10-Q 1 q210q-2016630.htm FORM 10-Q Document

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                                           June 30, 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 8/4/2016
Common stock, No par value
 
61,964,988




FIRST FINANCIAL BANCORP.

INDEX


 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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 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)

 
June 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
106,174

 
$
114,841

Interest-bearing deposits with other banks
18,911

 
33,734

Investment securities available-for-sale, at fair value (amortized cost $1,104,509 at June 30, 2016 and $1,203,065 at December 31, 2015)
1,114,349

 
1,190,642

Investment securities held-to-maturity (fair value $689,288 at June 30, 2016 and $731,951 at December 31, 2015)
670,111

 
726,259

Other investments
51,261

 
53,725

Loans held for sale
10,494

 
20,957

Loans and leases
 
 
 
Commercial and industrial
1,794,533

 
1,663,102

Lease financing
100,263

 
93,986

Construction real estate
374,949

 
311,712

Commercial real estate
2,363,456

 
2,258,297

Residential real estate
512,800

 
512,311

Home equity
467,549

 
466,629

Installment
46,917

 
41,506

Credit card
40,746

 
41,217

Total loans and leases
5,701,213

 
5,388,760

Less:  Allowance for loan and lease losses
56,708

 
53,398

Net loans and leases
5,644,505

 
5,335,362

Premises and equipment
133,969

 
136,603

Goodwill and other intangibles
211,199

 
211,865

FDIC indemnification asset
14,504

 
17,630

Accrued interest and other assets
334,625

 
305,793

Total assets
$
8,310,102

 
$
8,147,411

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Interest-bearing
$
1,436,078

 
$
1,414,291

Savings
1,974,449

 
1,945,805

Time
1,279,934

 
1,406,124

Total interest-bearing deposits
4,690,461

 
4,766,220

Noninterest-bearing
1,429,163

 
1,413,404

Total deposits
6,119,624

 
6,179,624

Federal funds purchased and securities sold under agreements to repurchase
80,084

 
89,325

Federal Home Loan Bank short-term borrowings
1,035,000

 
849,100

Total short-term borrowings
1,115,084

 
938,425

Long-term debt
119,596

 
119,540

Total borrowed funds
1,234,680

 
1,057,965

Accrued interest and other liabilities
109,075

 
100,446

Total liabilities
7,463,379

 
7,338,035

 
 
 
 
Shareholders' equity
 

 
 

Common stock - no par value
 

 
 

Authorized - 160,000,000 shares; Issued - 68,730,731 shares in 2016 and 2015
567,687

 
571,155

Retained earnings
410,893

 
388,240

Accumulated other comprehensive loss
(17,688
)
 
(30,580
)
Treasury stock, at cost, 6,771,202 shares in 2016 and 7,089,051 shares in 2015
(114,169
)
 
(119,439
)
Total shareholders' equity
846,723

 
809,376

Total liabilities and shareholders' equity
$
8,310,102

 
$
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
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Interest income
 
 
 
 
 
 
 
Loans, including fees
$
64,424

 
$
54,586

 
$
127,823

 
$
109,050

Investment securities
 
 
 
 
 
 
 
Taxable
10,706

 
9,281

 
22,079

 
18,889

Tax-exempt
1,156

 
1,139

 
2,318

 
2,256

Total interest on investment securities
11,862

 
10,420

 
24,397

 
21,145

Other earning assets
(1,103
)
 
(1,162
)
 
(2,242
)
 
(2,343
)
Total interest income
75,183

 
63,844

 
149,978

 
127,852

Interest expense
 

 
 

 
 
 
 
Deposits
5,457

 
4,621

 
10,987

 
9,441

Short-term borrowings
1,053

 
253

 
2,223

 
556

Long-term borrowings
1,541

 
296

 
3,081

 
595

Total interest expense
8,051

 
5,170

 
16,291

 
10,592

Net interest income
67,132

 
58,674

 
133,687

 
117,260

Provision for loan and lease losses
4,037

 
3,070

 
5,692

 
5,130

Net interest income after provision for loan and lease losses
63,095

 
55,604

 
127,995

 
112,130

Noninterest income
 

 
 

 
 
 
 
Service charges on deposit accounts
4,455

 
4,803

 
8,836

 
9,326

Trust and wealth management fees
3,283

 
3,274

 
6,723

 
6,908

Bankcard income
3,130

 
2,972

 
6,012

 
5,592

Client derivative fees
1,799

 
878

 
2,894

 
1,840

Net gains from sales of loans
1,846

 
1,924

 
3,027

 
3,388

Net gains on sales of investment securities
(188
)
 
1,094

 
(164
)
 
1,094

FDIC loss sharing income
59

 
(304
)
 
(506
)
 
(1,350
)
Accelerated discount on covered/formerly covered loans
1,191

 
4,094

 
2,162

 
6,186

Other
4,619

 
2,680

 
6,722

 
6,044

Total noninterest income
20,194

 
21,415

 
35,706

 
39,028

Noninterest expenses
 

 
 

 
 
 
 
Salaries and employee benefits
29,526

 
27,451

 
59,141

 
54,392

Net occupancy
4,491

 
4,380

 
9,448

 
9,385

Furniture and equipment
2,130

 
2,219

 
4,343

 
4,372

Data processing
2,765

 
2,657

 
5,483

 
5,429

Marketing
801

 
973

 
1,866

 
1,861

Communication
477

 
558

 
958

 
1,128

Professional services
1,299

 
1,727

 
3,112

 
3,697

State intangible tax
639

 
577

 
1,278

 
1,154

FDIC assessments
1,112

 
1,114

 
2,244

 
2,204

Loss (gain) - other real estate owned
43

 
419

 
(147
)
 
893

Loss sharing expense
(12
)
 
576

 
285

 
877

Other
6,142

 
6,135

 
12,122

 
11,462

Total noninterest expenses
49,413

 
48,786

 
100,133

 
96,854

Income before income taxes
33,876

 
28,233

 
63,568

 
54,304

Income tax expense
11,308

 
9,284

 
21,186

 
17,734

Net income
$
22,568

 
$
18,949

 
$
42,382

 
$
36,570

Net earnings per common share - basic
$
0.37

 
$
0.31

 
$
0.69

 
$
0.60

Net earnings per common share - diluted
$
0.36

 
$
0.31

 
$
0.68

 
$
0.59

Cash dividends declared per share
$
0.16

 
$
0.16

 
$
0.32

 
$
0.32

Average common shares outstanding - basic
61,194,254

 
61,115,802

 
61,115,525

 
61,064,928

Average common shares outstanding - diluted
62,027,008

 
61,915,294

 
61,912,366

 
61,824,106


See Notes to Consolidated Financial Statements.

2



FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
22,568

 
$
18,949

 
$
42,382

 
$
36,570

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on investment securities arising during the period
5,192

 
(3,778
)
 
12,235

 
1,230

Change in retirement obligation
201

 
221

 
401

 
404

Unrealized gain (loss) on derivatives
128

 
(83
)
 
256

 
(899
)
Unrealized gain (loss) on foreign currency exchange
0

 
(21
)
 
0

 
(41
)
Other comprehensive income (loss)
5,521

 
(3,661
)
 
12,892

 
694

Comprehensive income
$
28,089

 
$
15,288

 
$
55,274

 
$
37,264

 
 
 
 
 
 
 
 
                   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
 

 
 
 
36,570

 
 
 
 
 
 
 
36,570

Other comprehensive income (loss)
 
 
 
 
 
 
694

 
 
 
 
 
694

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock at $0.32 per share
 
 
 
 
(19,695
)
 
 
 
 
 
 
 
(19,695
)
Excess tax benefit on share-based compensation
 
 
106

 
 
 
 
 
 
 
 
 
106

Exercise of stock options, net of shares purchased
 
 
(174
)
 
 
 
 
 
18,067

 
303

 
129

Restricted stock awards, net of forfeitures
 
 
(5,118
)
 
 
 
 
 
233,233

 
3,882

 
(1,236
)
Share-based compensation expense
 
 
2,044

 
 
 
 
 
 
 
 
 
2,044

Balance at June 30, 2015
68,730,731

 
$
571,501

 
$
369,462

 
$
(20,715
)
 
(7,022,884
)
 
$
(117,865
)
 
$
802,383

Balance at January 1, 2016
68,730,731

 
$
571,155

 
$
388,240

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

Net income
 
 
 
 
42,382

 
 
 
 
 
 
 
42,382

Other comprehensive income (loss)
 
 
 
 
 
 
12,892

 
 
 
 
 
12,892

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock at $0.32 per share
 
 
 
 
(19,729
)
 
 
 
 
 
 
 
(19,729
)
Warrant Exercises
 
 
(971
)
 
 
 
 
 
57,575

 
971

 
0

Excess tax benefit on share-based compensation
 
 
156

 
 
 
 
 
 
 
 
 
156

Exercise of stock options, net of shares purchased
 
 
(177
)
 
 
 
 
 
45,928

 
774

 
597

Restricted stock awards, net of forfeitures
 
 
(4,872
)
 
 
 
 
 
214,346

 
3,525

 
(1,347
)
Share-based compensation expense
 
 
2,396

 
 
 
 
 
 
 
 
 
2,396

Balance at June 30, 2016
68,730,731

 
$
567,687

 
$
410,893

 
$
(17,688
)
 
(6,771,202
)
 
$
(114,169
)
 
$
846,723


See Notes to Consolidated Financial Statements.

4


FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Six months ended
 
June 30,
 
2016
 
2015
Operating activities
 
 
 
Net income
$
42,382

 
$
36,570

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
5,692

 
5,130

Depreciation and amortization
6,479

 
6,388

Stock-based compensation expense
2,396

 
2,044

Pension expense (income)
(450
)
 
(600
)
Net amortization of premiums/accretion of discounts on investment securities
4,005

 
3,820

Net gains on sales of investment securities
164

 
(1,094
)
Originations of loans held for sale
(100,437
)
 
(133,168
)
Net gains from sales of loans held for sale
(3,027
)
 
(3,388
)
Proceeds from sales of loans held for sale
113,604

 
126,045

Deferred income taxes
741

 
4,474

Bank owned life insurance income
(1,027
)
 
(955
)
Decrease (increase) in interest receivable
(1,611
)
 
(1,097
)
Decrease (increase) in indemnification asset
3,126

 
2,328

(Decrease) increase in interest payable
148

 
133

Decrease (increase) in other assets
(22,622
)
 
(21,462
)
(Decrease) increase in other liabilities
(8,034
)
 
30,625

Net cash provided by (used in) operating activities
41,529

 
55,793

 
 
 
 
Investing activities
 

 
 

Proceeds from sales of securities available-for-sale
98,734

 
53,518

Proceeds from calls, paydowns and maturities of securities available-for-sale
70,842

 
56,808

Purchases of securities available-for-sale
(74,856
)
 
(224,642
)
Proceeds from calls, paydowns and maturities of securities held-to-maturity
53,880

 
75,311

Purchases of securities held-to-maturity
0

 
(1,820
)
Net decrease (increase) in interest-bearing deposits with other banks
14,823

 
(18,397
)
Net decrease (increase) in loans and leases
(315,691
)
 
(84,658
)
Proceeds from disposal of other real estate owned
4,172

 
9,678

Purchases of premises and equipment
(5,023
)
 
(3,964
)
Life insurance death benefits
5,006

 
0

Net cash provided by (used in) investing activities
(148,113
)
 
(138,166
)
 
 
 
 
Financing activities
 

 
 

Net (decrease) increase in total deposits
(60,000
)
 
60,073

Net (decrease) increase in short-term borrowings
176,659

 
48,657

Payments on long-term debt
0

 
(932
)
Cash dividends paid on common stock
(19,520
)
 
(19,502
)
Proceeds from exercise of stock options
622

 
167

Excess tax benefit on share-based compensation
156

 
106

Net cash provided by (used in) financing activities
97,917

 
88,569

 
 
 
 
Cash and due from banks
 

 
 

Change in cash and due from banks
(8,667
)
 
6,196

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

 
110,122

Cash and due from banks at end of period
$
106,174

 
$
116,318


See Notes to Consolidated Financial Statements.

5


FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.

In June 2016, the FASB issued an update (ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments) which significantly changes how entities are required to measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This update will replace the current incurred loss approach for estimating credit losses with an expected loss model for instruments measured at amortized cost, including loans and leases. Expected credit losses are required to be based on amortized cost and reflect losses expected over the remaining contractual life of the asset. Management is expected to consider any available information relevant to assessing the collectability of contractual cash flows, such as information about past events, current conditions, voluntary prepayments and reasonable and supportable forecasts when developing expected credit loss estimates.

In addition to the new framework for calculating the ALLL, this update requires allowances for available-for-sale debt securities rather than a reduction of the security's carrying amount under the current other-than-temporary impairment model. The guidance in this ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans and will require new and updated footnote disclosures.

The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for all entities for interim and annual reporting periods beginning after December 15, 2018. First Financial is currently evaluating the impact of this update on its Consolidated Financial Statements.

NOTE 3:  INVESTMENTS

For the three months ending June 30, 2016, proceeds on the sale of $64.8 million of available-for-sale securities resulted in gains of $24 thousand and losses of $0.2 million. For the comparable quarter in 2015, proceeds on the sale of $53.9 million of available-for-sale securities resulted in gains of $1.1 million and no losses. No held-to-maturity securities were sold. For the six months ended June 30, 2016, proceeds on the sale of $107.5 million of available-for-sale securities resulted in gains of $0.3

7


million and losses of $0.5 million. For the six months ended June 30, 2015, proceeds on the sale of $54.0 million of available-for-sale securities resulted in gains of $1.1 million and no losses.

The following is a summary of held-to-maturity and available-for-sale investment securities as of June 30, 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

 
$
4

 
$
0

 
$
102

Securities of U.S. government agencies and corporations
 
14,345

 
468

 
0

 
14,813

 
7,471

 
255

 
0

 
7,726

Mortgage-backed securities
 
624,048

 
18,191

 
(227
)
 
642,012

 
673,084

 
9,460

 
(2,597
)
 
679,947

Obligations of state and other political subdivisions
 
26,900

 
775

 
0

 
27,675

 
108,575

 
5,609

 
(387
)
 
113,797

Asset-backed securities
 
0

 
0

 
0

 
0

 
269,380

 
1,080

 
(3,282
)
 
267,178

Other securities
 
4,818

 
0

 
(30
)
 
4,788

 
45,901

 
667

 
(969
)
 
45,599

Total
 
$
670,111

 
$
19,434

 
$
(257
)
 
$
689,288

 
$
1,104,509

 
$
17,075

 
$
(7,235
)
 
$
1,114,349


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 June 30, 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
$
4,724

 
$
4,743

 
$
83,023

 
$
82,480

Due after one year through five years
588,565

 
604,411

 
773,882

 
777,441

Due after five years through ten years
76,822

 
80,134

 
218,341

 
224,371

Due after ten years
0

 
0

 
29,263

 
30,057

Total
$
670,111

 
$
689,288

 
$
1,104,509

 
$
1,114,349



8


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:
 
 
June 30, 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
 
$
102,227

 
$
(531
)
 
$
202,649

 
$
(2,293
)
 
$
304,876

 
$
(2,824
)
Obligations of state and other political subdivisions
 
1,369

 
(11
)
 
13,279

 
(376
)
 
14,648

 
(387
)
Asset-backed securities
 
75,261

 
(895
)
 
106,105

 
(2,387
)
 
181,366

 
(3,282
)
Other securities
 
15,458

 
(543
)
 
11,472

 
(456
)
 
26,930

 
(999
)
Total
 
$
194,315

 
$
(1,980
)
 
$
333,505

 
$
(5,512
)
 
$
527,820

 
$
(7,492
)

 
 
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
U.S. Treasuries
 
$
97

 
$
(1
)
 
$
0

 
$
0

 
$
97

 
$
(1
)
Mortgage-backed securities
 
500,768

 
(5,362
)
 
246,523

 
(9,563
)
 
747,291

 
(14,925
)
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
)

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 June 30, 2016 or December 31, 2015.

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


9


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 $167.8 million and $191.6 million, at June 30, 2016 and December 31, 2015, respectively. The outstanding balance of all purchased impaired loans, including all contractual principal, interest, fees and penalties, was $182.9 million and $213.3 million as of June 30, 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
 
Six months ended
 
 
June 30,
 
June 30,
(Dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Balance at beginning of period
 
$
58,724

 
$
91,988

 
$
64,857

 
$
106,622

Reclassification from/(to) nonaccretable difference
 
3,402

 
(548
)
 
3,720

 
(2,124
)
Accretion
 
(3,755
)
 
(5,744
)
 
(7,965
)
 
(12,101
)
Other net activity (1)
 
(1,552
)
 
(6,751
)
 
(3,793
)
 
(13,452
)
Balance at end of period
 
$
56,819

 
$
78,945

 
$
56,819

 
$
78,945

 (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 $3.4 million for the second quarter of 2016 and $3.7 million for the six months ended June 30, 2106. Conversely, the Company recognized reclassifications from accretable to nonaccretable difference during the second quarter of 2015 of $0.5 million and $2.1 million during the six months ended June 30, 2015, 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. Covered loans totaled $104.4 million as of June 30, 2016 and $113.3 million as of December 31, 2015. For a detailed discussion of covered loans, please refer to the Loans and Leases note in the Company's 2015 Annual Report on Form 10-K.

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.

10



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 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.

Commercial and consumer credit exposure by risk attribute was as follows:
 
 
As of June 30, 2016
 
 
Commercial
 
Real Estate
 
Lease
 
 
(Dollars in thousands)
 
and industrial
 
Construction
 
Commercial
 
financing
 
Total
Pass
 
$
1,715,798

 
$
368,565

 
$
2,269,024

 
$
97,603

 
$
4,450,990

Special Mention
 
31,872

 
5,761

 
29,629

 
149

 
67,411

Substandard
 
46,863

 
623

 
64,803

 
2,511

 
114,800

Doubtful
 
0

 
0

 
0

 
0

 
0

Total
 
$
1,794,533

 
$
374,949

 
$
2,363,456

 
$
100,263

 
$
4,633,201


(Dollars in thousands)
 
Residential
real estate
 
Home equity
 
Installment
 
Other
 
Total
Performing
 
$
503,713

 
$
462,665

 
$
46,381

 
$
40,746

 
$
1,053,505

Nonperforming
 
9,087

 
4,884

 
536

 
0

 
14,507

Total
 
$
512,800

 
$
467,549

 
$
46,917

 
$
40,746

 
$
1,068,012


 
 
As of December 31, 2015
 
 
Commercial
 
Real Estate
 
Lease
 
 
(Dollars in thousands)
 
and industrial
 
Construction
 
Commercial
 
financing
 
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



11


(Dollars in thousands)
 
Residential
real estate
 
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 June 30, 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 and industrial
 
$
951

 
$
24

 
$
2,987

 
$
3,962

 
$
1,784,004

 
$
1,787,966

 
$
6,567

 
$
1,794,533

 
$
868

Construction real estate
 
0

 
0

 
0

 
0

 
374,202

 
374,202

 
747

 
374,949

 
0

Commercial real estate
 
920

 
1,003

 
5,782

 
7,705

 
2,250,948

 
2,258,653

 
104,803

 
2,363,456

 
0

Residential real estate
 
75

 
512

 
1,880

 
2,467

 
457,808

 
460,275

 
52,525

 
512,800

 
0

Home equity
 
611

 
24

 
2,403

 
3,038

 
462,941

 
465,979

 
1,570

 
467,549

 
0

Installment
 
10

 
45

 
349

 
404

 
44,945

 
45,349

 
1,568

 
46,917

 
0

Other
 
490

 
149

 
113

 
752

 
140,257

 
141,009

 
0

 
141,009

 
113

Total
 
$
3,057

 
$
1,757

 
$
13,514

 
$
18,328

 
$
5,515,105

 
$
5,533,433

 
$
167,780

 
$
5,701,213

 
$
981


 
 
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 and industrial
 
$
2,255

 
$
2,232

 
$
1,937

 
$
6,424

 
$
1,648,902

 
$
1,655,326

 
$
7,776

 
$
1,663,102

 
$
0

Construction real estate
 
0

 
17

 
0

 
17

 
310,872

 
310,889

 
823

 
311,712

 
0

Commercial real estate
 
2,501

 
913

 
7,421

 
10,835

 
2,124,290

 
2,135,125

 
123,172

 
2,258,297

 
0

Residential real estate
 
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 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

12


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 261 TDRs totaling $36.0 million at June 30, 2016, including $28.0 million on accrual status and $8.0 million classified as nonaccrual. First Financial had $0.6 million of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs, and the ALLL included reserves of $2.0 million related to TDRs at June 30, 2016. For the three months ended June 30, 2016 and 2015, the Company charged off $0.3 million and $1.7 million, respectively, for the portion of TDRs determined to be uncollectible. For the six months ended June 30, 2016 and 2015, First Financial charged off $0.5 million and $1.7 million respectively, for the portion of TDRs determined to be uncollectible. Additionally, as of June 30, 2016, approximately $14.5 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, and $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 and six months ended June 30, 2016 and 2015:
 
Three months ended
 
June 30, 2016
 
June 30, 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 and industrial
2

 
$
44

 
$
35

 
14

 
$
1,155

 
$
1,151

Construction real estate
0

 
0

 
0

 
0

 
0

 
0

Commercial real estate
9

 
1,468

 
1,040

 
6

 
2,426

 
2,391

Residential real estate
0

 
0

 
0

 
3

 
362

 
327

Home equity
0

 
0

 
0

 
9

 
1,883

 
1,375

Installment
1

 
2

 
2

 
7

 
46

 
46

Total
12

 
$
1,514

 
$
1,077

 
39

 
$
5,872

 
$
5,290

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended
 
June 30, 2016
 
June 30, 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 and industrial
10

 
$
2,127

 
$
2,130

 
22

 
$
1,515

 
$
1,510

Construction real estate
0

 
0

 
0

 
0

 
0

 
0

Commercial real estate
10

 
1,510

 
1,082

 
12

 
15,340

 
11,734

Residential real estate
2

 
282

 
247

 
3

 
362

 
327

Home equity
4

 
149

 
140

 
10

 
2,050

 
1,539

Installment
3

 
9

 
9

 
7

 
46

 
46

Total
29

 
$
4,077

 
$
3,608

 
54

 
$
19,313

 
$
15,156



13


The following table provides information on how TDRs were modified during the three and six months ended June 30, 2016 and 2015.
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Extended maturities
$
35

 
$
1,180

 
$
521

 
$
10,661

Adjusted interest rates
0
 
0
 
0

 
0

Combination of rate and maturity changes
0
 
1,157
 
162

 
1,219

Forbearance
88
 
260
 
88

 
260

Other (1)
954
 
2,693
 
2,837

 
3,016

Total
$
1,077

 
$
5,290

 
$
3,608

 
$
15,156

(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.

For the three months ended June 30, 2016, there were no TDRs for which there was a payment default during the period that occurred within twelve months of the loan modification. For the comparable period in 2015, there was one TDR with a balance of $0.2 million that experienced a payment default within twelve months of the modification. For the six months ended June 30, 2016 and 2015, there were four and five TDRs, respectively, with balances of $0.3 million and $1.2 million, respectively, for which there was a payment default during the period that occurred within twelve months of the loan modification.