10-Q 1 q110q-2016331.htm FROM 10-Q 10-Q

FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.  20549

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

For the quarterly period ended                                           March 31, 2016                                                   

OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________

Commission file number 001-34762
 
FIRST FINANCIAL BANCORP.
(Exact name of registrant as specified in its charter)

Ohio
 
31-1042001
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
255 East Fifth Street, Suite 700
Cincinnati, Ohio
 
45202
(Address of principal executive offices)
 
(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes     x        No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x
Accelerated filer o
 
 
Non-accelerated filer o
Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
 
Outstanding at 5/4/2016
Common stock, No par value
 
61,858,864




FIRST FINANCIAL BANCORP.

INDEX


 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Glossary of Abbreviations and Acronyms

First Financial Bancorp. has identified the following list of abbreviations and acronyms that are used in the Notes to Consolidated Financial Statements and the Management's Discussion and Analysis of Financial Condition and Results of Operations.

the Act
Private Securities Litigation Reform Act
 
FDIC
Federal Deposit Insurance Corporation
ALLL
Allowance for loan and lease losses
 
FHLB
Federal Home Loan Bank
ASC
Accounting standards codification
 
First Financial
First Financial Bancorp.
ASU
Accounting standards update
 
First Financial Bank
First Financial Bank, N.A.
ATM
Automated teller machine
 
Form 10-K
First Financial Bancorp. Annual Report on Form 10-K
Bank
First Financial Bank, N.A.
 
GAAP
U.S. Generally Accepted Accounting Principles
Basel III
Basel Committee regulatory capital reforms, Third Basel Accord
 
IRLC
Interest Rate Lock Commitment
BP
basis point
 
N/A
Not applicable
CDs
certificates of deposits
 
NII
Net interest income
Company
First Financial Bancorp.
 
Oak Street
Oak Street Holdings Corporation
ERM
Enterprise Risk Management
 
OREO
Other real estate owned
EVE
Economic value of equity
 
SEC
United States Securities and Exchange Commission
FASB
Financial Accounting Standards Board
 
TDR
Troubled debt restructuring
Fair Value Topic
FASB ASC Topic 825, Financial Instruments
 
 
 





PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
102,675

 
$
114,841

Interest-bearing deposits with other banks
15,582

 
33,734

Investment securities available-for-sale, at fair value (amortized cost $1,165,093 at March 31, 2016 and $1,203,065 at December 31, 2015)
1,164,319

 
1,190,642

Investment securities held-to-maturity (fair value $718,277 at March 31, 2016 and $731,951 at December 31, 2015)
702,315

 
726,259

Other investments
53,255

 
53,725

Loans held for sale
15,369

 
20,957

Loans and leases
 
 
 
Commercial and industrial
1,744,732

 
1,663,102

Lease financing
101,135

 
93,986

Real estate-construction
341,453

 
311,712

Real estate-commercial
2,261,857

 
2,258,297

Real estate-residential
508,512

 
512,311

Home equity
466,010

 
466,629

Installment
41,627

 
41,506

Credit card
39,283

 
41,217

Total loans and leases
5,504,609

 
5,388,760

Less:  Allowance for loan and lease losses
53,732

 
53,398

Net loans and leases
5,450,877

 
5,335,362

Premises and equipment
138,036

 
136,603

Goodwill and other intangibles
211,533

 
211,865

FDIC indemnification asset
16,256

 
17,630

Accrued interest and other assets
323,337

 
305,793

Total assets
$
8,193,554

 
$
8,147,411

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Interest-bearing
$
1,430,963

 
$
1,414,291

Savings
1,922,892

 
1,945,805

Time
1,414,313

 
1,406,124

Total interest-bearing deposits
4,768,168

 
4,766,220

Noninterest-bearing
1,408,609

 
1,413,404

Total deposits
6,176,777

 
6,179,624

Federal funds purchased and securities sold under agreements to repurchase
75,499

 
89,325

Federal Home Loan Bank short-term borrowings
894,400

 
849,100

Total short-term borrowings
969,899

 
938,425

Long-term debt
119,556

 
119,540

Total borrowed funds
1,089,455

 
1,057,965

Accrued interest and other liabilities
100,735

 
100,446

Total liabilities
7,366,967

 
7,338,035

 
 
 
 
Shareholders' equity
 

 
 

Common stock - no par value
 

 
 

Authorized - 160,000,000 shares; Issued - 68,730,731 shares in 2016 and 2015
567,497

 
571,155

Retained earnings
398,224

 
388,240

Accumulated other comprehensive loss
(23,209
)
 
(30,580
)
Treasury stock, at cost, 6,875,704 shares in 2016 and 7,089,051 shares in 2015
(115,925
)
 
(119,439
)
Total shareholders' equity
826,587

 
809,376

Total liabilities and shareholders' equity
$
8,193,554

 
$
8,147,411


See Notes to Consolidated Financial Statements.


1


FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)

 
 
Three months ended
 
 
March 31,
 
 
2016
 
2015
Interest income
 
 
 
 
Loans, including fees
 
$
63,399

 
$
54,464

Investment securities
 
 
 
 
Taxable
 
11,373

 
9,608

Tax-exempt
 
1,162

 
1,117

Total interest on investment securities
 
12,535

 
10,725

Other earning assets
 
(1,139
)
 
(1,181
)
Total interest income
 
74,795

 
64,008

Interest expense
 
 
 
 
Deposits
 
5,530

 
4,820

Short-term borrowings
 
1,170

 
303

Long-term borrowings
 
1,540

 
299

Total interest expense
 
8,240

 
5,422

Net interest income
 
66,555

 
58,586

Provision for loan and lease losses
 
1,655

 
2,060

Net interest income after provision for loan and lease losses
 
64,900

 
56,526

Noninterest income
 
 
 
 
Service charges on deposit accounts
 
4,381

 
4,523

Trust and wealth management fees
 
3,440

 
3,634

Bankcard income
 
2,882

 
2,620

Client derivative fees
 
1,095

 
962

Net gains from sales of loans
 
1,181

 
1,464

Net gains on sales of investment securities
 
24

 
0

FDIC loss sharing income
 
(565
)
 
(1,046
)
Accelerated discount on covered/formerly covered loans
 
971

 
2,092

Other
 
2,103

 
3,364

Total noninterest income
 
15,512

 
17,613

Noninterest expenses
 
 
 
 
Salaries and employee benefits
 
29,615

 
26,941

Net occupancy
 
4,957

 
5,005

Furniture and equipment
 
2,213

 
2,153

Data processing
 
2,718

 
2,772

Marketing
 
1,065

 
888

Communication
 
481

 
570

Professional services
 
1,813

 
1,970

State intangible tax
 
639

 
577

FDIC assessments
 
1,132

 
1,090

Loss (gain) - other real estate owned
 
(190
)
 
474

Loss sharing expense
 
297

 
301

Other
 
5,980

 
5,327

Total noninterest expenses
 
50,720

 
48,068

Income before income taxes
 
29,692

 
26,071

Income tax expense
 
9,878

 
8,450

Net income
 
$
19,814

 
$
17,621

Net earnings per common share - basic
 
$
0.32

 
$
0.29

Net earnings per common share - diluted
 
$
0.32

 
$
0.29

Cash dividends declared per share
 
$
0.16

 
$
0.16

Average common shares outstanding - basic
 
61,036,797

 
61,013,489

Average common shares outstanding - diluted
 
61,840,247

 
61,731,844


See Notes to Consolidated Financial Statements.

2



FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
 
 
 
 
Three months ended
 
March 31,
 
2016
 
2015
Net income
$
19,814

 
$
17,621

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gains (losses) on investment securities arising during the period
7,043

 
5,008

Change in retirement obligation
200

 
183

Unrealized gain (loss) on derivatives
128

 
(816
)
Unrealized gain (loss) on foreign currency exchange
0

 
(20
)
Other comprehensive income (loss)
7,371

 
4,355

Comprehensive income
$
27,185

 
$
21,976

 
 
 
 
                   See Notes to Consolidated Financial Statements.


3


FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Common Stock
 
Retained
 
Accumulated other comprehensive
 
Treasury stock
 
 
 
Shares
 
Amount
 
Earnings
 
income (loss)
 
Shares
 
Amount
 
Total
Balance at January 1, 2015
68,730,731

 
$
574,643

 
$
352,587

 
$
(21,409
)
 
(7,274,184
)
 
$
(122,050
)
 
$
783,771

Net income
 

 
 
 
17,621

 
 
 
 
 
 
 
17,621

Other comprehensive income (loss)
 
 
 
 
 
 
4,355

 
 
 
 
 
4,355

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock at $0.16 per share
 
 
 
 
(9,818
)
 
 
 
 
 
 
 
(9,818
)
Excess tax benefit on share-based compensation
 
 
99

 
 
 
 
 
 
 
 
 
99

Exercise of stock options, net of shares purchased
 
 
(170
)
 
 
 
 
 
15,217

 
256

 
86

Restricted stock awards, net of forfeitures
 
 
(4,807
)
 
 
 
 
 
215,123

 
3,577

 
(1,230
)
Share-based compensation expense
 
 
858

 
 
 
 
 
 
 
 
 
858

Balance at March 31, 2015
68,730,731

 
$
570,623

 
$
360,390

 
$
(17,054
)
 
(7,043,844
)
 
$
(118,217
)
 
$
795,742

Balance at January 1, 2016
68,730,731

 
$
571,155

 
$
388,240

 
$
(30,580
)
 
(7,089,051
)
 
$
(119,439
)
 
$
809,376

Net income
 
 
 
 
19,814

 
 
 
 
 
 
 
19,814

Other comprehensive income (loss)
 
 
 
 
 
 
7,371

 
 
 
 
 
7,371

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock at $0.16 per share
 
 
 
 
(9,830
)
 
 
 
 
 
 
 
(9,830
)
Excess tax benefit on share-based compensation
 
 
105

 
 
 
 
 
 
 
 
 
105

Exercise of stock options, net of shares purchased
 
 
(85
)
 
 
 
 
 
9,937

 
167

 
82

Restricted stock awards, net of forfeitures
 
 
(4,685
)
 
 
 
 
 
203,410

 
3,347

 
(1,338
)
Share-based compensation expense
 
 
1,007

 
 
 
 
 
 
 
 
 
1,007

Balance at March 31, 2016
68,730,731

 
$
567,497

 
$
398,224

 
$
(23,209
)
 
(6,875,704
)
 
$
(115,925
)
 
$
826,587


See Notes to Consolidated Financial Statements.

4


FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Three months ended
 
March 31,
 
2016
 
2015
Operating activities
 
 
 
Net income
$
19,814

 
$
17,621

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
1,655

 
2,060

Depreciation and amortization
3,287

 
3,208

Stock-based compensation expense
1,007

 
858

Pension expense (income)
(225
)
 
(300
)
Net amortization of premiums/accretion of discounts on investment securities
1,911

 
1,741

Gains on sales of investment securities
(24
)
 
0

Originations of loans held for sale
(42,935
)
 
(59,541
)
Net gains from sales of loans held for sale
(1,181
)
 
(1,464
)
Proceeds from sales of loans held for sale
49,381

 
56,816

Deferred income taxes
0

 
2,313

Decrease (increase) in interest receivable
(2,471
)
 
(2,354
)
Decrease (increase) in cash surrender value of life insurance
(493
)
 
(480
)
Decrease (increase) in indemnification asset
1,374

 
2,269

(Decrease) increase in interest payable
(1,353
)
 
0

Decrease (increase) in other assets
(15,305
)
 
(13,435
)
(Decrease) increase in other liabilities
(3,923
)
 
5,790

Net cash provided by (used in) operating activities
10,519

 
15,102

 
 
 
 
Investing activities
 

 
 

Proceeds from sales of securities available-for-sale
42,696

 
25

Proceeds from calls, paydowns and maturities of securities available-for-sale
31,974

 
26,103

Purchases of securities available-for-sale
(36,851
)
 
(55,005
)
Proceeds from calls, paydowns and maturities of securities held-to-maturity
22,881

 
27,155

Net decrease (increase) in interest-bearing deposits with other banks
18,152

 
(2,720
)
Net decrease (increase) in loans and leases
(117,755
)
 
8,883

Proceeds from disposal of other real estate owned
2,035

 
4,557

Purchases of premises and equipment
(4,900
)
 
(2,255
)
Net cash provided by (used in) investing activities
(41,768
)
 
6,743

 
 
 
 
Financing activities
 

 
 

Net (decrease) increase in total deposits
(2,847
)
 
58,848

Net (decrease) increase in short-term borrowings
31,474

 
(69,750
)
Payments on long-term debt
0

 
(532
)
Cash dividends paid on common stock
(9,760
)
 
(9,745
)
Proceeds from exercise of stock options
111

 
124

Excess tax benefit on share-based compensation
105

 
99

Net cash provided by (used in) financing activities
19,083

 
(20,956
)
 
 
 
 
Cash and due from banks
 

 
 

Net increase (decrease) in cash and due from banks
(12,166
)
 
889

Cash and due from banks at beginning of period
114,841

 
110,122

Cash and due from banks at end of period
$
102,675

 
$
111,011


See Notes to Consolidated Financial Statements.

5


FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)

NOTE 1:  BASIS OF PRESENTATION

The Consolidated Financial Statements of First Financial Bancorp., a bank holding company, principally serving Ohio, Indiana and Kentucky, include the accounts and operations of First Financial and its wholly-owned subsidiary, First Financial Bank, N.A.  All significant intercompany transactions and accounts have been eliminated in consolidation.  Certain reclassifications of prior periods' amounts have been made to conform to current year presentation. Such reclassifications had no effect on net earnings.
   
The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes.  These estimates, assumptions and judgments are inherently subjective and may be susceptible to significant change.  Actual realized amounts could differ materially from these estimates.  

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and serve to update the Form 10-K for the year ended December 31, 2015.  These interim financial statements may not include all information and notes necessary to constitute a complete set of financial statements under GAAP applicable to annual periods and it is suggested that these interim statements be read in conjunction with the Form 10-K.  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, 2015 has been derived from the audited financial statements in the Company’s 2015 Form 10-K.

NOTE 2:  RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS

In April 2015, the FASB issued an update (ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs) that requires debt issuance costs to be presented as a deduction from the corresponding debt liability. Upon adoption, an entity must apply the new guidance retrospectively to all prior periods presented in the financial statements. The provisions of this update became effective January 1, 2016. First Financial early adopted this accounting standard during the third quarter of 2015. Management concluded that the debt issuance costs capitalized in prior periods was immaterial as a component of other assets, total assets, total long-term debt and total liabilities, and as such, the Company's prior periods have not been restated.

In September 2015, the FASB issued an update (ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments) which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. This update requires acquiring companies to recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance in this ASU became effective January 1, 2016 and did not have a material impact on the Company's Consolidated Financial Statements.

In January 2016, the FASB issued an update (ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities) which will require entities to measure many equity investments at fair value and recognize changes in fair value in net income. This update does not apply to equity investments that result in consolidation, those accounted for under the equity method and certain others, and will eliminate use of the available for sale classification for equity securities while providing a new measurement alternative for equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient. The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. First Financial does not anticipate this update will have a material impact on its Consolidated Financial Statements.

In February 2016, the FASB issued an update (ASU 2016-02, Leases) which will require lessees to record most leases on their balance sheet and recognize leasing expenses in the income statement. Operating leases, except for short-term leases that are subject to an accounting policy election, will be recorded on the balance sheet for lessees by establishing a lease liability and corresponding right-of-use asset. The guidance in this ASU will become effective for interim and annual reporting periods

6


beginning after December 15, 2018, with early adoption permitted. First Financial is currently evaluating the impact of this update on its Consolidated Financial Statements.

In March 2016, the FASB issued an update (ASU 2016-05, Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships) which clarifies that the novation of a derivative contract in a hedge accounting relationship does not, in and of itself, require de-designation of that hedge accounting relationship. In the event of a novation, hedge accounting relationships could continue if all other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. First Financial does not anticipate this update will have a material impact on its Consolidated Financial Statements.

In March 2016, the FASB issued an update (ASU 2016-06, Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments) which clarifies that an assessment of whether an embedded contingent put or call option is clearly and closely related to the debt host requires only an analysis of the four-step decision sequence in ASC 815-15-25-42. Entities are required to apply the guidance to existing debt instruments (or hybrid financial instruments that are determined to have a debt host) using a modified retrospective transition method as of the period of adoption. The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. First Financial does not anticipate this update will have a material impact on its Consolidated Financial Statements.

In March 2016, the FASB issued an update (ASU 2016-07, Investments-Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting) which will eliminate the requirement to retrospectively apply the equity method when an investment that had been accounted for utilizing another method qualifies for use of the equity method. The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. First Financial does not anticipate this update will have a material impact on its Consolidated Financial Statements.

In March 2016, the FASB issued an update (ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting) which will require recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled (i.e., Additional Paid-in-Capital pools will be eliminated). The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. First Financial does not anticipate this update will have a material impact on its Consolidated Financial Statements.
 
NOTE 3:  INVESTMENTS

For the first quarter 2016, proceeds on the sale of $42.7 million of available-for-sale securities resulted in gains of $0.3 million and losses of $0.3 million. For the comparable quarter in 2015, proceeds on the sale of $25 thousand of available-for-sale securities resulted in no gains or losses. No held-to-maturity securities were sold.

The following is a summary of held-to-maturity and available-for-sale investment securities as of March 31, 2016:
  
 
Held-to-maturity
 
Available-for-sale
(Dollars in thousands)
 
Amortized
cost
 
Unrecognized gain
 
Unrecognized loss
 
Fair
value
 
Amortized
cost
 
Unrealized
gain
 
Unrealized
loss
 
Fair
value
U.S. Treasuries
 
$
0

 
$
0

 
$
0

 
$
0

 
$
98

 
$
3

 
$
0

 
$
101

Securities of U.S. government agencies and corporations
 
14,935

 
373

 
0

 
15,308

 
8,183

 
223

 
0

 
8,406

Mortgage-backed securities
 
655,387

 
15,615

 
(410
)
 
670,592

 
720,407

 
6,868

 
(4,493
)
 
722,782

Obligations of state and other political subdivisions
 
27,180

 
480

 
(2
)
 
27,658

 
103,215

 
3,437

 
(443
)
 
106,209

Asset-backed securities
 
0

 
0

 
0

 
0

 
258,731

 
31

 
(5,266
)
 
253,496

Other securities
 
4,813

 
0

 
(94
)
 
4,719

 
74,459

 
632

 
(1,766
)
 
73,325

Total
 
$
702,315

 
$
16,468

 
$
(506
)
 
$
718,277

 
$
1,165,093

 
$
11,194

 
$
(11,968
)
 
$
1,164,319



7


The following is a summary of held-to-maturity and available-for-sale investment securities as of December 31, 2015:
  
 
Held-to-maturity
 
Available-for-sale
(Dollars in thousands)
 
Amortized
cost
 
Unrecognized gain
 
Unrecognized
loss
 
Fair
value
 
Amortized
cost
 
Unrealized
gain
 
Unrealized
loss
 
Fair
value
U.S. Treasuries
 
$
0

 
$
0

 
$
0

 
$
0

 
$
98

 
$
0

 
$
(1
)
 
$
97

Securities of U.S. government agencies and corporations
 
15,486

 
121

 
0

 
15,607

 
8,183

 
157

 
0

 
8,340

Mortgage-backed securities
 
678,318

 
7,452

 
(1,999
)
 
683,771

 
775,285

 
2,708

 
(12,926
)
 
765,067

Obligations of state and other political subdivisions
 
27,646

 
338

 
(99
)
 
27,885

 
105,212

 
2,655

 
(730
)
 
107,137

Asset-backed securities
 
0

 
0

 
0

 
0

 
236,411

 
35

 
(3,445
)
 
233,001

Other securities
 
4,809

 
0

 
(121
)
 
4,688

 
77,876

 
523

 
(1,399
)
 
77,000

Total
 
$
726,259

 
$
7,911

 
$
(2,219
)
 
$
731,951

 
$
1,203,065

 
$
6,078

 
$
(18,501
)
 
$
1,190,642


The following table provides a summary of investment securities by contractual maturity or estimated weighted average life as of March 31, 2016. Estimated lives on amortizing investment securities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Held-to-maturity
 
Available-for-sale
(Dollars in thousands)
Amortized
cost
 
Fair
value
 
Amortized
cost
 
Fair
value
Due in one year or less
$
5,105

 
$
5,207

 
$
58,659

 
$
58,493

Due after one year through five years
563,324

 
574,597

 
775,602

 
774,467

Due after five years through ten years
133,886

 
138,473

 
303,552

 
304,623

Due after ten years
0

 
0

 
27,280

 
26,736

Total
$
702,315

 
$
718,277

 
$
1,165,093

 
$
1,164,319


The following tables provide the fair value and gross unrealized losses on investment securities in an unrealized loss position, aggregated by investment category and the length of time the individual securities have been in a continuous loss position:
 
 
March 31, 2016
 
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in thousands)
 
Fair
value
 
Unrealized
loss
 
Fair
value
 
Unrealized
loss
 
Fair
value
 
Unrealized
loss
Mortgage-backed securities
 
$
167,950

 
$
(1,299
)
 
$
235,099

 
$
(3,604
)
 
$
403,049

 
$
(4,903
)
Obligations of state and other political subdivisions
 
6,684

 
(53
)
 
20,758

 
(392
)
 
27,442

 
(445
)
Asset-backed securities
 
215,166

 
(4,217
)
 
24,018

 
(1,049
)
 
239,184

 
(5,266
)
Other securities
 
34,001

 
(1,123
)
 
16,766

 
(737
)
 
50,767

 
(1,860
)
Total
 
$
423,801

 
$
(6,692
)
 
$
296,641

 
$
(5,782
)
 
$
720,442

 
$
(12,474
)

 
 
December 31, 2015
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(Dollars in thousands)
 
value
 
loss
 
value
 
loss
 
value
 
loss
Securities of U.S. government agencies and corporations
 
$
97

 
$
0

 
$
0

 
$
0

 
$
97

 
$
0

Mortgage-backed securities
 
500,768

 
(5,363
)
 
246,523

 
(9,563
)
 
747,291

 
(14,926
)
Obligations of state and other political subdivisions
 
5,800

 
(65
)
 
29,287

 
(764
)
 
35,087

 
(829
)
Asset-backed securities
 
189,066

 
(3,042
)
 
17,144

 
(403
)
 
206,210

 
(3,445
)
Other securities
 
30,828

 
(592
)
 
24,716

 
(928
)
 
55,544

 
(1,520
)
Total
 
$
726,559

 
$
(9,062
)
 
$
317,670

 
$
(11,658
)
 
$
1,044,229

 
$
(20,720
)

8



Gains and losses on debt securities are generally due to fluctuations in current market yields relative to the yields of the debt securities at their amortized cost. All securities with unrealized losses are reviewed quarterly to determine if any impairment is considered other than temporary, requiring a write-down to fair value. First Financial considers the percentage loss on a security, duration of the loss, average life or duration of the security, credit rating of the security and payment performance as well as the Company's intent and ability to hold the security to maturity when determining whether any impairment is other than temporary. At this time First Financial does not intend to sell, and it is not more likely than not that the Company will be required to sell debt securities temporarily impaired prior to maturity or recovery of the recorded value. First Financial had no other than temporary impairment related to its investment securities portfolio as of March 31, 2016 or December 31, 2015.

For further detail on the fair value of investment securities, see Note 14 – Fair Value Disclosures.

NOTE 4:  LOANS AND LEASES

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 states where the Bank currently operates banking centers (Ohio, Indiana and Kentucky). Additionally, First Financial has two national lending platforms, one that provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and another that provides loans secured by commissions and cash collateral accounts primarily to insurance agents and brokers. Commercial loan categories include commercial and industrial, commercial real estate, construction real estate and lease financing. Consumer loan categories include residential real estate, home equity, installment and credit card.

Purchased impaired loans. Loans accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, are referred to as purchased impaired loans. First Financial accounts for the majority of loans acquired in FDIC transactions as purchased impaired loans, except for loans with revolving privileges, which are outside the scope of FASB ASC Topic 310-30, and loans for which cash flows could not be estimated, which are accounted for under the cost recovery method. Purchased impaired loans include loans previously covered under loss sharing agreements as well as loans that remain subject to FDIC loss sharing coverage.

Purchased impaired loans are not classified as nonperforming assets as the loans are considered to be performing under FASB ASC Topic 310-30. Therefore, interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows (accretable difference) is recognized on all purchased impaired loans. First Financial had purchased impaired loans totaling $177.0 million and $191.6 million, at March 31, 2016 and December 31, 2015, respectively. The outstanding balance of all purchased impaired loans, including all contractual principal, interest, fees and penalties, was $196.2 million and $213.3 million as of March 31, 2016 and December 31, 2015, respectively. These balances exclude contractual interest not yet accrued.

Changes in the carrying amount of accretable difference for purchased impaired loans were as follows:
 
 
Three months ended
 
 
March 31,
(Dollars in thousands)
 
2016
 
2015
Balance at beginning of period
 
$
64,857

 
$
106,622

Reclassification from/(to) nonaccretable difference
 
318

 
(1,576
)
Accretion
 
(4,210
)
 
(6,357
)
Other net activity (1)
 
(2,241
)
 
(6,701
)
Balance at end of period
 
$
58,724

 
$
91,988

 (1) Includes the impact of loan repayments and charge-offs.

First Financial regularly reviews its forecast of expected cash flows for purchased impaired loans. The Company recognized reclassifications from nonaccretable to accretable difference of $0.3 million for the first quarter of 2016, however, during the three months ended March 31, 2015, the Company recognized reclassifications from accretable to nonaccretable difference of $1.6 million due to changes in the cash flow expectations related to certain loan pools. These reclassifications can result in impairment and provision expense in the current period or yield adjustments on the related loan pools on a prospective basis.

Covered loans. Loans acquired in FDIC-assisted transactions covered under loss sharing agreements whereby the FDIC will reimburse First Financial for the majority of any losses incurred are referred to as covered loans. Pursuant to the terms of the

9


loss sharing agreements, covered loans are subject to a stated loss threshold whereby the FDIC will reimburse First Financial for 80% of losses up to a stated loss threshold and 95% of losses in excess of the threshold. These loss sharing agreements provide for partial loss protection on single-family, residential loans for a period of ten years and First Financial is required to share any recoveries of previously charged-off amounts for the same time period, on the same pro-rata basis with the FDIC. All other loans subject to loss sharing agreements were provided loss protection for a period of five years and recoveries of previously charged-off amounts must be shared with the FDIC for an additional three year period, on the same pro-rata basis.

The Company's loss sharing agreements with the FDIC related to non-single family loans expired effective October 1, 2014, and the ten year period of loss protection on all other covered loans and covered OREO expires October 1, 2019. Covered loans totaled $109.2 million as of March 31, 2016 and $113.3 million as of December 31, 2015.

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

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

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

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

Doubtful - First Financial assigns a doubtful rating to loans and leases with all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, 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 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.

Commercial and consumer credit exposure by risk attribute was as follows:
 
 
As of March 31, 2016
 
 
 
 
Real Estate
 
 
 
 
(Dollars in thousands)
 
Commercial
 
Construction
 
Commercial
 
Leasing
 
Total
Pass
 
$
1,680,764

 
$
337,472

 
$
2,182,683

 
$
99,583

 
$
4,300,502

Special Mention
 
22,155

 
3,417

 
19,754

 
0

 
45,326

Substandard
 
41,813

 
564

 
59,420

 
1,552

 
103,349

Doubtful
 
0

 
0

 
0

 
0

 
0

Total
 
$
1,744,732

 
$
341,453

 
$
2,261,857

 
$
101,135

 
$
4,449,177


(Dollars in thousands)
 
Real Estate
Residential
 
Home Equity
 
Installment
 
Other
 
Total
Performing
 
$
499,849

 
$
460,341

 
$
41,408

 
$
39,283

 
$
1,040,881

Nonperforming
 
8,663

 
5,669

 
219

 
0

 
14,551

Total
 
$
508,512

 
$
466,010

 
$
41,627

 
$
39,283

 
$
1,055,432


10



 
 
As of December 31, 2015
 
 
 
 
Real Estate
 
 
 
 
(Dollars in thousands)
 
Commercial
 
Construction
 
Commercial
 
Leasing
 
Total
Pass
 
$
1,596,415

 
$
310,806

 
$
2,179,701

 
$
93,236

 
$
4,180,158

Special Mention
 
27,498

 
128

 
19,903

 
0

 
47,529

Substandard
 
39,189

 
778

 
58,693

 
750

 
99,410

Doubtful
 
0

 
0

 
0

 
0

 
0

Total
 
$
1,663,102

 
$
311,712

 
$
2,258,297

 
$
93,986

 
$
4,327,097


(Dollars in thousands)
 
Real Estate
Residential
 
Home Equity
 
Installment
 
Other
 
Total
Performing
 
$
503,317

 
$
461,188

 
$
41,253

 
$
41,217

 
$
1,046,975

Nonperforming
 
8,994

 
5,441

 
253

 
0

 
14,688

Total
 
$
512,311

 
$
466,629

 
$
41,506

 
$
41,217

 
$
1,061,663


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, 2016
(Dollars in thousands)
 
30 – 59
days
past due
 
60 – 89
days
past due
 
> 90 days
past due
 
Total
past
due
 
Current
 
Subtotal
 
Purchased impaired
 
Total
 
> 90 days
past due
and still
accruing
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
4,354

 
$
310

 
$
3,034

 
$
7,698

 
$
1,729,886

 
$
1,737,584

 
$
7,148

 
$
1,744,732

 
$
0

Real estate - construction
 
5,002

 
0

 
0

 
5,002

 
335,689

 
340,691

 
762

 
341,453

 
0

Real estate - commercial
 
2,718

 
0

 
6,631

 
9,349

 
2,141,626

 
2,150,975

 
110,882

 
2,261,857

 
0

Real estate - residential
 
858

 
0

 
2,020

 
2,878

 
450,582

 
453,460

 
55,052

 
508,512

 
0

Home equity
 
505

 
81

 
3,025

 
3,611

 
460,929

 
464,540

 
1,470

 
466,010

 
0

Installment
 
133

 
13

 
67

 
213

 
39,713

 
39,926

 
1,701

 
41,627

 
0

Other
 
435

 
328

 
59

 
822

 
139,596

 
140,418

 
0

 
140,418

 
59

Total
 
$
14,005

 
$
732

 
$
14,836

 
$
29,573

 
$
5,298,021

 
$
5,327,594

 
$
177,015

 
$
5,504,609

 
$
59


 
 
As of December 31, 2015
(Dollars in thousands)
 
30 – 59
days
past due
 
60 – 89
days
past due
 
> 90 days
past due
 
Total
past
due
 
Current
 
Subtotal
 
Purchased impaired
 
Total
 
> 90 days
past due
and still
accruing
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
2,255

 
$
2,232

 
$
1,937

 
$
6,424

 
$
1,648,902

 
$
1,655,326

 
$
7,776

 
$
1,663,102

 
$
0

Real estate - construction
 
0

 
17

 
0

 
17

 
310,872

 
310,889

 
823

 
311,712

 
0

Real estate - commercial
 
2,501

 
913

 
7,421

 
10,835

 
2,124,290

 
2,135,125

 
123,172

 
2,258,297

 
0

Real estate - residential
 
1,220

 
239

 
2,242

 
3,701

 
451,907

 
455,608

 
56,703

 
512,311

 
0

Home equity
 
696

 
248

 
2,830

 
3,774

 
461,647

 
465,421

 
1,208

 
466,629

 
0

Installment
 
197

 
111

 
48

 
356

 
39,206

 
39,562

 
1,944

 
41,506

 
0

Other
 
920

 
302

 
230

 
1,452

 
133,751

 
135,203

 
0

 
135,203

 
108

Total
 
$
7,789

 
$
4,062

 
$
14,708

 
$
26,559

 
$
5,170,575

 
$
5,197,134

 
$
191,626

 
$
5,388,760

 
$
108


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 such as

11


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 return to accrual status if collection of future principal and interest payments is no longer doubtful.

Purchased impaired loans are classified as performing, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period provision for loan and lease losses or prospective yield adjustments.

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

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

First Financial had 271 TDRs totaling $37.7 million at March 31, 2016, including $30.1 million on accrual status and $7.5 million classified as nonaccrual. First Financial had $0.4 million of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs at March 31, 2016. At March 31, 2016, the ALLL included reserves of $2.4 million related to TDRs. For the three months ended March 31, 2016 and 2015, First Financial charged off $0.2 million and $6 thousand respectively, for the portion of TDRs determined to be uncollectible. Additionally, as of March 31, 2016, approximately $10.2 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year.

First Financial had 271 TDRs totaling $38.2 million at December 31, 2015, including $28.9 million of loans on accrual status and $9.3 million classified as nonaccrual. First Financial had $1.8 million of commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2015, the ALLL included reserves of $6.3 million related to TDRs. For the year ended December 31, 2015, First Financial charged off $2.7 million for the portion of TDRs determined to be uncollectible. As of December 31, 2015, approximately $10.3 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, 2016 and 2015:
 
Three months ended
 
March 31, 2016
 
March 31, 2015
(Dollars in thousands)
Number of loans
 
Pre-modification loan balance
 
Period end balance
 
Number of loans
 
Pre-modification loan balance
 
Period end balance
Commercial
8

 
$
2,083

 
$
2,095

 
8

 
$
360

 
$
359

Real estate - construction
0

 
0

 
0

 
0

 
0

 
0

Real estate - commercial
1

 
42

 
42

 
6

 
12,914

 
9,343

Real estate - residential
2

 
281

 
247

 
0

 
0

 
0

Home equity
4

 
149

 
140

 
0

 
0

 
0

Installment
2

 
7

 
7

 
0

 
0

 
0

Total
17

 
$
2,562

 
$
2,531

 
14

 
$
13,274

 
$
9,702



12


The following table provides information on how TDRs were modified during the three months ended March 31, 2016 and 2015.
 
Three months ended
 
March 31,
(Dollars in thousands)
2016
 
2015
Extended maturities
$
486

 
$
9,481

Adjusted interest rates
0
 
0
Combination of rate and maturity changes
162
 
62
Forbearance
0
 
0
Other (1)
1,883
 
159
Total
$
2,531

 
$
9,702

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

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

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:

 
 
Three months ended
 
 
March 31, 2016
 
March 31, 2015
(Dollars in thousands)
 
Number
of loans
 
Period end
balance
 
Number of loans
 
Period end
balance
Commercial
 
1
 
$
55

 
0
 
$
0

Real estate - construction
 
0
 
0
 
0
 
0
Real estate - commercial
 
0
 
0
 
3
 
967
Real estate - residential
 
1
 
214
 
1
 
73
Home equity
 
1
 
28
 
0
 
0
Installment
 
1
 
4
 
0
 
0
Total
 
4
 
$
301

 
4
 
$
1,040




13


Impaired Loans. Loans classified as nonaccrual and loans modified as TDRs are considered impaired. The following table provides information on impaired loans, excluding purchased impaired loans.
(Dollars in thousands)
 
March 31, 2016
 
December 31, 2015
Impaired loans
 
 
 
 
Nonaccrual loans (1)
 
 
 
 
Commercial
 
$
3,917

 
$
8,405

Real estate-construction
 
0

 
0

Real estate-commercial
 
8,577

 
9,418

Real estate-residential
 
4,243

 
5,027

Home equity
 
5,036

 
4,898

Installment
 
113

 
127

Other
 
121

 
122

Nonaccrual loans (1)
 
22,007

 
27,997

Accruing troubled debt restructurings
 
30,127

 
28,876

Total impaired loans
 
$
52,134

 
$
56,873

(1) Nonaccrual loans include nonaccrual TDRs of $7.5 million and $9.3 million as of March 31, 2016 and December 31, 2015, respectively.

 
Three months ended
 
March 31,
(Dollars in thousands)
2016
 
2015
Interest income effect on impaired loans
 
 
 
Gross amount of interest that would have been recorded under original terms
$
754

 
$
967

Interest included in income
 
 
 
Nonaccrual loans
76

 
171

Troubled debt restructurings
232

 
132

Total interest included in income
308

 
303

Net impact on interest income
$
446

 
$
664


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 discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.


14


First Financial's investment in impaired loans was as follows:
 
 
As of March 31, 2016
(Dollars in thousands)
 
Current balance
 
Contractual
principal
balance
 
Related
allowance
 
Average
current
balance
 
YTD interest
income
recognized
Loans with no related allowance recorded
 
 
 
 
 
 
 
 
Commercial
 
$
13,512

 
$
14,442

 
$
0

 
$
14,965

 
$
74

Real estate - construction
 
0

 
0

 
0

 
0

 
0

Real estate - commercial
 
14,003

 
18,707

 
0

 
15,152

 
70

Real estate - residential
 
7,126

 
8,383

 
0

 
7,287

 
46

Home equity
 
5,569

 
7,673

 
0

 
5,455

 
21

Installment
 
219

 
236

 
0

 
236

 
1

Other
 
121

 
121

 
0

 
122

 
0

Total
 
40,550

 
49,562

 
0

 
43,217

 
212

 
 
 
 
 
 
 
 
 
 
 
Loans with an allowance recorded
 
 
 
 
 
 
 
 
Commercial
 
973

 
1,163

 
400

 
983

 
9

Real estate - construction
 
0

 
0

 
0

 
0

 
0

Real estate - commercial
 
8,974

 
8,974

 
763

 
8,663

 
77

Real estate - residential
 
1,537

 
1,551

 
236

 
1,542

 
9

Home equity
 
100

 
100

 
2

 
101

 
1

Installment
 
0

 
0

 
0

 
0

 
0

Other
 
0

 
0

 
0

 
0

 
0

Total
 
11,584

 
11,788

 
1,401

 
11,289

 
96

 
 
 
 
 
 
 
 
 
 
 
Total
 
 

 
 

 
 

 
 

 
 

Commercial
 
14,485

 
15,605

 
400

 
15,948

 
83

Real estate - construction
 
0

 
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