government stimulus response. For reasonableness, the Company also considered the impact to the model from alternative, more adverse economic forecasts, slower prepayment speeds and increased default rates. These alternative analyses were utilized to inform the Company's qualitative adjustments. Additionally, First Financial considered its credit exposure to certain industries believed to be at risk for future credit stress related to the COVID-19 pandemic, such as franchise, hotel and investor commercial real estate lending when making qualitative adjustments to the ACL model.

The ACL as a percentage of nonaccrual loans was 199.33% at March 31, 2021 and 217.55% at December 31, 2020. The ACL as a percentage of nonperforming loans, including accruing TDRs, fell to 175.44% as of March 31, 2021 from 199.97% as of December 31, 2020. These decreases were driven by the decline in the ACL and the increase in nonaccrual loans during the period.

The Company recorded net charge-offs of $9.2 million, or 0.38% of average loans and leases on an annualized basis, in the first quarter 2021, compared to net recoveries of $0.9 million, or 0.04% of average loans and leases on an annualized basis, for the first quarter of 2020. Higher net charge-offs in the first quarter of 2021 were driven by a $7.1 million charge-off of a single C&I relationship during the period.

Provision expense is a product of the Company's ACL model combined with net charge-off activity during the period. First quarter 2021 provision expense was $3.5 million compared to a provision of $23.9 million during the first quarter in 2020. The decline in provision expense was driven by elevated provision in the first quarter of 2020 due to the onset of the COVID pandemic.

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The ACL on unfunded commitments was $13.0 million as of March 31, 2021 and $12.5 million as of December 31, 2020. Additionally, First Financial recorded $0.5 million of provision for credit losses on unfunded commitments for the three months ended March 31, 2021, compared to $1.6 million in the first quarter of 2020. The increase in ACL on unfunded commitments compared to December 31, 2020 was driven by the the moderation of prepayment speeds utilized in the modeling for the ACL on unfunded commitments.
See Note 5 – Allowance for Credit Losses in the Notes to Consolidated Financial Statements for further discussion of First Financial's ACL.

The table that follows includes the activity in the ACL for the quarterly periods presented.
 Three months ended
 20212020
(Dollars in thousands)Mar. 31,Dec. 31,Sep. 30,June 30,Mar. 31,
Allowance for credit loss activity
Balance at beginning of period$175,679 $168,544 $158,661 $143,885 $57,650 
Impact of adopting ASC 3260 0 0 0 61,505 
Provision for loan losses3,450 13,758 15,299 17,859 23,880 
Gross charge-offs
Commercial and industrial7,910 1,505 1,467 1,282 1,091 
Lease financing0 0 852 0 0 
Construction real estate2 0 0 0 0 
Commercial real estate1,250 6,270 3,789 2,037 4 
Residential real estate1 203 22 148 115 
Home equity611 386 460 428 267 
Installment36 21 59 7 61 
Credit card222 169 171 234 311 
Total gross charge-offs10,032 8,554 6,820 4,136 1,849 
Recoveries
Commercial and industrial337 367 265 275 2,000 
Lease financing0 (6)6 0 0 
Construction real estate0 3 0 14 0 
Commercial real estate195 844 760 424 234 
Residential real estate44 145 91 93 52 
Home equity177 428 209 156 339 
Installment34 65 35 27 31 
Credit card39 85 38 64 43 
Total recoveries826 1,931 1,404 1,053 2,699 
Total net charge-offs9,206 6,623 5,416 3,083 (850)
Ending allowance for credit losses$169,923 $175,679 $168,544 $158,661 $143,885 
Net charge-offs to average loans and leases (annualized)
Commercial and industrial1.01 %0.14 %0.14 %0.13 %(0.15)%
Lease financing0.00 %0.03 %4.29 %0.00 %0.00 %
Construction real estate0.00 %0.00 %0.00 %(0.01)%0.00 %
Commercial real estate0.10 %0.50 %0.28 %0.15 %(0.02)%
Residential real estate(0.02)%0.02 %(0.03)%0.02 %0.02 %
Home equity0.24 %(0.02)%0.13 %0.14 %(0.04)%
Installment0.01 %(0.21)%0.12 %(0.10)%0.15 %
Credit card1.59 %0.69 %1.16 %1.54 %2.15 %
Total net charge-offs0.38 %0.26 %0.21 %0.12 %(0.04)%

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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 and liquidity risk.

Interest rate risk 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 its 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 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 36% in its interest rate risk modeling as of March 31, 2021. 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, 2021, assuming immediate, parallel shifts in interest rates:
% Change from base case for
 immediate parallel changes in rates
 
-100 bps(1)
+100 bps+200 bps
NII-Year 1(5.11)%8.69 %16.72 %
NII-Year 2(7.61)%12.28 %23.48 %
EVE(10.09)%7.06 %13.33 %
(1) Because certain current interest rates are at or below 1.00%, the 100 basis point downward shock assumes that certain corresponding interest rates approach an implied floor that, in effect, reflects a decrease of less than the full 100 basis point downward shock.

“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, 2021. The projected results for NII and EVE reflected an asset sensitive position, due to the significant addition of low cost transactional deposits replacing wholesale borrowings. First Financial continues to manage its balance sheet with a bias toward asset sensitivity while simultaneously balancing the potential earnings impact of this strategy.

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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, 2021 assuming a 25% increase and a 25% reduction to the beta assumption on managed rate deposits:
Beta sensitivity (% change from base)
+100 BP+200 BP
Beta 25% lowerBeta 25% higherBeta 25% lowerBeta 25% higher
NII-Year 110.05 %7.33 %18.03 %15.40 %
NII-Year 213.69 %10.87 %24.84 %22.12 %

See the Net Interest Income section of Management’s Discussion and Analysis for further discussion.

Liquidity risk is the potential that an entity will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain funding or that it cannot easily unwind or offset exposures without significantly lowering market prices because of inadequate market depth or market disruptions. Management focuses on maintaining and enhancing liquidity by maximizing collateral based liquidity availability. First Financial manages liquidity in relation to the trend and stability of deposits; degree and reliance on short-term, volatile sources of funds, including any undue reliance on borrowings or brokered deposits to fund longer-term assets. Management identifies, measures, monitors and controls liquidity while seeking to maintain diversification of funding sources, both on- and off-balance-sheet.

The bank has continued to update liquidity risk management processes, such as refining the contingency funding plan, proactively meeting more frequently during the pandemic, securing additional contingent borrowing capacity, and developing additional ad-hoc liquidity reporting to monitor funding inflows and outflows related to the PPP funding and forgiveness. Management is closely monitoring the usage of excess business deposits, the balance of personal deposits and the broader macroeconomic environment during this period of heightened uncertainty and profound fiscal and monetary stimulus. For further discussion of the Company's liquidity, please see the Liquidity section within Management's Discussion and Analysis.

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 which are inherently subjective and may be susceptible to significant change.  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 ACL - loans and leases, 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 2020 Annual Report.  There were no changes to the accounting policies for the ACL, goodwill, pension or income taxes during the three months ended March 31, 2021.

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 2020 and 2021, 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.

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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:

•economic, market, liquidity, credit, interest rate, operational and technological risks associated with the Company’s business;

•future credit quality and performance, including our expectations regarding future loan losses and our allowance for credit losses;

•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;

•Management’s ability to effectively execute its business plans;

•mergers and acquisitions, including costs or difficulties related to the integration of acquired companies;

•the possibility that any of the anticipated benefits of the Company’s acquisitions will not be realized or will not be realized within the expected time period;

•the effect of changes in accounting policies and practices;

•changes in consumer spending, borrowing and saving and changes in unemployment;

•changes in customers’ performance and creditworthiness;

•the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;

•current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates, U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth;

•the adverse impact on the U.S. economy, including the markets in which we operate, of the novel coronavirus, which causes the Coronavirus disease 2019 (“COVID-19”), global pandemic, and the impact of a slowing U.S. economy and increased unemployment on the performance of our loan and lease portfolio, the market value of our investment securities, the availability of sources of funding and the demand for our products;

•our capital and liquidity requirements (including under regulatory capital standards, such as the Basel III capital standards) and our ability to generate capital internally or raise capital on favorable terms:

•financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services;

•the effect of the current interest rate environment or changes in interest rates or in the level or composition of our assets or liabilities on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgage loans held for sale;

•the effect of a fall in stock market prices on our brokerage, asset and wealth management businesses;

•a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber attacks;

•the effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin;

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•our ability to develop and execute effective business plans and strategies.

Additional factors that may cause our actual results to differ materially from those described in our forward-looking statements can be found in our Form 10-K for the year ended December 31, 2020, as well as our other filings with the SEC, which are available on the SEC website at www.sec.gov.

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.


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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
There were no other changes in First Financial's internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, First Financial'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, 2020.

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, 2020.

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and updated in the “Risk Factors” section of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
In December 2018, the Board approved a stock repurchase plan pursuant to which the Company was authorized to repurchase up to 5,000,000 shares of stock through December 31, 2020. On December 22, 2020, the Board announced that it authorized a new repurchase plan that provided for the purchase of up to 5,000,000 additional shares of common stock of the Company (the 2020 Repurchase Plan). The 2020 Repurchase Plan became effective January 1, 2021, upon the expiration of the previously authorized stock repurchase plan, and will expire December 31, 2022. The Company purchased 840,115 shares at an average price of $21.40 under the Stock Repurchase Plan in the first quarter of 2021.

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Item 6.         Exhibits
(a)Exhibits:
Exhibit Number
3.1
3.2
31.1
31.2
32.1
32.2
101.INSXBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. *
101.SCHInline XBRL Taxonomy Extension Schema. *
101.CALInline XBRL Taxonomy Extension Calculation Linkbase. *
101.DEFInline XBRL Taxonomy Extension Definition Linkbase. *
101.LABInline XBRL Taxonomy Extension Labels Linkbase. *
101.PREInline XBRL Taxonomy Extension Presentation Linkbase. *
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). *
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.

** Compensatory plan or arrangement
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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)
 
Date5/6/2021Date5/6/2021

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