NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The Consolidated Financial Statements of First Financial Bancorp., a financial holding company principally serving Ohio, Indiana, Kentucky and Illinois, include the accounts and operations of First Financial and its wholly-owned subsidiary, First Financial Bank. 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.
These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and accompanying notes necessary to constitute a complete set of financial statements required by GAAP and should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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, 2019 has been derived from the audited financial statements in the Company’s 2019 Form 10-K.
Use of estimates. 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.
COVID-19. In the first nine months of 2020, First Financial's operations and financial results were significantly impacted by the COVID-19 pandemic. The spread of COVID-19 has caused significant economic disruption throughout the United States as state and local governments issued stay at home orders and temporarily closed non-essential businesses. The potential financial impact from the pandemic is unknown at this time, however prolonged disruption may adversely impact several industries within the Company's geographic footprint and impair the ability of First Financial's customers to fulfill their contractual obligations to the Company. This could cause First Financial to experience a material adverse effect on business operations, asset valuations, financial condition and results of operations. Material adverse impacts may include all or a combination of valuation impairments on First Financial's intangible assets, investments, loans, mortgage servicing rights or counter-party risk derivatives.
Investment securities. First Financial classifies debt securities into three categories: HTM, trading and AFS. Management classifies investment securities into the appropriate category at the time of purchase and re-evaluates that classification as deemed appropriate.
Investment securities are classified as HTM when First Financial has the positive intent and ability to hold the securities to maturity. HTM securities are recorded at amortized cost.
Investment securities classified as trading are held principally for resale in the near-term and are recorded at fair value. Fair value is determined using quoted market prices. Gains or losses on trading securities, both realized and unrealized, are reported in noninterest income.
Investment securities not classified as either HTM or trading are classified as AFS. AFS securities are recorded at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of accumulated other comprehensive income (loss) in shareholders' equity.
The amortized cost of investment securities classified as either HTM or AFS is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion are considered an adjustment to the yield on the security and included in interest income from investments. Interest and dividends are also included in interest income from investment securities in the Consolidated Statements of Income. Realized gains and losses are based on the amortized cost of the security sold using the specific identification method.
Allowance for credit losses - held-to-maturity securities. Management measures expected credit losses on held-to-maturity debt securities on a collective basis by security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management classifies the held-to-maturity portfolio into the following major security types: Mortgage-backed, CMOs and Obligations of state and other political subdivisions.
Nearly all of the HTM securities held by the Company are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The remainder of the Company's HTM securities are non-agency collateralized mortgage obligations and obligations of state and other political subdivisions which currently carry ratings no lower than A+. Accrued interest receivable on held-to maturity debt securities, which totaled $0.2 million as of September 30, 2020, is excluded by policy election from the estimate of credit losses.
Allowance for credit losses - available-for-sale securities. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.
If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities, which totaled $11.7 million as of September 30, 2020, is excluded from the estimate of credit losses.
Allowance for credit losses - loans and leases. The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Management's determination of the adequacy of the ACL is based on an assessment of the expected credit losses on loan and leases over the expected life of the loan. The ACL is increased by provision expense and decreased by charge-offs, net of recoveries of amounts previously charged-off. Loans are charged off when management believes that the collection of the principal amount owed in full, either through payments from the borrower or a guarantor or from the liquidation of collateral, is unlikely. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Any interest that is accrued but not collected is reversed against interest income when a loan is placed on nonaccrual status, which typically occurs prior to charging off all, or a portion, of a loan. The Company made the policy election to exclude accrued interest receivable on loans and leases from the estimate of credit losses.
Management estimates the allowance balance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience paired with economic forecasts provide the basis for the quantitatively modeled estimation of expected credit losses. First Financial adjusts its quantitative model, as necessary, to reflect conditions not already considered by the quantitative model. These adjustments are commonly known as the Qualitative Framework.
First Financial quantitatively models expected credit loss using PD, LGD and EAD over the R&S forecast period, reversion and post-reversion periods.
Utilizing third-party software, the Bank forecasts PD by using a parameterized transition matrix approach. Average transition matrices are calculated over the TTC period, which was defined as the period from December 2007 to December 2016. TTC transition matrices are adjusted under forward-looking macroeconomic expectations to obtain R&S forecasts.
First Financial is not required to develop forecasts over full the contractual term of the financial asset or group of financial assets. Rather, for periods beyond which the entity is able to make or obtain R&S forecasts of expected credit losses, the Company reverts in a straight line manner over a one year period to an average TTC loss level that is reflective of the
prepayment adjusted contractual term of the financial asset or group of financial assets. The R&S period, elected by the bank to be two years, is forecasted using econometric data sourced from Moody's, an industry-leading independent third party.
FFB utilizes a non-parametric loss curve approach embedded within a third-party software for estimating LGD. The PD multiplied by LGD produces an expected loss rate that, when calculating the ACL, is applied to contractual loan cash flows, adjusted for expected future rates of principal prepayments.
The Company adjusts its quantitative model for certain qualitative factors to reflect the extent to which management expects current conditions and R&S forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The Qualitative Framework reflects changes related to relevant data, such as changes in asset quality trends, portfolio growth and composition, national and local economic factors, credit policy and administration and other factors not considered in the base quantitative model.
Loans that do not share risk characteristics are evaluated on an individual basis. First Financial will typically evaluate on an individual basis any loans that are on nonaccrual, designated as a TDR, or reasonably expected to be designated as a TDR. When management determines that foreclosure is probable or when repayment is expected to be provided substantially through the operation or sale of underlying collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs. For loans evaluated on an individual basis that are not determined to be collateral dependent, a discounted cash flow analysis is performed to determine expected credit losses.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Credit card receivables do not have stated maturities. In determining the estimated life of a credit card receivable, management first estimates the future cash flows expected to be received and then applies those expected future cash flows to the credit card balance.
Allowance for credit losses - unfunded commitments. Effective January 1, 2020, First Financial adopted ASC 326, at which time First Financial estimated expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life consistent with the Company's ACL methodology for loans and leases. Adjustments to the reserve for unfunded commitments are recorded in Provision for credit losses - unfunded commitments in the Consolidated Statements of Income.
Prior to the adoption of ASC 326, First Financial maintained its reserve to absorb probable losses incurred in standby letters of credit and outstanding loan commitments. First Financial determined the adequacy of this reserve based upon an evaluation of the unfunded credit facilities, which included consideration of historical commitment utilization experience, credit risk ratings and historical loss rates, consistent with the Company's ALLL methodology at the time.
NOTE 2: ACCOUNTING STANDARDS RECENTLY ADOPTED OR ISSUED
Standards Adopted in 2020
On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the previously required incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities that management does not intend to sell or believes that it is more likely than not they will be required to sell. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $56.9 million as of January 1, 2020 for the cumulative effect of
adopting ASC 326. As detailed in the following table, the transition adjustment included a $61.5 million increase to ACL, a $12.2 million increase in the ACL for unfunded commitments and a $16.8 million decrease in deferred tax liabilities.
The Company adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as purchased credit impaired and accounted for under ASC 310-30. In accordance with the standard, First Financial did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption.
The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. First Financial is adopting the capital transition relief over the five year permissible period.
The impact of adopting ASC 326 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2020
|
(dollars in thousands)
|
|
As Reported under ASC 326
|
|
Pre-ASC 326
|
|
Impact of ASC 326 Adoption
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
28,485
|
|
|
$
|
18,584
|
|
|
$
|
9,901
|
|
Lease financing
|
|
1,089
|
|
971
|
|
118
|
Construction real estate
|
|
13,960
|
|
2,381
|
|
11,579
|
Commercial real estate
|
|
47,697
|
|
23,579
|
|
24,118
|
Residential real estate
|
|
10,789
|
|
5,299
|
|
5,490
|
Home equity
|
|
13,217
|
|
4,787
|
|
8,430
|
Installment
|
|
1,193
|
|
392
|
|
801
|
Credit card
|
|
2,725
|
|
1,657
|
|
1,068
|
Allowance for credit losses on loans
|
|
$
|
119,155
|
|
|
$
|
57,650
|
|
|
$
|
61,505
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Deferred tax liability
|
|
$
|
16,252
|
|
|
$
|
33,030
|
|
|
$
|
(16,778)
|
|
Allowance for credit losses on OBS credit exposures
|
|
12,740
|
|
585
|
|
12,155
|
For more information on the calculation of the ACL, please refer to Note 1 - Summary of Significant Accounting Policies and Note 5 - Allowance for Credit Losses.
During the first quarter of 2020, the Company adopted ASU No. 2018-13, Disclosure Framework: Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Under the changes, entities are no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but must disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This update did not have a material impact on the Company’s Consolidated Financial Statements.
NOTE 3: INVESTMENTS
For the three months ended September 30, 2020, there were sales of $1.3 million of AFS securities with insignificant gross realized gains and gross realized losses. For the three months ended September 30, 2019, proceeds on the sale of $284.9 million of AFS securities resulted in $1.2 million in gross realized gains and $1.1 million in gross realized losses. For the nine months ended September 30, 2020, there were sales of $42.6 million of AFS securities with $0.1 million in gross realized gains and $0.2 million in gross realized losses. For the nine months ended September 30, 2019, there were $400.5 million sales of AFS securities with $1.9 million in gross realized gains and $1.8 million in gross realized losses. In conjunction with the
adoption of ASU 2017-12 in the first quarter of 2019, First Financial reclassified $268.7 million of HTM securities to AFS resulting in a $0.2 million realized loss recorded in the Consolidated Statement of Income.
The following is a summary of HTM and AFS investment securities as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
99
|
|
|
$
|
4
|
|
|
$
|
0
|
|
|
$
|
103
|
|
Securities of U.S. government agencies and corporations
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
59
|
|
|
1
|
|
|
0
|
|
|
60
|
|
Mortgage-backed securities - residential
|
|
16,069
|
|
|
250
|
|
|
0
|
|
|
16,319
|
|
|
393,395
|
|
|
16,084
|
|
|
(59)
|
|
|
409,420
|
|
Mortgage-backed securities - commercial
|
|
84,701
|
|
|
3,834
|
|
|
0
|
|
|
88,535
|
|
|
550,408
|
|
|
10,943
|
|
|
(4,791)
|
|
|
556,560
|
|
Collateralized mortgage obligations
|
|
6,987
|
|
|
93
|
|
|
0
|
|
|
7,080
|
|
|
680,581
|
|
|
25,891
|
|
|
(339)
|
|
|
706,133
|
|
Obligations of state and other political subdivisions
|
|
10,315
|
|
|
1,192
|
|
|
0
|
|
|
11,507
|
|
|
761,589
|
|
|
41,007
|
|
|
(599)
|
|
|
801,997
|
|
Asset-backed securities
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
433,811
|
|
|
2,963
|
|
|
(2,978)
|
|
|
433,796
|
|
Other securities
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
95,995
|
|
|
1,496
|
|
|
(597)
|
|
|
96,894
|
|
Total
|
|
$
|
118,072
|
|
|
$
|
5,369
|
|
|
$
|
0
|
|
|
$
|
123,441
|
|
|
$
|
2,915,937
|
|
|
$
|
98,389
|
|
|
$
|
(9,363)
|
|
|
$
|
3,004,963
|
|
The following is a summary of HTM and AFS investment securities as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
99
|
|
|
$
|
1
|
|
|
$
|
0
|
|
|
$
|
100
|
|
Securities of U.S. government agencies and corporations
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
156
|
|
|
2
|
|
|
0
|
|
|
158
|
|
Mortgage-backed securities - residential
|
|
20,818
|
|
|
122
|
|
|
(174)
|
|
|
20,766
|
|
|
421,945
|
|
|
9,709
|
|
|
(99)
|
|
|
431,555
|
|
Mortgage-backed securities - commercial
|
|
101,267
|
|
|
571
|
|
|
(1,225)
|
|
|
100,613
|
|
|
474,174
|
|
|
4,988
|
|
|
(2,644)
|
|
|
476,518
|
|
Collateralized mortgage obligations
|
|
9,763
|
|
|
0
|
|
|
(108)
|
|
|
9,655
|
|
|
769,076
|
|
|
16,753
|
|
|
(385)
|
|
|
785,444
|
|
Obligations of state and other political subdivisions
|
|
11,014
|
|
|
804
|
|
|
(31)
|
|
|
11,787
|
|
|
652,986
|
|
|
23,729
|
|
|
(462)
|
|
|
676,253
|
|
Asset-backed securities
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
400,081
|
|
|
1,414
|
|
|
(1,064)
|
|
|
400,431
|
|
Other securities
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
79,781
|
|
|
1,959
|
|
|
(115)
|
|
|
81,625
|
|
Total
|
|
$
|
142,862
|
|
|
$
|
1,497
|
|
|
$
|
(1,538)
|
|
|
$
|
142,821
|
|
|
$
|
2,798,298
|
|
|
$
|
58,555
|
|
|
$
|
(4,769)
|
|
|
$
|
2,852,084
|
|
The following table provides a summary of investment securities by contractual maturity as of September 30, 2020, except for residential and commercial mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, which are shown as single totals due to the unpredictability of the timing in principal repayments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
Available-for-sale
|
(Dollars in thousands)
|
|
Amortized
cost
|
|
Fair
value
|
|
Amortized
cost
|
|
Fair
value
|
By Contractual Maturity:
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,098
|
|
|
$
|
4,133
|
|
Due after one year through five years
|
|
0
|
|
|
0
|
|
|
53,902
|
|
|
55,486
|
|
Due after five years through ten years
|
|
5,784
|
|
|
6,864
|
|
|
183,872
|
|
|
190,863
|
|
Due after ten years
|
|
4,531
|
|
|
4,643
|
|
|
615,870
|
|
|
648,572
|
|
Mortgage-backed securities - residential
|
|
16,069
|
|
|
16,319
|
|
|
393,395
|
|
|
409,420
|
|
Mortgage-backed securities - commercial
|
|
84,701
|
|
|
88,535
|
|
|
550,408
|
|
|
556,560
|
|
Collateralized mortgage obligations
|
|
6,987
|
|
|
7,080
|
|
|
680,581
|
|
|
706,133
|
|
Asset-backed securities
|
|
0
|
|
|
0
|
|
|
433,811
|
|
|
433,796
|
|
Total
|
|
$
|
118,072
|
|
|
$
|
123,441
|
|
|
$
|
2,915,937
|
|
|
$
|
3,004,963
|
|
Unrealized 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. For securities in an unrealized loss position, the Company first assesses whether it intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.
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 September 30, 2020 or December 31, 2019.
As of September 30, 2020, the Company's investment securities portfolio consisted of 1,291 securities, of which 119 were in an unrealized loss position. As of December 31, 2019, the Company's investment securities portfolio consisted of 1,273 securities, of which 140 were in an unrealized loss position.
Primarily all of First Financial’s HTM debt securities are issued by U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. The remainder of the Company's HTM securities are non-agency collateralized mortgage obligations and obligations of state and other political subdivisions which currently carry ratings no lower than A+. There were no HTM securities on nonaccrual status, past due or in a loss position as of September 30, 2020. Therefore, the Company did not record an allowance for credit losses for these securities as of September 30, 2020.
The following tables provide the fair value and gross unrealized losses on investment securities in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by investment category and the length of time the individual securities have been in a continuous loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
(Dollars in thousands)
|
|
Fair
value
|
|
Unrealized
loss
|
|
Fair
value
|
|
Unrealized
loss
|
|
Fair
value
|
|
Unrealized
loss
|
U.S. Treasuries
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Securities of U.S. Government agencies and corporations
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Mortgage-backed securities - residential
|
|
20,145
|
|
|
(59)
|
|
|
0
|
|
|
0
|
|
|
20,145
|
|
|
(59)
|
|
Mortgage-backed securities - commercial
|
|
145,885
|
|
|
(1,568)
|
|
|
44,164
|
|
|
(3,223)
|
|
|
190,049
|
|
|
(4,791)
|
|
Collateralized mortgage obligations
|
|
42,042
|
|
|
(339)
|
|
|
1
|
|
|
0
|
|
|
42,043
|
|
|
(339)
|
|
Obligations of state and other political subdivisions
|
|
81,678
|
|
|
(599)
|
|
|
0
|
|
|
0
|
|
|
81,678
|
|
|
(599)
|
|
Asset-backed securities
|
|
138,610
|
|
|
(1,307)
|
|
|
97,031
|
|
|
(1,671)
|
|
|
235,641
|
|
|
(2,978)
|
|
Other securities
|
|
19,033
|
|
|
(349)
|
|
|
4,577
|
|
|
(248)
|
|
|
23,610
|
|
|
(597)
|
|
Total
|
|
$
|
447,393
|
|
|
$
|
(4,221)
|
|
|
$
|
145,773
|
|
|
$
|
(5,142)
|
|
|
$
|
593,166
|
|
|
$
|
(9,363)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
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
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Securities of U.S. Government agencies and corporations
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Mortgage-backed securities - residential
|
|
40,190
|
|
|
(209)
|
|
|
11,063
|
|
|
(64)
|
|
|
51,253
|
|
|
(273)
|
|
Mortgage-backed securities - commercial
|
|
111,658
|
|
|
(298)
|
|
|
104,069
|
|
|
(3,571)
|
|
|
215,727
|
|
|
(3,869)
|
|
Collateralized mortgage obligations
|
|
85,248
|
|
|
(297)
|
|
|
30,628
|
|
|
(196)
|
|
|
115,876
|
|
|
(493)
|
|
Obligations of state and other political subdivisions
|
|
118,623
|
|
|
(457)
|
|
|
7,950
|
|
|
(36)
|
|
|
126,573
|
|
|
(493)
|
|
Asset-backed securities
|
|
125,889
|
|
|
(553)
|
|
|
54,963
|
|
|
(511)
|
|
|
180,852
|
|
|
(1,064)
|
|
Other securities
|
|
0
|
|
|
0
|
|
|
5,649
|
|
|
(115)
|
|
|
5,649
|
|
|
(115)
|
|
Total
|
|
$
|
481,608
|
|
|
$
|
(1,814)
|
|
|
$
|
214,322
|
|
|
$
|
(4,493)
|
|
|
$
|
695,930
|
|
|
$
|
(6,307)
|
|
For further detail on the fair value of investment securities, see Note 16 – Fair Value Disclosures.
NOTE 4: LOANS AND LEASES
First Financial offers clients a variety of commercial and consumer loan and lease products with diverse 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 primarily provides loans that are secured by commissions and cash collateral to insurance agents and brokers.
In accordance with the CARES Act, First Financial participated in offering PPP loans to its customers. These loans provide a direct incentive for small businesses to keep their workers on the payroll and to maintain their operations. PPP loans are eligible to be forgiven provided certain conditions are met. As of September 30, 2020, First Financial had $886.1 million in PPP loans, net of unearned fees of $24.2 million.
Credit Quality. To facilitate the monitoring of credit quality for commercial loans, 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, lease or 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.
The following table sets forth the Company's loan portfolio at September 30, 2020 by risk attribute and origination date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Term Total
|
|
Revolving
|
|
Total
|
Commercial & industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
1,254,361
|
|
|
$
|
502,248
|
|
|
$
|
384,079
|
|
|
$
|
242,588
|
|
|
$
|
153,411
|
|
|
$
|
152,890
|
|
|
$
|
2,689,577
|
|
|
$
|
468,883
|
|
|
$
|
3,158,460
|
|
Special mention
|
|
21,981
|
|
|
6,871
|
|
|
16,363
|
|
|
13,925
|
|
|
2,366
|
|
|
8,325
|
|
|
69,831
|
|
|
10,570
|
|
|
80,401
|
|
Substandard
|
|
4,513
|
|
|
1,086
|
|
|
7,802
|
|
|
25,010
|
|
|
6,804
|
|
|
1,626
|
|
|
46,841
|
|
|
6,611
|
|
|
53,452
|
|
Doubtful
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
1,280,855
|
|
|
$
|
510,205
|
|
|
$
|
408,244
|
|
|
$
|
281,523
|
|
|
$
|
162,581
|
|
|
$
|
162,841
|
|
|
$
|
2,806,249
|
|
|
$
|
486,064
|
|
|
$
|
3,292,313
|
|
Lease financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
11,084
|
|
|
$
|
30,564
|
|
|
$
|
13,872
|
|
|
$
|
7,983
|
|
|
$
|
5,971
|
|
|
$
|
3,367
|
|
|
$
|
72,841
|
|
|
$
|
0
|
|
|
$
|
72,841
|
|
Special mention
|
|
317
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
317
|
|
0
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Term Total
|
|
Revolving
|
|
Total
|
Substandard
|
|
9
|
|
0
|
|
476
|
|
822
|
|
277
|
|
0
|
|
1,584
|
|
0
|
|
1,584
|
|
Doubtful
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Total
|
|
$
|
11,410
|
|
|
$
|
30,564
|
|
|
$
|
14,348
|
|
|
$
|
8,805
|
|
|
$
|
6,248
|
|
|
$
|
3,367
|
|
|
$
|
74,742
|
|
|
$
|
0
|
|
|
$
|
74,742
|
|
Construction real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
53,598
|
|
|
$
|
211,962
|
|
|
$
|
223,732
|
|
|
$
|
34,952
|
|
|
$
|
23,987
|
|
|
$
|
990
|
|
|
$
|
549,221
|
|
|
$
|
15,822
|
|
|
$
|
565,043
|
|
Special mention
|
|
0
|
|
|
621
|
|
|
0
|
|
|
9,984
|
|
|
0
|
|
|
0
|
|
|
10,605
|
|
|
0
|
|
|
10,605
|
|
Substandard
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Doubtful
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
53,598
|
|
|
$
|
212,583
|
|
|
$
|
223,732
|
|
|
$
|
44,936
|
|
|
$
|
23,987
|
|
|
$
|
990
|
|
|
$
|
559,826
|
|
|
$
|
15,822
|
|
|
$
|
575,648
|
|
Commercial real estate - investor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
379,720
|
|
|
$
|
1,096,225
|
|
|
$
|
445,501
|
|
|
$
|
451,095
|
|
|
$
|
327,564
|
|
|
$
|
431,524
|
|
|
$
|
3,131,629
|
|
|
$
|
39,470
|
|
|
$
|
3,171,099
|
|
Special mention
|
|
952
|
|
|
56
|
|
|
0
|
|
|
15,178
|
|
|
16,873
|
|
|
8,697
|
|
|
41,756
|
|
|
559
|
|
|
42,315
|
|
Substandard
|
|
6,198
|
|
|
2,562
|
|
|
17,861
|
|
|
7,241
|
|
|
94
|
|
|
15,843
|
|
|
49,799
|
|
|
0
|
|
|
49,799
|
|
Doubtful
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
386,870
|
|
|
$
|
1,098,843
|
|
|
$
|
463,362
|
|
|
$
|
473,514
|
|
|
$
|
344,531
|
|
|
$
|
456,064
|
|
|
$
|
3,223,184
|
|
|
$
|
40,029
|
|
|
$
|
3,263,213
|
|
Commercial real estate - owner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
155,486
|
|
|
$
|
180,808
|
|
|
$
|
153,043
|
|
|
$
|
144,601
|
|
|
$
|
140,566
|
|
|
$
|
219,723
|
|
|
$
|
994,227
|
|
|
$
|
40,541
|
|
|
$
|
1,034,768
|
|
Special mention
|
|
2,048
|
|
|
1,946
|
|
|
13,043
|
|
|
4,903
|
|
|
4,540
|
|
|
11,873
|
|
|
38,353
|
|
|
59
|
|
|
38,412
|
|
Substandard
|
|
647
|
|
|
520
|
|
|
851
|
|
|
4,907
|
|
|
446
|
|
|
3,361
|
|
|
10,732
|
|
|
0
|
|
|
10,732
|
|
Doubtful
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
158,181
|
|
|
$
|
183,274
|
|
|
$
|
166,937
|
|
|
$
|
154,411
|
|
|
$
|
145,552
|
|
|
$
|
234,957
|
|
|
$
|
1,043,312
|
|
|
$
|
40,600
|
|
|
$
|
1,083,912
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
228,049
|
|
|
$
|
265,023
|
|
|
$
|
133,562
|
|
|
$
|
74,811
|
|
|
$
|
68,109
|
|
|
$
|
250,625
|
|
|
$
|
1,020,179
|
|
|
$
|
0
|
|
|
$
|
1,020,179
|
|
Nonperforming
|
|
242
|
|
|
526
|
|
|
642
|
|
|
509
|
|
|
88
|
|
|
5,516
|
|
|
7,523
|
|
|
0
|
|
|
7,523
|
|
Total
|
|
$
|
228,291
|
|
|
$
|
265,549
|
|
|
$
|
134,204
|
|
|
$
|
75,320
|
|
|
$
|
68,197
|
|
|
$
|
256,141
|
|
|
$
|
1,027,702
|
|
|
$
|
0
|
|
|
$
|
1,027,702
|
|
Home equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
45,297
|
|
|
$
|
22,107
|
|
|
$
|
19,391
|
|
|
$
|
12,418
|
|
|
$
|
10,704
|
|
|
$
|
46,839
|
|
|
$
|
156,756
|
|
|
$
|
594,615
|
|
|
$
|
751,371
|
|
Nonperforming
|
|
0
|
|
|
0
|
|
|
75
|
|
|
39
|
|
|
29
|
|
|
204
|
|
|
347
|
|
|
3,025
|
|
|
3,372
|
|
Total
|
|
$
|
45,297
|
|
|
$
|
22,107
|
|
|
$
|
19,466
|
|
|
$
|
12,457
|
|
|
$
|
10,733
|
|
|
$
|
47,043
|
|
|
$
|
157,103
|
|
|
$
|
597,640
|
|
|
$
|
754,743
|
|
Installment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
18,610
|
|
|
$
|
17,887
|
|
|
$
|
12,809
|
|
|
$
|
10,367
|
|
|
$
|
2,582
|
|
|
$
|
3,708
|
|
|
$
|
65,963
|
|
|
$
|
18,557
|
|
|
$
|
84,520
|
|
Nonperforming
|
|
9
|
|
|
29
|
|
|
25
|
|
|
21
|
|
|
21
|
|
|
4
|
|
|
109
|
|
|
0
|
|
|
109
|
|
Total
|
|
$
|
18,619
|
|
|
$
|
17,916
|
|
|
$
|
12,834
|
|
|
$
|
10,388
|
|
|
$
|
2,603
|
|
|
$
|
3,712
|
|
|
$
|
66,072
|
|
|
$
|
18,557
|
|
|
$
|
84,629
|
|
Credit cards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
43,426
|
|
|
$
|
43,426
|
|
Nonperforming
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
481
|
|
|
481
|
|
Total
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
43,907
|
|
|
$
|
43,907
|
|
Grand Total
|
|
$
|
2,183,121
|
|
|
$
|
2,341,041
|
|
|
$
|
1,443,127
|
|
|
$
|
1,061,354
|
|
|
$
|
764,432
|
|
|
$
|
1,165,115
|
|
|
$
|
8,958,190
|
|
|
$
|
1,242,619
|
|
|
$
|
10,200,809
|
|
Commercial and consumer credit exposure by risk attribute as of December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Commercial
|
|
Real Estate
|
|
Lease
|
|
|
(Dollars in thousands)
|
|
& industrial
|
|
Construction
|
|
Commercial
|
|
financing
|
|
Total
|
Pass
|
|
$
|
2,324,021
|
|
|
$
|
493,182
|
|
|
$
|
4,108,752
|
|
|
$
|
85,262
|
|
|
$
|
7,011,217
|
|
Special Mention
|
|
100,954
|
|
|
0
|
|
|
59,383
|
|
|
488
|
|
|
160,825
|
|
Substandard
|
|
40,902
|
|
|
0
|
|
|
26,516
|
|
|
2,614
|
|
|
70,032
|
|
Doubtful
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
2,465,877
|
|
|
$
|
493,182
|
|
|
$
|
4,194,651
|
|
|
$
|
88,364
|
|
|
$
|
7,242,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Residential
real estate
|
|
Home equity
|
|
Installment
|
|
Credit card
|
|
Total
|
Performing
|
|
$
|
1,040,787
|
|
|
$
|
766,169
|
|
|
$
|
82,385
|
|
|
$
|
48,983
|
|
|
$
|
1,938,324
|
|
Nonperforming
|
|
15,162
|
|
|
5,700
|
|
|
204
|
|
|
201
|
|
|
21,267
|
|
Total
|
|
$
|
1,055,949
|
|
|
$
|
771,869
|
|
|
$
|
82,589
|
|
|
$
|
49,184
|
|
|
$
|
1,959,591
|
|
Delinquency. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the date of the scheduled payment.
Loan delinquency, including loans classified as nonaccrual, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
(Dollars in thousands)
|
|
30 – 59
days
past due
|
|
60 – 89
days
past due
|
|
> 90 days
past due
|
|
Total
past
due
|
|
Current
|
|
Total
|
|
> 90 days
past due
and still
accruing
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
54
|
|
|
$
|
133
|
|
|
$
|
2,181
|
|
|
$
|
2,368
|
|
|
$
|
3,289,945
|
|
|
$
|
3,292,313
|
|
|
$
|
0
|
|
Lease financing
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
74,742
|
|
|
74,742
|
|
|
0
|
|
Construction real estate
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
575,648
|
|
|
575,648
|
|
|
0
|
|
Commercial real estate-investor
|
|
84
|
|
|
7,895
|
|
|
1,286
|
|
|
9,265
|
|
|
3,253,948
|
|
|
3,263,213
|
|
|
0
|
|
Commercial real estate-owner
|
|
755
|
|
|
0
|
|
|
1,051
|
|
|
1,806
|
|
|
1,082,106
|
|
|
1,083,912
|
|
|
0
|
|
Residential real estate
|
|
2,816
|
|
|
340
|
|
|
4,368
|
|
|
7,524
|
|
|
1,020,178
|
|
|
1,027,702
|
|
|
0
|
|
Home equity
|
|
1,468
|
|
|
319
|
|
|
1,585
|
|
|
3,372
|
|
|
751,371
|
|
|
754,743
|
|
|
0
|
|
Installment
|
|
50
|
|
|
20
|
|
|
38
|
|
|
108
|
|
|
84,521
|
|
|
84,629
|
|
|
0
|
|
Credit card
|
|
215
|
|
|
183
|
|
|
83
|
|
|
481
|
|
|
43,426
|
|
|
43,907
|
|
|
79
|
|
Total
|
|
$
|
5,442
|
|
|
$
|
8,890
|
|
|
$
|
10,592
|
|
|
$
|
24,924
|
|
|
$
|
10,175,885
|
|
|
$
|
10,200,809
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
(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 & industrial
|
|
$
|
1,266
|
|
|
$
|
3,332
|
|
|
$
|
14,518
|
|
|
$
|
19,116
|
|
|
$
|
2,443,680
|
|
|
$
|
2,462,796
|
|
|
$
|
3,081
|
|
|
$
|
2,465,877
|
|
|
$
|
0
|
|
Lease financing
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
88,364
|
|
|
88,364
|
|
|
0
|
|
|
88,364
|
|
|
0
|
|
Construction real estate
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
493,167
|
|
|
493,167
|
|
|
15
|
|
|
493,182
|
|
|
0
|
|
Commercial real estate
|
|
776
|
|
|
857
|
|
|
5,613
|
|
|
7,246
|
|
|
4,151,513
|
|
|
4,158,759
|
|
|
35,892
|
|
|
4,194,651
|
|
|
0
|
|
Residential real estate
|
|
8,032
|
|
|
1,928
|
|
|
5,031
|
|
|
14,991
|
|
|
1,014,138
|
|
|
1,029,129
|
|
|
26,820
|
|
|
1,055,949
|
|
|
0
|
|
Home equity
|
|
2,530
|
|
|
1,083
|
|
|
2,795
|
|
|
6,408
|
|
|
762,863
|
|
|
769,271
|
|
|
2,598
|
|
|
771,869
|
|
|
0
|
|
Installment
|
|
111
|
|
|
50
|
|
|
148
|
|
|
309
|
|
|
82,022
|
|
|
82,331
|
|
|
258
|
|
|
82,589
|
|
|
0
|
|
Credit card
|
|
208
|
|
|
75
|
|
|
201
|
|
|
484
|
|
|
48,700
|
|
|
49,184
|
|
|
0
|
|
|
49,184
|
|
|
201
|
|
Total
|
|
$
|
12,923
|
|
|
$
|
7,325
|
|
|
$
|
28,306
|
|
|
$
|
48,554
|
|
|
$
|
9,084,447
|
|
|
$
|
9,133,001
|
|
|
$
|
68,664
|
|
|
$
|
9,201,665
|
|
|
$
|
201
|
|
For PCD assets, the delinquency status was determined individually for each loan in accordance with the individual loan's contractual repayment terms. Prior to the adoption of CECL in the first quarter of 2020, PCI loans were classified as performing, even though they may have been contractually past due, as any nonpayment of contractual principal or interest was considered in the periodic re-estimation of expected cash flows and was included in the resulting recognition of current period provision for credit losses or prospective yield adjustments.
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 none of the principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual principal and interest.
Troubled Debt Restructurings. A loan modification is considered a TDR when the borrower is experiencing financial difficulty and a concession is 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. In accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, performing loans that demonstrated limited signs of credit deterioration, but were modified to provide borrowers relief during the COVID-19 pandemic were not considered to be TDR as of September 30, 2020.
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 169 TDRs totaling $37.1 million at September 30, 2020, including $7.8 million on accrual status and $29.3 million classified as nonaccrual. First Financial had $0.2 million of commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs, and the ACL included reserves of $5.7 million related to TDRs at September 30, 2020. Additionally, as of September 30, 2020, $5.4 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year.
First Financial had 157 TDRs totaling $30.0 million at December 31, 2019, including $11.4 million of loans on accrual status and $18.5 million classified as nonaccrual. First Financial had $2.5 million commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2019, the ALLL included reserves of $2.5 million related to TDRs, and $4.7 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, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
(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
|
|
1
|
|
|
$
|
1,480
|
|
|
$
|
1,480
|
|
|
2
|
|
|
$
|
2,482
|
|
|
$
|
2,521
|
|
Construction real estate
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Commercial real estate
|
|
0
|
|
|
0
|
|
|
0
|
|
|
2
|
|
|
1,659
|
|
|
1,658
|
|
Residential real estate
|
|
2
|
|
|
109
|
|
|
92
|
|
|
5
|
|
|
478
|
|
|
455
|
|
Home equity
|
|
4
|
|
|
120
|
|
|
118
|
|
|
1
|
|
|
35
|
|
|
36
|
|
Installment
|
|
0
|
|
|
0
|
|
|
0
|
|
|
1
|
|
|
30
|
|
|
29
|
|
Total
|
|
7
|
|
|
$
|
1,709
|
|
|
$
|
1,690
|
|
|
11
|
|
|
$
|
4,684
|
|
|
$
|
4,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
(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
|
|
|
$
|
14,984
|
|
|
$
|
14,984
|
|
|
8
|
|
|
$
|
25,009
|
|
|
$
|
25,071
|
|
Construction real estate
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Commercial real estate
|
|
0
|
|
|
0
|
|
|
0
|
|
|
9
|
|
|
3,024
|
|
|
2,932
|
|
Residential real estate
|
|
20
|
|
|
1,677
|
|
|
1,581
|
|
|
22
|
|
|
2,944
|
|
|
2,626
|
|
Home equity
|
|
10
|
|
|
346
|
|
|
344
|
|
|
13
|
|
|
358
|
|
|
330
|
|
Installment
|
|
1
|
|
|
26
|
|
|
15
|
|
|
1
|
|
|
30
|
|
|
29
|
|
Total
|
|
39
|
|
|
$
|
17,033
|
|
|
$
|
16,924
|
|
|
53
|
|
|
$
|
31,365
|
|
|
$
|
30,988
|
|
For TDRs identified during the three and nine months ended September 30, 2020, there were $0.6 million and $1.7 million, respectively, of chargeoffs for the portion of TDRs determined to be uncollectible. For TDRs identified during the three and nine months ended September 30, 2019, there were $2.3 million chargeoffs for the portion of TDRs determined to be uncollectible.
The following table provides information on how TDRs were modified during the nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Extended maturities
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,877
|
|
Adjusted interest rates
|
|
0
|
|
0
|
|
0
|
|
|
5,284
|
|
Combination of rate and maturity changes
|
|
0
|
|
0
|
|
0
|
|
|
508
|
|
Forbearance
|
|
1,480
|
|
4,349
|
|
4,663
|
|
|
19,984
|
|
Other (1)
|
|
210
|
|
350
|
|
12,261
|
|
|
2,335
|
|
Total
|
|
$
|
1,690
|
|
|
$
|
4,699
|
|
|
$
|
16,924
|
|
|
$
|
30,988
|
|
(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, are considered to be in default of the terms of the TDR agreement.
For each of the three and nine month periods ended September 30, 2020, there was one TDR relationship with an insignificant balance for which there was a payment default during the period that occurred within twelve months of the loan modifications. For the three month period ended September 30, 2019, there was one TDR relationship for $0.1 million for which there was a payment default during the period that occurred within twelve months of the loan modifications. For the nine months ended September 30, 2019, there were three TDR relationships for $7.0 million for which there was a payment default during the period that occurred within twelve months of the loan modification.
As stated in the CARES Act, loan modifications in response to COVID-19 executed on a loan that was not more than 30 days past due as of December 31, 2019 and executed between March 1, 2020, and the earlier of 60 days after the date of termination of the National Emergency or December 31, 2020 are not required to be reported as TDR. As of September 30, 2020, the Company's loan portfolio included 1,902 commercial loans with balances of $2.1 billion and 1,830 consumer loans with balances of $131.4 million that were modified in response to COVID-19 that are not considered TDRs. Of the loan balances initially modified, $1.5 billion have returned to a normal payment schedule, with $631.2 million receiving a second deferral. The second round of deferrals consist primarily of hotel and franchise loans, which comprise $438.2 million or 69% of the total balances deferred for a second time.
Nonperforming Loans. Loans classified as nonaccrual and loans modified as TDRs are considered nonperforming for September 30, 2020 and impaired as of December 31, 2019. The following table provides information on nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(Dollars in thousands)
|
|
Nonaccrual loans with a related ACL
|
|
Nonaccrual loans with no related ACL
|
|
Total nonaccrual
|
|
Total nonaccrual
|
Nonaccrual loans (1)
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
20,558
|
|
|
$
|
14,128
|
|
|
$
|
34,686
|
|
|
$
|
24,346
|
|
Lease financing
|
|
0
|
|
|
1,092
|
|
|
1,092
|
|
|
223
|
|
Construction real estate
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Commercial real estate
|
|
1,310
|
|
|
23,211
|
|
|
24,521
|
|
|
7,295
|
|
Residential real estate
|
|
252
|
|
|
11,852
|
|
|
12,104
|
|
|
10,892
|
|
Home equity
|
|
0
|
|
|
5,374
|
|
|
5,374
|
|
|
5,242
|
|
Installment
|
|
0
|
|
|
153
|
|
|
153
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
$
|
22,120
|
|
|
$
|
55,810
|
|
|
$
|
77,930
|
|
|
$
|
48,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Nonaccrual loans include nonaccrual TDRs of $29.3 million and $18.5 million as of September 30, 2020 and December 31, 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Interest income effect on nonperforming loans
|
|
|
|
|
|
|
|
|
Gross amount of interest that would have been recorded under original terms
|
|
$
|
1,552
|
|
|
$
|
1,568
|
|
|
$
|
4,185
|
|
|
$
|
4,648
|
|
Interest included in income
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
689
|
|
|
336
|
|
|
1,226
|
|
|
863
|
|
Troubled debt restructurings
|
|
64
|
|
|
184
|
|
|
367
|
|
|
689
|
|
Total interest included in income
|
|
753
|
|
|
520
|
|
|
1,593
|
|
|
1,552
|
|
Net impact on interest income
|
|
$
|
799
|
|
|
$
|
1,048
|
|
|
$
|
2,592
|
|
|
$
|
3,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Financial individually reviews all nonperforming loan relationships greater than $250,000 to determine if an individually evaluated 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. Individually evaluated 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 as of December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
(Dollars in thousands)
|
|
Current balance
|
|
Contractual
principal
balance
|
|
Related
allowance
|
Loans with no related allowance recorded
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
16,726
|
|
|
$
|
19,709
|
|
|
$
|
0
|
|
Lease financing
|
|
223
|
|
|
223
|
|
|
0
|
|
Construction real estate
|
|
0
|
|
|
0
|
|
|
0
|
|
Commercial real estate
|
|
10,160
|
|
|
17,897
|
|
|
0
|
|
Residential real estate
|
|
14,868
|
|
|
17,368
|
|
|
0
|
|
Home equity
|
|
5,700
|
|
|
6,462
|
|
|
0
|
|
Installment
|
|
204
|
|
|
341
|
|
|
0
|
|
Total
|
|
47,881
|
|
|
62,000
|
|
|
0
|
|
|
|
|
|
|
|
|
Loans with an allowance recorded
|
|
|
|
|
|
Commercial & industrial
|
|
10,754
|
|
|
21,513
|
|
|
2,044
|
|
Lease financing
|
|
0
|
|
|
0
|
|
|
0
|
|
Construction real estate
|
|
0
|
|
|
0
|
|
|
0
|
|
Commercial real estate
|
|
671
|
|
|
675
|
|
|
113
|
|
Residential real estate
|
|
294
|
|
|
294
|
|
|
18
|
|
Home equity
|
|
0
|
|
|
0
|
|
|
0
|
|
Installment
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
|
|
11,719
|
|
|
22,482
|
|
|
2,175
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Commercial & industrial
|
|
27,480
|
|
|
41,222
|
|
|
2,044
|
|
Lease financing
|
|
223
|
|
|
223
|
|
|
0
|
|
Construction real estate
|
|
0
|
|
|
0
|
|
|
0
|
|
Commercial real estate
|
|
10,831
|
|
|
18,572
|
|
|
113
|
|
Residential real estate
|
|
15,162
|
|
|
17,662
|
|
|
18
|
|
Home equity
|
|
5,700
|
|
|
6,462
|
|
|
0
|
|
Installment
|
|
204
|
|
|
341
|
|
|
0
|
|
Total
|
|
$
|
59,600
|
|
|
$
|
84,482
|
|
|
$
|
2,175
|
|
First Financial's average impaired loans and interest income recognized by class for the three and nine months ended September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2019
|
|
September 30, 2019
|
(Dollars in thousands)
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
Loans with no related allowance recorded
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
37,835
|
|
|
$
|
316
|
|
|
$
|
35,626
|
|
|
$
|
807
|
|
Lease financing
|
|
148
|
|
|
0
|
|
|
155
|
|
|
0
|
|
Construction real estate
|
|
6
|
|
|
0
|
|
|
7
|
|
|
0
|
|
Commercial real estate
|
|
18,703
|
|
|
94
|
|
|
20,907
|
|
|
295
|
|
Residential real estate
|
|
15,388
|
|
|
74
|
|
|
16,177
|
|
|
229
|
|
Home equity
|
|
5,594
|
|
|
29
|
|
|
5,941
|
|
|
95
|
|
Installment
|
|
150
|
|
|
0
|
|
|
162
|
|
|
2
|
|
Total
|
|
77,824
|
|
|
513
|
|
|
78,975
|
|
|
1,428
|
|
|
|
|
|
|
|
|
|
|
Loans with an allowance recorded
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
4,316
|
|
|
1
|
|
|
3,213
|
|
|
87
|
|
Lease financing
|
|
142
|
|
|
0
|
|
|
71
|
|
|
0
|
|
Construction real estate
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Commercial real estate
|
|
1,010
|
|
|
4
|
|
|
1,507
|
|
|
27
|
|
Residential real estate
|
|
668
|
|
|
2
|
|
|
484
|
|
|
10
|
|
Home equity
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Installment
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
|
|
6,136
|
|
|
7
|
|
|
5,275
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
42,151
|
|
|
317
|
|
|
38,839
|
|
|
894
|
|
Lease financing
|
|
290
|
|
|
0
|
|
|
226
|
|
|
0
|
|
Construction real estate
|
|
6
|
|
|
0
|
|
|
7
|
|
|
0
|
|
Commercial real estate
|
|
19,713
|
|
|
98
|
|
|
22,414
|
|
|
322
|
|
Residential real estate
|
|
16,056
|
|
|
76
|
|
|
16,661
|
|
|
239
|
|
Home equity
|
|
5,594
|
|
|
29
|
|
|
5,941
|
|
|
95
|
|
Installment
|
|
150
|
|
|
0
|
|
|
162
|
|
|
2
|
|
Total
|
|
$
|
83,960
|
|
|
$
|
520
|
|
|
$
|
84,250
|
|
|
$
|
1,552
|
|
The following table provides collateral information by class of loan for collateral-dependent loans with a specific reserve. A loan is considered to be collateral dependent when the borrower is experiencing financial difficulty and the repayment is expected to be provided substantially through the operation or sale of collateral.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Type of Collateral
|
(Dollar in thousands)
|
|
Business
assets
|
|
Commercial real estate
|
|
Equipment
|
|
Residential real estate
|
|
Total
|
Class of loan
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
$
|
10,091
|
|
|
$
|
0
|
|
|
$
|
11,541
|
|
|
$
|
0
|
|
|
$
|
21,632
|
|
Commercial real estate-investor
|
|
0
|
|
0
|
|
|
0
|
|
|
649
|
|
|
649
|
|
Commercial real estate-owner
|
|
0
|
|
0
|
|
|
0
|
|
|
662
|
|
|
662
|
|
Residential real estate
|
|
0
|
|
0
|
|
|
0
|
|
|
1,235
|
|
|
1,235
|
|
Total
|
|
$
|
10,091
|
|
|
$
|
0
|
|
|
$
|
11,541
|
|
|
$
|
2,546
|
|
|
$
|
24,178
|
|
Lease financing. The Company prospectively applied FASB ASC Topic 842 in the first quarter of 2019. First Financial originates both sales-type and direct financing leases, and the Company manages and reviews lease residuals in accordance with its credit policies. Sales-type lease contracts contain the ability to purchase the underlying equipment at lease maturity and profit or loss is recognized at lease commencement. Direct financing leases are generally three to five years in length and may be extended at maturity, however, early cancellation may result in a fee to the borrower. For direct financing leases, the net unearned income is deferred and amortized over the life of the lease. Income recognized in first nine months of 2020 and 2019 related to the implementation of FASB ASC Topic 842 was insignificant.
OREO. OREO consists of properties acquired by the Company primarily through the loan foreclosure or repossession process, 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)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Balance at beginning of period
|
|
$
|
1,872
|
|
|
$
|
1,421
|
|
|
$
|
2,033
|
|
|
$
|
1,401
|
|
Additions
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
187
|
|
|
217
|
|
|
510
|
|
|
353
|
|
Residential real estate
|
|
136
|
|
|
104
|
|
|
282
|
|
|
1,376
|
|
Total additions
|
|
323
|
|
|
321
|
|
|
792
|
|
|
1,729
|
|
Disposals
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
0
|
|
|
(228)
|
|
|
(217)
|
|
|
(498)
|
|
Residential real estate
|
|
(510)
|
|
|
(325)
|
|
|
(1,270)
|
|
|
(709)
|
|
Total disposals
|
|
(510)
|
|
|
(553)
|
|
|
(1,487)
|
|
|
(1,207)
|
|
Valuation adjustment
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
|
(22)
|
|
|
(56)
|
|
|
448
|
|
|
(111)
|
|
Residential real estate
|
|
(20)
|
|
|
480
|
|
|
(143)
|
|
|
(199)
|
|
Total valuation adjustment
|
|
(42)
|
|
|
424
|
|
|
305
|
|
|
(310)
|
|
Balance at end of period
|
|
$
|
1,643
|
|
|
$
|
1,613
|
|
|
$
|
1,643
|
|
|
$
|
1,613
|
|
NOTE 5: ALLOWANCE FOR CREDIT LOSSES
Allowance for credit losses - loans and leases. The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The ACL is increased by provision expense and decreased by charge-offs, net of recoveries of amounts previously charged-off. First Financial's policy is to charge-off all or a portion of a loan when, in management's opinion, it is unlikely to collect the principal amount owed in full
either through payments from the borrower or a guarantor or from the liquidation of collateral. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable on loans and leases, which totaled $41.2 million as of September 30, 2020, is excluded from the estimate of credit losses.
Management estimates the allowance balance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience paired with economic forecasts provides the basis for the quantitatively modeled estimation of expected credit losses. First Financial adjusts its quantitative model, as necessary, to reflect conditions not already considered by the quantitative model. These adjustments are commonly known as the Qualitative Framework.
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the ACL using the following methods:
Commercial and industrial – C&I loans include revolving lines of credit and term loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, leasehold improvements or other projects. C&I loans are generally underwritten individually and secured with the assets of the Company and/or the personal guarantee of the business owners. C&I loans also include ABL, equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and commission-based loans to insurance agents and brokers. ABL transactions typically involve larger commercial clients and are secured by specific assets, such as inventory, accounts receivable, machinery and equipment. In the franchise lending space, First Financial focuses on a limited number of restaurant concepts that have sound economics, low closure rates and strong brand awareness within specified local, regional or national markets. Within the insurance lending platform, First Financial serves insurance agents and brokers that are looking to maximize their book-of-business value and grow their agency business.
Current period default rates are utilized in the modeling of the ACL for C&I loans, and are adjusted for forecasted changes in the treasury term spread and market volatility index. Changes in current period defaults or forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Lease financing – Lease financing consists of lease transactions for the acquisition of both new and used business equipment for commercial clients. Lease products may include tax leases, finance leases, lease lines of credit and interim funding. The credit underwriting for lease transactions includes detailed analysis of the lessee's industry and business model, nature of the equipment, equipment resale values, historical and projected cash flow analysis, secondary sources of repayment and guarantor in addition to other considerations.
The ACL model for leases sources expected default rates from the C&I portfolio model. Therefore, changes in forecasted expectations for the treasury term spread and market volatility index could result in volatility in the Company's ACL in future periods.
Construction real estate – Real estate construction loans are term loans to individuals, companies or developers used for the construction or development of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Generally, these loans are for construction projects that have been pre-sold, pre-leased or have secured permanent financing, as well as loans to real estate companies with significant equity invested in the project. An independent credit team underwrites construction real estate loans, which are managed by experienced lending officers and monitored through the construction phase by a centralized funding desk that manages loan disbursements.
The construction ACL model is adjusted for forecasted changes in rental vacancy rates in the Bank's geographic footprint and the housing price index. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Commercial real estate - owner & investor – Commercial real estate loans consist of term loans secured by a mortgage lien on real estate properties such as apartment buildings, office and industrial buildings and retail shopping centers. Additionally, the Company's franchise lending activities discussed in the "Commercial and Industrial" section often include the financing of real estate in addition to equipment. The credit underwriting for both owner-occupied and investor income producing real estate loans includes detailed market analysis, historical and projected cash flow analysis, appropriate equity margins, assessment of lessees and lessors, environmental risks and the type, age, condition and location of real estate, among other factors.
First Financial models owner-occupied and investor CRE separately when determining the ACL. For owner occupied CRE, current period default rates are utilized in the modeling, and are adjusted for forecasted changes in the BAA bond spread, national rental vacancy rates and the consumer confidence index. Current period default rates are also utilized in the modeling
of investor CRE loans, and are adjusted for forecasted changes in the BAA bond spread, multifamily building permits within the Bank’s geographic footprint and national rental vacancy rates. Changes in current period defaults and forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Residential real estate – Residential real estate loans represent loans to consumers for the financing of a residence. These loans generally have a 15 to 30 year term and a fixed interest rate, but may have a shorter term to maturity with an adjustable interest rate. In most cases, these loans are extended to borrowers to finance their primary residence. First Financial sells residential real estate loan originations into the secondary market on both servicing retained and servicing released bases. Residential real estate loans are generally underwritten to secondary market lending standards, utilizing underwriting processes that rely on empirical data to assess credit risk as well as analysis of the borrower's ability to repay their obligations, credit history, the amount of any down payment and the market value or other characteristics of the property. First Financial also offers a residential mortgage product that features similar borrower credit characteristics but a more streamlined underwriting process than typically required to sell to government-sponsored enterprises and thus is retained on the Consolidated Balance Sheets.
The residential real estate ACL model is adjusted for forecasted changes in the housing price index, housing starts within the Bank’s geographic footprint and national single-family existing home sales. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Home equity – Home equity lending includes both home equity loans and revolving lines of credit secured by a first or second lien on the borrower’s residence. Home equity lending underwriting considerations include the borrower's credit history as well as to debt-to-income and loan-to-value policy limits.
The home equity ACL model is adjusted for forecasted changes in the consumer credit growth rate within the Bank’s geographic footprint and the working-age labor participation rate. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Installment – Installment lending consists of consumer loans not secured by real estate, including loans secured by automobiles and unsecured personal loans.
The ACL model for installment loans sources expected default rates from the residential real estate and home equity portfolio models and is paired with installment specific LGD rates. Changes in forecasted expectations for the consumer credit growth rate within the Bank’s geographic footprint, the working-age labor participation rate, the housing price index, housing starts within the Bank’s geographic footprint and national existing single-family existing home sales could result in volatility in the Company's ACL in future periods.
Credit card – Credit card lending consists of secured and unsecured revolving lines of credit to consumer and business customers. Credit card lines are generally available for an indefinite period of time as long as the borrower's credit characteristics do not materially or adversely change, but lines are unconditionally cancellable by the Company at any time.
The ACL model for credit card loans sources expected default rates from the residential real estate and home equity portfolio models and is paired with credit card specific LGD rates. Changes in forecasted expectations for the consumer credit growth rate within the Bank’s geographic footprint, the working-age labor participation rate, the housing price index, housing starts within the Bank’s geographic footprint and national existing single-family existing home sales could result in volatility in the Company's ACL in future periods.
First Financial's ACL is influenced by loan volumes, risk rating migration, delinquency status and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. For the three and nine months ended September 30, 2020 the ACL increased primarily due to First Financial's expectation of higher credit losses resulting from the COVID-19 pandemic, however, this was somewhat offset by an increase in prepayment rates during the period.
The Company utilized the final Moody's September baseline forecast as its R&S forecast in the quantitative model, which included consideration of the impact from both the COVID-19 pandemic and the related government stimulus response, as well as the potential for further government stimulus actions. For reasonableness, the Company also considered the impact to the model from alternative, more adverse economic forecasts, slower prepayment speeds and increased default rates. These alternative analyses were utilized to inform the Company's qualitative adjustments. Additionally, First Financial considered its credit exposure to certain industries believed to be at risk for future credit stress related to the COVID-19 pandemic, such as franchise, hotel and investor commercial real estate lending when making qualitative adjustments to the ACL model.
Changes in the allowance by loan category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
(Dollars in thousands)
|
|
Commercial & industrial
|
|
Lease financing
|
|
Construction real estate
|
|
Commercial real estate
|
|
Residential real estate
|
|
Home Equity
|
|
Installment
|
|
Credit card
|
|
Total
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
50,421
|
|
|
$
|
1,431
|
|
|
$
|
15,357
|
|
|
$
|
62,340
|
|
|
$
|
10,581
|
|
|
$
|
14,236
|
|
|
$
|
1,226
|
|
|
$
|
3,069
|
|
|
$
|
158,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
1,297
|
|
|
702
|
|
|
3,613
|
|
|
12,896
|
|
|
(1,364)
|
|
|
(1,455)
|
|
|
35
|
|
|
(425)
|
|
|
15,299
|
|
Gross charge-offs
|
|
(1,467)
|
|
|
(852)
|
|
|
0
|
|
|
(3,789)
|
|
|
(22)
|
|
|
(460)
|
|
|
(59)
|
|
|
(171)
|
|
|
(6,820)
|
|
Recoveries
|
|
265
|
|
|
6
|
|
|
0
|
|
|
760
|
|
|
91
|
|
|
209
|
|
|
35
|
|
|
38
|
|
|
1,404
|
|
Total net charge-offs
|
|
(1,202)
|
|
|
(846)
|
|
|
0
|
|
|
(3,029)
|
|
|
69
|
|
|
(251)
|
|
|
(24)
|
|
|
(133)
|
|
|
(5,416)
|
|
Ending allowance for credit losses
|
|
$
|
50,516
|
|
|
$
|
1,287
|
|
|
$
|
18,970
|
|
|
$
|
72,207
|
|
|
$
|
9,286
|
|
|
$
|
12,530
|
|
|
$
|
1,237
|
|
|
$
|
2,511
|
|
|
$
|
168,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2019
|
(Dollars in thousands)
|
|
Commercial & industrial
|
|
Lease financing
|
|
Construction real estate
|
|
Commercial real estate
|
|
Residential real estate
|
|
Home Equity
|
|
Installment
|
|
Credit card
|
|
Total
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
24,586
|
|
|
$
|
1,393
|
|
|
$
|
2,919
|
|
|
$
|
20,357
|
|
|
$
|
5,008
|
|
|
$
|
5,307
|
|
|
$
|
395
|
|
|
$
|
1,584
|
|
|
$
|
61,549
|
|
Provision for credit losses
|
|
2,654
|
|
|
(388)
|
|
|
(152)
|
|
|
1,684
|
|
|
702
|
|
|
68
|
|
|
(2)
|
|
|
662
|
|
|
5,228
|
|
Loans charged off
|
|
(9,556)
|
|
|
0
|
|
|
0
|
|
|
(535)
|
|
|
(278)
|
|
|
(627)
|
|
|
(65)
|
|
|
(598)
|
|
|
(11,659)
|
|
Recoveries
|
|
556
|
|
|
0
|
|
|
0
|
|
|
347
|
|
|
64
|
|
|
335
|
|
|
93
|
|
|
39
|
|
|
1,434
|
|
Total net charge-offs
|
|
(9,000)
|
|
|
0
|
|
|
0
|
|
|
(188)
|
|
|
(214)
|
|
|
(292)
|
|
|
28
|
|
|
(559)
|
|
|
(10,225)
|
|
Ending allowance for credit losses
|
|
$
|
18,240
|
|
|
$
|
1,005
|
|
|
$
|
2,767
|
|
|
$
|
21,853
|
|
|
$
|
5,496
|
|
|
$
|
5,083
|
|
|
$
|
421
|
|
|
$
|
1,687
|
|
|
$
|
56,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
(Dollars in thousands)
|
|
Commercial & industrial
|
|
Lease financing
|
|
Construction real estate
|
|
Commercial real estate
|
|
Residential real estate
|
|
Home equity
|
|
Installment
|
|
Credit card
|
|
Total
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, prior to adoption of ASC 326
|
|
$
|
18,584
|
|
|
$
|
971
|
|
|
$
|
2,381
|
|
|
$
|
23,579
|
|
|
$
|
5,299
|
|
|
$
|
4,787
|
|
|
$
|
392
|
|
|
$
|
1,657
|
|
|
$
|
57,650
|
|
Impact of adopting ASC 326
|
|
9,901
|
|
|
118
|
|
|
11,579
|
|
|
24,118
|
|
|
5,490
|
|
|
8,430
|
|
|
801
|
|
|
1,068
|
|
|
61,505
|
|
Provision for credit losses
|
|
23,331
|
|
|
1,044
|
|
|
4,996
|
|
|
28,922
|
|
|
(1,454)
|
|
|
(236)
|
|
|
78
|
|
|
357
|
|
|
57,038
|
|
Loans charged off
|
|
(3,840)
|
|
|
(852)
|
|
|
0
|
|
|
(5,830)
|
|
|
(285)
|
|
|
(1,155)
|
|
|
(127)
|
|
|
(716)
|
|
|
(12,805)
|
|
Recoveries
|
|
2,540
|
|
|
6
|
|
|
14
|
|
|
1,418
|
|
|
236
|
|
|
704
|
|
|
93
|
|
|
145
|
|
|
5,156
|
|
Total net charge-offs
|
|
(1,300)
|
|
|
(846)
|
|
|
14
|
|
|
(4,412)
|
|
|
(49)
|
|
|
(451)
|
|
|
(34)
|
|
|
(571)
|
|
|
(7,649)
|
|
Ending allowance for credit losses
|
|
$
|
50,516
|
|
|
$
|
1,287
|
|
|
$
|
18,970
|
|
|
$
|
72,207
|
|
|
$
|
9,286
|
|
|
$
|
12,530
|
|
|
$
|
1,237
|
|
|
$
|
2,511
|
|
|
$
|
168,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2019
|
(Dollars in thousands)
|
|
Commercial & industrial
|
|
Lease financing
|
|
Construction real estate
|
|
Commercial real estate
|
|
Residential real estate
|
|
Home equity
|
|
Installment
|
|
Credit card
|
|
Total
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
18,746
|
|
|
$
|
1,130
|
|
|
$
|
3,413
|
|
|
$
|
21,048
|
|
|
$
|
4,964
|
|
|
$
|
5,348
|
|
|
$
|
362
|
|
|
$
|
1,531
|
|
|
$
|
56,542
|
|
Provision for credit losses
|
|
22,164
|
|
|
(25)
|
|
|
(714)
|
|
|
1,966
|
|
|
841
|
|
|
427
|
|
|
49
|
|
|
1,261
|
|
|
25,969
|
|
Loans charged off
|
|
(23,757)
|
|
|
(100)
|
|
|
0
|
|
|
(1,835)
|
|
|
(510)
|
|
|
(1,784)
|
|
|
(192)
|
|
|
(1,228)
|
|
|
(29,406)
|
|
Recoveries
|
|
1,087
|
|
|
0
|
|
|
68
|
|
|
674
|
|
|
201
|
|
|
1,092
|
|
|
202
|
|
|
123
|
|
|
3,447
|
|
Total net charge-offs
|
|
(22,670)
|
|
|
(100)
|
|
|
68
|
|
|
(1,161)
|
|
|
(309)
|
|
|
(692)
|
|
|
10
|
|
|
(1,105)
|
|
|
(25,959)
|
|
Ending allowance for credit losses
|
|
$
|
18,240
|
|
|
$
|
1,005
|
|
|
$
|
2,767
|
|
|
$
|
21,853
|
|
|
$
|
5,496
|
|
|
$
|
5,083
|
|
|
$
|
421
|
|
|
$
|
1,687
|
|
|
$
|
56,552
|
|
The ACL balance and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
(Dollars in thousands)
|
|
Commercial & industrial
|
|
Lease financing
|
|
Construction real estate
|
|
Commercial real estate
|
|
Residential real estate
|
|
Home equity
|
|
Installment
|
|
Credit card
|
|
Total
|
Ending allowance balance attributable to loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,044
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
113
|
|
|
$
|
18
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,175
|
|
Collectively evaluated for impairment
|
|
16,540
|
|
|
971
|
|
|
2,381
|
|
|
23,466
|
|
|
5,281
|
|
|
4,787
|
|
|
392
|
|
|
1,657
|
|
|
55,475
|
|
Ending allowance for credit losses
|
|
$
|
18,584
|
|
|
$
|
971
|
|
|
$
|
2,381
|
|
|
$
|
23,579
|
|
|
$
|
5,299
|
|
|
$
|
4,787
|
|
|
$
|
392
|
|
|
$
|
1,657
|
|
|
$
|
57,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
27,480
|
|
|
$
|
223
|
|
|
$
|
0
|
|
|
$
|
10,831
|
|
|
$
|
15,162
|
|
|
$
|
5,700
|
|
|
$
|
204
|
|
|
$
|
0
|
|
|
$
|
59,600
|
|
Collectively evaluated for impairment
|
|
2,438,397
|
|
|
88,141
|
|
|
493,182
|
|
|
4,183,820
|
|
|
1,040,787
|
|
|
766,169
|
|
|
82,385
|
|
|
49,184
|
|
|
9,142,065
|
|
Total loans
|
|
$
|
2,465,877
|
|
|
$
|
88,364
|
|
|
$
|
493,182
|
|
|
$
|
4,194,651
|
|
|
$
|
1,055,949
|
|
|
$
|
771,869
|
|
|
$
|
82,589
|
|
|
$
|
49,184
|
|
|
$
|
9,201,665
|
|
Allowance for credit losses - unfunded commitments. First Financial estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life consistent with the Company's ACL methodology for loans and leases.
Prior to the adoption of ASC 326, First Financial maintained its reserve to absorb probable losses incurred in standby letters of credit and outstanding loan commitments. First Financial determined the adequacy of this reserve based upon an evaluation of the unfunded credit facilities, which included consideration of historical commitment utilization experience, credit risk ratings and historical loss rates, consistent with the Company's ALLL methodology at the time.
The ACL on unfunded commitments was $14.8 million as of September 30, 2020 and $0.6 million as of December 31, 2019. Additionally, First Financial recorded $1.9 million of provision recapture related to the allowance for credit losses on unfunded commitments for the three months ended September 30, 2020. However, First Financial recorded a provision for credit losses on unfunded commitments of $2.0 million for the nine months ended September 30, 2020. First Financial recorded $0.2 million and $0.3 million of provision recapture for unfunded commitments in three and nine month periods ended September 30, 2019, respectively.
NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill. Assets and liabilities acquired in a business combination are recorded at their estimated fair values as of the acquisition date. The excess of the purchase price of the acquisition over the fair value of net assets acquired is recorded as goodwill.
Changes in the carrying amount of goodwill for the three and nine months ended September 30, 2020 and September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Balance at beginning of period
|
|
$
|
937,771
|
|
|
$
|
879,727
|
|
|
$
|
937,771
|
|
|
$
|
880,251
|
|
Goodwill resulting from business combinations
|
|
0
|
|
|
57,962
|
|
|
0
|
|
|
57,438
|
|
Balance at end of period
|
|
$
|
937,771
|
|
|
$
|
937,689
|
|
|
$
|
937,771
|
|
|
$
|
937,689
|
|
During the third quarter of 2019, First Financial recorded $58.0 million of additions to goodwill resulting from the Bannockburn acquisition. In the first quarter of 2019, First Financial recorded its final adjustments to goodwill related to the 2018 MSFG merger. For further detail on the acquisition of Bannockburn, see Note 17 - Business Combinations.
Goodwill is evaluated for impairment on an annual basis as of October 1 of each year, or whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying value. In response to the COVID-19 pandemic and the related deterioration in general economic conditions, First Financial performed an interim qualitative impairment test as of September 30, 2020. The results of this interim qualitative test did not indicate that the Company's goodwill was impaired as of September 30, 2020. First Financial will continue to monitor the status of its goodwill and
intangible assets for signs of further deterioration and potential impairment. First Financial performed its annual impairment test as of October 1, 2019 and no impairment was indicated at that time.
Other intangible assets. Other intangible assets consist primarily of core deposit, customer list and other miscellaneous intangibles.
Core deposit intangibles represent the estimated fair value of acquired customer deposit relationships on the date of acquisition and are amortized on an accelerated basis over their estimated useful lives. First Financial's core deposit intangibles have an estimated weighted average remaining life of 7.3 years.
First Financial recorded a $39.4 million customer list intangible asset in conjunction with the Bannockburn merger to account for the obligation or advantage on the part of either the Company or the customer to continue the pre-existing relationship subsequent to the merger. The customer list intangible asset is amortized on a straight-line basis over its estimated useful life of 11 years.
Other miscellaneous intangibles include purchase commissions, non-compete agreements and trade name intangibles. Other intangible assets are included in Other intangibles in the Consolidated Balance Sheets.
Amortization expense recognized on intangible assets for the three months ended September 30, 2020 and 2019 were $2.8 million and $2.4 million, respectively. Amortization expense recognized on intangible assets for the nine months ended September 30, 2020 and 2019 was $8.4 million and $6.5 million, respectively.
The gross carrying amount and accumulated amortization of other intangible assets at September 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
Core deposit intangibles
|
|
$
|
51,031
|
|
|
$
|
(25,930)
|
|
|
$
|
51,031
|
|
|
$
|
(21,149)
|
|
Customer list
|
|
39,420
|
|
|
(3,883)
|
|
|
39,420
|
|
|
(1,195)
|
|
Other
|
|
10,093
|
|
|
(3,312)
|
|
|
10,093
|
|
|
(1,999)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,544
|
|
|
$
|
(33,125)
|
|
|
$
|
100,544
|
|
|
$
|
(24,343)
|
|
NOTE 7: LEASES
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. First Financial is primarily the lessee in its leasing agreements, and substantially all of those agreements are for real estate property for branches, ATM locations or office space.
On January 1, 2019, the Company adopted Topic 842 and all subsequent modifications. For First Financial, this adoption primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. Substantially all of the Company's leases are classified as operating leases, and therefore, were previously not recognized on the Company’s Consolidated Balance Sheets.
With the adoption of Topic 842, operating lease agreements were required to be recognized on the Consolidated Balance Sheets as an ROU asset and a corresponding lease liability. The Company's right to use an asset over the life of a lease is recorded as a "right of use" asset in Accrued interest and other assets on the Consolidated Balance Sheets and was $67.2 million and $58.6 million at September 30, 2020 and December 31, 2019, respectively. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received. First Financial recorded a $74.9 million and $64.3 million lease liability in Accrued interest and other liabilities on the Consolidated Balance Sheet at September 30, 2020 and December 31, 2019, respectively.
The calculated amount of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of minimum lease payments. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its
incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate was based upon the remaining lease term as of that date.
Leases with an initial term of 12 months or less are not recorded on the balance sheet, and First Financial recognizes lease expense for these leases on a straight-line basis over the term of the lease. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years or more. The exercise of renewal options on operating leases is at the Company's sole discretion, and certain leases may include options to purchase the leased property. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. First Financial does not enter into lease agreements which contain material residual value guarantees or material restrictive covenants.
Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements and leases generally also include real estate taxes and common area maintenance charges in the annual rental payments.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Operating lease cost
|
|
$
|
1,972
|
|
|
$
|
1,846
|
|
|
$
|
5,973
|
|
|
$
|
5,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term lease cost
|
|
30
|
|
|
14
|
|
|
111
|
|
|
15
|
|
Variable lease cost
|
|
632
|
|
|
688
|
|
|
1,899
|
|
|
1,918
|
|
Total operating lease cost
|
|
$
|
2,634
|
|
|
$
|
2,548
|
|
|
$
|
7,983
|
|
|
$
|
7,427
|
|
Future minimum commitments due under these lease agreements as of September 30, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Operating leases
|
|
|
|
|
2020 (remaining three months)
|
|
$
|
1,767
|
|
|
|
|
|
2021
|
|
7,116
|
|
|
|
|
|
2022
|
|
7,283
|
|
|
|
|
|
2023
|
|
7,312
|
|
|
|
|
|
2024
|
|
7,045
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
64,700
|
|
|
|
|
|
Total lease payments
|
|
95,223
|
|
|
|
|
|
Less imputed interest
|
|
20,316
|
|
|
|
|
|
Total
|
|
$
|
74,907
|
|
|
|
|
|
The weighted average remaining lease term and discount rate for the Company's operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Operating leases
|
|
|
|
|
Weighted-average remaining lease term
|
|
15.1 years
|
|
15.6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
3.10
|
%
|
|
3.43
|
%
|
|
|
|
|
|
Supplemental cash information at September 30, 2020 and 2019 related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
1,928
|
|
|
$
|
1,893
|
|
|
$
|
5,801
|
|
|
$
|
5,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for lease obligations
|
|
|
|
|
|
|
|
|
Operating leases
|
|
29
|
|
|
582
|
|
|
9,688
|
|
|
65,520
|
|
|
|
|
|
|
|
|
|
|
NOTE 8: BORROWINGS
Short-term borrowings on the Consolidated Balance Sheets include repurchase agreements utilized for corporate sweep accounts with cash management account agreements in place, federal funds purchased and overnight advances from the FHLB. All repurchase agreements are subject to terms and conditions agreed to by the Bank and the client. To secure its liability to the client, the Bank is authorized to sell or repurchase U.S. Treasury, government agency and mortgage-backed securities.
The following shows the remaining contractual maturity of repurchase agreements by collateral pledged:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Overnight and continuous
|
Repurchase agreements
|
|
|
Mortgage-backed securities
|
|
$
|
29,096
|
|
Collateralized mortgage obligations
|
|
85,562
|
|
Total
|
|
$
|
114,658
|
|
Securities sold under agreements to repurchase were secured by securities with a carrying amount of $114.7 million and $90.2 million as of September 30, 2020 and December 31, 2019, respectively.
First Financial had $133.0 million federal funds purchased at September 30, 2020 and $165.2 million as of December 31, 2019. The Company had no short-term borrowings with the FHLB at September 30, 2020 and had $1.2 billion at December 31, 2019. These short-term borrowings are used to manage normal liquidity needs and support the Company's asset and liability management strategies.
First Financial had $1.3 billion and $414.4 million of long-term debt as of September 30, 2020 and December 31, 2019, respectively, which included FRB borrowings, subordinated notes, FHLB long term advances and an interest free loan with a municipality.
During the third quarter of 2020 First Financial participated in the PPPLF, which is a program created by the FRB to extend credit to eligible financial institutions that originate PPP loans. The bank had outstanding PPPLF advances of $881.7 million as of September 30, 2020, with an average interest rate of 35 basis points. These borrowings are secured by pledged PPP loans and prepay in conjunction with reductions in the principal balances of those loans.
The following is a summary of First Financial's long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(Dollars in thousands)
|
|
Amount
|
|
Average rate
|
|
Amount
|
|
Average rate
|
FRB borrowings
|
|
$
|
881,672
|
|
|
0.35
|
%
|
|
$
|
0
|
|
|
N/A
|
FHLB borrowings
|
|
138,424
|
|
|
1.69
|
%
|
|
242,428
|
|
|
1.94
|
%
|
Subordinated notes
|
|
321,280
|
|
|
4.86
|
%
|
|
170,967
|
|
|
4.97
|
%
|
Unamortized debt issuance costs
|
|
(2,866)
|
|
|
N/A
|
|
(1,007)
|
|
|
N/A
|
Lease liability
|
|
1,879
|
|
|
3.81
|
%
|
|
1,213
|
|
|
4.48
|
%
|
Capital loan with municipality
|
|
775
|
|
|
0.00
|
%
|
|
775
|
|
|
0.00
|
%
|
Total long-term debt
|
|
$
|
1,341,164
|
|
|
1.57
|
%
|
|
$
|
414,376
|
|
|
3.20
|
%
|
In April 2020, First Financial issued $150.0 million of fixed to floating rate subordinated notes. The subordinated notes have an initial fixed interest rate of 5.25% to, but excluding, May 15, 2025, payable semi-annually in arrears. From, and including, May 15, 2025, the interest rate on the subordinated notes will reset quarterly to a floating rate per annum equal to a benchmark rate, which is expected to be the then-current three-month term SOFR, plus 5 basis points, payable quarterly in arrears. The subordinated notes mature on May 15, 2030. These notes are redeemable by the Company in whole or in part beginning with the interest payment date of May 15, 2025.
In 2015, First Financial issued $120.0 million of subordinated notes, which have a fixed interest rate of 5.125% payable semiannually and mature in August 2025. These notes are not redeemable by the Company, or callable by the holders of the notes prior to maturity. In addition, First Financial acquired $49.5 million of variable rate subordinated notes in the MSFG merger that were issued to previously formed trusts in exchange for the trust proceeds. Interest on the acquired subordinated notes is payable quarterly, in arrears, and the Company has the option to defer interest payments for a period not to exceed 20 consecutive quarters. These acquired subordinated notes mature 30 years after the date of original issuance and may be called at par following the 5 year anniversary of issuance. First Financial also acquired $8.4 million of 6.00% fixed rate private placement subordinated debt in conjunction with the MSFG merger that was issued in 2015 and matures in 2025. These notes are redeemable by the Company at par following the 5 year anniversary of issuance. The subordinated notes are treated as Tier 2 capital for regulatory capital purposes and are included in Long-term debt on the Consolidated Balance Sheets.
In addition to subordinated notes, long-term debt included $138.4 million and $242.4 million of fixed rate FHLB long-term advances as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, long-term FHLB advances had a weighted average interest rate of 1.69%. These instruments are primarily utilized to reduce overnight liquidity risk and to mitigate interest rate sensitivity on the Consolidated Balance Sheets.
NOTE 9: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to accumulated other comprehensive income (loss). The related tax effects allocated to other comprehensive income and reclassifications out of accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
|
Total other comprehensive income (loss)
|
|
Total accumulated other
comprehensive income (loss)
|
(Dollars in thousands)
|
|
Prior to
reclass
|
|
Reclass
from
|
|
Pre-tax
|
|
Tax effect
|
|
Net of tax
|
|
Beginning balance
|
|
Net activity
|
|
|
|
Ending balance
|
Unrealized gain (loss) on debt securities
|
|
$
|
6,931
|
|
|
$
|
2
|
|
|
$
|
6,929
|
|
|
$
|
(1,495)
|
|
|
$
|
5,434
|
|
|
$
|
63,691
|
|
|
$
|
5,434
|
|
|
|
|
$
|
69,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement obligation
|
|
0
|
|
|
(519)
|
|
|
519
|
|
|
(118)
|
|
|
401
|
|
|
(27,260)
|
|
|
401
|
|
|
|
|
(26,859)
|
|
Total
|
|
$
|
6,931
|
|
|
$
|
(517)
|
|
|
$
|
7,448
|
|
|
$
|
(1,613)
|
|
|
$
|
5,835
|
|
|
$
|
36,431
|
|
|
$
|
5,835
|
|
|
|
|
$
|
42,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2019
|
|
|
Total other comprehensive income (loss)
|
|
Total accumulated other
comprehensive income (loss)
|
(Dollars in thousands)
|
|
Prior to
reclass
|
|
Reclass
from
|
|
Pre-tax
|
|
Tax effect
|
|
Net of tax
|
|
Beginning balance
|
|
Net activity
|
|
|
|
Ending balance
|
Unrealized gain (loss) on debt securities
|
|
$
|
12,719
|
|
|
$
|
105
|
|
|
$
|
12,614
|
|
|
$
|
(2,699)
|
|
|
$
|
9,915
|
|
|
$
|
37,320
|
|
|
$
|
9,915
|
|
|
|
|
$
|
47,235
|
|
Unrealized gain (loss) on derivatives
|
|
94
|
|
|
0
|
|
|
94
|
|
|
(21)
|
|
|
73
|
|
|
(73)
|
|
|
73
|
|
|
|
|
0
|
|
Retirement obligation
|
|
0
|
|
|
(347)
|
|
|
347
|
|
|
(78)
|
|
|
269
|
|
|
(32,054)
|
|
|
269
|
|
|
|
|
(31,785)
|
|
Total
|
|
$
|
12,813
|
|
|
$
|
(242)
|
|
|
$
|
13,055
|
|
|
$
|
(2,798)
|
|
|
$
|
10,257
|
|
|
$
|
5,193
|
|
|
$
|
10,257
|
|
|
|
|
$
|
15,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
|
|
Total other comprehensive income (loss)
|
|
Total accumulated
other comprehensive income (loss)
|
(Dollars in thousands)
|
|
Prior to
reclass
|
|
Reclass
from
|
|
Pre-tax
|
|
Tax effect
|
|
Net of tax
|
|
Beginning balance
|
|
Net activity
|
|
|
|
Ending balance
|
Unrealized gain (loss) on debt securities
|
|
$
|
35,474
|
|
|
$
|
(55)
|
|
|
$
|
35,529
|
|
|
$
|
(7,668)
|
|
|
$
|
27,861
|
|
|
$
|
41,264
|
|
|
$
|
27,861
|
|
|
|
|
$
|
69,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement obligation
|
|
0
|
|
|
(1,401)
|
|
|
1,401
|
|
|
(319)
|
|
|
1,082
|
|
|
(27,941)
|
|
|
1,082
|
|
|
|
|
(26,859)
|
|
Total
|
|
$
|
35,474
|
|
|
$
|
(1,456)
|
|
|
$
|
36,930
|
|
|
$
|
(7,987)
|
|
|
$
|
28,943
|
|
|
$
|
13,323
|
|
|
$
|
28,943
|
|
|
|
|
$
|
42,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2019
|
|
|
Total other comprehensive income (loss)
|
|
Total accumulated
other comprehensive income (loss)
|
(Dollars in thousands)
|
|
Prior to
reclass
|
|
Reclass
from
|
|
Pre-tax
|
|
Tax effect
|
|
Net of tax
|
|
Beginning balance
|
|
Net activity
|
|
Cumulative effect of new standard
|
|
Ending balance
|
Unrealized gain (loss) on debt securities
|
|
$
|
73,588
|
|
|
$
|
(110)
|
|
|
$
|
73,698
|
|
|
$
|
(15,768)
|
|
|
$
|
57,930
|
|
|
$
|
(11,601)
|
|
|
$
|
57,930
|
|
|
$
|
906
|
|
|
$
|
47,235
|
|
Unrealized gain (loss) on derivatives
|
|
281
|
|
|
0
|
|
|
281
|
|
|
(64)
|
|
|
217
|
|
|
(217)
|
|
|
217
|
|
|
0
|
|
|
0
|
|
Retirement obligation
|
|
0
|
|
|
(1,042)
|
|
|
1,042
|
|
|
(237)
|
|
|
805
|
|
|
(32,590)
|
|
|
805
|
|
|
0
|
|
|
(31,785)
|
|
Total
|
|
$
|
73,869
|
|
|
$
|
(1,152)
|
|
|
$
|
75,021
|
|
|
$
|
(16,069)
|
|
|
$
|
58,952
|
|
|
$
|
(44,408)
|
|
|
$
|
58,952
|
|
|
$
|
906
|
|
|
$
|
15,450
|
|
The following table presents the activity reclassified from accumulated other comprehensive income into income during the three and nine month periods ended September 30, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from
accumulated other comprehensive income (loss)
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Affected Line Item in the Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss) on securities available-for-sale
|
|
$
|
2
|
|
|
$
|
105
|
|
|
$
|
(55)
|
|
|
$
|
(110)
|
|
|
Net gain (loss) on sales of investments securities
|
Defined benefit pension plan
|
|
|
|
|
|
|
|
|
Amortization of prior service cost (1)
|
|
106
|
|
|
104
|
|
|
308
|
|
|
310
|
|
|
Other noninterest expense
|
Recognized net actuarial loss (1)
|
|
(625)
|
|
|
(451)
|
|
|
(1,709)
|
|
|
(1,352)
|
|
|
Other noninterest expense
|
Defined benefit pension plan total
|
|
(519)
|
|
|
(347)
|
|
|
(1,401)
|
|
|
(1,042)
|
|
|
|
Total reclassifications for the period, before tax
|
|
$
|
(517)
|
|
|
$
|
(242)
|
|
|
$
|
(1,456)
|
|
|
$
|
(1,152)
|
|
|
|
(1) Included in the computation of net periodic pension cost (see Note 13 - Employee Benefit Plans for additional details).
NOTE 10: DERIVATIVES
First Financial uses certain derivative instruments, including interest rate caps, floors, swaps and foreign exchange contracts, to meet the needs of its clients while managing the interest and currency rate risk associated with certain transactions. First Financial may also utilize interest rate swaps to manage the interest rate risk profile of the Company. Interest rate payments are exchanged with counterparties, based on the notional amount established in the interest rate agreement. As only interest rate payments are exchanged, the cash requirements and credit risk associated with interest rate swaps are significantly less than the notional amount and the Company’s credit risk exposure is limited to the market value of the instruments. First Financial does not use derivatives for speculative purposes.
First Financial manages market value credit risk through counterparty credit policies including a review of total derivative notional position to total assets, total credit exposure to total capital and counterparty credit exposure risk.
Client derivatives. First Financial utilizes interest rate swaps as a means to offer commercial borrowers fixed rate funding while providing the Company with floating rate assets.
At September 30, 2020, for the interest rate derivatives, the Company had a total counterparty notional amount outstanding of $2.2 billion, spread among nineteen counterparties, with an estimated fair value of $206.2 million. At December 31, 2019, the Company had interest rate derivatives with a total counterparty notional amount outstanding of $1.9 billion, spread among eighteen counterparties, with an estimated fair value of $67.5 million.
First Financial monitors its derivative credit exposure to borrowers by monitoring the creditworthiness of the related loan customers through the Company's normal credit review processes. Additionally, the Company's ACL Committee monitors derivative credit risk exposure related to problem loans through the Company's ACL committee. First Financial considers the market value of a derivative instrument to be part of the carrying value of the related loan for these purposes as the borrower is contractually obligated to pay First Financial this amount in the event the derivative contract is terminated.
In connection with its use of derivative instruments, First Financial and its counterparties may be required to post cash collateral to offset the market position of the derivative instruments. First Financial maintains the right to offset these derivative positions with the collateral posted against them by or with the relevant counterparties.
Foreign exchange contracts. First Financial may enter into foreign exchange derivative contracts for the benefit of commercial customers to hedge their exposure to foreign currency fluctuations. Similar to the hedging of interest rate risk from interest rate derivative contracts, First Financial also enters into foreign exchange contracts with major financial institutions to economically hedge a substantial portion of the exposure from client driven foreign exchange activity. These derivatives are classified as free-standing instruments with the revaluation gain or loss recorded in Foreign exchange income in the Consolidated Statements of Income. The Company has risk limits and internal controls in place to help ensure excessive risk is not being taken in providing this service to customers. These controls include an independent determination of currency volatility and credit equivalent exposure on these contracts, counterparty credit approvals and country limits performed by independent risk management. At September 30, 2020, the Company had total counterparty notional amount outstanding of $3.1 billion spread among six counterparties, with an estimated fair value of $0.7 million. At December 31, 2019, the Company had total counterparty notional amounts outstanding of $1.9 billion spread among six counterparties, with an estimated fair value of $18.3 million.
In connection with its use of foreign exchange contracts, First Financial and its counterparties may be required to post cash collateral to offset the market position of the derivative instruments. First Financial maintains the right to offset these derivative positions with the collateral posted against them by or with the relevant counterparties.
The following table details the classification and amounts of client derivatives and foreign exchange contracts recognized in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
Estimated fair value
|
|
|
|
Estimated fair value
|
(Dollars in thousands)
|
|
Balance sheet classification
|
|
Notional
amount
|
|
Gain
|
|
Loss
|
|
Notional
amount
|
|
Gain
|
|
Loss
|
Client derivatives - instruments associated with loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Matched interest rate swaps with borrower
|
|
Accrued interest and other assets
|
|
$
|
2,246,698
|
|
|
$
|
208,296
|
|
|
$
|
(1)
|
|
|
$
|
1,923,375
|
|
|
$
|
70,799
|
|
|
$
|
(2,636)
|
|
Matched interest rate swaps with counterparty
|
|
Accrued interest and other liabilities
|
|
2,246,698
|
|
|
1
|
|
|
(208,403)
|
|
|
1,923,375
|
|
|
2,636
|
|
|
(70,808)
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matched foreign exchange contracts with customers
|
|
Accrued interest and other assets
|
|
3,085,637
|
|
|
35,888
|
|
|
(36,545)
|
|
|
1,869,934
|
|
|
28,739
|
|
|
(10,433)
|
|
Match foreign exchange contracts with counterparty
|
|
Accrued interest and other liabilities
|
|
3,085,637
|
|
|
36,545
|
|
|
(35,888)
|
|
|
1,869,934
|
|
|
10,433
|
|
|
(28,739)
|
|
Total
|
|
|
|
$
|
10,664,670
|
|
|
$
|
280,730
|
|
|
$
|
(280,837)
|
|
|
$
|
7,586,618
|
|
|
$
|
112,607
|
|
|
$
|
(112,616)
|
|
The following table discloses the gross and net amounts of client derivatives and foreign exchange contacts recognized in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(Dollars in thousands)
|
|
Gross amounts of recognized liabilities
|
|
Gross amounts offset in the Consolidated Balance Sheets
|
|
Net amounts of liabilities (assets) presented in the Consolidated Balance Sheets
|
|
Gross amounts of recognized liabilities
|
|
Gross amounts offset in the Consolidated Balance Sheets
|
|
Net amounts of liabilities (assets) presented in the Consolidated Balance Sheets
|
Client derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matched interest rate swaps with counterparty
|
|
$
|
208,404
|
|
|
$
|
(425,946)
|
|
|
$
|
(217,542)
|
|
|
$
|
73,444
|
|
|
$
|
(147,193)
|
|
|
$
|
(73,749)
|
|
Foreign exchange contracts with counterparty
|
|
72,433
|
|
|
(38,686)
|
|
|
33,747
|
|
|
39,172
|
|
|
(41,202)
|
|
|
(2,030)
|
|
Total
|
|
$
|
280,837
|
|
|
$
|
(464,632)
|
|
|
$
|
(183,795)
|
|
|
$
|
112,616
|
|
|
$
|
(188,395)
|
|
|
$
|
(75,779)
|
|
The following table details the derivative financial instruments, the average remaining maturities and the weighted-average interest rates being paid and received by First Financial at September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Notional
amount
|
|
Average
maturity
(years)
|
|
Fair
value
|
|
|
|
|
Client derivatives-interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
Receive fixed, matched interest rate swaps with borrower
|
|
$
|
2,246,698
|
|
|
5.2
|
|
$
|
208,295
|
|
|
|
|
|
Pay fixed, matched interest rate swaps with counterparty
|
|
2,246,698
|
|
|
5.2
|
|
(208,402)
|
|
|
|
|
|
Client derivatives-foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts-pay USD
|
|
$
|
3,085,637
|
|
|
0.5
|
|
(657)
|
|
|
|
|
|
Foreign exchange contracts-receive USD
|
|
$
|
3,085,637
|
|
|
0.5
|
|
657
|
|
|
|
|
|
Total client derivatives
|
|
$
|
10,664,670
|
|
|
2.5
|
|
$
|
(107)
|
|
|
|
|
|
Credit derivatives. In conjunction with participating interests in commercial loans, First Financial periodically enters into risk participation agreements with counterparties whereby First Financial assumes a portion of the credit exposure associated with an interest rate swap on the participated loan in exchange for a fee. Under these agreements, First Financial will make payments to the counterparty if the loan customer defaults on its obligation to perform under the interest rate swap contract with the counterparty. The total notional value of these agreements totaled $235.0 million as of September 30, 2020 and $216.2 million as of December 31, 2019. The fair value of these agreements is recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets and was $0.4 million at September 30, 2020 and $0.2 million at December 31, 2019.
Mortgage derivatives. First Financial enters into IRLCs and forward commitments for the future delivery of mortgage loans to third party investors, which are considered derivatives. When borrowers secure IRLCs with First Financial and the loans are intended to be sold, First Financial will enter into forward commitments for the future delivery of the loans to third party investors in order to hedge against the effect of changes in interest rates impacting IRLCs and loans held for sale. At September 30, 2020, the notional amount of the IRLCs was $158.1 million and the notional amount of forward commitments was $153.0 million. As of December 31, 2019, the notional amount of IRLCs was $33.4 million and the notional amount of forward commitments was $37.8 million. The unrealized gain on these agreements was $1.1 million and $0.9 million at September 30, 2020 and December 31, 2019, respectively, and were recorded in accrued interest and other assets on the Consolidated Balance Sheets.
NOTE 11: COMMITMENTS AND CONTINGENCIES
First Financial offers a variety of financial instruments including loan commitments and letters of credit to assist clients in meeting their requirement for liquidity and credit enhancement. GAAP does not require these financial instruments to be recorded in the Consolidated Financial Statements.
First Financial utilizes the same credit policies in issuing commitments and conditional obligations as it does for credit instruments recorded on the Consolidated Balance Sheets. First Financial’s exposure to credit loss in the event of non-performance by the counterparty was represented by the contractual amounts of those instruments. Effective January 1, 2020, First Financial adopted ASC 326, at which time First Financial estimated expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life consistent with the Company's ACL methodology for loans and leases. Adjustments to the reserve for unfunded commitments are recorded in Provision for credit losses - unfunded commitments in the Consolidated Statements of Income. First Financial had $14.8 million of ACL for unfunded commitments recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets as of September 30, 2020.
Prior to the adoption of ASC 326, First Financial maintained its reserve to absorb probable losses incurred in standby letters of credit and outstanding loan commitments. First Financial determined the adequacy of this reserve based upon an evaluation of the unfunded credit facilities, which included consideration of historical commitment utilization experience, credit risk ratings and historical loss rates, consistent with the Company's ALLL methodology at the time. First Financial had $0.6 million of reserves for unfunded commitments recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets at December 31, 2019.
Loan commitments. Loan commitments are agreements to extend credit to a client, absent any violation of conditions established in the commitment agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments will expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by First Financial upon extension of credit, is based on management’s credit evaluation of the client. The collateral held varies, but may include securities, real estate, inventory, plant or equipment. First Financial had commitments outstanding to extend credit totaling $3.5 billion at September 30, 2020 and $3.3 billion at December 31, 2019. As of September 30, 2020, loan commitments with a fixed interest rate totaled $128.8 million while commitments with variable interest rates totaled $3.4 billion. At December 31, 2019, loan commitments with a fixed interest rate totaled $123.7 million while commitments with variable interest rates totaled $3.2 billion. First Financial's fixed rate loan commitments have interest rates ranging from 0.00% to 21.00% for both September 30, 2020 and December 31, 2019 and have maturities ranging from less than one year to 30.0 years for September 30, 2020 and less than one year to 31.6 years for December 31, 2019.
The following table presents by type First Financial's active loan balances and related obligations to extend credit as of September 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Unfunded commitment
|
|
Loan balance
|
Commercial & industrial
|
|
$
|
1,287,307
|
|
|
$
|
3,292,313
|
|
Lease financing
|
|
0
|
|
74,742
|
Construction real estate
|
|
404,441
|
|
575,648
|
Commercial real estate-investor
|
|
142,502
|
|
3,263,213
|
Commercial real estate-owner
|
|
47,943
|
|
1,083,912
|
Residential real estate
|
|
31,513
|
|
1,027,702
|
Home equity
|
|
750,994
|
|
754,743
|
Installment
|
|
20,138
|
|
84,629
|
Credit card
|
|
204,527
|
|
43,907
|
Total
|
|
$
|
2,889,365
|
|
|
$
|
10,200,809
|
|
Letters of credit. Letters of credit are conditional commitments issued by First Financial to guarantee the performance of a client to a third party. First Financial’s letters of credit consist of performance assurances made on behalf of clients who have a contractual commitment to produce or deliver goods or services. The risk to First Financial arises from its obligation to make payment in the event of the client's contractual default to produce the contracted good or service to a third party. First Financial issued letters of credit aggregating $37.6 million and $33.4 million at September 30, 2020 and December 31, 2019, respectively. Management conducts regular reviews of these instruments on an individual client basis.
Investments in affordable housing tax credits. First Financial has made investments in certain qualified affordable housing tax credits. These credits are indirect federal subsidies that provide tax incentives to encourage investment in the acquisition, development, and rehabilitation of affordable rental housing, and allow investors to claim tax credits and other tax benefits (such as deductions from taxable income for operating losses) on their federal income tax returns. The principal risk associated with qualified affordable housing investments is the potential for noncompliance with the tax code requirements, such as failure to rent property to qualified tenants, resulting in the unavailability or recapture of the tax credits and other tax benefits. Investments in affordable housing projects are accounted for under the proportional amortization method and are included in Accrued interest and other assets in the Consolidated Balance Sheets.
First Financial's affordable housing commitments totaled $43.5 million and $38.5 million as of September 30, 2020 and December 31, 2019, respectively. The Company recognized tax credits of $1.8 million and $1.6 million for the three months ended September 30, 2020 and 2019, respectively. First Financial recognized tax credits of $5.5 million and $4.8 million for the nine months ended September 30, 2020 and 2019, respectively. The Company recognized amortization expense, which was included in income tax expense, of $2.0 million and $1.6 million for the three months ended September 30, 2020 and 2019, respectively, and $6.1 million and $5.4 million for the nine months ended September 30, 2020 and 2019, respectively. First Financial had no affordable housing contingent commitments as of September 30, 2020 or December 31, 2019.
Investments in historic tax credits. First Financial has noncontrolling financial investments in private investment funds and partnerships which are not consolidated. These investments may generate a return through the realization of federal and state income tax credits, as well as other tax benefits, such as tax deductions from net operating losses of the investments over a period of time. Investments in historic tax credits are accounted for under the equity method of accounting and are carried in
Accrued interest and other assets on the Consolidated Balance Sheets. The Company’s recorded investment in these entities was approximately $3.8 million at September 30, 2020 and $3.1 million at December 31, 2019. The maximum exposure to loss related to these investments was $4.1 million at September 30, 2020 and $5.1 million at December 31, 2019, representing the Company’s investment balance and its unfunded commitments to invest additional amounts. Investments in historic tax credits resulted in $0.1 million of tax credits for the three months ended September 30, 2020 and were insignificant for the three months ended September 30, 2019. Investments in historic tax credits resulted in $0.3 million of tax credits for the nine months ended September 30, 2020 and $0.1 million for the nine months ended September 30, 2019.
Contingencies/Litigation. First Financial and its subsidiaries are engaged in various matters of litigation from time to time, and have a number of unresolved claims pending. Additionally, as part of the ordinary course of business, First Financial and its subsidiaries are parties to litigation involving claims to the ownership of funds in particular accounts, the collection of delinquent accounts, challenges to security interests in collateral and foreclosure interests that are incidental to our regular business activities. While the ultimate liability with respect to these litigation matters and claims cannot be determined at this time, First Financial believes that damages, if any, and other amounts relating to pending matters are not probable or cannot be reasonably estimated as of September 30, 2020. Reserves are established for these various matters of litigation when appropriate under FASB ASC Topic 450, Contingencies, based in part upon the advice of legal counsel. First Financial had no reserves related to litigation matters as of September 30, 2020 or December 31, 2019.
NOTE 12: INCOME TAXES
For the third quarter of 2020, income tax expense was $9.3 million, resulting in an effective tax rate of 18.3% compared with income tax expense of $12.4 million and an effective tax rate of 19.6% for the comparable period in 2019. The decrease in the effective tax rate in the third quarter of 2020 compared to the same period in 2019 is due to lower pre-tax income in the third quarter of 2020 as well as higher executive compensation in 2019. For the first nine months of 2020, income tax expense was $23.2 million, resulting in an effective tax rate of 17.8% compared with income tax expense of $35.5 million and an effective tax rate of 19.2% for the comparable period in 2019. The decrease in the year-to-date effective tax rate is primarily due to lower pre-tax income in the first nine months of 2020 and the carryback of certain net operating losses as allowed under the CARES Act. These adjustments were partially offset by an unfavorable impact related to stock compensation activity in 2020.
At September 30, 2020 and December 31, 2019, First Financial had $1.9 million and $2.4 million, respectively, of unrecognized tax benefits, as determined under FASB ASC Topic 740-10, Income Taxes, that if recognized would favorably impact the effective income tax rate in future periods. The unrecognized tax benefits relate to state income tax exposures from taking tax positions where the Company believes it is likely that, upon examination, a state may take a position contrary to the position taken by First Financial. The Company believes that resolution regarding our uncertain tax positions is reasonably possible within the next twelve months and could result in full, partial or no recognition of the benefit. First Financial recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. At September 30, 2020 and December 31, 2019, the Company had no interest or penalties recorded.
First Financial and its subsidiaries are subject to U.S. federal income tax as well as state and local income tax in several jurisdictions. Tax years prior to 2017 have been closed and are no longer subject to U.S. federal income tax examinations. Tax years 2017 through 2019 remain open to examination by the federal taxing authority.
First Financial is no longer subject to state and local income tax examinations for years prior to 2012. Tax years 2012 through 2019 remain open to state and local examination in various jurisdictions.
NOTE 13: EMPLOYEE BENEFIT PLANS
First Financial sponsors a non-contributory defined benefit pension plan which covers substantially all employees and uses a December 31 measurement date for the plan. Plan assets are primarily invested in fixed income and publicly traded equity mutual funds. The pension plan does not directly own any shares of First Financial common stock or any other First Financial security or product.
First Financial made no cash contributions to fund the pension plan during the nine months ended September 30, 2020, or the year ended December 31, 2019, and does not expect to make cash contributions to the plan through the remainder of 2020.
As a result of the plan’s actuarial projections, First Financial recorded expense as set forth in the following table. The amounts are recognized in First Financial’s Consolidated Statements of Income related to the Company's pension plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Service cost
|
|
$
|
2,079
|
|
|
$
|
1,649
|
|
|
$
|
5,855
|
|
|
$
|
4,944
|
|
Interest cost
|
|
624
|
|
|
694
|
|
|
1,831
|
|
|
2,083
|
|
Expected return on assets
|
|
(2,443)
|
|
|
(2,429)
|
|
|
(7,382)
|
|
|
(7,288)
|
|
Amortization of prior service cost
|
|
(106)
|
|
|
(104)
|
|
|
(308)
|
|
|
(310)
|
|
Net actuarial loss
|
|
625
|
|
|
451
|
|
|
1,709
|
|
|
1,352
|
|
Net periodic benefit cost (income)
|
|
$
|
779
|
|
|
$
|
261
|
|
|
$
|
1,705
|
|
|
$
|
781
|
|
NOTE 14: REVENUE RECOGNITION
The majority of the Company’s revenues come from sources that are outside of the scope of ASU 2014-09, Revenue from Contracts with Customers. Income sources that are outside of this standard include income earned on loans, leases, securities, derivatives and foreign exchange. The Company's services that fall within the scope of ASU 2014-09 are presented within Noninterest income and are recognized as revenue when the Company satisfies its obligation to the customer. Services within the scope of this guidance include service charges on deposits, trust and wealth management fees, bankcard income, gain/loss on the sale of OREO and investment brokerage fees.
Service charges on deposit accounts. The Company earns revenues from its deposit customers for transaction-based fees, account maintenance fees and overdraft fees. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Similarly, overdraft fees are recognized at the point in time that the overdraft occurs as this corresponds with the Company's performance obligation. Service charges on deposit accounts are withdrawn from the customer's deposit account.
Trust and wealth management fees. Trust and wealth management fees are primarily asset-based, but can also include flat fees based upon a specific service rendered, such as tax preparation services. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fees. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and wealth management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, as incurred.
Bankcard income. The Company earns interchange fees from cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized concurrent with the transaction processing services provided to the cardholder. Interchange income is presented on the Consolidated Statements of Income net of expenses. Gross interchange income for the third quarter of 2020 was $6.3 million, which was partially offset by $3.1 million of expenses within Noninterest income. Gross interchange income for the third quarter of 2019 was $6.3 million, which was partially offset by $3.0 million of expenses. Gross interchange income for the first nine months of 2020 was $17.6 million, which was partially offset by $8.9 million of expenses within Noninterest income. Gross interchange income for the first nine months of 2019 was $24.2 million, which was partially offset by $8.8 million of expenses.
Other. Other noninterest income consists of other recurring revenue streams such as transaction fees, safe deposit rental income, insurance commissions, merchant referral income, gain (loss) on sale of OREO and brokerage revenue. Transaction fees primarily include check printing sales commissions, collection fees and wire transfer fees which arise from in-branch transactions. Safe deposit rental income arises from fees charged to the customer on an annual basis and recognized upon receipt of payment. Insurance commissions are agent commissions earned by the Company and earned upon the effective date of the bound coverage. Merchant referral income is associated with a program whereby the Company receives a share of processing revenue that is generated from clients that were referred by First Financial to the service provider. Revenue is recognized at the point in time when the transaction occurs.
The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of the executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectibility of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.
Brokerage revenue represents fees from investment brokerage services provided to customers by a third party provider. The Company receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The fees are recognized monthly and a receivable is recorded until commissions are paid the following month. Because the Company (i) acts as an agent in arranging the relationship between the customer and the third-party service provider and (ii) does not control the services rendered to the customers, investment brokerage fees are presented net of related costs.
NOTE 15: EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
(Dollars in thousands, except per share data)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Numerator
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
41,477
|
|
|
$
|
50,856
|
|
|
$
|
107,498
|
|
|
$
|
149,398
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per common share
|
|
97,247,080
|
|
|
98,517,025
|
|
|
97,400,942
|
|
|
98,177,802
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Employee stock awards
|
|
761,653
|
|
|
560,698
|
|
|
716,521
|
|
|
545,371
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares for diluted earnings per common share
|
|
98,008,733
|
|
|
99,077,723
|
|
|
98,117,463
|
|
|
98,723,173
|
|
|
|
|
|
|
|
|
|
|
Earnings per share available to common shareholders
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.43
|
|
|
$
|
0.52
|
|
|
$
|
1.10
|
|
|
$
|
1.52
|
|
Diluted
|
|
$
|
0.42
|
|
|
$
|
0.51
|
|
|
$
|
1.10
|
|
|
$
|
1.51
|
|
If applicable, stock options and warrants with exercise prices greater than the average market price of the common shares are excluded from the computation of net income per diluted share, as they would be antidilutive. Using the end of period price of the Company's common shares, there were no antidilutive options at September 30, 2020 and September 30, 2019.
NOTE 16: FAIR VALUE DISCLOSURES
The fair value framework as disclosed in the Fair Value Topic includes a hierarchy which focuses on prioritizing the inputs used in valuation techniques. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), a lower priority to observable inputs other than quoted prices in active markets for identical assets and liabilities (Level 2) and the lowest priority to unobservable inputs (Level 3). When determining the fair value measurements for assets and liabilities, First Financial looks to active markets to price identical assets or liabilities whenever possible and classifies such items in Level 1. When identical assets and liabilities are not traded in active markets, First Financial looks to observable market data for similar assets and liabilities and classifies such items as Level 2. Certain assets and liabilities are not actively traded in observable markets and First Financial must use alternative techniques, based on unobservable inputs, to determine the fair value and classifies such items as Level 3. The level within the fair value hierarchy is based on the lowest level of input that is significant in the fair value measurement.
The estimated fair values of First Financial’s financial instruments not measured at fair value on a recurring or nonrecurring basis in the consolidated financial statements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Estimated fair value
|
(Dollars in thousands)
|
|
value
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
245,934
|
|
|
$
|
245,934
|
|
|
$
|
245,934
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Investment securities held-to-maturity
|
|
118,072
|
|
|
123,441
|
|
|
0
|
|
|
123,441
|
|
|
0
|
|
Other investments
|
|
118,292
|
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
Loans held for sale
|
|
69,008
|
|
|
69,008
|
|
|
0
|
|
|
69,008
|
|
|
0
|
|
Loans and leases
|
|
10,032,265
|
|
|
9,953,876
|
|
|
0
|
|
|
0
|
|
|
9,953,876
|
|
Accrued interest receivable
|
|
53,127
|
|
|
53,127
|
|
|
0
|
|
|
11,902
|
|
|
41,225
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
11,567,430
|
|
|
11,576,499
|
|
|
0
|
|
|
11,576,499
|
|
|
0
|
|
Short-term borrowings
|
|
247,658
|
|
|
247,658
|
|
|
247,658
|
|
|
0
|
|
|
0
|
|
Long-term debt
|
|
1,341,164
|
|
|
1,337,424
|
|
|
0
|
|
|
1,337,424
|
|
|
0
|
|
Accrued interest payable
|
|
9,112
|
|
|
9,112
|
|
|
104
|
|
|
9,008
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Estimated fair value
|
(Dollars in thousands)
|
|
value
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
257,639
|
|
|
$
|
257,639
|
|
|
$
|
257,639
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Investment securities held-to-maturity
|
|
142,862
|
|
|
142,821
|
|
|
0
|
|
|
142,821
|
|
|
0
|
|
Other investments
|
|
125,020
|
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
Loans held for sale
|
|
13,680
|
|
|
13,680
|
|
|
0
|
|
|
13,680
|
|
|
0
|
|
Loans and leases
|
|
9,144,015
|
|
|
9,134,215
|
|
|
0
|
|
|
0
|
|
|
9,134,215
|
|
Accrued interest receivable
|
|
39,591
|
|
|
39,591
|
|
|
0
|
|
|
12,743
|
|
|
26,848
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
10,210,229
|
|
|
10,209,790
|
|
|
0
|
|
|
10,209,790
|
|
|
0
|
|
Short-term borrowings
|
|
1,316,181
|
|
|
1,316,181
|
|
|
1,316,181
|
|
|
0
|
|
|
0
|
|
Long-term debt
|
|
414,376
|
|
|
414,937
|
|
|
0
|
|
|
414,937
|
|
|
0
|
|
Accrued interest payable
|
|
13,671
|
|
|
13,671
|
|
|
1,899
|
|
|
11,772
|
|
|
0
|
|
The following methods, assumptions and valuation techniques were used by First Financial to measure different financial assets and liabilities at fair value on a recurring or nonrecurring basis.
Investment securities. Investment securities classified as available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar investment securities. First Financial compiles prices from various sources who may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for the specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Any investment securities not valued based upon the methods previously described are considered Level 3.
First Financial utilizes values provided by third-party pricing vendors to price the investment securities portfolio in accordance with the fair value hierarchy of the Fair Value Topic and reviews the pricing methodologies utilized by the pricing vendors to ensure that the fair value determination is consistent with the applicable accounting guidance. First Financial’s pricing process
includes a series of quality assurance activities where prices are compared to recent market conditions, historical prices and other independent pricing services. Further, the Company periodically validates the fair value of a sample of securities in the portfolio by comparing the fair values to prices from other independent sources for the same or similar securities. First Financial analyzes unusual or significant variances, conducts additional research with the pricing vendor, and if necessary, takes appropriate action based on its findings. The results of the quality assurance process are incorporated into the selection of pricing providers by the portfolio manager.
Derivatives. The fair values of derivative instruments are based primarily on a net present value calculation of the cash flows related to the interest rate swaps and foreign exchange contracts at the reporting date, using primarily observable market inputs such as interest rate yield curves which represents the cost to terminate the swap if First Financial should choose to do so. Additionally, First Financial utilizes an internally-developed model to value the credit risk component of derivative assets and liabilities, which is recorded as an adjustment to the fair value of the derivative asset or liability on the reporting date. Derivative instruments are classified as Level 2 in the fair value hierarchy.
Nonperforming loans. The fair value of nonperforming loans are specifically reviewed for purposes of determining the appropriate amount of impairment to be allocated to the ACL. Fair value is generally measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed third-party appraiser (Level 3). The value of business equipment is based on an outside appraisal, if deemed significant, or the net book value on the applicable borrower financial statements. Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3). Nonperforming loans are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period expected to occur as provision for credit losses on the Consolidated Statements of Income.
OREO. Assets acquired through loan foreclosure are recorded at fair value less costs to sell, with any difference between the fair value of the property and the carrying value of the loan recorded as a charge-off. If the fair value is higher than the carrying amount of the loan, the excess is recognized first as a recovery and then as noninterest income. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in noninterest expense. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value differs from the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals and is updated at least annually. The Company classifies OREO in level 3 of the fair value hierarchy.
The financial assets and liabilities measured at fair value on a recurring basis in the consolidated financial statements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
|
|
(Dollars in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets/liabilities
at fair value
|
September 30, 2020
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
$
|
103
|
|
|
$
|
2,964,105
|
|
|
$
|
40,755
|
|
|
$
|
3,004,963
|
|
Interest rate derivative contracts
|
|
0
|
|
|
208,443
|
|
|
0
|
|
|
208,443
|
|
Foreign exchange derivative contracts
|
|
0
|
|
|
72,433
|
|
|
0
|
|
|
72,433
|
|
Total
|
|
$
|
103
|
|
|
$
|
3,244,981
|
|
|
$
|
40,755
|
|
|
$
|
3,285,839
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest rate derivative contracts
|
|
$
|
0
|
|
|
$
|
209,401
|
|
|
$
|
0
|
|
|
$
|
209,401
|
|
Foreign exchange derivative contracts
|
|
0
|
|
|
72,433
|
|
|
0
|
|
|
72,433
|
|
Total
|
|
$
|
0
|
|
|
$
|
281,834
|
|
|
$
|
0
|
|
|
$
|
281,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
|
|
(Dollars in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets/liabilities
at fair value
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
$
|
100
|
|
|
$
|
2,842,794
|
|
|
$
|
9,190
|
|
|
$
|
2,852,084
|
|
Interest rate derivative contracts
|
|
0
|
|
|
73,558
|
|
|
0
|
|
|
73,558
|
|
Foreign exchange derivative contracts
|
|
0
|
|
|
39,172
|
|
|
0
|
|
|
39,172
|
|
Total
|
|
$
|
100
|
|
|
$
|
2,955,524
|
|
|
$
|
9,190
|
|
|
$
|
2,964,814
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest rate derivative contracts
|
|
$
|
0
|
|
|
$
|
73,750
|
|
|
$
|
0
|
|
|
$
|
73,750
|
|
Foreign exchange derivative contracts
|
|
$
|
0
|
|
|
$
|
39,172
|
|
|
$
|
0
|
|
|
$
|
39,172
|
|
Total
|
|
$
|
0
|
|
|
$
|
112,922
|
|
|
$
|
0
|
|
|
$
|
112,922
|
|
The following table presents a reconciliation for certain AFS securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine month periods ended September 30, 2020 and September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
(dollars in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Beginning balance
|
|
$
|
41,577
|
|
|
$
|
12,798
|
|
|
$
|
9,190
|
|
|
$
|
14,715
|
|
Accretion (amortization)
|
|
(9)
|
|
|
5
|
|
|
10
|
|
|
(557)
|
|
Increase (decrease) in fair value
|
|
12
|
|
|
0
|
|
|
(26)
|
|
|
33
|
|
Settlements
|
|
(825)
|
|
|
(2,940)
|
|
|
31,581
|
|
|
(4,328)
|
|
Ending balance
|
|
$
|
40,755
|
|
|
$
|
9,863
|
|
|
$
|
40,755
|
|
|
$
|
9,863
|
|
Certain financial assets and liabilities are measured at fair value on a nonrecurring basis. Adjustments to the fair market value of these assets usually result from the application of fair value accounting or write-downs of individual assets. The following table summarizes financial assets and liabilities measured at fair value on a nonrecurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
(Dollars in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
September 30, 2020
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
16,030
|
|
OREO
|
|
0
|
|
|
0
|
|
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
(Dollars in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
December 31, 2019
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
9,268
|
|
OREO
|
|
0
|
|
|
0
|
|
|
1,088
|
|
NOTE 17: BUSINESS COMBINATIONS
In August, 2019, the Company completed the acquisition of Bannockburn Global Forex, LLC. Pursuant to the acquisition agreement, First Financial agreed to acquire all of the issued and outstanding membership interests of BGF for aggregate consideration of approximately $114.6 million consisting of $53.7 million in cash and $60.9 million of First Financial common stock. BGF was a privately held capital markets trading firm specializing in foreign currency advisory, hedge analytics, and transaction processing for closely held enterprises. Upon completion of the transaction, Bannockburn became a division of the Bank, but continues to operate as Bannockburn Global Forex, taking advantage of its existing brand recognition within the foreign exchange industry.
The Bannockburn transaction was accounted for using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date, in accordance with FASB ASC Topic 805, Business Combinations. The fair value measurements of assets acquired and liabilities assumed were $74.9 million and $18.4 million, respectively, and were subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values became available. The fair values of assets acquired and liabilities assumed were considered final as of August 2020. Goodwill arising from the BGF acquisition was $58.0 million and reflects the business’s high growth potential and the expectation that the acquisition will provide additional revenue growth and diversification. The goodwill is deductible for income tax purposes as the transaction is considered a taxable exchange. For further detail, see Note 6 – Goodwill and Other Intangible Assets.