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TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019

OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
Commission File Number 001-34762
FIRST FINANCIAL BANCORP.
(Exact name of registrant as specified in its charter)
Ohio
 
31-1042001
(State of incorporation)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
255 East Fifth Street, Suite 800
Cincinnati
Ohio
 
45202
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code:  (877) 322-9530

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol
 
Name of each exchange on which registered
Common stock, No par value
 
FFBC
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☒ Yes     ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 ☐ Yes     ☒  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes     ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes     ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 ☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes    ☒  No
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the sales price of the last trade of such stock as of June 30, 2019, was $2,341,389,000.  (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)
As of February 20, 2020, there were issued and outstanding 98,490,998 common shares of the registrant.
Documents Incorporated by Reference:
Portions of the registrant’s Annual Report to Shareholders for the year ended December 31, 2019 are incorporated by reference into Parts I and II.
Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 26, 2020 are incorporated by reference into Part III.

TABLE OF CONTENTS

FORM 10-K CROSS REFERENCE INDEX

 
 
 
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TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS


Certain statements contained in this Annual Report on Form 10-K and the documents incorporated by reference that are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, the statements specifically identified as forward-looking statements within this document. In addition, certain statements in future filings by us with the SEC, in press releases, and in oral and written statements made by or with our approval, which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include: (i) projections of income or expense, earnings per share, the payment or non-payment of dividends, capital structure and other financial items; (ii) statements of our plans and objectives or our management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying those statements.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those predicted by the forward-looking statements because of various factors and possible events, including those factors and events identified (i) in "Item 1A. Risk Factors" of this Annual Report on Form 10-K and (ii) in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of First Financial's 2019 Annual Report (included within Exhibit 13 to this Annual Report on Form 10-K and incorporated by reference into Item 7 of this Annual Report on Form 10-K).

Forward-looking statements speak only as of the date on which they are made, and, except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect unanticipated events. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified in their entirety by the foregoing cautionary statements.


TABLE OF CONTENTS

PART I

Item 1.  Business.

First Financial Bancorp.

First Financial Bancorp., an Ohio corporation (First Financial or the Company), was formed in 1982.  First Financial is a mid-sized, regional bank holding company headquartered in Cincinnati, Ohio, which has elected to become a financial holding company. References in this Form 10-K to “we,” “us” or “our” refer, as the context requires, to First Financial and its subsidiaries, collectively or to First Financial as the holding company.

First Financial engages in the business of commercial banking and other banking and banking-related activities through its wholly owned subsidiary, First Financial Bank (the Bank), which was founded in 1863. Effective December 30, 2016, the Bank converted its charter to an Ohio state chartered bank from a nationally chartered bank.

The range of banking services provided by First Financial to individuals and businesses includes commercial lending, real estate lending and consumer financing.  Real estate loans are loans secured by a mortgage lien on the real property of the borrower, which may either be residential property (one to four family residential housing units) or commercial property (owner-occupied and/or investor income producing real estate, such as apartments, shopping centers, or office buildings).  Risk of loss related to lending activities is managed by adherence to standard loan policies that establish certain levels of performance prior to the extension of a loan to the borrower.  In addition, First Financial offers deposit products that include interest-bearing and noninterest-bearing accounts, time deposits and cash management services for commercial customers. A full range of trust and wealth management services is also provided through First Financial’s Wealth Management line of business.

Commercial and industrial loans are made to all types of businesses for a variety of purposes including, but not limited to, inventory, receivables and equipment.  First Financial works with businesses to meet their shorter term working capital needs while also providing long-term financing for their business plans.  First Financial also offers lease and equipment financing through a wholly-owned subsidiary of the Bank, First Financial Equipment Finance LLC (First Equipment Finance).  Credit risk for lending activities is managed through standardized loan policies, established and authorized credit limits, centralized portfolio management and the diversification of market area and industries.  The overall strength of the borrower is evaluated through the credit underwriting process and includes a variety of analytical activities, including the review of historical and projected cash flows, financial performance, financial strength of the principals and guarantors and collateral values, where applicable.

Commercial and industrial lending activities also include equipment and leasehold improvement financing for franchisees throughout the U.S., principally in the quick service and casual dining sector.  The underwriting of these loans incorporates basic credit proficiencies combined with knowledge of select franchise concepts to measure the creditworthiness of proposed multi-unit borrowers.  The focus is on a limited number of concepts that we believe have sound economics, lower closure rates, and higher brand awareness within specified local, regional or national markets.  Loan terms for equipment are generally up to 84 months fully amortizing and up to 180 months on real estate-related requests.

First Financial also offers secured commercial financing throughout the U.S. through two wholly-owned subsidiaries of the Bank, Oak Street Funding LLC (Oak Street) and First Franchise Capital Corporation (First Franchise). Oak Street lends to the insurance industry, registered investment advisors, certified public accountants and indirect auto finance companies, while First Franchise lends to restaurant franchisees. Together, these niche lending activities are driven by acquisitions, ownership transitions and financing general working capital needs.  The underwriting of Oak Street's loans involves analyses of collateral (through use of Oak Street’s proprietary system) that consists of revenue, which is then continuously monitored by Oak Street throughout the life of the loans.

Commercial real estate loans are secured by a mortgage lien on the real property.  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, type of real estate and other analyses.  Market diversification within First Financial’s service area and industry diversification are other means by which First Financial manages the risk.  First Financial does not have a significant exposure to residential builders and developers.

The majority of residential real estate loans originated by the Bank conform to secondary market underwriting standards and are sold within a short timeframe to unaffiliated third parties. The Bank sells the loans with both servicing retained and servicing released, depending on pricing and other market conditions.  The credit underwriting standards adhere to a required

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level of documentation, verifications, valuation and overall credit performance of the borrower.  The underwriting of these loans includes an evaluation of these and other pertinent factors prior to the extension of credit. These underwriting standards increase the marketability and address the credit risk associated with the loans.

Consumer loans are primarily loans made to individuals.  These types of loans include new and used vehicle loans, second mortgages on residential real estate and unsecured loans.  Risk elements in the consumer loan portfolio are primarily focused on the borrower’s cash flow and credit history, which are key indicators of the ability to repay.  A level of security is provided through liens on automobile titles and second mortgage liens, where applicable.  Consumer loans are generally smaller dollar amounts than other types of lending and are made to a large number of customers, increasing diversification within the portfolio.  Economic conditions that affect consumers in First Financial’s markets have a direct impact on the credit quality of these loans.  Higher levels of unemployment, lower levels of income growth and weaker economic growth are factors that may impact consumer loan credit quality.

Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.  Home equity lines of credit are generally governed by the same lending policies and subject to the same credit risks as described previously for residential real estate loans.

Information regarding statistical disclosure required by the Securities and Exchange Commission’s Industry Guide 3 is included on the "Statistical Information" page in First Financial's Annual Report to Shareholders for the year ended December 31, 2019, and is incorporated herein by reference.

First Financial's executive office is located at 255 East Fifth Street, Suite 800, Cincinnati, Ohio 45202, and the telephone number is (877) 322-9530.  We maintain a website with the address www.bankatfirst.com. The information contained on our website is not included, a part of or incorporated by reference into this Annual Report on Form 10-K. First Financial makes available its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, free of charge, as soon as reasonably practicable after filing with the Securities and Exchange Commission (SEC), through its website, www.bankatfirst.com under the “Investor Relations” link, under “Financial Reporting.”  Copies of such reports also can be found on the SEC’s website at www.sec.gov.

Employees

At December 31, 2019, First Financial and its subsidiaries had 2,123 full-time and part-time employees.

Subsidiaries

A listing of each of First Financial’s subsidiaries can be found in Exhibit 21 to this Form 10-K.

Business Combinations

In August 2019, the Company acquired Bannockburn Global Forex, LLC, an industry-leading capital markets firm. The
Cincinnati-based company provides transactional currency payments, foreign exchange hedging and other advisory products to
closely held enterprises, financial sponsors and downstream financial institutions across the United States. Bannockburn
became a division of the Bank and will continue to operate under the name "Bannockburn Global Forex", taking advantage of its existing brand recognition within the foreign exchange industry. The total purchase consideration was $114.6 million consisting of $53.7 million in cash and $60.9 million of First Financial common stock.

In April 2018, First Financial acquired MainSource Financial Group, Inc., an Indiana bank holding company in a stock-for-stock transaction and MainSource Bank, a wholly owned subsidiary of MainSource, merged into First Financial Bank. Under the terms of the merger agreement, shareholders of MainSource received 1.3875 common shares of First Financial common stock for each share of MainSource common stock. At the effective time of the merger, MainSource had assets of approximately $4.5 billion and operated 88 full-service offices in Indiana, Ohio, Illinois and Kentucky.

Market and Competitive Information

First Financial utilizes a community banking business model and serves a combination of metropolitan and non-metropolitan markets through its full-service banking centers primarily in Indiana, Ohio, Kentucky and Illinois.  Market selection is based upon a number of factors, but markets are primarily chosen for their potential for growth, long-term profitability and customer reach.  First Financial’s goal is to develop a competitive advantage through a local market focus, building long-term relationships with clients to help them reach greater levels of financial success.

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We also compete on a nationwide basis through Oak Street which lends to the insurance industry, registered investment advisors, certified public accountants and indirect auto finance companies, First Franchise which lends to restaurants franchisees and Bannockburn which provides foreign exchange services to customers throughout the United States.

The Company’s markets support many different types of business activities, such as manufacturing, agriculture, education, healthcare and professional services.  Within these markets, growth is projected to continue in key demographic groups and populations.  First Financial’s market evaluation includes demographic measures such as income levels, median household income and population growth.  The Midwestern markets that First Financial serves have historically not experienced the level of economic volatility experienced in other areas of the country, although material fluctuations may occur.  

First Financial believes that it is well positioned to compete in its markets.  Smaller than super-regional and multi-national bank holding companies, First Financial believes that it can meet the needs of its markets through a local decision-making process and that it is better positioned to compete for business than smaller community banks that may have size or geographic limitations.  First Financial’s targeted customers include individuals and small to medium sized businesses within the Bank's geographic footprint. Through its diversified delivery systems of banking centers, ATMs, internet banking and telephone-based transactions, First Financial is able to meet the needs of its customers in an ever-changing marketplace.

First Financial faces strong competition from financial institutions and other non-financial organizations.  Its competitors include local and regional financial institutions, savings and loans and bank holding companies, as well as some of the largest banking organizations in the United States.  In addition, other types of financial institutions, such as credit unions, offer a wide range of loan and deposit services that are competitive with those offered by First Financial. The consumer is also served by brokerage firms and mutual funds that provide checking services, credit cards, margin loans and other services similar to those offered by First Financial.  Online lenders also create additional competition, particularly in the mortgage and consumer lending areas. Major consumer retail stores compete for loans by offering credit cards and retail installment contracts.  It is anticipated that competition from other financial and non-financial services entities will continue and, for certain products and services, intensify.

Supervision and Regulation

First Financial and its subsidiaries are subject to an extensive system of laws and regulations that are intended primarily for the protection of customers, the Deposit Insurance Fund (DIF), and the banking system in general and not for the protection of shareholders.  These laws and regulations govern areas such as capital, permissible activities, allowance for loan and lease losses, loans and investments, interest rates that can be charged on loans and consumer protection communications and disclosures.  Certain elements of selected laws and regulations are described in more detail in the sections that follow.  These descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described.

Bank Holding Company Regulation

As a bank holding company, First Financial is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the BHCA), and is subject to supervision and examination by the Federal Reserve Board.  The BHCA requires prior approval by the Federal Reserve Board of the acquisition of 5% or more of the voting stock or substantially all the assets of any bank within the United States.  In addition, First Financial’s acquisition of a savings and loan association requires prior Federal Reserve Board approval. Acquisitions are also subject to certain anti-competitive limitations.

The BHCA and the regulations of the Federal Reserve Board prohibit a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services.  A tie-in arrangement is when a bank uses its ability to offer banking products in a coercive manner to gain a competitive advantage for non-banking products or services. The BHCA also imposes certain restrictions upon dealings by affiliated banks with the holding company and among themselves, including restrictions on inter-bank borrowing and upon dealings in the securities or obligations of the holding company or other affiliates.

The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including the ability to assess civil monetary penalties, issue cease and desist or removal orders, and require that a bank holding company divest subsidiaries (including a subsidiary bank). In general, the Federal Reserve Board may initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices. A bank holding company is required by law and Federal Reserve Board policy to act as a source of financial strength to each subsidiary bank and to commit resources to support such subsidiary bank. The Federal Reserve Board may require a bank holding company to contribute additional capital to an

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undercapitalized subsidiary bank and may disapprove of the payment of dividends to its shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound practice.

With some exceptions, the BHCA prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve non-bank activities that, by statute or by Federal Reserve Board regulation or order, are held to be closely related to the business of banking or of managing or controlling banks. A bank holding company that elects to be a financial holding company may, however, engage in additional non-bank activities that are financial in nature or incidental to activities that are financial in nature.
Activities that are considered by the Federal Reserve Board to be “financial in nature” include:

•securities underwriting, dealing and market making;
•sponsoring mutual funds and investment companies;
•insurance underwriting and agency;
•merchant banking; and
•activities that the Federal Reserve Board has determined to be closely related to banking.

A financial holding company must be well-capitalized and well-managed, and each subsidiary bank must be well-capitalized and well-managed and have a CRA rating of at least satisfactory. If a financial holding company or a subsidiary bank fails to meet all requirements for the holding company to maintain financial holding company status, material restrictions may be placed on the activities of the holding company and on the ability of the holding company to enter into certain transactions or obtain regulatory approvals. The holding company could also lose its financial holding company status and could be required to divest ownership or control of all banks owned by the financial holding company. If restrictions are imposed on the activities of a financial holding company, such restrictions may not be made publicly available pursuant to confidentiality regulations of the banking regulators.

Economic Growth, Regulatory Relief and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended (the Dodd-Frank Act), has had a broad impact on the financial services industry, imposing significant regulatory and compliance requirements, including the imposition of increased capital, leverage, and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector. Additionally, the Dodd-Frank Act established a new framework of authority to conduct systemic risk oversight within the U.S. financial system to be distributed among new and existing federal regulatory agencies, including the U.S. Financial Stability Oversight Council, the Federal Reserve Board, and the Federal Deposit Insurance Corporation (FDIC).
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the Regulatory Relief Act) was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. Bank holding companies with consolidated assets of less than $100 billion, including First Financial, are no longer subject to the enhanced capital, liquidity, risk management and other prudential standards established under the Dodd-Frank Act. The Regulatory Relief Act also relieves bank holding companies and banks with consolidated assets of less than $100 billion, including First Financial, from certain record-keeping, reporting and disclosure requirements. Certain other regulatory requirements applied only to banks with assets in excess of $50 billion and so did not apply to the Company even before the enactment of the Regulatory Relief Act.

Depository Institution Regulation

The Bank, as a bank chartered under the laws of the State of Ohio and a member of the Federal Reserve Bank of Cleveland (Federal Reserve Bank), is subject to supervision and examination by the Federal Reserve Board and the Ohio Division of Financial Institutions (ODFI). The Bank's deposits are insured up to the legal limits by the DIF, which is administered by the FDIC and is subject to the provisions of the Federal Deposit Insurance Act, as amended (FDIA). The Bank is also subject to regulations of the Consumer Financial Protection Bureau (CFPB), which was established by the Dodd-Frank Act and has broad powers to adopt and enforce consumer protection regulations.

Regulatory Capital

Financial institutions and their holding companies are required to maintain capital as a way of absorbing losses that can and cannot be predicted. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies as well

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as state banks that are members of a Federal Reserve Bank. The guidelines provide a systematic analytical framework that makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and incentivizes to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of prompt corrective action regulatory provisions.    

In July 2013, the United States banking regulators approved final rules (the Basel III Capital Rules) implementing the Basel III framework set forth by the Basel Committee on Banking Supervision, as well as certain provisions of the Dodd-Frank Act. Community banking organizations, including First Financial and the Bank, began transitioning to the new rules when the new minimum capital requirements became effective on January 1, 2015. A capital conservation buffer (i.e. common equity) and additional deductions from common equity capital were phased in through January 1, 2019.

The Basel III capital rules include (a) a minimum common equity tier 1 capital ratio of at least 4.5%, (b) a minimum tier 1 capital ratio of at least 6.0%, (c) a minimum total capital ratio of 8.0% and (d) a minimum leverage ratio of 4.0%.

Common equity for the common equity tier 1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus, trust preferred securities that have been grandfathered (but which are not otherwise permitted), and limited amounts of minority interests in the form of additional tier 1 capital instruments, less certain deductions.

Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to specified eligibility criteria, less applicable deductions.

The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).

The Basel III Capital Rules also place restrictions on the payment of capital distributions, including dividends and stock repurchases, and certain discretionary bonus payments to executive officers if the Company does not hold a capital conservation buffer greater than 2.5% composed of common equity tier 1 capital compared to its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer requirement phases were fully phased in as of January 1, 2019.

Federal banking regulators have established regulations governing prompt corrective action to resolve capital deficient banks. Under these regulations, institutions that become undercapitalized become subject to mandatory regulatory scrutiny and limitations, which increase as capital continues to decrease. Each such institution is also required to file a capital plan with its primary federal regulator, and its holding company must guarantee the capital shortfall up to 5% of the assets of the capital deficient institution at the time it becomes undercapitalized.

In accordance with the Basel III Capital Rules, in order to be “well-capitalized” under the prompt corrective action guidelines, a bank must have a common equity tier 1 capital ratio of at least 6.5%, a total risk-based capital ratio of at least 10.0%, a tier 1 risk-based capital ratio of at least 8.0% and a leverage ratio of at least 5.0%, and the bank must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level or any capital measure. At December 31, 2019, the Bank met the capital ratio requirements to be deemed “well-capitalized” according to the guidelines previously described.

A bank with a capital level that might qualify for well capitalized or adequately capitalized status may nevertheless be treated as though the bank is in the next lower capital category if the bank’s primary federal banking supervisory authority determines that an unsafe or unsound condition or practice warrants that treatment. A bank’s operations can be significantly affected by its capital classification under the prompt corrective action rules. For example, a bank that is not well capitalized generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market without advance regulatory approval. These deposit-funding limitations can have an effect on the bank’s liquidity. At each successively lower capital category, an insured depository institution is subject to additional restrictions. Undercapitalized banks are required to take specified actions to increase their capital or otherwise decrease the risks to the DIF. Bank regulatory

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agencies generally are required to appoint a receiver or conservator within 90 days after a bank becomes critically undercapitalized with a leverage ratio of less than 2%. The FDIA provides that a federal bank regulatory authority may require a bank holding company to divest itself of an undercapitalized bank subsidiary if the agency determines that divestiture will improve the bank’s financial condition and prospects.

On June 16, 2016, the Financial Accounting Standards Board (FASB) issued the current expected credit loss (CECL) methodology for estimating allowances for credit losses. CECL replaces the allowance for loan losses (ALLL) standard. The Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, and the Federal Deposit Insurance Corporation (FDIC) issued a final rule in December 2018 to address regulatory treatment of credit loss allowances under CECL. The final rule revised the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under CECL are eligible for inclusion in regulatory capital and to provide certain banking institutions the option to phase in over three years the day one effects on regulatory capital that may result from the adoption of the CECL. First Financial expects to adopt the regulatory phase-in over the permissible three-year period.

Debit Card Interchange Fees
The “Durbin Amendment” to the Dodd-Frank Act, also known as Regulation II, was enacted into law in July 2010. The Durbin Amendment limits the amount of interchange fees that banks with assets of $10 billion or more may charge to process electronic debit transactions. Under the Durbin Amendment and the Federal Reserve Board’s implementing regulations, bank issuers which are not exempt may only receive an interchange fee from merchants that is reasonable and proportional to the cost of clearing the transaction. The maximum permissible interchange fee is equal to no more than $0.21 plus 5 basis points of the transaction value for many types of debit interchange transactions. A debit card issuer may also recover $0.01 per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements established by the Federal Reserve Board. In addition, the Federal Reserve Board has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
First Financial became subject to the Durbin Amendment on July 1, 2019 and will experience the full impact of the Durbin Amendment in its 2020 financial statements. First Financial expects noninterest income to decline by an additional $6.5 million in 2020 as a result of the Durbin Amendment.

Limitations on Dividends and Other Payments

There are various legal limitations on the extent to which a subsidiary bank may finance or otherwise supply funds to its parent holding company. Under applicable federal and state laws, the Bank may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, First Financial. A subsidiary bank is also subject to collateral security requirements for any loan or extension of credit permitted by such exceptions.

The Bank may not pay dividends out of its surplus if, after paying these dividends, it would fail to meet the required minimum capital levels established by the Federal Reserve Board. The amount of dividends payable by the Bank is also restricted if the Bank does not hold a capital conservation buffer as described above. In addition, the Bank must have the approval of the Federal Reserve Board and the ODFI if a dividend in any year would cause the total dividends for that year to exceed the sum of the Bank’s current year’s net income and the retained net income for the preceding two years, less required transfers to surplus or to fund the retirement of preferred stock. Under Ohio law, the Bank may pay a dividend from surplus only with the approval of First Financial (as the sole shareholder of the Bank) and the approval of the ODFI. Payment of dividends by the Bank may be restricted at any time at the discretion of its regulatory authorities, if such regulatory authorities deem such dividends to constitute unsafe and/or unsound banking practices or if necessary to maintain adequate capital.

The ability of First Financial to obtain funds for the payment of dividends, for the servicing of indebtedness and for other cash requirements is largely dependent on the amount of dividends that may be declared by the Bank. However, because the Federal Reserve Board expects First Financial to serve as a source of strength to the Bank, as discussed above, payment of dividends by the Bank may be restricted at any time at the discretion of the Federal Reserve Board if the Federal Reserve Board deems such dividends to constitute an unsafe and/or unsound banking practice.

The Federal Reserve Board has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that, as a matter of prudent banking, a bank holding company should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the bank holding company’s capital needs, asset quality, and overall financial condition. Accordingly, a bank holding company generally should not pay cash dividends that exceed its net income or can only be funded in ways that weaken the bank holding company’s financial health, such as by

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borrowing. Under certain circumstances, a bank holding company must provide notice to the Federal Reserve Board of an intended dividend payment, to which the Federal Reserve Board might object if it determines the payment would be an unsafe or unsound practice.

Insurance of Accounts

The FDIC maintains the DIF, which insures the deposit accounts of the Bank to the maximum amount provided by law.  The general insurance limit is $250,000 per separately insured depositor.  This insurance is backed by the full faith and credit of the United States government.

The FDIC assesses deposit insurance premiums on each insured institution quarterly based on risk characteristics of the institution. As a bank with assets of more than $10 billion, First Financial is subject to a deposit assessment based on a scorecard issued by the FDIC. This scorecard considers, among other things, the Bank’s CAMELS rating, results of asset-related stress testing and funding-related stress, as well as its use of core deposits, among other things. Depending on the results of the Bank’s performance under that scorecard, the total base assessment rate is between 1.5 and 40 basis points. The FDIC may also impose a special assessment in an emergency situation.

Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (DRR), which is the ratio of the DIF to insured deposits of the total industry. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. The FDIC’s rules reduced assessment rates on all banks, but imposed a surcharge on banks with assets of $10 billion or more until the DRR reached 1.35% and will provide assessment credits to banks with assets of less than $10 billion for the portion of their assessments that contribute to the increase of the DRR to 1.35%. The rules also changed the method to determine risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than less risky banks. The reserve ratio reached 1.36% on September 30, 2018, and, as a result, the surcharge on banks with assets of $10 billion or more ceased with the first assessment invoice in 2019. In addition, once the DRR reached 1.38%, the FDIC applied an assessment credit to banks that had assets below $10 billion at any time during the credit calculation period, which includes the Bank. As such, the Bank received assessment credits in 2019 of approximately $3.4 million.
In addition, all institutions with deposits insured by the FDIC were required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed ownership government corporation established to recapitalize a predecessor to the DIF. These assessments continued until the Financing Corporation bonds matured in September 2019. The last assessment was collected on the March 2019 FDIC invoice.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by DIF-insured institutions. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC.

Consumer Protection Laws and Regulations

Banks are subject to regular examination to ensure compliance with federal statutes and regulations applicable to their business, including consumer protection statutes and implementing regulations. Potential penalties under these laws include, but are not limited to, fines. The Dodd-Frank Act established the CFPB, which has extensive regulatory and enforcement powers over consumer financial products and services. As a bank with total assets in excess of $10 billion, the Bank is primarily examined by the CFPB with respect to consumer protection laws and regulations. The CFPB has adopted numerous rules with respect to consumer protection laws and has commenced related enforcement actions. The following are just a few of the consumer protection laws applicable to the Bank:

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Community Reinvestment Act of 1977: imposes a continuing and affirmative obligation to fulfill the credit needs of its entire community, including low- and moderate-income neighborhoods.

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Equal Credit Opportunity Act: prohibits discrimination in any credit transaction on the basis of any of various criteria.

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Truth in Lending Act: requires that credit terms are disclosed in a manner that permits a consumer to understand and compare credit terms more readily and knowledgeably.


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Fair Housing Act: makes it unlawful for a lender to discriminate in its housing-related lending activities against any person on the basis of any of certain criteria.

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Home Mortgage Disclosure Act: requires financial institutions to collect data that enables regulatory agencies to determine whether the financial institutions are serving the housing credit needs of the communities in which they are located.

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Real Estate Settlement Procedures Act: requires that lenders provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits abusive practices that increase borrowers’ costs.

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Privacy provisions of the Gramm-Leach-Bliley Act: requires financial institutions to establish policies and procedures to restrict the sharing of non-public customer data with non-affiliated parties and to protect customer information from unauthorized access.

The banking regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of specific banking or consumer finance law.

In October 2017, the CFPB issued a final rule (the Payday Rule) to establish regulations for payday loans, vehicle title loans, and certain high-cost installment loans. The Payday Rule addressed two discrete topics. First, it contained a set of provisions with respect to the underwriting of certain covered loans and related reporting and recordkeeping requirements (the Mandatory Underwriting Provisions). Second, it contained a set of provisions establishing certain requirements and limitations with respect to attempts to withdraw payments from consumers’ checking or other accounts and related recordkeeping requirements (the Payment Provisions). The Payday Rule became effective on January 16, 2018. However, most provisions had a compliance date of August 19, 2019.
On June 6, 2019, the CFPB issued a final rule delaying the compliance date for most Mandatory Underwriting Provisions until November 19, 2020. However, the final rule did not delay the compliance date for the Payment Provisions. The CFPB has proposed in a separate notice to rescind the Mandatory Underwriting Provisions. The Payday Rule did not have a material effect on First Financial's financial condition or results of operations on a consolidated basis in 2019.

Community Reinvestment Act

Under the Community Reinvestment Act (CRA), every FDIC-insured institution is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low and moderate income neighborhoods.  The CRA requires the appropriate federal banking regulator, in connection with the examination of an insured institution, to assess the institution's record of meeting the credit needs of its community and to consider this record in its evaluation of certain applications to banking regulators, such as an application for approval of a merger or the establishment of a branch.  An unsatisfactory rating may be used as the basis for the denial of an application and will prevent a bank holding company from making an election to become a financial holding company. As of its last examination, the Bank received a CRA rating of “satisfactory.”

Privacy Rules

Federal banking regulators, as required under the Gramm-Leach-Bliley Act, as amended (the GLBA), have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to non-affiliated third parties.  The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties.  The privacy provisions of the GLBA affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.


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Fiscal and Monetary Policies

The earnings of banks, and, therefore, the earnings of First Financial (and its subsidiaries), are affected by the fiscal and monetary policies of the United States government and its agencies, including the Federal Reserve Board.  An important function of the Federal Reserve Board is to regulate the national supply of bank credit in an effort to prevent recession and to restrain inflation.  Among the procedures used to implement these objectives are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements on member bank deposits. These policies are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits.

Volcker Rule

In December 2013, five federal agencies adopted a final regulation implementing the so-called Volcker Rule provision of the Dodd-Frank Act (the Volcker Rule). The Volcker Rule places limits on the trading activity of insured depository institutions and entities affiliated with depository institutions, subject to certain exceptions. Such trading activity includes the purchase or sale as principal of a security derivative, commodity future, option, or similar instrument in order to benefit from short-term price movements or to realize short-term profits. The Volcker Rule exempts trading in specified U.S. government, agency, state and/or municipal obligations. The Volcker Rule also excludes: (i) trading conducted in certain capacities, including as a broker or other agent, through a deferred compensation or pension plan, as a fiduciary on behalf of customers; (ii) to satisfy a debt previously contracted; (iii) trading under certain repurchase and securities lending agreements; and (iv) trading in connection with risk-mitigating hedging activities. Further, the Volcker Rule prohibits a banking entity from having an ownership interest in, or certain relationships with, a hedge fund or private equity fund, subject to a number of exceptions. To the extent First Financial engages in any of the trading activities or has any ownership interests in or relationship with any of the types of funds regulated by the Volcker Rule, First Financial believes that its activities and relationships fall within the scope of one or more of these exceptions.

Transactions with Affiliates, Directors, Executive Officers and Shareholders

Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Board Regulation W generally:

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limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of the bank’s capital stock and surplus;
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limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates to an amount equal to 20.0% of the bank’s capital stock and surplus; and
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require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate.

An affiliate of a bank is any company or entity which controls, is controlled by, or is under common control with the bank. The term “covered transaction” includes the making of loans to the affiliate, the purchase of assets from the affiliate, the issuance of a guarantee on behalf of the affiliate, the purchase of securities issued by the affiliate, and other similar types of transactions.

A bank’s authority to extend credit to executive officers, directors and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve Board. Among other things, these loans must be made on terms (including interest rates charged and collateral required) substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.


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Executive and Incentive Compensation

In June 2010, the Federal Reserve Board, the OCC and the FDIC issued joint interagency guidance on incentive compensation policies (the Joint Guidance) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. The Joint Guidance made incentive compensation part of the regulatory agencies’ examination process, with the findings of the supervisory initiatives included in reports of examination and enforcement actions possible.

In May 2016, the federal bank regulatory agencies approved a joint notice of proposed rules (the Proposed Joint Rules) designed to prohibit incentive-based compensation arrangements that encourage inappropriate risks at financial institutions. The Proposed Joint Rules apply to covered financial institutions with total assets of $1 billion or more. For all covered institutions, the Proposed Joint Rules:

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prohibit incentive-based compensation arrangements that are “excessive” or “could lead to material financial loss;”
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require incentive based compensation that is consistent with a balance of risk and reward, effective management and control of risk and effective governance; and
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require board oversight, recordkeeping and disclosure to the appropriate regulatory agency.

Further, as stock exchanges adopt additional listing requirements under the Dodd-Frank Act, public companies will be required to implement “clawback” procedures for incentive compensation payments and to disclose the details of the procedures, which will allow recovery of incentive compensation paid on the basis of erroneous financial information necessitating an accounting restatement due to material noncompliance with financial reporting requirements. This clawback policy, once implemented, will apply to compensation paid within a three-year look-back window of the restatement and would cover all executives (including former executives) who received incentive awards.

Office of Foreign Assets Control Regulation

The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. First Financial is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the financial institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the financial institution or its critical service providers fall victim to this type of cyber-attack. If First Financial fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.

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State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. First Financial expects this trend of new state-level activity to continue and is actively monitoring developments in the states in which we conduct business.
In the ordinary course of business, First Financial relies on electronic communications and information systems to conduct its operations and to store sensitive data. First Financial employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. First Financial utilizes a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as report on any suspected advanced persistent threats. Notwithstanding the strength of First Financial’s defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, in addition to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.

Patriot Act

In response to the terrorist events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act) was signed into law in October 2001. The Patriot Act gives the United States government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions. Among other requirements, Title III and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity. The Bank has established policies and procedures that it considers to be in compliance with the requirements of the Patriot Act.

State Law

As an Ohio-chartered bank, the Bank is subject to regular examination by the ODFI. State banking regulation affects the Bank’s internal organization and corporate governance, capital distributions, activities, acquisitions of other institutions and branching. State banking regulation may contain limitations on an institution’s activities that are in addition to limitations imposed under federal banking law. The ODFI may initiate supervisory measures or formal enforcement actions, and under certain circumstances, it may take control of an Ohio-chartered bank.

Item 1A. Risk Factors.

The risks listed here are not the only risks we face. Additional risks that are not presently known, or that we presently deem to be immaterial, also could have a material effect on our financial condition, results of operations, business and prospects. (See also “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for certain forward looking statements.)

Risks Related to Economic and Market Conditions

Weakness in the economy and in the real estate market, including specific weakness within our geographic footprint, may affect us, including requiring us to record additional loan loss provision or to charge off loans.
First Financial’s success depends, in part, on economic and political conditions, local and national, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy and other factors beyond First Financial’s control may affect its deposit levels and composition, demand for loans, the ability of borrowers to repay their loans and the value of the collateral securing the loans it makes. Economic turmoil in different regions of the world affect the economy and stock prices in the United States, which can affect First Financial’s earnings and capital and the ability of its customers to repay loans. Due to First Financial's volume of real estate loans, declining real estate values could affect the value of property used as collateral as well as First Financial’s ability to sell the collateral upon foreclosure.

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If the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations decline, this could result in, among other things, a deterioration of credit quality or a reduced demand for credit, including a resultant effect on our loan portfolio and allowance for credit losses. These factors could also result in higher delinquencies and greater charge-offs in future periods, which would materially affect our financial condition and results of operations.
There is no assurance that our non-impaired loans will not become impaired or that our impaired loans will not suffer further deterioration in value. The fluctuations in national, regional and local economic conditions, including those related to local residential, commercial real estate and construction markets, may result in increased charge-offs and, consequently, reduce our net income. These fluctuations are not predictable, cannot be controlled and may have a material impact on our operations and financial condition even if other favorable events occur.
Weakness in the real estate market, including the secondary market for residential mortgage loans, could affect us.
Disruptions in the secondary market for residential mortgage loans limit the market for and liquidity of many mortgage loans. The effects of mortgage market challenges, combined with reductions in residential real estate market prices and reduced levels of home sales, could affect the value of collateral securing mortgage loans that we hold, mortgage loan originations and profits on sales of mortgage loans. Such conditions could result in higher losses or charge-offs in our mortgage loan portfolio and other lines of business. Declines in real estate values, home sale volumes, financial stress on borrowers as a result of job losses, interest rate resets on adjustable rate mortgage loans or other factors could have further effects on borrowers that could result in higher delinquencies and greater charge-offs in future periods, which would affect our financial condition or results of operations. Additionally, declines in real estate values might affect the creditworthiness of state and local governments, resulting in decreased profitability or credit losses from loans made to such governments. A decline in home values or overall economic weakness could also have an impact upon the value of real estate or other assets which we own upon foreclosing a loan and our ability to realize value on such assets.
Changes in market interest rates or capital markets could affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital or liquidity.
Given our business mix, and the fact that most of our assets and liabilities are financial in nature, we tend to be sensitive to market interest rate movements and the performance of the financial markets. Our primary source of income is net interest income, which is the difference between the interest income generated by our interest-earning assets (consisting primarily of loans and, to a lesser extent, securities) and the interest expense generated by our interest-bearing liabilities. Prevailing economic conditions, fiscal and monetary policies and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which, in turn, significantly affect financial institutions’ net interest income. If the interest we pay on deposits and other borrowings increases at a faster rate than increases in the interest we receive on loans and investments, net interest income, and, therefore, our earnings, could be affected. Earnings could also be affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings.
In addition to the general impact of the economy, changes in interest rates or in valuations in the debt or equity markets could directly impact us in one or more of the following ways:

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the yield on earning assets and rates paid on interest bearing liabilities may change in disproportionate ways;
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the value of certain balance sheet and off-balance sheet financial instruments or the value of equity investments that we hold could decline;
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the value of assets for which we provide processing services could decline;
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the demand for loans and refinancings may decline, which could negatively impact income related to loan originations; or
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to the extent we access capital markets to raise funds to support our business, such changes could affect the cost of such funds or the ability to raise such funds.

Although we have implemented procedures we believe will reduce the potential effects of changes in interest rates on our results of operations, these procedures may not always be successful. In addition, any substantial or prolonged change in market interest rates could affect our financial condition, results of operations and liquidity.
We may be impacted by the transition from LIBOR as a reference rate.

The London Interbank Offered Rate or “LIBOR” is used extensively in the United States and globally as a reference rate for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other

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derivatives. In 2017, the United Kingdom’s Financial Conduct Authority announced that in 2021 it would no longer compel banks to submit rates required to calculate LIBOR. Therefore, it is uncertain at this time to what extent banks will continue to provide submissions for the calculation of LIBOR after 2021.
As a result of this announcement, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fallback language for LIBOR-linked financial instruments, identified and recommended alternatives for LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR) and proposed implementations of the recommended alternatives in floating rate instruments, including loans and derivatives. It is currently unknown whether these recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what effect of their implementation may have on the markets for floating-rate financial instruments. Any discontinuance, modification, alternative reference rates or other reforms may affect interest rates on our current or future indebtedness and other financial instruments.
First Financial has established a working group to manage the LIBOR transition process.  The working group is in the process of identifying all LIBOR-related contracts and determining which, if any, will require amended language to incorporate a substitute reference rate.  The working group has also developed and implemented flexible language regarding reference rates for all new loan products and agreements and is working on identifying a replacement index for 2021 and beyond. 
Until this replacement rate is identified and all agreements have been addressed, we will continue to have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are directly or indirectly dependent on LIBOR.  The transition from LIBOR could create considerable costs and additional risk for us.  Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR.  The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies.  Further, our failure to adequately manage this transition process with our customers could impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, any market-wide transition away from LIBOR could have an effect on our business, financial condition and results of operations.
Declining values of real estate, increases in unemployment, insurance market disruptions and the related effects on local economies may increase our credit losses, which would negatively affect our financial results.

We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential and commercial) within our market area. A major change in the real estate market, such as deterioration in the value of collateral, or in the local or national economy, could affect our customers' ability to pay these loans, which in turn could impact our results of operations and financial condition. Additionally, increases in unemployment also may affect the ability of certain clients to repay loans and the financial results of commercial clients in localities with higher unemployment, may result in loan defaults and foreclosures and may impair the value of our collateral. Loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our exposure to this risk by monitoring carefully our extensions of credit. Additionally, a concentration of natural disasters or a significant disruption in the insurance market could impact the risk relating to our insurance lending business. We cannot fully eliminate credit risk, and as a result, credit losses may increase in the future.

Our financial instruments carried at fair value expose us to certain market risks.
We maintain an available-for-sale investment securities portfolio, which includes assets with various types of instruments and maturities. At times, we also maintain certain assets that are classified and accounted for as trading assets. The changes in fair value of available-for-sale securities are recognized in shareholders' equity as a component of other comprehensive income. The changes in fair value of financial instruments classified as trading assets are carried at fair value with changes in fair value recognized in earnings. The fair value of financial instruments carried at fair value is exposed to market risks related to changes in interest rates and market liquidity. We manage the market risks associated with these instruments through broad asset/liability management strategies. Changes in the market values of these financial instruments could have a material impact on our financial condition or results of operations. We may classify additional financial assets or financial liabilities at fair value in the future.

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Risks Related to Our Business
When we loan money, commit to loan money or enter into a letter of credit or other contract with a counterparty, we incur credit risk, or the risk of loss if our borrowers do not repay their loans or our counterparties fail to perform according to the terms of their contracts.
As lending is one of our primary business activities, the credit quality of our portfolio can have a significant impact on our earnings. We estimate and establish reserves for credit risks and probable incurred credit losses inherent in our loan portfolio. This process, which is critical to our financial results and condition, requires difficult, subjective and complex judgments, including reviews of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. As is the case with any such assessments, there is always the chance that we will fail to identify the proper factors or that we will fail to accurately estimate the impacts of factors that we identify. In addition, large loans, letters of credit and contracts with individual counterparties in our portfolio magnify the credit risk that we face, as the impact of large borrowers and counterparties not repaying their loans or performing according to the terms of their contracts has a disproportionately significant impact on our credit losses and reserves.
The information that we use in managing our credit risk may be inaccurate or incomplete, which may result in an increased risk of default and otherwise have an effect on our business, results of operations and financial condition.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. Although we regularly review our credit exposure to specific clients and counterparties and to specific industries that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect, such as fraud. Moreover, such circumstances, including fraud, may become more likely to occur or be detected in periods of general economic uncertainty. We may also fail to receive full information with respect to the risks of a counterparty. In addition, in cases where we have extended credit against collateral, we may find that we are under-secured, for example, as a result of sudden declines in market values that reduce the value of collateral or due to fraud with respect to such collateral. If such events or circumstances were to occur, it could result in a potential loss of revenue and have an effect on our business, results of operations and financial condition.
Our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio.
Like all financial institutions, we maintain an allowance for credit losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for credit losses is maintained at a level adequate to absorb probable incurred losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our allowance for credit losses may not be sufficient to cover actual loan losses, and future provision for credit losses could materially and affect our operating results. The accounting measurements related to impairment and the allowance for credit losses require significant estimates which are subject to uncertainty and change related to new information and changing circumstances. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.
Our regulators, as an integral part of their examination process, periodically review our allowance for credit losses and may require us to increase our allowance for credit losses by recognizing additional provision for losses charged to expense, or to decrease our allowance for credit losses by recognizing loan charge-offs, net of recoveries. Any such additional provision for loan losses or charge-offs, as required by these regulatory agencies, could have a material effect on our financial condition and results of operations.
Projections for new business initiatives and strategies may prove inaccurate.
The introduction, implementation, withdrawal, success and timing of business initiatives and strategies, including, but not limited to, the opening of new banking centers or entering into new product lines, may be less successful or may be different than anticipated, which could affect our business.
The Bank makes certain projections and develops plans and strategies for its banking and financial products. If we do not accurately determine demand for our banking and financial products, it could result in us incurring significant expenses without the anticipated increases in revenue, which could result in a material effect on the Bank’s business.

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We may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud, or certain borrower defaults, which could harm our liquidity, results of operations and financial condition.
When we sell mortgage loans, whether as whole loans or pursuant to a securitization, we are required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Our whole loan sale agreements require us to repurchase or substitute mortgage loans in the event we breach any of these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of borrower fraud. While we have taken steps to enhance our underwriting policies and procedures, there can be no assurance that these steps will be effective or reduce risk associated with loans sold in the past. If the level of repurchase and indemnity activity becomes material, our liquidity, results of operations and financial condition may be affected.
Competition in the financial services industry is intense and could result in our losing business or experiencing reduced margins.
We operate in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes, and continued consolidation. We face aggressive competition from other domestic and foreign lending institutions as well as from numerous other providers of financial services. The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition. Because non-banking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures. Securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The OCC has recently announced that it will accept applications for national bank charters from non-depository financial technology companies engaged in banking activities. These developments may significantly change the competitive environment in which we conduct business. Some of our competitors have greater financial resources and/or face fewer regulatory constraints. Credit unions that compete with us have advantages that allow them to price products and services more competitively. As a result of these various sources of competition, we could lose business to competitors or be forced to price products and services on less advantageous terms to retain or attract clients, either of which would affect our profitability.
Clients could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding.
Checking and savings account balances and other forms of client deposits could decrease if clients perceive alternative investments as providing superior expected returns. When clients move money out of bank deposits in favor of alternative investments, we can lose a relatively inexpensive source of funds, increasing our funding costs.
Consumers may decide not to use banks to complete their financial transactions, or deposit funds electronically with banks having no branches within our market area, which could affect net income.
Technology and other changes allow parties to complete financial transactions without banks. For example, consumers can pay bills and transfer funds directly without banks. Consumers can also shop for higher deposit interest rates at banks across the country, which may offer higher rates because they have few or no physical branches and open deposit accounts electronically. This process could result in the loss of fee income, as well as the loss of client deposits, in addition to increasing our funding costs.
Our wealth management business subjects us to a variety of investment and market risks.
At December 31, 2018, we had $2.9 billion in assets under management. A sharp decline in the stock market could negatively impact the amount of assets under management and thus subject our earnings to additional risks and uncertainties.
Our foreign exchange business is largely dependent upon a small number of large clients and volatility in the markets.
In August 2019 First Financial acquired Bannockburn Global Forex, a capital markets firm engaged in various foreign exchange market activities. Bannockburn’s business model relies, to some extent, upon a small number of large clients engaged in foreign currency transactions. The loss of one or more of these large client would adversely affect the revenue derived from Bannockburn.

Additionally, foreign currency transactions increase as volatility in the market increases. Sustained periods of stability in the financial markets could adversely affect Bannockburn’s revenue.


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Negative public opinion could damage our reputation and impact business operations and revenues.
As a financial institution, our earnings and capital are subject to risks associated with negative public opinion. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, the failure of any product or service sold by us to meet our clients’ expectations or applicable regulatory requirements, corporate governance and acquisitions, or from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can affect our ability to attract and/or retain clients and can expose us to litigation and regulatory action. Negative public opinion could also affect our ability to borrow funds in the unsecured wholesale debt markets.
We rely on other companies to provide key components of our business infrastructure, creating risks of failures by such companies and cybersecurity incidents involving our customers’ information.
Third parties provide key components of our business infrastructure, such as processing and Internet connections and network access. Any disruption in such services provided by these third parties or any failure of these third parties to handle current or higher volumes of use could affect our ability to deliver products and services to clients and otherwise to conduct business. Technological or financial difficulties of a third-party service provider could affect our business to the extent those difficulties result in the interruption or discontinuation of services provided by that party. These vendors provide services that support our operations, including the storage and processing of sensitive consumer and business customer data, as well as our sales efforts.
A cybersecurity breach of a vendor's system may result in theft of our data or disruption of business processes. A material breach of customer data security at a service provider's site may negatively impact our business reputation and cause a loss of customers, result in increased expense to contain the event and/or require that we provide credit monitoring services for affected customers, result in regulatory fines and sanctions, and may result in litigation. We may experience liability to our customers for losses arising from a breach of a vendor's data security system. We rely on our outsourced service providers to implement and maintain prudent cybersecurity controls. Furthermore, we may not be insured against all types of losses as a result of third-party failures, and our insurance coverage may be inadequate to cover all losses resulting from system failures or other disruptions. Failures in our business infrastructure could interrupt the operations or increase the costs of doing business.
We rely on our systems, employees and certain counterparties, and certain failures could affect our operations.

We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical and record-keeping errors, and computer/telecommunications systems malfunctions. Our businesses are dependent on our ability to process a large number of increasingly complex transactions. If any of our financial, accounting or other data processing systems fail or have other significant shortcomings, we could be affected. We depend on internal systems and outsourced technology to support these data storage and processing operations. Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations. In recent years, some banks have experienced denial of service attacks in which individuals or organizations flood the bank's website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. Additionally, we could be affected if one of our employees causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems.
We are also at risk of an impact on our systems and operations from natural disasters, terrorism and international hostilities. Such events can also impact power or communications systems operated by others on which we rely.

Misconduct by employees could include fraudulent, improper or unauthorized activities on behalf of clients or improper use of confidential information. We may not be able to prevent employee errors or misconduct, and the precautions we take to detect this type of activity might not be effective in all cases. Employee errors or misconduct could subject us to civil claims for negligence or regulatory enforcement actions, including fines and restrictions on our business.

In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. The breach of the systems of a credit bureau presents additional threats as criminals now have more information about a larger portion of our country's population than past breaches have involved, which could be used by criminals to pose as customers initiating transfers of money from customer accounts. Although we have policies and procedures in place to verify the authenticity of our customers, we cannot assure that such policies and procedures will prevent all fraudulent transfers. Such activity can result in financial liability and harm to our reputation.


16

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, or other breaches in the security of our systems could harm our business. 

As part of our business, we collect, process and retain sensitive and confidential client and customer information on behalf of our subsidiaries and other third parties. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, theft of information, misplaced or lost data, programming and/or human errors, or other similar events. If information security is breached, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others. Our systems can be rendered inoperable, resulting in our inability to provide service to our customers. Any security breach involving the misappropriation, loss, destruction or unauthorized disclosure of confidential customer information, whether by us or by our vendors, could severely damage our reputation, expose us to the risk of litigation and liability, disrupt our operations and have a material effect on our business.

Cybersecurity risk management programs are expensive to maintain and will not protect us from all risks associated with maintaining the security of customer data and our proprietary data from external and internal intrusions, disaster recovery and failures in the controls used by our vendors. Employee error or misconduct may result in failure to implement policies and procedures designed to avoid risks. Moreover, as technology and cyberattacks change over time, we must continually monitor and change systems to guard against new threats. We may not know of and be able to guard against a new threat until after an attack has occurred. Congress and the legislatures of states in which we operate regularly consider legislation that would impose more stringent data privacy requirements.
Any of these occurrences could result in our diminished ability to operate one or more of our businesses, potential liability to clients, reputational damage and regulatory intervention in the form of requirements, restrictions and penalties, which could affect us.
Weaknesses of other financial institutions could affect us.
Our ability to engage in routine funding transactions could be affected by the actions and lack of commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, and counterparty relationships, among others. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry in general, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions in the future. A default, or threatened default, of a large institution could negatively impact the entire financial system, and could expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not affect our financial condition or results of operations.
Maintaining or increasing market share depends on market acceptance and regulatory approval of new products and services.

Our success depends, in part, on our ability to adapt products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices, which can reduce net interest income and noninterest income from fee-based products and services. In addition, the widespread adoption of new technologies could require us to make substantial capital expenditures to modify or adapt existing products and services or develop new products and services. We may not be successful in introducing new products and services in response to industry trends or developments in technology or those new products may not achieve market acceptance. As a result, we could lose business, be forced to price products and services on less advantageous terms to retain or attract clients, or be subject to increased costs.
We may not pay dividends on our common shares.
Holders of our common shares are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common shares, we are not required to do so and may reduce or eliminate our common share dividend in the future. Additionally, our funds to pay dividends on common shares are dependent upon dividends paid to us by the Bank, which are subject to regulatory restrictions in certain circumstances. A reduction in our dividend rate could affect the market price of our common shares.

17

Our liquidity is dependent upon our ability to receive dividends from our subsidiaries, which accounts for most of our revenue and could affect our ability to pay dividends, and we may be unable to enhance liquidity from other sources.
We are a separate and distinct legal entity from our subsidiaries, notably First Financial Bank. We receive substantially all of our revenue from dividends from our subsidiaries. These dividends are the principal source of funds to pay dividends on our common shares and interest and principal on outstanding debt. Various federal and/or state laws and regulations limit or restrict the amount of dividends that the Bank and certain of our non-bank subsidiaries may pay us. Additionally, if our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, we may not be able to make dividend payments to our common shareholders. As of December 31, 2019, the Bank had $155.7 million available to pay dividends to First Financial without prior regulatory approval.
To enhance liquidity, we may borrow under credit facilities or from other sources. Turbulence in the capital and credit markets may cause many lenders and institutional investors to reduce or cease to provide funding to borrowers and, as a result, we may not be able to further increase liquidity through additional borrowings.
Limitations on our ability to receive dividends from our subsidiaries or an inability to increase liquidity through additional borrowings, or inability to maintain, renew or replace existing credit facilities, could have a material effect on our liquidity and on our ability to pay dividends on our common shares and interest and principal on our debt.
As of December 31, 2019, we had indebtedness of $1.7 billion.
Disruptions in our ability to access capital markets may affect our capital resources, liquidity and business.

We depend on wholesale capital markets to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, and to accommodate the transaction and cash management needs of our clients. Other sources of funding available to us, and upon which we rely as regular components of our liquidity risk management strategy, include inter-bank borrowings, repurchase agreements and borrowings from the Federal Home Loan Bank system. Any occurrence that may limit our access to these sources, such as a decline in the confidence of debt purchasers, a downgrade in our credit rating, or a downgrade in the credit rating of our depositors or counterparties participating in the capital markets, may affect our capital costs and our ability to raise capital and, in turn, our liquidity.
Significant or sustained declines in our current market capitalization could impact the carrying value of our goodwill.
Numerous facts and circumstances are considered when evaluating the carrying value of our goodwill. One of those considerations is our market capitalization, evaluated over a reasonable period of time, in relation to the aggregate estimated fair value of the reporting unit. While this comparison provides some relative market information regarding the estimated fair value of our reporting unit, it is not determinative and needs to be evaluated in the context of the current economic and political environment. However, significant and/or sustained declines in First Financial’s market capitalization, especially in relation to First Financial’s book value, could be an indication of potential impairment of goodwill.
A reduction in our credit rating could affect us or the holders of our securities.
The credit rating agencies assessing our creditworthiness regularly evaluate the Company, and credit ratings are based on a number of factors, including our financial strength and ability to generate earnings, as well as factors not entirely within our control, including changes in rating methodologies and conditions affecting the financial services industry and the economy. There can be no assurance that we will maintain our current credit rating. A downgrade of the credit rating of the Company could affect our access to liquidity and capital, and could significantly increase our cost of funds, trigger additional collateral or funding requirements and decrease the number of investors and counterparties willing to lend to us or purchase our securities. This could affect our growth, profitability and financial condition, including liquidity.

We may feel challenged in retaining key officers and employees.
Our future operating results depend substantially upon the continued service of our executive officers and key personnel. Our future operating results also depend in significant part upon our ability to attract and retain qualified management, lending, financial, technical, marketing, sales, and support personnel. Competition for qualified personnel is intense and we cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for us to hire personnel over time.

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Our ability to retain key officers and employees may be further impacted by legislation and regulation affecting the financial services industry. For example, legislation and bank regulatory action that places restrictions on executive compensation at, and the pay practices of, financial institutions may further impact our ability to compete for talent with other industries that are not subject to the same limitations as financial institutions.
Our business, financial condition, or results of operations could be materially affected by the loss of any of our key employees, or our inability to attract and retain skilled employees.
Potential acquisitions may disrupt our business and dilute shareholder value, and we may not be able to successfully consummate or integrate such acquisitions.
Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:
•potential exposure to unknown or contingent liabilities of the target company;
•exposure to potential asset quality issues of the target company;
•difficulty and expense of integrating the operations and personnel of the target company;
•difficulty or added costs in the wind-down of non-strategic operations;
•potential disruption to our business;
•potential diversion of our management’s time and attention;
•the possible loss of key employees and customers of the target company;
•difficulty in estimating the value (including goodwill) of the target company;
•difficulty in receiving appropriate regulatory approval for any proposed transaction; and
•potential changes in banking, or tax laws or regulations or accounting rules that may affect the target company.

We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases negotiations, may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions could involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, any difficulty integrating businesses acquired as a result of a merger or acquisition and the failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have an impact on our liquidity, results of operations and financial condition and any such integration could divert management’s time and attention from managing our company in an effective manner.
Any merger or acquisition opportunity that we decide to pursue will ultimately be subject to regulatory approval or other closing conditions. We may expend substantial time and resources pursuing potential acquisitions which may not be consummated because regulatory approval or other closing requirements are not satisfied. Additionally, the banking regulators and applicable laws and regulations may restrict our ability to engage in acquisitions under certain circumstances.
Our accounting policies and processes are critical to how we report our financial condition and results of operations. They require management to make estimates about matters that are uncertain.
Accounting policies and processes are fundamental to how we record and report our financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and processes so they comply with Generally Accepted Accounting Principles in the United States (GAAP).
Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate valuation that is made when recording income, recognizing an expense, recovering an asset, valuing an asset or liability, or reducing a liability. We have established detailed policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. In addition, our policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding our judgments and the estimates pertaining to these matters, we cannot guarantee that we will not be required to adjust accounting policies or re-state prior period financial statements.
See the “Critical Accounting Policies” in the Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1- Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements, in our 2019 Annual Report (included within Exhibit 13 to this Annual Report on Form 10-K) for more information.

19

Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.
From time to time, the FASB and SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements.

In June 2016, the FASB issued a new accounting standard for recognizing current expected credit losses, commonly referred to as CECL. CECL will result in earlier recognition of credit losses and requires consideration of not only past and current events but also reasonable and supportable forecasts that affect collectibility. First Financial will be required to comply with the new standard in the first quarter of 2020. Upon adoption of CECL in the first quarter of 2020, credit loss allowances are anticipated to increase, which would decrease retained earnings and regulatory capital. The federal banking regulators have adopted a regulation that will allow banks to phase in the day-one impact of CECL on regulatory capital over three years. First Financial expects to adopt the regulatory phase-in over the permissible three year period. CECL implementation poses operational risk, including the failure to properly transition internal processes or systems, which could lead to errors, financial misstatements or operational losses.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 (Exchange Act) is accurately accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of management's system of controls are met.

These inherent limitations include the realities that judgments in decision making can be faulty, that alternative reasoned judgments can be drawn, or that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in management's system of controls, misstatements due to error or fraud may occur and not be detected.
Our revenues derived from investment securities may be volatile and subject to a variety of risks.
We generally maintain investment securities and trading positions in the fixed income markets. Unrealized gains and losses associated with our investment portfolio and mark to market gains and losses associated with our investment portfolio are affected by many factors, including our credit position, interest rate volatility and volatility in capital markets, among other economic factors. Our return on such investments could experience volatility, and such volatility may affect our financial condition and results of operations. Additionally, accounting regulations may require us to record a charge prior to the actual realization of a loss when market valuations of such securities are impaired and such impairment is considered to be other than temporary.
Risks Related to the Legal and Regulatory Environment

If our regulators deem it appropriate, they can take regulatory actions that could impact our ability to compete for new business, constrain our ability to fund our liquidity needs and increase the cost of our services.

First Financial and its subsidiaries are subject to the supervision and regulation of various state and federal regulators, including the Federal Reserve Board, the FDIC, the SEC, the Consumer Financial Protection Bureau (CFPB), the Financial Industry Regulatory Authority (FINRA), the ODFI, and various other state regulatory agencies. As such, we are subject to a wide variety of laws and regulations. As part of their supervisory process, which includes periodic examinations and continuous monitoring, the regulators have the authority to impose restrictions or conditions on our activities and the manner in which we manage the organization. These actions could impact the organization in a variety of ways, including subjecting us to monetary fines, restricting our ability to pay dividends, precluding mergers or acquisitions, limiting our ability to offer certain products or services, or imposing additional capital, operating, or oversight requirements.

20

The fiscal and monetary policies of the U.S. government and its agencies could have an effect on our earnings.
The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies determine in large part the cost of funds for lending and investing and the returns earned on those loans and investments, both of which affect the net interest margin. The resultant changes in interest rates can also materially affect the value of certain financial assets we hold, such as debt securities. The policies of the Federal Reserve Board can also affect borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal Reserve Board policies are beyond our control and difficult to predict; consequently, the impact of these changes on our activities and results of operations is difficult to predict.
We are subject to ongoing tax examinations in various jurisdictions. The Internal Revenue Service and other taxing jurisdictions may propose various adjustments to our previously filed tax returns. It is possible that the ultimate resolution of such proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and non-income taxes. The effective tax rate is based in part on our interpretation of the relevant current tax laws. We believe the aggregate liabilities related to taxes are appropriately reflected in our consolidated financial statements. We review the appropriate tax treatment of all transactions taking into consideration statutory, judicial and regulatory guidance in the context of our tax positions. In addition, we rely on various tax opinions, recent tax audits, and historical experience.
From time to time, we engage in business transactions that may have an effect on our tax liabilities. Where appropriate, we have obtained opinions of outside experts and have assessed the relative merits and risks of the appropriate tax treatment of business transactions taking into account statutory, judicial, and regulatory guidance in the context of the tax position. However, changes to our estimates of accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities regarding previously taken tax positions prior to acquisition and newly enacted statutory, judicial and regulatory guidance. Such changes could affect the amount of our accrued taxes and could be material to our financial position and/or results of operations.
In the event the Internal Revenue Service, State of Ohio, or other state tax officials propose adjustments to our previously filed tax returns (or those of our subsidiaries), it is possible that the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results of operations in the period it occurs.
Changes in tax laws could affect our performance.
We are subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, property, franchise, withholding and ad valorem taxes. Changes to our tax liability could have a material effect on our results of operations. In addition, our customers are subject to a wide variety of federal, state and local taxes. Changes in taxes paid by our customers may affect their ability to purchase homes or consumer products, which could affect their demand for our loans and deposit products. In addition, such negative effects on our customers could result in defaults on the loans we have made and decrease the value of mortgage-backed securities in which we have invested.
On December 22, 2017, H.R.1, formally known as the “Tax Cuts and Jobs Act,” was enacted into law. This new tax legislation, among other changes, limits the amount of state, federal and local taxes that taxpayers are permitted to deduct on their individual tax returns and eliminates other deductions in their entirety.

Item 1B.  Unresolved Staff Comments.
None.

Item 2.  Properties.
At December 31, 2019, the Company operated 145 full service banking centers, 32 of which are leased facilities.  Our core banking operating markets are located within the four state region of Ohio, Indiana, Kentucky and Illinois. First Financial's executive office is a leased facility located in Cincinnati, Ohio and we operate 63 banking centers in Ohio, three banking centers in Illinois, 65 banking centers in Indiana and 14 banking centers in Kentucky. In addition, we operate our Commercial Finance division, responsible for our insurance lending business and franchise lending business, from a non-banking center location in Indiana.

Item 3.  Legal Proceedings.
We are from time to time engaged in various litigation matters including the defense of claims of improper or fraudulent loan practices or lending violations, and other matters, and we have a number of unresolved claims pending. In addition, as part of the ordinary course of business, we are parties to litigation involving claims to the ownership of funds in particular accounts,

21

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 other litigation matters and claims cannot be determined at this time, we believe that damages, if any, and other amounts relating to pending matters are not likely to be material to our consolidated financial position or results of operations. 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.

Item 4. Mine Safety Disclosures.
Not applicable.

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Supplemental Item. Information About Our Executive Officers.

The following table sets forth information concerning the executive officers of First Financial as of February 21, 2020. The executive officers perform policy-making functions for First Financial. The officers are elected annually at the organizational meeting of the board of directors and serve until the next organizational meeting, or until their successors are elected and duly qualified.
 
 
Position with
First Financial Bancorp
 
Age
Archie M. Brown
 
President and Chief Executive Officer
 
59
 
 
 
 
 
James M. Anderson
 
EVP, Chief Financial Officer
 
48
 
 
 
 
 
Andrew K. Hauck
 
EVP, Chief Commercial Banking Officer
 
58
 
 
 
 
 
Catherine M. Myers
 
EVP, Consumer Banking
 
58
 
 
 
 
 
John M. Gavigan
 
EVP, Chief Operating Officer
 
41
 
 
 
 
 
Karen B. Woods
 
EVP, General Counsel and Chief Risk Officer
 
51
 
 
 
 
 
William R. Harrod
 
EVP, Chief Credit Officer
 
52
 
 
 
 
 
Amanda N. Neeley
 
EVP, Chief Strategy Officer
 
39

The following is a brief description of the business experience over the past five years of the individuals named above.

Archie M. Brown - Archie Brown is the President, Chief Executive Officer and a director of First Financial and the Bank, having been appointed to these positions on April 1, 2018 following First Financial’s acquisition of MainSource Financial Group, Inc. Previously, he served as the President and Chief Executive Officer of MainSource from August 2008 until April 2018 and chairman of the board of MainSource from April 2011 until April 2018.

James M. Anderson - Jamie Anderson became the Chief Financial Officer of First Financial and the Bank on April 1, 2018 following the merger of First Financial and MainSource. Previously Mr. Anderson served as the Chief Financial Officer of MainSource from January 2006 to April 2018. Prior to that role, he served in the following roles at MainSource: Administrative Vice President and Principal Accounting Officer from March 2005 to January 2006, Controller and Principal Accounting Officer from March 2002 to March 2005, and Controller from September 2000 to March 2002. Mr. Anderson is a certified public accountant (inactive).

Andrew K. Hauck - Andy Hauck is the Chief Commercial Banking Officer of First Financial. Mr. Hauck joined the organization in January 2019 following a long career with another institution. In his current capacity, he is responsible for all facets of the wholesale business of the Bank, including direct lending, treasury and other fee-based services, deposit gathering in the Commercial and Industrial space, as well as the Bank’s specialized units (Investor Commercial Real Estate, Business Capital, Equipment Finance and Foreign Exchange). Mr. Hauck’s prior experience includes these areas as well as International Banking, Capital Markets, and other forms of specialty finance.

Catherine M. Myers - Cathy Myers serves as Executive Vice President, Consumer Banking for First Financial and the Bank.  She is responsible for Retail Banking, Wealth Management, Mortgage Banking and Business Banking.  Cathy joined First Financial in 2018 and has over 34 years of experience in the banking industry. Prior to joining First Financial, Cathy served in various leadership capacities at U.S. Bank and Key Bank.  Most recently she was the USB Consumer Bank Technology Executive.  She began her career in banking as a Management Trainee for First National Bank of Southwestern Ohio.


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John M. Gavigan - John Gavigan is the Executive Vice President, Chief Operating Officer for First Financial where he is responsible for Enterprise Digital Solutions, Information Technology, Operations, Customer Support Center, Project Management and Corporate Facilities.  Mr. Gavigan was appointed to his current role in late 2018, having previously served as Chief Administrative Officer for the majority of 2018 and Chief Financial Officer from 2014 through early 2018. He joined the Company in 2008 as Assistant Controller and also served as Corporate Controller from 2011 into 2014. Mr. Gavigan is a certified public accountant (inactive).

Karen B. Woods - Karen Woods serves as General Counsel and Chief Risk Officer of First Financial. She joined First Financial in April 2018 following the merger of First Financial and MainSource. She previously served as Corporate Counsel and Chief Risk Officer of MainSource from January 2016 to April 2018. Prior to joining MainSource, Ms. Woods was a partner at Krieg DeVault LLP in Indianapolis, Indiana. Ms. Woods previously served as a judicial law clerk to the Honorable John G. Baker, Indiana Court of Appeals.

William R. Harrod - Bill Harrod is the Chief Credit Officer of First Financial, a role he has held since October 2017. He is responsible for managing and monitoring the loan portfolio and other related credit functions in a risk appropriate manner including underwriting, approval, and collections. Mr. Harrod first joined First Financial in 2015 and has held various credit and management positions since then in specialty banking, corporate banking, commercial and industrial lending and commercial finance.

Amanda N. Neeley - Mandy Neeley is the Chief Strategy Officer of First Financial, a role she has held since 2016.  Ms. Neeley is responsible for the launch and evolution of the First Financial brand, the introduction of the Premier Business Bank acquisition strategy, the advancement of sales process and enterprise CRM, and development of a formalized strategic planning program.  Ms. Neeley has spent her entire career in banking with the Bank, beginning as a part-time teller during college and, after graduating in 2003, Marketing Coordinator.

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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a)           Market information, holders, dividends

First Financial's common shares are listed on The NASDAQ Global Select Stock Market® under the symbol "FFBC." The information contained in the “Quarterly Financial And Common Stock Data” in First Financial’s Annual Report to Shareholders for the year ended December 31, 2019 with respect to our stock price and dividends, is incorporated herein by reference in response to this item.

As of February 20, 2020, our common shares were held by approximately 4,216 shareholders of record, a number that does not include beneficial owners who hold shares in “street name,” or shareholders from previously acquired companies that have not exchanged their stock. At December 31, 2019, a total of 37,856 stock options and 530,569 shares of restricted stock were outstanding. Additional information about stock options, restricted stock and restricted stock units is included in Note 20 - Stock Options and Awards in the Notes to Consolidated Financial Statements in First Financial’s 2019 Annual Report and in Item 12 below.
The payment of future cash dividends is at the discretion of our Board of Directors and subject to a number of factors, including results of operations, general business conditions, growth, financial condition, regulatory limitation and other factors deemed relevant by the Board. Further, our ability to pay future cash dividends is subject to certain regulatory requirements and restrictions discussed in the Supervision and Regulation section in Item 1 above. For further information see Note 3 - Restrictions on Cash and Dividends in the Notes to Consolidated Financial Statements of First Financial's 2019 Annual Report (included as Exhibit 13 of this report), which is incorporated by reference in response to this item.

Stock Performance Graph

The stock performance graph contained in “Total Return to Shareholders” of First Financial's 2019 Annual Report (included as Exhibit 13 of this report), is incorporated herein by reference in response to this item.

(b)
Unregistered Sales of Equity Securities and Use of Proceeds
None.
 
(c)
The following table shows the total number of shares repurchased in the fourth quarter of 2019.

Issuer Purchases of Equity Securities
 
 
(a)
 
(b)
 
(c)
 
(d)
Period
 
Total Number 
of Shares 
Purchased
 
Average 
Price Paid 
Per Share
 
Total Number of 
Shares Purchased as 
Part of Publicly 
Announced Plans
 
Maximum Number of
Shares that may yet 
be purchased Under 
the Plans
October 1 to October 31, 2019
 
660,049

 
$
23.96

 
660,049

 
3,196,457

November 1 to November 30, 2019
 
652,625

 
$
24.18

 
652,625

 
2,543,832

December 1 to December 31, 2019
 
297,104

 
$
24.42

 
297,104

 
2,246,728

Total
 
1,609,778

 
$
24.13

 
1,609,778

 
 


The First Financial Board of Directors has approved a stock repurchase plan pursuant to which the Company is authorized to repurchase up to 5,000,000 shares of the Company’s common stock through December 31, 2021.

Item 6.  Selected Financial Data.
The information contained in Table 1 of the Management’s Discussion and Analysis section of First Financial's 2019 Annual Report (included as Exhibit 13 of this report), is incorporated herein by reference in response to this item.


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Item 7.  Management's Discussion and Analysis of Financial Condition and Results Of Operations.
The information contained in the Management’s Discussion and Analysis section (including certain forward looking statements) of First Financial’s 2019 Annual Report (included as Exhibit 13 of this report) is incorporated herein by reference in response to this item.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk.
The information contained in the Market Risk section and in Table 14 - Market Risk Disclosure of the Management’s Discussion and Analysis section in First Financial's 2019 Annual Report (included as Exhibit 13 of this report), is incorporated herein by reference in response to this item.

Item 8.  Financial Statements and Supplementary Data.
The consolidated financial statements and the reports of our independent registered public accounting firm included in the Consolidated Financial Statements and the Notes to Consolidated Financial Statements in First Financial’s 2019 Annual Report (included as Exhibit 13 of this report), are incorporated herein by reference.

The Quarterly Financial and Common Stock Data at the end of the Notes to Consolidated Financial Statements in First Financial’s 2019 Annual Report (included as Exhibit 13 of this report), is incorporated herein by reference.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
First Financial’s chief executive officer and chief financial officer, together with other members of senior management, have evaluated First Financial’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act)
as of the end of the fiscal year covered by this report. Based upon that evaluation, First Financial’s chief executive officer and chief financial officer have concluded that such disclosure controls and procedures are effective to ensure that material information required to be disclosed by First Financial, including its consolidated subsidiaries, in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Internal Control Over Financial Reporting
Management's Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm included in First Financial’s 2019 Annual Report (included as Exhibit 13 of this report), are incorporated herein by reference.

Changes in Internal Controls Over Financial Reporting
There were no changes in First Financial’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, First Financial’s internal control over financial reporting.

Item 9B.  Other Information.
None.


26

PART III

Item 10.  Directors, Executive Officers and Corporate Governance.
Certain information concerning executive officers of First Financial has been supplied in the “Supplemental Item. Executive Officers of the Registrant” of this Form 10-K. Information appearing under “Election of Directors,” “Corporate Governance - Board Committees,” “Shareholder Nominations for Election to the Board” and "Delinquent Section 16(a) Reports" of First Financial's Definitive Proxy Statement with respect to the Annual Meeting of Shareholders to be held on May 26, 2020, and which is expected to be filed with the SEC, pursuant to Regulation 14A of the Exchange Act (First Financial’s Proxy Statement) within 120 days of the close of our fiscal year, is incorporated herein by reference in response to this item.

Item 11.  Executive Compensation.
The information appearing under the headings “Meetings of the Board of Directors and Committees of the Board,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in First Financial’s Proxy Statement is incorporated herein by reference in response to this item.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information appearing under the heading “Shareholdings of Directors, Executive Officers, and Nominees for Director” of First Financial’s Proxy Statement is incorporated herein by reference in response to this item.

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2019 with respect to compensation plans under which our common shares may be issued:

Securities authorized for issuance under equity compensation plans

 
 
Number of securities to be issued
upon exercise of
 outstanding options,
warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights
 
Number of securities
 remaining available for
 future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
Plan category
 
(a)
 
(b)
 
(c) (1)
Equity compensation plans approved by security holders
 
37,856

 
$
9.54

 
1,519,231

Equity compensation plans not approved by security holders
 
N/A

 
N/A

 
N/A


(1)
The securities included in this column are available for issuance under the First Financial Bancorp. Amended and Restated 2012 Stock Plan, which was approved by the shareholders at the 2017 Annual Meeting.  The Amended and Restated 2012 Plan includes provisions regarding adjustments to the number of securities available for future issuance under the Amended and Restated 2012 Plan in the event of a merger, reorganization, consolidation, recapitalization, reclassification, split-up, spin-off, separation, liquidation, stock dividend, stock split, reverse stock split, property dividend, share repurchase, share combination, share exchange, issuance of warrants, rights or debentures or other change in corporate structure of First Financial affecting First Financial’s common shares.  In any of the foregoing events, the Amended and Restated 2012 Plan permits the Board of Directors or the Compensation Committee of the board to make such substitution or adjustments in the aggregate number and kind of shares available for issuance under the respective plans as the Board of Directors or the Compensation Committee, as the case may be, determine to be appropriate in its sole discretion.  All of the securities reported in column (c) are available under the Amended and Restated 2012 Plan.

Item 13.  Certain Relationships and Related Transactions.
The information appearing in Note 13 - Loans to Related Parties in the Notes to Consolidated Financial Statements included in First Financial’s 2019 Annual Report (included as Exhibit 13 of this report) is incorporated herein by reference in response to this item.  The information appearing under the heading “Corporate Governance-Transactions with Related Parties” in First Financial’s Proxy Statement is incorporated herein by reference in response to this item.


27

Item 14.  Principal Accounting Fees and Services.
Information appearing under the heading “Independent Registered Public Accounting Firm Fees” in First Financial’s Proxy Statement is incorporated herein by reference in response to this item.


28

PART IV

Item 15.  Exhibits, Financial Statement Schedules.

(a)
(1)
The consolidated financial statements (and report thereon) listed below are incorporated herein by reference from First Financial’s 2019 Annual Report (included as Exhibit 13 of this report) as noted:
 
 
 
 
 
Reports of Independent Registered Public Accounting Firm - Incorporated by reference from First Financial’s 2019 Annual Report
 
 
 
 
 
Consolidated Balance Sheets as of December 31, 2019 and 2018 - Incorporated by reference from First Financial’s 2019 Annual Report
 
 
 
 
 
Consolidated Statements of Income for years ended December 31, 2019, 2018, and 2017 - Incorporated by reference from First Financial’s 2019 Annual Report
 
 
 
 
 
Consolidated Statements of Comprehensive Income for years ended December 31, 2019, 2018, and 2017 - Incorporated by reference from First Financial’s 2019 Annual Report
 
 
 
 
 
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2019, 2018, and 2017 - Incorporated by reference from First Financial’s 2019 Annual Report
 
 
 
 
 
Consolidated Statements of Cash Flows for years ended December 31, 2019, 2018, and 2017 - Incorporated by reference from First Financial’s 2019 Annual Report
 
 
 
 
 
Notes to Consolidated Financial Statements - Incorporated by reference from First Financial’s 2019 Annual Report
 
 
 
 
(2)
Financial Statement Schedules: Schedules to the consolidated financial statements required by Regulation S-X are not required under the related instructions, or are inapplicable, and therefore have been omitted
 
 
 
 
(3)
Exhibits:

The documents listed below are filed/furnished with this Annual Report on Form 10-K as exhibits or incorporated into this Annual Report on Form 10-K by reference as noted:

Exhibit
Number
2.1
2.2
2.3
2.4
3.1
3.2

29

4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17

30

4.18
4.19
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19

31

10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
13
14.1
14.2
21
23
31.1
31.2
32.1
32.2
101.1
Financial statements from the Annual Report on Form 10-K of the Company for the year ended December 31, 2019, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Shareholders’ Equity, and (v) Notes to Consolidated Financial Statements, as blocks of text and in detail.**

 

32

First Financial will furnish, without charge, to a security holder upon request a copy of the documents, portions of which are incorporated by reference (Annual Report to Shareholders and Proxy Statement), and will furnish any other Exhibit upon the payment of reproduction costs.

* Compensation plan(s) or arrangement(s).
** As provided in Rule 406T of Regulation S-T, this information shall not be deemed "filed" for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.


Item 16. Form 10-K Summary.
None.


33

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST FINANCIAL BANCORP.
 
By: 
/s/ Archie M. Brown
Archie M. Brown, Director
President and Chief Executive Officer

Date 
2/21/2020

Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
  /s/ Archie M. Brown
 
/s/ James M. Anderson
Archie M. Brown, Director
President and Chief Executive Officer
 
James M. Anderson, Executive Vice President and Chief Financial Officer
 
 
 
 
Date
2/21/2020
 
Date
2/21/2020
 
 
 
 
/s/ Claude E. Davis
 
/s/ Scott Crawley
Claude E. Davis, Director
 
Scott T. Crawley, First Vice President and Controller
Chairman of the Board
 
(Principal Accounting Officer)
 
 
 
 
 
Date
2/21/2020
 
Date
2/21/2020
 
 
 
 
/s/ J. Wickliffe Ach
 
/s/ Kathleen L. Bardwell
J. Wickliffe Ach, Director
 
Kathleen L. Bardwell, Director
 
 
 
 
Date
2/21/2020
 
Date
2/21/2020
 
 
 
 
/s/ William G. Barron
 
/s/ Vincent A. Berta
Wiliam G. Barron, Director
 
Vincent A. Berta, Director
 
 
 
 
Date
2/21/2020
 
Date
2/21/2020
 
 
 
 
/s/ Cynthia O. Booth
 
/s/ Corinne R. Finnerty
Cynthia O. Booth, Director
 
Corinne R. Finnerty, Director
 
 
 
 
Date
2/21/2020
 
Date
2/21/2020
 
 
 
 
/s/ Erin P. Hoeflinger
 
/s/ Susan L. Knust
Erin P. Hoeflinger, Director
 
Susan L. Knust, Director
 
 
 
 
 
Date
2/21/2020
 
Date
2/21/2020

34
TABLE OF CONTENTS

 
 
 
 
/s/ William J. Kramer
 
/s/ John T. Neighbours
William J. Kramer, Director
 
John T. Neighbours, Director
 
 
 
 
Date
2/21/2020
 
Date
2/21/2020
 
 
 
 
/s/ Thomas M. O'Brien
 
/s/ Richard E. Olszewski
Thomas M. O'Brien, Director
 
Richard E. Olszewski, Director
 
 
 
Date
2/21/2020
 
Date
2/21/2020
 
 
 
 
 
/s/ Maribeth S. Rahe
 
 
 
Maribeth S. Rahe, Director
 
 
 
 
 
 
 
 
Date
2/21/2020
 
 
 


35
EXHIBIT 4.19

DESCRIPTION OF CAPITAL STOCK

As of December 31, 2019, First Financial Bancorp, an Ohio corporation, had two classes of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended: common Stock, without par value, and preferred shares, with or without par value. The following summary provides a brief description of our capital stock, as well as certain additional information.

This summary is subject to, and qualified in its entirety by reference to, our Amended and Restated Articles of Incorporation, as amended ("Articles"), and our Amended and Restated Regulations, as amended ("Regulations"). Our Articles and Regulations are filed as exhibits to the Annual Report on Form 10-K of which this exhibit is a part and incorporated by reference herein.

Authorized Capital Stock

Our authorized capital stock consists of 160,000,000 common shares, without par value, and 10,000,000 preferred shares, with or without par value ("preferred shares") as determined in accordance with the Articles. As of December 31, 2019, 104,281,794 of our common shares were issued and outstanding, 5,790,796 of our common shares were held by us in treasury, and none of our preferred shares were issued or outstanding.

Common Shares

Holders of our common shares are entitled to:

•
cast one vote for each common share held of record on all matters submitted to a vote of shareholders;
•
receive dividends when, as and if declared by our Board of Directors (the "Board") from funds legally available therefor, subject to the rights of holders of preferred shares, if any; and
•
share ratably in our net assets legally available to our shareholders in the event of our liquidation, dissolution or winding up, after provision for the distribution of any preferential amounts to the holders of preferred shares, if any.

Holders of our common shares have no preemptive, subscription, preference, redemption, conversion, exchange or cumulative voting rights. The rights, preferences and privileges of the holders of our common shares are subject to, and may be adversely affected by, the rights, preferences and privileges of holders of any preferred shares that we may designate and issue in the future.

Subject to compliance with applicable federal and state securities laws, our common shares may be transferred without any restrictions or limitations. The transfer agent and registrar for our common shares is Computershare Shareholder Services.

Our common shares are listed on The NASDAQ Global Select Market under the symbol "FFBC". Our outstanding common shares are, and any common shares registered under this prospectus and any applicable prospectus supplement will be, when issued, fully paid and nonassessable.

Preferred Shares

Our Articles authorize the Board to issue, without any further vote or action by our shareholders, subject to certain limitations prescribed by law and the rules and regulations of any stock exchange on which our securities may be listed, up to an aggregate of 10,000,000 preferred shares in one or more series.

Subject to the limitations described in the next paragraph, the Board is also authorized to determine and fix the powers, designations, preferences and relative, participating, optional, conversion and other special rights of each series of preferred shares issued from time to time, and the qualifications, limitations and restrictions thereof, including the designation and authorized number of each series, dividend rights, voting rights, conversion rights, redemption and exchange rights, sinking fund requirements and liquidation rights. The Board may increase or


decrease the number of shares of any series of preferred shares before or after the issue of that series, but not below the number of shares of such series then outstanding. If the number of preferred shares of any series is so decreased, the shares constituting such decrease will resume the status of authorized but unissued shares. Under Ohio law, the authority of a board to establish the par value of preferred shares is not settled even if such authority is provided in the corporation's articles. Consequently, our preferred shares will be issued without par value unless the Board determines to issue preferred shares with par value after having been advised by counsel that it has the authority to do so.

The Articles provide that the voting rights of each preferred share are limited to no more than one vote per share when voting as a class with the common shares, and the preferred shares will not vote as a separate class or series except as required by Ohio law. The Board has represented that it will not issue, without prior shareholder approval, any series of preferred shares for any defensive or anti-takeover purpose, for the purpose of implementing a shareholder rights plan, or with features specifically intended to make any attempted acquisition of the Company more difficult or costly.

The Board will fix the powers, designations, preferences and relative, participating, optional, conversion and other special rights of each series of preferred shares that we offer under this prospectus and any applicable prospectus supplement, and the qualifications, limitations and restrictions of such series, in a certificate of amendment to our Articles relating to that series. We will file as an exhibit to the registration statement of which this prospectus is a part, or incorporate by reference therein from another report that we file with the SEC, the form of any certificate of amendment to our Articles that describes the terms of the series of preferred shares that we are offering before the issuance of the related series of preferred shares. We will also describe in the applicable prospectus supplement the terms of the series of preferred shares being offered.

The Board may authorize the issuance of preferred shares with voting, conversion or other rights that could adversely affect the voting power or other rights of the holders of our common shares. The issuance of preferred shares could have the effect of decreasing the market price of our common shares, restricting our ability to repurchase outstanding common shares, decreasing the amount of earnings and assets available for distribution to holders of our common shares and creating restrictions upon the payment and amount of dividends and other distributions to holders of our common shares. The issuance of preferred shares also could have the effect of delaying, deterring or preventing a change in control of us without further action by our shareholders. When we issue preferred shares under this prospectus and the applicable prospectus supplement, such preferred shares will be fully paid and nonassessable.

Anti-Takeover Effects of Certain Provisions of our Articles of Incorporation and Ohio Law

Our Articles contain certain provisions that make it more difficult to acquire control of us by means of a tender offer, open market purchase, a proxy fight or otherwise. These provisions are designed to encourage persons seeking to acquire control of us to negotiate with our Board. We believe that, as a general rule, the interests of our shareholders would be best served if any change in control results from negotiations with our Board. The following provisions of our Articles and Ohio law might have the effect of delaying, deterring or preventing a change in control of us and would operate only with respect to an extraordinary corporate transaction, such as a merger, reorganization, tender offer, sale or transfer of assets or liquidation involving the Company and certain persons described below.

The Ohio General Corporation Law (the "OGCL") provides that the approval of two-thirds of the voting power of a corporation is required to effect mergers and similar transactions, to adopt amendments to the articles of incorporation of a corporation and to take certain other significant actions. Although under Ohio law the articles of incorporation of a corporation may permit such actions to be taken by a vote that is less than two-thirds (but not less than a majority), our Articles do not contain such a provision. The two-thirds voting requirement tends to make approval of such matters, including further amendments to the Articles, relatively difficult, and a vote of the holders of in excess of one-third of our outstanding common shares would be sufficient to prevent implementation of any of the corporate actions mentioned above.



Section 1701.831 of the OGCL is a "control share acquisition" statute. The control share acquisition statute basically provides that any person acquiring shares of an "issuing public corporation" (which definition we meet) in any of the following three ownership ranges must seek and obtain shareholder approval of the acquisition transaction that first puts such ownership within each such range: (i) more than 20% but less than 331/3%; (ii) 331/3% but not more than 50%; and (iii) more than 50%.

The purpose of the control share acquisition statute is to give shareholders of Ohio corporations a reasonable opportunity to express their views on a proposed shift in control, thereby reducing the coercion inherent in an unfriendly takeover. The provisions of the control share acquisition statute grant to our shareholders the assurance that they will have adequate time to evaluate the proposal of
the acquiring person, that they will be permitted to vote on the issue of authorizing the acquiring person's purchase in the same manner and with the same proxy information that would be available to them if a proposed merger of the Company were before them and, most importantly, that the interests of all shareholders will be taken into account in connection with such vote and the probability will be increased that they will be treated equally regarding the price to be offered for their common shares if the purchase is approved.

The control share acquisition statute applies not only to traditional offers but also to open market purchases, privately negotiated transactions and original issuances by an Ohio corporation, whether friendly or unfriendly. The procedural requirements of the control share acquisition statute could render approval of any control share acquisition difficult because it must be authorized at a special meeting of shareholders, at which a quorum is present, by the affirmative vote of the majority of the voting power represented and by a majority of the portion of such voting power, excluding interested shares. Any corporate defense against persons seeking to acquire control may have the effect of discouraging or preventing offers which some shareholders might find financially attractive. On the other hand, the need on the part of the acquiring person to convince our shareholders of the value and validity of the offer may cause such offer to be more financially attractive in order to gain shareholder approval.

Chapter 1704 of the OGCL is a "merger moratorium" statute. The merger moratorium statute provides that, unless a corporation's articles of incorporation or regulations otherwise provide, an "issuing public corporation" (which definition we meet) may not engage in a "Chapter 1704 transaction" for three years following the date on which a person acquires more than 10% of the voting power in the election of directors of the issuing corporation, unless the Chapter 1704 transaction is approved by the corporation's board of directors prior to such transaction. A person who acquires such voting power is an "interested shareholder," and "Chapter 1704 transactions" involve a broad range of transactions, including mergers, consolidations, combinations, liquidations, recapitalizations and other transactions between an issuing public corporation and an interested shareholder if such transactions involve 5% of the assets or shares of the issuing public corporation or 10% of its earning power. After the initial three year moratorium, Chapter 1704 of the OGCL prohibits such transactions absent approval by disinterested shareholders or the transaction meeting certain statutorily defined fair price provisions. One significant effect of Chapter 1704 of the OGCL is to encourage a person to negotiate with a corporation's board of directors prior to becoming an interested shareholder.

Ohio also has enacted Section 1707.043 of the OGCL, which provides that a person who announces a control bid must disgorge profits realized by that person upon the sale of any equity securities within 18 months of the announcement.

In addition, Section 1701.59 of the OGCL provides that, in determining what a director reasonably believes to be in the best interests of the corporation, such director may consider, in addition to the interests of the corporation's shareholders, any of the interests of the corporation's employees, suppliers, creditors and customers, the economy of the State of Ohio and the United States, community and societal considerations and the long-term as well as the short-term interests in the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.

The overall effect of these statutes may be to render more difficult or discourage the removal of incumbent management or the assumption of effective control by other persons.


EXHIBIT 13 GLOSSYFINAL2001.JPG

2019 Annual Report TRANSFORMING OUR BUSINES
2019 Annual Report TRANSFORMING OUR BUSINESS first First Financial Bancorp



GLOSSYFINAL2002.JPG

CONSECUTIVE Net Income $198.1 QUARTERS OF (dollars in millions) $172.6 117 PROFITABILITY $96.8 $88.5 $75.1 YEARS OF STRENGTH & STABILITY 156 2015 2016 2017 2018 2019 $9.2 $10.2 $14.5 Total Loans Total Deposits $10.1 Total Assets (dollars in billions) $8.8 (dollars in billions) (dollars in billions) $14.0 $6.0 $6.9 $5.8 $6.5 $6.2 $8.9 $5.4 $8.4 $8.1 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 $2.00 1.39% Earnings Per Share Return On Assets 1.37% Return On Equity 10.78% $1.93 10.48% 9.85% 9.33% 9.11% 1.12% $1.56 1.07% $1.43 1.00% $1.21 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019



GLOSSYFINAL2003.JPG

Dear Fellow Shareholders, The past year was transformational for First Financial Bancorp. With the completion of the MainSource merger in 2018, First Financial emerged as a $10+ billion company, “ raising our profile within the industry and assuming new we must be in the right responsibilities to shareholders, regulators, and the clients and communities we serve. place at the right time Transformation is never simple. It presents challenges to our with the right advice people, processes, and the products and services we offer. and solutions to help I’m pleased to report that we rose to the challenge and emerged as a stronger bank, better positioned to compete, our clients innovate, and win. 2019 Highlights in technology, and in the social, economic, and political conditions that impact our key stakeholders. First Financial’s 2019 achievements are evidenced by important developments internally, in the services we offer, We must be in the right place at the right time with the and in the ways with which we engage our clients: right advice and solutions to help our clients along their financial journeys. This means understanding the needs of The roll out of our Corporate Strategic Plan, setting clear our clients on an instinctive level. We will immerse ourselves direction for our planning efforts and aligning our people into client segments, working to understand the economic, with the core tenets of our business social, and psychographic nuances of Low and Moderate Investments in key talent, adding high-quality associates in Income, Mass Affluent, and High Net Worth individuals and strategic roles to drive innovation and growth families. Similarly, we continue to develop specialized skills in understanding the specific needs of Corporate, Middle Market, The formation of our Digital Solutions Group, the creation Commercial, and Small Business clients, responding to - and of a three-year digital roadmap, and the rollout of new ultimately anticipating - needs in ways that keep businesses technologies that enable improved online business and moving forward on their journeys. We will take the concept retail mortgage lending capabilities of an advisor to an entirely new level, leveraging data to better understand needs and trends, removing friction, and The acquisition of Bannockburn Global Forex, adding making the First Financial banking experience easier and foreign currency hedging, advising, and trading capabilities more pleasing than any financial relationship our clients have to our specialty services offerings ever had. The opening of our 4th & Vine Innovation Center in Client centric. Ready to engage. Delivering expert advice and Cincinnati, providing a new distribution approach for solutions. This is where we’re going in 2020. This is the next banking services, innovation, and financial wellness stage in First Financial Bank’s transformation. The renovation of our Greensburg Operations Center and Thank you for your continued support. our commitment of $500,000 in support of the capital campaign to expand the Greensburg, IN YMCA with a Decatur County Memorial Hospital wellness facility A $1 million donation to the Cincinnati USA Regional Chamber’s Minority Business Accelerator to help continue the development of sizable minority businesses in the Greater Cincinnati area Financially, 2019 was another successful year for First Financial. The year was highlighted by record earnings, top- quartile returns, and shareholder-focused capital actions despite headwinds from Fed rate cuts, legislatively mandated reductions in interchange revenue, and increased credit costs. This success is a direct reflection of the resolve and dedication of our associates, who continue to deliver unparalleled service to our clients and return to our shareholders. What’s Ahead In 2020 With a strong foundation firmly established, we move forward in 2020 with specific execution plans that continue our transformation. We will adapt to changes in our markets, Archie M. Brown President & Chief Executive Officer


First Financial Bancorp 2019 Annual Report 1

GLOSSYFINAL2004.JPG
Leadership Senior Management Archie M. Brown John M. Gavigan Amanda N. Neeley President and Chief Executive Officer Chief Operating Officer Chief Strategy Officer James M. Anderson William R. Harrod James R. Shank Chief Financial Officer Chief Credit Officer Chief Internal Auditor Scott T. Crawley Andrew K. Hauck Karen B. Woods Corporate Controller and Chief Commercial Banking Officer General Counsel and Principal Accounting Officer Chief Risk Officer Catherine M. Myers Richard S. Dennen Chief Consumer Banking Officer President, Oak Street Funding Board of Directors Claude E. Davis Erin P. Hoeflinger Board Chair, First Financial Bancorp Senior Vice President, Business Strategy and Execution Managing Director Aetna Brixey and Meyer Capital Susan L. Knust J. Wickliffe Ach Owner and President Lead Independent Director Omega Warehouse Services Board of Directors of First Financial Bancorp William J. Kramer Kathleen L. Bardwell Vice President of Operations Senior Vice President, Chief Compliance Officer Valco Companies, Inc. STERIS Corporation John T. Neighbours William G. Barron General Counsel Chairman and President AmeriQual Group Holdings William G. Barron Enterprises Thomas M. O’Brien Vincent A. Berta Senior Advisor President and Managing Director Boston Consulting Group Covington Capital, LLC Richard E. Olszewski Cynthia O. Booth Owner/Operator President and Chief Executive Officer 7 Eleven Food Stores COBCO Enterprises, LLC Maribeth S. Rahe Archie M. Brown President and Chief Executive Officer President and Chief Executive Officer Fort Washington Investment Advisors, Inc. First Financial Bancorp and First Financial Bank Corinne R. Finnerty Principal McConnell Finnerty PC


2 First Financial Bancorp 2019 Annual Report


FINANCIAL HIGHLIGHTS
 
 
 
 
 
 
 
(Dollars in thousands, except per share data)
 
2019
 
2018
 
% Change
Earnings
 
 
 
 
 
 
Net interest income
 
$
484,254

 
$
449,235

 
7.8
 %
Net income
 
198,075

 
172,595

 
14.8
 %
 
 
 
 
 
 
 
Per Share
 
 
 
 
 
 
Net income per common share-basic
 
$
2.01

 
$
1.95

 
3.1
 %
Net income per common share-diluted
 
2.00

 
1.93

 
3.6
 %
Cash dividends declared per common share
 
0.90

 
0.78

 
15.4
 %
Tangible book value per common share (end of year)
 
12.42

 
11.72

 
6.0
 %
Market price (end of year)
 
25.44

 
23.72

 
7.3
 %
 
 
 
 
 
 
 
Balance Sheet - End of Year
 
 
 
 
 
 
Total assets
 
$
14,511,625

 
$
13,986,660

 
3.8
 %
Loans
 
9,201,665

 
8,824,214

 
4.3
 %
Investment securities
 
3,119,966

 
3,324,243

 
(6.1
)%
Deposits
 
10,210,229

 
10,140,394

 
0.7
 %
Shareholders' equity
 
2,247,705

 
2,078,249

 
8.2
 %
 
 
 
 
 
 
 
Ratios
 
 
 
 
 
 
Return on average assets
 
1.39
%
 
1.37
%
 
 
Return on average shareholders' equity
 
9.11
%
 
9.85
%
 
 
Return on average tangible shareholders' equity
 
16.32
%
 
17.32
%
 
 
Net interest margin
 
3.95
%
 
4.05
%
 
 
Net interest margin (fully tax equivalent)
 
4.00
%
 
4.10
%
 
 



First Financial Bancorp 2019 Annual Report 3








 
2019 Financial Highlights






4 First Financial Bancorp 2019 Annual Report

Glossary of Abbreviations and Acronyms

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

ABL
Asset based lending
 
FHLMC
Federal Home Loan Mortgage Corporation
ACL
Allowance for credit losses
 
First Financial
First Financial Bancorp.
the Act
Private Securities Litigation Reform Act
 
FNMA
Federal National Mortgage Association
AFS
Available-for-sale
 
Form 10-K
First Financial Bancorp. Annual Report on Form 10-K
ALLL
Allowance for loan and lease losses
 
FRB
Federal Reserve Bank
AOCI
Accumulated other comprehensive income
 
GAAP
U.S. Generally Accepted Accounting Principles
ASC
Accounting standards codification
 
GDP
Gross Domestic Product
ASU
Accounting standards update
 
GNMA
Government National Mortgage Association
ATM
Automated teller machine
 
HTM
Held-to-maturity
Bank
First Financial Bank
 
Insignificant
Less than $0.1 million
Basel III
Basel Committee regulatory capital reforms, Third Basel Accord
 
IRLC
Interest Rate Lock Commitment
BGF or Bannockburn
Bannockburn Global Forex, LLC
 
MBSs
Mortgage-backed securities
Bp/bps
Basis point(s)
 
MSFG
MainSource Financial Group, Inc.
BOLI
Bank owned life insurance
 
N/A
Not applicable
CDs
Certificates of deposit
 
NII
Net interest income
CECL
Current Expected Credit Loss
 
N/M
Not meaningful
C&I
Commercial & industrial
 
Oak Street
Oak Street Holdings Corporation
CLOs
Collateralized loan obligations
 
ODFI
Ohio Department of Financial Institutions
CMOs
Collateralized mortgage obligations
 
OREO
Other real estate owned
CRE
Commercial real estate
 
PCA
Prompt corrective action
Company
First Financial Bancorp.
 
ROU
Right-of-use
ERM
Enterprise Risk Management
 
SEC
United States Securities and Exchange Commission
EVE
Economic value of equity
 
Topic 842
FASB ASC Topic 842, Leasing
Fair Value Topic
FASB ASC Topic 825, Financial Instruments
 
Special Assets
Special Assets Division
FASB
Financial Accounting Standards Board
 
TDR
Troubled debt restructuring
FDIC
Federal Deposit Insurance Corporation
 
USD
United States dollars
FHLB
Federal Home Loan Bank
 
 
 


First Financial Bancorp 2019 Annual Report 5

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Table 1 • Financial Summary
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
(Dollars in thousands, except per share data)
 
2019
 
2018
 
2017
 
2016
 
2015
Summary of operations
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
607,578

 
$
540,382

 
$
333,073

 
$
305,950

 
$
269,759

Tax equivalent adjustment (1)
 
6,328

 
5,147

 
5,259

 
4,215

 
4,017

Interest income tax – equivalent (1)
 
613,906

 
545,529

 
338,332

 
310,165

 
273,776

Interest expense
 
123,324

 
91,147

 
49,528

 
33,279

 
23,257

  Net interest income tax – equivalent (1)
 
$
490,582

 
$
454,382

 
$
288,804

 
$
276,886

 
$
250,519

Interest income
 
$
607,578

 
$
540,382

 
$
333,073

 
$
305,950

 
$
269,759

Interest expense
 
123,324

 
91,147

 
49,528

 
33,279

 
23,257

  Net interest income
 
484,254

 
449,235

 
283,545

 
272,671

 
246,502

Provision for loan and lease losses
 
30,598

 
14,586

 
3,582

 
10,140

 
9,641

Noninterest income
 
131,373

 
103,382

 
76,142

 
69,601

 
75,202

Noninterest expenses
 
342,167

 
323,810

 
239,942

 
201,401

 
201,130

Income before income taxes
 
242,862

 
214,221

 
116,163

 
130,731

 
110,933

Income tax expense
 
44,787

 
41,626

 
19,376

 
42,205

 
35,870

   Net income
 
$
198,075

 
$
172,595

 
$
96,787

 
$
88,526

 
$
75,063

 
 
 
 
 
 
 
 
 
 
 
Per share data
 
 
 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
 
 
 
Basic
 
$
2.01

 
$
1.95

 
$
1.57

 
$
1.45

 
$
1.23

Diluted
 
$
2.00

 
$
1.93

 
$
1.56

 
$
1.43

 
$
1.21

Cash dividends declared per common share
 
$
0.90

 
$
0.78

 
$
0.68

 
$
0.64

 
$
0.64

Average common shares outstanding–basic (in thousands)
 
98,306

 
88,582

 
61,529

 
61,206

 
61,063

Average common shares outstanding–diluted (in thousands)
 
98,851

 
89,614

 
62,172

 
61,985

 
61,848

 
 
 
 
 
 
 
 
 
 
 
Selected year-end balances
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
14,511,625

 
$
13,986,660

 
$
8,896,923

 
$
8,437,967

 
$
8,147,411

Earning assets
 
12,392,259

 
12,190,567

 
8,117,115

 
7,719,285

 
7,431,707

Investment securities
 
3,119,966

 
3,324,243

 
2,056,556

 
1,854,201

 
1,970,626

Total loans and leases
 
9,201,665

 
8,824,214

 
6,013,183

 
5,757,482

 
5,388,760

Interest-bearing demand deposits
 
2,364,881

 
2,307,071

 
1,453,463

 
1,513,771

 
1,414,291

Savings deposits
 
2,960,979

 
3,167,325

 
2,462,420

 
2,142,189

 
1,945,805

Time deposits
 
2,240,441

 
2,173,564

 
1,317,105

 
1,321,843

 
1,406,124

Noninterest-bearing demand deposits
 
2,643,928

 
2,492,434

 
1,662,058

 
1,547,985

 
1,413,404

Total deposits
 
10,210,229

 
10,140,394

 
6,895,046

 
6,525,788

 
6,179,624

Short-term borrowings
 
1,316,181

 
1,040,691

 
814,565

 
807,912

 
938,425

Long-term debt
 
414,376

 
570,739

 
119,654

 
119,589

 
119,540

Shareholders’ equity
 
2,247,705

 
2,078,249

 
930,664

 
865,224

 
809,376

 
 
 
 
 
 
 
 
 
 
 
Select Financial Ratios
 
 
 
 
 
 
 
 
 
 
Average loans to average deposits (2)
 
88.59
%
 
87.49
%
 
88.12
%
 
89.33
%
 
84.00
%
Net charge-offs to average loans and leases
 
0.33
%
 
0.15
%
 
0.13
%
 
0.10
%
 
0.18
%
Average shareholders’ equity to average total assets
 
15.30
%
 
13.89
%
 
10.42
%
 
10.24
%
 
10.73
%
Return on average assets
 
1.39
%
 
1.37
%
 
1.12
%
 
1.07
%
 
1.00
%
Return on average equity
 
9.11
%
 
9.85
%
 
10.78
%
 
10.48
%
 
9.33
%
Net interest margin
 
3.95
%
 
4.05
%
 
3.59
%
 
3.62
%
 
3.60
%
Net interest margin (tax equivalent basis) (1)
 
4.00
%
 
4.10
%
 
3.66
%
 
3.68
%
 
3.66
%
Dividend payout
 
44.78
%
 
40.00
%
 
43.31
%
 
44.14
%
 
52.03
%
(1) Tax equivalent basis was calculated using a 21.00% tax rate for 2019 and 2018 and a 35.00% tax rate for 2017, 2016 and 2015.
(2) Includes loans held for sale.


6 First Financial Bancorp 2019 Annual Report

This annual report contains forward-looking statements. See the Forward-Looking Statements section that follows for further information on the risks and uncertainties associated with forward-looking statements.

The following discussion and analysis is presented by management to facilitate the understanding of the financial position and results of operations of First Financial Bancorp. Management's discussion and analysis identifies trends and material changes that occurred during the reporting periods presented and should be read in conjunction with the Statistical Data, Consolidated Financial Statements and accompanying Notes.

Certain reclassifications of prior years' amounts have been made to conform to current year presentation. Such reclassifications had no effect on net earnings, total assets, liabilities and shareholders' equity.

EXECUTIVE SUMMARY

First Financial Bancorp. is a $14.5 billion financial holding company headquartered in Cincinnati, Ohio, which operates through its subsidiaries primarily in Ohio, Indiana, Kentucky and Illinois. These subsidiaries include First Financial Bank, an
Ohio-chartered commercial bank, which operated 145 full service banking centers as of December 31, 2019. First Financial
provides banking and financial services products to business and retail clients through its six lines of business: Commercial,
Retail Banking, Mortgage Banking, Wealth Management, Investment Commercial Real Estate and Commercial Finance.
Commercial Finance provides equipment and leasehold improvement financing for franchisees in the quick service and casual
dining restaurant sector and commission-based financing, primarily to insurance agents and brokers, throughout the United
States. Wealth Management had $2.9 billion in assets under management as of December 31, 2019 and provides the following
services: financial planning, investment management, trust administration, estate settlement, brokerage services and retirement planning.

Additional information about the Company, including its products, services and banking locations, is available at www.bankatfirst.com.

The major components of First Financial’s operating results for the previous five years are summarized in Table 1 – Financial Summary and are discussed in greater detail in the sections that follow.

MARKET STRATEGY

First Financial aims to develop a competitive advantage by utilizing a local market focus to provide superior service and build
long-term relationships with clients while helping them achieve greater financial success. First Financial serves a combination
of metropolitan and community markets in Ohio, Indiana, Kentucky and Illinois through its full-service banking centers, and
provides financing to franchise owners and clients within the financial services industry throughout the United States. First
Financial’s market selection process includes a number of factors, but markets are primarily chosen for their potential for
growth and long-term profitability. First Financial intends to concentrate plans for future growth and capital investment within
its current metropolitan markets, and will continue to evaluate additional growth opportunities in metropolitan markets located
within, or in close proximity to, the Company's current geographic footprint. Additionally, First Financial may assess strategic acquisitions that provide product line extensions or additional industry verticals that compliment its existing business and diversify its product suite and revenue streams. First Financial's investment in community markets remains an important part of the Bank's core funding base and has historically provided stable, low-cost funding sources.

BUSINESS COMBINATIONS

In August 2019, the Company acquired Bannockburn Global Forex, LLC, an industry-leading capital markets firm. The
Cincinnati-based company provides transactional currency payments, foreign exchange hedging and other advisory products to
closely held enterprises, financial sponsors and financial institutions across the United States. Bannockburn became a division of the Bank and continues to operate as Bannockburn Global Forex, taking advantage of its existing brand recognition within the foreign exchange industry. The total purchase consideration was $114.6 million, consisting of $53.7 million in cash and $60.9 million of First Financial common stock. The transaction resulted in First Financial recording $58.0 million of goodwill on the Consolidated Balance Sheet, which 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.

In April 2018, First Financial completed its acquisition of MainSource Financial Group, Inc. and its banking subsidiary,
MainSource Bank. The merger positioned the combined company to better serve the complementary geographies of Ohio,

First Financial Bancorp 2019 Annual Report 7

Indiana, Kentucky and Illinois by creating a higher performing bank with greater scale and capabilities. Under the terms of the
merger agreement, shareholders of MSFG received 1.3875 common shares of First Financial common stock for each share of MSFG common stock. Including outstanding options and warrants on MSFG common stock, total purchase consideration was $1.1 billion. In the merger, First Financial acquired $4.4 billion of total assets, $2.8 billion of loans and $3.3 billion of deposits, which resulted in goodwill of $675.6 million.

The BGF and MSFG transactions were accounted for using the acquisition method of accounting. 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.

See Note 23 – Business Combinations in the Notes to Consolidated Financial Statements, for further discussion of these transactions.

OVERVIEW OF OPERATIONS
 
Net income for the year ended December 31, 2019 was $198.1 million, resulting in earnings per diluted common share of $2.00. This compares to net income of $172.6 million and earnings per diluted common share of $1.93 in 2018. First Financial’s return on average shareholders’ equity for 2019 was 9.11%, compared to 9.85% for 2018, and First Financial’s return on average assets was 1.39% and 1.37% for 2019 and 2018, respectively.
  
Net interest income in 2019 increased $35.0 million, or 7.8%, from 2018, to $484.3 million, primarily driven by higher average earning asset balances subsequent to the MSFG merger as well as higher yields earned on the investment and loan portfolios. The net interest margin on a fully tax equivalent basis was 4.00% for 2019 compared to 4.10% in 2018 as rising interest costs outpaced interest income growth.
 
Noninterest income increased $28.0 million, or 27.1%, during 2019 to $131.4 million from $103.4 million in 2018. The increase in 2019 was driven primarily by the full year impact of the MSFG merger, an increase in client derivative fees and the BGF acquisition in August of 2019.

Noninterest expense increased $18.4 million, or 5.7%, from $323.8 million in 2018 to $342.2 million in 2019. This increase was impacted by the larger scale created by the MSFG merger as well as the BGF acquisition.

Income tax expense increased $3.2 million, or 7.6%, to $44.8 million in 2019 from $41.6 million in 2018, with the effective tax rate decreasing to 18.4% in 2019 from 19.4% in 2018. The lower effective tax rate in 2019 was primarily related to the recognition of a historic tax credit investment during the period.
 
Total loans increased $377.5 million, or 4.3%, to $9.2 billion at December 31, 2019 from $8.8 billion at December 31, 2018. Total deposits increased $69.8 million, or 0.7%, to $10.2 billion as of December 31, 2019 from $10.1 billion at December 31, 2018.
 
The ALLL was $57.7 million, or 0.63% of total loans at December 31, 2019, compared to $56.5 million, or 0.64% of total loans at December 31, 2018. Provision expense increased $16.0 million, or 109.8%, to $30.6 million in 2019 while classified assets declined $42.4 million, or 32.2%, during the year. The elevated provision expense was mainly attributed to $13.2 million of charge-offs related to a single franchise relationship.

First Financial’s operational results may be influenced by certain economic factors and conditions, such as market interest rates, industry competition, household and business spending levels, consumer confidence and the regulatory environment. For a more detailed discussion of the Company's operations, please refer to the sections that follow.

NET INCOME
 
2019 vs. 2018. First Financial’s net income increased $25.5 million, or 14.8%, to $198.1 million in 2019, compared to net income of $172.6 million in 2018. The increase was primarily related to a $35.0 million, or 7.8%, increase in net interest income, combined with a $28.0 million, or 27.1%, increase in noninterest income. These increases were partially offset by an $18.4 million, or 5.7%, increase in noninterest expenses and a $3.2 million, or 7.6%, increase in income tax expense during 2019.

2018 vs. 2017. First Financial’s net income increased $75.8 million, or 78.3%, to $172.6 million in 2018, compared to net

First Financial Bancorp 2019 Annual Report 8

income of $96.8 million in 2017. The increase was primarily related to a $165.7 million, or 58.4%, increase in net interest
income, combined with a $27.2 million, or 35.8%, increase in noninterest income. These increases were partially offset by an
$83.9 million, or 35.0%, increase in noninterest expenses and a $22.3 million, or 114.8%, increase in income tax expense
during 2018.

For more detail, refer to the Net interest income, Noninterest income, Noninterest expenses and Income taxes sections that follow.

NET INTEREST INCOME
 
First Financial’s net interest income for the years 2015 through 2019 is shown in Table 1 – Financial Summary. First Financial’s principal source of income is net interest income, which is the excess of interest received from earning assets, including loan-related fees and purchase accounting accretion, less interest paid on interest-bearing liabilities. The amount of net interest income is determined by the volume and mix of earning assets, the rates earned on such assets and the volume, mix and rates paid for the deposits and borrowed money that support the earning assets. Earning assets consist of interest-bearing loans to customers as well as marketable investment securities.
 
For analytical purposes, net interest income is also presented in Table 1 – Financial Summary on a tax equivalent basis assuming a 21.00% marginal tax rate for 2018 and 2019 and a 35.00% marginal tax rate for years 2015 through 2017. Net interest income is presented on a tax equivalent basis to consistently reflect income from tax-exempt assets, such as municipal loans and investments, in order to facilitate a comparison between taxable and tax-exempt amounts.  Management believes it is a standard practice in the banking industry to present net interest margin and net interest income on a fully tax equivalent basis as these measures provide useful information to make peer comparisons. First Financial's tax equivalent net interest margin was 4.00%, 4.10% and 3.66% for 2019, 2018 and 2017, respectively.

Table 2 – Volume/Rate Analysis - Tax Equivalent Basis describes the extent to which changes in interest rates as well as changes in the volume of earning assets and interest-bearing liabilities have affected First Financial’s net interest income on a tax equivalent basis during the years presented. Nonaccrual loans and loans held for sale were included in the average loan balances used to determine the yields in Table 2 – Volume/Rate Analysis - Tax Equivalent Basis, which should be read in conjunction with the Statistical Information table.
 
Loan fees included in the interest income computation for 2019, 2018 and 2017 were $15.9 million, $16.5 million and $13.9 million, respectively. Interest income also included purchase accounting accretion of $26.8 million, $25.5 million and $0.7 million for 2019, 2018 and 2017, respectively.

2019 vs. 2018. Net interest income increased $35.0 million, or 7.8%, from $449.2 million in 2018 to $484.3 million in 2019, primarily due to an increase in average earning assets and higher yields earned during 2019. Average earning assets increased from $11.1 billion in 2018 to $12.3 billion in 2019 primarily due to the full year impact of the MSFG merger and organic loan growth, while the tax equivalent yield on earning assets increased from 4.93% in 2018 to 5.00% in 2019.

Interest income was $607.6 million in 2019, increasing $67.2 million, or 12.4%, from 2018. The increase was primarily attributable to interest income from loans, which increased $51.8 million, or 11.6%, from $447.2 million in 2018 to $499.0 million in 2019. The increase in interest income on loans resulted from a merger driven increase in average loan balances, including loans held for sale, of $797.8 million, or 9.8%, the impact from purchase accounting accretion and higher loan yields. Additionally, interest income earned on investment securities increased $15.3 million, or 16.5%, during the period. Similar to interest on loans, higher interest income on investment securities was driven by a $391.7 million, or 13.5%, merger-related increase in average investment balances as well as higher yields earned during the period.

Interest expense was $123.3 million in 2019, which was a $32.2 million, or 35.3%, increase from 2018. Interest expense increased as the average balance of interest-bearing deposits increased $478.5 million, or 6.7%, primarily due to the full year impact of the MSFG merger in 2019 in addition to increased customer demand. Additionally, higher interest rates during the twelve month period contributed to the cost of funds related to these deposits increasing to 1.04% for 2019 from 0.80% in 2018. Interest expense was also impacted in 2019 by a $199.3 million, or 21.0%, increase in average Short-term borrowings and an $83.8 million, or 19.1%, increase in average Long-term borrowings.

2018 vs. 2017. Net interest income increased $165.7 million, or 58.4%, from $283.5 million in 2017 to $449.2 million in 2018,
primarily due to an increase in average earning assets and higher yields earned during 2018. Average earning assets increased

First Financial Bancorp 2019 Annual Report 9
Management’s Discussion and Analysis of Financial Condition and Results of Operations

from $7.9 billion in 2017 to $11.1 billion in 2018, while the tax equivalent yield on earning assets increased from 4.29% in 2017 to 4.93% in 2018.

Interest income was $540.4 million in 2018, a $207.3 million, or 62.2%, increase from 2017. This increase was primarily
attributable to interest income from loans, which increased $167.1 million, or 59.6%, from $280.1 million in 2017 to $447.2
million in 2018 as well as a $36.0 million, or 63.8%, increase in interest income earned on investment securities during 2018. The increase in interest income on loans resulted from a merger driven increase in average loan balances, including loans held for sale, of $2.3 billion, or 39.4%, and the impact from purchase accounting accretion, in addition to higher loan yields resulting from rising interest rates. Similar to interest on loans, the increase in interest income on investment securities was driven by a $895.8 million, or 44.8%, merger related increase in average investment balances as well as higher yields earned during the period due to rising interest rates.

Interest expense was $91.1 million in 2018, which was a $41.6 million, or 84.0%, increase from 2017. Interest expense
increased as the average balance of interest-bearing deposits increased $2.0 billion, or 39.4%, primarily due to the MSFG merger. Additionally, rising interest rates during the twelve month period contributed to the cost of these deposits increasing to 80 bps for 2018 from 69 bps in 2017. Interest expense was also impacted in 2018 by an increase in short-term borrowing rates from 99 bps in 2017 to 1.90% in 2018 as a result of rising interest rates.

Table 2 • Volume/Rate Analysis - Tax Equivalent Basis (1) 
 
 
 
 
 
 
2019 change from 2018 due to
 
2018 change from 2017 due to
(Dollars in thousands)
 
Volume
Rate
 
Total
 
Volume
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 
 
 
 
 
Loans (2)
 
$
44,638

 
$
7,257

 
$
51,895

 
$
126,901

 
$
39,681

 
$
166,582

Indemnification asset
 
0

 
0

 
0

 
0

 
3,871

 
3,871

Investment securities (3)
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
7,846

 
3,246

 
11,092

 
21,278

 
7,230

 
28,508

Tax-exempt
 
5,831

 
(555
)
 
5,276

 
9,004

 
(1,112
)
 
7,892

Total investment securities interest (3)
 
13,677

 
2,691

 
16,368

 
30,282

 
6,118

 
36,400

Interest-bearing deposits with other banks
 
84

 
30

 
114

 
25

 
319

 
344

Total
 
58,399

 
9,978

 
68,377

 
157,208

 
49,989

 
207,197

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
 
859

 
3,443

 
4,302

 
2,641

 
1,563

 
4,204

Savings deposits
 
261

 
3,072

 
3,333

 
3,488

 
(1,379
)
 
2,109

Time deposits
 
5,750

 
8,685

 
14,435

 
11,766

 
3,701

 
15,467

Short-term borrowings
 
4,386

 
2,816

 
7,202

 
2,228

 
7,612

 
9,840

Long-term debt
 
3,056

 
(151
)
 
2,905

 
11,703

 
(1,704
)
 
9,999

Total
 
14,312

 
17,865

 
32,177

 
31,826

 
9,793

 
41,619

Net interest income
 
$
44,087

 
$
(7,887
)
 
$
36,200

 
$
125,382

 
$
40,196

 
$
165,578


(1) Tax equivalent basis was calculated using a 21.00% tax rate for 2019 and 2018 and a 35.00% tax rate for 2017.
(2) Includes nonaccrual loans and loans held-for-sale.
(3) Includes HTM securities, AFS securities and other investments.

NONINTEREST INCOME AND NONINTEREST EXPENSES
 
Noninterest income and noninterest expenses for 2019, 2018 and 2017 are shown in Table 3 – Noninterest Income and Noninterest Expenses.
 
NONINTEREST INCOME
 
2019 vs. 2018. Noninterest income increased $28.0 million, or 27.1%, from $103.4 million in 2018 to $131.4 million in 2019. The increase was primarily related to an $8.8 million, or 144.6%, increase in Gain on sale of loans, an $8.0 million, or 103.9%,

10 First Financial Bancorp 2019 Annual Report

increase in Client derivative fees and a $7.7 million increase in Foreign exchange income. These increases were partially offset by a $1.4 million, or 7.1% decrease in bankcard income.

Higher gain on sale of loans and client derivative fees were primarily driven by the full year impact of the MSFG merger and strong loan origination activity, while foreign exchange income was directly attributable to the BGF acquisition, which closed in August of 2019. The decline in bankcard income was due to the impact of the Durbin Amendment cap on interchange fees, which became applicable to First Financial in the third quarter of 2019.

2018 vs. 2017. Noninterest income increased $27.2 million, or 35.8%, from $76.1 million in 2017 to $103.4 million in 2018.
The increase was primarily related to a $15.3 million, or 77.5%, increase in service charges on deposits, a $6.9 million, or
52.2% increase in bankcard income, a $3.6 million, or 22.8%, increase in other noninterest income, a $1.3 million, or 19.7%,
increase in client derivative fees, and a $1.0 million, or 7.2%, increase in trust and wealth management fees. These increases
were partially offset by $1.8 million, or 109.8%, decrease in gains on sale of investment securities.

The increases in service charges on deposits, bankcard income, other noninterest income, derivative fees and wealth
management fees were primarily driven by increased scale created by the MSFG merger.
Table 3 • Noninterest Income and Noninterest Expenses
 
 
2019
 
2018
 
2017
(Dollars in thousands)
 
Total
 
% Change
 
Total
 
% Change
 
Total
 
% Change
Noninterest income
 
 
 
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
 
$
37,939

 
8.1
 %
 
$
35,108

 
77.5
 %
 
$
19,775

 
4.4
 %
Trust and wealth management fees
 
15,644

 
3.7
 %
 
15,082

 
7.2
 %
 
14,073

 
6.6
 %
Bankcard income
 
18,804

 
(7.1
)%
 
20,245

 
52.2
 %
 
13,298

 
9.6
 %
Client derivative fees
 
15,662

 
103.9
 %
 
7,682

 
19.7
 %
 
6,418

 
40.4
 %
Foreign exchange income
 
7,739

 
N/M

 
0

 
N/M

 
0

 
N/M

Net gains from sales of loans
 
14,851

 
144.6
 %
 
6,071

 
17.5
 %
 
5,169

 
(24.0
)%
Other
 
21,140

 
9.2
 %
 
19,355

 
22.8
 %
 
15,760

 
14.8
 %
Subtotal
 
131,779

 
27.3
 %
 
103,543

 
39.0
 %
 
74,493

 
7.4
 %
Net gain (loss) on sales/transfers of investment securities
 
(406
)
 
N/M

 
(161
)
 
N/M

 
1,649

 
N/M

Total
 
$
131,373

 
27.1
 %
 
$
103,382

 
35.8
 %
 
$
76,142

 
9.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expenses
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
$
209,061

 
10.6
 %
 
$
188,990

 
37.7
 %
 
$
137,240

 
6.8
 %
Net occupancy
 
24,069

 
(0.6
)%
 
24,215

 
39.2
 %
 
17,397

 
(5.1
)%
Furniture and equipment
 
15,903

 
6.7
 %
 
14,908

 
76.6
 %
 
8,443

 
(2.5
)%
Data processing
 
21,881

 
(22.1
)%
 
28,077

 
100.2
 %
 
14,022

 
22.9
 %
Marketing
 
6,908

 
(9.1
)%
 
7,598

 
137.4
 %
 
3,201

 
(19.3
)%
Communication
 
3,267

 
3.2
 %
 
3,167

 
74.1
 %
 
1,819

 
(3.7
)%
Professional services
 
11,254

 
(8.3
)%
 
12,272

 
(18.3
)%
 
15,023

 
138.3
 %
State intangible tax
 
5,829

 
40.4
 %
 
4,152

 
56.4
 %
 
2,655

 
30.5
 %
FDIC assessments
 
1,973

 
(50.3
)%
 
3,969

 
0.6
 %
 
3,944

 
(8.1
)%
Intangible assets amortization
 
9,671

 
31.4
 %
 
7,359

 
466.9
 %
 
1,298

 
(17.6
)%
Other
 
32,351

 
11.2
 %
 
29,103

 
(16.6
)%
 
34,900

 
142.5
 %
Total
 
$
342,167

 
5.7
 %
 
$
323,810

 
35.0
 %
 
$
239,942

 
19.1
 %

NONINTEREST EXPENSES

2019 vs. 2018. Noninterest expenses increased $18.4 million, or 5.7%, in 2019 compared to 2018, primarily due to a $20.1 million, or 10.6%, increase in salaries and employee benefits, a $3.2 million, or 11.2%, increase in other noninterest expenses, and a $2.3 million, or 31.4%, increase in intangible assets amortization expense. These increases were partially offset by a $6.2 million, or 22.1%, decrease in data processing expenses and a $2.0 million, or 50.3%, decrease in FDIC assessments.
  

First Financial Bancorp 2019 Annual Report 11
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Higher salaries and employee benefits in 2019 were attributed to merger related increases in staffing levels, higher performance-based compensation and annual compensation adjustments. Intangible assets recorded in conjunction with the purchase accounting for the MSFG and BFG business combinations resulted in higher intangible asset amortization during 2019, while the increase in other noninterest expense included a $2.9 million historic tax credit investment write-down. Lower data processing expenses were primarily due to elevated merger-related expenses in 2018, while the reduction of FDIC assessments was attributed to the recognition of a $3.4 million FDIC small bank assessment credit in the second half of 2019.

2018 vs. 2017. Noninterest expenses increased $83.9 million, or 35.0%, in 2018 compared to 2017, primarily due to a $51.8
million, or 37.7%, increase in salaries and employee benefits, a $14.1 million, or 100.2%, increase in data processing expenses,
a $6.8 million, or 39.2%, increase in net occupancy expenses, a $6.5 million, or 76.6%, increase in furniture and equipment
expenses, a $4.4 million, or 137.4%, increase in marketing expenses, and a $0.5 million, or 1.5%, decrease in other noninterest expenses. These increases were partially offset by a $2.8 million, or 18.3%, decrease in professional services.

Higher salaries and employee benefits in 2018 were attributed to merger related increases in staffing levels, higher severance
and retention costs, higher performance-based compensation, increased health care costs and annual compensation adjustments.
The increases in data processing, net occupancy, furniture and equipment and marketing expenses were largely attributable to
merger related expenses combined with the larger scale of the Company subsequent to the MSFG merger. Lower professional services in 2018 were mainly due to elevated costs in 2017. Higher other noninterest expenses during 2017 were primarily driven by an $11.3 million historic tax credit investment write-down, a $5.1 million impairment charge resulting from the preliminary agreement to early terminate the Company's FDIC loss sharing agreements and a $3.0 million charitable contribution to the First Financial Foundation.

INCOME TAXES
 
2019 vs. 2018. First Financial’s income tax expense in 2019 totaled $44.8 million compared to $41.6 million in 2018, resulting in effective tax rates of 18.4% and 19.4% for 2019 and 2018, respectively. The lower effective tax rate in 2019 was related to the recognition of a historic tax credit investment, which reduced income tax expense by $3.2 million and increased 2019 net income by $0.4 million when netted against the investment write-down included in noninterest expense.

2018 vs. 2017. First Financial’s income tax expense in 2018 totaled $41.6 million compared to $19.4 million in 2017, resulting in effective tax rates of 19.4% and 16.7% in 2018 and 2017, respectively. The higher effective tax rate in 2018 was related to the recognition of a significant historic tax credit investment in 2017, which was partially offset by the impact of tax reform. The historic tax credit investment reduced income tax expense by $12.5 million in 2017, and resulted in a $1.1 million increase to net income for the year when netted against the investment write-down included in noninterest expense.

For further information on income taxes, see Note 15 – Income Taxes in the Notes to Consolidated Financial Statements.

LENDING PRACTICES
 
First Financial remains dedicated to meeting the financial needs of individuals and businesses through its client-focused business model. The loan portfolio is comprised of a broad range of borrowers primarily located in the Ohio, Indiana and Kentucky markets; however, the commercial finance line of business serves a national client base.

First Financial’s loan portfolio consists of commercial loan types, including C&I, lease financing (equipment leasing), construction real estate and commercial real estate, as well as consumer loan types, such as residential real estate, home equity, installment and credit card loans. First Financial's lending portfolios are managed to avoid the creation of inappropriate industry, geographic, franchise concept or borrower concentration risk.

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.  

12 First Financial Bancorp 2019 Annual Report


First Financial maintains vigorous underwriting processes to assess prospective C&I borrowers' credit worthiness prior to origination, and actively monitors C&I relationships subsequent to funding in order to ensure adequate oversight of the portfolio.

First Financial remains optimistic that positive macroeconomic trends will result in C&I growth in future periods. While C&I growth is a strategic organizational priority, the Company will continue to monitor the size and composition of the franchise portfolio to ensure that it remains comprised of historically profitable concepts and financially responsible borrowers.

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.

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.

First Financial has pursued select real estate construction lending opportunities while actively monitoring industry and portfolio-specific credit trends and sector concentrations. In general, First Financial will seek to enter into typical construction lending arrangements only when the prospect of term financing is probable upon completion of the construction period.

Commercial Real Estate – 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.

Credit risk is mitigated by limiting total credit exposure to individual borrowers and by requiring borrowers to have adequate down payments or cash equity, thereby limiting the loan balance in relation to the market value of the property. First Financial also regularly reviews borrower financial performance, makes periodic site visits to financed properties and monitors rental rates, occupancy trends, capitalization rates and other factors that could potentially influence real estate collateral values in the Company's markets.

The Company believes its current underwriting criteria, coupled with active credit monitoring, provides adequate oversight of the commercial real estate loan portfolio. In addition, management continually monitors CRE balances in relation to the rest of the loan portfolio to ensure that real estate concentration risk is properly mitigated.

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.

While First Financial continues to sell the majority of residential real estate originations into the secondary market, the Company believes its current underwriting criteria coupled with the monitoring of a number of portfolio metrics, including credit scores and loan-to-value ratios, provides adequate oversight of this portfolio.


First Financial Bancorp 2019 Annual Report 13
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

First Financial believes its current underwriting criteria coupled with the monitoring of a number of portfolio metrics including credit scores, loan-to-value ratios, line size and utilization rates provide adequate oversight of the home equity portfolio.

Installment – Installment lending consists of consumer loans not secured by real estate, including loans secured by automobiles and unsecured personal loans.

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.

Underwriting for installment and credit card lending focuses on a borrower's debt-to-income ratios and credit history among other considerations.

Credit Management. Subject to First Financial’s credit policy and guidelines, credit underwriting and approval occur within the market and/or the centralized line of business originating the loan. First Financial has delegated a lending limit sufficient to address the majority of client requests in a timely manner to each market president and line of business manager. Loan requests for amounts greater than those limits require the approval of a designated credit officer or senior credit committee and may require additional approvals from the chief credit officer, the chief executive officer and the board of directors. This allows First Financial to manage the initial credit risk exposure through a standardized, strategic and disciplined approval process, but with an increasingly higher level of authority. Plans to purchase or sell a participation in a loan, or a group of loans, requires the approval of certain senior lending and administrative officers, and in some cases could include the board of directors.

Credit management practices are dependent on the type and nature of the loan. First Financial monitors all significant
exposures on an ongoing basis. Commercial loans are assigned internal risk ratings reflecting the risk of loss inherent in the loan. These internal risk ratings are assigned upon initial approval of credit and are updated periodically thereafter. First Financial reviews and adjusts its risk ratings based on actual experience, which is the basis for determining an appropriate ALLL. First Financial's commercial risk ratings of pass, special mention, substandard and doubtful are derived from standard regulatory rating definitions and facilitate the monitoring of credit quality across the commercial loan portfolio. For further information regarding these risk ratings, see Note 5 – Loans and Leases in the Notes to the Consolidated Financial Statements.

Commercial loans rated as special mention, substandard or doubtful are considered criticized, while loans rated as substandard or doubtful are considered classified. Commercial loans may be designated as criticized/classified based on individual borrower performance or industry and environmental factors. Criticized/classified loans are subject to more frequent internal reviews to assess the borrower’s credit status and develop appropriate action plans.

Classified loans are considered to be the leading indicator of credit losses, and are typically managed by the Special Assets Department. Special Assets is a commercial credit group whose primary focus is to handle the day-to-day management of commercial workouts, recoveries and problem loan resolutions. Special Assets ensures that First Financial has appropriate oversight, improved communication and timely resolution of issues throughout the loan portfolio. Additionally, the Credit Risk Management group within First Financial's Risk Management function provides independent, objective oversight and assessment of commercial credit quality and processes.

Consumer lending credit approvals are based on, among other factors, the financial strength and payment history of the borrower, type of exposure and the transaction structure. Consumer loans are generally smaller dollar amounts than other types of lending and are made to a large number of customers, providing diversification within the portfolio. Credit risk in the consumer loan portfolio is managed by loan type, and consumer loan asset quality indicators, including delinquency, are continuously monitored. The Credit Risk Management group performs product-level performance reviews and assesses credit quality and compliance with underwriting and loan administration guidelines across the consumer loan portfolio.

LOANS AND LEASES 

2019 vs. 2018. First Financial experienced steady loan growth in 2019. Loans, excluding loans held for sale, totaled $9.2 billion at December 31, 2019, increasing $377.5 million, or 4.3%, compared to December 31, 2018. Commercial real estate loans increased $440.0 million, or 11.7%, and residential real estate increased $100.3 million, or 10.5%, while construction real

14 First Financial Bancorp 2019 Annual Report

estate loans decreased $55.8 million, or 10.2%, C&I loans decreased $48.8 million, or 1.9%, home equity decreased $45.4 million, or 5.6%, and installment loans decreased $10.6 million, or 11.4%, during 2019. Average loan balances, including loans held for sale, were $8.9 billion at December 31, 2019, an increase of $797.8 million, or 9.8% compared to December 31, 2018.

Table 4 - Loan and Lease Portfolio details loan and lease balances by type as a percentage of the total portfolio as of December 31 for the last five years.
Table 4 • Loan and Lease Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
 
 
2019
 
2018
 
2017
 
2016
 
2015
(Dollars in thousands)
 
Loans
 
% of Loans to Total Loans
 
Loans
 
% of Loans to Total Loans
 
Loans
 
% of Loans to Total Loans
 
Loans
 
% of Loans to Total Loans
 
Loans
 
% of Loans to Total Loans
Commercial and industrial
 
$
2,465,877

 
26.8
%
 
$
2,514,661

 
28.5
%
 
$
1,912,743

 
31.8
%
 
$
1,781,948

 
31.0
%
 
$
1,663,102

 
30.8
%
Lease financing
 
88,364

 
1.0
%
 
93,415

 
1.1
%
 
89,347

 
1.5
%
 
93,108

 
1.6
%
 
93,986

 
1.7
%
Real estate – construction
 
493,182

 
5.3
%
 
548,935

 
6.2
%
 
467,730

 
7.8
%
 
399,434

 
6.9
%
 
311,712

 
5.8
%
Real estate – commercial
 
4,194,651

 
45.6
%
 
3,754,681

 
42.5
%
 
2,490,091

 
41.4
%
 
2,427,577

 
42.2
%
 
2,258,297

 
41.9
%
Real estate – residential
 
1,055,949

 
11.5
%
 
955,646

 
10.8
%
 
471,391

 
7.8
%
 
500,980

 
8.7
%
 
512,311

 
9.5
%
Home equity
 
771,869

 
8.4
%
 
817,282

 
9.3
%
 
493,604

 
8.2
%
 
460,388

 
8.0
%
 
466,629

 
8.7
%
Installment
 
82,589

 
0.9
%
 
93,212

 
1.1
%
 
41,586

 
0.7
%
 
50,639

 
0.9
%
 
41,506

 
0.8
%
Credit card
 
49,184

 
0.5
%
 
46,382

 
0.5
%
 
46,691

 
0.8
%
 
43,408

 
0.7
%
 
41,217

 
0.8
%
Total loans and leases
 
$
9,201,665

 
100
%
 
$
8,824,214

 
100
%
 
$
6,013,183

 
100
%
 
$
5,757,482

 
100
%
 
$
5,388,760

 
100
%

Table 5 – Loan Maturity/Rate Sensitivity indicates the contractual maturity of C&I loans and construction real estate loans outstanding at December 31, 2019 as well as their sensitivity to changes in interest rates.

For discussion of risks associated with the loan portfolio and First Financial's ALLL, see the Credit Risk section included in Management’s Discussion and Analysis.

Table 5 • Loan Maturity/Rate Sensitivity
 
 
December 31, 2019
 
 
Maturity
 
 
 
 
After one
 
 
 
 
 
 
Within
 
but within
 
After
 
 
(Dollars in thousands)
 
one year
 
five years
 
five years
 
Total
Commercial and industrial
 
$
616,407

 
$
1,255,963

 
$
593,507

 
$
2,465,877

Construction real estate
 
198,053

 
166,755

 
128,374

 
493,182

   Total
 
$
814,460

 
$
1,422,718

 
$
721,881

 
$
2,959,059

 
 
 
 
 
 
 
 
 
 
 
 
 
After one
 
 
 
 
 
 
Within
 
but within
 
After
 
 
(Dollars in thousands)
 
one year
 
five years
 
five years
 
Total
Fixed rate
 
$
131,396

 
$
309,651

 
$
77,716

 
$
518,763

Variable rate
 
683,064

 
1,113,067

 
644,165

 
2,440,296

   Total
 
$
814,460

 
$
1,422,718

 
$
721,881

 
$
2,959,059


OFF-BALANCE SHEET ARRANGEMENTS

Off-balance sheet arrangements include commitments to extend credit and financial guarantees.  Loan commitments are agreements to extend credit to a client absent any violation of any condition established in the commitment agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  First Financial had commitments outstanding to extend credit, totaling $3.3 billion and $3.0 billion at December 31, 2019 and 2018, respectively. As of December 31, 2019, loan commitments with a fixed interest rate totaled $123.7 million while commitments

First Financial Bancorp 2019 Annual Report 15

with variable interest rates totaled $3.2 billion. The fixed rate loan commitments have interest rates ranging from 0.00% to 21.00% for both December 31, 2019 and 2018. The fixed rate loan commitments have maturities ranging from 1 to 31.6 years at December 31, 2019 and 1 to 30 years at December 31, 2018.

Letters of credit are conditional commitments issued by First Financial to guarantee the performance of a client to a third party.  First Financial’s portfolio of letters of credit consists primarily of performance assurances made on behalf of clients who have a contractual commitment to produce or deliver goods or services.  First Financial has issued letters of credit aggregating $33.4 million and $32.7 million at December 31, 2019, and 2018, respectively. Management conducts regular reviews of these instruments on an individual client basis.

ASSET QUALITY

Nonperforming assets consist of nonaccrual loans, accruing TDRs (collectively, nonperforming loans) and OREO. 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 a borrower's continued
failure to adhere to contractual payment terms, 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.

Loans are classified as TDRs when borrowers are experiencing financial difficulties and concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. 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.

See Table 6 – Nonperforming Assets for a summary of First Financial’s nonaccrual loans, TDRs and OREO.

2019 vs. 2018. Total nonperforming assets declined $26.6 million, or 30.1%, to $61.6 million at December 31, 2019 from $88.2 million at December 31, 2018. Nonaccrual loans declined $22.5 million and accruing TDRs declined $4.7 million, which was partially offset by a $0.6 million increase in OREO.

First Financial's nonperforming assets as a percentage of total loans plus OREO declined to 0.67% at December 31, 2019 from 1.00% at December 31, 2018 as a result of lower nonperforming loan balances during the period. Additionally, classified asset balances declined $42.4 million, or 32.2%, to $89.3 million at December 31, 2019 from $131.7 million at December 31, 2018.

The significant decreases in nonperforming and classified assets during 2019 were driven by focused resolution efforts during the period, which included significant paydowns/payoffs and a $12.2 million problem loan sale, in addition to positive risk rating migration and elevated net charge-offs during the period. Management is optimistic that the Company's credit quality trends will remain strong in future periods given the diligent underwriting and monitoring processes in place as well as the sustained improvement in employment rates, the real estate markets, and business and consumer confidence levels.


First Financial Bancorp 2019 Annual Report 16

Table 6 • Nonperforming Assets
 
 
December 31,
(Dollars in thousands)
 
2019
 
2018
 
2017
 
2016
 
2015
Nonaccrual loans (1)
 
$
48,165

 
$
70,700

 
$
24,082

 
$
17,730

 
$
27,997

Accruing troubled debt restructurings (2)
 
11,435

 
16,109

 
17,545

 
30,240

 
28,876

Other real estate owned (OREO)
 
2,033

 
1,401

 
2,781

 
6,284

 
13,254

Total nonperforming assets
 
$
61,633

 
$
88,210

 
$
44,408

 
$
54,254

 
$
70,127

 
 
 
 
 
 
 
 
 
 
 
Nonperforming assets as a percent of total loans plus OREO
 
0.67
%
 
1.00
%
 
0.74
%
 
0.94
%
 
1.30
%
 
 
 
 
 
 
 
 
 
 
 
Accruing loans past due 90 days or more
 
$
201

 
$
63

 
$
61

 
$
142

 
$
108

 
 
 
 
 
 
 
 
 
 
 
Classified assets
 
$
89,250

 
$
131,668

 
$
87,293

 
$
125,155

 
$
132,431


(1) Nonaccrual loans include nonaccrual TDRs of $18.5 million, $22.4 million, $6.4 million, $5.1 million and $9.3 million, as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(2) Accruing troubled debt restructurings include TDRs past due 90 days or more and still accruing of $2.7 million as of December 31, 2016. There were no TDRs 90 days past due and still accruing as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively.

INVESTMENTS
 
First Financial utilizes its investment portfolio as a source of liquidity and interest income, as well as a tool for managing the Company's interest rate risk profile. As such, the Company's primary investment strategy is to invest in debt securities with low credit risk, such as treasury and agency-backed residential MBSs. The investment portfolio is also managed with consideration to prepayment and extension/maturity risk. First Financial invests primarily in MBSs issued by U.S. government agencies and corporations, such GNMA, FHLMC and FNMA, as these securities are considered to have a low credit risk and high liquidity profile due to government agency guarantees. Government and agency backed securities comprised 50.6% and 58.0% of First Financial's investment securities portfolio as of December 31, 2019 and 2018, respectively.

The Company also invests in certain securities that are not supported by government or agency guarantees and whose realization is dependent on future principal and interest repayments, thus carrying greater credit risk. First Financial performs a detailed collateral and structural analysis prior to any purchase of these securities and limits investments to asset classes in which the Company has expertise and experience, as well as a senior position in the capital structure. First Financial continuously monitors credit risk and geographic concentration risk in its evaluation of market opportunities that would enhance the overall performance of the portfolio. Securities not supported by government or agency guarantees represented 49.4% and 42.0% of First Financial's investment securities portfolio as of December 31, 2019 and 2018, respectively.

The other investments category in the Consolidated Balance Sheets consists primarily of First Financial’s investments in FRB and FHLB stock.

Gains and losses on debt securities are generally due to fluctuations in current market yields relative to the yields of the debt securities at their amortized cost.  All securities with unrealized losses are reviewed quarterly to determine if any impairment is considered other than temporary, requiring a write-down to fair value. First Financial considers the percentage loss on a security, duration of the loss, average life or duration of the security, credit rating of the security as well as payment performance and the Company’s intent and ability to hold the security when determining whether any impairment is other than temporary. First Financial had no other than temporary impairment expense for the years ended December 31, 2019 and 2018.

2019 vs. 2018. First Financial’s investment portfolio at December 31, 2019 totaled $3.0 billion, and represented 20.6% of total assets at December 31, 2019. The $213.6 million, or 6.7%, decline in the investment portfolio during 2019 was primarily related to Company's strategic redeployment of cash flows to support loan growth and to reduce borrowings.
 
First Financial classified $2.9 billion, or 95.2%, and $2.8 billion, or 86.6%, of investment securities as AFS at December 31, 2019 and 2018, respectively. First Financial classified $142.9 million, or 4.8%, and $429.3 million, or 13.4%, of investment securities as HTM at December 31, 2019 and 2018, respectively. In addition, First Financial reclassified $268.7 million and

First Financial Bancorp 2019 Annual Report 17
Management’s Discussion and Analysis of Financial Condition and Results of Operations

$372.1 of HTM securities to AFS upon adoption of ASU 2017-12 and subsequent to the MSFG merger to align with post-merger investment strategies, respectively.

First Financial recorded a $41.3 million unrealized after-tax gain on the investment portfolio as a component of equity in AOCI resulting from changes in the fair value of AFS securities at December 31, 2019, which increased $52.9 million from an $11.6 million unrealized after-tax loss at December 31, 2018.

Debt securities issued by the U.S. government and U.S. government agencies and corporations, including the FHLB, FHLMC, FNMA and the U.S. Export/Import Bank represented 1.0% of the investment portfolio at December 31, 2018 but was not meaningful as a percentage of the portfolio at December 31, 2019.

Investments in MBS securities, which include CMOs, represented 61.0% and 65.2% of First Financial's portfolio at December 31, 2019 and 2018, respectively. MBSs are participations in pools of loans secured by mortgages under which payments of principal and interest are passed through to the security holders. These securities are subject to prepayment risk, particularly during periods of falling interest rates, and extension risk during periods of rising interest rates. Prepayments of the underlying residential real estate loans may shorten the lives of the securities, thereby affecting yields to maturity and market values.  

Tax-exempt securities of states, municipalities and other political subdivisions totaled $687.3 million as of December 31, 2019 and $501.9 million as of December 31, 2018, comprising 22.9% and 15.6% of the investment portfolio at December 31, 2019 and 2018, respectively. The securities are diversified to include states as well as issuing authorities within states, thereby decreasing geographic portfolio risk. First Financial continuously monitors the risk associated with this investment type and reviews underlying ratings for possible downgrades. First Financial does not own any state or other political subdivision securities that are currently impaired.

Asset-backed securities were $400.4 million, or 13.4% of the investment portfolio at December 31, 2019 and $509.2 million, or 15.9% of the investment portfolio at December 31, 2018. First Financial considers these investment securities to have lower credit risk and a high liquidity profile as a result of explicit guarantees on the collateral.

Other securities, consisting primarily of taxable securities of states, municipalities and other political subdivisions and debt securities issued by corporations, were $81.6 million, or 2.7% of the investment portfolio, at December 31, 2019 and $73.2 million, or 2.3% of the investment portfolio, at December 31, 2018.

The overall duration of the investment portfolio increased to 3.4 years as of December 31, 2019 from 3.3 years as of December 31, 2018. First Financial has avoided adding to its portfolio any particular securities that would materially increase credit risk or geographic concentration risk and the Company continuously monitors and considers these risks in its evaluation of current market opportunities that would enhance the overall performance of the portfolio.

Table 7 • Investment Securities as of December 31
 
 
 
 
 
 
 
 
 
 
2019
 
2018
 
 
 
 
Percent of
 
 
 
Percent of
(Dollars in thousands)
 
Amount
 
Portfolio
 
Amount
 
Portfolio
U.S. Treasuries
 
$
100

 
0.0
%
 
$
97

 
0.0
%
Securities of U.S. government agencies and corporations
 
158

 
0.0
%
 
31,919

 
1.0
%
Mortgage-backed securities-residential
 
452,373

 
15.1
%
 
584,164

 
18.2
%
Mortgage-backed securities-commercial
 
577,785

 
19.3
%
 
568,815

 
17.7
%
Collateralized mortgage obligations
 
795,207

 
26.6
%
 
939,287

 
29.3
%
Obligations of state and other political subdivisions
 
687,267

 
22.9
%
 
501,868

 
15.6
%
Asset-backed securities
 
400,431

 
13.4
%
 
509,231

 
15.9
%
Other securities
 
81,625

 
2.7
%
 
73,202

 
2.3
%
Total
 
$
2,994,946

 
100.0
%
 
$
3,208,583

 
100.0
%
 
The estimated maturities and weighted-average yields of HTM and AFS investment securities as of December 31, 2019 are shown in Table 8 – Investment Securities. Tax-equivalent adjustments using a rate of 21.0% were included in calculating yields on tax-exempt obligations of state and other political subdivisions.

18 First Financial Bancorp 2019 Annual Report


First Financial held cash on deposit with the Federal Reserve of $56.9 million and $37.7 million at December 31, 2019 and 2018, respectively. First Financial continually monitors its liquidity position as part of its ERM framework, specifically through its asset/liability management process.
 
First Financial will continue to monitor loan and deposit demand, balance sheet composition, capital sensitivity and the interest rate environment as it manages investment strategies in future periods. See Note 4 – Investment Securities in the Notes to Consolidated Financial Statements for additional information on the Company's investment portfolio and Note 22 – Fair Value Disclosures for additional information on how First Financial determines the fair value of investment securities.

Table 8 • Investment Securities as of December 31, 2019
 
 
Maturity (2)
 
 
Within one year
 
After one but within five years
 
After five but within ten years
 
After ten years
(Dollars in thousands)
 
Amount
 
Yield(1)
 
Amount
 
Yield(1)
 
Amount
 
Yield(1)
 
Amount
 
Yield(1)
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities of other U.S. government agencies and corporations
 
$
0

 
0.00
%
 
$
0

 
0.00
%
 
$
0

 
0.00
%
 
$
0

 
0.00
%
Mortgage-backed securities-residential
 
0

 
0.00
%
 
20,818

 
2.38
%
 
0

 
0.00
%
 
0

 
0.00
%
Mortgage-backed securities-commercial
 
0

 
0.00
%
 
83,736

 
2.36
%
 
17,531

 
2.96
%
 
0

 
0.00
%
Collateralized mortgage obligations
 
0

 
0.00
%
 
9,763

 
1.71
%
 
0

 
0.00
%
 
0

 
0.00
%
Obligations of state and other political subdivisions
 
0

 
0.00
%
 
0

 
0.00
%
 
4,756

 
3.56
%
 
6,258

 
2.39
%
   Total
 
$
0

 
0.00
%
 
$
114,317

 
2.31
%
 
$
22,287

 
3.09
%
 
$
6,258

 
2.39
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasuries
 
$
0

 
0.00
%
 
$
100

 
1.97
%
 
$
0

 
0.00
%
 
$
0

 
0.00
%
Securities of other U.S. government agencies and corporations
 
0

 
0.00
%
 
158

 
1.77
%
 
0

 
0.00
%
 
0

 
0.00
%
Mortgage-backed securities-residential
 
592

 
3.59
%
 
297,995

 
3.07
%
 
87,430

 
2.99
%
 
45,538

 
2.86
%
Mortgage-backed securities-commercial
 
85,143

 
3.78
%
 
252,558

 
3.50
%
 
98,199

 
2.95
%
 
40,618

 
2.93
%
Collateralized mortgage obligations
 
67,905

 
3.24
%
 
554,295

 
3.15
%
 
125,988

 
3.08
%
 
37,256

 
2.93
%
Obligations of state and other political subdivisions
 
34,597

 
3.12
%
 
291,443

 
2.64
%
 
278,281

 
3.19
%
 
71,932

 
3.08
%
Asset-backed securities
 
54,040

 
3.81
%
 
210,250

 
3.63
%
 
136,141

 
3.30
%
 
0

 
0.00
%
Other securities
 
2,558

 
4.09
%
 
55,029

 
5.53
%
 
24,038

 
3.47
%
 
0

 
0.00
%
   Total
 
$
244,835

 
3.55
%
 
$
1,661,828

 
3.24
%
 
$
750,077

 
3.14
%
 
$
195,344

 
2.97
%

(1) Tax equivalent basis was calculated using a 21.0% tax rate and yields were based on amortized cost.
(2) Maturity represents estimated life of investment securities.

DERIVATIVES
 
First Financial is authorized to use certain derivative instruments including interest rate caps, floors, swaps and foreign exchange contracts to meet the needs of its clients while managing interest rate risk associated with certain transactions.  The Company does not use derivatives for speculative purposes.

First Financial primarily utilizes interest rate swaps as a means to offer borrowers credit-based products that meet their needs and achieve the Company's desired interest rate risk profile. These interest rate swaps generally involve the receipt by First Financial of floating rate amounts from swap counterparties in exchange for payments to these counterparties by First Financial of fixed rate amounts received from borrowers. This results in the Company's loan customers receiving fixed rate funding while providing First Financial with a floating rate asset.
 

First Financial Bancorp 2019 Annual Report 19
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

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 an IRLC with First Financial and the loan is 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.

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 the exposure from client driven foreign exchange activity.

See Note 12 – Derivatives in the Notes to Consolidated Financial Statements for additional information regarding First Financial's use of derivative instruments.
 
DEPOSITS
 
First Financial solicits deposits by offering commercial and consumer clients a wide variety of transaction and savings accounts, including checking, savings, money-market and time deposits of various maturities and rates.
 
2019 vs. 2018. First Financial's total deposits increased $69.8 million, or 0.7%, from $10.1 billion at December 31, 2018 to $10.2 billion as of December 31, 2019. During the period, noninterest bearing deposits increased $151.5 million, or 6.1%, interest-bearing checking deposits increased $57.8 million, or 2.5%, and time deposits increased $66.9 million, or 3.1%, while savings deposits decreased $206.3 million, or 6.5%. Total non-time deposit balances were $8.0 billion as of December 31, 2019 and December 31, 2018.

Total average deposits for 2019 increased $785.2 million, or 8.4%, from 2018 primarily due to an increase in average time deposits of $284.7 million, or 14.7%, an increase in average noninterest bearing deposits of $306.7 million, or 13.8%, an increase in average interest-bearing demand deposits of $156.8 million, or 7.2%, and an increase in average savings deposits $37.0 million, or 1.2%. The year-over-year growth in average deposits was primarily attributable to the full year impact of the MSFG merger as well as increased customer demand.
 
Table 9 – Maturities of Time Deposits Greater Than or Equal to $100,000 details the contractual maturity of these deposits. Time Deposits Greater Than or Equal to $100,000 represent 14.2% of total deposits outstanding at December 31, 2019.
  
Table 9 • Maturities of Time Deposits Greater than or Equal to $100,000
 
 
December 31, 2019
(Dollars in thousands)
 
CDs
 
IRAs
 
Brokered CDs
 
Total
Maturing in
 
 
 
 
 
 
 
 
   3 months or less
 
$
136,714

 
$
7,357

 
$
273,410

 
$
417,481

   3 months to 6 months
 
120,670

 
8,935

 
316,253

 
445,858

   6 months to 12 months
 
204,918

 
22,234

 
140,497

 
367,649

   over 12 months
 
171,653

 
39,499

 
5,982

 
217,134

     Total
 
$
633,955

 
$
78,025

 
$
736,142

 
$
1,448,122


BORROWINGS
 
First Financial's short-term borrowings are utilized to manage the Company's normal liquidity needs. These borrowings include repurchase agreements utilized for corporate sweep accounts with cash management account agreements in place, as well as overnight advances from the FHLB. The Company's long-term borrowings consist of subordinated debt, FHLB long-term advances, repurchase agreements utilizing investment securities pledged as collateral and a capital loan from a municipality.


20 First Financial Bancorp 2019 Annual Report

2019 vs. 2018. Short-term borrowings increased $275.5 million, or 26.5%, to $1.3 billion at December 31, 2019, from $1.0 billion at December 31, 2018.

First Financial utilizes short-term borrowings and longer-term advances from the FHLB as wholesale funding sources. First Financial had $1.2 billion of short-term borrowings from the FHLB at December 31, 2019 compared to $857.1 million at December 31, 2018. In addition to FHLB borrowings, short term borrowings included repurchase agreements of $90.2 million and $84.6 million at December 31, 2019 and 2018, respectively, and federal funds purchased of $75.0 million and $99.0 million as of December 31, 2019 and 2018, respectively.

Total long-term debt was $414.4 million and $570.7 million at December 31, 2019 and 2018, respectively. Long-term debt included FHLB long-term advances of $242.4 million and $400.6 million as of December 31, 2019 and 2018, respectively. First Financial's total remaining borrowing capacity from the FHLB was $486.4 million at December 31, 2019. For ease of borrowing execution, First Financial utilizes a blanket collateral agreement with the FHLB. First Financial pledged $6.2 billion of certain eligible residential, commercial and agricultural real estate loans, home equity lines of credit and certain agency CMOs, municipals and CMBS securities as collateral for borrowings from the FHLB as of December 31, 2019.  
  
Long-term debt also included an interest free $0.8 million capital loan outstanding with a municipality and subordinated debt of $171.0 million and $170.6 million as of December 31, 2019 and 2018, respectively. The subordinated debt is treated as Tier 2 capital for regulatory capital purposes. The subordinated debt also included unamortized valuation and debt issuance costs of $7.9 million and $8.5 million as of December 31, 2019 and 2018, respectively.

See Note 11 – Borrowings in the Notes to Consolidated Financial Statements for additional information on First Financial's borrowings.

LIQUIDITY

Liquidity management is the process by which First Financial manages the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost. These funding commitments include withdrawals by depositors, credit commitments to borrowers, shareholder dividends, share repurchases, operating expenses and capital expenditures. Liquidity is derived primarily from deposit growth, principal and interest payments on loans and investment securities, maturing loans and investment securities and access to wholesale funding sources.

First Financial’s most stable source of liability-funded liquidity for both long and short-term needs is deposit growth and retention of the core deposit base. In addition to core deposit funding, First Financial also utilizes a variety of short and long-term funding sources, which include subordinated notes, longer-term advances from the FHLB and its short-term line of credit.

First Financial maintains a short-term credit facility with an unaffiliated bank for $30.0 million that matures in September 2020. This facility can have a variable or fixed interest rate and provides First Financial additional liquidity, if needed, for various corporate activities, including the repurchase of First Financial shares and the payment of dividends to shareholders. As of December 31, 2019 and December 31, 2018, there was no outstanding balance. The credit agreement requires First Financial to maintain certain covenants related to asset quality and capital levels, and First Financial was in compliance with all covenants associated with this line of credit as of December 31, 2019 and December 31, 2018.

Both First Financial and the Bank received investment grade credit ratings from Kroll Bond Rating Agency, Inc., an independent rating agency. These credit ratings impact the cost and availability of financing to First Financial, and a downgrade to these credit ratings could affect First Financial's or the Bank’s abilities to access the credit markets and potentially increase borrowing costs, which would negatively impact financial condition and liquidity. Key factors in maintaining high credit ratings include consistent and diverse earnings, strong credit quality and capital ratios, diverse funding sources and disciplined liquidity monitoring procedures. The ratings of First Financial and the Bank at December 31, 2019 were as follows:
 
First Financial Bancorp
First Financial Bank
Senior Unsecured Debt
BBB+
A-
Subordinated Debt
BBB
BBB+
Short-Term Debt
K2
K2
Deposit
N/A
A-
Short-Term Deposit
N/A
K2

First Financial Bancorp 2019 Annual Report 21
Management’s Discussion and Analysis of Financial Condition and Results of Operations


First Financial's principal source of asset-funded liquidity is marketable investment securities, particularly those of shorter maturities. The market value of investment securities classified as AFS totaled $2.9 billion and $2.8 billion at December 31, 2019 and 2018, respectively. HTM securities that are maturing within a short period of time can be an additional source of liquidity. As of December 31, 2019, the Company had no HTM securities maturing within one year. As of December 31, 2018, the Company had $0.8 million of HTM securities maturing within one year.

Other sources of liquidity include cash and due from banks and interest-bearing deposits with other banks. At December 31, 2019, these balances totaled $257.6 million, and First Financial had unused and available overnight wholesale funding sources of $3.2 billion, or 21.9% of total assets, to fund loan and deposit activities in addition to general corporate requirements.

Certain restrictions exist regarding the Bank's ability to transfer funds to First Financial in the form of cash dividends, loans, other assets or advances and the approval of the Bank's primary federal regulator is required to pay dividends in excess of regulatory limitations. Dividends paid to the parent company from its subsidiaries totaled $196.8 million, $107.3 million and $54.6 million for 2019, 2018 and 2017, respectively. As of December 31, 2019, First Financial’s subsidiaries had retained earnings of $660.7 million, of which $155.7 million was available for distribution to First Financial without prior regulatory approval. Additionally, First Financial had $55.9 million in cash at the parent company as of December 31, 2019.

Capital expenditures, such as banking center expansion, remodeling and technology investments, were $20.9 million for 2019, $18.2 million for 2018 and $6.5 million for 2017. Material commitments for capital expenditures as of December 31, 2019, were $27.2 million. Management believes that sufficient liquidity exists to fund its future capital expenditure commitments.

Share repurchases also impact First Financial's liquidity. For further information regarding share repurchases, see the Capital section that follows.

Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on First Financial’s liquidity.

Table 10 • Contractual Obligations as of December 31, 2019
 
(Dollars in thousands)
 
Less than one year
 
One to three years
 
Three to five years
 
More than five years
 
Total
Contractual Obligations
 
 
 
 
 
 
 
 
 
 
Long-term debt obligations (including interest)
 
 
 
 
 
 
 
 
 

Federal Home Loan Bank borrowings
 
$
109,707

 
$
75,117

 
$
2,217

 
$
72,136

 
$
259,177

Subordinated debt
 
8,175

 
18,574

 
17,831

 
203,585

 
248,165

Capital loan with municipality
 
0

 
0

 
0

 
775

 
775

Operating lease obligations
 
7,200

 
13,806

 
13,168

 
50,504

 
84,678

Pension obligations
 
5,611

 
10,383

 
11,195

 
35,362

 
62,551

Time deposits
 
1,752,552

 
435,840

 
51,029

 
1,020

 
2,240,441

Total
 
$
1,883,245

 
$
553,720

 
$
95,440

 
$
363,382

 
$
2,895,787

 
CAPITAL

Risk-Based Capital. First Financial and its subsidiary, First Financial Bank, are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory guidelines. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate regulatory action.

The Board of Governors of the Federal Reserve System approved Basel III in order to strengthen the regulatory capital framework for all banking organizations, subject to a phase-in period for certain provisions.  Basel III established and defined quantitative measures to ensure capital adequacy. These measures require First Financial to maintain minimum amounts and ratios of Common Equity tier 1 capital, total and tier 1 capital to risk-weighted assets and tier 1 capital to average assets (leverage ratio).  


22 First Financial Bancorp 2019 Annual Report

Basel III includes a minimum ratio of common equity tier 1 capital to risk-weighted assets of 7.0% at December 31, 2019 and 6.375% at December 31, 2018 and a phased-in capital conservation buffer of 2.5% of risk-weighted assets that began on January 1, 2016 at 0.625% until it was fully phased-in as of January 1, 2019. Further, the minimum ratio of tier 1 capital to risk-weighted assets increased to 8.5% at December 31, 2019 and all banks are subject to a 4.0% minimum leverage ratio.  The required total risk-based capital ratio is 10.5%. Failure to maintain the required common equity Tier 1 capital conservation buffer will result in potential restrictions on a bank’s ability to pay dividends, repurchase stock and pay discretionary compensation to its employees. The capital requirements also provide strict eligibility criteria for regulatory capital instruments and change the method for calculating risk-weighted assets in an effort to better identify riskier assets, such as highly volatile commercial real estate and nonaccrual loans.

First Financial's tier 1 capital decreased to 11.69% at December 31, 2019 from 12.28% at December 31, 2018, while the total capital ratio decreased to 13.39% from 14.10% during the same period. The decline in these ratios was primarily attributed to higher shareholder dividends and share repurchases in 2019, as well as higher risk-weighted assets driven by an increase commercial real estate loan balances and a decline in lower risk securities. The leverage ratio decreased to 9.58% at December 31, 2019 compared to 9.71% as of December 31, 2018 while the Company’s tangible common equity ratio increased to 9.07% at December 31, 2019 from 8.79% at December 31, 2018.

Management believes that, as of December 31, 2019, First Financial met all capital adequacy requirements to which it was subject. At December 31, 2019 and 2018, regulatory notifications categorized First Financial Bank as well-capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events that management believes has changed the Company’s capital categorization.

For further detail on First Financial's capital ratios at December 31, 2019, see Note 19 – Capital in the Notes to Consolidated Financial Statements.


First Financial Bancorp 2019 Annual Report 23
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Table 11 • Capital Adequacy
 
 
 
 
 
December 31,
(Dollars in thousands)
 
2019
 
2018
Consolidated capital calculations
 
 
 
Common stock
 
$
1,640,771

 
$
1,633,256

 
Retained earnings
 
711,249

 
600,014

 
Accumulated other comprehensive loss
 
13,323

 
(44,408
)
 
Treasury stock, at cost
 
(117,638
)
 
(110,613
)
Total shareholders' equity
 
2,247,705

 
2,078,249

 
Common equity tier 1 capital adjustments
 
 
 
 
 
Goodwill and other intangibles
 
(1,024,622
)
 
(931,030
)
Total tangible equity
 
$
1,223,083

 
$
1,147,219

 
Total assets
 
$
14,511,625

 
$
13,986,660

 
Goodwill and other intangibles
 
(1,024,622
)
 
(931,030
)
Total tangible assets
 
$
13,487,003

 
$
13,055,630

Common tier 1 capital
 
$
1,245,746

 
$
1,215,613

Tier 1 capital
 
1,288,185

 
1,257,366

Total capital
 
1,475,813

 
1,444,146

Total risk-weighted assets
 
11,023,795

 
10,241,159

Average assets (1)
 
13,440,151

 
12,948,944

 
 
 
 
 
 
Regulatory capital
 
 
 
 
 
Common tier 1 ratio
 
11.30
%
 
11.87
%
 
Tier 1 ratio
 
11.69
%
 
12.28
%
 
Total capital ratio
 
13.39
%
 
14.10
%
 
Leverage ratio
 
9.58
%
 
9.71
%
 
 
 
 
 
 
Other capital ratios
 
 
 
 
 
Total shareholders' equity to ending assets
 
15.49
%
 
14.86
%
 
Total tangible shareholders' equity to ending tangible assets
 
9.07
%
 
8.79
%
 
 
 
 
 
 
(1) For purposes of calculating the Leverage ratio, certain intangible assets are excluded from average assets.

First Financial generally seeks to balance the return of earnings to shareholders through shareholder dividends and share repurchases with capital retention in order to maintain adequate levels of capital and support the Company's growth plans.

Shareholder Dividends. First Financial’s dividend payout ratio, or total dividends paid divided by net income available to common shareholders, was 44.8%, 40.0% and 43.3% for the years 2019, 2018 and 2017, respectively. The dividend payout ratio is continually reviewed by management and the board of directors for consistency with First Financial’s overall capital planning activities and compliance with applicable regulatory limitations. In January 2020, the board of directors authorized a dividend of $0.23 per common share, payable on March 16, 2020 to all shareholders of record as of March 2, 2020.

Share Repurchases. In January 2019, First Financial's board of directors approved a stock repurchase plan, replacing the plan
approved in 2012. The 2019 plan authorizes the purchase of up to 5,000,000 shares of the Company's common stock and expires in January 2021. First Financial repurchased 2,753,272 shares at an average market price of $24.05 under this plan during 2019. At December 31, 2019, 2,246,728 shares remained available for purchase under the 2019 share repurchase plan.

Shareholders' Equity. Total shareholders’ equity at December 31, 2019 was $2.2 billion, compared to total shareholders’ equity at December 31, 2018 of $2.1 billion. The increase in shareholders' equity is primarily related to the Company's 2019 earnings.


24 First Financial Bancorp 2019 Annual Report

For further detail, see the Consolidated Statements of Changes in Shareholders’ Equity.

PENSION PLAN
 
First Financial sponsors a non-contributory defined-benefit pension plan covering substantially all employees. The significant assumptions used in the valuation and accounting for the pension plan include the discount rate, expected return on plan assets and the rate of employee compensation increase. The discount rate assumption was determined based on highly rated corporate bonds, weighted to adjust for their relative size, projected plan cash flows using the annuity substitution method as well as comparisons to external industry surveys. The expected return on plan assets was 7.25% for both 2019 and 2018, and was based on the composition of plan assets, actual returns, economic forecasts and economic trends. The assumed rate of compensation increase was 3.50% and was compared to historical increases for plan participants for reasonableness.

Presented below is the estimated impact on First Financial’s projected benefit obligation and pension expense as of December 31, 2019, assuming shifts in the significant assumptions: 
 
Discount rate
 
Expected return on
plan assets
 
Rate of compensation increase
 (Dollars in thousands)
 
-100 BP
 
+100 BP
 
-100 BP
 
+100 BP
 
-100 BP
 
+100 BP
Change in Projected Benefit Obligation
 
$
6,277

 
$
(4,729
)
 
N/A

 
N/A

 
$
(327
)
 
$
826

Change in Pension Expense
 
74

 
114

 
$
1,340

 
$
(1,340
)
 
(62
)
 
218

 
Based upon the plan’s current funding status and updated actuarial projections for 2019, First Financial recorded expense related to its pension plan of $1.0 million for 2019 and $0.9 million for 2018, while recording income of $0.6 million for 2017 in the Consolidated Statements of Income. First Financial will make contributions to the plan if plan assets do not meet or exceed ERISA’s minimum funding standards.  Given the plan's over-funded status, First Financial made no cash contributions to fund the pension plan in 2019, 2018 or 2017 nor does it expect to make a cash contribution in 2020.

See Note 16 – Employee Benefit Plans in the Notes to Consolidated Financial Statements for additional information on First Financial's pension plan.

ENTERPRISE RISK MANAGEMENT
 
First Financial considers risk to be any issue that could have an adverse impact on the Company's capital or earnings, or negatively impact the Company's ability to meet its objectives. First Financial manages risks through a structured ERM approach that routinely assesses the overall level of risk, identifies specific risks and evaluates the steps being taken to mitigate those risks. First Financial continues to enhance its risk management capabilities and has, over time, embedded risk awareness into the the Company's culture. ERM allows First Financial to align a variety of risk management activities within the Company into a cohesive, enterprise-wide approach and focus on process-level risk management activities and strategic objectives within the risk management culture. Additionally, ERM allows the Company to deliberately develop risk responses and evaluate the effectiveness of mitigation compared to established thresholds for risk appetite and tolerance, in addition to facilitating the consideration of significant organizational changes and consolidation of information through a common process for management and the board of directors.

First Financial has identified nine types of risk that it monitors in its ERM framework.  These risks include credit, market, operational, compliance, strategic, reputation, information technology, cyber and legal.
 
First Financial uses a robust regulatory risk framework as one of the foundational components of its ERM framework.  This allows for a common categorization across the Company and provides a consistent and complete risk framework that can be summarized and assessed enterprise-wide. Additionally, the risk framework utilized is consistent with that used by the Company’s regulators, which results in additional feedback on First Financial’s ability to assess and measure risk across the organization as well as the ability for management and the board of directors to identify and understand differences in assessed risk profiles.
 
ERM helps ensure that First Financial continues to identify and adequately address risks that emerge from a combination of new customers, products and associates, changing markets, new lines of business and processes and new or evolving systems.
 
The goals of First Financial’s ERM framework are to:


First Financial Bancorp 2019 Annual Report 25
Management’s Discussion and Analysis of Financial Condition and Results of Operations

•
focus on the Company at both the enterprise and line of business levels;
•
align the Company's risk appetite with its strategic, operational, compliance and reporting objectives;
•
enhance risk response decisions;
•
reduce operational deficiencies and possible losses;
•
identify and manage interrelated risks;
•
provide integrated responses to multiple risks;
•
improve the deployment and allocation of capital; and
•
improve overall business performance.
 
Specific enterprise-level objectives include:

•
creating a holistic view of risk in which risk is comprehensively considered, consistently communicated and documented in decision making;
•
centralizing the oversight of risk management activities;
•
defining the risks that will be addressed by the enterprise and each functional area or business unit to create an awareness of risks affecting the Company;
•
establishing and maintaining systems and mechanisms to identify, assess, monitor and measure risks that may impact First Financial’s ability to achieve its business objectives;
•
creating a process which ensures that, for all new lines of business and new product decisions, management evaluates the expertise needed and assesses the risks involved;
•
establishing and maintaining systems and mechanisms to monitor risk responses;
•
developing risk occurrence information systems to provide early warning of events or situations that create risk for the Company;
•
maintaining a compliance culture and framework that ensures adherence to laws, rules and regulations, fair treatment and privacy of customers and prevention of money laundering and terrorist financing;
•
implementing and reviewing risk measurement techniques that management may use to establish the Company’s risk tolerance, assess risk likelihood and impact and analyze risk monitoring processes; and
•
establishing appropriate management reporting systems regarding the enterprise-wide risk exposures and allocation of capital.

Line of business-level objectives focus on why the particular business or business unit risk exists; how the business affects the Company’s strategy, earnings, reputation and other key success factors; and whether the line of business objectives are aligned with enterprise objectives.
 
Board of Directors and Board Risk & Compliance Committees. First Financial’s board of directors is responsible for understanding the Company’s compliance and risk management objectives and risk tolerance, and as such, board oversight of the Company’s compliance and risk management activities is a key component to an effective risk management process. Responsibilities of the board of directors include:

•
establishing and guiding the Company’s strategic direction and tolerance for risk, including the determination of the aggregate risk appetite and identifying the senior managers who have the responsibility for managing risk;
•
monitoring the Company’s performance and overall risk profile, ensuring that the level of risk is maintained at prudent levels and is supported by adequate capital;
•
ensuring that the Company implements sound fundamental principles that facilitate the identification, measurement, monitoring and control of risk;
•
ensuring that adequate resources are dedicated to compliance and risk management; and
•
ensuring that awareness of risk management activities is evident throughout the organization.

The board of directors has defined broad risk tolerance levels, or limits, to guide management in the decision-making process, and is responsible for establishing information and communication requirements to ensure that risk management activities remain within these tolerance limits. The risk and compliance committee, a standing committee of the board of directors, is responsible for carrying out the board’s responsibilities in this regard. Other standing committees of the board (audit, compensation, corporate governance and nominating, and capital markets) oversee particular areas of risk assigned specifically to them.

Executive and Senior Management. Members of executive and senior management are responsible for managing risk activities and delegating risk authority and tolerance to the responsible risk owners.


26 First Financial Bancorp 2019 Annual Report

Management must identify which processes and activities are critical to achieving the Company’s business objectives within the designated tolerance levels.  Management must then delegate responsibility, authority and accountability to the appropriate risk owners who are responsible for ensuring that the respective processes and activities are designed and implemented to manage the related risks within those delegated tolerance levels.

Chief Risk Officer. The chief risk officer is responsible for the oversight of the Company’s ERM processes.  The chief risk officer may appoint other officers or establish other management committees as required for effective risk management and governance, including risk identification, risk measurement, risk monitoring, risk control or mitigation and risk reporting.  The chief risk officer is also responsible for the maintenance of procedures, methodologies and guidelines considered necessary to administer the ERM program.

Chief Compliance Officer. The chief compliance officer is responsible for the oversight of the Company’s compliance management function, which includes Bank Secrecy Act/Anti-Money Laundering and all other regulatory compliance.  The chief compliance officer is authorized to implement all necessary actions to ensure achievement of the objectives of an effective compliance program and may appoint other officers or establish other management committees as required for effective compliance management. The chief compliance officer reviews and evaluates compliance issues and concerns and is responsible for monitoring and reporting results of the compliance efforts in addition to providing guidance to the board of directors and senior management team on matters relating to compliance.

Committee Chairs. The ERM program utilizes multiple management committees as its primary assessment and communication mechanism for identified risks.  Committee chairs play key roles in the execution of risk management activities throughout the enterprise and are responsible for continuous updates and communication among committee members in conjunction with the risk management department regarding changes to risk profiles, changes to risk assessments and the emergence of new risks that could impact the Company.

Internal Audit. Internal audit is responsible for planning audit activities to periodically reassess the design and operation of key risk management processes and to make periodic evaluations of the ongoing accuracy and effectiveness of the communications from risk owners to senior management and from senior management to the board of directors.

Risk Assessment Process. The periodic assessment of risks is a key component of a sound ERM program.  Managers, business line leaders and executives are responsible for developing the risk assessment for their individual departments, business lines and subsidiaries.  The chief risk officer, management and the board risk and compliance committee are responsible for ensuring that risk is viewed and analyzed from an enterprise-level global perspective. Furthermore, interrelated risks are considered, assessing how a single risk or event may create multiple risks.

Risk management programs, in each functional component and in aggregate, accomplish the following:

•
identify risks and their respective owners;
•
link identified risks and their mitigation to the Company's strategic objectives;
•
evaluate the risks and their associated likelihood of occurrence and consequences;
•
develop strategies to manage risk, such as avoiding the risk; reducing the negative effect of the risk; transferring the risk to another party; and/or accepting some or all of the consequences of a particular risk;
•
prioritize the risk issues with regard to the current risk status and trend;
•
provide reports to management and risk owners that will assist them in implementing appropriate risk management processes;
•
assist management in assessing the alternatives for managing risks;
•
assist management in the development of risk management plans; and
•
track risk management efforts.

Monitoring and Reporting. The board of directors oversees risk reporting and monitoring through the board risk and compliance committee, which meets at least quarterly. 

Management continually reviews any risk identified as key, as well as the appropriateness of established tolerance limits and the actions considered as necessary to mitigate key risks.  As circumstances warrant, management provides recommendations to the board risk and compliance committee related to changes or adjustments to key risks or tolerance limits.


First Financial Bancorp 2019 Annual Report 27
Management’s Discussion and Analysis of Financial Condition and Results of Operations

First Financial believes that communication is fundamental to successful risk management and productive reporting and communication between the risk management department, management and the board of directors is required for collaborative and effective risk management.

CREDIT RISK
  
Credit risk represents the risk of loss due to failure of a customer or counterparty to meet its financial obligations in accordance with contractual terms. First Financial manages credit risk through its underwriting practices, periodically reviewing and approving its credit exposures using credit policies and guidelines approved by the board of directors.

Allowance for loan and lease losses. The ALLL is a reserve accumulated on the Consolidated Balance Sheets through the recognition of the provision for loan and lease losses. First Financial records the provision in the Consolidated Statements of Income to maintain the ALLL at a level considered sufficient to absorb probable incurred loan and lease losses inherent in the portfolio.

The recorded values of the loans and leases actually removed from the Consolidated Balance Sheets due to credit deterioration are referred to as charge-offs. 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 from the liquidation of collateral. All loans charged-off are subject to continuous review and concerted efforts are made to maximize any recovery. In most cases, the borrower’s debt obligation is not canceled even though the balance may have been charged-off. Actual losses on loans and leases are charged against the ALLL. Any subsequent recovery of a previously charged-off loan is credited back to the ALLL.

Management determines the adequacy of the ALLL based on historical loss experience as well as other significant factors such as composition of the portfolio; economic conditions; geographic footprint; the results of periodic internal and external evaluations of delinquent, nonaccrual and classified loans; and any other situations that may affect a specific borrower's ability to repay. The evaluation of these factors is the responsibility of the ALLL committee, which is comprised of senior officers from the risk management, credit administration, finance and lending areas.

See Table 12 – Summary of the ALLL and Selected Statistics for a summary of activity impacting the ALLL and Table 13 – Allocation of the ALLL for detail on its composition.

2019 vs. 2018. The ALLL at December 31, 2019 was $57.7 million, or 0.63% of loans, which was a $1.1 million, or 2.0%, increase from $56.5 million, or 0.64% of loans at December 31, 2018. Provision expense increased $16.0 million, or 109.8%, to $30.6 million in 2019 from $14.6 million in 2018.

Net charge-offs increased $17.4 million, or 144.4%, to $29.5 million for 2019 compared to $12.1 million for 2018, while the ratio of net charge-offs as a percentage of average loans outstanding increased to 0.33% in 2019 from 0.15% in 2018. The increase in net charge-offs in 2019 was the primary driver of the elevated provision expense, and was mainly attributed to $13.2 million of charge-offs related to a single franchise relationship.

The ALLL as a percentage of nonperforming loans, including accruing TDRs was 96.7% at December 31, 2019 compared with 65.1% at December 31, 2018. The improvement in this ratio largely is attributed to the reduction of nonperforming loans as a result of strong resolution efforts during the period.

28 First Financial Bancorp 2019 Annual Report

For further discussion of First Financial's ALLL, see Note 6 – Allowance for Loan and Lease Losses in the Notes to Consolidated Financial Statements.
Table 12 • Summary of the ALLL and Selected Statistics
(Dollars in thousands)
 
2019
 
2018
 
2017
 
2016
 
2015
Transactions in the allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Balance at January 1
 
$
56,542

 
$
54,021

 
$
57,961

 
$
53,398

 
$
52,858

   Provision for loan and lease losses
 
30,598

 
14,586

 
3,582

 
10,140

 
9,641

Loans charged-off:
 
 
 
 
 
 
 
 
 
 
   Commercial and industrial
 
26,676

 
11,533

 
10,194

 
2,630

 
5,408

   Lease financing
 
162

 
0

 
0

 
0

 
0

   Real estate – construction
 
0

 
0

 
1

 
93

 
85

   Real estate – commercial
 
3,689

 
4,835

 
1,038

 
4,983

 
10,083

   Real estate – residential
 
677

 
422

 
435

 
387

 
1,531

Home equity
 
2,591

 
1,725

 
913

 
1,445

 
1,891

Installment
 
223

 
435

 
225

 
386

 
509

Credit card
 
1,547

 
1,720

 
857

 
1,190

 
1,049

      Total loans charged-off
 
35,565

 
20,670

 
13,663

 
11,114

 
20,556

 
 
 
 
 
 
 
 
 
 
 
Recoveries of loans previously charged-off:
 
 
 
 
 
 
 
 
 
 
   Commercial and industrial
 
2,883

 
2,066

 
1,650

 
1,155

 
3,724

   Lease financing
 
0

 
1

 
1

 
1

 
2

   Real estate – construction
 
68

 
146

 
89

 
285

 
253

   Real estate – commercial
 
1,113

 
4,106

 
2,719

 
2,502

 
5,214

   Real estate – residential
 
273

 
211

 
215

 
236

 
558

Home equity
 
1,335

 
1,309

 
1,027

 
720

 
1,001

Installment
 
251

 
575

 
234

 
335

 
463

Credit card
 
152

 
191

 
206

 
303

 
240

      Total recoveries
 
6,075

 
8,605

 
6,141

 
5,537

 
11,455

      Net charge-offs
 
29,490

 
12,065

 
7,522

 
5,577

 
9,101

      Balance at December 31
 
$
57,650

 
$
56,542

 
$
54,021

 
$
57,961

 
$
53,398

 
 
 
 
 
 
 
 
 
 
 
Net charge-offs to average loans and leases
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
0.95
 %
 
0.38
 %
 
0.47
 %
 
0.08
 %
 
0.12
 %
Lease financing
 
0.17
 %
 
0.00
 %
 
0.00
 %
 
0.00
 %
 
0.00
 %
Real estate-construction
 
(0.01
)%
 
(0.03
)%
 
(0.02
)%
 
(0.05
)%
 
(0.07
)%
Real estate-commercial
 
0.07
 %
 
0.02
 %
 
(0.07
)%
 
0.11
 %
 
0.23
 %
Real estate-residential
 
0.04
 %
 
0.03
 %
 
0.05
 %
 
0.03
 %
 
0.19
 %
Home equity
 
0.16
 %
 
0.06
 %
 
(0.02
)%
 
0.16
 %
 
0.19
 %
Installment
 
(0.03
)%
 
(0.15
)%
 
(0.02
)%
 
0.11
 %
 
0.11
 %
Credit card
 
2.81
 %
 
3.19
 %
 
1.44
 %
 
2.10
 %
 
2.04
 %
Total net charge-offs
 
0.33
 %
 
0.15
 %
 
0.13
 %
 
0.10
 %
 
0.18
 %
 
 
 
 
 
 
 
 
 
 
 
Credit quality ratios:
 
 
 
 
 
 
 
 
 
 
   As a percent of year-end loans, net of unearned income:
 
 
 
 
 
 
 
 
 
 
      Allowance for loan and lease losses
 
0.63
 %
 
0.64
 %
 
0.90
 %
 
1.01
 %
 
0.99
 %
     Nonperforming loans (1)
 
0.65
 %
 
0.98
 %
 
0.69
 %
 
0.83
 %
 
1.06
 %
 
 
 
 
 
 
 
 
 
 
 
   Allowance for loan and lease losses to nonperforming loans (1)
 
96.73
 %
 
65.13
 %
 
129.77
 %
 
120.83
 %
 
93.89
 %

(1) Includes loans classified as nonaccrual and troubled debt restructurings.

First Financial Bancorp 2019 Annual Report 29
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Table 13 • Allocation of the ALLL
 
 
December 31,
 
 
2019
 
2018
 
2017
 
2016
 
2015
(Dollars in thousands)
 
Allowance
 
Percent of Loans to Total Loans
 
Allowance
 
Percent of Loans to Total Loans
 
Allowance
 
Percent of Loans to Total Loans
 
Allowance
 
Percent of Loans to Total Loans
 
Allowance
 
Percent of Loans to Total Loans
Balance at End of Period Applicable to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
18,584

 
26.8
%
 
$
18,746

 
28.5
%
 
$
17,598

 
31.8
%
 
$
19,225

 
31.0
%
 
$
16,995

 
30.9
%
Lease financing
 
971

 
1.0
%
 
1,130

 
1.1
%
 
675

 
1.5
%
 
716

 
1.6
%
 
821

 
1.7
%
Real estate – construction
 
2,381

 
5.4
%
 
3,413

 
6.2
%
 
3,577

 
7.8
%
 
3,282

 
6.9
%
 
1,810

 
5.8
%
Real estate – commercial
 
23,579

 
45.5
%
 
21,048

 
42.5
%
 
20,930

 
41.4
%
 
26,540

 
42.2
%
 
23,656

 
41.9
%
Real estate – residential
 
5,299

 
11.5
%
 
4,964

 
10.8
%
 
4,683

 
7.8
%
 
3,208

 
8.7
%
 
4,014

 
9.5
%
Installment, home equity & credit card
 
6,836

 
9.8
%
 
7,241

 
10.9
%
 
6,558

 
9.7
%
 
4,990

 
9.6
%
 
6,102

 
10.2
%
  Total
 
$
57,650

 
100.0
%
 
$
56,542

 
100.0
%
 
$
54,021

 
100.0
%
 
$
57,961

 
100.0
%
 
$
53,398

 
100.0
%

MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, foreign exchange rates and equity prices. The primary source of market risk for First Financial is interest rate risk. Interest rate risk is the risk to earnings and the value of the Company's equity arising from changes in market interest rates. Interest rate risk arises in the normal course of business to the extent that there is a divergence between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid, withdrawn, re-priced or mature in specified periods. First Financial seeks to achieve consistent growth in net interest income and equity while managing volatility from shifts in market interest rates.

First Financial monitors the Company's interest rate risk position using income simulation models and EVE sensitivity analyses that capture both short-term and long-term interest rate risk exposure.  Income simulation involves forecasting NII under a variety of interest rate scenarios. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest-rate scenarios. First Financial uses EVE sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital.  For both NII and EVE modeling, First Financial leverages instantaneous parallel shocks to evaluate interest rate risk exposure across rising and falling rate scenarios. Additional scenarios evaluated include various non-parallel yield curve twists.

First Financial’s interest rate risk models are based on the contractual and assumed cash flows and repricing characteristics for the Company’s assets, liabilities and off-balance sheet exposure. A number of assumptions are also incorporated into the interest rate risk models, including prepayment behaviors and repricing spreads for assets in addition to attrition and repricing rates for liabilities. Assumptions are primarily derived from behavior studies of the Company’s historical client base and are continually refined. Modeling the sensitivity of NII and EVE to changes in market interest rates is highly dependent on the assumptions incorporated into the modeling process.

Non-maturity deposit modeling is particularly dependent on the assumption for repricing sensitivity known as a beta. Beta is the amount by which First Financial’s interest bearing non-maturity deposit rates will increase when short-term interest rates rise. The Company utilized a weighted average deposit beta of 37% in its interest rate risk modeling as of December 31, 2019. First Financial also includes an assumption for the migration of non-maturity deposit balances into CDs for all upward rate scenarios beginning with the +100 BP scenario, thereby increasing deposit costs and reducing asset sensitivity.


30 First Financial Bancorp 2019 Annual Report

Presented below is the estimated impact on First Financial’s NII and EVE as of December 31, 2019, assuming immediate, parallel shifts in interest rates:
 
 
% Change from base case for
 immediate parallel changes in rates
 
 
-100 BP
 
+100 BP
 
+200 BP
NII - Year 1
 
(6.62)%
 
3.99%
 
7.01%
NII - Year 2
 
(9.02)%
 
5.33%
 
9.46%
EVE
 
(5.51)%
 
3.83%
 
6.34%

“Risk-neutral” refers to the absence of a strong bias toward either asset or liability sensitivity. “Asset sensitivity” is when a company's interest-earning assets reprice more quickly or in greater quantities than interest-bearing liabilities. Conversely, “liability sensitivity” is when a company's interest-bearing liabilities reprice more quickly or in greater quantities than interest-earning assets. In a rising interest rate environment, asset sensitivity results in higher net interest income while liability sensitivity results in lower net interest income. In a declining interest rate environment, asset sensitivity results in lower net interest income while liability sensitivity results in higher net interest income.

First Financial was within policy limits set for the disclosed interest rate scenarios as of December 31, 2019. The projected
results for NII and EVE reflected an asset sensitive position, which was relatively in line with third quarter results, but has increased slightly over the back half of 2019 due to increased variable rate loan production. First Financial continues to manage its balance sheet with a bias toward neutrality or slight asset sensitivity while simultaneously balancing the potential earnings impact of this strategy.

First Financial continually evaluates the sensitivity of its interest rate risk position to modeling assumptions. The following table reflects First Financial’s estimated NII sensitivity profile as of December 31, 2019 assuming both a 25% increase and decrease to the beta assumption on managed rate deposit products:
 
 
Beta sensitivity (% change from base)
 
 
+100 BP
 
+200 BP
 
 
Beta 25% lower
 
Beta 25% higher
 
Beta 25% lower
 
Beta 25% higher
NII-Year 1
 
4.93
%
 
3.05
%
 
7.92
%
 
6.11
%
NII-Year 2
 
6.27
%
 
4.39
%
 
10.36
%
 
8.55
%

See the Net Interest Income section of Management’s Discussion and Analysis for further discussion.

Table 14 – Market Risk Disclosure projects the principal maturities and yields of First Financial’s interest-bearing financial instruments at December 31, 2019 for the next five years and thereafter, as well as the fair value of the instruments. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities. For investment securities, including MBSs and CMOs, principal cash flows are based on estimated average lives. For loan instruments without contractual maturities, such as credit card loans, principal payments are allocated based on historical payment activity trends. Maturities for interest-bearing liability accounts with no contractual maturity dates are estimated according to historical experience of cash flows and current expectations of client behaviors when calculating fair value, but are included in the maturing in one year or less category as they can be withdrawn on demand.

First Financial Bancorp 2019 Annual Report 31
Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
Table 14 • Market Risk Disclosure
 
 
 
 
Fair Value
 
 
Principal Amount Maturing In
 
December 31,
(Dollars in thousands)
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
 
Total
 
2019
Rate sensitive assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed interest rate loans (1)
 
$
390,678

 
$
332,995

 
$
264,535

 
$
275,995

 
$
177,186

 
$
725,114

 
$
2,166,503

 
$
2,227,168

   Average interest rate
 
4.60
%
 
4.48
%
 
4.58
%
 
4.50
%
 
4.82
%
 
4.29
%
 
4.48
%
 
 
Variable interest rate loans (1)
 
1,046,607

 
742,251

 
693,245

 
568,836

 
796,736

 
3,143,517

 
6,991,192

 
6,920,727

   Average interest rate
 
4.70
%
 
4.64
%
 
4.55
%
 
4.64
%
 
4.94
%
 
4.69
%
 
4.69
%
 
 
Fixed interest rate securities
 
191,525

 
350,046

 
454,086

 
449,592

 
313,114

 
842,935

 
2,601,298

 
2,601,257

   Average interest rate
 
3.39
%
 
3.28
%
 
3.08
%
 
2.90
%
 
3.00
%
 
3.09
%
 
3.10
%
 
 
Variable interest rate securities
 
53,310

 
68,224

 
54,485

 
17,710

 
68,889

 
131,030

 
393,648

 
393,648

   Average interest rate
 
4.15
%
 
4.23
%
 
4.12
%
 
4.77
%
 
3.70
%
 
3.20
%
 
3.80
%
 
 
Other earning assets
 
56,948

 
0

 
0

 
0

 
0

 
0

 
56,948

 
56,948

   Average interest rate
 
1.75
%
 
0.00
%
 
0.00
%
 
0.00
%
 
0.00
%
 
0.00
%
 
1.75
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rate sensitive liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing checking (2)
 
$
2,643,928

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
2,643,928

 
$
2,643,928

Savings and interest-bearing checking (2)
 
5,325,860

 
0

 
0

 
0

 
0

 
0

 
5,325,860

 
5,325,860

   Average interest rate
 
0.50
%
 
0.00
%
 
0.00
%
 
0.00
%
 
0.00
%
 
0.00
%
 
0.50
%
 
 
Time deposits
 
1,753,100

 
294,630

 
141,268

 
37,757

 
13,282

 
404

 
2,240,441

 
2,240,002

   Average interest rate
 
2.01
%
 
1.72
%
 
1.95
%
 
0.74
%
 
1.23
%
 
2.34
%
 
1.94
%
 
 
Fixed interest rate borrowings
 
1,330,017

 
19,007

 
49,404

 
0

 
0

 
193,948

 
1,592,376

 
1,593,427

   Average interest rate
 
1.84
%
 
4.92
%
 
2.67
%
 
0.00
%
 
0.00
%
 
4.29
%
 
2.20
%
 
 
Variable interest rate borrowings
 
90,181

 
0

 
0

 
0

 
0

 
48,000

 
138,181

 
137,691

   Average interest rate
 
0.22
%
 
0.00
%
 
0.00
%
 
0.00
%
 
0.00
%
 
4.51
%
 
1.71
%
 
 

(1) Includes loans held for sale.
(2) Deposits without a stated maturity are represented as maturing within one year due to the ability of the client to withdraw deposited amounts on demand.
   
OPERATIONAL RISK

Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls and external influences such as market conditions, fraudulent activities, natural disasters and security risks. First Financial continuously strives to strengthen the Company’s system of internal controls and operating processes as well as associates' ability to assess the impact on earnings and capital from operational risk.

COMPLIANCE RISK

Compliance risk represents the risk of regulatory sanctions, reputational impact or financial loss resulting from the Company’s failure to comply with rules and regulations issued by the various banking agencies and standards of good banking practice. Activities which may expose First Financial to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, community reinvestment initiatives, fair lending challenges resulting from the Company’s expansion of its banking center network and employment and tax matters.

STRATEGIC AND REPUTATION RISK

Strategic risk represents the risk of loss due to failure to fully develop and execute business plans, failure to assess current and new business opportunities, markets and products and any other event not identified in the defined risk types previously mentioned. Strategic risk focuses on analyzing factors that affect the direction of the institution or improper implementation of decisions.

32 First Financial Bancorp 2019 Annual Report

Reputation risk represents the risk of loss or impairment of earnings and capital from negative publicity. This affects the ability of First Financial to establish new relationships or services or to continue servicing existing relationships. Reputation risk is recognized by the effect that public opinion could have on First Financial's franchise value and has evolved in recent years with the growth in social media.

Mitigation of strategic and reputation risk elements is achieved through initiatives that help First Financial better understand and report on the various risks it faces each day, including those related to the development of new products and business initiatives.

INFORMATION TECHNOLOGY RISK

Information technology risk is the risk that the information technologies utilized by FFB are not efficiently and effectively supporting the current and future needs of the business, operating as intended or compromise the availability, integrity and reliability of data and information. This risk also considers whether or not the Company’s information technology exposes the Company's assets to potential loss or misuse, or threatens the Company’s ability to sustain the operation of critical business processes.

CYBERSECURITY RISK

Cyber risk is differentiated from information technology risk by threat interactions that yield high impact consequences and ever-increasing probability. First Financial continues to be the target of various evolving and adaptive cyber attacks, including malware, phishing and distributed denial-of-service, in order to disrupt the operations of financial institutions, potentially test their cybersecurity capabilities, commit fraud, or obtain confidential, proprietary or other information. While standard security operations address most day to day incidents, cyber risk includes threats and attacks that often use advanced tools, techniques and processes to evade detection or inflict maximum damage to an organization's information assets. Cyber threats and attacks adapt and evolve rapidly, so First Financial works to continuously enhance controls and processes to protect its networks and applications from attack, damage or unauthorized access. Critical components to the Company’s cyber risk control structure include corporate governance, threat intelligence, security awareness training and patch management programs. Cybersecurity risk mitigation includes effectively identifying, protecting against, detecting, responding to, and recovering from cyber threats.

LEGAL RISK

Legal risk encompasses the impact of unenforceable contracts, lawsuits or adverse judgments, which can disrupt or otherwise negatively affect the Company’s operations or condition. Legal risk also includes the exposure from litigation, fiduciary relationships and contractual obligations from both traditional and nontraditional financial institution activities. Legal risk is present in all areas of the Company and its activities.

CRITICAL ACCOUNTING POLICIES

First Financial’s Consolidated Financial Statements are prepared based on the application of accounting policies, the most significant of which are described in Note 1 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements. These policies require the reliance on estimates and assumptions which are inherently subjective and may be susceptible to significant change. Changes in underlying factors, assumptions or estimates could have a material impact on First Financial’s future financial condition and results of operations. In management’s opinion, some of these estimates and assumptions have a more significant impact than others on First Financial’s financial reporting. For First Financial, these estimates and assumptions include accounting for the ALLL, goodwill, pension and income taxes.

ALLL. For each reporting period, management maintains the ALLL at a level that it considers sufficient to absorb probable incurred loan and lease losses inherent in the portfolio. Management determines the adequacy of the ALLL based on historical loss experience as well as other significant factors such as composition of the portfolio, economic conditions, geographic footprint, the results of periodic internal and external evaluations of delinquent, nonaccrual and classified loans and any other adverse situations that may affect a specific borrower's ability to repay, including the timing of future payments.
 
Management's determination of the adequacy of the ALLL is based on an assessment of the probable incurred loan and lease losses inherent in the portfolio given the conditions at the time. The ALLL is generally 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 from the liquidation of collateral, is unlikely.

First Financial Bancorp 2019 Annual Report 33
Management’s Discussion and Analysis of Financial Condition and Results of Operations


To the extent actual outcomes differ from management’s estimates, additional provision for credit losses may be required that would impact First Financial’s operating results. The Credit Risk section of this annual report provides management’s analysis of the ALLL.

Goodwill. Assets and liabilities acquired in a business combination are recorded at their estimated fair values as of the acquisition date. The excess cost of the acquisition over the fair value of net assets acquired is recorded as goodwill. The Company is required to evaluate goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. First Financial performs its annual impairment test effective October 1, absent events or changes in circumstances that indicate the carrying value of goodwill may not be recoverable.

The Company’s goodwill is accounted for in a single reporting unit representing the consolidated entity. Fair value is estimated using the market capitalization of the Company, as of the annual impairment testing date. First Financial also utilizes additional information and analysis to corroborate the use of the Company’s market capitalization as a proper indicator of fair value for purposes of the annual goodwill impairment test. The additional information and analysis uses the discounted cash flows of First Financial’s assets and liabilities to determine an implied fair value of the Company, which is compared to the Company’s book value.

Pension. First Financial sponsors a non-contributory defined-benefit pension plan covering substantially all employees. Accounting for the pension plan involves material estimates regarding future plan obligations and investment returns on plan assets. Significant assumptions used in the pension plan include the discount rate, expected return on plan assets and the rate of compensation increase. First Financial determines the discount rate assumption using published corporate bond indices and the projected cash flows of the pension plan. First Financial also utilizes external surveys for industry comparisons to assess the discount rate for reasonableness. The expected long-term return on plan assets is determined based on the composition of plan assets, actual returns, economic forecasts and economic, while the rate of compensation increase is compared to historical increases for plan participants. Changes in these assumptions can have a material impact on the amount of First Financial’s future pension obligations, on the funded status of the plan and on the Company's operating results.

Income Taxes. First Financial evaluates and assesses the relative risks and appropriate tax treatment of transactions after considering statutes, regulations, judicial precedent and other information, and maintains tax accruals consistent with its evaluation of these relative risks. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions. These changes, when they occur, can affect deferred taxes and accrued taxes as well as the current period’s income tax expense and can be material to the Company's operating results.

First Financial regularly reviews its tax positions and establishes reserves for income tax-related uncertainties based on estimates of whether it is more likely than not that the tax uncertainty would be sustained upon challenge by the appropriate tax authorities which would then result in additional taxes, penalties and interest due.  Reserves for uncertain tax positions, if any, are included in income tax expense in the Consolidated Financial Statements.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the Act). In addition, certain statements in future filings by First Financial with the SEC, in press releases, and in oral and written statements made by or with the approval of First Financial which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to, projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items, statements of plans and objectives of First Financial or its management or board of directors and statements of future economic performances and statements of assumptions underlying such statements. Words such as ''believes,'' ''anticipates,'' “likely,” “expected,” ''intends,'' and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Management's analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties that may cause actual results to differ materially. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

▪
management's ability to effectively execute its business plan;

34 First Financial Bancorp 2019 Annual Report

▪
the risk that the strength of the United States economy in general and the strength of the local economies in which we conduct operations may deteriorate resulting in, among other things, a further deterioration in credit quality or a reduced demand for credit, including the resultant effect on our loan portfolio, allowance for loan and lease losses and overall financial performance;
▪
U.S. fiscal debt and budget matters;
▪
the ability of financial institutions to access sources of liquidity at a reasonable cost;
▪
the impact of upheaval in the financial markets and the effectiveness of domestic and international governmental actions taken in response, and the effect of such governmental actions on us, our competitors and counterparties, financial markets generally and availability of credit specifically, and the U.S. and international economies, including potentially higher FDIC premiums arising from increased payments from FDIC insurance funds as a result of depository institution failures;
▪
the effect of and changes in policies and laws or regulatory agencies (notably the Dodd-Frank Wall Street Reform and Consumer Protection Act and the capital rules promulgated by federal banking regulators);
▪
the effect of the current interest rate environment or changes in interest rates on our net interest margin and our loan originations and securities holdings;
▪
our ability to stay current with technological trends;
▪
failure or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers;
▪
mergers and acquisitions, including costs or difficulties related to the integration of acquired companies;
▪
the risk that exploring merger and acquisition opportunities may detract from management's time and ability to successfully manage our business;
▪
expected cost savings in connection with acquisitions may not be fully realized or realized within the expected time frames, and deposit attrition, customer loss and revenue loss following completed acquisitions may be greater than expected;
▪
our ability to increase market share and control expenses;
▪
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the FASB and the SEC;
▪
adverse changes in the creditworthiness of our borrowers and lessees, collateral values, the value of investment securities and asset recovery values;
▪
adverse changes in the securities, debt and/or derivatives markets;
▪
our success in recruiting and retaining the necessary personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services;
▪
monetary and fiscal policies of the Board of Governors of the Federal Reserve System (Federal Reserve) and the U.S. government and other governmental initiatives affecting the financial services industry;
▪
unpredictable natural or other disasters could have an adverse effect on us in that such events could materially disrupt our operations or our vendors' operations or willingness of our customers to access the financial services we offer;
▪
our ability to manage loan delinquency and charge-off rates and changes in estimation of the adequacy of the allowance for loan and lease losses; and
▪
the costs and effects of litigation and of unexpected or adverse outcomes in such litigation.

Such forward-looking statements are meaningful only on the date when such statements are made, and First Financial undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such a statement is made to reflect the occurrence of unanticipated events.

These and other risk factors are more fully described in First Financial's Annual Report on Form 10-K for the year ended December 31, 2019 under the section entitled “Item 1A. Risk Factors” and from time to time, in other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, First Financial undertakes no obligation to revise or update publicly any forward-looking statements for any reason.


First Financial Bancorp 2019 Annual Report 35

Statistical Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
 
2018
 
2017
(Dollars in thousands)
 
Average Balance
 
Interest
 
Average Yield
 
Average Balance
 
Interest
 
Average Yield
 
Average Balance
 
Interest
 
Average Yield
Earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases (1), (4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial (2)
 
$
2,505,615

 
$
153,128

 
6.11
%
 
$
2,518,333

 
$
150,113

 
5.96
%
 
$
1,815,925

 
$
98,683

 
5.43
 %
Lease financing (2)
 
92,902

 
3,964

 
4.27
%
 
91,476

 
3,911

 
4.28
%
 
86,662

 
3,999

 
4.61
 %
Construction-real estate
 
491,503

 
26,637

 
5.42
%
 
540,014

 
28,761

 
5.33
%
 
429,868

 
18,076

 
4.21
 %
Commercial-real estate (2)
 
3,906,992

 
216,757

 
5.55
%
 
3,310,697

 
178,235

 
5.38
%
 
2,448,570

 
110,586

 
4.52
 %
Residential-real estate
 
1,025,394

 
47,635

 
4.65
%
 
821,454

 
38,543

 
4.69
%
 
499,397

 
19,588

 
3.92
 %
Installment and other consumer
 
926,129

 
52,539

 
5.67
%
 
868,724

 
49,202

 
5.66
%
 
565,441

 
31,251

 
5.53
 %
Total loans and leases
 
8,948,535

 
500,660

 
5.59
%
 
8,150,698

 
448,765

 
5.51
%
 
5,845,863

 
282,183

 
4.83
 %
Indemnification asset
 
0

 
0

 
N/M

 
370

 
0

 
0.00
%
 
9,535

 
(3,871
)
 
(40.60
)%
Investment securities (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
2,684,973

 
90,168

 
3.36
%
 
2,451,352

 
79,076

 
3.23
%
 
1,791,729

 
50,568

 
2.82
 %
Tax-exempt (2)
 
603,902

 
22,273

 
3.69
%
 
445,815

 
16,997

 
3.81
%
 
209,658

 
9,105

 
4.34
 %
Total investment securities (3)
 
3,288,875

 
112,441

 
3.42
%
 
2,897,167

 
96,073

 
3.32
%
 
2,001,387

 
59,673

 
2.98
 %
Interest-bearing deposits with other banks
 
35,814

 
805

 
2.25
%
 
32,090

 
691

 
2.15
%
 
30,933

 
347

 
1.12
 %
Total earning assets
 
12,273,224

 
613,906

 
5.00
%
 
11,080,325

 
545,529

 
4.93
%
 
7,887,718

 
338,332

 
4.29
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonearning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses
 
(58,504
)
 
 
 
 
 
(56,115
)
 
 
 
 
 
(56,599
)
 
 
 
 
Cash and due from banks
 
191,864

 
 
 
 
 
188,971

 
 
 
 
 
116,409

 
 
 
 
Accrued interest and other assets
 
1,804,135

 
 
 
 
 
1,398,257

 
 
 
 
 
663,875

 
 
 
 
Total assets
 
$
14,210,719

 
 
 
 
 
$
12,611,438

 
 
 
 
 
$
8,611,403

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
 
$
2,326,193

 
$
12,748

 
0.55
%
 
$
2,169,396

 
$
8,446

 
0.39
%
 
$
1,491,114

 
$
4,242

 
0.28
 %
Savings
 
3,027,725

 
21,383

 
0.71
%
 
2,990,731

 
18,050

 
0.60
%
 
2,412,788

 
15,941

 
0.66
 %
Time
 
2,223,429

 
44,901

 
2.02
%
 
1,938,709

 
30,466

 
1.57
%
 
1,189,963

 
14,999

 
1.26
 %
Total interest-bearing deposits
 
7,577,347

 
79,032

 
1.04
%
 
7,098,836

 
56,962

 
0.80
%
 
5,093,865

 
35,182

 
0.69
 %
Borrowed funds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
1,146,719

 
25,235

 
2.20
%
 
947,427

 
18,033

 
1.90
%
 
830,365

 
8,193

 
0.99
 %
Long-term debt
 
522,340

 
19,057

 
3.65
%
 
438,567

 
16,152

 
3.68
%
 
120,794

 
6,153

 
5.09
 %
Total borrowed funds
 
1,669,059

 
44,292

 
2.65
%
 
1,385,994

 
34,185

 
2.47
%
 
951,159

 
14,346

 
1.51
 %
Total interest-bearing liabilities
 
9,246,406

 
123,324

 
1.33
%
 
8,484,830

 
91,147

 
1.07
%
 
6,045,024

 
49,528

 
0.82
 %
Noninterest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
2,524,011

 
 
 
 
 
2,217,349

 
 
 
 
 
1,540,384

 
 
 
 
Other liabilities
 
265,623

 
 
 
 
 
156,998

 
 
 
 
 
128,564

 
 
 
 
Shareholders' equity
 
2,174,679

 
 
 
 
 
1,752,261

 
 
 
 
 
897,431

 
 
 
 
Total liabilities and shareholders' equity
 
$
14,210,719

 
 
 
 
 
$
12,611,438

 
 
 
 
 
$
8,611,403

 
 
 
 
Net interest income and interest rate spread (fully tax equivalent)
 
 
 
$
490,582

 
3.67
%
 
 
 
$
454,382

 
3.86
%
 
 
 
$
288,804

 
3.47
 %
Net interest margin (fully tax equivalent)
 
 
 
 
 
4.00
%
 
 
 
 
 
4.10
%
 
 
 
 
 
3.66
 %
Interest income and yield
 
 
 
$
607,578

 
4.95
%
 
 
 
$
540,382

 
4.88
%
 
 
 
$
333,073

 
4.22
 %
Interest expense and rate
 
 
 
123,324

 
1.33
%
 
 
 
91,147

 
1.07
%
 
 
 
49,528

 
0.82
 %
Net interest income and spread
 
 
 
$
484,254

 
3.62
%
 
 
 
$
449,235

 
3.81
%
 
 
 
$
283,545

 
3.40
 %
Net interest margin
 
 
 
 
 
3.95
%
 
 
 
 
 
4.05
%
 
 
 
 
 
3.59
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Nonaccrual loans are included in average loan balance and loan fees are included in interest income.
 
 
 
 
 
 
(2) Interest income on tax-exempt investments and on certain tax-exempt loans and leases has been adjusted to a tax equivalent basis using a 21.00% tax rate for 2019 and 2018 and a 35.00% tax rate for 2017.
(3) Includes HTM securities, AFS securities and other investments.
(4) Includes loans held-for-sale.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
N/M = not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

36 First Financial Bancorp 2019 Annual Report

Management’s Report on Internal Control over Financial Reporting

First Financial’s management is responsible for establishing and maintaining adequate internal control over financial reporting. First Financial’s internal control over financial reporting is a process designed under the supervision of First Financial’s chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. As of December 31, 2019, First Financial’s management, including the chief executive officer and the chief financial officer, evaluated the effectiveness of First Financial’s internal controls over financial reporting, using as its framework for that evaluation the Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission (2013 framework). Based on the evaluation, we believe that, as of December 31, 2019, our internal control over financial reporting is effective based on those criteria.

Crowe LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K, has issued an attestation report on First Financial’s internal control over financial reporting as of December 31, 2019. The report, which expresses an unqualified opinion on First Financial’s internal control over financial reporting as of December 31, 2019, is included in the information that follows under the heading “Report of Independent Registered Public Accounting Firm."

/s/ Archie M. Brown, Jr.
 
/s/ James M. Anderson
 
President and Chief Executive Officer
 
Executive Vice President and Chief Financial Officer
 
February 21, 2020
 
February 21, 2020
 


First Financial Bancorp 2019 Annual Report 37

CROWE2018A06.JPG
 
Crowe LLP
Independent Member Crowe Global









Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of First Financial Bancorp
Cincinnati, Ohio

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of First Financial Bancorp (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


38 First Financial Bancorp 2019 Annual Report

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses - Adjustments for other factors

As more fully described in Note 1 and Note 6 to the consolidated financial statements, the Company estimates and records an allowance for loan losses for loans collectively evaluated for impairment by developing a loss rate based on historical losses and other factors. Other factors are used to adjust historical loss rates considering relevant market factors such as composition of the portfolio; economic conditions; geographic footprint; the results of periodic internal and external evaluations of delinquent, nonaccrual and classified loans; and any other situations that may affect a specific borrower's ability to repay. The application of the adjustments for other factors to the historical loss rate calculation is subjective.

The principal considerations for our determination that auditing the adjustments to the historical loss rates is a critical audit matter is the high degree of management judgment in the determination of the adjustments, which involves evaluation of managements established floors, risk factors, and using a rating scale in concluding on the estimate. Our audit procedures included both control and substantive testing related to the adjustments for other factors. Procedures included, among others:

Control tests included:
◦
Management’s review of the accuracy of data inputs used to adjust historical loss rates.
◦
Management’s review of the appropriateness of the adjustments to the historical loss rates
◦
Management’s review of the changes that occurred in the allowance for loans losses for loans collectively evaluated for impairment during the period by portfolio segment based on the system calculation analyzing changes due to rate (changes in the adjustment) and volume (changes in loan balance).
◦
Approval of the conclusions reached over the allowance for loan losses for loans collectively evaluated for impairment.

•
Substantive tests included:
◦
Objective inputs were agreed to source documentation such as trial balances, unemployment statistics, loan performance and relevant indices
◦
The adjustments for other factors were evaluated for reasonableness and appropriateness including both directional consistency and the magnitude of the adjustments for other factors.
◦
Analytical procedures were performed to evaluate changes that occurred in the allowance for loan losses for loans collectively evaluated for impairment at December 31, 2018 as compared to December 31, 2019.



First Financial Bancorp 2019 Annual Report 39


CROWEBALDWINV2A06.JPG
Crowe LLP

We have served as the Company's auditor since 2015, which is the year the engagement letter was signed for the audit of the 2016 financial statements.
Indianapolis, Indiana
 
February 21, 2020


40 First Financial Bancorp 2019 Annual Report


Consolidated Balance Sheets
 
 
December 31,
(Dollars in thousands)
 
2019
 
2018
Assets
 
 
 
 
Cash and due from banks
 
$
200,691

 
$
236,221

Interest-bearing deposits with other banks
 
56,948

 
37,738

Investment securities available-for-sale, at fair value (amortized cost $2,798,298 at December 31, 2019 and $2,792,326 at December 31, 2018)
 
2,852,084

 
2,779,255

Investment securities held-to-maturity (fair value $142,821 at December 31, 2019 and $424,118 at December 31, 2018)
 
142,862

 
429,328

Other investments
 
125,020

 
115,660

Loans held for sale
 
13,680

 
4,372

Loans and leases
 
 

 
 

Commercial & industrial
 
2,465,877

 
2,514,661

Lease financing
 
88,364

 
93,415

Construction real estate
 
493,182

 
548,935

Commercial real estate
 
4,194,651

 
3,754,681

Residential real estate
 
1,055,949

 
955,646

Home equity
 
771,869

 
817,282

Installment
 
82,589

 
93,212

Credit card
 
49,184

 
46,382

Total loans and leases
 
9,201,665

 
8,824,214

Less: Allowance for loan and lease losses
 
57,650

 
56,542

Net loans and leases
 
9,144,015

 
8,767,672

Premises and equipment
 
214,506

 
215,652

Goodwill
 
937,771

 
880,251

Other intangibles
 
76,201

 
40,805

Accrued interest and other assets
 
747,847

 
479,706

Total assets
 
$
14,511,625

 
$
13,986,660

 
 
 
 
 
Liabilities
 
 

 
 

Deposits
 
 

 
 

Interest-bearing demand
 
$
2,364,881

 
$
2,307,071

Savings
 
2,960,979

 
3,167,325

Time
 
2,240,441

 
2,173,564

Total interest-bearing deposits
 
7,566,301

 
7,647,960

Noninterest-bearing
 
2,643,928

 
2,492,434

Total deposits
 
10,210,229

 
10,140,394

Federal funds purchased and securities sold under agreements to repurchase
 
165,181

 
183,591

FHLB short-term borrowings
 
1,151,000

 
857,100

      Total short-term borrowings
 
1,316,181

 
1,040,691

Long-term debt
 
414,376

 
570,739

Total borrowed funds
 
1,730,557

 
1,611,430

Accrued interest and other liabilities
 
323,134

 
156,587

Total liabilities
 
12,263,920

 
11,908,411

 
 
 
 
 
Shareholders' equity
 
 

 
 

Common stock - no par value
 
 

 
 

Authorized - 160,000,000 shares; Issued - 104,281,794 shares in 2019 and 104,281,794 shares in 2018
 
1,640,771

 
1,633,256

Retained earnings
 
711,249

 
600,014

Accumulated other comprehensive income (loss)
 
13,323

 
(44,408
)
Treasury stock, at cost, 5,790,796 shares in 2019 and 6,387,508 shares in 2018
 
(117,638
)
 
(110,613
)
Total shareholders' equity
 
2,247,705

 
2,078,249

Total liabilities and shareholders' equity
 
$
14,511,625

 
$
13,986,660


See Notes to Consolidated Financial Statements.


First Financial Bancorp 2019 Annual Report 41

Consolidated Statements of Income
 
 
Years ended December 31,
(Dollars in thousands except per share data)
 
2019
 
2018
 
2017
Interest income
 
 
 
 
 
 
Loans and leases, including fees
 
$
499,009

 
$
447,187

 
$
280,111

Investment securities
 
 

 
 
 
 

Taxable
 
90,168

 
79,076

 
50,568

Tax-exempt
 
17,596

 
13,428

 
5,918

Total interest on investment securities
 
107,764

 
92,504

 
56,486

Other earning assets
 
805

 
691

 
(3,524
)
Total interest income
 
607,578

 
540,382

 
333,073

Interest expense
 
 

 
 

 
 
Deposits
 
79,032

 
56,962

 
35,182

Short-term borrowings
 
25,235

 
18,033

 
8,193

Long-term borrowings
 
19,057

 
16,152

 
6,153

Total interest expense
 
123,324

 
91,147

 
49,528

Net interest income
 
484,254

 
449,235

 
283,545

Provision for loan and lease losses
 
30,598

 
14,586

 
3,582

Net interest income after provision for loan and lease losses
 
453,656

 
434,649

 
279,963

 
 
 
 
 
 
 
Noninterest income
 
 

 
 

 
 
Service charges on deposit accounts
 
37,939

 
35,108

 
19,775

Trust and wealth management fees
 
15,644

 
15,082

 
14,073

Bankcard income
 
18,804

 
20,245

 
13,298

Client derivative fees
 
15,662

 
7,682

 
6,418

Foreign exchange income
 
7,739

 
0

 
0

Net gain from sales of loans
 
14,851

 
6,071

 
5,169

Net gain (loss) on sales/transfers of investment securities
 
(406
)
 
(161
)
 
1,649

Other
 
21,140

 
19,355

 
15,760

Total noninterest income
 
131,373

 
103,382

 
76,142

 
 
 
 
 
 
 
Noninterest expenses
 
 

 
 

 
 
Salaries and employee benefits
 
209,061

 
188,990

 
137,240

Net occupancy
 
24,069

 
24,215

 
17,397

Furniture and equipment
 
15,903

 
14,908

 
8,443

Data processing
 
21,881

 
28,077

 
14,022

Marketing
 
6,908

 
7,598

 
3,201

Communication
 
3,267

 
3,167

 
1,819

Professional services
 
11,254

 
12,272

 
15,023

State intangible tax
 
5,829

 
4,152

 
2,655

FDIC assessments
 
1,973

 
3,969

 
3,944

Intangible assets amortization
 
9,671

 
7,359

 
1,298

Other
 
32,351

 
29,103

 
34,900

Total noninterest expenses
 
342,167

 
323,810

 
239,942

Income before income taxes
 
242,862

 
214,221

 
116,163

Income tax expense
 
44,787

 
41,626

 
19,376

Net income
 
$
198,075

 
$
172,595

 
$
96,787

 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
Basic
 
$
2.01

 
$
1.95

 
$
1.57

Diluted
 
$
2.00

 
$
1.93

 
$
1.56

Average common shares outstanding - basic
 
98,305,570

 
88,582,090

 
61,529,460

Average common shares outstanding - diluted
 
98,851,471

 
89,614,205

 
62,171,590


See Notes to Consolidated Financial Statements.

42 First Financial Bancorp 2019 Annual Report

Consolidated Statements of Comprehensive Income

 
 
Years ended December 31,
(Dollars in thousands)
 
2019
 
2018
 
2017
Net income
 
$
198,075

 
$
172,595

 
$
96,787

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Unrealized gain (loss) on debt securities arising during the period
 
51,959

 
(11,229
)
 
4,367

Change in retirement obligation
 
4,649

 
(8,180
)
 
3,172

Unrealized gain (loss) on derivatives
 
217

 
484

 
514

Other comprehensive income (loss)
 
56,825

 
(18,925
)
 
8,053

Comprehensive income
 
$
254,900

 
$
153,670

 
$
104,840


See Notes to Consolidated Financial Statements.



First Financial Bancorp 2019 Annual Report 43

Consolidated Statements of Changes in Shareholders' Equity
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
Common
 
Common
 
 
 
other
 
 
 
 
 
 
stock
 
stock
 
Retained
 
comprehensive
 
Treasury stock
 
 
(Dollars in thousands, except share amounts)
 
shares
 
amount
 
earnings
 
income (loss)
 
Shares
 
Amount
 
Total
Balance at January 1, 2017
 
68,730,731

 
$
570,382

 
$
437,188

 
$
(28,443
)
 
(6,751,179
)
 
$
(113,903
)
 
$
865,224

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 

 
 

 
96,787

 
 

 
 

 
 

 
96,787

Other comprehensive income (loss)
 
 

 
 

 
 

 
8,053

 
 

 
 

 
8,053

Cash dividends declared:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
Common stock at $0.68 per share
 
 

 
 

 
(42,128
)
 
 

 
 

 
 

 
(42,128
)
Warrant exercises
 
 
 
(99
)
 
 
 
 
 
5,843

 
99

 
0

Exercise of stock options, net of shares purchased
 
 
 
(912
)
 
 
 
 
 
58,212

 
987

 
75

Restricted stock awards, net of forfeitures
 
 

 
(1,708
)
 
 

 
 

 
25,480

 
(1,085
)
 
(2,793
)
Share-based compensation expense
 
 

 
5,446

 
 

 
 

 
 

 
 

 
5,446

Balance at December 31, 2017, as previously reported
 
68,730,731

 
573,109

 
491,847

 
(20,390
)
 
(6,661,644
)
 
(113,902
)
 
930,664

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of cumulative effect of adoption of new accounting principles
 
 
 
 
 
5,093

 
(5,093
)
 
 
 
 
 
0

Net income
 
 
 
 
 
172,595

 
 
 
 
 
 
 
172,595

Other comprehensive income (loss)
 
 
 
 
 
 
 
(18,925
)
 
 
 
 
 
(18,925
)
Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock at $0.78 per share
 
 
 
 
 
(69,521
)
 
 
 
 
 
 
 
(69,521
)
Common stock issued in connection with business combinations
 
35,551,063

 
1,043,424

 
 
 
 
 
 
 
 
 
1,043,424

Stock options and warrants acquired and converted in connection with business combinations
 
 
 
16,037

 
 
 
 
 
 
 
 
 
16,037

Warrant exercises
 
 
 
(1,120
)
 
 
 
 
 
65,354

 
1,120

 
0

Exercise of stock options, net of shares purchased
 
 
 
(282
)
 
 
 
 
 
32,941

 
566

 
284

Restricted stock awards, net of forfeitures
 
 
 
(4,131
)
 
 
 
 
 
175,841

 
1,603

 
(2,528
)
Share-based compensation expense
 
 
 
6,219

 
 
 
 
 
 
 
 
 
6,219

Balance at December 31, 2018
 
104,281,794

 
1,633,256

 
600,014

 
(44,408
)
 
(6,387,508
)
 
(110,613
)
 
2,078,249

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of cumulative effect of adoption of new accounting principles
 
 
 
 
 
2,636

 
906

 
 
 
 
 
3,542

Net income
 
 
 
 
 
198,075

 
 
 
 
 
 
 
198,075

Other comprehensive income (loss)
 
 
 
 
 
 
 
56,825

 
 
 
 
 
56,825

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock at $0.90 per share
 
 
 
 
 
(89,476
)
 
 
 
 
 
 
 
(89,476
)
Purchase of common stock
 
 
 
 
 
 
 
 
 
(2,753,272
)
 
(66,218
)
 
(66,218
)
Common stock issued in connection with business combinations
 
 
 
13,658

 
 
 
 
 
2,601,823

 
47,276

 
60,934

Warrant exercises
 
 
 
(7,830
)
 
 
 
 
 
452,134

 
7,830

 
0

Exercise of stock options, net of shares purchased
 
 
 
(264
)
 
 
 
 
 
20,424

 
354

 
90

Restricted stock awards, net of forfeitures
 
 
 
(6,018
)
 
 
 
 
 
275,603

 
3,733

 
(2,285
)
Share-based compensation expense
 
 
 
7,969

 
 
 
 
 
 
 
 
 
7,969

Balance at December 31, 2019
 
104,281,794

 
$
1,640,771

 
$
711,249

 
$
13,323

 
(5,790,796
)
 
$
(117,638
)
 
$
2,247,705


See Notes to Consolidated Financial Statements.

44 First Financial Bancorp 2019 Annual Report

Consolidated Statements of Cash Flows
 
 
Year ended December 31,
(Dollars in thousands)
 
2019
 
2018
 
2017
Operating activities
 
 
 
 
 
 
Net income
 
$
198,075

 
$
172,595

 
$
96,787

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
Provision for loan and lease losses
 
30,598

 
14,586

 
3,582

Depreciation and amortization
 
28,138

 
24,171

 
12,645

Stock-based compensation expense
 
7,969

 
6,219

 
5,446

Pension expense (income)
 
1,041

 
859

 
(628
)
Net amortization (accretion) on investment securities
 
11,430

 
10,846

 
10,798

Net (gains) losses on sales of investments securities
 
406

 
161

 
(1,649
)
Originations of loans held for sale
 
(390,578
)
 
(157,771
)
 
(157,796
)
Net (gains) losses on sales of loans held for sale
 
(14,851
)
 
(6,071
)
 
(5,169
)
Proceeds from sales of loans held for sale
 
396,121

 
167,374

 
163,300

Deferred income taxes
 
12,590

 
6,267

 
(4,488
)
Amortization of operating leases
 
7,324

 
0

 
0

Payments for operating leases
 
(7,335
)
 
0

 
0

Decrease (increase) cash surrender value of life insurance
 
(3,748
)
 
(5,454
)
 
(3,792
)
Decrease (increase) in interest receivable
 
2,117

 
(3,808
)
 
(5,707
)
Decrease in indemnification asset
 
0

 
1,900

 
10,117

(Decrease) increase in interest payable
 
1,545

 
5,207

 
55

Decrease (increase) in other assets
 
(166,477
)
 
34,360

 
(21,455
)
(Decrease) increase in other liabilities
 
71,964

 
(10,043
)
 
21,478

Net cash provided by (used in) operating activities
 
186,329

 
261,398

 
123,524

 
 
 
 
 
 
 
Investing activities
 
 

 
 

 
 

Proceeds from sales of investment securities available-for-sale
 
519,136

 
290,745

 
189,962

Proceeds from calls, paydowns and maturities of securities available-for-sale
 
557,034

 
387,351

 
224,690

Purchases of securities available-for-sale
 
(834,743
)
 
(852,131
)
 
(723,131
)
Proceeds from calls, paydowns and maturities of securities held-to-maturity
 
18,062

 
36,671

 
121,903

Purchases of securities held-to-maturity
 
0

 
(14,014
)
 
(23,402
)
Purchases of other investment securities
 
(12,120
)
 
(31,385
)
 
(2,353
)
Net decrease (increase) in interest-bearing deposits with other banks
 
(19,210
)
 
(3,764
)
 
48,476

Net decrease (increase) in loans and leases
 
(409,557
)
 
(28,577
)
 
(266,043
)
Proceeds from disposal of other real estate owned
 
1,453

 
3,797

 
6,983

Purchases of premises and equipment
 
(20,934
)
 
(18,228
)
 
(6,537
)
Net cash acquired (paid) from business combinations
 
(51,663
)
 
64,895

 
0

Net cash (paid) received for branch divestitures
 
118

 
(41,197
)
 
0

Net cash provided by (used in) investing activities
 
(252,424
)
 
(205,837
)
 
(429,452
)
 
 
 
 
 
 
 
Financing activities
 
 

 
 

 
 

Net (decrease) increase in total deposits
 
69,953

 
(18,690
)
 
369,258

Net (decrease) increase in short-term borrowings
 
275,490

 
30,531

 
6,653

Payments on long-term borrowings
 
(159,653
)
 
(52,460
)
 
(94
)
Proceeds from FHLB borrowings
 
0

 
150,000

 
0

Cash dividends paid on common stock
 
(89,097
)
 
(79,655
)
 
(41,178
)
Purchases of common stock
 
(66,218
)
 
0

 
0

Proceeds from exercise of stock options
 
90

 
284

 
341

Net cash provided by (used in) financing activities
 
30,565

 
30,010

 
334,980

 
 
 
 
 
 
 
Cash and due from banks
 
 

 
 

 
 

Net (decrease) increase in Cash and due from banks
 
(35,530
)
 
85,571

 
29,052

Cash and due from banks at beginning of year
 
236,221

 
150,650

 
121,598

Cash and due from banks at end of year
 
$
200,691

 
$
236,221

 
$
150,650

 
 
 
 
 
 
 

First Financial Bancorp 2019 Annual Report 45

Supplemental disclosures
 
 
 
 
 
 
Interest paid
 
$
121,779

 
$
84,125

 
$
49,474

Income taxes paid
 
$
27,497

 
$
16,004

 
$
38,329

Acquisition of other real estate owned through foreclosure
 
$
2,448

 
$
1,821

 
$
4,119

Issuance of restricted stock awards
 
$
10,488

 
$
8,797

 
$
6,416

Securities transferred from HTM to AFS
 
$
268,703

 
$
372,128

 
$
0

Common stock issued in acquisitions
 
$
60,934

 
$
1,043,424

 
$
0

Initial recognition of operating lease right of use asset
 
$
60,249

 
$
0

 
$
0

Initial recognition of operating lease liabilities
 
$
65,799

 
$
0

 
$
0

 
 
 
 
 
 
 
Supplemental schedule for investing activities
 
 
 
 
 
 
Business combinations
 
 
 
 
 
 
Assets acquired, net of purchase consideration
 
$
(39,140
)
 
$
3,342,781

 
$
0

Liabilities assumed
 
18,380

 
4,018,948

 
0

Goodwill
 
$
57,520

 
$
676,167

 
$
0


See Notes to Consolidated Financial Statements.

46 First Financial Bancorp 2019 Annual Report

Notes to Consolidated Financial Statements

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 years' amounts have been made to conform to current year presentation. Such reclassifications had no effect on net earnings.
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. Actual realized amounts could differ materially from those estimates.

Cash and due from banks. Cash and due from banks consist of currency, coin and cash items due from banks. Cash items due from banks include noninterest-bearing balances that are on deposit at other depository institutions.
 
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. AFS and HTM securities are reviewed quarterly for potential impairment. In performing this review, management considers the length of time and extent to which the fair value of the security has been less than amortized cost, the financial condition and near-term prospects of the issuer and the ability and intent of First Financial to hold the security for a period sufficient to allow for any anticipated recovery in fair value. If the fair value of a security is less than the amortized cost and the impairment is determined to be other-than-temporary, the security is written down, establishing a new and reduced cost basis. The related charge is recorded in the Consolidated Statements of Income.
 
Other investments. Other investments include holdings in FRB and FHLB stock, which are both carried at cost, in addition to equity securities which are carried at fair value. Changes in the fair value of equity securities are recorded in Other noninterest income in the Consolidated Statements of Income.

Loans held for sale. Loans held for sale consist of residential real estate loans newly originated for the purpose of sale to third parties, and in certain circumstances, loans previously originated that have been specifically identified by management for sale based on predetermined criteria. Loans held for sale are carried at fair value. Any subsequent change in the carrying value of transferred loans, not to exceed original cost, is recorded in the Consolidated Statements of Income. First Financial sells loans with servicing retained or released depending on pricing and market conditions.  


First Financial Bancorp 2019 Annual Report 47
Notes to Consolidated Financial Statements

Loans and leases. Loans and leases for which First Financial has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified in the Consolidated Balance Sheets as loans and leases. Loans and leases are carried at the principal amount outstanding, net of unamortized deferred loan origination fees and costs, and net of unearned income. Loan origination and commitment fees received, as well as certain direct loan origination costs paid, are deferred, and the net amount is amortized as an adjustment to the related loan's yield.

Interest income on loans and leases is recorded on an accrual basis. 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 classified as nonaccrual are applied as a reduction to the carrying value of the loan. A loan may return to accrual status if collection of future principal and interest payments is no longer doubtful.
 
Acquired loans. Acquired loans are recorded at their estimated fair value at the time of acquisition. Estimated fair values for acquired loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, interest rate, term of loan, whether or not the loan was amortizing and a discount rate reflecting the Company's assessment of risk inherent in the cash flow estimates. Acquired loans are grouped together according to similar characteristics and treated in the aggregate when applying various valuation techniques.
 
First Financial evaluates acquired loans for impairment in accordance with the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Acquired loans with evidence of credit deterioration since origination are accounted for under FASB ASC Topic 310-30 and are referred to as purchased impaired loans. Accretion of the difference between the carrying value of the loans and the expected cash flows (accretable difference) is recognized on purchased impaired loans through interest income.
 
Acquired loans outside of the scope of FASB ASC Topic 310-30 are accounted for under FASB ASC Topic 310-20, Receivables-Nonrefundable Fees and Costs. Discounts created when the loans were recorded at their estimated fair values at acquisition are amortized over the remaining term of the loan as an adjustment to the related loan's yield. The accrual of interest income is discontinued when the collection of a loan or interest, in whole or in part, is doubtful.

Allowance for loan and lease losses. For each reporting period, management maintains the ALLL at a level that it considers sufficient to absorb probable incurred loan and lease losses inherent in the portfolio. Management determines the adequacy of the ALLL based on historical loss experience as well as other significant factors such as composition of the portfolio, economic conditions, geographic footprint, the results of periodic internal and external evaluations of delinquent, nonaccrual and classified loans and any other adverse situations that may affect a specific borrower's ability to repay (including the timing of future payments).
 
The ALLL 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 through payments from the borrower or the liquidation of collateral.
 
Management evaluates Commercial loan and lease relationships greater than $250,000 that are considered impaired, or designated as a TDR to determine the need for a specific allowance. This evaluation is based on the borrower's overall financial condition, resources, payment record, guarantor support and the realizable value of any collateral.

The allowance for non-impaired commercial loans and leases, as well as impaired commercial loan and lease relationships less than $250,000, includes a process of estimating the probable losses incurred in the portfolio by loan type, based on First Financial's internal system of credit risk ratings and historical loss data. These estimates may also be adjusted based upon trends in delinquent and nonaccrual loans, prevailing economic conditions and changes in lending strategies, among other influencing factors.
 
Consumer loans generally exhibit homogeneous characteristics and are evaluated by loan type. The allowance for consumer loans, which includes residential real estate, installment, home equity, credit card loans and overdrafts, is established by estimating probable losses incurred in each particular category of consumer loans. The estimate of losses is primarily based on historical loss rates for each category and may be adjusted for trends in delinquent and nonaccrual loans, prevailing economic conditions and other significant influencing factors. Consumer loans greater than $250,000 classified as TDRs are individually evaluated to determine an appropriate allowance.

An allowance for loan losses will be established for any subsequent credit deterioration or adverse changes in expected cash flows.

48 First Financial Bancorp 2019 Annual Report

Reserve for unfunded commitments. First Financial maintains a reserve that it considers sufficient to absorb probable losses incurred in standby letters of credit and outstanding loan commitments. First Financial determines the adequacy of the reserve based upon an evaluation of the unfunded credit facilities, which includes consideration of historical commitment utilization experience, credit risk ratings and historical loss rates, consistent with the Company's ALLL methodology. The reserve for unfunded commitments is included in Accrued interest and other liabilities on the Consolidated Balance Sheets and adjustments are recorded in Other noninterest expense in the Consolidated Statements of Income.
 
Premises and equipment. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are principally computed on the straight-line method over the estimated useful lives of the assets. Useful lives generally range from 10 to 40 years for building and building improvements; 3 to 10 years for furniture, fixtures and equipment; and 3 to 5 years for software, hardware and data handling equipment. Land improvements are depreciated over 20 years and leasehold improvements are depreciated over the lesser of the term of the respective lease or the useful life of the asset. Premises and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Maintenance and repairs are expensed as incurred.

Bank-owned life insurance. First Financial purchases life insurance policies on the lives of certain employees and is the owner and beneficiary of the policies. The Bank invests in these policies to provide an efficient form of funding for long-term retirement and other employee benefits costs. The policies are included within Accrued interest and other assets in the Consolidated Balance Sheets at each policy’s respective cash surrender value with changes recorded in Other noninterest income in the Consolidated Statements of Income.
 
Goodwill. Under accounting for business combinations, the net assets of entities acquired by First Financial are recorded at their estimated fair value at the date of acquisition. The excess cost of the acquisition over the fair value of net assets acquired is recorded as goodwill. Goodwill and other intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. The Company is required to evaluate goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. First Financial performs its annual impairment test effective October 1, absent events or changes in circumstances that indicate the carrying value of goodwill may not be recoverable.

The Company’s goodwill is accounted for in a single reporting unit representing the consolidated entity. Fair value is estimated using the market capitalization of the Company as of the annual impairment testing date. First Financial also utilizes additional information and analyses to corroborate the use of the Company’s market capitalization as a proper indicator of fair value for purposes of the annual goodwill impairment test.

Other intangible assets. Other intangible assets consist primarily of core deposit, customer list and other miscellaneous intangibles.

CDI represent the estimated value of acquired customer deposit relationships. CDI are recorded at fair value at the date of acquisition and are based on a discounted cash flow methodology that gives appropriate consideration to expected customer attrition rates, cost of the deposit base, reserve requirements and the net maintenance cost attributable to customer deposits. Core deposit intangibles are recorded in Other intangibles on the Consolidated Balance Sheets and are amortized on an accelerated basis over their estimated useful lives.

First Financial recorded a 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.

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.  
 
Other real estate owned. OREO consists of properties acquired by the Company primarily through the loan foreclosure or repossession process, or other resolution activity that results in partial or total satisfaction of problem loans. OREO properties are recorded at fair value, less estimated disposal costs (net realizable value). Losses arising at the time of acquisition of such properties are charged against the ALLL. Management performs periodic valuations to assess the adequacy of recorded OREO balances and subsequent changes in the carrying value of OREO properties are recorded in the Consolidated Statements of Income. Improvements to OREO properties may be capitalized if the improvements contribute to the overall value of the

First Financial Bancorp 2019 Annual Report 49
Notes to Consolidated Financial Statements

property, but may not be capitalized in excess of the net realizable value of the property. When management disposes of an OREO property, any gains or losses realized at the time of disposal are reflected in the Consolidated Statements of Income.
 
Affordable housing projects. First Financial has investments in certain qualified affordable housing projects. These projects are indirect federal subsidies that provide tax incentives to encourage investment in the development, acquisition 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 properties to qualified tenants, resulting in unavailability or recapture of the tax credits and other tax benefits. Investments in affordable housing projects are included in Accrued interest and other assets in the Consolidated Balance Sheets and are accounted for under the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other benefits received and recognized as a component of Income tax expense in the Consolidated Statements of Income.

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. The Company’s recorded investment in these entities is carried in Accrued interest and other assets on the Consolidated Balance Sheets. For historic tax credits, impairment is recorded in Other noninterest expense. The tax credit and other net tax benefits received are recognized as a component of income tax expense in the Consolidated Statements of Income. 
 
Income taxes. First Financial and its subsidiaries file a consolidated federal income tax return. Each subsidiary provides for income taxes on a separate return basis, and remits to First Financial amounts determined to be currently payable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Interest and penalties on income tax assessments or income tax refunds are recorded in Other noninterest expense in the Consolidated Statements of Income.
 
Pension. First Financial sponsors a non-contributory defined benefit pension plan covering substantially all employees. The measurement of the accrued benefit liability and the annual pension expense involves actuarial and economic assumptions, which include the discount rate, the expected return on plan assets and the rate of compensation increase.
 
Derivative instruments. First Financial accounts for its derivative financial instruments in accordance with FASB ASC Topic 815, Derivatives and Hedging. FASB ASC Topic 815 requires all derivative instruments to be carried at fair value on the balance sheet.

The accounting for changes in the fair value of derivatives is based on the intended use of the derivative and the resulting designation.  Derivatives used to hedge the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.  Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

Client derivatives - First Financial utilizes matched interest rate swaps as a means to offer commercial borrowers fixed rate funding while providing the Company with floating rate assets. Upon entering into an interest rate swap with a borrower, the Bank simultaneously enters into an offsetting swap agreement with an institutional counterparty, with substantially matching terms. These matched interest rate swap agreements generally involve the receipt by First Financial of floating rate amounts from the counterparties in exchange for payments to these counterparties by First Financial of fixed rate amounts received from commercial borrowers over the life of the agreements.

First Financial's matched interest rate swaps qualify as derivatives, but are not designated as hedging instruments. The net interest receivable or payable on matched interest rate swaps is accrued and recognized as an adjustment to interest income.  The fair values of client derivatives are included within Accrued interest and other assets and Accrued interest and other liabilities in the Consolidated Balance Sheets.

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

50 First Financial Bancorp 2019 Annual Report

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.

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 fair value of these agreements is recorded in the Consolidated Balance Sheets in Accrued interest and other liabilities.

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 an IRLC with First Financial and the loan is 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 and Loans held for sale. The fair value of these agreements is recorded in the Consolidated Balance Sheets in Accrued interest and other assets.

Stock-based compensation. First Financial grants stock-based awards, including restricted stock awards and options to purchase the Company’s common stock. Stock option grants are for a fixed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant. Stock-based compensation expense is recognized in the Consolidated Statements of Income on a straight-line basis over the vesting period. As compensation expense is recognized, a deferred tax asset is recorded that represents an estimate of the future tax deduction from exercise. At the time stock-based awards are exercised, canceled or expire, First Financial may be required to recognize an adjustment to tax expense.
 
Earnings per share. Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding, unvested shares and dilutive common stock equivalents outstanding during the period. Common stock equivalents, which consist of common stock issuable under the assumed exercise of stock options granted under First Financial's stock-based compensation plans and the assumed conversion of common stock warrants, are calculated using the treasury stock method.
 
Segments and related information. While the Company monitors the operating results of its six lines of business, operations are managed and financial performance is evaluated on a consolidated basis. Accordingly, and consistent with prior years, all of the Company's operations are considered by management to be aggregated in one reportable operating segment.

2. Accounting Standards Recently Adopted or Issued
Standards Adopted in 2019

In February 2016, the FASB issued an update (ASU 2016-02, Leases) which requires lessees to record most leases on their balance sheet and recognize leasing expenses in the income statement. Operating leases where the Company is the lessee, except for short-term leases that are subject to an accounting policy election, were recorded on the balance sheet by establishing a lease liability and corresponding ROU asset. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. As the Company elected the transition option provided in ASU No. 2018-11, the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). The Company also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component and the option not to recognize ROU assets and lease liabilities that arise from short-term leases. The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of ROU assets. The guidance in this ASU became effective January 1, 2019 at which time the Company recorded on the Consolidated Balance Sheet an ROU asset of $60.2 million and a lease liability of $65.8 million. For further detail, see Note 7 – Leases.

In March 2017, the FASB issued an update (ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities) which amends the amortization period for certain purchased callable debt securities held at a premium and shortens the amortization period for the premium to the earliest call date rather than as an adjustment of yield over the contractual life of the instrument. This update more closely aligns the

First Financial Bancorp 2019 Annual Report 51
Notes to Consolidated Financial Statements

amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities, as in most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates (that is, the security is trading at a premium) and price securities to maturity when the coupon is below market rates (that is, the security is trading at a discount) in anticipation that the borrower will act in its economic best interest in an attempt to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. The guidance in this ASU became effective at the beginning of 2019 but did not have a material impact on the Consolidated Financial Statements.

In August 2017, the FASB issued an update (ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting
for Hedging Activities) to better align financial reporting for hedging activities with the economic objectives of those activities.
This update aligns certain aspects of hedge documentation, effectiveness assessments, accounting and disclosures and expands
permissible hedge strategies as of the date of adoption. The guidance in this ASU became effective January 1, 2019. Upon
adoption, the Company reclassified $268.7 million of HTM securities to AFS, resulting in a $0.2 million loss in the
Consolidated Statement of Income.

Standards Issued But Not Yet Adopted

In June 2016, the FASB issued an update (ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses
on Financial Instruments), which significantly changes how entities are required to measure credit losses for most financial
assets and certain other instruments that are not measured at fair value through net income. This update, commonly known as CECL, will replace the current incurred loss approach for estimating credit losses with an expected loss model for instruments measured at amortized cost, including loans and leases. Expected credit losses are required to be based on amortized cost and reflect losses expected over the remaining contractual life of the asset. Management is expected to consider any available information relevant to assessing the collectibility of contractual cash flows, such as information about past events, current conditions, voluntary prepayments and reasonable and supportable economic forecasts, when developing expected credit loss estimates. This update also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the ACL, including the disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.

In addition to the new framework for calculating the ACL, this update requires allowances for AFS debt securities rather than a reduction of the security's carrying amount under the current other-than-temporary impairment model. This update also simplifies the accounting model for purchased credit-impaired debt securities and loans.

The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2019. As of January 1, 2020, First Financial expects to recognize a one-time cumulative effect adjustment to increase the ACL with an offsetting reduction to the retained earnings component of equity. In December 2018, the federal bank regulatory agencies approved a final rule that modifies their regulatory capital rules and provides institutions the option to phase in over a three-year period any day-one regulatory capital effects of this update. First Financial expects to adopt the regulatory phase-in over the permissible three-year period.

First Financial formed a cross-functional internal management committee and engaged a third party vendor to assist with the transition to the guidance set forth in this update. The new allowance model implemented by First Financial estimates credit losses over the expected life of the portfolio and includes a qualitative framework to account for the drivers of losses that are not captured by the quantitative model. Based upon preliminary modeling results, management estimates that the reserve will increase to between $115.0 million and $125.0 million upon adoption of this ASU. The expected increase in the ACL is significantly impacted by the number of previously acquired loans with credit discounts, the credit losses expected over the life of the portfolio and management's consideration of future economic conditions. The actual impact from adopting this guidance may be subject to change based upon refinement and finalization of the model and associated assumptions, the implementation and testing of certain internal controls ensuring model effectiveness and management’s judgment. In addition, the adoption of this ASU may result in a more volatile provision for credit losses in future periods.

Management expects the ACL for unfunded commitments to increase to $11.0 million to $14.0 million upon adoption. First Financial does not expect a material allowance for credit losses on HTM securities as a result of guidance set forth in this update given the size and composition of the portfolio, which primarily includes government agency backed securities. In addition, the Company does not expect a material loss on AFS debt securities.

In August 2018, the FASB issued an update (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

52 First Financial Bancorp 2019 Annual Report

measurements. Under the changes, entities will 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 will be required to disclose the range and weighted average used to
develop significant unobservable inputs for Level 3 fair value measurements. The update is effective for interim and annual
reporting periods beginning after December 15, 2019, and early adoption is permitted. This update is not expected to have a
material impact on the Company’s Consolidated Financial Statements.

3. Restrictions on Cash and Dividends

First Financial is required by the FRB to hold cash in reserve against deposit liabilities when total reservable deposit liabilities exceed the regulatory exemption known as the reserve requirement. The reserve requirement is calculated based on a two-week average of daily net transaction account deposits as defined by the FRB and may be satisfied with average vault cash during the following two-week maintenance period. When vault cash is not sufficient to meet the reserve requirement, the remaining amount must be satisfied with average funds held at the FRB. First Financial's deposit at the FRB is recorded in Interest-bearing deposits with other banks on the Consolidated Balance Sheets. The average required reserve balances, based upon the average level of First Financial's transaction deposits were $84.1 million and $85.9 million for 2019 and 2018, respectively. Additionally, as of December 31, 2019, First Financial had $15.8 million in cash restricted for withdrawal and usage due to the centrally cleared derivative initial margin requirement.

Dividends paid by First Financial to its shareholders are principally funded through dividends paid to the Company by its subsidiaries, however, certain restrictions exist regarding the ability of the Bank to transfer funds to First Financial in the form of cash dividends, loans or advances. The approval of the Federal Reserve Board and the ODFI is required for the Bank to pay dividends in excess of the regulatory limit, which is equal to the net income of the current year through the dividend date combined with the Bank's retained net income from the two preceding years. As of December 31, 2019, First Financial's subsidiaries had retained earnings of $660.7 million, of which $155.7 million was available for distribution to First Financial without prior regulatory approval.

4. Investment Securities

During the year ended December 31, 2019, proceeds on the sale of $519.1 million of AFS securities resulted in gains of $2.1 million and losses of $2.1 million, with insignificant tax expense. During the year ended December 31, 2018, proceeds on the sale of $290.7 million of AFS securities resulted in gains of $0.5 million, losses of $0.6 million and insignificant tax expense. During the year ended December 31, 2017, proceeds on the sale of $190.0 million of AFS securities resulted in gains of $1.8 million and losses of $0.2 million in addition to tax expense of $0.6 million. In addition to the sale of certain securities, First Financial reclassified $268.7 million of HTM securities, in conjunction with the adoption of ASU 2017-12 in the first quarter of 2019, resulting in a $0.2 million realized loss recorded in the Consolidated Statement of Income. To align with post-merger investment strategies, during the second quarter 2018 First Financial sold certain securities and reclassified $372.1 million of HTM securities to AFS.

The carrying value of investment securities pledged as collateral to secure public deposits, repurchase agreements and for other purposes as required by law totaled $1.1 billion at December 31, 2019 and $1.2 billion at December 31, 2018.

First Financial Bancorp 2019 Annual Report 53
Notes to Consolidated Financial Statements


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 is a summary of HTM and AFS investment securities as of December 31, 2018:
  
 
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

 
$
0

 
$
(2
)
 
$
97

Securities of U.S. government agencies and corporations
 
0

 
0

 
0

 
0

 
32,095

 
57

 
(233
)
 
31,919

Mortgage-backed securities - residential
 
25,565

 
0

 
(1,045
)
 
24,520

 
565,071

 
691

 
(7,163
)
 
558,599

Mortgage-backed securities - commercial
 
147,780

 
258

 
(4,385
)
 
143,653

 
423,797

 
819

 
(3,581
)
 
421,035

Collateralized mortgage obligations
 
12,540

 
0

 
(633
)
 
11,907

 
928,586

 
4,319

 
(6,158
)
 
926,747

Obligations of state and other political subdivisions
 
243,443

 
1,954

 
(1,359
)
 
244,038

 
257,300

 
2,554

 
(1,429
)
 
258,425

Asset-backed securities
 
0

 
0

 
0

 
0

 
511,430

 
611

 
(2,810
)
 
509,231

Other securities
 
0

 
0

 
0

 
0

 
73,948

 
358

 
(1,104
)
 
73,202

Total
 
$
429,328

 
$
2,212

 
$
(7,422
)
 
$
424,118

 
$
2,792,326

 
$
9,409

 
$
(22,480
)
 
$
2,779,255





54 First Financial Bancorp 2019 Annual Report

The following table provides a summary of investment securities by contractual maturity as of December 31, 2019, 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
Due in one year or less
 
$
0

 
$
0

 
$
7,382

 
$
7,408

Due after one year through five years
 
0

 
0

 
52,075

 
53,189

Due after five years through ten years
 
4,756

 
5,417

 
144,626

 
149,961

Due after ten years
 
6,258

 
6,370

 
528,939

 
547,578

Mortgage-backed securities - residential
 
20,818

 
20,766

 
421,945

 
431,555

Mortgage-backed securities - commercial
 
101,267

 
100,613

 
474,174

 
476,518

Collateralized mortgage obligations
 
9,763

 
9,655

 
769,076

 
785,444

Asset-backed securities
 
0

 
0

 
400,081

 
400,431

Total
 
$
142,862

 
$
142,821

 
$
2,798,298

 
$
2,852,084



Unrealized gains and losses on debt securities are generally due to fluctuations in current market yields relative to the yields of the securities at their amortized cost.  All securities with unrealized losses are reviewed quarterly to determine if any impairment is considered other than temporary, requiring a write-down to fair value. First Financial considers the percentage loss on a security, duration of the loss, average life or duration of the security, credit rating of the security and payment performance, in addition to the Company’s intent and ability to hold the security to maturity, when determining whether any impairment is other than temporary. At this time First Financial does not intend to sell, and it is not more likely than not that the Company will be required to sell, debt securities temporarily impaired prior to maturity or recovery of the recorded value. First Financial had no other than temporary impairment related to its investment securities portfolio as of December 31, 2019, 2018 or 2017.

As of December 31, 2019, the Company's investment securities portfolio consisted of 1,273 securities, of which 140 securities were in an unrealized loss position. As of December 31, 2018, the Company's investment securities portfolio consisted of 1,417 securities, of which 504 were in an unrealized loss position.

The following tables provide the fair value and gross unrealized losses on investment securities in an unrealized loss position, aggregated by investment category and the length of time the individual securities have been in a continuous loss position:
 
 
December 31, 2019
 
 
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
 
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
)


First Financial Bancorp 2019 Annual Report 55
Notes to Consolidated Financial Statements

 
 
December 31, 2018
 
 
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

 
$
97

 
$
(2
)
 
$
97

 
$
(2
)
Securities of U.S. Government agencies and corporations
 
0

 
0

 
16,777

 
(233
)
 
16,777

 
(233
)
Mortgage-backed securities - residential
 
186,029

 
(935
)
 
264,795

 
(7,273
)
 
450,824

 
(8,208
)
Mortgage-backed securities - commercial
 
147,754

 
(369
)
 
232,363

 
(7,597
)
 
380,117

 
(7,966
)
Collateralized mortgage obligations
 
194,795

 
(1,546
)
 
240,514

 
(5,245
)
 
435,309

 
(6,791
)
Obligations of state and other political subdivisions
 
62,805

 
(299
)
 
86,644

 
(2,489
)
 
149,449

 
(2,788
)
Asset-backed securities
 
336,437

 
(2,312
)
 
37,105

 
(498
)
 
373,542

 
(2,810
)
Other securities
 
33,752

 
(884
)
 
4,570

 
(220
)
 
38,322

 
(1,104
)
Total
 
$
961,572

 
$
(6,345
)
 
$
882,865

 
$
(23,557
)
 
$
1,844,437

 
$
(29,902
)


For further detail on the fair value of investment securities, see Note 22 – Fair Value Disclosures.

5. Loans and Leases

First Financial offers clients a variety of commercial and consumer loan and lease products with various interest rates and payment terms. Commercial loan categories include C&I, CRE, construction real estate and lease financing. Consumer loan categories include residential real estate, home equity, installment and credit card.

Lending activities are primarily concentrated in states where the Bank operates banking centers (Ohio, Indiana, Kentucky and Illinois). First Financial also offers two nationwide lending platforms, one that provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and another that provides loans primarily to insurance agents and brokers that are secured by commissions and cash collateral accounts.

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

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

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

Substandard - First Financial assigns a substandard rating to loans or leases that are inadequately protected by the current sound financial worth and paying capacity of the borrower or 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 of 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.


56 First Financial Bancorp 2019 Annual Report

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 as the best indicator of credit quality for consumer loans. Consumer loans that have principal and interest payments that are past due by 90 days or more are generally classified as nonperforming. Additionally, consumer loans that have been modified in a TDR are classified as nonperforming. Purchased impaired loans are not classified as nonperforming as the loans are considered to be performing under FASB ASC Topic 310-30.

Commercial and consumer credit exposure by risk attribute was as follows:

 
 
As of December 31, 2019
 
 
 
 
Real Estate
 
 
 
 
(Dollars in thousands)
 
Commercial & industrial
 
Construction
 
Commercial
 
Lease
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

 
 
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


 
 
As of December 31, 2018
 
 
 
 
Real Estate
 
 
 
 
(Dollars in thousands)
 
Commercial & industrial
 
Construction
 
Commercial
 
Lease
financing
 
Total
Pass
 
$
2,432,834

 
$
548,323

 
$
3,664,434

 
$
90,902

 
$
6,736,493

Special Mention
 
24,594

 
603

 
38,653

 
0

 
63,850

Substandard
 
57,233

 
9

 
51,594

 
2,513

 
111,349

Doubtful
 
0

 
0

 
0

 
0

 
0

Total
 
$
2,514,661

 
$
548,935

 
$
3,754,681

 
$
93,415

 
$
6,911,692


 
 
Residential
real estate
 
Home equity
 
Installment
 
Credit card
 
Total
Performing
 
$
939,936

 
$
811,108

 
$
93,038

 
$
46,382

 
$
1,890,464

Nonperforming
 
15,710

 
6,174

 
174

 
0

 
22,058

Total
 
$
955,646

 
$
817,282

 
$
93,212

 
$
46,382

 
$
1,912,522



Delinquency. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment.


First Financial Bancorp 2019 Annual Report 57
Notes to Consolidated Financial Statements

Loan delinquency, including nonaccrual loans, was as follows:
 
 
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


 
 
As of December 31, 2018
(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
 
$
13,369

 
$
41

 
$
7,423

 
$
20,833

 
$
2,488,450

 
$
2,509,283

 
$
5,378

 
$
2,514,661

 
$
0

Lease financing
 
352

 
0

 
0

 
352

 
93,063

 
93,415

 
0

 
93,415

 
0

Construction real estate
 
0

 
0

 
0

 
0

 
548,687

 
548,687

 
248

 
548,935

 
0

Commercial real estate
 
6,279

 
1,158

 
12,644

 
20,081

 
3,682,455

 
3,702,536

 
52,145

 
3,754,681

 
0

Residential real estate
 
11,060

 
2,976

 
4,535

 
18,571

 
902,404

 
920,975

 
34,671

 
955,646

 
0

Home equity
 
5,245

 
1,228

 
2,578

 
9,051

 
804,835

 
813,886

 
3,396

 
817,282

 
0

Installment
 
420

 
37

 
145

 
602

 
92,128

 
92,730

 
482

 
93,212

 
0

Credit card
 
541

 
96

 
63

 
700

 
45,682

 
46,382

 
0

 
46,382

 
63

Total
 
$
37,266

 
$
5,536

 
$
27,388

 
$
70,190

 
$
8,657,704

 
$
8,727,894

 
$
96,320

 
$
8,824,214

 
$
63


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.

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

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


58 First Financial Bancorp 2019 Annual Report

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 157 TDRs totaling $30.0 million at December 31, 2019, including $11.4 million of loans on accrual status and $18.5 million of loans 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, and the ALLL included reserves of $2.5 million related to TDRs as of December 31, 2019. For the years ended December 31, 2019, 2018 and 2017, First Financial charged off $2.6 million, $0.9 million and $0.3 million, respectively, for the portion of TDRs determined to be uncollectible. Additionally, as of December 31, 2019, approximately $4.7 million of the accruing TDRs have been performing in accordance with the restructured terms for more than one year.

First Financial had 196 TDRs totaling $38.5 million at December 31, 2018, including $16.1 million of loans on accrual status and $22.4 million of loans classified as nonaccrual. First Financial had no commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2018 the ALLL included reserves of $1.5 million related to TDRs, and $7.9 million of the accruing TDRs had been performing in accordance with the restructured terms for more than one year.

First Financial had 214 TDRs totaling $23.9 million at December 31, 2017, including $17.5 million of loans on accrual status and $6.4 million of loans classified as nonaccrual. First Financial had an insignificant amount of commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2017, the ALLL included reserves of $1.3 million related to TDRs, and $17.2 million of the accruing TDRs had been performing in accordance with the restructured terms for more than one year.

The following table provides information on loan modifications classified as TDRs during the years ended December 31, 2019, 2018 and 2017:
 
 
Years ended December 31,
 
 
2019
 
2018
 
2017
(Dollars in thousands)
 
Number of loans
 
Pre-modification loan balance
 
Period end balance
 
Number of loans
 
Pre-modification loan balance
 
Period end balance
 
Number of loans
 
Pre-modification loan balance
 
Period end balance
Commercial & industrial
 
8

 
$
25,009

 
$
25,071

 
17
 
$
23,943

 
$
23,890

 
7
 
$
5,724

 
$
5,661

Construction
real estate
 
0

 
0

 
0

 
0
 
0

 
0

 
0
 
0

 
0

Commercial
real estate
 
9

 
3,024

 
2,932

 
8
 
3,385

 
3,150

 
8
 
1,816

 
1,758

Residential
real estate
 
30

 
3,415

 
3,062

 
13
 
1,148

 
1,073

 
6
 
416

 
315

Home equity
 
14

 
395

 
366

 
5
 
95

 
192

 
1
 
39

 
39

Installment
 
2

 
41

 
39

 
0
 
0

 
0

 
0
 
0

 
0

Total
 
63

 
$
31,884

 
$
31,470

 
43

 
$
28,571

 
$
28,305

 
22

 
$
7,995

 
$
7,773

 
The following table provides information on how TDRs were modified during the years ended December 31, 2019, 2018 and 2017:
 
 
Years Ended December 31,
(Dollars in thousands)
 
2019
 
2018
 
2017
Extended maturities
 
$
2,877

 
$
4,093

 
$
3,261

Adjusted interest rates
 
5,284
 
52
 
2,767
Combination of rate and maturity changes
 
516
 
0

 
489

Forbearance
 
20,320
 
23,175

 
1,181

Other (1)
 
2,473
 
985

 
75

Total
 
$
31,470

 
$
28,305

 
$
7,773

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


First Financial Bancorp 2019 Annual Report 59
Notes to Consolidated Financial Statements

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 payment default of the terms of the TDR agreement.

For the twelve months ended December 31, 2019, there were three TDRs with a balance of $7.0 million for which there was a payment default during the period that occurred within twelve months of the loan modification. For the twelve months ended December 31, 2018, there was one TDR with an insignificant balance for which there was a payment default during the period that occurred within twelve months of the loan modification. For the twelve months ended December 31, 2017, there was one TDR with a balance $1.5 million for which there was a payment default during the period that occurred within twelve months of the loan modification.
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans. Loans classified as nonaccrual and loans modified as TDRs are considered impaired. The following table provides information on impaired loans, excluding purchased impaired loans, as of December 31:

(Dollars in thousands)
 
2019
 
2018
 
2017
Impaired loans
 
 
 
 
 
 
Nonaccrual loans (1)
 
 
 
 
 
 
Commercial & industrial
 
$
24,346

 
$
30,925

 
$
5,229

Lease financing
 
223

 
22

 
82

Construction real estate
 
0

 
9

 
29

Commercial real estate
 
7,295

 
20,500

 
10,616

Residential real estate
 
10,892

 
13,495

 
4,140

Home equity
 
5,242

 
5,580

 
3,743

Installment
 
167

 
169

 
243

Total nonaccrual loans
 
48,165

 
70,700

 
24,082

Accruing troubled debt restructurings
 
11,435

 
16,109

 
17,545

Total impaired loans
 
$
59,600

 
$
86,809

 
$
41,627

 
 
 
 
 
 
 
Interest income effect
 
 
 
 
 
 
Gross amount of interest that would have been recorded under original terms
 
$
5,813

 
$
4,656

 
$
3,397

Interest included in income
 
 
 
 
 
 
Nonaccrual loans
 
1,042

 
715

 
535

Troubled debt restructurings
 
801

 
642

 
710

Total interest included in income
 
1,843

 
1,357

 
1,245

Net impact on interest income
 
$
3,970

 
$
3,299

 
$
2,152

 
 
 
 
 
 
 
Commitments outstanding to borrowers with nonaccrual loans
 
$
3

 
$
200

 
$
0

(1) Nonaccrual loans include nonaccrual TDRs of $18.5 million, $22.4 million and $6.4 million as of December 31, 2019, 2018 and 2017, respectively.

First Financial individually reviews all impaired commercial loan relationships greater than $250,000, as well as consumer loan TDRs greater than $250,000, to determine if a specific allowance is necessary based on the borrower’s overall financial condition, resources, and payment record, support from guarantors and the realizable value of any collateral. Specific allowances are based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.


60 First Financial Bancorp 2019 Annual Report

First Financial's investment in impaired loans, excluding purchased impaired loans, is as follows:
 
 
December 31, 2019
 
December 31, 2018
(Dollars in thousands)
 
Current balance
 
Contractual
principal
balance
 
Related
allowance
 
Current balance
 
Contractual
principal
balance
 
Related
allowance
Loans with no related allowance recorded
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
 
$
16,726

 
$
19,709

 
$
0

 
$
36,694

 
$
42,561

 
$
0

Lease financing
 
223

 
223

 
0

 
22

 
22

 
0

Construction real estate
 
0

 
0

 
0

 
9

 
26

 
0

Commercial real estate
 
10,160

 
17,897

 
0

 
23,513

 
31,375

 
0

Residential real estate
 
14,868

 
17,368

 
0

 
17,297

 
19,975

 
0

Home equity
 
5,700

 
6,462

 
0

 
6,351

 
7,461

 
0

Installment
 
204

 
341

 
0

 
174

 
563

 
0

Total
 
47,881

 
62,000

 
0

 
84,060

 
101,983

 
0

 
 
 
 
 
 
 
 
 
 
 
 
 
Loans with an allowance recorded
 
 
 
 
 
 
 
 
Commercial & industrial
 
10,754

 
21,513

 
2,044

 
939

 
939

 
667

Lease financing
 
0

 
0

 
0

 
0

 
0

 
0

Construction real estate
 
0

 
0

 
0

 
0

 
0

 
0

Commercial real estate
 
671

 
675

 
113

 
1,509

 
1,509

 
461

Residential real estate
 
294

 
294

 
18

 
301

 
301

 
32

Home equity
 
0

 
0

 
0

 
0

 
0

 
0

Installment
 
0

 
0

 
0

 
0

 
0

 
0

Total
 
11,719

 
22,482

 
2,175

 
2,749

 
2,749

 
1,160

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 

 
 

 
 

 
 
 
 
 
 
Commercial & industrial
 
27,480

 
41,222

 
2,044

 
37,633

 
43,500

 
667

Lease financing
 
223

 
223

 
0

 
22

 
22

 
0

Construction real estate
 
0

 
0

 
0

 
9

 
26

 
0

Commercial real estate
 
10,831

 
18,572

 
113

 
25,022

 
32,884

 
461

Residential real estate
 
15,162

 
17,662

 
18

 
17,598

 
20,276

 
32

Home equity
 
5,700

 
6,462

 
0

 
6,351

 
7,461

 
0

Installment
 
204

 
341

 
0

 
174

 
563

 
0

Total
 
$
59,600

 
$
84,482

 
$
2,175

 
$
86,809

 
$
104,732

 
$
1,160



First Financial Bancorp 2019 Annual Report 61
Notes to Consolidated Financial Statements

 
 
Years ended December 31,
 
 
2019
 
2018
 
2017
(Dollars in thousands)
 
Average
balance
 
Interest
income
recognized
 
Average
balance
 
Interest
income
recognized
 
Average
balance
 
Interest
income
recognized
Loans with no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
 
$
31,846

 
$
926

 
$
14,498

 
$
360

 
$
13,167

 
$
280

Lease financing
 
168

 
0

 
21

 
0

 
112

 
4

Construction real estate
 
6

 
0

 
20

 
2

 
601

 
1

Commercial real estate
 
18,757

 
357

 
24,738

 
490

 
20,935

 
563

Residential real estate
 
15,915

 
307

 
11,359

 
301

 
7,616

 
196

Home equity
 
5,893

 
121

 
5,541

 
114

 
4,032

 
99

Installment
 
170

 
2

 
274

 
2

 
332

 
4

Total
 
72,755

 
1,713

 
56,451

 
1,269

 
46,795

 
1,147

 
 
 
 
 
 
 
 
 
 
 
 
 
Loans with an allowance recorded
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
 
4,721

 
87

 
900

 
44

 
1,204

 
28

Lease financing
 
57

 
0

 
0

 
0

 
0

 
0

Construction real estate
 
0

 
0

 
0

 
0

 
0

 
0

Commercial real estate
 
1,339

 
31

 
1,402

 
18

 
2,634

 
40

Residential real estate
 
446

 
12

 
895

 
23

 
1,112

 
26

Home equity
 
0

 
0

 
80

 
3

 
101

 
4

Installment
 
0

 
0

 
0

 
0

 
0

 
0

Total
 
6,563

 
130

 
3,277

 
88

 
5,051

 
98

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 

 
 

 
 

 
 

 
 

 
 

Commercial & industrial
 
36,567

 
1,013

 
15,398

 
404

 
14,371

 
308

Lease financing
 
225

 
0

 
21

 
0

 
112

 
4

Construction real estate
 
6

 
0

 
20

 
2

 
601

 
1

Commercial real estate
 
20,096

 
388

 
26,140

 
508

 
23,569

 
603

Residential real estate
 
16,361

 
319

 
12,254

 
324

 
8,728

 
222

Home equity
 
5,893

 
121

 
5,621

 
117

 
4,133

 
103

Installment
 
170

 
2

 
274

 
2

 
332

 
4

Total
 
$
79,318

 
$
1,843

 
$
59,728

 
$
1,357

 
$
51,846

 
$
1,245





62 First Financial Bancorp 2019 Annual Report


OREO. OREO is comprised of properties acquired by the Company primarily through the loan foreclosure or repossession process, that result in partial or total satisfaction of problem loans.

Changes in OREO were as follows:
 
 
Years ended December 31,
(Dollars in thousands)
 
2019
 
2018
 
2017
Balance at beginning of year
 
$
1,401

 
$
2,781

 
$
6,284

Additions
 
 
 
 
 
 
Commercial
 
415

 
1,269

 
1,732

Residential
 
2,033

 
1,913

 
2,387

Total additions
 
2,448

 
3,182

 
4,119

Disposals
 
 

 
 

 
 
Commercial
 
(541
)
 
(2,967
)
 
(5,409
)
Residential
 
(912
)
 
(830
)
 
(1,574
)
Total disposals
 
(1,453
)
 
(3,797
)
 
(6,983
)
Valuation adjustments
 
 

 
 

 
 
Commercial
 
(112
)
 
(355
)
 
(439
)
Residential
 
(251
)
 
(410
)
 
(200
)
Total valuation adjustments
 
(363
)
 
(765
)
 
(639
)
Balance at end of year
 
$
2,033

 
$
1,401

 
$
2,781



6. Allowance for Loan and Lease Losses

Management maintains the ALLL at a level that it considers sufficient to absorb probable incurred loan and lease losses inherent in the portfolio. Management determines the adequacy of the ALLL based on historical loss experience as well as other significant factors such as composition of the portfolio, economic conditions, geographic footprint, the results of periodic internal and external evaluations of delinquent, nonaccrual and classified loans and any other adverse situations that may affect a specific borrower's ability to repay, including the timing of future payments. For further discussion of First Financial's allowance methodology, see Note 1 – Summary of Significant Accounting Policies.

The ALLL 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 from the liquidation of collateral.

Changes in the ALLL by loan category as of December 31 were as follows:
  
 
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 loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
$
18,746

 
$
1,130

 
$
3,413

 
$
21,048

 
$
4,964

 
$
5,348

 
$
362

 
$
1,531

 
$
56,542

Provision for loan and lease losses
 
23,631

 
3

 
(1,100
)
 
5,107

 
739

 
695

 
2

 
1,521

 
30,598

Gross charge-offs
 
(26,676
)
 
(162
)
 
0

 
(3,689
)
 
(677
)
 
(2,591
)
 
(223
)
 
(1,547
)
 
(35,565
)
Recoveries
 
2,883

 
0

 
68

 
1,113

 
273

 
1,335

 
251

 
152

 
6,075

Total net charge-offs
 
(23,793
)
 
(162
)
 
68

 
(2,576
)
 
(404
)
 
(1,256
)
 
28

 
(1,395
)
 
(29,490
)
Ending allowance for loan and lease losses
 
$
18,584

 
$
971

 
$
2,381

 
$
23,579

 
$
5,299

 
$
4,787

 
$
392

 
$
1,657

 
$
57,650



First Financial Bancorp 2019 Annual Report 63
Notes to Consolidated Financial Statements

 
 
2018
(Dollars in thousands)
 
Commercial & industrial
 
Lease financing
 
Construction real estate
 
Commercial real estate
 
Residential real estate
 
Home equity
 
Installment
 
Credit card
 
Total
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
$
17,598

 
$
675

 
$
3,577

 
$
20,930

 
$
4,683

 
$
4,935

 
$
307

 
$
1,316

 
$
54,021

Provision for loan and lease losses
 
10,615

 
454

 
(310
)
 
847

 
492

 
829

 
(85
)
 
1,744

 
14,586

Gross charge-offs
 
(11,533
)
 
0

 
0

 
(4,835
)
 
(422
)
 
(1,725
)
 
(435
)
 
(1,720
)
 
(20,670
)
Recoveries
 
2,066

 
1

 
146

 
4,106

 
211

 
1,309

 
575

 
191

 
8,605

Total net charge-offs
 
(9,467
)
 
1

 
146

 
(729
)
 
(211
)
 
(416
)
 
140

 
(1,529
)
 
(12,065
)
Ending allowance for loan and lease losses
 
$
18,746

 
$
1,130

 
$
3,413

 
$
21,048

 
$
4,964

 
$
5,348

 
$
362

 
$
1,531

 
$
56,542



 
 
2017
(Dollars in thousands)
 
Commercial & industrial
 
Lease financing
 
Construction real estate
 
Commercial real estate
 
Residential real estate
 
Home equity
 
Installment
 
Credit card
 
Total
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
$
19,225

 
$
716

 
$
3,282

 
$
26,540

 
$
3,208

 
$
3,043

 
$
388

 
$
1,559

 
$
57,961

Provision for loan and lease losses
 
6,917

 
(42
)
 
207

 
(7,291
)
 
1,695

 
1,778

 
(90
)
 
408

 
3,582

Gross charge-offs
 
(10,194
)
 
0

 
(1
)
 
(1,038
)
 
(435
)
 
(913
)
 
(225
)
 
(857
)
 
(13,663
)
Recoveries
 
1,650

 
1

 
89

 
2,719

 
215

 
1,027

 
234

 
206

 
6,141

Total net charge-offs
 
(8,544
)
 
1

 
88

 
1,681

 
(220
)
 
114

 
9

 
(651
)
 
(7,522
)
Ending allowance for loan and lease losses
 
$
17,598

 
$
675

 
$
3,577

 
$
20,930

 
$
4,683

 
$
4,935

 
$
307

 
$
1,316

 
$
54,021



The ALLL balance and the recorded investment in loans by portfolio segment and based on impairment method as of December 31 were as follows:
 
 
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 on loans individually evaluated for impairment
 
$
2,044

 
$
0

 
$
0

 
$
113

 
$
18

 
$
0

 
$
0

 
$
0

 
$
2,175

Ending allowance on loans collectively evaluated for impairment
 
16,540

 
971

 
2,381

 
23,466

 
5,281

 
4,787

 
392

 
1,657

 
55,475

Ending allowance for loan and lease losses
 
$
18,584

 
$
971

 
$
2,381

 
$
23,579

 
$
5,299

 
$
4,787

 
$
392

 
$
1,657

 
$
57,650

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and Leases
 
 

 
 
 
 

 
 

 
 

 
 

 
 
 
 

 
 

Ending balance of loans individually evaluated for impairment
 
$
27,480

 
$
223

 
$
0

 
$
10,831

 
$
15,162

 
$
5,700

 
$
204

 
$
0

 
$
59,600

Ending balance of loans 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




64 First Financial Bancorp 2019 Annual Report

 
 
December 31, 2018
(Dollars in thousands)
 
Commercial & industrial
 
Lease financing
 
Construction real estate
 
Commercial real estate
 
Residential real estate
 
Home equity
 
Installment
 
Credit card
 
Total
Ending allowance on loans individually evaluated for impairment
 
$
667

 
$
0

 
$
0

 
$
461

 
$
32

 
$
0

 
$
0

 
$
0

 
$
1,160

Ending allowance on loans collectively evaluated for impairment
 
18,079

 
1,130

 
3,413

 
20,587

 
4,932

 
5,348

 
362

 
1,531

 
55,382

Ending allowance for loan and lease losses
 
$
18,746

 
$
1,130

 
$
3,413

 
$
21,048

 
$
4,964

 
$
5,348

 
$
362

 
$
1,531

 
$
56,542

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and Leases
 
 

 
 
 
 

 
 

 
 

 
 

 
 
 
 

 
 

Ending balance of loans individually evaluated for impairment
 
$
37,633

 
$
22

 
$
9

 
$
25,022

 
$
17,598

 
$
6,351

 
$
174

 
$
0

 
$
86,809

Ending balance of loans collectively evaluated for impairment
 
2,477,028

 
93,393

 
548,926

 
3,729,659

 
938,048

 
810,931

 
93,038

 
46,382

 
8,737,405

Total loans
 
$
2,514,661

 
$
93,415

 
$
548,935

 
$
3,754,681

 
$
955,646

 
$
817,282

 
$
93,212

 
$
46,382

 
$
8,824,214




7. Premises and Equipment

Premises and equipment at December 31 were as follows:
(Dollars in thousands)
 
2019
 
2018
Land and land improvements
 
$
54,958

 
$
57,701

Buildings
 
163,277

 
161,817

Furniture and fixtures
 
74,881

 
66,567

Leasehold improvements
 
31,728

 
29,086

Construction in progress
 
4,096

 
5,731

 
 
328,940

 
320,902

 
 
 
 
 
Less: Accumulated depreciation and amortization
 
114,434

 
105,250

   Total
 
$
214,506

 
$
215,652



Rental expense recorded under operating leases in 2019, 2018 and 2017 was $11.2 million, $9.1 million and $7.1 million, respectively.

8.  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 and 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 Sheet and was $58.6 million at December 31, 2019. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received. First Financial recorded a $64.3 million lease liability in Accrued interest and other liabilities on the Consolidated Balance Sheet at December 31, 2019.

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

First Financial Bancorp 2019 Annual Report 65

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:
 
 
Year ended
(dollars in thousands)
 
December 31, 2019
Operating lease cost
 
$
7,324

Short-term lease cost
 
55

Variable lease cost
 
2,553

Total operating lease cost
 
$
9,932



Future minimum commitments due under these lease agreements as of December 31, 2019 are as follows:
(dollars in thousands)
 
Operating leases
2020
 
$
7,200

2021
 
7,166

2022
 
6,640

2023
 
6,711

2024
 
6,457

Thereafter
 
50,504

Total lease payments
 
84,678

Less imputed interest
 
20,401

Total
 
$
64,277



The lease term and discount rate at December 31, 2019 were as follows:
 
 
 
Operating leases
 
 
Weighted-average remaining lease term
 
15.6 years

Weighted-average discount rate
 
3.43
%


Supplemental cash information at December 31, 2019 related to leases was as follows:
 
 
Year ended
(dollars in thousands)
 
December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
7,335

ROU assets obtained in exchange for lease obligations
 
 
Operating leases
 
64,902



First Financial Bancorp 2019 Annual Report 66


9. 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 cost of the acquisition over the fair value of net assets acquired is recorded as goodwill.

Changes in the carrying amount of goodwill for the years ended December 31, 2019, 2018 and 2017 are shown below.

(Dollars in thousands)
 
2019
 
2018
 
2017
Balance at beginning of year
 
$
880,251

 
$
204,084

 
$
204,084

Goodwill resulting from business combinations
 
57,520

 
676,167

 
0

Balance at end of year
 
$
937,771

 
$
880,251

 
$
204,084



During 2019, First Financial recorded $58.0 million of additions to goodwill resulting from the Bannockburn acquisition. During 2018, First Financial recorded additions to goodwill of $676.2 million resulting from the merger with MSFG, and First Financial recorded its final adjustments to goodwill related to the MSFG merger in the first quarter of 2019. For further detail on the merger with MSFG or the acquisition of Bannockburn, see Note 23 - 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.  First Financial performed its annual impairment test of goodwill as of October 1, 2019 and no impairment was indicated.  As of December 31, 2019, no events or changes in circumstances indicated that the fair value of a reporting unit was below its carrying value.

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 8.0 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.  

The gross carrying amount and accumulated amortization of other intangible assets at December 31, 2019 and December 31, 2018 were as follows:
(Dollars in thousands)
 
December 31, 2019
 
December 31, 2018
Amortized intangible assets
 
 
 
 
 
 
 
 
Core deposit intangibles
 
$
51,031

 
$
(21,149
)
 
$
54,357

 
$
(16,500
)
Customer list
 
39,420

 
(1,195
)
 
0

 
0

Other
 
10,093

 
(1,999
)
 
3,763

 
(815
)
Total
 
$
100,544

 
$
(24,343
)
 
$
58,120

 
$
(17,315
)


Amortization expense recognized on intangible assets for 2019, 2018 and 2017 was $9.7 million, $7.4 million and $1.3 million, respectively. The estimated amortization expense of intangible assets for the next five years is as follows:

First Financial Bancorp 2019 Annual Report 67
Notes to Consolidated Financial Statements

(Dollars in thousands)
 
Intangible amortization
2020
 
$
11,670

2021
 
10,263

2022
 
7,718

2023
 
6,739

2024
 
6,670



10. Deposits

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2019 and 2018 were $285.0 million and $284.9 million, respectively.

Scheduled maturities of all time deposits for the next five years were as follows:
(Dollars in thousands)
 
Time deposits
2020
 
$
1,752,552

2021
 
294,579

2022
 
141,261

2023
 
37,757

2024
 
13,272

Thereafter
 
1,020

Total
 
$
2,240,441



11. Borrowings

Short-term borrowings on the Consolidated Balance Sheets include repurchase agreements utilized for corporate sweep accounts with cash management account agreements in place, overnight advances from the FHLB and a short-term line of credit. 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
 
$
9,755

Collateralized mortgage obligations
 
80,426

Total
 
$
90,181



Securities sold under agreements to repurchase are secured by securities with a carrying amount of $90.2 million and $85.5 million, as of December 31, 2019 and 2018, respectively.

First Financial has a $30.0 million short-term credit facility with an unaffiliated bank that matures in September, 2020. This facility can have a variable or fixed interest rate and provides First Financial additional liquidity, if needed, for various corporate activities including the repurchase of First Financial common stock and the payment of dividends to shareholders. As of December 31, 2019 and December 31, 2018, there was no outstanding balance. The credit agreement requires First Financial to comply with certain covenants including those related to asset quality and capital levels, and First Financial was in compliance with all covenants associated with this facility as of December 31, 2019 and December 31, 2018.


68 First Financial Bancorp 2019 Annual Report

The following is a summary of short-term borrowings for the last three years:
 
 
 
2019
 
2018
 
2017
(Dollars in thousands)
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
At December 31,
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
 
$
165,181

 
0.85
%
 
$
183,591

 
1.65
%
 
$
72,265

 
0.19
%
FHLB borrowings
 
1,151,000

 
1.73
%
 
857,100

 
2.48
%
 
742,300

 
1.43
%
Total
 
$
1,316,181

 
1.62
%
 
$
1,040,691

 
2.33
%
 
$
814,565

 
1.32
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average for the year
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
 
$
155,859

 
1.15
%
 
$
87,221

 
0.58
%
 
$
69,766

 
0.19
%
FHLB borrowings
 
990,860

 
2.37
%
 
857,028

 
2.03
%
 
760,558

 
1.05
%
Other short-term borrowings
 
0

 
0.00
%
 
3,178

 
4.36
%
 
41

 
4.07
%
Total
 
$
1,146,719

 
1.90
%
 
$
947,427

 
1.90
%
 
$
830,365

 
0.98
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Maximum month-end balances
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
 
$
260,621

 
 
 
$
183,591

 
 
 
$
130,633

 
 
FHLB borrowings
 
1,171,400

 
 
 
1,170,800

 
 
 
957,700

 
 
Other short-term borrowings
 
0

 
 
 
10,000

 
 
 
0

 
 


In 2015, First Financial issued $120.0 million of subordinated notes, which have a fixed interest rate of 5.13% 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. The 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 7.40% 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 $242.4 million and $400.6 million of fixed rate FHLB long-term advances as of December 31, 2019 and December 31, 2018, respectively. As of December 31, 2019, long-term FHLB advances had a weighted average interest rate of 1.94%. These instruments are primarily utilized to reduce overnight liquidity risk and to mitigate interest rate sensitivity on the Consolidated Balance Sheets.
 
FHLB advances, both short-term and long-term, must be collateralized with qualifying assets, typically certain commercial and residential real estate loans, as well as certain government and agency securities. For ease of borrowing execution, First Financial utilizes a blanket collateral agreement with the FHLB, and at December 31, 2019, had collateral pledged with a book value of $6.2 billion.


First Financial Bancorp 2019 Annual Report 69
Notes to Consolidated Financial Statements

The following is a summary of First Financial's long-term debt:
 
 
2019
 
2018
(Dollars in thousands) 
 
Amount
 
Average Rate
 
Amount
 
Average Rate
FHLB borrowings
 
$
242,428

 
1.94
%
 
$
400,599

 
2.08
%
Subordinated debt
 
170,967

 
4.97
%
 
170,550

 
5.28
%
Unamortized debt issuance costs
 
(1,007
)
 
n/a

 
(1,185
)
 
n/a

Capital lease liability
 
1,213

 
4.48
%
 
0

 
0.00
%
Capital loan with municipality
 
775

 
0.00
%
 
775

 
0.00
%
Total long-term debt
 
$
414,376

 
3.20
%
 
$
570,739

 
3.04
%

 
As of December 31, 2019, First Financial's long-term debt matures as follows:
 (Dollars in thousands) 
 
Long-term debt
2020
 
$
104,059

2021
 
19,052

2022
 
49,451

2023
 
49

2024
 
51

Thereafter
 
241,714

Total
 
$
414,376



12. Derivatives

First Financial uses certain derivative instruments, including rate caps, floors, swaps and foreign exchange contracts, to meet the operating 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 as 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 this 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.

For discussion of First Financial's accounting for derivative instruments, see Note 1 – Summary of Significant Accounting Policies.

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 December 31, 2019, for interest rate derivatives, the Company had a total counterparty notional amount outstanding of $1.9 billion, spread among eighteen counterparties, with an outstanding liability from these contracts of $67.5 million. At December 31, 2018, the Company had interest rate derivatives with a total counterparty notional amount outstanding of $1.4 billion, spread among thirteen counterparties, with an outstanding liability from these contracts of $4.9 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 ALLL Committee monitors
derivative credit risk exposure associated with problem loans through the Company's ALLL 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.


70 First Financial Bancorp 2019 Annual Report

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 that it is not taking excessive risk when 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 December 31, 2019, the Company had total counterparty notional amount outstanding of $1.9 billion spread among six counterparties, with an estimated fair value of $18.3 million at December 31, 2019 related to foreign exchange contracts, which is included in Accrued interest and other liabilities in the Consolidated Balance Sheets.

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 location and amounts recognized in the Consolidated Balance Sheets for client derivatives:
  
 
 
 
December 31, 2019
 
December 31, 2018
 
 
 
 
 
 
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 and other liabilities
 
$
1,923,375

 
$
70,799

 
$
(2,636
)
 
$
1,359,990

 
$
17,402

 
$
(11,787
)
Matched interest rate swaps with counterparty
 
Accrued interest and other liabilities
 
1,923,375

 
2,636

 
(70,808
)
 
1,359,990

 
11,787

 
(17,401
)
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Matched foreign exchange contracts with customers
 
Accrued interest and other assets
 
1,869,934

 
28,739

 
(10,433
)
 
0

 
0

 
0

Match foreign exchange contracts with counterparty
 
Accrued interest and other liabilities
 
1,869,934

 
10,433

 
(28,739
)
 
0

 
0

 
0

Total
 
 
 
$
7,586,618

 
$
112,607

 
$
(112,616
)
 
$
2,719,980

 
$
29,189

 
$
(29,188
)



First Financial Bancorp 2019 Annual Report 71
Notes to Consolidated Financial Statements

The following table discloses the gross and net amounts of client derivative liabilities recognized in the Consolidated Balance Sheets:
 
 
December 31, 2019
 
December 31, 2018
(Dollars in thousands)
 
Gross amounts of recognized liabilities
 
Gross amounts offset in the Consolidated Balance Sheets
 
Net amounts of (assets)/liabilities presented in the Consolidated Balance Sheets
 
Gross amounts of recognized liabilities
 
Gross amounts offset in the Consolidated Balance Sheets
 
Net amounts of (assets)/liabilities presented in the Consolidated Balance Sheets
Client derivatives
 
 
 
 
 
 
 
 
 
 
 
 
Matched interest rate swaps
 
$
73,444

 
$
(147,193
)
 
$
(73,749
)
 
$
29,189

 
$
(14,577
)
 
$
14,612

Foreign exchange contracts with counterparty
 
39,172

 
(41,202
)
 
(2,030
)
 
0

 
0

 
0

Total
 
$
112,616

 
$
(188,395
)
 
$
(75,779
)
 
$
29,189

 
$
(14,577
)
 
$
14,612


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 December 31, 2019:
 
 
 
 
 
 
 
(Dollars in thousands)
 
Notional
amount
 
Average
maturity
(years)
 
Fair
value
Client derivatives-interest rate contracts
 
 
 
 
 
 
Receive fixed, matched interest rate swaps with borrower
 
$
1,923,375

 
6.0
 
$
68,163

Pay fixed, matched interest rate swaps with counterparty
 
1,923,375

 
6.0
 
(68,172
)
Client derivatives-foreign exchange contracts
 
 
 
 
 
 
Foreign exchange contracts - pay USD
 
1,869,934

 
0.6
 
18,306

Foreign exchange contracts - receive USD
 
1,869,934

 
0.6
 
(18,306
)
Total client derivatives
 
$
7,586,618

 
3.3
 
$
(9
)


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 $216.2 million as of December 31, 2019 and $138.4 million as of December 31, 2018. The fair value of these agreements were recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets was $0.2 million at December 31, 2019 and $0.1 million at December 31, 2018.

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 an IRLC 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 and loans held for sale. At December 31, 2019, the notional amount of the IRLCs was $33.4 million and the notional amount of forward commitments was $37.8 million. As of December 31, 2018, the notional amount of IRLCs was $20.8 million and the notional amount of forward commitments was $12.3 million. The fair value of these agreements was $0.9 million at December 31, 2019 and was insignificant at December 31, 2018 and was recorded in Accrued interest and other assets on the Consolidated Balance Sheets.


72 First Financial Bancorp 2019 Annual Report

13. Commitments and Contingencies

First Financial offers a variety of financial instruments including letters of credit and outstanding commitments to extend 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 nonperformance by the counterparty is represented by the contractual amounts of those instruments. First Financial utilizes the ALLL methodology to maintain a reserve that it considers sufficient to absorb probable losses incurred in letters of credit and outstanding loan commitments and records the reserve within Accrued interest and other liabilities on the Consolidated Balance Sheets. First Financial had $0.6 million and $0.7 million of reserves for unfunded commitments recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets as of December 31, 2019 and 2018, respectively.

Loan commitments. Loan commitments are agreements to extend credit to a client absent any violation of any condition 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 are expected to expire without being 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 $3.3 billion and $3.0 billion at December 31, 2019 and 2018, respectively. As of December 31, 2019, loan commitments with a fixed interest rate totaled $123.7 million while commitments with variable interest rates totaled $3.2 billion. At December 31, 2018, loan commitments with a fixed interest rate totaled $174.0 million while commitments with variable interest rates totaled $2.9 billion. The fixed rate loan commitments have interest rates ranging from 0.00% to 21.00% for both December 31, 2019 and 2018 and have maturities ranging from less than 1 year to 31.6 years for December 31, 2019 and between 1 and 30 years for December 31, 2018.

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 portfolio of letters of credit consists primarily 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 has issued letters of credit aggregating $33.4 million and $32.7 million at December 31, 2019, and 2018, respectively. Management conducts regular reviews of these instruments on an individual client basis.

Investments in affordable housing projects. First Financial has made investments in certain qualified affordable housing tax credits. These credits are an indirect federal subsidy that provide tax incentives to encourage investment in the development, acquisition 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 $38.5 million and $39.4 million as of December 31, 2019 and 2018, respectively. The Company recognized tax credits of $6.2 million, $4.9 million and $3.2 million related to its investments in affordable housing projects for the years ended December 31, 2019, 2018 and 2017, respectively. The Company recognized amortization expense which was included in income tax expense of $6.9 million, $5.7 million and $4.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. First Financial had no affordable housing contingent commitments as of December 31, 2019 or December 31, 2018.

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 included in Accrued interest and other assets on the Consolidated Balance Sheets. The Company’s recorded investment in these entities was approximately $3.1 million at December 31, 2019, and $3.9 million at December 31, 2018. The maximum exposure to loss related to these investments was $5.1 million at December 31, 2019 and $3.9 million at December 31, 2018, representing the

First Financial Bancorp 2019 Annual Report 73
Notes to Consolidated Financial Statements

Company’s investment balance and its unfunded commitments to invest additional amounts. Investments in historic tax credits resulted in $3.5 million, $0.5 million and $13.7 million of tax credits for the years ended December 31, 2019, 2018 and 2017, respectively.

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 is 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 December 31, 2019. 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 December 31, 2019 or December 31, 2018.

14. Related Party Transactions

Outstanding balance of loans to directors, executive officers, principal holders of First Financial’s common stock and certain related persons were as follows:
 
(Dollars in thousands)
 
2019
Beginning balance
 
$
2,732

Additions
 
4,348

Deductions
 
(1,791
)
Ending balance
 
$
5,289

Loans 90 days or more past due
 
$
0



Related parties of First Financial, as defined for inclusion in the table above, were clients of, and had transactions with, subsidiaries of First Financial during the periods noted. Similar transactions with related parties may be expected in future periods.

15. Income Taxes

Income tax expense consisted of the following components:
 
(Dollars in thousands)
 
2019
 
2018
 
2017
Current expense
 
 
 
 
 
 
Federal
 
$
31,343

 
$
34,330

 
$
22,599

State
 
854

 
1,029

 
1,265

Total current expense
 
32,197

 
35,359

 
23,864

Deferred expense (benefit)
 
 
 
 
 
 
Federal
 
10,946

 
4,675

 
(4,657
)
State
 
1,644

 
1,592

 
169

Total deferred expense (benefit)
 
12,590

 
6,267

 
(4,488
)
Income tax expense
 
$
44,787

 
$
41,626

 
$
19,376




74 First Financial Bancorp 2019 Annual Report

The difference between the federal income tax rates applied to income before income taxes and the effective rates were due to the following:

(Dollars in thousands)
 
2019
 
2018
 
2017
Income taxes computed at federal statutory rate on income before income taxes (21% in 2019 and 2018; 35% in 2017)
 
$
51,001

 
$
44,986

 
$
40,657

Benefit from tax-exempt income
 
(5,964
)
 
(4,499
)
 
(3,427
)
Tax credits
 
(10,075
)
 
(5,439
)
 
(16,806
)
Tax rate reduction impact
 
0

 
0

 
(8,191
)
Basis reduction on tax credit
 
738

 
0

 
4,599

Tax benefit of equity compensation
 
(140
)
 
(565
)
 
(1,449
)
State income taxes, net of federal tax benefit
 
1,973

 
2,070

 
932

Affordable housing investments
 
5,825

 
4,725

 
2,798

Other
 
1,429

 
348

 
263

Income tax expense
 
$
44,787

 
$
41,626

 
$
19,376



On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. As a result, First Financial revalued its deferred tax assets and liabilities as well as its investments in affordable housing projects utilizing a 21% federal rate compared to a 35% rate in prior periods, which resulted in an $8.2 million reduction in tax expense in 2017.

First Financial Bancorp 2019 Annual Report 75
Notes to Consolidated Financial Statements


The major components of the temporary differences that gave rise to deferred tax assets and liabilities at December 31, 2019, and 2018, were as follows:
(Dollars in thousands)
 
2019
 
2018
Deferred tax assets
 
 
 
 
Allowance for loan and lease losses
 
$
13,011

 
$
12,782

Fair value adjustments on business combinations
 
6,470

 
11,199

Deferred compensation
 
228

 
392

Postretirement benefits other than pension liability
 
666

 
676

Accrued stock-based compensation
 
1,296

 
1,145

OREO write-downs
 
162

 
118

Interest on nonaccrual loans
 
548

 
1,160

Accrued expenses
 
4,708

 
5,808

Net unrealized losses on investment securities and derivatives
 
0

 
3,221

State net operating loss
 
2,792

 
3,119

Leasing liability
 
14,806

 
0

Federal tax credit carryforwards
 
0

 
873

Other
 
816

 
425

Total deferred tax assets
 
45,503

 
40,918

 
 
 
 
 
Deferred tax liabilities
 
 
 
 
Tax depreciation in excess of book depreciation
 
(10,970
)
 
(9,530
)
FHLB and FRB stock
 
(4,043
)
 
(4,044
)
Mortgage-servicing rights
 
(2,435
)
 
(2,285
)
Leasing activities
 
(7,349
)
 
(3,881
)
Retirement obligation
 
(8,511
)
 
(6,614
)
Intangible assets
 
(11,647
)
 
(12,310
)
Deferred loan fees and costs
 
(1,100
)
 
(131
)
Prepaid expenses
 
(623
)
 
(582
)
Limited partnership investments
 
(2,249
)
 
(2,367
)
Net unrealized gains on investment securities
 
(11,359
)
 
0

Foreign exchange deferred income
 
(2,845
)
 
0

Right of use assets
 
(13,354
)
 
0

Other
 
(2,048
)
 
(1,867
)
Total deferred tax liabilities
 
(78,533
)
 
(43,611
)
Total net deferred tax liability
 
$
(33,030
)
 
$
(2,693
)


In conjunction with the MSFG merger, First Financial acquired a state net operating loss. At December 31, 2019 and 2018, the state net operating loss carryforward was $3.6 million and $3.9 million, and begin to expire in 2024 and 2022, respectively. The Company expects to fully utilize this net operating loss and, therefore, a valuation allowance is not required at December 31, 2019 and 2018. The acquired MSFG state net operating loss is subject to IRC Section 382 and is limited annually.

The realization of the Company’s deferred tax assets is dependent upon the Company’s ability to generate taxable income in future periods and the reversal of deferred tax liabilities during the same period. The Company has evaluated the available evidence supporting the realization of its deferred tax assets and determined it is more likely than not that the assets will be realized and thus no valuation allowance was recorded at December 31, 2019 and 2018.

The Bank’s retained earnings at December 31, 2019 and December 31, 2018 included base-year bad debt reserves of $16.1 million as a result of the merger with MSFG.  Base-year reserves are subject to recapture in the event the Bank redeems its stock, makes distributions in excess of current and accumulated earnings and profits (as calculated for federal income tax purposes), loses its “bank” status or liquidates.  The Bank has no intention of meeting any of the criteria for recapture.  Accordingly, a deferred income tax liability of $3.4 million has not been recorded.

76 First Financial Bancorp 2019 Annual Report


At both December 31, 2019 and 2018, First Financial had $2.4 million and $2.9 million of unrecognized tax benefits, as determined in FASB ASC Topic 740-10, Income Taxes, that, if recognized, would favorably affect the effective income tax rate in future periods. A progression of gross unrecognized tax benefits as of December 31, 2019 and 2018 is as follows:

(Dollars in thousands)
 
2019
 
2018
Balance at beginning of year
 
$
3,735

 
$
3,735

Settlements
 
(729
)
 
0

Balance at end of year
 
$
3,006

 
$
3,735



The unrecognized tax benefits relate to state income tax exposures where First Financial believes it is likely that, upon examination, a state may take a position contrary to the position taken by the Company. 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 December 31, 2019 and 2018, 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 2016 have been closed and are no longer subject to U.S. federal income tax examinations. Tax years 2016 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 2011. Tax years 2011 through 2019 remain open to state and local examination by various other jurisdictions.
 
16. Employee Benefit Plans

Pension plan. First Financial sponsors a non-contributory defined benefit pension plan covering substantially all employees and uses a December 31 measurement date for the plan. Plan assets were primarily invested in fixed income and 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.
 
The investment objective of the Plan is to structure the assets to mirror the liabilities of the Plan, with the fixed income component matching the identified near and long-term plan distributions and the equity component generating growth of capital to meet other future Plan liabilities. The determination of the overall expected long-term return on plan assets was based on the composition of plan assets and a consensus of estimates from similarly managed portfolios of expected future returns.

First Financial recorded expense related to its pension plan of $1.0 million for 2019 and $0.9 million for 2018. During 2017, First Financial recorded income of $0.6 million. The components of net periodic benefit cost other than the service cost component are included in Other noninterest expense while service costs are recorded as a component Salaries and employee benefits in the Consolidated Statements of Income.

First Financial made no cash contributions to the pension plan in 2019, 2018 or 2017 and does not expect to make any contributions in 2020.
 

First Financial Bancorp 2019 Annual Report 77
Notes to Consolidated Financial Statements

The following tables set forth information concerning amounts recognized in First Financial's Consolidated Balance Sheets and Consolidated Statements of Income related to the Company's pension plan:
 
 
December 31,
(Dollars in thousands)
 
2019
 
2018
Change in benefit obligation
 
 
 
 
Benefit obligation at beginning of year
 
$
68,286

 
$
71,154

Service cost
 
6,591

 
6,501

Interest cost
 
2,778

 
2,394

Actuarial (gain) loss
 
6,848

 
(4,032
)
Benefits paid, excluding settlement
 
(9,459
)
 
(7,731
)
Benefit obligation at end of year
 
75,044

 
68,286

 
 
 
 
 
Change in plan assets
 
 
 
 
Fair value of plan assets at beginning of year
 
130,078

 
144,349

Actual return on plan assets
 
21,197

 
(6,540
)
Benefits paid, excluding settlement
 
(9,459
)
 
(7,731
)
Fair value of plan assets at end of year
 
141,816

 
130,078

 
 
 
 
 
Amounts recognized in the Consolidated Balance Sheets
 
 
 
 
Assets
 
66,772

 
61,792

Liabilities
 
0

 
0

Net amount recognized
 
$
66,772

 
$
61,792

 
 
 
 
 
Amounts recognized in accumulated other comprehensive income (loss)
 
 
 
 
Net actuarial loss
 
$
37,278

 
$
43,711

Net prior service cost
 
(1,095
)
 
(1,508
)
Deferred tax assets
 
(8,242
)
 
(9,613
)
Net amount recognized
 
$
27,941

 
$
32,590

 
 
 
 
 
Change in accumulated other comprehensive income (loss)
 
$
(4,649
)
 
$
12,959

 
 
 
 
 
Accumulated benefit obligation
 
$
74,424

 
$
66,320




78 First Financial Bancorp 2019 Annual Report

The components of net periodic benefit cost are shown in the table that follows:
 
 
December 31,
(Dollars in thousands)
 
2019
 
2018
 
2017
Service cost
 
$
6,591

 
$
6,501

 
$
4,894

Interest cost
 
2,778

 
2,394

 
2,325

Expected return on assets
 
(9,718
)
 
(9,811
)
 
(9,358
)
Amortization of prior service cost
 
(413
)
 
(413
)
 
(413
)
Recognized net actuarial loss
 
1,803

 
2,188

 
1,924

Net periodic benefit (income) cost
 
1,041

 
859

 
(628
)
 
 
 
 
 
 
 
Other changes recognized in accumulated other comprehensive income (loss)
 
 
 
 
Net actuarial (gain) loss
 
(4,630
)
 
12,319

 
(2,775
)
Prior service cost
 
0

 
0

 
0

Amortization of prior service cost
 
413

 
413

 
413

Amortization of gain
 
(1,803
)
 
(2,188
)
 
(1,924
)
Total recognized in accumulated other comprehensive income (loss)
 
(6,020
)
 
10,544

 
(4,286
)
Total recognized in net periodic benefit cost and accumulated other comprehensive income (loss)
 
$
(4,979
)
 
$
11,403

 
$
(4,914
)
 
 
 
 
 
 
 
Amount expected to be recognized in net periodic pension expense in the coming year
 
 
 
 
Amortization of (gain) loss
 
$
2,079

 
$
1,867

 
$
2,090

Amortization of prior service credit
 
(413
)
 
(413
)
 
(413
)


The pension plan assumptions are shown in the table that follows:
 
 
December 31,
 
 
2019
 
2018
 
2017
Benefit obligations
 
 
 
 
 
 
Discount rate
 
3.33
%
 
4.31
%
 
3.43
%
Rate of compensation increase
 
3.50
%
 
3.50
%
 
3.50
%
 
 
 
 
 
 
 
Net periodic benefit cost
 
 
 
 
 
 
Discount rate
 
4.31
%
 
3.43
%
 
3.88
%
Expected return on plan assets
 
7.25
%
 
7.25
%
 
7.25
%
Rate of compensation increase
 
3.50
%
 
3.50
%
 
3.50
%

 
The fair value of the plan assets as of December 31, 2019 by asset category is shown in the table that follows:
 
 
Fair Value Measurements
(Dollars in thousands)
 
Total
 
Quoted Prices in 
Active Markets 
for 
Identical Assets 
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Asset Category
 
 
 
 
 
 
 
 
Cash
 
$
195

 
$
195

 
$
0

 
$
0

U. S. Government agencies
 
5,357

 
0

 
5,357

 
0

Fixed income mutual funds
 
75,720

 
75,720

 
0

 
0

Equity mutual funds
 
60,544

 
60,544

 
0

 
0

Total
 
$
141,816

 
$
136,459

 
$
5,357

 
$
0



First Financial Bancorp 2019 Annual Report 79
Notes to Consolidated Financial Statements

The fair value of the plan assets as of December 31, 2018 by asset category is shown in the table that follows:
 
 
Fair Value Measurements
(Dollars in thousands)
 
Total
 
Quoted Prices in 
Active Markets 
for 
Identical Assets 
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Asset Category
 
 
 
 
 
 
 
 
Cash
 
$
216

 
$
216

 
$
0

 
$
0

U. S. Government agencies
 
8,053

 
0

 
8,053

 
0

Fixed income mutual funds
 
74,453

 
74,453

 
0

 
0

Equity mutual funds
 
47,356

 
47,356

 
0

 
0

Total
 
$
130,078

 
$
122,025

 
$
8,053

 
$
0


The level within the fair value hierarchy is based on the lowest level of input that is significant in the fair value measurement. See Note 22 – Fair Value Disclosures for further information related to the framework for measuring fair value and the fair value hierarchy.
 
The following benefit payments, which reflect expected future service, are expected to be paid:
(Dollars in thousands)
 
Expected benefit payments
2020
 
$
5,611

2021
 
5,210

2022
 
5,173

2023
 
5,125

2024
 
6,070

Thereafter
 
35,362



401(k) plan. First Financial sponsors a defined contribution 401(k) plan which covers substantially all employees. Employees may contribute up to 50.0% of their earnings into the plan, not to exceed applicable limitations prescribed by the Internal Revenue Service. First Financial's contributions to the 401(k) plan are discretionary. The Company made no contributions to the 401(k) plan during the years ended December 31, 2019 and 2018. First Financial recorded $1.9 million of expense related to the Company's contributions to the 401(k) plan during 2017.

17. Revenue Recognition

On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers using the modified retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the guidance set forth in this update while prior period amounts continue to be reported in accordance with legacy GAAP. Adoption of this update did not result in a change to the accounting for any of the in-scope revenue streams. As such, no cumulative effect adjustment to retained earnings was recorded.

The majority of the Company's revenues come from interest income and other sources, including loans, leases, securities, derivatives and foreign exchange, that are outside the scope of ASU No. 2014-09, Revenue from Contracts with Customers. The Company's services that fall within the scope of ASU 2019-09 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 fees from its deposit customers for transaction-based, account maintenance and overdraft. 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

80 First Financial Bancorp 2019 Annual Report

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 account balance.

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 2019 was $30.4 million, and was partially offset by $11.9 million of expenses within Noninterest income. Gross interchange income for 2018 was $31.3 million, and was partially offset by $11.0 million of expenses within Noninterest income.

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.

First Financial Bancorp 2019 Annual Report 81
Notes to Consolidated Financial Statements

18. 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 accumulated other comprehensive income (loss) are as follows:

 
 
December 31, 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
 
$
65,858

 
$
(370
)
 
$
66,228

 
$
(14,269
)
 
$
51,959

 
$
(11,601
)
 
$
51,959

 
$
906

 
$
41,264

Unrealized gain (loss) on derivatives
 
281

 
0

 
281

 
(64
)
 
217

 
(217
)
 
217

 
0

 
0

Retirement obligation
 
4,630

 
(1,390
)
 
6,020

 
(1,371
)
 
4,649

 
(32,590
)
 
4,649

 
0

 
(27,941
)
Total
 
$
70,769

 
$
(1,760
)
 
$
72,529

 
$
(15,704
)
 
$
56,825

 
$
(44,408
)
 
$
56,825

 
$
906

 
$
13,323


 
 
December 31, 2018
 
 
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
 
$
(14,461
)
 
$
(161
)
 
$
(14,300
)
 
$
3,071

 
$
(11,229
)
 
$
(182
)
 
$
(11,229
)
 
$
(190
)
 
$
(11,601
)
Unrealized gain (loss) on derivatives
 
628

 
0

 
628

 
(144
)
 
484

 
(577
)
 
484

 
(124
)
 
(217
)
Retirement obligation
 
(12,319
)
 
(1,775
)
 
(10,544
)
 
2,364

 
(8,180
)
 
(19,631
)
 
(8,180
)
 
(4,779
)
 
(32,590
)
Total
 
$
(26,152
)
 
$
(1,936
)
 
$
(24,216
)
 
$
5,291

 
$
(18,925
)
 
$
(20,390
)
 
$
(18,925
)
 
$
(5,093
)
 
$
(44,408
)

 
 
December 31, 2017
 
 
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
 
$
8,447

 
$
1,649

 
$
6,798

 
$
(2,431
)
 
$
4,367

 
$
(4,549
)
 
$
4,367

 
$
(182
)
Unrealized gain (loss) on derivatives
 
810

 
0

 
810

 
(296
)
 
514

 
(1,091
)
 
514

 
(577
)
Retirement obligation
 
2,775

 
(1,511
)
 
4,286

 
(1,114
)
 
3,172

 
(22,803
)
 
3,172

 
(19,631
)
Total
 
$
12,032

 
$
138

 
$
11,894

 
$
(3,841
)
 
$
8,053

 
$
(28,443
)
 
$
8,053

 
$
(20,390
)



82 First Financial Bancorp 2019 Annual Report

The following table details the activity reclassified from accumulated other comprehensive income into income during the period:
 
 
Amount Reclassified from Accumulated Other Comprehensive Income (1)
 
 
 
 
December 31,
 
 
(Dollars in thousands)
 
2019
 
2018
 
2017
 
Affected Line Item in the Consolidated Statements of Income
Realized gains and losses on securities available-for-sale
 
$
(370
)
 
$
(161
)
 
$
1,649

 
Net gain (loss) on sales of investment securities
Defined benefit pension plan
 
 
 
 
 
 
 
 
Amortization of prior service cost (2)
 
413

 
413

 
413

 
Other noninterest expense
Recognized net actuarial loss (2)
 
(1,803
)
 
(2,188
)
 
(1,924
)
 
Other noninterest expense
Amortization and settlement charges of defined benefit pension items
 
(1,390
)
 
(1,775
)
 
(1,511
)
 
 
Total reclassifications for the period, before tax
 
$
(1,760
)
 
$
(1,936
)
 
$
138

 
 

(1) Negative amounts are debits to profit/loss.
(2) Included in the computation of net periodic pension cost (see Note 16 - Employee Benefit Plans for additional details).

19. Capital

Risk-based capital. First Financial and its subsidiary, First Financial Bank, are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate regulatory action.

The Board of Governors of the Federal Reserve System approved Basel III in order to strengthen the regulatory capital framework for all banking organizations, subject to a phase-in period for certain provisions.  Basel III established and defined quantitative measures to ensure capital adequacy. These measures require First Financial to maintain minimum amounts and ratios of Common Equity tier 1 capital, total and tier 1 capital to risk-weighted assets and tier 1 capital to average assets (leverage ratio).  

Basel III includes a minimum ratio of Common equity tier 1 capital to risk-weighted assets of 7.00% at December 31, 2019 and 6.38% at December 31, 2018 and a phased-in capital conservation buffer of 2.5% of risk-weighted assets that began on January 1, 2016 at 0.625% until it was fully phased in as of January 1, 2019.  Further, the minimum ratio of tier 1 capital to risk-weighted assets increased to 8.5% at December 31, 2019 and all banks are subject to a 4.0% minimum leverage ratio.  The required Total risk-based capital ratio is 10.50%. Failure to maintain the required Common equity Tier 1 capital conservation buffer will result in potential restrictions on a bank’s ability to pay dividends, repurchase stock and pay discretionary compensation to its employees. The capital requirements also provide strict eligibility criteria for regulatory capital instruments and change the method for calculating risk-weighted assets in an effort to better identify riskier assets, such as highly volatile commercial real estate and nonaccrual loans.

As of December 31, 2019, management believes that First Financial met all capital adequacy requirements to which it was subject. To be categorized as well-capitalized, First Financial must maintain minimum Total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios as set forth in the table that follows. The Company's most recent regulatory notifications categorized First Financial as "well-capitalized" under the regulatory framework for prompt corrective action. There have been no conditions or events since those notifications that management believes have changed the Company's categorization. Total regulatory capital exceeded the “minimum” requirement by $318.3 million on a consolidated basis at December 31, 2019.  

First Financial Bancorp 2019 Annual Report 83
Notes to Consolidated Financial Statements

The following tables present the actual and required capital amounts and ratios as of December 31, 2019 and 2018 under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels based on the phase-in provisions of the Basel III Capital Rules as of the year presented. The 2018 table includes the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules had been fully phased-in. Capital levels required to be considered "well capitalized" are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
 
 
Actual
 
Minimum capital
required - Basel III
 
PCA requirement to be
considered well
capitalized
(Dollars in thousands)
 
Capital
amount
 
Ratio
 
Capital
amount
 
Ratio
 
Capital
amount
 
Ratio
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
Consolidated
 
$
1,245,746

 
11.30
%
 
$
771,666

 
7.00
%
 
N/A

 
N/A

First Financial Bank
 
1,333,978

 
12.11
%
 
770,997

 
7.00
%
 
$
715,926

 
6.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
Consolidated
 
1,288,185

 
11.69
%
 
937,023

 
8.50
%
 
N/A

 
N/A

First Financial Bank
 
1,334,082

 
12.11
%
 
936,211

 
8.50
%
 
$
881,140

 
8.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
Consolidated
 
1,475,813

 
13.39
%
 
1,157,498

 
10.50
%
 
N/A

 
N/A

First Financial Bank
 
1,399,817

 
12.71
%
 
1,156,496

 
10.50
%
 
1,101,425

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Leverage
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
1,288,185

 
9.58
%
 
537,606

 
4.00
%
 
N/A

 
N/A

First Financial Bank
 
1,334,082

 
9.93
%
 
537,299

 
4.00
%
 
671,623

 
5.00
%
 
 
 
Actual
 
Minimum capital
required - Basel III
 
PCA requirement to be
considered well
capitalized
 
Minimum capital
required - Basel III
fully phased-in
(Dollars in thousands)
 
Capital
amount
 
Ratio
 
Capital
amount
 
Ratio
 
Capital
amount
 
Ratio
 
Capital
amount
 
Ratio
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
$
1,215,613

 
11.87
%
 
$
652,874

 
6.38
%
 
N/A

 
N/A

 
$
716,881

 
7.00
%
First Financial Bank
 
1,279,492

 
12.50
%
 
652,590

 
6.38
%
 
$
665,386

 
6.50
%
 
716,570

 
7.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
1,257,366

 
12.28
%
 
806,491

 
7.88
%
 
N/A

 
N/A

 
870,499

 
8.50
%
First Financial Bank
 
1,279,596

 
12.50
%
 
806,141

 
7.88
%
 
818,937

 
8.00
%
 
870,120

 
8.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
1,444,146

 
14.10
%
 
1,011,314

 
9.88
%
 
N/A

 
N/A

 
1,075,322

 
10.50
%
First Financial Bank
 
1,344,388

 
13.13
%
 
1,010,875

 
9.88
%
 
1,023,671

 
10.00
%
 
1,074,855

 
10.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Leverage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
1,257,366

 
9.71
%
 
517,958

 
4.00
%
 
N/A

 
N/A

 
517,958

 
4.00
%
First Financial Bank
 
1,279,596

 
9.89
%
 
517,710

 
4.00
%
 
647,138

 
5.00
%
 
517,710

 
4.00
%


Share repurchases. In January 2019, First Financial's board of directors approved a stock repurchase plan, replacing the plan approved in 2012. The 2019 plan authorizes the purchase of up to 5,000,000 shares of the Company's common stock. First Financial repurchased 2,753,272 shares at an average market price of $24.05 under this plan during 2019. At December 31,

84 First Financial Bancorp 2019 Annual Report

2019, 2,246,728 common shares remained available for repurchase under the 2019 plan. There were no share repurchases in 2018 or 2017.

ATM Offering. In March 2017, First Financial initiated an "at-the-market" equity offering program to provide flexibility with respect to capital planning and to support future growth. First Financial was not active through the ATM program during the period.

20. Stock Options and Awards

First Financial follows the provisions of FASB ASC Topic 718, Compensation-Stock Compensation, which requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service period for all awards expected to vest. First Financial recorded share-based compensation expense (within salaries and employee benefits on the Consolidated Statements of Income) of $8.0 million, $6.2 million and $5.4 million for the years ended December 31, 2019, 2018 and 2017, respectively, related to stock options and restricted stock awards. Total unrecognized compensation cost related to non-vested share-based compensation was $8.5 million at December 31, 2019 and is expected to be recognized over a weighted average period of 1.93 years.
 
As of December 31, 2019, First Financial had a single active stock-based compensation plan, the Amended and Restated 2012 Stock Plan, under which additional awards may be granted. At December 31, 2019, there were 1,513,826 shares available for issuance under the Amended and Restated 2012 Stock Plan.

In April 2018, in conjunction with the MSFG merger, First Financial assumed existing MSFG stock options, which were converted into 83,551 options to purchase First Financial common stock. The converted MSFG options remain subject to all of the terms and conditions of the plan and grant agreements under which the MSFG Stock Options were originally issued. The assumed options were exercisable at the time of the merger and remain outstanding for 10 years after the initial grant date with all options expiring at the end of the exercise period. At December 31, 2019, 37,856 options were outstanding under the Plan, all of which expire on or before February 3, 2024.

First Financial utilizes the Black-Scholes valuation model to determine the fair value of stock options granted. In addition to the stock option strike price, the Black-Scholes valuation model incorporates the following assumptions: the expected dividend yield based on historical dividend payouts; the expected stock price volatility based on the historical volatility of Company stock for a period approximating the expected life of the options; the risk-free rate based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option; and the expected option life represented by the period of time the options are expected to be outstanding, and is based on historical trends. No new options were granted in 2019, 2018 or 2017.
 
Stock option activity for the year ended December 31, 2019, is summarized as follows:
(Dollars in thousands, except share and per share data)
 
Number of shares
 
Weighted
average exercise price
 
Weighted average
remaining contractual life
 
Aggregate intrinsic value
Outstanding at beginning of year
 
62,410

 
$
9.08

 
 
 
 
Granted
 
0

 
0.00

 
 
 
 
Exercised
 
(24,554
)
 
8.37

 
 
 
 
Forfeited or expired
 
0

 
0.00

 
 
 
 
Outstanding at end of year
 
37,856

 
$
9.54

 
3.12
 
$
602

Exercisable at end of year
 
37,856

 
$
9.54

 
3.12
 
$
602



The intrinsic value of stock options is defined as the difference between the current market value and the exercise price. First Financial uses treasury shares purchased under the Company's share repurchase program to satisfy share-based exercises.
 
 
2019
 
2018
 
2017
Total intrinsic value of options exercised
 
$
462

 
$
734

 
$
1,533

Cash received from exercises
 
$
90

 
$
284

 
$
341

Tax benefit from exercises
 
$
1,844

 
$
1,439

 
$
1,991



First Financial Bancorp 2019 Annual Report 85
Notes to Consolidated Financial Statements


Restricted stock awards are recorded at fair value as of the grant date as a component of shareholders' equity and amortized on a straight-line basis to salaries and benefits expense over the specified vesting periods, which is currently three years for employees and one year for non-employee directors. The vesting of these awards for employees and non-employee directors may require a service period to be met, and certain awards may also require performance measures to be met.
 
Activity in restricted stock for the previous three years ended December 31 is summarized as follows:
 
 
2019
 
2018
 
2017
 
 
Number of shares
 
Weighted
 average
grant date
fair value
 
Number of shares
 
Weighted
 average
grant date
fair value
 
Number of shares
 
Weighted
 average
grant date
fair value
Nonvested at beginning of year
 
462,446

 
$
26.39

 
468,372

 
$
21.63

 
648,817

 
$
17.82

Granted
 
395,023

 
26.55

 
303,930

 
28.94

 
234,529

 
27.36

Vested
 
(295,633
)
 
24.94

 
(267,031
)
 
20.94

 
(307,825
)
 
18.12

Forfeited
 
(31,267
)
 
28.63

 
(42,825
)
 
26.38

 
(107,149
)
 
21.18

Nonvested at end of year
 
530,569

 
$
27.19

 
462,446

 
$
26.39

 
468,372

 
$
21.63



The fair value of restricted stock is determined based on the number of shares granted and the quoted price of First Financial's common stock. The fair value of restricted stock vested during 2019, 2018 and 2017 was $7.4 million, $5.6 million and $5.6 million, respectively.

21. Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings per share:
(Dollars in thousands, except share and per share data)
 
2019
 
2018
 
2017
Numerator
 
 
 
 
 
 
Net income
 
$
198,075

 
$
172,595

 
$
96,787

 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
Basic earnings per common share - weighted average shares
 
98,305,570

 
88,582,090

 
61,529,460

Effect of dilutive securities
 
 
 
 
 
 
Employee stock awards
 
545,901

 
514,680

 
581,329

Warrants
 
0

 
517,435

 
60,801

Diluted earnings per common share - adjusted weighted average shares
 
98,851,471

 
89,614,205

 
62,171,590

 
 
 
 
 
 
 
Earnings per share available to common shareholders
 
 
 
 
 
 
Basic
 
$
2.01

 
$
1.95

 
$
1.57

Diluted
 
$
2.00

 
$
1.93

 
$
1.56



First Financial had no warrants outstanding to purchase the Company's common stock as of December 31, 2019. Warrants acquired in the MSFG merger were outstanding as of December 31, 2018 and represented the right to purchase 804,858 shares of First Financial's common stock at an exercise price of $10.62 per share. These warrants were exercised in January 2019. At December 31, 2017, First Financial had warrants outstanding representing the right to purchase 104,200 shares of common stock at an exercise price of $12.12. These warrants expired in December 2018.

Stock options and warrants with exercise prices greater than the average market price of the common shares were not included in the computation of net income per diluted share, as they would have been antidilutive.  Using the period end price, there were no antidilutive options at December 31, 2019, 2018, or 2017.


86 First Financial Bancorp 2019 Annual Report

As of December 31, 2019, 2018, and 2017, First Financial was authorized to issue 10,000,000 preferred shares, however no preferred shares were issued or outstanding.

22. 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
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




First Financial Bancorp 2019 Annual Report 87
Notes to Consolidated Financial Statements

 
 
Carrying
 
Estimated Fair Value
(Dollars in thousands)
 
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments
 
$
273,959

 
$
273,959

 
$
273,959

 
$
0

 
$
0

Investment securities held-to-maturity
 
429,328

 
424,118

 
0

 
424,118

 
0

Other investments
 
115,660

 
N/A

 
N/A

 
N/A

 
N/A

Loans held for sale
 
4,372

 
4,372

 
0

 
4,372

 
0

Loans and leases
 
8,767,672

 
8,662,868

 
0

 
0

 
8,662,868

Accrued interest receivable
 
41,816

 
41,816

 
0

 
13,819

 
27,997

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
Deposits
 
10,140,394

 
10,113,475

 
0

 
10,113,475

 
0

Short-term borrowings
 
1,040,691

 
1,040,691

 
1,040,691

 
0

 
0

Long-term debt
 
570,739

 
557,933

 
0

 
557,933

 
0

Accrued interest payable
 
12,126

 
12,126

 
2,035

 
10,091

 
0


In accordance with our adoption of ASU 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at December 31, 2019 and December 31, 2018 represent an approximation of exit price, however, an actual exit price may differ.

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 and currency exchange rates, 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.

Impaired loans. The fair value of impaired loans are specifically reviewed for purposes of determining the appropriate amount of impairment to be allocated to the ALLL.  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

88 First Financial Bancorp 2019 Annual Report

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).  Impaired loans are measured at fair value on a nonrecurring basis.  Any fair value adjustments are recorded in the period incurred as provision for loan and lease 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 declines 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
 
Assets/Liabilities
(Dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
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


 
 
Fair Value Measurements Using
 
Assets/Liabilities
(Dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
at Fair Value
December 31, 2018
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities available-for-sale
 
$
97

 
$
2,764,443

 
$
14,715

 
$
2,779,255

Derivatives
 
0

 
29,543

 
0

 
29,543

Total
 
$
97

 
$
2,793,986

 
$
14,715

 
$
2,808,798

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Derivatives
 
$
0

 
$
29,336

 
$
0

 
$
29,336


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 year ended December 31, 2019.

First Financial Bancorp 2019 Annual Report 89
Notes to Consolidated Financial Statements

 
 
Year ended
(dollars in thousands)
 
December 31, 2019
Beginning balance
 
$
14,715

Accretion (amortization)
 
(552
)
Increase (decrease) in fair value
 
30

Settlements
 
(5,003
)
Ending balance
 
$
9,190



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
December 31, 2019
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Impaired loans
 
$
0

 
$
0

 
$
9,268

OREO
 
0

 
0

 
1,088


 
 
Fair Value Measurements Using
(Dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
December 31, 2018
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Impaired loans
 
$
0

 
$
0

 
$
1,320

OREO
 
0

 
0

 
1,089




23. Business Combination

In August, 2019, the Company completed its 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 are 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 measurement period ends in 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 9 – Goodwill and Other Intangible Assets.

In April 2018, First Financial completed its acquisition of MainSource Financial Group, Inc. and its banking subsidiary, MainSource Bank. Under the terms of the merger agreement, shareholders of MSFG received 1.3875 common shares of First Financial common stock for each share of MSFG common stock, with cash paid in lieu of fractional shares. Including outstanding options and warrants to purchase MSFG common stock, the total purchase consideration was $1.1 billion and resulted in goodwill of $675.6 million. The goodwill arising from the acquisition largely reflected synergies and cost savings

90 First Financial Bancorp 2019 Annual Report

resulting from combining the operations of the companies. First Financial incurred merger related expenses related to the MSFG acquisition of $3.2 million and $37.8 million during the years ended December 31, 2019 and 2018, respectively.

The MSFG acquisition provided additional revenue growth and diversification. The goodwill is not deductible for income tax purposes as the transaction was accounted for as a tax-free exchange. For further detail, see Note 9 – Goodwill and Other Intangible Assets.

The MainSource 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 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 March 31, 2019.


First Financial Bancorp 2019 Annual Report 91

The following table provides the purchase price calculation as of the acquisition date, identifiable assets purchased and liabilities assumed at their estimated fair value for the MSFG merger. As a condition of the merger, certain acquired assets and liabilities held for sale were divested subsequent to the closing of the merger. There was no gain or loss recorded in the Consolidated Statement of Income in conjunction with this divestiture.

(Dollars in thousands)
 
MainSource
Purchase consideration
 
 
Cash consideration
 
$
43

Stock consideration
 
1,043,424

Warrant consideration
 
14,460

Options consideration
 
1,577

Total purchase consideration
 
1,059,504

 
 
 
Assets acquired
 
 
Cash
 
71,806

Investment securities available-for-sale
 
900,935

Investment securities held-to-maturity
 
171,423

Other investments
 
28,763

Loans
 
2,792,572

Premises and equipment
 
98,814

Intangible assets
 
42,887

Other assets
 
167,829

Assets held for sale
 
127,775

Total assets acquired
 
4,402,804

 
 
 
Liabilities assumed
 
 
Deposits
 
3,263,920

Subordinated notes
 
49,027

FHLB advances
 
291,887

Other borrowings
 
205,620

Other liabilities
 
32,649

Liabilities held for sale
 
175,840

Total liabilities assumed
 
4,018,943

 
 
 
Net identifiable assets
 
383,861

Goodwill
 
$
675,643



The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired as of the acquisition date as the Company believes that all contractual cash flows will be collected. The fair value adjustments were determined using discounted cash flows. In conjunction with the MSFG merger, First Financial acquired non-impaired loans with a fair value and gross contractual amounts receivable of $2.8 billion and $2.9 billion, respectively.


First Financial Bancorp 2019 Annual Report 92

The following table presents supplemental pro forma information as if the MSFG acquisition had occurred at the beginning of 2017. The pro forma information includes adjustments for interest income on acquired loans, amortization of intangible assets arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, merger-related expenses incurred and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed date. The disclosures regarding the results of operations for MSFG subsequent to its acquisition date are omitted as this information is not practical to obtain.
 
 
Twelve months ended
 
 
December 31,
(Dollars in thousands, except per share data) (Unaudited)
 
2018
 
2017
Pro Forma Condensed Combined Income Statement Information
Net interest income
 
$
484,915

 
$
454,579

Net income
 
$
221,122

 
$
130,402

Basic earnings per share
 
$
2.27

 
$
1.34

Diluted earnings per share
 
$
2.25

 
$
1.33



24. First Financial Bancorp. (Parent Company Only) Financial Information

Balance Sheets
 
 
December 31,
(Dollars in thousands)
 
2019
 
2018
Assets
 
 
 
 
Cash
 
$
55,869

 
$
86,878

Investment securities
 
1,116

 
694

Subordinated notes from subsidiaries
 
7,500

 
7,500

Investment in subsidiaries
 
 
 
 
Commercial bank
 
2,272,991

 
2,078,655

Non-banks
 
8,260

 
7,194

Total investment in subsidiaries
 
2,281,251

 
2,085,849

Premises and equipment
 
1,344

 
1,361

Other assets
 
77,572

 
71,817

Total assets
 
$
2,424,652

 
$
2,254,099

 
 
 
 
 
Liabilities
 
 
 
 
Subordinated notes
 
$
171,983

 
$
171,416

Dividends payable
 
849

 
465

Other liabilities
 
4,115

 
3,969

Total liabilities
 
176,947

 
175,850

Shareholders’ equity
 
2,247,705

 
2,078,249

Total liabilities and shareholders’ equity
 
$
2,424,652

 
$
2,254,099




First Financial Bancorp 2019 Annual Report 93
Notes to Consolidated Financial Statements

Statements of Income and Comprehensive Income
 
 
Years Ended December 31,
(Dollars in thousands)
 
2019
 
2018
 
2017
Income
 
 
 
 
 
 
Interest income
 
$
30

 
$
23

 
$
6

Noninterest income
 
191

 
0

 
86

Dividends from subsidiaries
 
196,800

 
107,340

 
54,600

Total income
 
197,021

 
107,363

 
54,692

 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
Interest expense
 
9,552

 
8,798

 
6,152

Salaries and employee benefits
 
8,169

 
6,413

 
5,519

Professional services
 
1,040

 
5,130

 
970

Other
 
6,599

 
5,648

 
4,819

Total expenses
 
25,360

 
25,989

 
17,460

Income before income taxes and equity in undistributed net earnings of subsidiaries
 
171,661

 
81,374

 
37,232

Income tax expense (benefit)
 
(5,975
)
 
(6,687
)
 
(7,080
)
Equity in undistributed earnings (loss) of subsidiaries
 
20,439

 
84,534

 
52,475

Net income
 
$
198,075

 
$
172,595

 
$
96,787

 
 
 
 
 
 
 
Comprehensive income
 
$
254,900

 
$
153,670

 
$
104,840


 

  

94 First Financial Bancorp 2019 Annual Report

Statements of Cash Flows
 
 
Years Ended December 31,
(Dollars in thousands)
 
2019
 
2018
 
2017
Operating activities
 
 
 
 
 
 
Net income
 
$
198,075

 
$
172,595

 
$
96,787

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Equity in undistributed (earnings) loss of subsidiaries
 
(20,439
)
 
(84,534
)
 
(52,475
)
Depreciation and amortization
 
584

 
194

 
193

Stock-based compensation expense
 
7,969

 
6,219

 
5,446

Deferred income taxes
 
1,255

 
739

 
(360
)
(Decrease) increase in dividends payable
 
384

 
(10,500
)
 
579

Increase (decrease) in other liabilities
 
(244
)
 
9,979

 
(889
)
Decrease (increase) in other assets
 
(7,187
)
 
16,346

 
(6,951
)
Net cash provided by (used in) operating activities
 
180,397

 
111,038

 
42,330

 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
Capital contributions to subsidiaries
 
0

 
(3,000
)
 
0

Net cash acquired (paid) in business combinations
 
(53,660
)
 
11,353

 
0

Proceeds from sales and maturities of investment securities
 
264

 
0

 
0

Purchases of investment securities
 
(500
)
 
0

 
0

Net cash (used in) provided by investing activities
 
(53,896
)
 
8,353

 
0

 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
  (Decrease) increase in short-term borrowings
 
0

 
(8,333
)
 
0

Cash dividends paid on common stock
 
(89,097
)
 
(79,655
)
 
(41,178
)
Purchases of common stock
 
(66,218
)
 
0

 
0

Proceeds from exercise of stock options, net of shares purchased
 
90

 
284

 
341

Other
 
(2,285
)
 
(2,528
)
 
(3,059
)
Net cash (used in) provided by financing activities
 
(157,510
)
 
(90,232
)
 
(43,896
)
Net increase (decrease) in cash
 
(31,009
)
 
29,159

 
(1,566
)
Cash at beginning of year
 
86,878

 
57,719

 
59,285

Cash at end of year
 
$
55,869

 
$
86,878

 
$
57,719





First Financial Bancorp 2019 Annual Report 95

Quarterly Financial And Common Stock Data (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Three months ended
(Dollars in thousands, except per share data)
 
December 31
 
September 30
 
June 30
 
March 31
2019
 
 
 
 
 
 
 
 
Interest income
 
$
147,651

 
$
153,645

 
$
154,523

 
$
151,759

Interest expense
 
28,749

 
32,110

 
32,221

 
30,244

Net interest income
 
118,902

 
121,535

 
122,302

 
121,515

Provision for loan and lease losses
 
4,629

 
5,228

 
6,658

 
14,083

Noninterest income
 
36,768

 
33,140

 
34,638

 
26,827

Noninterest expenses
 
93,064

 
86,226

 
84,378

 
78,499

Income before income taxes
 
57,977

 
63,221

 
65,904

 
55,760

Income tax expense
 
9,300

 
12,365

 
13,201

 
9,921

Net income
 
$
48,677

 
$
50,856

 
$
52,703

 
$
45,839

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.49

 
$
0.52

 
$
0.54

 
$
0.47

Diluted
 
$
0.49

 
$
0.51

 
$
0.53

 
$
0.47

Cash dividends paid per common share
 
$
0.23

 
$
0.23

 
$
0.22

 
$
0.22

Market price
 
 
 
 
 
 
 
 
High
 
$
26.04

 
$
25.49

 
$
25.80

 
$
28.56

Low
 
$
23.24

 
$
22.37

 
$
22.16

 
$
23.02

 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
Interest income
 
$
153,429

 
$
149,220

 
$
147,379

 
$
90,354

Interest expense
 
27,470

 
25,735

 
23,400

 
14,542

Net interest income
 
125,959

 
123,485

 
123,979

 
75,812

Provision for loan and lease losses
 
5,310

 
3,238

 
3,735

 
2,303

Noninterest income
 
29,504

 
28,684

 
28,256

 
16,938

Noninterest expenses
 
83,352

 
85,415

 
102,755

 
52,288

Income before income taxes
 
66,801

 
63,516

 
45,745

 
38,159

Income tax expense
 
11,787

 
12,859

 
9,327

 
7,653

Net income
 
$
55,014

 
$
50,657

 
$
36,418

 
$
30,506

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.56

 
$
0.52

 
$
0.37

 
$
0.49

Diluted
 
$
0.56

 
$
0.51

 
$
0.37

 
$
0.49

Cash dividends paid per common share
 
$
0.20

 
$
0.20

 
$
0.19

 
$
0.36

Market price
 
 
 
 
 
 
 
 
High
 
$
29.58

 
$
32.35

 
$
33.55

 
$
29.35

Low
 
$
22.40

 
$
29.40

 
$
28.10

 
$
26.40


First Financial Bancorp common stock trades on the Nasdaq Stock Market under the symbol FFBC.

96 First Financial Bancorp 2019 Annual Report



Total Return to Shareholders

The following graph compares the five-year cumulative total return to shareholders of First Financial Bancorp common stock with that of companies that comprise the Nasdaq Composite Index and the KBW Regional Bank Index. The KBW Regional Bank Index is comprised of 50 banks headquartered throughout the country and is used frequently by investors when comparing First Financial Bancorp's stock performance to that of other similarly sized institutions. First Financial Bancorp is included in the KBW Regional Bank Index.

The following table assumes $100 invested on December 31, 2014 in First Financial Bancorp, the Nasdaq Composite Index and the KBW Regional Bank Index, and assumes that dividends are reinvested.


COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG FIRST FINANCIAL BANCORP, NASDAQ COMPOSITE INDEX
AND KBW REGIONAL BANK INDEX

CHART-48D6A5F6049959D6973.JPG

 
2014
2015
2016
2017
2018
2019
First Financial Bancorp
100.00

100.68

163.47

155.39

143.64

159.86

Nasdaq Composite Index
100.00

106.00

147.46

150.13

123.87

153.44

KBW Regional Bank Index
100.00

107.11

116.71

151.40

147.15

201.21




First Financial Bancorp 2019 Annual Report 97

GLOSSYFINAL2005.JPG


Shareholder Information Annual Meeting of Shareholders Investor Relations The annual meeting of shareholders will be held on Corporate and investor information, including news Tuesday, May 26, 2020, at 10:00 AM (EDT) via a releases, webcasts, investor presentations, annual reports, virtual shareholder meeting. proxy statements and SEC filings, as well as information on the Company’s corporate governance practices are Common Stock Listing available within the Investor Relations section of our First Financial Bancorp’s common stock trades website at www.bankatfirst.com/investor. on the Nasdaq Stock Market (NASDAQ) under the symbol FFBC. Shareholders, analysts and other investment professionals who would like corporate and financial information on Registrar and Transfer Agent First Financial Bancorp should contact: Computershare Shareholder Services serves as the registrar and transfer agent for First Financial Bancorp Jamie Anderson common stock for registered shareholders. Shareholder Chief Financial Officer account inquiries, including changes of address or First Financial Bancorp ownership, transferring stock and replacing lost 255 East Fifth Street, 29th Floor certificates or dividend checks should be directed to Cincinnati, OH 45202 Computershare Shareholder Services at: (513) 887-5400 Email: InvestorRelations@bankatfirst.com Transfer Agent Computershare Shareholder Services Securities and Exchange Commission Filings P.O. Box 505000 All reports filed electronically by First Financial Bancorp Louisville, KY 40233 with the United States Securities and Exchange (800) 368-5948 Commission (SEC), including the Annual Report on Form 10-K, quarterly reports on Form 10-Q, and Shareholders of record can also access their shareholder current reports on Form 8-K, as well as any amendments account records and request information related to their to those reports, are accessible at no cost within shareholder account via the internet. To register for online the Investor Relations section of our website at account access, go to: www.computershare.com/investor. www.bankatfirst.com/investor, or by contacting Investor Relations. These filings are also accessible on the Dividend Reinvestment and Stock Purchase Plan SEC’s website at www.sec.gov. Shareholders of record holding 25 shares or more are eligible to participate in our Dividend Reinvestment Plan. Shareholders of record may elect to have cash dividends automatically reinvested in additional common shares and can also purchase additional common shares by making optional cash payments. To obtain a prospectus, enroll in the plan, or to contact Investor Relations, please visit the Investor Relations section of our website at www.bankatfirst.com/investor.


98 First Financial Bancorp 2019 Annual Report

GLOSSYFINAL2006.JPG

First Financial Bancorp First Financial Bank First Financial Center 255 East Fifth Street Suite 800 Cincinnati, OH 45202-4248 www.bankatfirst.com


first financial bancorp code of conduct values first Confidential. For internal use only.

 
values first Fellow Associates, At First Financial, nothing is more important to our mission and our business than the trust our clients put in us. Integrity is the cornerstone of our culture, and all of us share a personal responsibility to exemplify our principles of uncompromising ethics, respect, responsibility, and good citizenship. We will succeed Strategic Intent by putting values first. We must rely on your sense of personal integrity to protect and enhance our reputation and ask Why do we exist? that you seek appropriate guidance whenever To be woven into the communities we serve. To understand needs and necessary. Basing your decisions on our Company offer financial solutions and resources in order to make lives better. values should lead you to do the right thing, especially in those circumstances where you cannot seek confirmation. What do we believe in? Harm to our reputation affects the entire Company 1. Our Company. We are confident in our collective abilities and is enduring. Any actual or perceived ethical and believe that lives are made betterby our existence. transgression, no matter how isolated or minor, 2. Whole-Life Balance. Our associates should be successful can substantially damage our reputation. at work and at home. 3. Being In-It Together. Our team-based approach means Doing the right thing is key to our success! we are all in it together. 4. Mutual Respect. We seek out, value and respect differences We expect each of you to understand and comply – in opinions, expertise, and experiences. with this Code of Conduct, and all other policies 5. Doing the Right Thing. We do the right thing for each other, that apply to you, both in letter and in spirit. our clients, communities and shareholders. Please take the time to review this Code of Conduct and other elements of the values first Program. values first and Code of Conduct Mission These tools are designed to help you put values first. The values first program and the Code of Conduct are designed to establish and encourage our Company culture based on the highest Sincerely, ethical principles that pervade throughout every office, level and function of the Company. These will guide our day-to-day decisions and activities in accordance with our Company values. Archie M. Brown President and CEO 2 3

 
Table of Contents Living values first and Living by the Code of Conduct 6 How the Code Works 6 To Whom Does the Code Apply? 6 Making Good Decisions 7 Reporting Code of Conduct Violations and Sharing Concerns About Misconduct 8 Non-Retaliation 10 Investigations 11 Where Do I Turn for Assistance; Help and Resources 11 Your Responsibilities as an Associate 12 Special Responsibilities of Leadership 12 Training and Acknowledgment 13 Waivers and Exceptions to the Code of Conduct 13 “ Our Responsibilities to All 14 Non-Discrimination and Equal Opportunity 14 Protection of Confidential Information 14 Fair Dealing and Competition 16 doing the right thing Compliance with Laws and Regulations 17 Our Responsibilities to the Company 19 Protecting Company Assets 19 is key to our success! Conflicts of Interest 20 Personal Financial Affairs 22 Gifts and Entertainment 23 Outside Activities 24 Political Contributions and Activities 25 Corporate Opportunities 26 Accuracy of Records and Information Reporting 26 Effectively Manage Risk and Lead in Risk Control 27 Business Expenses 28 Our Responsibilities to Our Associates 29 Diversity and Equal Opportunity 29 Discrimination and Harassment 29 Personal Conduct 31 Workplace Safety and Health 31 Our Responsibilities to the Market and Our Shareholders 32 Insider Trading 32 Disclosure 34 Media and Shareholder Inquiries 34 Our Responsibilities to the Community 35 Community Reinvestment 35 Charitable Conduct and Donations 35

 
values values first first You may also have certain professional responsibilities or obligations Living values first and with respect to specific licenses you hold. Similarly, many First Financial associates are subject to ethical and conduct standards stemming from Living by the Code of Conduct fiduciary obligations and fiduciary positions. Applicable local or federal law may also dictate certain courses of action. If you believe there is a conflict between the Code and any other policy or standard you are expected to First Financial Bancorp and First Financial Bank, and all related affiliates and subsidiaries (collectively comply with, you should comply with the most restrictive standard. “First Financial” or the “Company”), are committed to living and conducting business according to our core Company values and living values first. While Integrity is first among our core Company values, all Making Good Decisions of our core values are engaged in the values first program. Situations that involve ethical questions are often complex, and it may be difficult to clearly identify the right choice of action. It is similarly The values first program identifies our approach to creating a culture based on the highest ethical difficult to express definitively whether something is right or wrong in principles that pervades throughout every office, level and function of the Company to guide our many situations. You are expected to carefully weigh the various factors day to day decisions and activities in accordance with our Company values. Living values first at and reach a rational, well-reasoned, and ethically sound decision. When First Financial means basing your decisions and actions on your values to guide you to do what is faced with these situations or decisions, there are several questions you right for yourself, our stakeholders and the Company. The Code of Conduct is the pillar of the values should ask yourself before making a decision or taking action: first program. • Do I have the necessary facts and information? This Code of Conduct: • Have I identified and considered the alternatives? • Is designed to help you understand First Financial’s commitment to living values first; • Is the decision legal? Q: What if I have a concern • Provides guidance, identifies resources and helps you understand First Financial’s expectations • Is the decision ethical? that is not covered by this of a values-based culture; Code of Conduct? • Does the action comply with values first, the Code of Conduct, • Includes certain questions and answers about issues that commonly arise, but does not the Company values, and any other directives? address every situation you may face; and A: Apply the decision • How does my decision affect each of our stakeholders: clients, tools in this Code of Conduct • Together with other components of the values first program, will give you the tools to help shareholders, associates, regulators, and the community? guide you in making ethical decisions in line with First Financial’s Values. and the values first materials • How would others perceive my decision and can it be explained and listen to your own and defended? instincts! If you are not We believe living values first sets us apart from our competitors. The Code of Conduct identifies certain if it is right, please our commitment to our Values and our responsibilities to our stakeholders, including our clients, our • What would happen if my decision and the rationale behind it became discuss the matter with your shareholders, our fellow associates, our regulators, and our community. front page news? How would it reflect on me and on First Financial? manager or appropriate • What would happen if everyone made the same decision? Is this representatives of the How the Code Works sustainable in the long term or is it a short term benefit (with possible Human Resources, Legal, long-term negative consequences)? or Audit departments. To Whom Does the Code Apply? The Code applies to all associates, officers, and directors of First Financial. Outside consultants, • Should I consult with my manager, my Human Resources Business contractors, and agents used by First Financial are encouraged to abide by the Code of Conduct and Partner, Legal, or Audit before acting? may be required to comply with specific codes or policies established for their particular situations when performing services for First Financial. If you are uncertain as to the proper course, you should seek guidance from your manager or appropriate representatives from the Human This Code represents the values first ethical foundation to which everyone is expected to live. Resources, Legal, or Audit departments. Additional information about Depending upon your individual role or position, you may also be subject to more stringent or more where to turn for advice can be found in this Code. specific policies or standards. For example, the Chief Executive Officer and Chief Financial Officer, as well as certain other executive officers, are subject to theCode of Ethics for the Chief Executive Officer and Senior Financial Officers. 6 7

 
values values first first Reporting Code of Conduct Violations and • E-mail the Manager of the Ethics First Hotline system via email Sharing Concerns About Misconduct You may also email: J.R. Shank, Chief Internal Auditor at jr.shank@bankatfirst.com Not only are you expected to live values first in your own conduct, you are expected to help ensure that others within First Financial Any email you send from your work or personal accounts is not are doing likewise. Reporting violations of the Code, violations of expected to provide anonymity. You may, however, request that your law, other misconduct, or sharing concerns you have about the identity be kept confidential to the extent possible. actions of others, is critical to First Financial’s success and its ability to protect its assets and reputation. • Correspond directly with the Audit Committee of the Board of Directors or with the Manager of the Ethics First Hotline system You are obligated to report any misconduct or any violations or through US mail suspected violations of this Code, applicable law, or any other ap- This reporting channel allows you to remain anonymous or request plicable policy or standard. You may be held responsible for not re- that your identity remain confidential to the extent possible. porting misconduct, violations, or suspected violations if you knew Correspondence sent to the below post office box is only acces- or should have known of the matter. Even if you are not sure if a sible by one of the two persons indicated. You may send written violation or misconduct has occurred or will occur, you should correspondence to the attention of any of the following: report your suspicion! ° Audit Committee Chair – Confidential ° Chief Internal Auditor – Confidential We have set up several different channels for you to report viola- tions or share concerns about misconduct. Any of these channels You may also send correspondence to the attention of the Ethics Q. I am processing a trans- action and the documentation are available to you, and you are encouraged to use the channel First Hotline, in which case a copy will be routed to each of the two Q. I am suspicious that appears to have been altered. that best suits your situation. dishonest conduct may be individuals above. I’m not sure there has been any occurring in my department. misconduct and I don’t want • Call the Toll-free Ethics First Hotline I would like to gather more The correspondence should be sent to the following address: to get anyone in trouble if my The Ethics First Hotline number is 866-291-2909 and can be facts before I report it. What First Financial Bancorp suspicions are not accurate. used at any time, day or night. The Ethics First Hotline is operated by is the best way to proceed? Attn: [insert one of the titles above] What do I do? an independent third-party reporting service, Ethicspoint, Inc., that P.O. Box 234 will forward the information to the Audit Committee and Chief Hamilton, Ohio 45012-0234 A. You should report it to You should report your Internal Auditor for appropriate action. The Ethics First Hotline A. your manager or through one concern through the appro- allows you to remain completely anonymous if you so choose. of the other means identified • Discuss the situation with your Human Resources Business priate channel as long as you in the Code immediately so Partner, an attorney within the Legal Department, or a have a good faith belief that The Ethics First Hotline does not use caller-ID or other devices that the appropriate people can representative of the Audit Department. there has been misconduct. identify you or trace your number. If you do choose to identify make a determination on how Depending on the situation, representatives of these areas of the After your report has been yourself, you may still request that your identity be kept confidential best to proceed. Company may be able to more personally address your concerns. made, an investigation will to the extent possible as described below. While anonymity may not be possible, you may request that your be conducted by appropriate identity be kept confidential to the extent possible. personnel to determine • Go Online to the Ethics First Hotline web-based reporting system whether misconduct has The web-based Ethics First Hotline system is operated by an • Discuss the situation with your manager or with higher levels of occurred. independent third-party reporting service, Ethicspoint, Inc., and management within your business unit if appropriate. allows you to remain completely anonymous if you choose to do You are encouraged to report violations or share concerns about so. You can access this system directly at www.ethicsatfirst.com. If misconduct with your manager or more senior management within you do choose to identify yourself, you may still request that your your business line. In many situations, your manager may be attuned identity be kept confidential to the extent possible. to the situation or particular issue. However, there may be situations that are not appropriate to discuss with your supervisor or where you wish to remain anonymous. In these situations, you should use one of the other channels available. 8 9

 
values values first first A report of a violation, potential violation, or other misconduct Investigations made using any of these channels will be reviewed and investigated thoroughly by the Company. If you have chosen not to remain First Financial takes all reports of possible misconduct or violations seriously. We will anonymous, you may still ask that your identity be kept confidential investigate the matter thoroughly and, if appropriate, take corrective action. to the extent possible. Any information you provide will be handled discreetly and shared only with those who If you request that your identity remain confidential to the extent will be investigating and resolving the matter, as well as any other party who we may possible, we will take all reasonable steps to make certain that have an obligation to inform, such as our regulators in certain situations. your identity is only shared on a need-to-know basis and only to the extent necessary to complete an adequate investigation or Where Do I Turn for Assistance Help and Resources review, or to comply with applicable law or other legal obligations. This Code and information concerning the values first program, including the Ethics First Hotline, are available on Knowledge Share. Non-Retaliation We strictly prohibit retaliation, in any form, against anyone who Q. My manager typically The values first program and this Code provide guidelines to help you make appropriate makes a good faith effort to report any misconduct or any violations does nothing when concerns decisions. We will provide decision tools, questions to ask yourself, and various scenarios or suspected violations of this Code, applicable law, or any other about potential misconduct and examples to help guide your decision making. applicable policy or standard. Your good faith report of misconduct are brought to her attention, or a suspected violation, or your participation in an investigation, and I believe she has made If you are uncertain as to the proper course of action to take, you should seek guidance things difficult for associates cannot be the basis for any adverse employment action, including from your manager or appropriate representatives from the Human Resources, Legal, or who have raised issues. termination, demotion, loss of benefits, threats, harassment, or I have concerns about the Audit Departments. Specific contact information for these departments can be found at discrimination. actions of another associate and the values first intranet site. Representatives of these departments, in addition to your don’t know where to turn. own manager, are open-door resources to you. Any retaliation against an employee who in good faith raises an issue or makes a report of misconduct or any violation or suspected violation of this Code, applicable law or any other applicable policy A. Speak up. Our Code or standard, is itself a violation of this Code and should be reported of Conduct says that you to the Chief Internal Auditor, Chief Human Resources Officer or should report misconduct of which you are aware and that General Counsel, or through one of the channels identified above. you can do so without fear of retaliation for good- faith Reporting in good faith does not mean that you have to be reporting. You should also right when you raise a concern or that the investigation must report any retaliation you reach the conclusion that misconduct has occurred. Reporting perceive. in good faith means you have to believe that the information you are providing is accurate. Making a report without good faith, or with malicious intent, can be extremely harmful to the Company’s operations and its associates. Making a report without good faith will itself be considered a violation of this Code. 10 11

 
values values first first Your Responsibilities • Proactively prevent, identify and report misconduct within your group. • Create and encourage a work environment where ethical conduct as an Associate is valued and recognized and where associates feel comfortable asking questions and raising concerns. First and foremost, it is your responsibility to understand and • Not encourage or direct associates to achieve business results at adhere to the Code of Conduct, both in letter and in spirit. You the expense of unethical behavior or non-compliance with the Code. are also responsible for understanding and abiding by all other Company policies that affect your position. • Listen carefully to any questions or concerns related to the Code or certain conduct that are raised by your group. Answer any questions Your responsibilities include: and respond appropriately. If you need help or if the concern requires investigation, contact the Legal, Human Resources, Corporate Fraud • Acting in an ethical and professional manner at all times when or Audit Departments. performing your duties for First Financial. Investigations are conducted and managed by the preceding departments • Promptly reporting or raising concerns about any actual or and while your assistance and cooperation are required, it is not your role suspected misconduct or violation of this Code, other Company to conduct an investigation. policy or applicable law. • Promptly reporting any circumstance where you feel you are Training and Acknowledgment being told to do something unethical or illegal. We rely on you Q. I am a manager and I to make good decisions and help preserve the ethical standards would like to start discus- All associates are required to acknowledge the Code of Conduct and values first culture of First Financial. No one, at any level, Q. My business unit has sions about ethical behavior has the authority to tell you to do something unethical or illegal. upon hire. In addition, all associates are required to complete during a team meeting. certain sales goals that we are training on the Code of Conduct at least annually and at any other asked to achieve. I sometimes What resources can I use? • Never asking or suggesting that any associate, officer, director, interval required by General Counsel or Human Resources. client or other business line do something that would be feel pressured to violate the Code of Conduct to achieve prohibited by this Code. A. Start with the Company’s these goals. Is this acceptable? Waivers and Exceptions to the Code of Conduct • Cooperating and providing honest and accurate information in core values and use any of the materials available any investigation conducted by the Company, as well as any Waivers of the Code, or the approval of certain actions or situations on the intranet or in audit, regulatory exam, legal proceeding, or similar activity. A. No. While successful referenced in this Code, should be rare, but may be appropriate Knowledge Share. You • Completing required Code of Conduct and values first training businesses set goals and in certain cases, including conflicts of interest or use of Company might ask your direct reports in a timely manner. employees strive to achieve assets. Any waiver or exception must be requested by you in to provide examples of them, you should never writing and submitted to the executive vice president who leads behavior that support those Special Responsibilities of Leadership violate the Code of Conduct your business unit. Any approval or waiver that is granted by an values and examples that do or First Financial policies to executive vice president must be in writing and a copy must be not. Once initiated, the con- versation will be productive achieve them. given to General Counsel. If you are in a leadership position, you have additional and and lively. The most im- heightened responsibilities. portant thing is that you’ve If you are an executive officer or a director, any waiver or exception introduced the topic for You are expected to: must be approved by the Audit Committee. discussion – a good example • Be a role model of living values first and be a resource to your of leadership. reports concerning how to follow the Code, other policies and Any approved waiver or exception to the Code of Conduct must be applicable law in their daily work. renewed at least annually and may be revoked at any time. 12 13

 
values values first first Our Responsibilities to All • Competitive intelligence that you or our third party vendors or consultants make or compile on our behalf; Non-Discrimination and Equal Opportunity • Employee, client, business, and vendor lists with or without associated contact information; It is our policy not to discriminate in any of our business or employment matters against any individual in violation of federal, state, and local laws • Software or computer programs; as it relates to age, race, color, religion, national origin, sex, marital status, • Merger, acquisition, or divesture plans, whether successful or not; pregnancy, gender, disability, sexual orientation, genetic information, • Personnel plans or major management changes; and veteran/military service, or any other characteristic protected by law. • Internal communications such as webcasts, audio transmissions of conference calls, memoranda to staff, and transcripts or minutes Q. A former employee We do not tolerate any discrimination or harassment, and you should asked me to send her a copy of Company meetings. immediately report any concerns about suspected discrimination or of a report she created before harassment. she left. May I send it to her? Your obligation to preserve Confidential Information continues even after your association with us ends. All associates are Protection of Confidential Information expected to follow Company policies concerning the proper storage and disposal of such information. A. No. The report is property You are required to safeguard and maintain the confidentiality of of First Financial and you Confidential Information entrusted to you by us, our customers or cannot release it outside the A close friend works Before disclosing Confidential Information: company – not even to the vendors, except when disclosure is authorized by the Legal Q. for a competitor of ours. person who created it. Department or required by applicable law or regulation. “Confidential We sometimes talk about • Seek advice from the Legal Department to ensure you are Information” includes all nonpublic information that: (i) might be the challenges we have in permitted to do so under applicable law and Company policies of use to competitors; (ii) could be harmful to us or our customers, marketing certain products and procedures; if disclosed; and (iii) information that vendors and customers have and bounce ideas off one entrusted to us. another. Is there a problem • Disclose it only to those who are authorized to receive it and who with this? have a need to know the information to perform their jobs; Some examples of Confidential Information include, but are not • Limit what you share to the amount actually required to achieve limited to, the following: the stated business purpose; and Yes. You are discussing • Pricing policies and information; A. • Obtain a confidentiality agreement if the Company is sharing We are hiring a new confidential information that Q. information with someone outside of the Company in accordance vendor who might need to • Business or strategic operating plans and outlooks; belongs to the Company. with the current Vendor Management Program. see confidential customer • Nonpublic financial information about us or our customers, You may also be violating information. What do I need anti-trust or anti-competitive business lines, and vendors; to do? laws. Do not talk about these • New product, brand or marketing studies, developments, plans, types of matters with your or forecasts; friend, family members or Want more information about this topic? Please • Customer data, including contact details, specifications, and preferences; anyone outside of the Company. locate the following policies in Knowledge Share A. Customer information • Contracts and agreements, including agreement terms such as for more information: can only be shared in accordance with applicable law. The expiration dates, any exclusivity provisions, and financial conditions; Disclosure Policy Company’s vendor manage- Consumer Privacy Policy / RFPA ment program addresses the Customer Information Security Policy process required to become Clean Desk Policy a fully approved vendor, Information Technology and Acceptable Use Policy including any requirements concerning confidentiality agreements. 14 15

 
values values first first Customer Information. You may access customer information Compliance with Laws and Regulations only for business purposes and must protect the confidential- ity and security of that information at all times. You should be First Financial operates in a highly regulated environment and under familiar with the Company’s privacy notice to customers and intense scrutiny by our regulators, our clients, and the general public. consumers, which details how the Company protects personal We will comply with all relevant laws and regulations. It is important information and the circumstances under which the Company that we maintain a positive and effective working relationship with may share that information. our regulators. You must cooperate with our regulators and respond to requests for information in a complete and timely manner. You Company Information. You must keep confidential and secure should feel free to bring concerns about compliance directly to the any nonpublic information about First Financial. Additionally, Compliance Department, Legal Department, the Risk Management certain company information should only be shared within the Department, or the Audit Department. Company with other associates who have a “need to know” the information to perform their duties. Ask your manager for more As a financial institution, there are numerous laws, rules and regu- information if you have any questions about sharing Company lations that govern our business. Any violation of these laws, rules information on a “need to know” basis. or regulations could jeopardize our business and our reputation. You must not take any action, either personally or on our behalf, Associate Information. You must keep confidential and se- which violates any applicable laws, regulations or internal policies. cure any information the Company has about its associates. While we don’t expect you to be a legal expert, you are expected We recently hired a Fair Dealing and Competition Q. to understand and comply with the laws, rules and regulations that manager who was previ- ously employed with one of are applicable to your job or position, and you should also know We seek to outperform our competition fairly and honestly when to seek advice from your manager, the Legal Department, or our competitors. May I ask Meeting my production and each of you is expected to deal fairly with clients, com- Q. the manager for information the Compliance Department. Fraud, dishonesty or criminal conduct goals or goals in supporting petitors, vendors and other associates. In order to meet this about the competition? will not be tolerated. revenue is very important to objective, you must: me and the success of First • Always award contracts and purchase goods and services As appropriate for your job responsibilities and position, you Financial, is compliance really solely in accordance with the Vendor Management Program A. You must not inquire should: a big deal? and in the best interest of First Financial; about their former employer’s • Learn about the laws, rules and regulations that affect what you • Not take unfair advantage of anyone through manipulations, trade secrets or any other do at First Financial; confidential information of our concealment, abuse of confidential information, misrepresen- • Consult with the Legal Department if you have any questions A. Yes! You should consider competitor. Just as we expect tation of facts or any other unfair practice; and about the applicability, existence or interpretation of any law, rule compliance with all laws, rules you to honor your obligations or regulation; and regulations at least equal • Not give or accept bribes, kickbacks, or self-interested to First Financial with respect to if not paramount to your promises from a current or prospective client or vendor. to confidential information, we • Take mandatory compliance training; and business goals. We will only respect the rights of our com- • Attend periodic training and seek to keep informed about any be successful if we are Additional related information can be found in the Code of petitors in their confidential relevant legal or regulatory developments. committed to compliance. Conduct sections concerning Conflicts of Interest and Gifts information. All associates are and Entertainment. expected to honor their obli- gations to former employers. Want more information about this topic? Please locate the following documents in Knowledge Share: Vendor Management Policy Vendor Management Program 16 17

 
values values first first We have established multiple policies and procedures that address laws and regulations that apply to First Financial. You are expected Our Responsibilities to to comply, both in letter and in spirit, with all of these policies, pro- cedures, laws and regulations. the Company It is not practicable to identify here all the laws and regulations to Protecting Company Assets which we are subject, and the following are just a sample. Company assets are highly valuable and are meant only for busi- U.S. Foreign Corrupt Practices Act ness use. You have a responsibility to protect and safeguard these First Financial is prohibited from giving anything of value, directly or indi- assets from loss, theft, carelessness, misuse, damage, and waste in rectly, to officials of foreign governments or foreign political candidates in order to preserve their value. order to obtain or retain business. You are strictly prohibited from making illegal payments to government officials of any country. Examples of our assets include, but are not limited to: • Computer systems, equipment and technology (including laptops, Economic Sanction Regulations tablets and mobile devices); The U.S. Treasury’s Office of Foreign Assets Control (OFAC) prohibits financial institutions from providing financial services to certain foreign • Phones, copiers, scanners and fax machines; governments or individuals. Additionally, assets of these governments • Confidential information, including customer information; Q. With so many laws The Company uses or individuals may be required to be frozen by First Financial. • Business, marketing and service plans; Q. and regulations affecting our certain financial modeling business, where do I go to Payments and Gifts to U.S. Government Personnel • Intellectual property, such as trade secrets, patents, trademarks software that I think my learn more? and copyrights; friend’s business could really benefit from. I would like to There are a multitude of laws and regulations concerning business • Software codes and licenses, ideas, concepts, content and inventions; ask an associate who works gratuities that may be accepted by U.S. government personnel. The • Customer information and any unpublished financial data and with this software frequently For general information, promise, offer or delivery of a gift, favor or other gratuity to an offi- A. reports; to use it to help my friend. cial or employee of the U.S. government is prohibited and may also please visit the policies section in Knowledge Share, ask your • Office supplies, furniture and equipment; and be a criminal offense. State and local governments may have similar manager for information about rules that you are required to follow. • The First Financial name, various brand names and logos. procedures affecting your role, A. This would be an in- or review training resources Company assets also include all memos, notes, lists, records and appropriate use of Company Bank Secrecy Act and Anti-Money Laundering Regulations available through Learning assets both with respect to other documents (in paper and/or electronic format) that you or The Bank Secrecy Act and Anti-Money Laundering Regulations are and Development. the software and the associ- designed to prevent money laundering and terrorist financing. These any of our third party business partners or consultants make or ate’s time. Even though these laws require, in addition to other items, that First Financial implement For specific questions or compile relating to our business. circumstances may not seem certain policies and procedures regarding customer identification, re- assistance, please contact to impact the Company’s port instances of suspicious activity in a timely manner, and properly the Compliance Department You should use Company assets appropriately for legitimate and use of the software, it is still maintain certain records. at ComplianceQuestions @ authorized business purposes. You should not access systems or not appropriate and may be bankatfirst.com. information unless you’ve been authorized and enabled to do so, prohibited by the terms of and the extent of your access must be consistent with the scope of the software license. your authorization. Company assets should never be used for ille- gal activities. We allow and permit limited and occasional personal use of our e-mail, messaging, the internet and phones if the use is not excessive, does not interfere with work responsibilities, and otherwise does not violate this Code or other applicable policies. 18 19

 
values values first first Misappropriation of Company assets is a breach of your duty to us and may be an act of fraud against us. Taking property from our A related party means: facilities without permission is regarded as theft. In addition, care- • Any of your family members, other relatives, or close friends; lessness or waste of our assets may also be a breach of your duty to us. If you become aware of loss, theft, misuse, damage, or waste • Members of your household, including roommates and other unrelated individuals; of our assets, or if you have any questions about your proper use • Any organization of which you or any of your family members are a sole proprietor, controlling of these assets, you should speak with your manager. shareholder, director, trustee, executive officer, or partner; or • Any trust or other estate in which you or your family members have a substantial beneficial inter- If you leave our employment, or upon our request, you must return est, or for which you or your family members serve as trustee or in a similar capacity. any and all of our assets in your possession. For example, due to the potential conflicts of interest, you are not permitted to: • Process transactions involving accounts for which you are an authorized signer; Want more information about this topic? Please locate the following policies in Knowledge Share: • Approve extensions of credit to yourself or to family members; or • Authorize the use of a family member’s business to provide services to us. Information Technology Acceptable Use Policy Physical Security Policy This is not intended to be a complete list of examples. Other similar transactions may create a conflict of interest. Q. My brother has a catering company that specializes in It is almost always a conflict of interest for you to work or volunteer simultaneously for a competitor, Conflicts of Interest corporate events. Can I help him get business from First customer, or vendor of ours. You are not allowed to work for a competitor as an employee, consultant, We expect that you will act in the best interests of First Financial Financial? or board member. You should never use your employment or position with us for personal advantage, and avoid conflicts of interest by making reasoned and impartial or seek special terms or price concessions for your personal benefit from customers or vendors of ours. decisions. A conflict of interest may arise whenever a personal interest interferes with (or even appears to interfere with) the Conflicts of interest and related party transactions involving directors and executive officers You can introduce him Company’s interests. A conflict of interest can also arise when you A. must be reviewed by the Audit Committee of the Board of Directors. Extensions of credit from to persons that coordinate take an action or have an interest that makes it difficult for you to corporate events or meals, First Financial to executive officers, directors, their related interests and other insiders identified perform your work objectively and effectively. While we respect but then you must remove by law are subject to various dollar and other limits, and may be required to be approved by or your right to manage your personal business and investments, you yourself from the conversa- reported to the chief legal officer or the Board of Directors. should place the Company’s interest in any business transaction tion. You should also disclose ahead of any personal interest or gain. your relationship and conflict Conflicts of interest are prohibited as a matter of our policy, and they must be avoided unless it to that group. You cannot can be shown that: (a) you or your related interest would receive no unfair advantages by virtue Conflicts of interest may also arise when you or your family members do anything to influence our of your position with us, and (b) the Company is in no way disadvantaged by the transaction. receive improper personal benefits as a result of your relationship decision about engaging your with us. Loans and other transactions to you or any party related to brother to provide services, Conflicts of interest may not always be clear-cut. If you have a question, you should consult with and you can’t be involved in you may create conflicts of interest. You are not permitted to process your manager or the Company’s General Counsel. If you become aware of an actual or a potential our dealings with your brother or approve any transactions between the Company and yourself or or his business. conflict of interest, you should bring it to the attention of your manager or other appropriate any party related to you. personnel by following the procedures described in this Code. For more information about lending to executive officers and directors, please see the Regulation O Policy in Knowledge Share. 20 21

 
values values first first Personal Financial Affairs Gifts and Entertainment As a financial institution, our business depends on public confi- We encourage you to develop strong relationships with our clients, vendors and others dence in our ability to help manage the financial affairs of others. In with whom the Company does business, however you should only do this in a manner general, your personal finances are private. However, because you that does not create or appear to create a conflict of interest. A conflict of interest may represent us, it is important that you manage your personal finances arise when you provide or receive gifts or entertainment. Such activities must be legal properly and in a prudent manner. and should not be frequent, excessive, or extravagant. You must not accept or provide entertainment to or from current or prospective clients or vendors unless it is for a valid Also, you must transact all personal financial business with us fol- business purpose and provides an opportunity for a meaningful business conversation. lowing the same procedures that are used by clients and from the You should not participate in any activity that could embarrass or reflect poorly on the “client side” of the window or desk. You are not allowed to handle Company. or approve your own transactions, transactions on accounts over which you have any ownership interest, control or signing authority, The acceptance of even a well-intentioned gift or offer of entertainment may present a or transactions for family members. conflict of interest, cloud your judgment when making a decision for the Company, or create the appearance of a conflict of interest, and can be misinterpreted as an attempt You may not approve overdrafts or reverse or waive fees or service by the donor to improperly influence the recipient’s behavior. charges for: • Your own accounts; In some situations, the acceptance of any gift from a client will be inappropriate re- • Accounts in which you have an interest; gardless of the intent of the person giving the gift. These situations include trustee and • Accounts of family members, other relatives and close friends; fiduciary relationships and any situation where the gift could be interpreted as taking advantage of the relationship with the client or where it is prohibited by law. • Accounts of members of your household, including roommates and other unrelated individuals; or Q. My roommate has asked You should seek the prior approval of your manager if you are offered any gift or enter- • Accounts of companies or organizations controlled by you, your me to get a fee on her account tainment that you are not certain is appropriate in light of this Code. If you are a director waived. It is a fee we normally family members, other relatives and close friends. waive upon request. Can I or executive officer, you should seek the advice or prior approval of the Corporate General waive the fee in the system? Counsel if you are uncertain about the appropriateness of a gift or entertainment. It is also important to remember that giving gifts, just like receiving gifts, can harm the Company’s reputation by creating an appearance of impropriety. In some situations, giving gifts or favors can also violate the law. There are strict laws restricting gifts to any A. No. You should ask your government officials, and you should follow all applicable laws and regulations. roommate to contact the Client Service Center or an associate Want more information about this topic? Please These restrictions are not intended to apply to gifts or entertainment based on family re- see the Transactions Processing Internal Control at the banking center to inquire lationships where the circumstances make it clear that it is the relationship – rather than Policy on Knowledge Share. about waiving the fee. our business – that is the motivating factor for giving the gift. 22 23

 
values values first first Outside Activities Political Contributions and Activities We encourage you to participate in outside activities, provided We respect your right to engage in personal political activity; these do not interfere with the performance of your job with First however, you must be sure any such activity: Financial. Working outside of First Financial or serving as a director • Is lawful; of another company may create a conflict of interest. Being a direc- tor or serving on a standing committee or advisory board of some • Does not use Company time or resources; and organizations, including government agencies, also may create a • Does not subject the Company to inappropriate risk, including conflict, whether the position is compensated or not. Outside activi- reputational risk. ties that compete with our business or present a conflict or potential conflict of interest are not permitted. Any volunteer activity must be done on your own time and cannot be done, or appear to be done, as a representative of First Financial. Before agreeing to work outside of First Financial or joining the board of a charity or non-profit organization, you should assess You may make personal political contributions, within applicable whether it would have the potential to be a conflict of interest, legal limits, to political candidates, political parties, political action depending on the nature of the position and your involvement. You committees, and other entities that make political expenditures. should inform and obtain the approval of your manager before you: You may not: • Pursue additional employment outside of First Financial; • Engage in political campaign fundraising or solicitation activities • Engage in an independent business venture; Q. A former colleague is run- for your own political interest on Company premises; or ning as a candidate for a local • Perform services for another business organization; • Commit First Financial to make any political contribution at any government position and has • Become an officer, director, owner, partner or controlling shareholder time, whether it is money, facilities or volunteering employee asked me to support her cam- I have been asked to sit of any business or organization; or Q. services, including buying tickets to political dinners or other paign with a personal financial on the board of directors for a contribution. Is this okay? • Run for or accept appointment to any political office. non-profit organization. Can I political fundraising events. accept the appointment? Directors and executive officers should not engage in the above activities without first notifying the General Counsel, who will The Company will not make any contribution or expenditure or to A. We respect the right of provide any service (except usual and customary banking services) our employees to personally determine whether securing approval from the Audit Committee of Probably. You must A. or anything of value in connection with any election to any political support political or charitable the Board of Directors is necessary. notify your manager first to office, or in connection with any primary election or political con- activities as long as this support ensure that the activities do is not associated with the vention or caucus held to select candidates for any political office. You must not pursue such outside business activities and relation- not create a conflict of interest Company or uses Company ships using Company assets (including but not limited to physical with your job. This prohibition applies to all federal, state, and local elections, assets. Therefore, you are free space, supplies, communications methods or time) or allow any political conventions, and caucuses. to personally support your outside business, civic or charitable activities to interfere with your former colleague’s campaign. job performance. Under no circumstance may you solicit other associates to make political contributions or volunteer their time for a political purpose. You must not act on behalf of or appear to represent the Company in any transaction outside of your role and responsibilities with us. Any legally permissible political contributions or activities, including It is important that you and the Company work together to avoid lobbying or communicating with elected officials, for or on behalf of any basis for criticism or misunderstandings. First Financial must be pre-approved by the Chief Executive Officer and the General Counsel. 24 25

 
values values first first Corporate Opportunities Business records and communications often become public and you should avoid exaggeration, derogatory remarks, guesswork, You owe a duty to First Financial to advance our interests to the best or inappropriate characterizations of people and companies that of your abilities. You may not take advantage of opportunities that can be misunderstood. This applies equally to e-mail, internal rightfully belong to First Financial. memos, and formal reports. For example, you may not: • Take personal advantage of opportunities that are discovered through the use of Company property, information or position; Want more information about this topic? Please • Use corporate property, information or position for personal gain; see the Accounting Policy on Knowledge Share. • Personally receive a commission or fee for a transaction you have conducted for First Financial; • Divert business from First Financial; or • Compete with First Financial directly or indirectly. Records should always be retained or destroyed according to our Records Management Policy. Accuracy of Records and Information Reporting We are each responsible for identifying and reporting any Q. In order to meet a We require honest and accurate recording and reporting of information Q. A friend was looking concerns about the Company’s business records, accounting, project deadline, I worked in order to make responsible business decisions. You must ensure that for a loan to start a business. I internal controls or other audit matters. Any complaints or con- overtime one evening. My complete and accurate financial and accounting records, that are not referred him to one of our loan cerns regarding accounting, internal accounting controls, audit manager wants me to record misleading, exist at all times. Internal controls and procedures must officers. He was successful in matters, or recordkeeping must be reported immediately as only my regular hours for that be closely followed so that all transactions are properly documented, obtaining the loan from us and described in this Code. day and will give me time off recorded and reported. now would like to thank me on another day equal to the for the referral by paying me a overtime hours. What should referral fee. Is this okay? Effectively Manage Risk and I do? Specifically, this means that: Lead in Risk Control • All of your books, records and accounts – including time sheets, sales records, invoices, bills and expense reports – must be complete, accu- Risk management is an important aspect of our corporate culture rate and reliable. A. No, you are not allowed A. Even though your to accept a fee or gift personally and values and an integral part of achieving our objectives. We manager may mean well, • You must never falsify any document or distort the facts relating to a for any transactions you referred are called upon daily to make decisions that impact our business inaccurately recording hours particular transaction. to us or for work you perform risk. Managers are expected to set the tone of accountability for worked is a policy and legal • Unrecorded or “off the books” funds or assets should not be main- for a client. their teams. violation. You are responsible tained unless permitted by applicable law or regulation. for reporting accurate and Each of you is expected to identify, assess, manage, and appro- complete information. • Financial records that reflect our activities and transactions should be priately escalate risks associated with your job responsibilities. maintained in accordance with our accounting policies and procedures You are accountable for debating risk- related issues, escalating and in compliance with applicable standards, laws and regulations. concerns, taking a stand, and making sound judgments about the • Transactions are to be recorded in a timely manner and supported by risk/reward tradeoffs of business decisions. appropriate documentation. 26 27

 
values values first first You should take an open, candid and fact-based approach to discussing risk issues, making all relevant facts and information Our Responsibilities to available, so that we can consider all possible options and make decisions. You are also responsible for promptly communicating Our Associates and escalating matters to management that may cause risk or potential harm to us, such as operational problems, inappropriate Diversity and Equal Opportunity conduct, policy violations, illegal activities, or other risks. You should always act to protect our interests and the interests of our We strongly encourage diverse viewpoints and creative minds. shareholders and other stakeholders. We believe that by respect and appreciation for diversity we are contributing to our growth and your growth. It is our policy not to discriminate against any individual in violation For more information on this topic, please of federal, state, or local laws as it relates to age, race, color, religion, see the Enterprise Risk Management Policy national origin, sex, marital status, pregnancy, gender, disability, on Knowledge Share. sexual orientation, genetic information, veteran/military service, or any other characteristic protected by law. Q. A co-worker has made Q. I’ve overheard another repeated references about a As an equal opportunity employer and in order to provide equal manager intimidating one colleague’s sexual orientation, of his employees with employment and advancement opportunities to all individuals, including using derogatory employment decisions at First Financial will be based on merit, Business Expenses derogatory language, but names. When the co-worker the employee refuses to qualifications and abilities. Equal employment opportunity is not was confronted, she said it only good practice, it’s the law and it applies to all areas of em- was only a joke. The behavior You must report your business expenses accurately and in a report his behavior. Is there anything I can do? ployment, including recruitment, selection, hiring, training, transfer, has not stopped. What should timely manner. Business credit cards must not be used for any promotion, demotion, termination, compensation, and benefits. be done? purpose other than appropriate business expenses as outlined in our Accounts Payable Policy. If you are not sure whether a cer- tain expense is legitimate, you should ask your manager. If you’re comfortable A. “It was only a joke” is doing so, encourage the Discrimination and Harassment A. not an excuse for inappropriate You may not approve your own expenses or request approval of employee to seek help from We strive to maintain a workplace that fosters mutual associate behavior. This incident, or any those expenses by anyone who reports directly or indirectly to their Human Resources respect and promotes productive working relationships. Discrim- concern about workplace be- you. Approval of expenses must be obtained from your manager, Business Partner. If you havior that may violate our Code ination or harassment in any form is not only harmful to the as- in accordance with our policies. observed the behavior, you of Conduct and other guide- should contact your Human sociate(s) toward whom it is directed, it is damaging to the work lines prohibiting harassment or Resources Business Partner environment and may be illegal. We prohibit discrimination and/ discrimination must be reported yourself. Upholding the Code or harassment of any kind including that which is sexual, racial or to your manager or Human means sharing concerns, religious in nature or is related to anyone’s gender, color, national Resources Business Partner. even though it may be easier origin, age, sexual orientation, disability or veteran/military status, Retaliation toward any associate who in good faith reports an Want more information about this topic? Please to look the other way. genetic information, or any other legally protected class. integrity or ethical concern or see the Travel Policy in Knowledge Share. We do not tolerate unlawful discrimination or harassment of any kind in issue will not be tolerated. the workplace. Additionally, in order to provide a respectful, productive and professional workplace, conduct that does not violate the law, but that is inappropriate in the workplace, is also prohibited. 28 29

 
values values first first This policy applies to all associates throughout the Company and Personal Conduct all individuals who may have contact with any associates of this Company, including but not limited to vendors and clients. In the spirit of our Company values, you are expected to treat and interact with your fellow associates, clients, vendors and members of Examples of conduct that is not acceptable include but are not the community with Integrity, Respect, Responsiveness, Commitment, limited to: Leadership and Excellence. • Unwelcome advances or physical contact; • Unwelcome or offensive jokes or innuendos; We look to you to live values first. • Offensive flirtation or propositions; Workplace Safety and Health • Inappropriate comments about an individual’s sex, race or other protected characteristic; Your safety and health while on the job is among our highest • Display of offensive objects or pictures; priorities. Policies and procedures have been established to en- • Obscene gestures; sure you are provided an appropriate work environment. These policies and procedures ensure there is an appropriate means of • Derogatory comments that involve discriminatory treatment of a reporting any safety concerns you may have and tell you what to legally protected class; do in the event of an injury or illness on the job. It is your respon- • Any conduct that has the effect of interfering with a person’s Q. I sometimes receive sibility to know and understand these policies and procedures work performance or creates an intimidating, hostile, or offensive e-mails to my work account and to report any unsafe work conditions. work environment; or from friends outside of Q. Is there somewhere I • Conduct of a sexual nature that requires submission as a condi- the Company that I find The use of illegal drugs, reporting to work under the influence of can go for help or counseling tion of employment, promotion or other benefit. amusing, but others may alcohol, and the abuse of legal prescription pharmaceuticals are related to alcohol or drugs? think are offensive. What violations of state and federal laws. These activities can have should I do with these? severe health and personal consequences. These activities also If you believe that you or another associate, client, or vendor is diminish the safety of all associates and visitors and can damage A. If you believe you have being harassed or discriminated against, you must report the the reputation of the Company in certain situations. These abuses an issue with alcoholism or account for tremendous losses in efficiency, attendance, and costs incident to your Human Resources Business Partner. If you are Even if the e-mails drug use (or if you are experi- A. of Company-provided healthcare. For these reasons, the Company uncomfortable reporting it to Human Resources, you must report do not offend you, you encing other difficult personal has adopted a drug and alcohol policy as set forth in the Company’s the incident using one of the methods described in the section of should delete them and issues), we encourage you to Handbook. With this policy, it is the intention of the Company to this Code titled “Reporting Code of Conduct Violations and Sharing not show or send them to use the Employee Assistance use every lawful means to establish and maintain a drug and alcohol Concerns about Misconduct”. Any manager to whom such a anyone – including sending Program. See the Benefits free workplace. report is made must report the incident to their Human Resources it to yourself at another e- Guide for more information Business Partner or to the Legal Department. mail address. Advise your on the Emplyee Assistance The policy addresses illegal drugs and the unauthorized use of friends that it would be Program. legal drugs, such as expired prescriptions, or other substances that prudent not to send these are controlled or outlawed, are not obtainable by lawful methods, types of e-mails to your or are legally obtainable but were not obtained in a lawful manner. work e-mail address. Want more information about this topic? Please see the Associate Handbook in Knowledge Share. 30 31

 
values values first first Material nonpublic information may also include information Our Responsibilities to the about a client, vendor, or other company that does business with First Financial, or that is negotiating a significant transaction or Market and Our Shareholders agreement with First Financial. You are similarly prohibited from conducting any transaction in the stock of any third party about Insider Trading whom you have material nonpublic information. You also may not share this information with anyone else. You must not buy, sell, recommend or trade in First Financial Bancorp securities while in possession of material nonpublic information about Contact the General Counsel if you need guidance as to whether the Company. Nonpublic information is information that is not generally information you have is material or nonpublic or any other concerns known or available to the investing public. It is not considered public until about insider trading before conducting any transactions in First First Financial releases the information through a press release, securi- Financial shares of stock. ties filing, distribution to shareholders, website posting, widely reported media coverage, or other official First Financial public communication. Your obligations described in this section also apply to any changes into or out of your FFBC Stock Fund in the First Financial Bancorp All nonpublic information about First Financial should be considered 401(k) Savings Plan. confidential and you have a duty to avoid using it for profit or to Q. I overheard some avoid a loss, as well as a duty not to disclose it to others. Breaching Certain associates are subject to certain additional requirements associates discussing an and may be restricted from engaging in any transaction in First this duty of confidentiality is a violation of the law and can result in upcoming announcement severe penalties. Financial shares of stock except during certain “open-window” about First Financial. The periods. If you are subject to these additional requirements and information could affect restrictions, you will be notified by the Legal Department. Disclosing any material nonpublic information to other persons, includ- the stock price. Since I was Q. I believe that the bank is ing relatives and friends who might trade on the information or disclose considering the acquisition of planning to buy some First Please review First Financial’s Insider Trading Policy on Knowl- it to others, is considered “tipping” and is also strictly prohibited. Financial stock, can I go another financial institution. edge Share for more information about insider trading, what it MayI acquire the stock of the ahead with my plan even means, and what activities are prohibited. Information about the financial performance of First Financial that though the information has other institution in anticipation of the acquisition? has not been publicly released is a common example of material not been released to the nonpublic information. The information can be either positive or public? negative information about the Company. Listed below are exam- ples of material nonpublic information: A. No. Trading on material • Changes to our business operations, projections or strategic plans nonpublic information is illegal A. No. You must not buy and a violation of this Code of • Mergers, acquisitions the stock until the infor- Conduct. • Restructuring mation is released to the public. In addition, you may • Possible sale of assets or subsidiaries not pass the information to • Significant change to a major client, contract, product or service anyone else until the infor- • Introduction of a major product or service mation is made public. • Securities offerings or repurchases as well as a declared stock split or a change in our dividend amounts • Executive management or Board of Director changes • Changes in accounting methods • Lawsuits, government or regulatory investigations 32 33

 
values values first first Disclosure Our Responsibilities to the Community First Financial has a responsibility to ensure full, fair, accurate, timely, and understandable disclosure in reports and documents filed or Community Reinvestment submitted to the U.S. Securities and Exchange Commission and stock exchanges, as well as other public communications made by We are committed to ensuring that low and moderate income and minority individuals and the Company. If you are involved in preparing or providing informa- communities have access to the services and programs they need to build financial stability and tion for the Company’s public disclosures, you have a duty to ensure create healthy neighborhoods. We continuously seek opportunities that support our community disclosures and information is in compliance with the Company’s reinvestment activities. Disclosure Policy. Charitable Conduct and Donations Media and Shareholder Inquiries We support the communities in which we operate through various charitable donations and It is imperative that we advance and protect First Financial volunteer services when appropriate opportunities arise. While other areas may be considered, and the brand by releasing information to the public in a con- specific target areas for these activities include: sistent manner. There are professionals at the Company who are trained and qualified to release information to the public. It • Economic development programs that attract new business and nurture enterprise is critical for compliance and accuracy of the information that Q. A shareholder is inquiring development zones; only authorized associates speak on behalf of the Company. about a rumor he recently heard • Education programs that focus on financial literacy or that support the economically regarding First Financial and is You have a duty and responsibility to refer all inquiries from the disadvantaged, and anxious to find out if it is true. Even • Neighborhood development programs that focus on neighborhood revitalization or media relating to First Financial to the designated Investor Rela- though I know the information to affordable housing initiatives. tions or Marketing representative. be false, should I refer him to the investor relations representative? If you are not authorized to speak on behalf of First Financial, Charitable contribution opportunities are considered and approved by senior management of any request you receive for information from an outside person First Financial. You should not make any commitments on behalf of the bank concerning charitable must be forwarded immediately to the appropriate department. contributions prior to receiving the appropriate approvals. A. Yes. You have a duty to direct him to the investor relations representative to ensure share- holder inquiries are handled in a consistent manner. For more information on this topic, see the Community For more information on this topic, please see the Development Policy in Knowledge Share. Disclosure Policy located in Knowledge Share. Doing the right thing is key to our success! 34 35 Rev. 10/2019

 

 


EXHIBIT 21


FIRST FINANCIAL BANCORP. SUBSIDIARIES (as of 12/31/19)

Name
 
State of Other Jurisdiction of
Incorporation or Organization
First Financial Bank
 
Ohio
First Financial Collateral, Inc.
 
Indiana
First Financial Equipment Finance, LLC
 
Ohio
First Financial Insurance Holding Company
 
Ohio
First Financial Insurance, Inc.
 
Ohio
First Franchise Capital Corporation
 
Indiana
Irwin Home Equity Corporation
 
Indiana
IHE Funding Corp. II
 
Delaware
Irwin Union Realty Corporation
 
Indiana
MainSource Insurance, LLC
 
Indiana
MSB Investments of Nevada, Inc.
 
Nevada
MSB Holdings of Nevada, Inc.
 
Nevada
MSB of Nevada, LLC
 
Nevada
First Financial Preferred Capital, Inc.
 
Ohio
New American Real Estate, LLC
 
Indiana
Oak Street Holdings Corporation
 
Delaware
Oak Street Funding LLC
 
Delaware
Oak Street Servicing, LLC
 
Delaware
CDE Fifty-One Service Corporation
 
Indiana
FCBKY Holding, LLC
 
Kentucky
Peoples Building and Savings Service Corporation of Troy, Ohio
 
Ohio
MainSource Risk Management, Inc.
 
Nevada
MainSource Statutory Trust I
 
Connecticut
MainSource Statutory Trust II
 
Connecticut
MainSource Statutory Trust III
 
Delaware
MainSource Statutory Trust IV
 
Delaware
FCB Bancorp Statutory Trust I
 
Delaware
OSF Insurance Receivables, LLC
 
Indiana





EXHIBIT 23



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We consent to the incorporation by reference in the following Registration Statements of First Financial Bancorp:

Form S-8 No.  338-86781
Form S-3 No.  333-25745
Form S-3 No.  333-156841
Form S-3 No.  333-153751
Form S-8 No.  333-168675
Form S-8 No.  333-188593
Form S-3 No. 333-197771
Form S-8 No. 333-218188
Form S-3 No. 333-219554
Form S-4 No. 333-220583
Form S-3 ASR No. 333-233701

of our report dated February 21, 2020 relating to the 2019 consolidated financial statements and effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K.



Crowe LLP

Indianapolis, Indiana
February 21, 2020





EXHIBIT 31.1

CERTIFICATIONS

I, Archie M. Brown, Jr., President and Chief Executive Officer of First Financial Bancorp., certify that:

1.
I have reviewed this annual report on Form 10-K of First Financial Bancorp.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: 
2/21/2020
 
/s/ Archie M. Brown, Jr.
 
 
 
Archie M. Brown, Jr.
President and Chief Executive Officer





EXHIBIT 31.2

CERTIFICATIONS

I, James M. Anderson, Executive Vice President and Chief Financial Officer of First Financial Bancorp., certify that:

1.
I have reviewed this annual report on Form 10-K of First Financial Bancorp.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: 
2/21/2020
 
/s/ James M. Anderson
 
 
 
James M. Anderson
Executive Vice President and Chief Financial Officer





EXHIBIT 32.1

CERTIFICATION OF PERIODIC FINANCIAL REPORT BY CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Form 10-K for the annual period ended December 31, 2019, of First Financial Bancorp. (the “Company”), as filed with the Securities and Exchange Commission on February 21, 2020 (the “Report”), I, Archie M. Brown, Jr., President and Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Archie M. Brown, Jr.
Archie M. Brown, Jr.
President and Chief Executive Officer
 
February 21, 2020





EXHIBIT 32.2

CERTIFICATION OF PERIODIC FINANCIAL REPORT BY CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Form 10-K for the annual period ended December 31, 2019, of First Financial Bancorp. (the “Company”), as filed with the Securities and Exchange Commission on February 21, 2020 (the “Report”), I, James M. Anderson, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ James M. Anderson
James M. Anderson
Executive Vice President and Chief Financial Officer
 
February 21, 2020