LOANS - EXCLUDING COVERED LOANS

First Financial offers clients a variety of commercial and consumer loan and lease products with various interest rates and payment terms. Lending activities are primarily concentrated in Ohio, Indiana and Kentucky, where the Bank currently operates banking centers. Additionally, First Financial provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector throughout the United States.

Credit Quality. To facilitate the monitoring of credit quality for commercial loans, and for purposes of determining an appropriate allowance for loan and lease losses, First Financial utilizes the following categories of credit grades:

Pass - Higher quality loans that do not fit any of the other categories described below.

Special Mention - First Financial assigns a special mention rating to loans and leases with potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in First Financial's credit position at some future date.

Substandard - First Financial assigns a substandard rating to loans or leases that are inadequately protected by the current sound financial worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans and leases have well-defined weaknesses that jeopardize repayment of the debt. Substandard loans and leases are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not addressed.

Doubtful - First Financial assigns a doubtful rating to loans and leases with all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

The credit grades described above, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter.

First Financial considers repayment performance as the best indicator of credit quality for consumer loans. Consumer loans that have principal and interest payments that are past due by ninety days or more are generally classified as nonperforming. Additionally, consumer loans that have been modified in a troubled debt restructuring (TDR) are also classified as nonperforming.

Commercial and consumer credit exposure by risk attribute was as follows:



	As of March 31, 2014
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Total
Pass	$	1,070,038	$	86,128	$	1,445,777	$	2,601,943
Special Mention	27,331		65		16,168		43,564
Substandard	20,688		1,803		51,946		74,437
Doubtful	0		0		0		0
Total	$	1,118,057	$	87,996	$	1,513,891	$	2,719,944



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other		Total
Performing	$	352,514	$	44,512	$	371,727	$	114,250	$	883,003
Nonperforming	8,157		399		2,700		0		11,256
Total	$	360,671	$	44,911	$	374,427	$	114,250	$	894,259



	As of December 31, 2013
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Total
Pass	$	991,161	$	78,872	$	1,422,215	$	2,492,248
Special Mention	23,053		65		23,832		46,950
Substandard	21,454		1,804		50,940		74,198
Doubtful	0		0		0		0
Total	$	1,035,668	$	80,741	$	1,496,987	$	2,613,396



(Dollars in thousands)	Real Estate Residential		Installment		Home Equity		Other		Total
Performing	$	344,325	$	46,559	$	373,472	$	115,727	$	880,083
Nonperforming	8,606		574		2,982		0		12,162
Total	$	352,931	$	47,133	$	376,454	$	115,727	$	892,245

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

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



	As of March 31, 2014
(Dollars in thousands)	30 – 59 days past due		60 – 89 days past due		> 90 days past due		Total past due		Current		Total		> 90 days past due and accruing
Loans
Commercial	$	1,040	$	160	$	6,846	$	8,046	$	1,110,011	$	1,118,057	$	0
Real estate - construction	0		0		223		223		87,773		87,996		0
Real estate - commercial	9,038		3,619		10,972		23,629		1,490,262		1,513,891		0
Real estate - residential	2,047		35		4,830		6,912		353,759		360,671		0
Installment	265		84		216		565		44,346		44,911		0
Home equity	579		112		1,405		2,096		372,331		374,427		0
Other	343		172		209		724		113,526		114,250		209
Total	$	13,312	$	4,182	$	24,701	$	42,195	$	3,572,008	$	3,614,203	$	209



	As of December 31, 2013
(Dollars in thousands)	30 - 59 days past due		60 - 89 days past due		> 90 days past due		Total past due		Current		Total		> 90 days past due and accruing
Loans
Commercial	$	2,016	$	161	$	7,136	$	9,313	$	1,026,355	$	1,035,668	$	0
Real estate - construction	0		0		223		223		80,518		80,741		0
Real estate - commercial	7,800		4,269		12,732		24,801		1,472,186		1,496,987		0
Real estate - residential	2,030		685		5,526		8,241		344,690		352,931		0
Installment	213		40		379		632		46,501		47,133		0
Home equity	985		292		1,648		2,925		373,529		376,454		0
Other	680		144		218		1,042		114,685		115,727		218
Total	$	13,724	$	5,591	$	27,862	$	47,177	$	3,458,464	$	3,505,641	$	218

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 ninety 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 such as insufficient collateral value. The accrual of interest income is discontinued and previously accrued, but unpaid interest is reversed when a loan is classified as nonaccrual. Any payments received while a loan is on nonaccrual status are applied as a reduction to the carrying value of the loan. A loan may be placed back on accrual status if collection of future principal and interest payments is no longer doubtful.

Troubled Debt Restructurings. A loan modification is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. The most common types of modifications include interest rate reductions, maturity extensions and modifications to principal amortization, including interest only structures. Modified terms are dependent upon the financial position and needs of the individual borrower. If the modification agreement is violated, the loan is managed by the Company’s credit administration group for resolution, which may result in foreclosure in the case of real estate.

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

First Financial had 231 TDRs totaling $28.0 million at March 31, 2014, including $13.4 million on accrual status and $14.6 million classified as nonaccrual. First Financial had an insignificant amount of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs at March 31, 2014. At March 31, 2014, the allowance for loan and lease losses included reserves of $3.4 million related to TDRs. For the three months ended March 31, 2014, First Financial charged off $0.7 million for the portion of TDRs determined to be uncollectible. Additionally, at March 31, 2014, approximately $8.4 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year.

First Financial had 217 TDRs totaling $28.1 million at December 31, 2013, including $15.1 million of loans on accrual status and $13.0 million classified as nonaccrual. First Financial had an insignificant amount of commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2013, the allowance for loan and lease losses included reserves of $4.4 million related to TDRs. For the year ended December 31, 2013, First Financial charged off $2.8 million for the portion of TDRs determined to be uncollectible. At December 31, 2013, approximately $9.0 million of the accruing TDRs had been performing in accordance with the restructured terms for more than one year.

The following tables provide information on loan modifications classified as TDRs during the three months ended March 31, 2014 and 2013.



	Three months ended
	March 31, 2014					March 31, 2013
(Dollars in thousands)	Number of loans	Pre-modification loan balance		Period end balance		Number of loans	Pre-modification loan balance		Period end balance
Commercial	3	$	73	$	73	6	$	7,568	$	7,561
Real estate - construction	0	0		0		0	0		0
Real estate - commercial	6	1,857		1,849		4	1,592		1,588
Real estate - residential	9	545		539		21	1,373		1,320
Installment	1	3		3		8	138		130
Home equity	8	247		246		24	801		798
Total	27	$	2,725	$	2,710	63	$	11,472	$	11,397

The following table provides information on how TDRs were modified during the three months ended March 31, 2014 and 2013.



	Three months ended
	March 31,⁽²⁾
(Dollars in thousands)	2014		2013
Extended maturities	$	669	$	8,481
Adjusted interest rates	293		568
Combination of rate and maturity changes	1,253		98
Forbearance	66		0
Other ⁽¹⁾	429		2,250
Total	$	2,710	$	11,397

(1) Includes covenant modifications and other concessions, or combination of concessions, that do not consist of interest rate adjustments, forbearance and maturity extensions

(2) Balances are as of period end

First Financial considers repayment performance as an indication of the effectiveness of the Company's loan modifications. Borrowers that are ninety days or more past due on any principal or interest payments for a TDR, or who prematurely terminates a restructured loan agreement without satisfying the contractual principal balance (for example, in a deed-in-lieu arrangement), is considered to be in payment default of the terms of the TDR agreement.

The following table provides information on TDRs for which there was a payment default during the period that occurred within twelve months of the loan modification:



	March 31,
	2014			2013
(Dollars in thousands)	Number of Loans	Period End Balance		Number of Loans	Period End Balance
Commercial	1	$	143	2	$	85
Real estate - construction	0	0		0	0
Real estate - commercial	0	0		1	72
Real estate - residential	0	0		2	119
Installment	1	1		1	16
Home equity	1	24		1	54
Total	3	$	168	7	$	346

Impaired Loans. Loans classified as nonaccrual and loans modified as TDRs are considered impaired. The following table provides information on nonaccrual loans, TDRs and total impaired loans.



(Dollars in thousands)	March 31, 2014		December 31, 2013
Impaired loans
Nonaccrual loans⁽¹⁾
Commercial	$	7,097	$	7,934
Real estate-construction	223		223
Real estate-commercial	16,758		17,286
Real estate-residential	8,157		8,606
Installment	399		574
Home equity	2,700		2,982
Other	0		0
Nonaccrual loans ⁽¹⁾	35,334		37,605
Accruing troubled debt restructurings	13,400		15,094
Total impaired loans	$	48,734	$	52,699

(1) Nonaccrual loans include nonaccrual TDRs of $14.6 million and $13.0 million as of March 31, 2014 and December 31, 2013, respectively.



	Three months ended
	March 31,
(Dollars in thousands)	2014		2013
Interest income effect on impaired loans
Gross amount of interest that would have been recorded under original terms	$	809	$	1,122
Interest included in income
Nonaccrual loans	75		214
Troubled debt restructurings	109		101
Total interest included in income	184		315
Net impact on interest income	$	625	$	807

Commitments outstanding to borrowers with nonaccrual loans	$	0	$	2,691

First Financial individually reviews all impaired commercial loan relationships greater than $250,000, as well as consumer loan TDRs greater than $100,000, to determine if a specific allowance is necessary based on the borrower’s overall financial condition, resources and payment record, support from guarantors and the realizable value of any collateral. Specific allowances are based on expected cash flows, discounted using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.

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



	As of March 31, 2014
(Dollars in thousands)	Current Balance		Contractual Principal Balance		Related Allowance		Average Current Balance		YTD Interest Income Recognized
Loans with no related allowance recorded
Commercial	$	5,203	$	7,086	$	0	$	5,208	$	24
Real estate - construction	223		443		0		223		0
Real estate - commercial	11,498		15,188		0		11,927		65
Real estate - residential	9,876		11,448		0		10,083		42
Installment	465		492		0		554		2
Home equity	2,932		3,832		0		3,070		12
Other	0		0		0		0		0
Total	30,197		38,489		0		31,065		145

Loans with an allowance recorded
Commercial	5,813		7,925		1,383		6,413		9
Real estate - construction	0		0		0		0		0
Real estate - commercial	10,478		13,411		2,800		11,058		19
Real estate - residential	2,145		2,212		368		2,081		10
Installment	0		0		0		0		0
Home equity	101		101		2		101		1
Other	0		0		0		0		0
Total	18,537		23,649		4,553		19,653		39

Total
Commercial	11,016		15,011		1,383		11,621		33
Real estate - construction	223		443		0		223		0
Real estate - commercial	21,976		28,599		2,800		22,985		84
Real estate - residential	12,021		13,660		368		12,164		52
Installment	465		492		0		554		2
Home equity	3,033		3,933		2		3,171		13
Other	0		0		0		0		0
Total	$	48,734	$	62,138	$	4,553	$	50,718	$	184



	As of December 31, 2013
(Dollars in thousands)	Current Balance		Contractual Principal Balance		Related Allowance		Average Current Balance		Interest Income Recognized
Loans with no related allowance recorded
Commercial	$	5,212	$	7,083	$	0	$	10,712	$	165
Real estate - construction	223		443		0		599		0
Real estate - commercial	12,355		16,431		0		16,563		380
Real estate - residential	10,291		12,087		0		10,225		152
Installment	642		663		0		463		6
Home equity	3,208		4,108		0		3,145		44
Other	0		0		0		148		0
Total	31,931		40,815		0		41,855		747

Loans with an allowance recorded
Commercial	7,013		8,353		2,080		5,047		71
Real estate - construction	0		0		0		726		7
Real estate - commercial	11,638		14,424		2,872		21,098		110
Real estate - residential	2,016		2,072		348		1,997		37
Installment	0		0		0		0		0
Home equity	101		101		2		101		2
Other	0		0		0		167		0
Total	20,768		24,950		5,302		29,136		227

Total
Commercial	12,225		15,436		2,080		15,759		236
Real estate - construction	223		443		0		1,325		7
Real estate - commercial	23,993		30,855		2,872		37,661		490
Real estate - residential	12,307		14,159		348		12,222		189
Installment	642		663		0		463		6
Home equity	3,309		4,209		2		3,246		46
Other	0		0		0		315		0
Total	$	52,699	$	65,765	$	5,302	$	70,991	$	974

OREO. Other real estate owned (OREO) is comprised of properties acquired by the Company through the loan foreclosure or repossession process, or other resolution activity that results in partial or total satisfaction of problem loans.

Changes in OREO were as follows:



	Three months ended
	March 31,
(Dollars in thousands)	2014		2013
Balance at beginning of period	$	19,806	$	12,526
Additions
Commercial	834		557
Residential	370		147
Total additions	1,204		704
Disposals
Commercial	7,857		241
Residential	114		294
Total disposals	7,971		535
Valuation adjustment
Commercial	223		405
Residential	73		297
Total valuation adjustment	296		702
Balance at end of period	$	12,743	$	11,993