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 C&I, CRE, construction real estate and lease financing. Consumer loan categories include residential real estate, home equity, installment and credit card. Lending activities are primarily concentrated in states where the Bank operates banking centers (Ohio, Indiana, Kentucky and Illinois). First Financial also offers two nationwide lending platforms, one that provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and another that provides loans primarily to insurance agents and brokers that are secured by commissions and cash collateral. 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 June 30, 2018 Commercial Real Estate Lease (Dollars in thousands) & industrial Construction Commercial financing Total Pass $ 2,367,649 $ 543,479 $ 3,794,902 $ 94,763 $ 6,800,793 Special Mention 24,261 11,947 29,399 0 65,607 Substandard 48,686 42 64,692 1,435 114,855 Doubtful 0 0 0 0 0 Total $ 2,440,596 $ 555,468 $ 3,888,993 $ 96,198 $ 6,981,255 (Dollars in thousands) Residential real estate Home equity Installment Credit card Total Performing $ 905,649 $ 828,558 $ 100,422 $ 48,665 $ 1,883,294 Nonperforming 13,255 6,473 304 0 20,032 Total $ 918,904 $ 835,031 $ 100,726 $ 48,665 $ 1,903,326 As of December 31, 2017 Commercial Real Estate Lease (Dollars in thousands) & industrial Construction Commercial financing Total Pass $ 1,882,464 $ 467,687 $ 2,446,999 $ 88,078 $ 4,885,228 Special Mention 6,226 0 4,436 0 10,662 Substandard 24,053 43 38,656 1,269 64,021 Doubtful 0 0 0 0 0 Total $ 1,912,743 $ 467,730 $ 2,490,091 $ 89,347 $ 4,959,911 (Dollars in thousands) Residential real estate Home equity Installment Credit card Total Performing $ 463,459 $ 489,148 $ 41,331 $ 46,691 $ 1,040,629 Nonperforming 7,932 4,456 255 0 12,643 Total $ 471,391 $ 493,604 $ 41,586 $ 46,691 $ 1,053,272 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, 2018 (Dollars in thousands) 30 – 59 60 – 89 > 90 days Total Current Subtotal Purchased impaired Total > 90 days Loans Commercial & industrial $ 1,885 $ 389 $ 2,814 $ 5,088 $ 2,429,204 $ 2,434,292 $ 6,304 $ 2,440,596 $ 0 Lease financing 0 0 0 0 96,198 96,198 0 96,198 0 Construction real estate 447 0 0 447 554,754 555,201 267 555,468 0 Commercial real estate 3,291 1,829 15,999 21,119 3,803,534 3,824,653 64,340 3,888,993 16 Residential real estate 1,962 601 2,945 5,508 872,404 877,912 40,992 918,904 0 Home equity 3,834 750 3,443 8,027 822,359 830,386 4,645 835,031 0 Installment 165 22 263 450 99,669 100,119 607 100,726 0 Credit card 427 216 311 954 47,711 48,665 0 48,665 311 Total $ 12,011 $ 3,807 $ 25,775 $ 41,593 $ 8,725,833 $ 8,767,426 $ 117,155 $ 8,884,581 $ 327 As of December 31, 2017 (Dollars in thousands) 30 – 59 60 – 89 > 90 days Total Current Subtotal Purchased impaired Total > 90 days Loans Commercial & industrial $ 755 $ 1,657 $ 5,078 $ 7,490 $ 1,901,821 $ 1,909,311 $ 3,432 $ 1,912,743 $ 0 Lease financing 485 0 0 485 88,862 89,347 0 89,347 0 Construction real estate 234 0 0 234 467,216 467,450 280 467,730 0 Commercial real estate 1,716 201 8,777 10,694 2,419,969 2,430,663 59,428 2,490,091 0 Residential real estate 526 811 1,992 3,329 430,500 433,829 37,562 471,391 0 Home equity 2,716 394 1,753 4,863 485,127 489,990 3,614 493,604 0 Installment 179 29 205 413 40,529 40,942 644 41,586 0 Credit card 285 87 62 434 46,257 46,691 0 46,691 62 Total $ 6,896 $ 3,179 $ 17,867 $ 27,942 $ 5,880,281 $ 5,908,223 $ 104,960 $ 6,013,183 $ 62 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 205 TDRs totaling $27.8 million at June 30, 2018 , including $21.8 million on accrual status and $5.9 million classified as nonaccrual. First Financial had an insignificant amount of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs, and the ALLL included reserves of $1.1 million related to TDRs at June 30, 2018 . For each of the three and six month periods ended June 30, 2018 and 2017, the Company charged off $0.1 million for the portion of TDRs determined to be uncollectible. Additionally, as of June 30, 2018 , $13.1 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year. First Financial had 214 TDRs totaling $23.9 million at December 31, 2017 , including $17.5 million of loans on accrual status and $6.4 million classified as nonaccrual. First Financial had an insignificant amount of commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2017 , the ALLL included reserves of $1.3 million related to TDRs, and $17.2 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, 2018 and 2017 : Three months ended June 30, 2018 June 30, 2017 (Dollars in thousands) Number of loans Pre-modification loan balance Period end balance Number of loans Pre-modification loan balance Period end balance Commercial & industrial 8 $ 6,221 $ 6,183 4 $ 2,177 $ 2,183 Construction real estate 0 0 0 0 0 0 Commercial real estate 4 2,047 2,016 6 1,506 1,449 Residential real estate 1 201 201 0 0 0 Home equity 0 0 0 0 0 0 Installment 0 0 0 0 0 0 Total 13 $ 8,469 $ 8,400 10 $ 3,683 $ 3,632 Six months ended June 30, 2018 June 30, 2017 (Dollars in thousands) Number of loans Pre-modification loan balance Period end balance Number of loans Pre-modification loan balance Period end balance Commercial & industrial 12 $ 7,149 $ 7,096 6 $ 5,679 $ 5,624 Construction real estate 0 0 0 0 0 0 Commercial real estate 6 2,119 2,088 6 1,506 1,449 Residential real estate 3 294 294 0 0 0 Home equity 0 0 0 0 0 0 Installment 0 0 0 0 0 0 Total 21 $ 9,562 $ 9,478 12 $ 7,185 $ 7,073 The following table provides information on how TDRs were modified during the three and six months ended June 30, 2018 and 2017 : Three months ended Six months ended June 30, June 30, (Dollars in thousands) 2018 2017 2018 2017 Extended maturities $ 2,000 $ 2,587 $ 2,888 $ 3,261 Adjusted interest rates 0 0 52 2,767 Combination of rate and maturity changes 0 180 0 180 Forbearance 6,199 827 6,199 827 Other (1) 201 38 339 38 Total $ 8,400 $ 3,632 $ 9,478 $ 7,073 (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 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 was one TDR, insignificant in amount, for which there was a payment default during the period that occurred within twelve months of the loan modification for the three and six months ended June 30, 2018 . 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 six month periods ended June 30, 2017 . 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) June 30, 2018 December 31, 2017 Impaired loans Nonaccrual loans (1) Commercial & industrial $ 3,448 $ 5,229 Lease financing 0 82 Construction real estate 24 29 Commercial real estate 21,593 10,616 Residential real estate 9,278 4,140 Home equity 5,820 3,743 Installment 299 243 Nonaccrual loans 40,462 24,082 Accruing troubled debt restructurings 21,839 17,545 Total impaired loans $ 62,301 $ 41,627 (1) Nonaccrual loans include nonaccrual TDRs of $5.9 million and $6.4 million as of June 30, 2018 and December 31, 2017 , respectively. Three months ended Six months ended June 30, June 30, (Dollars in thousands) 2018 2017 2018 2017 Interest income effect on impaired loans Gross amount of interest that would have been recorded under original terms $ 1,132 $ 1,158 $ 1,934 $ 1,974 Interest included in income Nonaccrual loans 146 163 226 305 Troubled debt restructurings 189 169 313 395 Total interest included in income 335 332 539 700 Net impact on interest income $ 797 $ 826 $ 1,395 $ 1,274 First Financial individually reviews all impaired commercial loan relationships, 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, 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 June 30, 2018 As of December 31, 2017 (Dollars in thousands) Current balance Contractual principal balance Related allowance Current balance Contractual Related Loans with no related allowance recorded Commercial & industrial $ 10,856 $ 14,647 $ 0 $ 7,162 $ 8,460 $ 0 Lease financing 0 0 0 82 82 0 Construction real estate 24 57 0 29 60 0 Commercial real estate 30,655 36,421 0 18,423 20,837 0 Residential real estate 12,216 14,383 0 6,876 8,145 0 Home equity 6,372 7,311 0 4,356 5,399 0 Installment 304 603 0 255 422 0 Total 60,427 73,422 0 37,183 43,405 0 Loans with an allowance recorded Commercial & industrial 379 379 179 169 169 169 Lease financing 0 0 0 0 0 0 Construction real estate 0 0 0 0 0 0 Commercial real estate 356 356 25 3,119 3,120 448 Residential real estate 1,039 1,039 160 1,056 1,063 160 Home equity 100 100 2 100 100 2 Installment 0 0 0 0 0 0 Total 1,874 1,874 366 4,444 4,452 779 Total Commercial & industrial 11,235 15,026 179 7,331 8,629 169 Lease financing 0 0 0 82 82 0 Construction real estate 24 57 0 29 60 0 Commercial real estate 31,011 36,777 25 21,542 23,957 448 Residential real estate 13,255 15,422 160 7,932 9,208 160 Home equity 6,472 7,411 2 4,456 5,499 2 Installment 304 603 0 255 422 0 Total $ 62,301 $ 75,296 $ 366 $ 41,627 $ 47,857 $ 779 First Financial's average impaired loans by class and interest income recognized by class was as follows: Three months ended June 30, 2018 June 30, 2017 (Dollars in thousands) Average Interest Average Interest Loans with no related allowance recorded Commercial & industrial $ 9,714 $ 73 $ 17,198 $ 87 Lease financing 0 0 98 1 Construction real estate 25 1 1,075 0 Commercial real estate 27,516 140 25,465 144 Residential real estate 9,173 76 7,605 46 Home equity 5,222 27 3,926 27 Installment 305 1 357 1 Total 51,955 318 55,724 306 Loans with an allowance recorded Commercial & industrial 309 6 2,301 11 Lease financing 0 0 0 0 Construction real estate 0 0 0 0 Commercial real estate 358 3 658 8 Residential real estate 1,042 7 1,126 6 Home equity 101 1 101 1 Installment 0 0 0 0 Total 1,810 17 4,186 26 Total Commercial & industrial 10,023 79 19,499 98 Lease financing 0 0 98 1 Construction real estate 25 1 1,075 0 Commercial real estate 27,874 143 26,123 152 Residential real estate 10,215 83 8,731 52 Home equity 5,323 28 4,027 28 Installment 305 1 357 1 Total $ 53,765 $ 335 $ 59,910 $ 332 Six months ended June 30, 2018 June 30, 2017 (Dollars in thousands) Average Interest Average Interest Loans with no related allowance recorded Commercial & industrial $ 8,863 $ 99 $ 15,607 $ 196 Lease financing 27 0 149 2 Construction real estate 26 2 538 0 Commercial real estate 24,485 239 19,939 304 Residential real estate 8,407 123 8,032 92 Home equity 4,933 47 4,111 51 Installment 288 1 413 3 Total 47,029 511 48,789 648 Loans with an allowance recorded Commercial & industrial 262 6 1,094 24 Lease financing 0 0 0 0 Construction real estate 0 0 0 0 Commercial real estate 1,278 6 4,374 13 Residential real estate 1,047 14 1,185 13 Home equity 100 2 101 2 Installment 0 0 0 0 Total 2,687 28 6,754 52 Total Commercial & industrial 9,125 105 16,701 220 Lease financing 27 0 149 2 Construction real estate 26 2 538 0 Commercial real estate 25,763 245 24,313 317 Residential real estate 9,454 137 9,217 105 Home equity 5,033 49 4,212 53 Installment 288 1 413 3 Total $ 49,716 $ 539 $ 55,543 $ 700 Acquired loans. Acquired loans are recorded at their estimated fair value at the time of acquisition. Estimated fair values for acquired loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, interest rate, term of loan, whether or not the loan was amortizing and a discount rate reflecting the Company's assessment of risk inherent in the cash flow estimates. Acquired loans are grouped together according to similar characteristics and treated in the aggregate when applying various valuation techniques. First Financial evaluates acquired loans for impairment in accordance with the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Acquired loans with evidence of credit deterioration since origination are accounted for under FASB ASC Topic 310-30 and are referred to as purchased impaired loans. 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 $117.2 million at June 30, 2018 , which included $24.1 million acquired in the merger with MSFG. Accretable yield, or income expected to be collected, and nonaccretable yield on the purchase impaired loans acquired in the MSFG merger was $1.2 million and $2.7 million , respectively, on the date of acquisition. First Financial had $105.0 million of purchased impaired loans at December 31, 2017 . Acquired loans outside of the scope of FASB ASC Topic 310-30 are accounted for under FASB ASC Topic 310-20, Receivables-Nonrefundable Fees and Costs. In its merger with MSFG, First Financial acquired loans with a fair value of $2.7 billion and gross contractual amounts receivable of $2.9 billion on the date of acquisition that were accounted for in accordance with FASB ASC Topic 310-20. 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 Six months ended June 30, June 30, (Dollars in thousands) 2018 2017 2018 2017 Balance at beginning of period $ 1,065 $ 5,300 $ 2,781 $ 6,284 Additions Commercial & industrial 1,020 50 1,190 172 Residential real estate 525 1,913 984 2,078 Total additions 1,545 1,963 2,174 2,250 Disposals Commercial & industrial (326 ) (682 ) (2,430 ) (1,607 ) Residential real estate (292 ) (448 ) (410 ) (685 ) Total disposals (618 ) (1,130 ) (2,840 ) (2,292 ) Valuation adjustment Commercial & industrial 0 (116 ) (97 ) (162 ) Residential real estate (139 ) (56 ) (165 ) (119 ) Total valuation adjustment (139 ) (172 ) (262 ) (281 ) Balance at end of period $ 1,853 $ 5,961 $ 1,853 $ 5,961 |