LOANS AND LEASES | LOANS AND LEASES First Financial offers clients a variety of commercial and consumer loan and lease products with distinct interest rates and payment terms. Commercial loan categories include 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. Lending activities are primarily concentrated in states where the Bank operates banking centers (Ohio, Indiana and Kentucky). First Financial also offers two nationwide lending platforms, one that provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and another that provides loans secured by commissions and cash collateral accounts primarily to insurance agents and brokers. Credit Quality. To facilitate the monitoring of credit quality for commercial loans, and for purposes of determining an appropriate ALLL, First Financial utilizes the following categories of credit grades: Pass - Higher quality loans that do not fit any of the other categories described below. Special Mention - First Financial assigns a special mention rating to loans and leases with potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in First Financial's credit position at some future date. Substandard - First Financial assigns a substandard rating to loans or leases that are inadequately protected by the current sound financial worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans and leases have well-defined weaknesses that jeopardize repayment of the debt. Substandard loans and leases are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not addressed. Doubtful - First Financial assigns a doubtful rating to loans and leases with all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The credit grades previously described are derived from standard regulatory rating definitions and are assigned upon initial approval of credit to borrowers and updated periodically thereafter. First Financial considers repayment performance to be the best indicator of credit quality for consumer loans. Consumer loans that have principal and interest payments that are past due by 90 days or more are generally classified as nonperforming. Additionally, consumer loans that have been modified in a TDR are classified as nonperforming. Purchased impaired loans are not classified as nonperforming assets as the loans are considered to be performing under FASB ASC Topic 310-30. Commercial and consumer credit exposure by risk attribute was as follows: As of September 30, 2017 Commercial Real Estate Lease (Dollars in thousands) and industrial Construction Commercial financing Total Pass $ 1,842,432 $ 420,101 $ 2,472,395 $ 84,607 $ 4,819,535 Special Mention 15,002 0 7,540 44 22,586 Substandard 28,659 840 43,452 1,363 74,314 Doubtful 0 0 0 0 0 Total $ 1,886,093 $ 420,941 $ 2,523,387 $ 86,014 $ 4,916,435 (Dollars in thousands) Residential real estate Home equity Installment Credit card Total Performing $ 469,320 $ 490,263 $ 43,396 $ 44,646 $ 1,047,625 Nonperforming 8,644 4,079 254 0 12,977 Total $ 477,964 $ 494,342 $ 43,650 $ 44,646 $ 1,060,602 As of December 31, 2016 Commercial Real Estate Lease (Dollars in thousands) and industrial Construction Commercial financing Total Pass $ 1,725,451 $ 398,155 $ 2,349,662 $ 92,540 $ 4,565,808 Special Mention 18,256 1,258 15,584 108 35,206 Substandard 38,241 21 62,331 460 101,053 Doubtful 0 0 0 0 0 Total $ 1,781,948 $ 399,434 $ 2,427,577 $ 93,108 $ 4,702,067 (Dollars in thousands) Residential real estate Home equity Installment Credit card Total Performing $ 491,380 $ 456,314 $ 50,202 $ 43,408 $ 1,041,304 Nonperforming 9,600 4,074 437 0 14,111 Total $ 500,980 $ 460,388 $ 50,639 $ 43,408 $ 1,055,415 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 September 30, 2017 (Dollars in thousands) 30 – 59 60 – 89 > 90 days Total Current Subtotal Purchased impaired Total > 90 days Loans Commercial and industrial $ 2,175 $ 205 $ 4,680 $ 7,060 $ 1,875,376 $ 1,882,436 $ 3,657 $ 1,886,093 $ 0 Lease financing 76 0 0 76 85,938 86,014 0 86,014 0 Construction real estate 1,612 0 824 2,436 418,213 420,649 292 420,941 0 Commercial real estate 1,353 865 9,337 11,555 2,449,194 2,460,749 62,638 2,523,387 0 Residential real estate 661 0 3,244 3,905 434,114 438,019 39,945 477,964 0 Home equity 2,249 590 1,224 4,063 486,495 490,558 3,784 494,342 0 Installment 109 43 215 367 42,547 42,914 736 43,650 0 Credit card 281 136 84 501 44,145 44,646 0 44,646 84 Total $ 8,516 $ 1,839 $ 19,608 $ 29,963 $ 5,836,022 $ 5,865,985 $ 111,052 $ 5,977,037 $ 84 As of December 31, 2016 (Dollars in thousands) 30 – 59 60 – 89 > 90 days Total Current Subtotal Purchased impaired Total > 90 days Loans Commercial and industrial $ 1,257 $ 208 $ 1,339 $ 2,804 $ 1,773,939 $ 1,776,743 $ 5,205 $ 1,781,948 $ 0 Lease financing 137 0 115 252 92,856 93,108 0 93,108 0 Construction real estate 0 0 0 0 398,877 398,877 557 399,434 0 Commercial real estate 777 134 5,589 6,500 2,339,327 2,345,827 81,750 2,427,577 2,729 Residential real estate 821 37 2,381 3,239 450,631 453,870 47,110 500,980 0 Home equity 195 145 1,776 2,116 456,143 458,259 2,129 460,388 0 Installment 24 1 258 283 49,058 49,341 1,298 50,639 0 Credit card 457 177 142 776 42,632 43,408 0 43,408 142 Total $ 3,668 $ 702 $ 11,600 $ 15,970 $ 5,603,463 $ 5,619,433 $ 138,049 $ 5,757,482 $ 2,871 Nonaccrual. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful or when principal or interest payments are 90 days or more past due. Generally, loans are classified as nonaccrual due to the continued failure to adhere to contractual payment terms by the borrower, coupled with other pertinent factors. When a loan is classified as nonaccrual, the accrual of interest income is discontinued and previously accrued but unpaid interest is reversed. Any payments received while a loan is on nonaccrual status are applied as a reduction to the carrying value of the loan. A loan classified as nonaccrual may return to accrual status if 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 230 TDRs totaling $28.8 million at September 30, 2017 , including $19.7 million on accrual status and $9.1 million classified as nonaccrual. First Financial had $0.1 million of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs, and the ALLL included reserves of $0.9 million related to TDRs at September 30, 2017 . For the three months ended September 30, 2017 , the Company charged off $0.1 million for the portion of TDRs determined to be uncollectible. For the nine months ended September 30, 2017 and 2016, First Financial charged off $0.2 million and $0.5 million respectively, for the portion of TDRs determined to be uncollectible. Additionally, as of September 30, 2017 , approximately $14.6 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year. First Financial had 247 TDRs totaling $35.4 million at December 31, 2016 , including $30.2 million of loans on accrual status and $5.1 million classified as nonaccrual. First Financial had $0.9 million of commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2016 , the ALLL included reserves of $1.9 million related to TDRs, and $22.6 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 nine months ended September 30, 2017 and 2016 : Three months ended September 30, 2017 September 30, 2016 (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 1 $ 45 $ 37 6 $ 1,045 $ 1,159 Construction real estate 0 0 0 0 0 0 Commercial real estate 1 285 285 5 3,550 3,531 Residential real estate 6 416 315 0 0 0 Home equity 1 39 39 1 16 16 Installment 0 0 0 0 0 0 Total 9 $ 785 $ 676 12 $ 4,611 $ 4,706 Nine months ended September 30, 2017 September 30, 2016 (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 7 $ 5,724 $ 5,661 16 $ 3,172 $ 3,290 Construction real estate 0 0 0 0 0 0 Commercial real estate 7 1,791 1,734 15 5,060 4,612 Residential real estate 6 416 315 2 282 247 Home equity 1 39 39 5 165 156 Installment 0 0 0 3 9 9 Total 21 $ 7,970 $ 7,749 41 $ 8,688 $ 8,314 The following table provides information on how TDRs were modified during the three and nine months ended September 30, 2017 and 2016 : Three months ended Nine months ended September 30, September 30, (Dollars in thousands) 2017 2016 2017 2016 Extended maturities $ 0 $ 1,831 $ 3,261 $ 2,352 Adjusted interest rates 0 0 2,767 0 Combination of rate and maturity changes 285 2,744 465 2,906 Forbearance 354 0 1,181 88 Other (1) 37 131 75 2,968 Total $ 676 $ 4,706 $ 7,749 $ 8,314 (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. There were no TDRs for which there was a payment default during the period that occurred within twelve months of the loan modification for the three or nine months ended September 30, 2017 . For the three months ended September 30, 2016 , there were no TDRs and for the nine months ended September 30, 2016 , there were four TDRs with balances of $0.3 million , for which there was a payment default during the period that occurred within twelve months of the loan modification. 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) September 30, 2017 December 31, 2016 Impaired loans Nonaccrual loans (1) Commercial and industrial $ 9,026 $ 2,419 Lease financing 87 195 Construction real estate 824 0 Commercial real estate 12,244 6,098 Residential real estate 4,333 5,251 Home equity 3,364 3,400 Installment 240 367 Credit card 0 0 Nonaccrual loans (1) 30,118 17,730 Accruing troubled debt restructurings 19,692 30,240 Total impaired loans $ 49,810 $ 47,970 (1) Nonaccrual loans include nonaccrual TDRs of $9.1 million and $5.1 million as of September 30, 2017 and December 31, 2016 , respectively. Three months ended Nine months ended September 30, September 30, (Dollars in thousands) 2017 2016 2017 2016 Interest income effect on impaired loans Gross amount of interest that would have been recorded under original terms $ 761 $ 705 $ 2,735 $ 2,173 Interest included in income Nonaccrual loans 140 97 445 269 Troubled debt restructurings 168 224 563 665 Total interest included in income 308 321 1,008 934 Net impact on interest income $ 453 $ 384 $ 1,727 $ 1,239 First Financial individually reviews all impaired commercial loan relationships greater than $250,000 , as well as consumer loan TDRs greater than $250,000 , to determine if a specific allowance is necessary based on the borrower’s overall financial condition, 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. First Financial's investment in impaired loans was as follows: As of September 30, 2017 As of December 31, 2016 (Dollars in thousands) Current balance Contractual principal balance Related allowance Current balance Contractual Related Loans with no related allowance recorded Commercial and industrial $ 12,146 $ 12,718 $ 0 $ 12,134 $ 12,713 $ 0 Lease financing 87 87 0 195 195 0 Construction real estate 824 824 0 0 0 0 Commercial real estate 23,089 25,607 0 12,232 14,632 0 Residential real estate 7,581 8,935 0 8,412 9,648 0 Home equity 3,978 5,094 0 3,973 5,501 0 Installment 254 426 0 437 603 0 Total 47,959 53,691 0 37,383 43,292 0 Loans with an allowance recorded Commercial and industrial 179 179 179 1,069 1,071 550 Lease financing 0 0 0 0 0 0 Construction real estate 0 0 0 0 0 0 Commercial real estate 508 508 44 8,228 8,277 593 Residential real estate 1,063 1,068 160 1,189 1,189 179 Home equity 101 101 2 101 101 2 Installment 0 0 0 0 0 0 Total 1,851 1,856 385 10,587 10,638 1,324 Total Commercial and industrial 12,325 12,897 179 13,203 13,784 550 Lease financing 87 87 0 195 195 0 Construction real estate 824 824 0 0 0 0 Commercial real estate 23,597 26,115 44 20,460 22,909 593 Residential real estate 8,644 10,003 160 9,601 10,837 179 Home equity 4,079 5,195 2 4,074 5,602 2 Installment 254 426 0 437 603 0 Total $ 49,810 $ 55,547 $ 385 $ 47,970 $ 53,930 $ 1,324 First Financial's average impaired loans by class and interest income recognized by class was as follows: Three months ended September 30, 2017 September 30, 2016 (Dollars in thousands) Average Interest Average Interest Loans with no related allowance recorded Commercial and industrial $ 13,730 $ 63 $ 13,015 $ 83 Lease financing 91 1 155 1 Construction real estate 950 0 0 0 Commercial real estate 23,187 147 14,363 98 Residential real estate 7,569 55 7,887 52 Home equity 3,791 26 4,635 23 Installment 290 1 460 2 Total 49,608 293 40,515 259 Loans with an allowance recorded Commercial and industrial 1,832 2 1,228 8 Lease financing 0 0 536 0 Construction real estate 0 0 0 0 Commercial real estate 652 5 6,704 46 Residential real estate 1,067 7 1,299 7 Home equity 101 1 101 1 Installment 0 0 0 0 Total 3,652 15 9,868 62 Total Commercial and industrial 15,562 65 14,243 91 Lease financing 91 1 691 1 Construction real estate 950 0 0 0 Commercial real estate 23,839 152 21,067 144 Residential real estate 8,636 62 9,186 59 Home equity 3,892 27 4,736 24 Installment 290 1 460 2 Total $ 53,260 $ 308 $ 50,383 $ 321 Nine months ended September 30, 2017 September 30, 2016 (Dollars in thousands) Average Interest Average Interest Loans with no related allowance recorded Commercial and industrial $ 14,669 $ 259 $ 13,990 $ 232 Lease financing 120 3 138 2 Construction real estate 744 0 0 0 Commercial real estate 21,563 451 14,757 259 Residential real estate 7,801 147 7,587 147 Home equity 3,951 77 5,044 65 Installment 351 4 348 5 Total 49,199 941 41,864 710 Loans with an allowance recorded Commercial and industrial 1,463 26 1,106 26 Lease financing 0 0 268 8 Construction real estate 0 0 0 0 Commercial real estate 2,513 18 7,684 163 Residential real estate 1,126 20 1,420 24 Home equity 101 3 101 3 Installment 0 0 0 0 Total 5,203 67 10,579 224 Total Commercial and industrial 16,132 285 15,096 258 Lease financing 120 3 406 10 Construction real estate 744 0 0 0 Commercial real estate 24,076 469 22,441 422 Residential real estate 8,927 167 9,007 171 Home equity 4,052 80 5,145 68 Installment 351 4 348 5 Total $ 54,402 $ 1,008 $ 52,443 $ 934 OREO. OREO consists of properties acquired by the Company primarily through the loan foreclosure or repossession process, or other resolution activity that results in partial or total satisfaction of problem loans. Changes in OREO were as follows: Three months ended Nine months ended September 30, September 30, (Dollars in thousands) 2017 2016 2017 2016 Balance at beginning of period $ 5,961 $ 10,031 $ 6,284 $ 13,254 Additions Commercial and industrial 1,559 936 1,731 1,824 Residential real estate 235 303 2,313 594 Total additions 1,794 1,239 4,044 2,418 Disposals Commercial and industrial (3,684 ) (2,670 ) (5,291 ) (4,763 ) Residential real estate (821 ) (66 ) (1,506 ) (2,145 ) Total disposals (4,505 ) (2,736 ) (6,797 ) (6,908 ) Valuation adjustment Commercial and industrial (102 ) (186 ) (264 ) (332 ) Residential real estate (32 ) (42 ) (151 ) (126 ) Total valuation adjustment (134 ) (228 ) (415 ) (458 ) Balance at end of period $ 3,116 $ 8,306 $ 3,116 $ 8,306 FDIC indemnification asset. The FDIC indemnification asset results from the loss sharing agreements entered into in conjunction with First Financial's FDIC-assisted transactions, and represents expected reimbursements from the FDIC for losses on covered assets. First Financial's FDIC indemnification asset balance was $8.2 million and $12.0 million as of September 30, 2017 and December 31, 2016 , respectively. The accounting for the FDIC indemnification asset is closely related to the accounting for the underlying, indemnified assets as well as the ongoing assessment of the collectibility of the indemnification asset. The primary activities impacting the FDIC indemnification asset are FDIC claims, amortization, FDIC loss sharing income and accelerated discount. For a detailed discussion on the indemnification asset, please refer to the Loans and Leases Note in the 2016 Form 10-K. |