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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, 2021
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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, 2021, was $2,227,220,000. (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 17, 2022, there were issued and outstanding 94,149,227 common shares of the registrant.
Documents Incorporated by Reference:
Portions of the registrant’s Annual Report to Shareholders for the year ended December 31, 2021 (Exhibit 13) are incorporated by reference into Parts I, II and III. Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 24, 2022 are incorporated by reference into Part III.
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 Annual Report of Form 10-K. 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 of 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 other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such 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 2021 Annual Report to Shareholders (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. 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.
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 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 2021 Annual Report to Shareholders for the year ended December 31, 2021, 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.
COVID-19
The Company's operations and financial results in 2021 continued to be substantially influenced by the COVID-19 pandemic. The pandemic negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, increased unemployment levels and decreased consumer confidence generally. Some of these issues persisted in 2021, in particular impacts to the global supply chains and the effects of a shrinking workforce, resulting in higher wages and more employee resignations across many industries.
The Company continued to prioritize the health and safety of clients and associates in 2021, although without the significant disruptions to our workforce that occurred in 2020. Banking centers offered drive through services without interruption, while lobbies were fully open and accessible to clients. Sales associates, support teams and management returned to corporate offices and operations centers in the second and third quarters of 2021.
To assist clients during the pandemic, the Company implemented distinct COVID-19 relief programs to provide payment
deferrals and fee waivers, in addition to temporarily suspending vehicle repossessions and residential property foreclosures.
Further, the Company continuously monitored the actions of federal and state governments to proactively assist clients and
ensure awareness of each financial assistance program available to them, while focusing internally on enhancing remote, mobile
and online processes to better support a bank anytime, anywhere environment.
The Bank underwent a significant level of cross training and redeployment of associate resources to rapidly meet the influx of
client requests in response to the passage of the CARES Act, the establishment of the Paycheck Protection Program and the
approval of the Consolidated Appropriations Act. The Bank proactively reached out to customers during 2020 to assist in seeking SBA forgiveness of PPP loans. The Company's response to the PPP resulted in successes in providing customer relief, although the program and assistance had substantially wound down by the end of 2021. As such, the Company had outstanding PPP loans totaling $55.6 million in balances, net of $2.6 million of unearned fees, as of of December 31, 2021, compared to $594.6 million of PPP loans, net of $13.7 million of unearned fees, as of December 31, 2020.
Additionally, in 2021, the Company had $16.5 million in loans that were still in a payment deferral to provide relief to borrowers adversely impacted by the pandemic, compared to $320.2 million as of December 31, 2020.
Human Capital
At December 31, 2021, First Financial had approximately 2,010 full-time employees located primarily in the states of Ohio, Indiana, Kentucky, and Illinois.
Employee Wellbeing. A key motive behind the Company’s strategic intent is “Investing in our People.” To achieve this goal, First Financial has developed a “Wellbeing Program” that is designed to support employees and their families in a holistic way, focusing on the five core areas of wellbeing: physical, financial, social, community and purpose. The program provides employees with incentives (such as health savings account contributions, paid time off and reimbursements) in exchange for participation in a range of activities, including an annual physical, webinar participation and enrollment in Company fitness activities. In 2021, 61% of eligible employees qualified for benefits under the Wellbeing Program.
Compensation and Benefits. First Financial offers employees competitive short-term and long-term compensation, a comprehensive set of benefits including health, dental and vision insurance, free or low-cost access to an independent provider of primary care clinics, product discounts and various expense reimbursement programs. First Financial also provides all eligible employees with an annual allocation to the First Financial Pension Plan of 5% of eligible annual pay. The pension allocation is 100% company-paid, fully-vested and portable. We regularly review our compensation practices to ensure we are paying employees equitably, taking into consideration such factors as experience, education, and performance.
Employee Engagement. First Financial launched its engagement initiative in 2020, partnering with a third party to measure associate engagement and develop action plans for continued improvement. In October 2021 First Financial launched its second all-associate engagement survey, which resulted in teams throughout the Bank formulating action plans to help bolster engagement across the company. In 2021, we continued to host monthly virtual town hall meetings for all associates, opening the lines of communications and answering associate concerns. In conjunction with the town hall meetings, pulse surveys were completed with themes around wellbeing, return to work, diversity and inclusion, and career coaching and development. These surveys provided insight into our associates’ needs and desires, which we can use in future program development.
Diversity, Equity and Inclusion. First Financial prioritizes diversity, equity and inclusion (DEI) as an employer, a financial institution and as a member of the communities in which we operate. The DEI Committee of the Board provides guidance and oversight to First Financial’s executive committee, the Manager of Diversity, Equity and Inclusion, and the First Financial Diversity Council, which is comprised of 10 associates from across our footprint. First Financial supports several associate-led business resource groups designed to facilitate networking and leadership development. First Financial continues to mature its DEI strategy, which includes goals and action plans designed to increase associate and management diversity.
Subsidiaries
A listing of each of First Financial’s subsidiaries can be found in Exhibit 21 to this Form 10-K.
Business Combinations
In December 2021, the Company completed its acquisition of Summit Funding Group, Inc. and its subsidiaries. Summit was a privately held, full service, equipment financing company that originates, purchases, sells and services equipment leases to commercial businesses in the United States and Canada. Upon completion of the transaction, Summit became a subsidiary of the Bank and continues to operate as Summit Funding Group, taking advantage of its existing brand recognition within the equipment financing industry. Pursuant to the purchase agreement, First Financial agreed to acquire all of the issued and outstanding equity securities of Summit for aggregate consideration of approximately $127.1 million consisting of $113.5 million in cash and $10.0 million of First Financial common stock, and a $3.6 million earn-out payment.
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 continues 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.
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.
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 restaurant 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 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 consumers, depositors, borrowers, the Deposit Insurance Fund (DIF) of the Federal Deposit Insurance Corporation (FDIC), 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 credit 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 that has elected to become a financial 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 in any case where a financial holding company proposes to: (i) acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by the financial holding company; (ii) acquire all or substantially all of the assets of another bank or another financial or bank holding company; or (iii) merge or consolidate with any other financial or bank holding company. In addition, First Financial’s acquisition of a savings and loan association requires prior Federal Reserve Board approval.
A qualifying bank holding company that has elected to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature and not otherwise permissible for a bank holding company, if: (i) the holding company is "well managed" and "well capitalized" and (ii) each of its subsidiary banks (a) is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, (b) is well managed, and (c) has at least a "satisfactory" rating under the Community Reinvestment Act (CRA). No regulatory approval is
required under the BHCA for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.
The Financial Services Modernization Act defines “financial in nature” to 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.
If a financial holding company or a subsidiary bank fails to maintain 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 its subsidiaries and on the ability of the holding company to enter into certain transactions and obtain regulatory approvals for new activities and transactions. The holding company could also be required to divest itself of subsidiaries that engage in activities that are not permitted for bank holding companies that are not financial holding companies. If restrictions are imposed on the activities of a financial holding company, the existence of such restrictions may not be made publicly available pursuant to confidentiality regulations of the bank regulatory agencies.
Each subsidiary bank of a financial holding company is subject to certain restrictions on the maintenance of reserves against deposits, extensions of credit to the financial holding company and its subsidiaries, investments in the stock and other securities of the financial holding company and its subsidiaries and the taking of such stock and securities as collateral for loans to borrowers. Further, a financial holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of any services. Various consumer laws and regulations also affect the operations of these subsidiaries.
In April 2020, the Federal Reserve Board adopted a final rule to revise its regulations related to determinations of whether a company has the ability to exercise control over another company for purposes of the Bank Holding Company Act. The final rule expands and codifies the presumptions for use in such determinations. By codifying the presumptions, the final rule provides greater transparency on the types of relationships that the Federal Reserve Board generally views as supporting a facts-and-circumstances determination that one company controls another company. The Federal Reserve Board’s final rule applies to questions of control under the Bank Holding Company Act, but does not extend to the Change in Bank Control Act.
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 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.
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 United States financial system to be distributed among new and existing federal regulatory agencies, including the United States Financial Stability Oversight Council, the Federal Reserve Board, and the FDIC.
On May 25, 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. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies as well 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 (i) a minimum common equity tier 1 capital ratio of at least 4.5%, (ii) a minimum tier 1 capital ratio of at least 6.0%, (iii) a minimum total capital ratio of 8.0% and (iv) 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.
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, 2021, the Bank met the capital ratio requirements to be deemed “well-capitalized.”
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 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.
In December 2018, the federal banking agencies issued a final rule to address regulatory treatment of credit loss allowances under the current expected credit loss (CECL) model (accounting standard). The rule revised the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model. Concurrent with the enactment of the CARES Act, discussed below, federal banking agencies issued an interim final rule that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provided banking organizations that implemented CECL prior to the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. First Financial adopted the capital transition relief over the five year permissible 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.
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 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 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%. 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. On June 30, 2020, the DRR fell below the statutory minimum to 1.30%. This drop resulted in the FDIC adopting a restoration plan requiring the restoration of the DRR to 1.35% within eight years, by September 30, 2028. This restoration plan maintained the scheduled assessment rates for all insured institutions.
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. 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:
•The CRA: imposes a continuing and affirmative obligation to fulfill the credit needs of its entire community, including low- and moderate-income neighborhoods.
•Equal Credit Opportunity Act: prohibits discrimination in any credit transaction on the basis of any of various criteria.
•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.
•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.
•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.
•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.
•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.
On July 22, 2020, the CFPB issued a final small dollar loan rule related to payday, vehicle title and certain high cost installment loans (the Small Dollar Rule) that modified a former rule that was issued in November 2013. Lenders are required to comply with the Small Dollar Rule by June 13, 2022. Specifically, the Small Dollar Rule revokes provisions contained in the 2013 rule that: (i) provide that it is an unfair and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms; (ii) prescribe mandatory underwriting requirements for making the ability-to-repay determination; (iii) exempt certain loans from mandatory underwriting requirements; and (iv) establish related definitions, reporting, and recordkeeping requirements.
Separately, in May 2018, the OCC published guidance that encourages national banks and federal savings associations to offer responsible short-term, small-dollar installment loans with terms between two and twelve months and equal amortizing payments. Pursuant to the OCC’s guidance on this issue, banks are encouraged to offer these products in a manner that is consistent with sound risk management principles and clear, documented underwriting guidelines. Further, the federal bank regulatory agencies issued interagency guidance on May 20, 2020, to encourage banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes. The Small Dollar Rule did not have a material effect on First Financial’s financial condition or results of operations on a consolidated basis in 2021.
Community Reinvestment Act
Under the 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 2021 examination, the Bank received a CRA rating of “outstanding.”
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.
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 United States 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 United States 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, also known as “covered funds,” subject to a number of exceptions.
On June 25, 2020, the federal bank regulatory agencies finalized a rule modifying the Volcker Rule’s prohibition on banking entities investing in or sponsoring covered funds. The new rule permits certain banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was originally intended to address. 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 comply with such rule, as modified through rule-making.
Office of Foreign Assets Control Regulation
The United States 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.
In November 2021, the FDIC, the OCC and the Federal Reserve Board issued a final rule requiring banking organizations that experience a computer-security incident to notify certain entities. A computer-security incident occurs when there is a violation or imminent threat of a violation to banking security policies and procedures, or when actual or potential harm to the confidentiality, integrity, or availability of an information system or the information occurs. The affected bank must notify its respective federal regulator of the computer-security incident as soon as possible and no later than 36 hours after the bank determines a computer-security incident has occurred. These notifications are intended to promote early awareness of threats to banking organizations and will help banks react to those threats before they manifest into bigger incidents. This rule also requires bank service providers to notify their customers of a computer-security incident.
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.
The Coronavirus Aid, Relief, and Economic Security Act of 2020
In response to the novel COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020, to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of United States financial institutions, such as the Company and the Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the United States Department of Treasury, the Federal Reserve Board and other federal banking agencies, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as COVID-19 evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. The Company is continuing to assess the impact of the CARES Act and other statues, regulations and supervisory guidance related to COVID-19.
The CARES Act amended the loan program of the Small Business Administration (the SBA) in which the Bank participates to create a guaranteed, unsecured loan program, the Paycheck Protection Program (the PPP), to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. In June 2020, the Paycheck Protection Program Flexibility Act was enacted, which, among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. After previously being extended by Congress, the application deadline for PPP loans expired on May 31, 2021. As a participating lender in the PPP, the Bank continues to monitor related legislative, regulatory, and supervisory developments. On September 29, 2020, the federal bank regulatory agencies issued a final rule that neutralizes the regulatory capital and liquidity coverage ratio effects of participating in certain COVID-19 liquidity facilities due to the fact there is no credit or market risk in association with exposures pledged to such facilities. As a result, the final rule supports the flow of credit to households and businesses affected by COVID-19.
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
The COVID-19 pandemic is adversely affecting our business, customers, employees, and third-party service providers, and the adverse impacts on our business, financial position, results of operations, and prospects could be significant.
COVID-19 has negatively impacted global, national and local economies, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, increased unemployment levels and decreased consumer confidence, generally. In addition, the pandemic resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities and may result in the same or similar restrictions in the future. As a result, the demand for our products and services have been and may continue to be significantly impacted, which could adversely affect our revenue and results of operations. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increase our allowance for credit losses, particularly if businesses remain required to operate at diminished capacities or are required to close again, the impact on the global, national and local economies worsen, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with COVID-19. The pandemic could also affect the stability of our deposit base as well as our capital and liquidity position, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, result in lost revenue and cause us to incur additional expenses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairments in future periods on the securities we hold as well as reductions in other comprehensive income.
The extent of the impact of the COVID-19, including the reise of new strains thereof, on our capital, liquidity, and other financial positions and on our business, results of operations, and prospects will depend on a number of evolving factors, that cannot be predicted, including:
•The duration, extent, and severity of the pandemic. COVID-19 has not been contained and could affect significantly more households and businesses. The duration and severity of COVID-19, including new variants thereof, continues to be impossible to predict.
•The continued response of governmental and nongovernmental authorities. Authorities may continue to take action in the future directed at curtailing personal and business activity to contain COVID-19 while simultaneously deploying fiscal-and monetary-policy measures to assist in mitigating the adverse effects on individuals and businesses.
•The effect on our customers, counterparties, employees, and third-party service providers. COVID-19, including new variants thereof, and its associated consequences and uncertainties may affect individuals, households, and businesses differently and unevenly.
•The success of hardship relief efforts to bridge the gap to reopening the economy. The U.S. government has implemented programs to directly compensate individuals and grant or loan money to businesses in an effort to provide funding while the economy is shut down. Many banks, including the Bank, have implemented hardship relief programs that include payment deferral and short-term funding options. The success of these programs could mute the effect on the Company's credit losses, which may be difficult to determine.
The pandemic could cause us to experience higher credit losses in our lending portfolio, impairment of our goodwill and other financial assets, reduced demand for our products and services, and other negative impacts on our financial position, results of operations, and prospects. You should consider that the effects of COVID-19 could be particularly pronounced with respect to certain of our lending portfolios:
•Commercial real estate-retail, including retail shopping centers, due to declining interest in such spaces by their users and declining interest in visiting large shared spaces. As of December 31, 2021, the retail portion of our ICRE portfolio was $795.9 million, or 8.6% of our loan portfolio.
•Residential real estate, due to customers' potential loss of income. As of December 31, 2021, this portfolio was $896.1 million, or 9.6% of our loan portfolio.
•Franchise, which primarily includes quick service and casual dining, due to stay at home orders and requirements that restaurants provide carry-out only service. As of December 31, 2021, this portfolio was $319.9 million, or 3.4% of our loan portfolio.
•Hospitality, including hotel and motel lending, due to travel limitations implemented by governments and businesses as well as declining interest in travel generally. As of December 31, 2021, this portfolio was $326.5 million, or 3.5% of our loan portfolio.
The cumulative effects of COVID-19 and the measures implemented by governments to combat the pandemic on mortgaged properties may cause borrowers to be unable to meet their payment obligations under mortgage loans that we hold and may result in significant losses.
Even after COVID-19 has subsided, the U.S. economy will likely require time to recover, the length of which is unknown and during which the U.S. may experience a recession or market correction. We may continue to experience materially adverse impacts to our business as a result of any such recession or market correction.
We continue to closely monitor COVID-19 and related risks as they evolve. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. The effects could have a material impact on our results of operations and heighten many of the other risk factors identified in this Item.
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, especially in light of COVID-19, 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.
If the strength of the United States 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 could 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:
•the yield on earning assets and rates paid on interest bearing liabilities may change in disproportionate ways;
•the value of certain balance sheet and off-balance sheet financial instruments or the value of equity investments that we hold could decline;
•the value of assets for which we provide processing services could decline;
•the demand for loans and refinancings may decline, which could negatively impact income related to loan originations; or
•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 (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
derivatives. LIBOR is set based on interest rate information reported by certain banks, which may stop reporting such information after 2021. On July 27, 2017, the United Kingdom’s Financial Conduct Authority (FCA) announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. On November 30, 2020, to facilitate an orderly LIBOR transition, the OCC, the FDIC, and the Federal Reserve Board jointly announced that entering into new contracts using LIBOR as a reference rate after December 31, 2021, would create a safety and soundness risk. On March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of 1-week and 2-month LIBOR, and immediately after June 30, 2023, in the case of the remaining LIBOR settings. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates are ongoing, and the Alternative Reference Rate Committee (ARRC) has recommended the use of a Secured Overnight Funding Rate (SOFR). SOFR is different from LIBOR in that it is a backward looking secured rate rather than a forward looking unsecured rate.
These differences could lead to a greater disconnect between our costs to raise funds for SOFR as compared to LIBOR. For cash products and loans, ARRC has also recommended Term SOFR, which is a forward looking SOFR based on SOFR futures and may in part reduce differences between SOFR and LIBOR. There are operational issues which may create a delay in the transition to SOFR or other substitute indices, leading to uncertainty across the industry.
First Financial has established a working group to manage the LIBOR transition process. The working group has identified all LIBOR-related contracts and determined which 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. First Financial continues to consider a replacement index for 2022 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 adversely affect 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 could 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. This is especially relevant in light of the impact COVID-19 has had on national and local economies. 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.
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.
Since 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.
We maintain an allowance for credit losses that we believe is a reasonable estimate of the expected losses within the CECL model. We believe that our allowance for credit losses is maintained at a level adequate to absorb expected losses over the life of the loans in the loan portfolio as of the corresponding balance sheet date. However, our allowance for credit losses may not be sufficient to cover actual credit losses, and future provision for credit losses could materially affect our operating results. The accounting measurements related to the allowance for credit losses require significant estimates which are subject to uncertainty and change related to new information and changing circumstances. Management estimates the allowance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience paired with economic forecasts provide the basis for the quantitatively modeled estimation of expected credit losses. First Financial adjusts its quantitative model, as necessary, to reflect conditions not already considered by such model. 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.
In addition, bank regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further loan charge-offs. Moreover, the Financial Accounting Standards Board (FASB) has changed its requirements for establishing the allowance for credit losses. The new accounting guidance requires banks to record, at the time of origination, credit losses expected throughout the life of the asset on loans, leases and held-to-maturity debt securities, as opposed to the previous practice of recording losses when it was probable that a loss event had occurred. Under the CECL model, we are required to use historical information, current conditions and reasonable and supportable forecasts to estimate the expected credit losses. If the methodologies and assumptions we use in the CECL model prove to be incorrect, or inadequate, the allowance for credit losses may not be sufficient, resulting in the need for additional allowance for credit losses to be established, which could have a material adverse impact on our financial condition and results of operations. We adopted the CECL accounting guidance in 2020 and recognized a one-time cumulative effect adjustment to our allowance for credit losses
and retained earnings as of January 1, 2020. Concurrent with the enactment of the CARES Act, federal bank regulatory agencies issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provided banking organizations that implemented CECL prior to the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay.
We adopted CECL in the first quarter of 2020, including the regulatory phase-in. 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. As a result of CECL, our financial results may be negatively affected as soon as weak or deteriorating economic conditions are forecasted and alter our expectations for credit losses. In 2021, we were able to reverse previous provision expense of $19.0 million as the credit conditions related to COVID-19 were not as significant as originally anticipated. However, depending upon future COVID-19 variants and circumstances, we may incur significant provision expense for credit losses in future periods.
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.
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. 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 regulatory and other 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 could affect our profitability.
The principal bases for competition are pricing (including the interest rates charged on loans or paid on interest bearing deposits), product structure, the range of products and services offered, and the quality of customer service (including convenience and responsiveness to customer needs and concerns). The ability to access and use technology is an increasingly important competitive factor in the financial services industry, and it is a critically important component to customer satisfaction as it affects our ability to deliver the right products and services. For example, digital or cryptocurrencies, blockchain, and other “fintech” technologies that are designed to enhance transactional security have the potential to disrupt the
financial industry, change the way banks do business, and reduce the need for banks as financial deposit-keepers and intermediaries.
Failure to adequately address the competitive pressures we face could make it harder for us to attract and retain customers across our businesses. Similarly, meeting these competitive pressures could require us to incur significant additional expense, to reevaluate the number of branches through which we serve our customers, or to accept risk beyond what we would otherwise view as desirable under the circumstances. In addition, competitive pressure to increase rates on deposits or decrease rates on loans could reduce our net interest margin with a resulting negative impact on our net interest income.
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. Consumers may move money out of bank deposits in favor of other investments, including digital or cryptocurrency. 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 and client deposits and could increase our funding costs.
Our wealth management business subjects us to a variety of investment and market risks.
At December 31, 2021, we had $3.4 billion in assets under management. A sharp decline or heightened volatility 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 market volatility.
In August 2019, First Financial acquired Bannockburn, which is 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 market volatility increases. Sustained periods of stability in global financial markets could adversely affect Bannockburn’s revenue.
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 of our products or services to meet our clients’ expectations or applicable regulatory requirements, corporate governance and acquisitions, social media and other marketing activities, the implementation of environmental, social and governance practives or actions taken by government regulators and community organizations in response to any of the foregoing. Negative public opinion could affect our ability to attract and/or retain clients, could expose us to litigation and regulatory action, and could have a material adverse effect on our stock price or result in heightened volatility. 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. These vendors also provide services that support our operations, including the storage and processing of sensitive consumer and business customer data, as well as our sales efforts. Any disruption in such services provided by these third parties or any failure of these third parties to handle current or higher volumes could affect our ability to deliver products and services to clients and to efficiently and effectively conduct our business. Technological or financial difficulties of a third-party
service provider could affect our business to the extent such difficulties result in the interruption or discontinuation of services provided by that party. Further, the operations of our third-party vendors could fail or otherwise become delayed as a result of COVD-19 and any new variants thereof.
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 or a third-party service provider 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 or third-party 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. 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.
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, malware, ransomware, 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 our business and results of operations.
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. A reduction in our dividend rate could affect the market price of our common shares.
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 provide liquidity from other sources.
We are a separate and distinct legal entity from our subsidiaries, notably the 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, 2021, the Bank had $166.2 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, 2021, we had indebtedness of $706.0 million.
Disruptions in our ability to access capital markets on desirable terms 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 on acceptable or desirable terms, 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.
In addition, prior debt offerings could potentially have important consequences to us and our debt and equity investors, including:
•requiring a substantial portion of our cash flow from operations to make interest payments;
•making it more difficult to satisfy debt service and other obligations;
•increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and limit the future availability of debt financing;
•increasing our vulnerability to general adverse economic and industry conditions;
•reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry;
•placing us at a competitive disadvantage relative to our competitors that may not be as highly leveraged with debt; and
•limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase securities.
We continue to evaluate these risks on an ongoing basis.
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.
Other considerations include forecasts of revenues and expenses derived from internal management projections for a period of five years, changes in working capital estimates, company specific discount rate derived from a rate build up approach, externally sourced bank peer group market multiples and externally sourced bank peer group change in control premium, all of which are highly subjective and require significant management judgment. Changes in these key assumptions could materially affect our estimate of the reporting unit fair value and could affect our conclusion regarding the existence of potential impairment.
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.
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. Acquisitions could involve the payment of a premium over book and market values, and, therefore, dilution of our tangible book value and net income per common share may occur in connection with any such 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.
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 2021 Annual Report to Shareholders (included within Exhibit 13 to this Form 10-K) for more information.
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, FASB issued CECL. CECL was expected to result in earlier recognition of credit losses and required consideration of not only past and current events but also reasonable and supportable forecasts that affect collectability. The Bank became subject to the new standard in the first quarter of 2020. Concurrent with the enactment of the CARES Act, federal banking agencies issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provided banking organizations that implemented CECL prior to the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. The CECL standard requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses. See Note 2 - Accounting Standards Recently Adopted or Issued and Note 6 - Allowance for Credit Losses in the Company's Form 10-K for further information regarding the Company's adoption of CECL and the corresponding allowance for credit 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
Regulatory actions 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 CFPB, the Financial Industry Regulatory Authority, and the ODFI. 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 operate our business. These actions could impact the Company and the Bank in a variety of ways, including subjecting us to 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.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (ESG) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG-related compliance costs for us as well as among our third-party suppliers, vendors and various other parties within our supply chain could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, access to capital, and the price of our common shares.
General Risk Factors
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, including digital or cryptocurrencies, blockchain, and other “fintech” 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.
The fiscal and monetary policies of the United States 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 adversely affect borrowers,adn increase default risk on 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.
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.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
At December 31, 2021, the Company operated 139 full service banking centers, 29 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 62 banking centers in Ohio, three banking centers in Illinois, 62 banking centers in Indiana and 12 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, 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.
Supplemental Item. Information About Our Executive Officers.
The following table sets forth information concerning the executive officers of First Financial as of February 18, 2022. 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 | | 61 |
| | | | |
| James M. Anderson | | EVP, Chief Financial Officer | | 50 |
| | | | |
| Richard S. Dennen | | EVP, Chief Corporate Banking Officer | | 55 |
| | | | |
| John M. Gavigan | | EVP, Chief Operating Officer | | 43 |
| | | | |
| Karen B. Woods | | EVP, General Counsel and Chief Risk Officer | | 53 |
| | | | |
| William R. Harrod | | EVP, Chief Credit Officer | | 54 |
| | | | |
| Amanda N. Neeley | | EVP, Chief Consumer Banking & Strategy Officer | | 41 |
| | | | |
| Gregory A. Harris | | President, Yellow Cardinal Advisory Group | | 53 |
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).
Richard S. Dennen - Rick Dennen became the Chief Corporate Banking Officer of First Financial in 2021, responsible for all commercial aspects of the Bank including business capital, investment real estate, equipment finance, treasury management and foreign exchange business. Mr. Dennen remains the President and CEO of First Commercial Finance, which includes Oak Street Funding and First Franchise Capital Corporation, a role he has held since 2015. Oak Street Funding is a specialty finance company engaged in lending to insurance agencies, registered investment advisors, certified public accountants, energy and indirect auto financing companies. First Franchise Capital Corporation lends to restaurant franchisee. Mr. Dennen is a certified public accountant.
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 Consumer Banking & Strategy Officer of First Financial. Ms. Neeley is responsible for retail banking and mortgage banking, as well as the launch and evolution of the First Financial brand, the advancement of sales process, 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. She has held the role of Chief Strategy Officer since 2016 and added the role of Chief Consumer Banking Officer in 2021.
Gregory A. Harris - Greg Harris serves as the president of Affluent Banking and Yellow Cardinal Advisory Group, a division of First Financial Bank. He is responsible for all aspects of the business line including sales, client experience, investment management, administration, compliance, and operations. Greg joined First Financial in 2009 and has over 30 years of experience in the financial services industry. Prior to joining First Financial, Greg served in various leadership capacities at Touchstone Investments, an institutional mutual fund management company and Fund Project Services, Inc., a financial services M&A integration firm he co-founded in 1998. He began his career at Fifth Third Bank as a product manager within the bank's Trust and Investment business.
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, 2021, with respect to our stock price and dividends, is incorporated herein by reference in response to this item.
As of February 17, 2022, our common shares were held by approximately 3,965 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, 2021, a total of 20,515 stock options and 839,733 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 2021 Annual Report to Shareholders 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 2021 Annual Report to Shareholders (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 2021 Annual Report to Shareholders (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)Issuer Purchases of Equity Securities
In December 2018 the Board approved a stock repurchase plan pursuant to which the Company was authorized to repurchase up to 5,000,000 shares of stock through December 31, 2020. On December 22, 2020, the Board announced that it authorized a new repurchase plan that provided for the purchase of up to 5,000,000 additional shares of common stock of the Company (the 2020 Repurchase Plan). The 2020 Repurchase Plan became effective January 1, 2021, upon the expiration of the previously authorized stock repurchase plan, but was terminated in December 2021 and replaced with a new plan effective January 1, 2022. The Company did not purchase any shares under the 2020 Repurchase Plan in the fourth quarter of 2021.
Item 6. Selected Financial Data.
Not applicable.
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 2021 Annual Report to Shareholders (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 2021 Annual Report to Shareholders (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 2021 Annual Report to Shareholders (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 2021 Annual Report to Shareholders (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.
On December 31, 2021, First Financial acquired Summit Funding Group, Inc. The internal control over financial reporting of Summit's operations were excluded from the evaluation of effectiveness of First Financial's disclosure controls and procedures as of the period end covered by this report as a result of the timing of the acquisition. As a result of the Summit acquisition, First Financial will be evaluating changes to processes, information technology systems and other components of internal control over financial reporting as part of its integration activities. The acquired Summit operations represents 1.5% of total consolidated assets as of the period covered by this report.
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 2021 Annual Report to Shareholders (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, 2021 that have materially affected, or are reasonably likely to materially affect, First Financial’s internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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 24, 2022, 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, 2021 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 | | 20,515 | | | $ | 10.98 | | | 4,984,895 | |
| 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. 2020Stock Plan, which was approved by the shareholders at the 2020 Annual Meeting.
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 2021 Annual Report to Shareholders (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.
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.
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 2021 Annual Report to Shareholders (included as Exhibit 13 of this report) as noted:
Reports of Independent Registered Public Accounting Firm (PCAOB ID 173) - Incorporated by reference from First Financial's 2021 Annual Report
Consolidated Balance Sheets as of December 31, 2021 and 2020 - Incorporated by reference from First Financial’s 2021 Annual Report
Consolidated Statements of Income for years ended December 31, 2021, 2020 and 2019 - Incorporated by reference from First Financial’s 2021 Annual Report
Consolidated Statements of Comprehensive Income for years ended December 31, 2021, 2020 and 2019 - Incorporated by reference from First Financial’s 2021 Annual Report
Consolidated Statements of Changes in Shareholders' Equity for years ended December 31, 2021, 2020 and 2019 - Incorporated by reference from First Financial’s 2021 Annual Report
Consolidated Statements of Cash Flows for years ended December 31, 2021, 2020 and 2019 - Incorporated by reference from First Financial’s 2021 Annual Report
Notes to Consolidated Financial Statements - Incorporated by reference from First Financial’s 2021 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 | Agreement and Plan of Merger dated as of June 18, 2019, by and among First Financial Bancorp., First Financial Bank, Wallace Merger Sub, LLC, Bannockburn Global Forex, LLC and Fortis Advisors, LLC, solely in its capacity as Member Representative (filed as Exhibit 1.1 to First Financial's Current Report on Form 8-K filed on June 19, 2019) (File No. 001-34762). |
| 2.3 | Amendment No. 1 to Agreement and Plan of Merger, dated as of August 6, 2019, by and among First Financial Bancorp., First Financial Bank, Wallace Merger Sub, Bannockburn Global Forex, LLC, and Fortis Advisors, LLC, solely in its capacity as the Member Representative (Incorporated by reference from Exhibit 2.1 to the Current Report on Form 8-K filed on August 6, 2019)(/File No. 001-34762). |
| 2.4 | Amendment No. 2 to Agreement and Plan of Merger, dated as of August 29, 2019, by and among First Financial Bancorp., First Financial Bank, Wallace Merger Sub LLC, Bannockburn Global Forex, LLC, and Fortis Advisors, LLC, solely in its capacity as the Member Representative (filed as Exhibit 2.1 to First Financial’s Current Report on Form 8-K filed on September 3, 2019, and incorporated herein by reference). |
| 2.5 | Stock Purchase Agreement, dated as of December 6, 2021, by and among First Financial Bancorp., First Financial Bank, Summit Funding Group, Inc., the Sellers (as defined therein), and Richard L. Ross, as Sellers’ Representative (Incorporated by reference from Exhibit 2.1 to the Current Report on Form 8-K filed on December 7, 2021) (certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) (File No. 001-34762). |
| | | | | |
| 3.1 | |
| 3.2 | |
| 4.1 | |
| 4.2 | |
| 4.3 | |
| 4.4 | |
| 4.5 | |
| 4.6 | Indenture dated as of December 19, 2002 between MainSource Financial Group, Inc., as issuer, and State Street Bank and Trust Company of Connecticut, N.A., as trustee, re: floating rate junior subordinated deferrable interest debentures due 2032 (incorporated by reference to Exhibit 4.6 to the Annual Report on Form 10‑K of MainSource Financial Group, Inc. for the fiscal year ended December 31, 2002 filed March 28, 2003 with the Commission). |
| 4.7 | Amended and Restated Declaration of Trust dated as of December 19, 2002 among State Street Bank and Trust Company of Connecticut, N.A., as institutional trustee, MainSource Financial Group, Inc., as sponsor, and James L. Saner Sr., Donald A. Benziger and James M. Anderson, as administrators (incorporated by reference to Exhibit 4.7 to the Annual Report on Form 10‑K of MainSource Financial Group, Inc. for the fiscal year ended December 31, 2002 filed March 28, 2003 with the Commission). |
| 4.8 | |
| 4.9 | Indenture dated as of April 1, 2003 between MainSource Financial Group, Inc., as issuer, and U.S. Bank, N.A., as trustee, re: floating rate junior subordinated deferrable interest debentures due 2033 (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10‑Q of MainSource Financial Group, Inc. for the quarter ended June 30, 2003 filed August 14, 2003 with the Commission). |
| 4.10 | Amended and Restated Declaration of Trust dated as of April 1, 2003 among U.S. Bank, N.A., as institutional trustee, MainSource Financial Group, Inc., as sponsor, and James L. Saner Sr., Donald A. Benziger and James M. Anderson, as administrators (incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10‑Q of MainSource Financial Group, Inc. for the quarter ended June 30, 2003 filed August 14, 2003 with the Commission). |
| 4.11 | |
| 4.12 | |
| 4.13 | Amended and Restated Declaration of Trust dated as of June 12, 2003 among The Bank of New York, as institutional trustee, MainSource Financial Group, Inc., as sponsor, and James L. Saner Sr., Donald A. Benziger and James M. Anderson, as administrators (incorporated by reference to Exhibit 4.5 to the Quarterly Report on Form 10‑Q of MainSource Financial Group, Inc. for the quarter ended June 30, 2003 filed August 14, 2003 with the Commission). |
| 4.14 | |
| 4.15 | |
| | | | | |
| 4.16 | |
| 4.17 | |
| 4.18 | |
| 4.19 | |
| 4.20 | |
| 4.21 | |
| 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 | |
| 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 | |
| 10.33 | |
| 10.34 | |
| 10.35 | |
| 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, 2021, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Shareholders’ Equity, and (vi) Notes to Consolidated Financial Statements, as blocks of text and in detail.** |
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.
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 |
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 | 2/18/2022 | | Date | 2/18/2022 |
| | | | |
| /s/ Claude E. Davis | | /s/ Scott T. Crawley |
| Claude E. Davis, Director | | Scott T. Crawley, First Vice President and Controller |
| Chairman of the Board | | (Principal Accounting Officer) |
| | | | | |
| Date | 2/18/2022 | | Date | 2/18/2022 |
| | | | |
| /s/ William G. Barron | | /s/ Vincent A. Berta |
| William G. Barron, Director | | Vincent A. Berta, Director |
| | | | |
| Date | 2/18/2022 | | Date | 2/18/2022 |
| | | |
| /s/ Cynthia O. Booth | | /s/ Corinne R. Finnerty |
| Cynthia O. Booth, Director | | Corinne R. Finnerty, Director |
| | | | |
| Date | 2/18/2022 | | Date | 2/18/2022 |
| | | | |
| /s/ Susan L. Knust | | /s/ William J. Kramer |
| Susan L. Knust, Director | | William J. Kramer, Director |
| | | | |
| Date | 2/18/2022 | | Date | 2/18/2022 |
| | | | |
| /s/ John T. Neighbours | | /s/ Thomas M. O'Brien |
| John T. Neighbours, Director | | Thomas M. O'Brien, Director |
| | | |
| Date | 2/18/2022 | | Date | 2/18/2022 |
| | | | |
| | | | |
| | | | |
| | | | | | | | | | | | | | |
| /s/ Maribeth S. Rahe | | | |
| Maribeth S. Rahe, Director | | | |
| | | |
| Date | 2/18/2022 | | | |
SEVERANCE AND CHANGE IN CONTROL AGREEMENT
This Severance and Change in Control Agreement (the "Agreement") is made and entered into by and between Richard S. Dennen ("Executive") and First Financial Bank (the "Company"), effective as of the latest date set forth by the signatures of the parties hereto below (the "Effective Date").
RECITALS
1. The Board of Directors of the Company (the "Board") recognizes that it is possible that the Company could terminate Executive's employment with the Company and from time to time the Company may consider the possibility of an acquisition by another company or other change in control transaction. The Board also recognizes that such considerations can be a distraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication and objectivity of Executive, notwithstanding the possibility, threat or occurrence of such a termination of employment or the occurrence of a Change in Control (as defined herein) of the Company.
2. The Board believes that it is in the best interests of the Company and its shareholders to provide Executive with an incentive to continue his or her employment with the Company and to motivate Executive to maximize the value of the Company for the benefit of its shareholders.
3. The Board believes that it is imperative to provide Executive with certain severance benefits upon Executive's termination of employment and with certain additional benefits following a Change in Control. These benefits will provide Executive with enhanced financial security and incentive and encouragement to remain with the Company notwithstanding the possibility of a Change in Control.
4. Executive and the Company are parties to a certain Employment and Non-competition Agreement dated July 23, 2015 (the “Employment Agreement”).
5. The Company and Executive wish to terminate any and all rights and obligations the Company and/or Executive have or had under the Employment Agreement and any other prior severance plan in exchange for this Agreement.
6. Certain capitalized terms used in the Agreement, and not otherwise defined, are defined in Section 9 below.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Company and Executive (each, the “Party,” and together, the “Parties”) hereto agree as follows:
1. Term of Agreement. This Agreement will continue until August 31, 2022 (the “Initial Term”, unless sooner terminated pursuant to Section 3 of this Agreement. The term of this Agreement shall renew automatically for successive one-year periods after the Initial Term (the “Renewal Terms”), unless and until non-renewed by either the Company or Executive upon not less than ninety (90) days’ prior written notice given by either party prior to the end of the Initial Term or any Renewal Term, as applicable (it being understood that non-renewal of this Agreement shall not result in a termination of employment unless the party providing such notice of non-renewal also specifies in such notice that Executive’s employment shall terminate at the expiration of the then-current term pursuant to Section 3 of this Agreement). The Initial Term and all Renewal Terms, if any, shall constitute the “Term.” Notwithstanding the foregoing, in the event of the consummation of a “Change in Control” of the Company (as defined below), the Term shall be the one-year period following the consummation of such Change in Control, without the possibility of non-renewal. For purposes of this Agreement, a “Change in Control” has the meaning given such term in the Company’s 2020 Stock Plan, or any stock plan intended to succeed the 2020 Stock Plan, as in effect on the Effective Date.
2. At-Will Employment. The Company and Executive acknowledge that Executive's employment is and will continue to be at-will, as defined under applicable law. If Executive's employment terminates for any reason, including (without limitation) any termination of employment not set forth in Section 3, Executive will not be entitled to any payments, benefits, damages, awards or compensation other than the payment of accrued but unpaid wages, as required by law, and any unreimbursed
reimbursable expenses or pursuant to written agreements with the Company, including equity award agreements.
3. Severance Benefits.
a) Termination Without Cause and not in Connection with a Change in Control. If the Company terminates Executive's employment with the Company for a reason other than Cause, Executive becoming Disabled or Executive's death at any time (other than in connection with a Change in Control under Section 3(b) of the Agreement), then, subject to Section 4, Executive will receive the following payments and benefits (the “Severance Benefits”) at the times specified below (subject to Sections 7 and 8 of this Agreement):
i. Severance Payments. Executive will receive severance in an amount equal to twenty four (24) months of Executive's base salary as in effect immediately prior to the date of Executive's termination of employment, less all required tax withholdings and other applicable deductions, payable in equal installments over the Restricted Period in accordance with Section 3(g). Notwithstanding the foregoing, the Company in its sole and absolute discretion may accelerate any installment payment or portion thereof to be paid on any date prior to the date the installment payment would otherwise be paid, subject to the limitations of Section 7.
ii. Termination Short-Term Bonus Payment. Executive shall be entitled to an annual bonus for the year of termination determined in accordance with the following:
A. In the event Executive is a Covered Executive for the year of his or her termination of employment or, as determined in the sole discretion of the Company, would have been a Covered Executive for such year if he or she had continued employment until the end of the year, then Executive shall receive a lump sum severance payment equal to the lesser of (x) two and one-half (2.5) times the Executive’s target annual short-term incentive plan bonus or (y) two (2) times the average of the three most recent actual annual bonus awards paid (or payable) to Executive by the Company (or, the average actual annual bonus payouts for such lesser number of completed performance years for which Executive was eligible to receive an annual bonus).
B. For any year in which the preceding paragraph A. does not apply, in lieu of the amount otherwise payable to Executive under paragraph A, Executive shall receive a payment equal to two (2) times Executive's target annual short-term incentive plan bonus as in effect for the fiscal year in which Executive's termination occurs (or the target annual short-term incentive plan bonus that is in effect for the previous year if the target bonus for the current year is not ratified/approved by the compensation committee of the Board of Directors as of Executive’s termination of employment).
C. Such amount shall be paid following Executive’s termination of employment, but in no event later than March 15th of the year following the year of Executive’s termination of employment.
iii. Continued Executive Benefits. If the Company’s severance plan of general applicability as in effect on Executive’s date of termination provides for continued payment by the Company of all or a portion of the cost of the premiums for continuation coverage under the Company’s health care plan pursuant to Section 4980B of the Code (“COBRA Coverage”) and if the Executive timely and properly elects such COBRA Coverage, the Company shall pay on the Executive’s behalf the difference between the monthly COBRA Coverage premium paid by the Executive for himself and his dependents and the monthly premium amount paid by similarly situated active employees for the same coverage. Such reimbursement shall be paid directly to the COBRA Coverage administrator (if any) and shall be treated as a taxable benefit to the Executive. The Executive shall be eligible to receive such reimbursement until the earliest of: (a) the twelve-month anniversary of the Executive’s termination of employment; (b) the date the Executive is no longer eligible to receive COBRA Coverage; or (c) the date on which the Executive otherwise becomes eligible to receive substantially similar coverage from another employer. The Company reserves the right to modify or terminate the COBRA Coverage benefit provided hereunder to the extent necessary to comply with applicable law.
iv. During the one-year period following the date of termination, Executive shall be entitled to full executive outplacement assistance with an agency selected by the Company with the fee paid by the Company in an amount not to exceed five percent (5%) of Executive’s base salary (“Outplacement Assistance”).
b) Termination Without Cause or Resignation for Good Reason in Connection with a Change in Control. If, immediately prior to a Change in Control (as determined in the sole discretion of the Company) or during the one year period that commences upon a Change in Control, (x) the Company terminates Executive's employment with the Company for a reason other than Cause, Executive becoming Disabled or Executive's death, or (y) Executive resigns from such employment for Good Reason, then, subject to Section 4, Executive will receive the following severance benefits from the Company in lieu of the benefits described in Section 3(a) above:
i. Severance Payments. Executive will receive severance in an amount equal to twenty four (24) months of Executive's base salary as in effect immediately prior to the date of Executive's termination of employment, less all required tax withholdings and other applicable deductions, payable in equal installments in accordance with Section 3(g). Notwithstanding the foregoing, the Company or its successor in its sole and absolute discretion may accelerate any installment payment or portion thereof to be paid on any date prior to the date the installment payment would otherwise be paid, subject to the limitations of Section 7.
ii. Short-Term Bonus Payment. Executive will receive a lump sum severance payment equal to two (2) times Executive's full target annual short-term incentive plan bonus as in effect for the fiscal year in which Executive's termination occurs (or, if greater, as in effect for the fiscal year in which the Change in Control occurs), less all required tax withholdings and other applicable deductions. Such amount shall be paid following Executive’s termination of employment, but in no event later than March 15th of the year following the year of Executive’s termination of employment.
iii. Continued Executive Benefits. Cobra Coverage as described in Section 3(a)(iii) of this Agreement.
iv. Outplacement Assistance as described in Section 3(a)(iv) of this Agreement.
c) Termination Due to Executive’s Death or Long-Term Disability, Termination by the Company for Cause or Voluntary Termination by Executive. If, during the Term, Executive’s employment is terminated: (1) by reason of Executive’s death or Long-Term Disability, (2) by the Company for Cause; or (3) voluntarily by Executive, the Company’s obligations to Executive shall be limited to the payment of the Accrued Obligations, as defined below, and the timely payment or provision of the Other Benefits, as defined below. The Accrued Obligations shall be paid to Executive or his estate or beneficiary in the event of his death, as applicable, in a lump sum in cash within thirty (30) days of the date of termination.
d) Full Settlement. Except as expressly provided in this Section 3, Executive shall have no right to receive any compensation or other benefits under this Agreement as a result of or in connection with the termination of this Agreement or the termination of his employment with the Company. If the Company has other severance programs or plans in place during the Term, Executive shall not be eligible for benefits under any such programs or plans.
e) Cessation of Payments and Benefits. Notwithstanding any other provision of this Agreement to the contrary, the obligation of the Company to pay or provide the Severance Benefits and the benefits under Sections 3(a) and 3(b) shall automatically and immediately terminate upon a breach by Executive of this Agreement, including without limitation a breach of Executive’s obligations under Section 5, other than an immaterial and inadvertent breach that is discontinued and/or remedied (to the extent subject to cure) by Executive promptly to the Company’s satisfaction.
f) Accrued Obligations and Other Benefits. Upon Executive’s separation of employment for any reason, the Company shall pay: (1) Executive’s accrued and unpaid Base Salary through the date of termination, to the extent not theretofore paid (the “Accrued Obligations”), which payments shall not be subject to the Release and shall be paid within thirty (30) days of the date of termination; and (2) any other benefits (other than benefits under any severance or termination pay plan of the Company or the Affiliated Companies) that are otherwise required to be provided
to Executive or to which Executive is otherwise eligible to receive through the date of termination under the terms of the applicable Company plan shall be provided to Executive consistent with the terms of the applicable Company plan (the “Other Benefits”). Such payment of the Other Benefits shall not be subject to the Executive’s execution of the Release unless otherwise called for in the applicable governing Company plan.
g) Timing of Payments. Subject to any specific timing provisions in Section 3(a), 3(b), or 7 as applicable, payment of severance under this Section 3 shall be made or commence to be made as soon as practicable following Executive's termination of employment in equal installments (no less frequently than monthly) in accordance with the Company’s general policies and procedures for the payment of salaries to its executive officers.
4. Conditions to Receipt of Severance. Executive agrees that in order to receive the Severance Benefits and the benefits provided in Section 3(a) or Section 3(b):
a) Executive must execute and not thereafter revoke his signature to a general release in a form provided by and acceptable to the Company (the “Release”). If the termination of employment occurs at a time during the calendar year where the Release Deadline could occur in the calendar year following the calendar year in which Executive's termination of employment occurs, then any severance payments or benefits under this Agreement that are not exempt from Section 409A will be paid on the first payroll date to occur during the calendar year following the calendar year in which such termination occurs, or such later time as required by (i) the payment schedule applicable to each payment or benefit as set forth in Section 3, (ii) the date the Release becomes effective, or (iii) Section 7; provided that the first payment shall include all amounts that would have been paid to Executive if payment had commenced on the date of Executive's termination of employment.
b) The Executive shall comply with requirements of Section 5 both during and after his or her employment.
5. Non-Competition, Non-Solicitation, Confidential Information.
a. Non-competition. During the term of Executive’s employment and during the first six-months of the Restricted Period (as defined below), other than following a termination by the Company for Cause (as defined below) in which case this Section 5(a) shall be inapplicable, Executive shall not directly or indirectly, whether individually or as a shareholder or other owner, partner, member, director, officer, employee, independent contractor, creditor or agent of any person (other than for the Company), enter into, engage in, or promote or assist (financially or otherwise), directly or indirectly, any business which provides any commercial banking, savings banking, mortgage lending, or any similar lending or banking services (the “Restricted Services”) anywhere in the geographic area consisting of the states of the United States in which any of the Affiliated Companies operate banking offices at any time during the term of Executive’s employment (the “Restricted Territory”). Notwithstanding the foregoing, ownership, for personal investment purposes only, of 1% or less of the outstanding capital stock of a publicly traded corporation shall not constitute a violation hereof.
b. Non-solicitation of Clients. During the Executive’s employment with the Company or any Affiliated Companies (as defined below) and during the Restricted Period, Executive shall not, directly or indirectly, whether individually or as a shareholder or other owner, partner, member, director, officer, employee, independent contractor, creditor or agent of any person (other than for the Company or any Affiliated Companies):
i. Solicit (as defined below) any person or entity located in the Restricted Territory for the provision of any Restricted Services;
ii. Solicit or attempt in any manner to persuade any client or customer of any Affiliated Companies to cease to do business, to refrain from doing business or to reduce the amount of business which any client or customer has customarily done or contemplates doing with any of the Affiliated Companies; or
iii. Interfere with or damage (or attempt to interfere with or damage) any relationship between any Affiliated Company and any client or customer.
c. Non-solicitation of Employees; No Hire. During the Executive’s employment with the Company or any Affiliated Companies and during the Restricted Period, Executive shall not, directly or indirectly, whether individually or as a shareholder or other owner, partner, member, director, officer, employee, independent contractor, creditor or agent of any person (other than for any Affiliated Company):
i. Solicit any employee, officer, director, agent or independent contractor of any Affiliated Company to terminate his or her relationship with, or otherwise refrain from rendering services to, any Affiliated Company, or otherwise interfere or attempt to interfere in any way with any Affiliated Company’s relationship with any of its employees, officers, directors, agents or independent contractors; or
ii. Employ or engage any person who, at any time within the two-year period immediately preceding such employment or engagement, was an employee, officer or director of any Affiliated Company.
d. Non-disclosure of Confidential Information.
i. During Executive’s employment with Company or any Affiliated Company and after the termination of such employment for any reason, Executive shall not, without the prior written consent of the Chief Legal Officer of Company (or such person’s designee) or as may be otherwise required by law or legal process, communicate or divulge any Confidential Information (as defined below) to any person or entity other than Company or an Affiliated Company, their employees, and those designated by Company or an Affiliated Company, or use any Confidential Information except for the benefit of Company or an Affiliated Company. Upon service to Executive of any subpoena, court order or other legal process requiring Executive to disclose Confidential Information, Executive shall immediately provide written notice to Company of such service and the content of any Confidential Information to be disclosed.
ii. Immediately upon the termination of Executive’s employment with Company or an Affiliated Company for any reason, Executive shall return to Company or the applicable Affiliated Company all Confidential Information in Executive’s possession, including but not limited to any and all copies, reproductions, notes, or extracts of Confidential Information in paper or electronic form.
e. Non-disparagement. Executive shall not, directly or indirectly, at any time (whether during Executive’s employment or thereafter), make any public statement (oral or written), or take any other action, that is disparaging to any Affiliated Company. The provisions of this Section 5(e) shall not preclude Executive from making truthful statements to correct any false statements made by any Affiliated Company or any person acting on behalf thereof about Executive.
f. Enforcement; Remedies; Blue Pencil. Executive acknowledges that: (1) the various covenants, restrictions, and obligations set forth in this Section 5 are separate and independent obligations, and may be enforced separately or in any combination; (2) the provisions of this Section 5 are fundamental and essential for the protection of the Company’s and the Affiliated Companies’ legitimate business and proprietary interests, and the Affiliated Companies (other than the Company) are intended third-party beneficiaries of such provisions; (3) such provisions are reasonable and appropriate in all respects and impose no undue hardship on Executive; and (4) in the event of any violation by Executive of any of such provisions, the Company and, if applicable, the Affiliated Companies, will suffer irreparable harm and their remedies at law may be inadequate. In the event of any violation or attempted violation of any provision of this Section 5 by Executive, the Company and the Affiliated Companies, or any of them, as the case may be, shall be entitled to a temporary restraining order, temporary and permanent injunctions, specific performance, and other equitable relief, without any showing of irreparable harm or damage or the posting of any bond, in addition to any other rights or remedies that may then be available to them, including, without limitation, money damages and the cessation of the payments contemplated under Section 3. If any of the covenants set forth in this Section 5 is finally held to be invalid, illegal or unenforceable (whether in whole or in part), such covenant shall be deemed
modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability, and the remaining such covenants shall not be affected thereby.
6. Termination of Prior Agreement. As a condition of and in consideration for the parties’ execution of this Agreement, and effective as of the date of this Agreement, Executive and the Company agree that the Employment Agreement shall be terminated and of no further force or effect, it being the intent of the parties that this Agreement replace the Employment Agreement. Each of Executive and the Company hereby waive any and all rights in and to the benefits and rights set forth in the Employment Agreement. Any required notices conditions to termination set forth in the Employment Agreement are hereby waived.
7. Section 409A of the Code.
a. General. It is intended that this Agreement shall comply with the provisions of Section 409A of the Code and the Treasury regulations relating thereto, or an exemption to Section 409A of the Code, and it shall be considered and interpreted in accordance with such intent. Any payments that qualify for the “short-term deferral” exception or another exception under Section 409A of the Code shall be paid under the applicable exception. For purposes of the limitations on nonqualified deferred compensation under Section 409A of the Code, each payment of compensation under this Agreement shall be treated as a separate payment of compensation for purposes of applying the Section 409A of the Code deferral election rules and the exclusion under Section 409A of the Code for certain short-term deferral amounts. All payments to be made upon a termination of employment under this Agreement may only be made upon a “separation from service” under Section 409A of the Code. Despite any contrary provision of this Agreement, any references to “termination of employment” or the “date of termination” (or any similar term) shall mean and refer to the date of Executive’s “separation from service,” as that term is defined in Section 409A of the Code and Treasury Regulation Section 1.409A-1(h). In no event may Executive directly or indirectly designate the calendar year of any payment under this Agreement.
b. Delay of Payments. Notwithstanding any other provision of this Agreement to the contrary, if Executive is considered a “specified employee” for purposes of Section 409A (as determined in accordance with the methodology established by the Company as in effect on the date of termination), any payment that constitutes nonqualified deferred compensation within the meaning of Section 409A of the Code that is otherwise due to Executive under this Agreement during the six-month period following his separation from service (as determined in accordance with Section 409A of the Code) on account of his separation from service shall be accumulated and paid to Executive on the first business day of the seventh month following his separation from service (the “Delayed Payment Date”). If Executive dies during the Section 409A postponement period, the amounts and entitlements delayed on account of Section 409A shall be paid to the personal representative (with interest as provided above) of his estate on the first to occur of the Delayed Payment Date or thirty (30) days after the date of Executive’s death.
c. In-Kind Benefits and Reimbursements. Notwithstanding any other provision of this Agreement to the contrary, all (1) reimbursements and (2) in-kind benefits provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A of the Code, including, where applicable, the requirement that (a) any reimbursement is for expenses incurred during Executive’s lifetime (or during a shorter period of time specified in this Agreement); (b) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during a calendar year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year; (c) the reimbursement of an eligible expense will be made no later than the last day of the calendar year following the year in which the expense is incurred; and (d) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit.
8. Limitation on Payments Under Certain Circumstances.
a. Anything in this Agreement to the contrary notwithstanding, in the event the Accounting Firm (as defined below) shall determine that receipt of all Severance Benefits would subject Executive to the excise tax under Section 4999 of the Code, the Accounting Firm shall determine whether to reduce any of the Severance Benefits paid or payable pursuant to this Agreement (the “Agreement Payments”) so that the Parachute Value of all Severance Benefits, in the aggregate, equals the Safe Harbor Amount (as defined below). The Agreement Payments shall be so reduced only if the Accounting Firm determines that Executive would have a greater Net
After-Tax Receipt (as defined below) of aggregate Severance Benefits if the Agreement Payments were so reduced. If the Accounting Firm determines that Executive would not have a greater Net After-Tax Receipt of aggregate Severance Benefits if the Agreement Payments were so reduced, Executive shall receive all Agreement Payments to which Executive is entitled hereunder.
b. If the Accounting Firm determines that the aggregate Agreement Payments should be reduced so that the Parachute Value of all Severance Benefits, in the aggregate, equals the Safe Harbor Amount, the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof. All determinations made by the Accounting Firm under this Section 8 shall be binding upon the Company and Executive and shall be made as soon as reasonably practicable and in no event later than thirty (30) days following the date of termination. For purposes of reducing the Agreement Payments so that the Parachute Value of all Severance Benefits, in the aggregate, equals the Safe Harbor Amount, only amounts payable under this Agreement (and no other payments) shall be reduced. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing the payments and benefits under the following sections in the following order: (1) first, any payments under Section 3(a)(iv); (2) second, any payments under Section 3(a)(iii); (3) third, any payments under Section 3(a)(1); and (4) fourth, any payments under Section 3(a)(ii). All fees and expenses of the Accounting Firm shall be borne solely by the Company.
c. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the benefit of Executive pursuant to this Agreement that should not have been so paid or distributed (“Overpayment”) or that additional amounts which will have not been paid or distributed by the Company to or for the benefit of Executive pursuant to this Agreement could have been so paid or distributed (“Underpayment”), in each case, consistent with the calculation of the Safe Harbor Amount hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or Executive that the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, Executive shall promptly (and in no event later than sixty (60) days following the date on which the Overpayment is determined) pay any such Overpayment to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by Executive to the Company if and to the extent such payment would not either reduce the amount on which Executive is subject to tax under Sections 1 and 4999 of the Code or generate a refund of such taxes. If the Accounting Firm, based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be paid promptly (and in no event later than sixty (60) days following the date on which the Underpayment is determined) by the Company to or for the benefit of Executive together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code.
d. To the extent requested by Executive, the Company shall cooperate with Executive in good faith in valuing, and the Accounting Firm shall take into account the value of, services provided or to be provided by Executive (including without limitation Executive’s agreeing to refrain from performing services pursuant to a covenant not to compete or similar covenant, including those set forth in Section 5 of this Agreement) before, on or after the date of a change in ownership or control of the Company (within the meaning of Q&A-2(b) of the final regulations under Section 280G of the Code), such that payments in respect of such services may be considered reasonable compensation within the meaning of Q&A-9 and Q&A-40 to Q&A-44 of the regulations under Section 280G of the Code and/or exempt from the definition of the term “parachute payment” within the meaning of Q&A-2(a) of the regulations under Section 280G of the Code in accordance with Q&A-5(a) of the regulations under Section 280G of the Code.
e. Definitions. For purposes of this Section, the following terms shall have the meaning set forth below:
“Accounting Firm” shall mean a nationally recognized certified public accounting firm that is selected by the Company for purposes of making the applicable determinations under Section 8 and is reasonably acceptable to Executive, which firm shall not, without Executive’s consent, be a firm serving as accountant or auditor for the individual, entity or group effecting the change in control or ownership.
“Net After-Tax Receipt” shall mean the present value (as determined in accordance with Sections 280G(b)(2)(A)(ii) and 280G(d)(4) of the Code) of a Payment net of all taxes imposed on Executive with respect thereto under Sections 1 and 4999 of the Code and under applicable state and local laws, determined by applying the highest marginal rate under Section 1 of the Code and under state and local laws which applied to Executive’s taxable income for the immediately preceding taxable year, or such other rate(s) as the Accounting Firm determined to be likely to apply to Executive in the relevant tax year(s).
“Parachute Value” of a Payment means the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a “parachute payment” under Section 280G(b)(2) of the Code, as determined by the Accounting Firm for purposes of determining whether and to what extent the excise tax under Section 4999 of the Code will apply to such Payment.
“Payment” means any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of Executive, whether paid or payable pursuant to this Agreement or otherwise.
“Safe Harbor Amount” means (1) 3.0 times Executive’s “base amount,” within the meaning of Section 280G(b)(3) of the Code, minus (2) $1.00.
9. Defined Terms. For purposes of this Agreement, the following terms shall have the meaning set forth below:
a) “Affiliated Companies” shall mean the Company, all of its direct or indirect subsidiaries, and any other entities controlled by, controlling, or under common control with the Company, including any successors thereof, except that, following the consummation of a Change in Control, for purposes of Sections 5(a) and 5(b), Affiliated Companies shall be limited to the Company and its subsidiaries as of immediately prior to the consummation of such Change in Control.
b) “Cause” shall mean, as determined in the sole discretion of the Company, any one or more of the following:
i. an indictment of Executive, or plea of guilty or plea of nolo contendere by Executive, to a charge of an act constituting a felony under the federal laws of the United States, the laws of any state, or any other applicable law, (II) fraud, embezzlement, or misappropriation of assets, (III) willful misfeasance or dishonesty, or (IV) other actions or criminal conduct which materially and adversely affects the business (including business reputation) or financial condition of the Company;
ii. the continued failure of Executive to (I) perform substantially Executive’s duties with the Company (other than any such failures resulting from incapacity due to physical or mental illness), (II) observe all material obligations and conditions to be performed and observed by Executive under this Agreement, or (III) perform his or her duties in accordance, in all material respects, with the policies and directions established from time to time by the Chief Executive Officer, the Board or a duly authorized Board committee (any such failure, a (“Performance Failure”), and to correct such Performance Failure within not more than fifteen (15) days following written notice from the Chief Executive Officer or the Board delivered to Executive, which notice specifically identifies the manner in which the Chief Executive Officer or the Board believes that Executive has not substantially performed; or
iii. having corrected (or the Company having waived the correction of) a Performance Failure, the occurrence of any subsequent Performance Failure (whether of the same or different type or nature).
c) “Change in Control” has the meaning given such term in the Company’s 2020 Stock Plan (or a successor plan thereto) as in effect on the Effective Date.
d) “Code” means the Internal Revenue Code of 1986, as amended.
e) “Confidential Information” shall mean all trade secrets, proprietary data, and other confidential information of or relating to any Affiliated Company, including without limitation financial
information, information relating to business operations, services, promotional practices, and relationships with customers, suppliers, employees, independent contractors, or other parties, and any information which any Affiliated Company is obligated to treat as confidential pursuant to any course of dealing or any agreement to which it is a party or otherwise bound, provided that Confidential Information shall not include information that is or becomes available to the general public and did not become so available through any breach of this Agreement by Executive or Executive’s breach of a duty owed to the Company.
f) “Covered Executive” shall have the meaning provided in Code Section 162(m)(3) and related guidance.
g) “Disability” or “Disabled” means, as determined in the sole discretion of the Company, that Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than one (1) year.
h) “Good Reason” means Executive's termination of employment within ninety (90) days following the expiration of any cure period (discussed below) following the occurrence, without Executive's consent, of one or more of the following:
i. A material reduction in Executive's base compensation (except where there is a reduction applicable to all similarly situated executive officers generally); provided, that a reduction of less than ten percent (10%) will not be considered a material reduction in base compensation; or
ii. A material breach by the Company of a material provision of this Agreement.
Executive will not resign for Good Reason without first providing the Company with written notice within sixty (60) days of the event that Executive believes constitutes “Good Reason” specifically identifying the acts or omissions constituting the grounds for Good Reason and a reasonable cure period of not less than thirty (30) days following the date of such notice during which such condition must not have been cured.
i) “Restricted Period” shall mean the twenty four (24) month period following Executive’s termination of employment with the Company or any Affiliated Company (whether pursuant to this Agreement or otherwise) for any reason.
j) “Section 409A” means Code Section 409A, and the final regulations and any guidance promulgated thereunder or any state law equivalent.
k) “Solicit” shall mean any direct or indirect communication of any kind whatsoever, regardless of by whom initiated, inviting, advising, persuading, encouraging or requesting any person or entity, in any manner, to take or refrain from taking any action; provided, however, that the term “Solicit” shall not include general advertisements by an entity with which Executive is associated or other communications in any media not targeted specifically at any specific individual described in Section 5(b) or 5(c).
10. Successors.
a) Company Successors. Any successor to the Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets will assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company” will include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this Section 10(a) or which becomes bound by the terms of this Agreement by operation of law.
b) Executive's Successors. The terms of this Agreement and all rights of Executive hereunder will inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
11. Arbitration.
a) Arbitration. Subject to the right of the Company and the Affiliated Companies to exercise the remedies described in Section 5 of this Agreement or the right of Executive to challenge, defend or contest same in any court having jurisdiction, the Parties agree that any and all controversies, claims, or disputes between Executive and the Company or any employee, officer, director, shareholder or benefit plan of the Company in their capacity as such or otherwise arising out of, relating to, or resulting from Executive's employment with the Company or termination thereof, including any breach of this Agreement, will be subject to binding arbitration under the then applicable Commercial Arbitration Rules of the American Arbitration Association. Claims subject to arbitration include but are not limited to claims under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the Sarbanes Oxley Act, the Worker Adjustment and Retraining Notification Act, the Family and Medical Leave Act, the Ohio Employment Practices Law, the Ohio Whistleblower Protection Law, the Ohio Equal Pay Law, and the Ohio State Wage Payment and Work Hour Laws, claims for breach of contract (express or implied), claims for violation of public policy or wrongful termination, and any other statutory or common law claim.
b) Procedure. In any such arbitration, the arbitrators shall consist of a panel of three arbitrators, which shall act by majority vote and which shall consist of one arbitrator selected by each party subject to the arbitration and a third arbitrator selected by the two arbitrators so selected, who shall be either a certified public accountant or an attorney at law licensed to practice in the State of Ohio and who shall act as chairman of the arbitration panel; provided that, if one party selects its arbitrator for the panel and the other party fails to so select its arbitrator within ten (10) business days after being requested by the first party to do so, then the sole arbitrator shall be the arbitrator selected by the first party. A decision in any such arbitration shall apply both to the particular question submitted and to all similar questions arising thereafter and shall be binding and conclusive upon both parties and shall be enforceable in any court having jurisdiction over the party to be charged. Each party shall bear the cost of its own attorney’s fees. However, if any party prevails on a claim, which, according to applicable law, affords the prevailing party attorney’s fees, the arbitrator may award reasonable attorney’s fees to the prevailing party. All other costs and expenses of arbitration shall be borne by the Company. All rights and remedies of each party under this Agreement are cumulative and in addition to all other rights and remedies that may be available to that party from time to time, whether under any other agreement, at law or in equity. Any arbitration under this Agreement shall be conducted in Cincinnati, Ohio.
c) Remedy. Except as otherwise provided by law or this Agreement, arbitration shall be the sole, exclusive, and final remedy for any dispute between Executive and the Company. Accordingly, except as otherwise provided by law or this Agreement, Executive and the Company hereby waive the right to seek remedies for any such disputes in court, including the right to a jury trial. Notwithstanding, the arbitrator will not have the authority to disregard or refuse to enforce any lawful Company policy, and the arbitrator will not order or require the Company to adopt a policy not otherwise required by law which the Company has not adopted.
d) Administrative Relief. Executive is not prohibited from pursuing an administrative claim with a local, state, or federal administrative body or government agency that is authorized to enforce or administer laws related to employment, including, but not limited to, the Department of Fair Employment and Housing, the Equal Employment Opportunity Commission, the National Labor Relations Board, or the Workers' Compensation Board. However, Executive may not pursue court action regarding any such claim, except as permitted by law.
12. Voluntary Nature of Agreement. Executive acknowledges and agrees that Executive is executing this Agreement voluntarily and without any duress or undue influence by the Company or anyone else. Executive further acknowledges and agrees that Executive has carefully read this Agreement and that Executive has asked any questions needed for Executive to understand the terms, consequences and binding effect of this Agreement and fully understands it, including that EXECUTIVE IS WAIVING EXECUTIVE’S RIGHT TO A JURY TRIAL. Finally, Executive Agrees that Executive has been provided an opportunity to seek the advice of an attorney of the Executive’s choice before signing this Agreement.
13. Notice.
a) General. Notices and all other communications contemplated by this Agreement will be in writing and will be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of Executive, mailed notices will be addressed to him or her at the home address which he or she most recently communicated to the Company in writing. In the case of the Company, mailed notices will be addressed to its corporate headquarters, and all notices will be directed to the attention of its General Counsel.
b) Notice of Termination. Any termination by the Company for Cause or by Executive for Good Reason will be communicated by a notice of termination to the other party hereto given in accordance with Section 13(a) of this Agreement. Such notice will indicate the specific termination provision in this Agreement relied upon, will set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and will specify the termination date (which will be not more than thirty (30) days after the giving of such notice), subject to any applicable cure period. The failure by Executive or the Company to include in the notice any fact or circumstance which contributes to a showing of Good Reason or Cause, as applicable, will not waive any right of Executive or the Company, as applicable, hereunder or preclude Executive or the Company, as applicable, from asserting such fact or circumstance in enforcing his or her or its rights hereunder, as applicable.
14. Miscellaneous Provisions.
a) No Duty to Mitigate. Executive will not be required to mitigate the amount of any payment contemplated by this Agreement, nor will any such payment be reduced by any earnings that Executive may receive from any other source.
b) Waiver. No provision of this Agreement will be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party will be considered a waiver of any other condition or provision or of the same condition or provision at another time.
c) Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.
d) Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto and supersedes in their entirety all prior or contemporaneous representations, understandings, undertakings or agreements (whether oral or written and whether expressed or implied) of the parties with respect to the subject matter hereof. Executive acknowledges and agrees that this Agreement encompasses all the rights of Executive to any severance payments and/or benefits based on the termination of Executive's employment and Executive hereby agrees that he or she has no such rights except as stated herein. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in writing and signed by duly authorized representatives of the parties hereto and which specifically mention this Agreement.
e) Choice of Law. The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the State of Ohio without giving effect to provisions governing the choice of law.
f) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement will not affect the validity or enforceability of any other provision hereof, which will remain in full force and effect.
g) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income, employment and other taxes, as determined in the Company's reasonable judgment.
h) Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.
i) Compliance with Applicable Law. The benefits paid and provided under this Agreement are subject to and conditioned upon compliance with applicable requirements of federal, state and local law and regulation, whether currently in effect or subsequently enacted, including without limitation, 12 U.S.C. Section 1828(k) and the regulations promulgated thereunder in 12 C.F.R. Part 359. Consistent with the foregoing, the Company shall have the right to defer, cancel or recoup any payment or refuse to provide any benefit under this Agreement in the event the Company determines in good faith, acting in its sole discretion, that making such payment or providing such benefit violates any applicable law or regulation. Further, benefits paid and provided under this Agreement may be subject to any claw back policy generally applicable to the executives of the Company as may be required by applicable law or as may be established by the Company in its sole discretion. To the extent determined necessary to comply with the Guidance on Sound Incentive Compensation Policies issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Company and the Office of Thrift Supervision on June 21, 2010, as it may be implemented, modified and interpreted from time to time, the Executive and the Company mutually agree to amend the provisions of this Agreement and to cooperate in good faith with respect thereto.
IN WITNESS THEREOF, Executive has hereunto set his hand, and the Company has caused these presents to be executed in its name and on its behalf, all as of the day and year first above written.
EXECUTIVE FIRST FINANCIAL BANK
By: ____________________ By: ____________________
Name: Richard S. Dennen Name: Archie Brown
Title: Chief Corporate Banking Officer Title: Chief Executive Officer
Date ____________________ Date ____________________
EXHIBIT 10.34
Execution Version
CREDIT AGREEMENT
by and between
FIRST FINANCIAL BANCORP.
and
STIFEL BANK & TRUST
Dated as of December 29, 2021
THIS AGREEMENT PROVIDES FOR AN UNCOMMITTED CREDIT FACILITY.
ALL LOANS UNDER THE UNCOMMITTED CREDIT FACILITY ARE DISCRETIONARY
ON THE PART OF THE LENDER IN ITS SOLE AND ABSOLUTE DISCRETION.
TABLE OF CONTENTS
Page
Exhibits and Schedules
Exhibit A – Form of Note
Exhibit B – Form of Compliance Certificate
Exhibit C – Opinion Matters
Schedule 4.17 – Subsidiary Banks and Other Subsidiaries
Schedule 6.10 – Indebtedness
CREDIT AGREEMENT
THIS CREDIT AGREEMENT dated as of December 29, 2021 (this “Agreement”) is by and between FIRST FINANCIAL BANCORP., a corporation organized under the laws of the State of Ohio (the “Borrower”), and STIFEL BANK & TRUST (the “Lender”).
WITNESSETH:
WHEREAS, the Borrower has requested that the Lender make available for the purposes specified in this Agreement a revolving credit facility on an uncommitted basis; and
WHEREAS, the Lender is willing to make available to the Borrower an uncommitted revolving credit facility upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, the parties hereto hereby agree as follows:
Article I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.1Defined Terms As used in this Agreement the following terms shall have the following respective meanings (and such meanings shall be equally applicable to both the singular and plural form of the terms defined, as the context may require):
“Acceleration Event”: the occurrence of (a) a failure by Borrower to repay all of the Obligations in full on the Termination Date, or (b) an Event of Default and the election by Lender to terminate the Uncommitted Revolving Line and accelerate the maturity of the Obligations.
“Acquisition”: Any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition by the Borrower or a Subsidiary of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition by the Borrower or a Subsidiary of in excess of 50% of the Equity Interests of any Person (other than a Person that is a Subsidiary), or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that the Borrower or the Subsidiary is the surviving entity.
“Adjusted Benchmark” means (i) the Benchmark plus (ii) 0.10% or such other percentage spread adjustment as may be specified in any written notice provided by the Lender to the Borrower from time to time based on any then applicable tenor of the then applicable Benchmark, as may be determined by the Lender in its sole discretion, after giving due consideration to (i) any selection or recommendation by Bloomberg Index Services Limited, or any other party responsible for the calculation or dissemination of a spread adjustment, or the method for calculating or determining the spread adjustment, whether or not in connection with any replacement of the Benchmark or (ii) any evolving or then- prevailing market convention for determining a spread adjustment, or method for calculating or determining such spread adjustment, whether or not in connection with the replacement of the Benchmark. Notwithstanding anything to the contrary, at any time the Adjusted Benchmark is less than zero, such rate shall be deemed to be zero for the purposes of this Agreement and the other Loan Documents.
“Affiliate” means any Person (1) which directly or indirectly controls, or is controlled by, or is under common control with, the Borrower or any Subsidiary; (2) which directly or indirectly beneficially owns or holds five percent (5%) or more of any class of voting stock of
Borrower or any Subsidiary; or (3) five percent (5%) or more of the voting stock of which is directly or indirectly beneficially owned or held by Borrower or any Subsidiary. The term “Control” for the purposes of this Agreement means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. For the purposes of the foregoing definition, a shareholder of Borrower shall not be deemed to be directly or indirectly controlling or controlled by the Borrower or a subsidiary, provided the person in question will not receive any proceeds from the Loans.
“Anti-Corruption Laws”: All laws, rules, and regulations of any jurisdiction applicable to the Borrower or its Subsidiaries, if any, from time to time concerning or relating to bribery or corruption.
“Applicable Margin”: 1.75%.
“Available Commitment”: The Uncommitted Revolving Line Amount then in effect minus the outstanding Uncommitted Loans at such time.
“Assignee”: As defined in Section 8.6(d).
“Available Tenor” means, as of any date of determination and with respect to the then-current Benchmark, as applicable, (i) if the then-current Benchmark is a term rate, any tenor for such Benchmark that is or may be used for determining the length of an interest period or (iii) otherwise, any payment period for interest calculated with reference to such Benchmark, as applicable, pursuant to this Agreement as of such date.
“Bank Regulatory Authority”: The Board, the Comptroller of the Currency, the FDIC, the Office of Thrift Supervision and all other relevant regulatory authorities (including, without limitation, the Ohio State Division of Financial Institutions and other relevant state bank regulatory authorities).
“Base Rate” means, at any time, the greatest of (a) the Prime Rate at such time, (b) 1/2 of 1% in excess of the Federal Funds Effective Rate at such time, and (c) SOFR for a SOFR Loan with a one-month Interest Period commencing at such time plus 1.10%. For the purposes of this definition, SOFR shall be determined using SOFR as determined by the Lender in accordance with the definition of “CME Term SOFR”, except that (i) if a given day is a Business Day, such determination shall be made on such day (rather than three Business Days prior to the commencement of an Interest Period) or (ii) if a given day is not a Business Day, CME Term SOFR for such day shall be the rate determined by the Lender for the most recent Business Day preceding such day. Any change in the Base Rate due to a change in the Prime Rate, the Federal Funds Effective Rate, or CME Term SOFR shall be effective as of the opening of business on the day of such change in the Prime Rate, the Federal Funds Effective Rate, or CME Term SOFR, respectively. Base Rate, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Base Rate. For the avoidance of doubt, none of the Prime Rate, the Federal Funds Effective Rate or the SOFR Rate shall at any time be less than zero.
“Benchmark” means, initially, CME Term SOFR; provided that if a Benchmark Replacement is utilized by the Lender, then the term “Benchmark” means the applicable Benchmark Replacement to the extent that such Benchmark Replacement has replaced such prior benchmark rate. Any reference to the “Benchmark” shall include, as applicable, the published component used in the calculation thereof. Notwithstanding anything to the contrary, at any time the Benchmark is less than zero, such rate shall be deemed to be zero for the purposes of this Agreement and the other Loan Documents.
“Benchmark Replacement” means the sum of (i) the then applicable alternate benchmark rate and (ii) an adjustment (which may be a positive or negative value or zero),
in each case, that has been selected by the Lender as the replacement Benchmark giving due consideration to any evolving or then-prevailing market convention, including any applicable recommendations made by a Relevant Governmental Body, for U.S. dollar-denominated securities based credit facilities similar to the revolving credit facility hereunder, at such time and applied in such manner as is reasonably determined by the Lender; provided that, at any time the Benchmark Replacement as determined above would be less than zero, the Benchmark Replacement will be deemed to be zero for the purposes of this Agreement and the other Loan Documents.
“Benchmark Replacement Conforming Changes” means, with respect to any Benchmark Replacement, any technical, administrative or operational changes (including changes to the definition of “Business Day,” timing and frequency of determining rates and making payments of interest, timing of borrowing requests or prepayment, the applicability and length of lookback periods, the applicability of breakage provisions, and other technical, administrative or operational matters) that the Lender decides may be appropriate to reflect the adoption and implementation of such Benchmark Replacement and to permit the administration thereof by the Lender in a manner substantially consistent with market practice (or, if the Lender decides that adoption of any portion of such market practice is not administratively feasible or if the Lender determines that no market practice for the administration of such Benchmark Replacement exists, in such other manner of administration as the Lender is reasonably necessary in connection with the administration of this Agreement and the other Loan Documents)
“Benchmark Transition Event” means, with respect to any then-current Benchmark, (i) the occurrence of a public statement or publication of information by or on behalf of the administrator of the then-current Benchmark or a Relevant Governmental Body or other governmental authority with jurisdiction over such administrator announcing or stating that all Available Tenors are or will no longer be representative, or made available, or used for determining the interest rate of loans, or shall or will otherwise cease, provided that, at the time of such statement or publication, there is no successor administrator that is satisfactory to the Lender, that will continue to provide any representative tenors of such Benchmark after such specific date, (ii) the administrator of the then-current Benchmark has permanently or indefinitely ceased to provide such Benchmark or (iii) such Benchmark has been announced by the regulatory supervisor for the administrator of such Benchmark pursuant to public statement or publication of information to be no longer representative of the underlying market and economic reality that such Benchmark is intended to measure and that representativeness will not be restored.
“Beneficial Ownership Certification”: A certification regarding beneficial ownership as required by the Beneficial Ownership Regulation.
“Beneficial Ownership Regulation”: 31 C.F.R. § 1010.230.
“Board”: The Board of Governors of the Federal Reserve System or any successor thereto.
“Borrower”: As defined in the opening paragraph hereof.
“Borrowing” means Loans of the same Type made, converted or continued on the same date and, in the case of SOFR Loans, as to which a single Interest Period is in effect.
“Borrowing Date”: The date of the making of any Borrowing hereunder.
“Borrowing Request” means a request by the Borrower for a Borrowing in accordance with Section 2.2.
“Business Day” means a day on which the Lender is open for business. For notices and determinations of SOFR, a Business Day may not be any day on which the Securities
Industry and Financial Markets Association recommends that the fixed income departments of its members be closed for the entire day for purposes of trading U.S. government securities.
“Call Report”: For each Subsidiary Bank, the “Consolidated Reports of Condition and Income” (FFIEC Form 031 or Form 041), or any successor form promulgated by the FFIEC.
“Capitalized Lease”: A lease of (or other agreement conveying the right to use) real or personal property with respect to which at least a portion of the rent or other amounts thereon constitute Capitalized Lease Obligations.
“Capitalized Lease Obligations”: As to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board), and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including such Statement No. 13).
“Change in Bank Control” means the sale, transfer, lease or conveyance by the Company, or an issuance of stock by the Bank, in either case resulting in ownership by the Company of securities that provides it with less than 80% of the Bank’s outstanding voting equity securities, calculated on the basis of voting power.
“Change of Control”: an event or series of events by which:
(a)any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, of Equity Interests representing more than 35% of the Equity Interests of the Borrower entitled to vote for members of the board of directors or equivalent governing body of the Borrower on a fully-diluted basis;
(b)during any period of 12 consecutive months, a majority of the seats (other than vacant seats) on the board of directors or other equivalent governing body of the Borrower cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body.
“Closing Date”: December 29, 2021.
“CME” means CME Group Benchmark Administration Limited.
“CME Term SOFR” means, for any tenor comparable to the applicable Interest Period, the forward-looking term rate based on SOFR administered by CME as the administrator thereof (or by any other administrator selected or recommended by the Relevant Governmental Body) and published by CME (or such other commercially available source providing such quotations as may be designated by the Lender from time to time), or such other forward-looking term rate based on SOFR for such tenor, or any other applicable
tenor, that has been selected or recommended by the Relevant Governmental Body. Notwithstanding anything to the contrary, at any time the CME Term SOFR is less than zero, such rate shall be deemed to be zero for the purposes of this Agreement and the other Loan Documents.
“Code”: The Internal Revenue Code of 1986, as amended.
“Contingent Obligation”: With respect to any Person at the time of any determination, without duplication, any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the “primary obligor”) in any manner, whether directly or otherwise: (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any direct or indirect security therefor, (b) to purchase property, securities, Equity Interests or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness, (c) to maintain working capital, equity capital or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such Indebtedness or otherwise to protect the owner thereof against loss in respect thereof, or (d) entered into for the purpose of assuring in any manner the owner of such Indebtedness of the payment of such Indebtedness or to protect the owner against loss in respect thereof; provided, that the term “Contingent Obligation” shall not include endorsements for collection or deposit, in each case in the ordinary course of business.
“Current Liabilities”: As of any date, the consolidated current liabilities of the Borrower, determined in accordance with GAAP.
“Default”: Any event which, with the giving of notice (whether such notice is required under Section 7.1, or under some other provision of this Agreement, or otherwise) or lapse of time, or both, would constitute an Event of Default.
“Equity Interests”: All shares, interests, participation or other equivalents, however designated, of or in a corporation or limited liability company, whether or not voting, including but not limited to common stock, member interests, warrants, preferred stock, convertible debentures, and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing.
“ERISA”: The Employee Retirement Income Security Act of 1974, as amended.
“ERISA Affiliate”: Any trade or business (whether or not incorporated) that is a member of a group of which the Borrower is a member and which is treated as a single employer under Section 414 of the Code.
“Event of Default”: Any event described in Section 7.1.
“Excluded Taxes”: Any (a) taxes imposed on or measured in whole or in part by revenue, net income, capital, or net worth of the Lender and franchise or other taxes imposed in lieu thereof by any jurisdiction in which the Lender is organized or incorporated, maintains its principal office, or is doing business, and (b) any branch profits taxes imposed by the United States or any similar tax imposed by any other jurisdiction in which the Lender is located.
“Federal Funds Effective Rate” means, for any day, the rate calculated by the Federal Reserve Bank of New York based on such day’s federal funds transactions by depositary institutions (as determined in such manner as shall be set forth on such bank’s Website from time to time) and published on the next succeeding Business Day by the Federal Reserve Bank of New York as the effective federal funds rate, provided that if the Federal Funds Effective Rate as so determined would be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement.
“FFIEC”: The Federal Financial Institution Examination Council.
“First Financial Bank”: First Financial Bank, an Ohio-chartered commercial bank and a wholly-owned Subsidiary of the Borrower.
“GAAP”: Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of any date of determination.
“Governmental Authority”: means the government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including, without limitation, any supra-national bodies such as the European Union or the European Central Bank) and any group or body charged with setting financial accounting or regulatory capital rules or standards (including, without limitation, the Financial Accounting Standards Board, the Bank for International Settlements or the Basel Committee on Banking Supervisory Practices or any successor or similar authority to any of the foregoing).
“Holding Company Guidelines”: The Risk-Based Capital Adequacy Guidelines for Bank Holding Companies of the Board as set forth in 12 CFR Part 225, Appendix A, as from time to time amended, or in any successor regulation.
“Immediately Available Funds”: Funds with good value on the day and in the city in which payment is received.
“Indebtedness”: With respect to any Person, at the time of any determination, without duplication, whether or not classified in accordance with GAAP as liabilities on the balance sheet of such Person: (a) all obligations of such Person for borrowed money (including non-recourse obligations), (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid or accrued, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services excluding trade payables incurred in the ordinary course of business, (f) all obligations of others secured by any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Capitalized Lease Obligations of such Person, (h) all obligations of such Person in respect of interest rate swap agreements, cap or collar agreements, interest rate futures or option contracts, currency swap agreements, currency futures or option agreements and other similar contracts, including Rate Protection Agreements of such Person, (i) all obligations of such Person, actual or contingent, as an account party in respect of letters of credit or bankers’ acceptances, (j) all obligations which constitute Indebtedness of any partnership or joint venture as to which such Person is a general partner or a joint venturer unless such Indebtedness is expressly made non-recourse to such Person, and (k) all Contingent Obligations of such Person.
“Indemnitee”: As defined in Section 8.12.
“Interest Election Request” means a request by the Borrower to convert or continue a Borrowing in accordance with Section 2.4.
“Interest Expense”: With respect to any Person, for any period of determination, the aggregate amount, without duplication, of interest paid, accrued or scheduled to be paid in
respect of any Indebtedness of such Person, including (a) all but the principal component of payments in respect of conditional sale contracts, Capitalized Leases and other title retention agreements, (b) commissions, discounts and other fees and charges with respect to letters of credit and bankers’ acceptance financings, (c) interest payments on Trust Preferred Shares, and (d) net costs under any Rate Protection Agreement, in each case determined in accordance with GAAP.
“Interest Payment Date” means, (i) with respect to any Base Rate Loan, the last Business Day of each month and (ii) with respect to any SOFR Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part.
“Interest Period” means, with respect to any SOFR Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one or three months thereafter, as the applicable Borrower may elect in accordance with Section 2.4; provided that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, and (b) any Interest Period of one month or longer that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.
“Investment”: The acquisition, purchase, making or holding of any Equity Interests or other security, any loan, advance, contribution to capital, extension of credit (except for trade and customer accounts receivable for inventory sold or services rendered in the ordinary course of business and payable in accordance with customary trade terms), any acquisition of all or substantially all of the property and assets or business of another Person or assets constituting a business unit, line of business or division of such Person, and the formation of, or entry into, any partnership as a limited or general partner or the entry into any joint venture. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, but giving effect to any returns or distributions of capital or repayment of principal actually received by such Person with respect thereto.
“Lender”: As defined in the opening paragraph hereof.
“Lien”: With respect to any Person, any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of each lessor under any Capitalized Lease), in, of or on any assets or properties of such Person, now owned or hereafter acquired, whether arising by agreement or operation of law.
“Loan”: An Uncommitted Loan.
“Loan Date”: The date of the making of any Uncommitted Loan hereunder.
“Loan Documents”: This Agreement, the Pledge Agreement and the Note.
“Loan Loss Reserves”: With respect to any Person, the allowance for loan and lease losses of such Person, as reported in the most recent Call Reports or FRY-9C reports, as applicable, of such Person.
“Material Adverse Occurrence”: Any occurrence of whatsoever nature which materially and adversely affects (a) the business, assets, properties, liabilities (actual or contingent), operations or financial condition of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower to perform its obligations under any of the Loan Documents, (c) the validity or enforceability of the material obligations of the Borrower under any Loan Document, or (d) the rights and remedies of the Lender against the Borrower. For purposes of clarity, in no event shall the acquisition of State Bank Financial Corporation and its subsidiaries, in and of itself, be deemed a Material Adverse Occurrence.
“Maturity Date”: December 28, 2022.
“Maximum Rate”: As defined in Section 8.17.
“Moody’s”: Moody’s Investors Service, Inc., or any successor thereto.
“Multiemployer Plan”: A multiemployer plan, as such term is defined in Section 4001 (a) (3) of ERISA, which is maintained (on the Closing Date, within the five years preceding the Closing Date, or at any time after the Closing Date) for employees of the Borrower or any ERISA Affiliate.
“Net Income”: With respect to any Person, the net income of such Person, consolidated with its Subsidiaries, after deductions for all expenses, including, but not limited to, income taxes if any, Interest Expense, and non-cash charges or expenses, including depreciation and amortization, all as determined in accordance with GAAP and, in the case of the Borrower, reported on the Borrower’s FRY-9C and FRY-9LP reports.
“Non-Performing Assets”: Individually or collectively, as the case may be, Non-Performing Loans and OREO.
“Non-Performing Loans”: With respect to any Person, the sum of all loans including those listed as “other restructured” or “other renegotiated” in any report to Bank Regulatory Authorities made by such Person that are either (a) ninety (90) days or more past due (either principal or interest) or (b) in non-accrual status, minus, in each case, a dollar amount representing the obligation any Governmental Authority guarantying the repayment of such loan.
“Note”: A promissory note of the Borrower in the form of Exhibit A, evidencing the obligation of the Borrower to repay the Uncommitted Loan.
“Obligations”: The Borrower’s obligations in respect of the due and punctual payment of principal and interest on the Note when and as due, whether by acceleration or otherwise and all fees, expenses, indemnities, reimbursements and other obligations of the Borrower under this Agreement (including Facility Fees) or any other Loan Document, and the Rate Protection Obligations, if any, in all cases whether now existing or hereafter arising or incurred.
“OFAC”: The U.S. Department of the Treasury’s Office of Foreign Assets Control, and any successor thereto.
“OREO”: With respect to any Person, the value of all real estate owned by such Person and classified as such by the regulatory authorities responsible for examining such Person, as shown on the most recent call or examination reports for such Person, minus, in each case, a dollar amount representing the obligation of any Governmental Authority guarantying the repayment of a loan financing such real estate.
“Participant”: As defined in Section 8.6(b).
“PATRIOT Act”: The USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), as amended from time to time, and any successor statute.
“PBGC”: The Pension Benefit Guaranty Corporation, established pursuant to Subtitle A of Title IV of ERISA, and any successor thereto or to the functions thereof.
“Permitted Acquisition”: An Acquisition made by the Borrower if:
(i)as of the date of the consummation of such Acquisition, no Default or Event of Default shall have occurred and be continuing or would result from such Acquisition, and the representation and warranty contained in Section 4.9 shall be true both before and after giving effect to such Acquisition,
(ii)such Acquisition is consummated on a non-hostile basis pursuant to a negotiated acquisition agreement that has been (if required by the governing documents of the seller or entity to be acquired) approved by the board of directors or other applicable governing body of the seller or entity to be acquired, and no material challenge to such Acquisition (excluding the exercise of appraisal rights) shall be pending or threatened by any stockholder or director of the seller or entity to be acquired,
(iii)the business to be acquired in such Acquisition is in the same or a substantially similar line of business as the Borrower’s or any Subsidiary’s or a line of business complementary thereto,
(iv)as of the date of the consummation of such Acquisition, all material approvals required in connection therewith shall have been obtained,
(v)the total assets (determined in accordance with GAAP) acquired pursuant to Acquisitions during any twelve month period do not exceed 50% of the Borrower’s and its Subsidiaries consolidated assets as determined as of the end of the first fiscal quarter for which financial statements and reports have been delivered pursuant to Section 5.1 during the preceding twelve month period or, if no Acquisition has occurred during such twelve month period, 50% of the Borrower’s and its Subsidiaries consolidated assets as determined as of the end of the most recent fiscal quarter for which financial statements and reports have been delivered pursuant to Section 5.1,
(vi)after giving effect to such Acquisition, Borrower will be in compliance with all covenants under this Agreement on a pro forma basis (calculated based on the most recently completed fiscal quarter for which financial statements and reports have been delivered pursuant to Section 5.1, and
(vii)the Borrower shall have furnished to the Lender, at least ten (10) Business Days before the closing of such Acquisition (or such shorter period as may be acceptable to the Lender), a certificate of the Chief Financial Officer certifying (A) that the conditions set forth in preceding clauses (i) through (vi) are satisfied after giving effect to such Acquisition, (B) as to a true and accurate copy attached to such certificate of a pro forma consolidated balance sheet and income statement of the Borrower and its Subsidiaries and pro forma compliance with the financial covenants in Section 6.13, Section 6.14 and Section 6.15, in each case calculated based on the most recently completed fiscal quarter for which financial statements and reports have been delivered pursuant to Section 5.1, prepared after giving effect to such Acquisition and all other Acquisitions consummated since the date of the such recently completed fiscal quarter, and (C) as to a true and accurate copy attached to such certificate of a statement of the sources and uses of the funding of such Acquisition.
“Person”: Any natural person, corporation, partnership, limited partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity.
“Plan”: Each employee benefit plan (whether in existence on the Closing Date or thereafter instituted), as such term is defined in Section 3 of ERISA, maintained for the benefit of employees, officers or directors of the Borrower or of any ERISA Affiliate.
“Pledge Agreement”: The Pledge and Security Agreement dated as of the date hereof and executed and delivered by the Borrower pursuant to which the Borrower pledges its 100% of its ownership interests in the Subsidiary Banks (including, without limitation, First Financial Bank) to the Lender as security for the Obligations.
“Prepayment Event”:
(a)any sale, transfer or other disposition (including pursuant to a sale and leaseback transaction) of any property or asset of the Borrower or any Subsidiary; or
(b)the incurrence by the Borrower or any Subsidiary of any Indebtedness, other than Indebtedness permitted by Section 6.10.
“Prime Rate” means the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the U.S. or, if The Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by the Board in Federal Reserve Statistical Release H.15 (519) (Selected Interest Rates) as the “bank prime loan” rate or, if such rate is no longer quoted therein, any similar rate quoted therein (as determined by the Lender) or any similar release by the Federal Reserve Board (as determined by the Lender). Each change in the Prime Rate shall be effective from and including the date such change is publicly announced or quoted as being effective.
“Prohibited Transaction”: The respective meanings assigned to such term in Section 4975 of the Code and Section 406 of ERISA.
“Property”: any and all property, whether real, personal, tangible, intangible or mixed, of such Person, or other assets owned, leased or operated by such Person.
“Rate Protection Agreement”: Any interest rate swap, cap or option agreement, or any other agreement pursuant to which the Borrower hedges interest rate risk.
“Rate Protection Obligations”: The liabilities, indebtedness and obligations of the Borrower, if any, under a Rate Protection Agreement with the Lender, or any Affiliate of the Lender, excluding any joint venturers or partners of the Lender.
“Regulatory Action”: Any cease and desist order, letter agreement, memorandum, or other similar regulatory action taken by a state or federal banking agency or other Person to which either the Borrower or any Subsidiary Bank is subject which, in the Lender’s commercially reasonable discretion, could reasonably be expected to constitute a Material Adverse Occurrence.
“Regulatory Reporting Principles”: Principles of accounting required by applicable regulations and used in the preparation of the Borrower’s periodic Form FRY-9LP statements filed with the Federal Reserve Board.
“Relevant Governmental Body” means the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of New York, or a committee officially
endorsed or convened by the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of New York, or any successor thereto.
“Reportable Event”: A reportable event as defined in Section 4043 of ERISA and the regulations issued under such Section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any waiver in accordance with Section 412(d) of the Code.
“Restricted Payments”: All dividends or other distributions of any nature (cash, Equity Interests, assets or otherwise) with respect to, and all other payments on account of, any class of Equity Interests (including warrants, options or rights therefor) issued by the Borrower, whether such Equity Interests are authorized or outstanding on the Closing Date or at any time thereafter, and any redemption or purchase of, or distribution in respect of, any Equity Interests of the Borrower, whether directly or indirectly.
“Risk-Based Capital”: Capital that is classified as risk-based capital by the Bank Regulatory Authorities responsible for examining such Person, as shown on the most recent call reports of such Person.
“Risk-Based Capital Guidelines”: (i) the risk-based capital guidelines applicable to Borrower and any Subsidiary in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations applicable to Borrower and any Subsidiary promulgated by regulatory authorities outside the United States including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement.
“Risk-Weighted Assets”: As defined in 12 CFR Part 325, as of any date of determination.
“S&P”: Standard & Poor’s Ratings Services, a division of McGraw-Hill, Inc.
“Sanctioned Country”: At any time, any country or territory which is itself the subject or target of any comprehensive Sanctions.
“Sanctioned Person”: At any time, (a) any Person or group listed in any Sanctions-related list of designated Persons maintained by OFAC or the U.S. Department of State, the United Nations Security Council, the European Union or any European Union member state, (b) any Person or group operating, organized or resident in a Sanctioned Country, or (c) any Person owned or controlled by any such Person or Persons described in the foregoing clauses (a) or (b).
“Sanctions”: Economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by (a) the U.S. government, including those administered by OFAC or the U.S. Department of State or (b) the United Nations Security Council, the European Union or Her Majesty’s Treasury of the United Kingdom.
“SEC”: The Securities Exchange Commission, or any successor agency performing similar functions.
“SOFR” means, with respect to any Business Day, a rate per annum equal to the secured overnight financing rate for such Business Day published by the Federal Reserve Bank of New York (or a successor administrator of the secured overnight financing rate) on the website of the Federal Reserve Bank of New York, currently at http://www.newyorkfed.org (or any successor source for the secured overnight financing rate
identified as such by the administrator of the secured overnight financing rate from time to time). Notwithstanding anything to the contrary, at any time SOFR is less than zero, such rate shall be deemed to be zero for the purposes of this Agreement and the other Loan Documents.
“Specified Officer”: The Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Credit Officer, Chief Internal Auditor or Chief Risk Officer of the Borrower.
“Subordinated Debt”: Any Indebtedness of the Borrower, now existing or hereafter created, incurred or arising, (a) that (i) is subordinated in right of payment to the payment of the Obligations, (ii) permits only payments of interest until maturity and so long as no Event of Default exists, (iii) does not mature prior to the Termination Date, and (iv) the incurrence of which does not cause Borrower to be in breach of any of the covenants set forth in this Agreement on a pro forma basis after giving effect to the incurrence thereof, and (b) any Indebtedness of the Borrower existing on the date of this Agreement and set forth on Schedule 6.10.
“Subsidiary”: Any corporation or other entity of which Equity Interests having ordinary voting power for the election of a majority of the board of directors or other Persons performing similar functions are owned by the Borrower either directly or through one or more of the Subsidiaries.
“Subsidiary Banks”: Individually or collectively, as the context may require, First Financial Bank and any of the other banks listed as “Subsidiary Banks” on Schedule 4.18 and each additional Subsidiary of the Borrower that is a federally- or state-chartered bank or thrift institution.
“Taxes”: Any and all present or future taxes, levies, imposts, deductions, charges, or withholdings, and all liabilities with respect thereto, excluding Excluded Taxes.
“Termination Date”: The earlier of (a) the Maturity Date, and (b) the date the Uncommitted Revolving Line is terminated pursuant to Section 7.2.
“Total Risk-Based Capital Ratio”: As of the last day of each fiscal quarter of the Borrower, the ratio (expressed as a percentage) of (a) total Risk-Based Capital, to (b) total Risk-Weighted Assets of the Borrower.
“Type”, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to CME Term SOFR or the Base Rate.
“Uncommitted Loan”: As defined in Section 2.1.
“Uncommitted Revolving Line”: The agreement, if any, of the Lender to make or consider requests to make Uncommitted Loans to the Borrower in an aggregate principal amount outstanding at any time not to exceed the Uncommitted Revolving Line Amount upon the terms and subject to the conditions and limitations of this Agreement.
“Uncommitted Revolving Line Amount”: $40,000,000.
“Upfront Fee”: As defined in Section 2.10.
Section 1.2Accounting Terms and Calculations Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. To the extent any change in GAAP affects any computation or determination required to be made
pursuant to this Agreement, such computation or determination shall be made as if such change in GAAP had not occurred unless the Borrower and the Lender agree in writing on an adjustment to such computation or determination to account for such change in GAAP.
Section 1.3Computation of Time Periods In this Agreement, in the computation of a period of time from a specified date to a later specified date, unless otherwise stated the word “from” means “from and including” and the word “to” or “until” each means “to but excluding.”
Section 1.4Other Definitional Terms The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections, Exhibits, Schedules and like references are to this Agreement unless otherwise expressly provided. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” Unless the context in which used herein otherwise clearly requires, “or” has the inclusive meaning represented by the phrase “and/or.” All incorporation by reference of covenants, terms, definitions or other provisions from other agreements are incorporated into this Agreement as if such provisions were fully set forth herein, and such incorporation shall include all necessary definitions and related provisions from such other agreements but including only amendments thereto agreed to by the Lender, and shall survive any termination of such other agreements until the obligations of the Borrower under this Agreement and the Note are irrevocably paid in full, and the commitments of the Lender to advance funds to the Borrower are terminated.
Article II
TERMS OF THE CREDIT FACILITIES
Section 2.1Uncommitted Loans On the terms and subject to the conditions hereof, the Lender agrees to consider on an UNCOMMITTED AND ABSOLUTELY DISCRETIONARY BASIS, to make loans under its Uncommitted Revolving Line (each, an “Uncommitted Loan”) to the Borrower on a revolving basis at any time and from time to time from the Closing Date to the Termination Date, during which period the Borrower may borrow, repay and re-borrow in accordance with the provisions hereof, provided, the unpaid principal amount of outstanding Uncommitted Loans shall not at any time exceed the Uncommitted Revolving Line Amount. THE LENDER SHALL NOT HAVE ANY COMMITMENT OR OBLIGATION TO MAKE ANY UNCOMMITTED LOAN HEREUNDER UNLESS AND UNTIL THE LENDER AFFIRMATIVELY COMMITS TO MAKE ANY SUCH UNCOMMITTED LOAN. NOTHING CONTAINED HEREIN SHALL OTHERWISE COMMIT OR OBLIGATE THE LENDER, OR BE INTERPRETED AS A PROMISE OR COMMITMENT BY THE LENDER, TO MAKE OR ELECT TO MAKE ANY SUCH UNCOMMIMTTED LOAN UNLESS AND UNTIL THE LENDER AFFIRMATIVELY COMMITS TO MAKE SUCH UNCOMMMITTED LOAN.
Section 2.2Procedure for Loans
(a)Loan Requests. To request a Borrowing, the Borrower shall notify the Lender of such request in writing, which request must be received by the Lender (i) in the case of a SOFR Borrowing, not later than 12:00 p.m. (noon), St. Louis, Missouri time, on the date which is three (3) Business Days prior to the date of the requested Borrowing Date or (ii) in the case of a Base Rate Borrowing, not later than 12:00 p.m. (noon), St. Louis, Missouri time, on the date of the requested Borrowing Date. Each request for a Borrowing hereunder shall be irrevocable and shall be deemed a representation by the Borrower that on the requested Borrowing Date and after giving effect to the requested Borrowing the applicable conditions specified in Article III have been and will be satisfied. Each request for a Borrowing shall be in an amount of $1,000,000 or a larger integral multiple of $100,000 in excess thereof and each Borrowing shall be composed entirely of Base Rate Loans or SOFR Loans. Each request for a Borrowing hereunder shall specify (i) the requested Borrowing Date, (ii) the amount of the Borrowing to be made on such date,
(iii) whether such Borrowing is to be a Base Rate Borrowing or a SOFR Borrowing, (iv) in the case of a SOFR Borrowing, the initial Interest Period to be applicable thereto (including specifying the duration of such Interest Period and the last day of such Interest Period), which shall be a period contemplated by the definition of “Interest Period”, and (v) the location and number of the Borrower’s accounts or Person to which funds are to be disbursed. The Lender may rely on any telephone request by the Borrower for a Borrowing hereunder which it believes in good faith to be genuine. Unless the Lender determines that any applicable condition specified in Article III has not been satisfied, the Lender will make available to the Borrower at the Lender’s primary office in St. Louis, Missouri, in Immediately Available Funds on the requested Borrowing Date the amount of the requested Borrowing.
If the Borrower does not specify the Type of Borrowing, then the requested Borrowing shall be a Base Rate Loan. If the Borrower does not specify an Interest Period with respect to any requested SOFR Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration. Unless the Lender shall have delivered a written notice to the Borrower pursuant to Section 2.2(b) prior to 12:00 p.m. (St. Louis, Missouri time), one Business Day prior to the Lender’s receipt of any Borrowing Request, the Lender shall be obligated, to make the amount of such Borrowing available to the Borrower in accordance with the preceding paragraph.
(b)Declining Lender Notice. On any date, the Lender may provide the Borrower a written notice indicated that for reasons other than an Event of Default the Lender has elected not to fund any additional Borrowings. Any such notice delivered to the Borrower shall be effective on the immediately succeeding Business Day and the Lender shall not be required to fund any Borrowings on or after such Business Day.
Section 2.3Note. The Uncommitted Loans shall be evidenced by the Note payable to the order of the Lender in a principal amount equal to the Uncommitted Revolving Line Amount originally in effect. The Lender shall enter in its ledgers and records the amount of each Uncommitted Loan, converted or continued and the payments made thereon, and the Lender is authorized by the Borrower to enter into its records, a record of such Uncommitted Loan and payments made thereon; provided, however that the failure by the Lender to make any such entry or any error in making such entry shall not limit or otherwise affect the obligation of the Borrower hereunder and on the Note, and, in all events, the principal amounts owing by the Borrower in respect of the Note shall be the aggregate amount of all Uncommitted Loans made by the Lender less all payments of principal thereof made by the Borrower.
Section 2.4Interest Elections.
(a)Elections by the Borrower for Borrowings. Each Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a SOFR Borrowing, shall have an initial Interest Period specified in such Borrowing Request. Thereafter, subject to the requirements of Section 2.12 and Section 2.14, the Borrower may elect to convert any SOFR Borrowing or Base Rate Borrowing to a different Type or to continue such SOFR Borrowing and, in the case of a SOFR Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case the Loans comprising each such portion shall be considered a separate Borrowing.
(b)Notice of Elections. To make an election pursuant to this Section, the Borrower shall notify the Lender of such election by telephone or by emailing an Interest Election Request to the Lender, in either case by the time that a Borrowing Request would be required under Section 2.2(a) if the Borrower were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each Interest Election Request (whether by telephone or email) shall be irrevocable and any such request
shall be confirmed promptly by hand delivery or telecopy to the Lender of a written Interest Election Request signed by the Borrower.
(c)Information in Interest Election Requests. Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.2(a):
(i)the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) of this Section 2.4(c) shall be specified for each resulting Borrowing);
(ii)the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;
(iii)whether the resulting Borrowing is to be a Base Rate Borrowing or a SOFR Borrowing; and
(iv)if the resulting Borrowing is a SOFR Borrowing, the Interest Period to be applicable thereto (by specifying the duration of such Interest Period and the last day of such Interest Period) after giving effect to such election, which shall be a period contemplated by the definition of “Interest Period”.
If any such Interest Election Request requests a SOFR Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.
(d)Failure to Elect; Default. If the Borrower shall fail to deliver a timely and properly completed Interest Election Request with respect to a SOFR Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to a Base Rate Borrowing. Notwithstanding any contrary provision hereof, if a Default has occurred and is continuing and the Lender, so notifies the Borrower, then, so long as a Default is continuing, (i) no outstanding Borrowing may be converted to or continued as a SOFR Borrowing and (ii) unless repaid, each SOFR Borrowing shall be converted to a Base Rate Borrowing at the end of the Interest Period applicable thereto.
Section 2.5Interest Rate.
(a)Interest Rate. Each SOFR Loan will bear interest at a variable rate equal to the Adjusted Benchmark plus the Applicable Margin. The rate of interest payable on the Loans is subject to change without notice in accordance with fluctuations in the Benchmark. On each day that the Benchmark changes (or that is otherwise specified by the Lender in writing), the interest rate on all Loans will change accordingly. Each Base Rate Loan will bear interest at a rate per annum equal to the Base Rate plus the Applicable Margin.
(b)Change of Benchmark. The Lender may, in its sole and absolute discretion, change the Benchmark at any time. In such event, the Bank shall provide notice to Borrower of the new Benchmark and the effective date of such change.
(c)Records of Interest Rates. The Lender’s internal records of applicable interest rates (including without limitation the Lender’s designation of any successor interest rate index if the rate index described above shall become temporarily unavailable) shall be determinative in the absence of manifest error.
(d)Interest Upon Event of Default. Upon the occurrence of any Event of Default, each Uncommitted Loan shall, at the option of the Lender (or, in the case of an Event of Default under Section 7.1(f), (g) or (h), automatically upon the occurrence of such Event of Default), bear interest until paid in full at the rate otherwise applicable thereto plus 2.0%.
(e)Notwithstanding anything to the contrary in this Agreement or in any other Loan Document:
(i)Upon (A) the occurrence of a Benchmark Transition Event, or (B) the Lender’s determination, in its discretion that the then current Benchmark is not representative of the benchmark commonly used for U.S. dollar-denominated securities based credit facilities similar to the revolving credit facility hereunder, the Benchmark Replacement will replace the then-current Benchmark for all purposes hereunder and under any Loan Document in respect of any Benchmark setting at or after 5:00 p.m. on the fifth (5th) Business Day after the date notice of such Benchmark Replacement is utilized by the Bank (or on such later effective date as may be specified by the Lender in such notice), without any amendment to, or further action or consent of any other party to, this Agreement or any other Loan Document.
(ii)In connection with the implementation and administration of a Benchmark Replacement, the Lender will have the right to make Benchmark Replacement Conforming Changes from time to time and, notwithstanding anything to the contrary herein or in any other Loan Document, any amendments implementing such Benchmark Replacement Conforming Changes will become effective without any further action or consent of any other party to this Agreement or the other Loan Documents.
(iii)At any time (including in connection with the implementation of a Benchmark Replacement), (A) if the then-current Benchmark is a term rate (including CME Term SOFR), then the Lender may remove any tenor of such Benchmark that is unavailable or non-representative for such Benchmark (including any Benchmark Replacement) and replace it with another tenor that is available and representative and (B) the Lender may reinstate any such previously removed tenor for such Benchmark (including any Benchmark Replacement.
(iv)The Lender will promptly notify the Borrower of (A) the implementation of any Benchmark Replacement pursuant to Subsection (i), above, (B) the effectiveness of any Benchmark Replacement Conforming Changes pursuant to Subsection (ii), above, or (C) any removal, replacement or reinstatement of any then applicable tenor, as the case may be, pursuant to Subsection (iii), above. Any determination, decision or election that may be made by the Lender pursuant to this Subsection, including any determination with respect to a tenor, rate or adjustment or of the occurrence or non-occurrence of an event, circumstance or date and any decision to take or refrain from taking any action, will be conclusive and binding absent manifest error and may be made in its sole discretion and without consent from any other party hereto, except, in each case, as expressly required pursuant to this Subsection.
Section 2.6Payment of Interest; Repayment of Principal
(a)Accrued Interest. Accrued interest on each Loan shall be payable (i) in arrears on each Interest Payment Date for such Loan; (ii) upon any permitted prepayment (on the amount prepaid); and (iii) on the Termination Date; provided that interest under Section 2.5(d) shall be payable on demand.
(b)Principal Repayment. Principal of the Uncommitted Loans is payable on the Termination Date.
Section 2.7Prepayments
(a)Optional Prepayment. The Borrower may prepay the Uncommitted Loans, in whole or in part, at any time, without premium or penalty. Any such prepayment must be accompanied by accrued and unpaid interest on the amount prepaid. Amounts paid (unless following an acceleration or upon termination of the Uncommitted Revolving Line in whole) or prepaid on the Uncommitted Loans under this Section 2.6(a) may be reborrowed upon the terms and subject to the conditions and limitations of this Agreement.
(b)Mandatory Prepayments for a Prepayment Event. If at any time a Prepayment Event occurs, within two (2) Business Days of the occurrence of such Prepayment Event, the Borrower shall pay to the Lender the net proceeds realized by such Prepayment Event. Any such prepayments shall be applied to the outstanding principal balance of the Uncommitted Loans and must be accompanied by accrued and unpaid interest on the amount prepaid. Amounts paid (unless following an acceleration or upon termination of the Uncommitted Revolving Line in whole) or prepaid on the Uncommitted Loans under this Subsection (b) may be reborrowed upon the terms and subject to the conditions and limitations of this Agreement.
Section 2.8Computation Interest on the Uncommitted Loans shall be computed on the basis of actual days elapsed and a year of 360 days.
Section 2.9Payments Payments and prepayments of principal of, and interest on, the Note and all fees, expenses and other obligations under this Agreement payable to the Lender shall be made without setoff or counterclaim in Immediately Available Funds not later than 2:00 p.m. (St. Louis, Missouri time) on the dates called for under this Agreement and the Note to the Lender at its primary office in St. Louis, Missouri. Funds received after such time shall be deemed to have been received on the next Business Day. Whenever any payment to be made hereunder or on the Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time, in the case of a payment of principal, shall be included in the computation of any interest on such principal payment.
Section 2.10Upfront Fee The Borrower shall pay to the Lender an upfront fee (the “Upfront Fee”) in the amount of Twenty Thousand Dollars ($20,000) on the Closing Date. Such fee shall be deemed fully earned by the Lender upon payment thereof and shall not be refundable to the Borrower under any circumstances.
Section 2.11Use of Loan Proceeds The proceeds of the Uncommitted Loans shall be used to finance general corporate purposes, including capital contributions to the Borrower’s Subsidiaries, payment of Restricted Payments permitted under Section 6.6 and financing Permitted Acquisitions; provided; however, that no part of the proceeds of the Uncommitted Loans will be used by the Borrower or any of its Subsidiaries or Affiliates, directly or indirectly, to pay Stifel, Nicolaus & Company, Incorporated or any affiliate of Stifel, Nicolaus & Company, Incorporated. Without limitation of the above sentence, the Borrower will not request any, and the Borrower shall not use, and the Borrower shall use commercially reasonable efforts to ensure that its Subsidiaries, and its or their respective directors, officers, employees and agents shall not use, the proceeds of any Uncommitted Loan (a) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws or (b) in any manner that would result in the violation of any applicable Sanctions.
Section 2.12Yield Protection If, on or after the date of this Agreement, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy,
guideline or directive (whether or not having the force of law), or any change in the interpretation, promulgation, implementation or administration thereof by any governmental or quasi-governmental authority, central bank or comparable agency charged with the interpretation or administration thereof including, notwithstanding the foregoing, all requests, rules, guidelines or directives in connection with Dodd-Frank Wall Street Reform and Consumer Protection Act regardless of the date enacted, adopted or issued, or compliance by the Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency:
(a)subjects the Lender to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to the Lender in respect of the Uncommitted Loans, or
(b)imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Lender (other than reserves and assessments taken into account in determining the interest rate), or
(c)imposes any other condition the result of which is to increase the cost to the Lender of making, funding or maintaining the Uncommitted Loans, or reduces any amount receivable by the Lender in connection with the Uncommitted Loans, or requires the Lender to make any payment calculated by reference to the amount of the Uncommitted Loans, by an amount determined by the Lender in its commercially reasonable discretion to be material,
and the result of any of the foregoing is to increase the cost to the Lender of making or maintaining the Uncommitted Loans or Uncommitted Revolving Line or to reduce the return received by the Lender in connection with the Uncommitted Loans or Uncommitted Revolving Line, then, within 15 days after demand by the Lender, the Borrower shall pay the Lender such additional amount or amounts as will compensate the Lender for such increased cost or reduction in amount received. The Lender shall provide to the Borrower a statement of the amount and basis of calculation of any such increased cost, reduction in return and/or revenue. The Lender’s statement as to such amounts shall be conclusive absent manifest error. Notwithstanding the foregoing, the Borrower will not be obligated to pay any such compensation unless the Lender also is requesting compensation as a result of such change from other similarly situated customers under agreements relating to similar credit transaction that include provisions similar to this Section 2.12.
Section 2.13Changes in Capital Adequacy Regulations If the Lender determines the amount of capital required or expected to be maintained by the Lender, or any corporation controlling the Lender, is increased as a result of a Change (as defined below), then, within 15 days after demand by the Lender, the Borrower shall pay the Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital that the Lender determines is attributable to this Agreement, the Uncommitted Loans, or the Uncommitted Revolving Line (after taking into account the Lender’s policies as to capital adequacy). The Lender shall provide to the Borrower a statement of the amount and basis of calculation of any such increased cost, reduction in return and/or revenue. The Lender’s statement as to such amounts shall be conclusive absent manifest error. For purposes of this Section 2.12, “Change” means (a) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (b) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) or in the interpretation, promulgation, implementation or administration thereof after the date of this Agreement that affects the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender. Notwithstanding the foregoing, for purposes of this Agreement, all requests, rules, guidelines or directives in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act shall be deemed to be a Change regardless of the date enacted, adopted or issued and all requests, rules, guidelines
or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States financial regulatory authorities shall be deemed to be a Change regardless of the date adopted, issued, promulgated or implemented. Further notwithstanding the foregoing, the Borrower will not be obligated to pay any such compensation unless the Lender also is requesting compensation as a result of such change from other similarly situated customers under agreements relating to similar credit transaction that include provisions similar to this Section 2.13.
Section 2.14Advances and Paying Procedure The Lender is authorized and directed to credit any of the Borrower’s accounts with the Lender (or to the account the Borrower designates in writing) for all Uncommitted Loans made under this Agreement, and the Lender is authorized to debit such account or any other account of the Borrower with the Lender for the amount of any principal or interest due under the Note or other amounts due under this Agreement on the due date with respect thereto.
Article III
CONDITIONS PRECEDENT
Section 3.1Conditions of Initial Transaction The obligation of the Lender to consider making Uncommitted Loans hereunder, which in each case shall be on an UNCOMMITTED AND ABSOLUTELY DISCRETIONARY basis, and this Agreement shall not become effective until the date on which the Lender shall have received each of the following, in each case in form and substance satisfactory to the Lender:
(a)Documents. The Lender shall have received the following:
(i)This Agreement duly executed by the Borrower.
(ii)The Pledge Agreement duly executed by the Borrower.
(iii)The Note duly executed by a duly authorized officer (or officers) of the Borrower and dated the Closing Date.
(iv)A certificate of the Secretary or Assistant Secretary (or other appropriate officer) of the Borrower dated as of the Closing Date and certifying as to the following:
(A)A true and accurate copy of the corporate resolutions of the Borrower authorizing the execution, delivery and performance of the Loan Documents to which the Borrower is a party contemplated hereby and thereby;
(B)The incumbency, names, titles and signatures of the officers of the Borrower authorized to execute the Loan Documents to which the Borrower is a party and to request Uncommitted Loans;
(C)A true and accurate copy of the Articles of Incorporation (or the equivalent) of the Borrower with all amendments thereto, certified by the appropriate governmental official of the jurisdiction of its incorporation as of a date not more than 30 days prior to the Closing Date;
(D)A true and accurate copy of the bylaws (or other constitutive documents) for the Borrower;
(v)At least five days prior to the Closing Date, if the Borrower qualifies as a “legal entity customer” under the Beneficial Ownership Regulation,
the Borrower must deliver a Beneficial Ownership Certification in relation to the Borrower.
(vi)A certificate dated the Closing Date of an authorized officer of the Borrower certifying as to the matters set forth in Subsections (e) and (f) of this Section.
(vii)Certified copies of all documents evidencing any necessary consent or governmental or regulatory approval (if any) with respect to this Agreement and the other Loan Documents and any other instrument or agreement executed by the Borrower in connection with this Agreement.
(viii)UCC and other searches for the Borrower its Subsidiaries issued not more than 30 days prior to the Closing Date.
(ix)The Lender shall have received a written opinion of the Borrower’s counsel, addressed to the Lender and addressing the matters described on Exhibit C.
(x)A good standing certificate for the Borrower and each Subsidiary Bank from the state or other jurisdiction of its incorporation or organization issued not more than 30 days prior to the Closing Date.
(xi)The Lender shall have received payment of the Upfront Fee as required under Section 2.10.
(xii)The Lender shall have received originals of the stock certificates evidencing the Borrower’s ownership of 100% of the Equity Interests of the Bank and any other Subsidiaries, together with blank and undated stock powers executed by the Borrower.
(xiii)Uniform Commercial Code financing statements required by the Pledge Agreement or under law or reasonably requested by the Lender to be filed, registered or recorded in order to create in favor of the Lender, a perfected Lien on the collateral described in the Pledge Agreement, prior and superior in right to any other Person.
(b)Compliance. The Borrower shall have performed and complied with all agreements, terms and conditions contained in this Agreement required to be performed or complied with by the Borrower prior to or simultaneously with the Closing Date.
(c)Other Matters. All corporate proceedings relating to the Borrower and all instruments and agreements in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in scope, form and substance to the Lender and its counsel, and the Lender shall have received all information and copies of all documents, including records of corporate proceedings, as the Lender or its counsel may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities.
(d)Fees and Expenses. The Lender shall have received all fees and other amounts due and payable by the Borrower on or prior to the Closing Date, including the reasonable and documented fees and expenses of counsel to the Lender payable pursuant to Section 8.2.
(e)Representations and Warranties. The representations and warranties contained in Article IV shall be true and correct on and as of the Closing Date.
(f)No Default. No Default or Event of Default shall have occurred and be continuing on the Closing Date.
Section 3.2Conditions Precedent to all Loans The obligation of the Lender to make any Uncommitted Loan (including the initial Uncommitted Loan) hereunder shall be subject to the fulfillment of the following conditions:
(a)Representations and Warranties. The representations and warranties contained in Article IV shall be true and correct in all material respects on and as of the date of such Uncommitted Loan (or, in the case of any such representation and warranty expressly stated to have been made as of a specific date, as of such specific date).
(b)No Default. No Default or Event of Default shall have occurred and be continuing on the date of such Uncommitted Loan or will exist after giving effect to the Uncommitted Loan made on such date.
(c)Notices and Requests. The Lender shall have received the Borrower’s request for such Uncommitted Loan as required under Section 2.2.
Article IV
REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Agreement and to make Uncommitted Loans hereunder, the Borrower represents and warrants to the Lender:
Section 4.1Organization, Standing, Etc. The Borrower is a corporation duly incorporated and validly existing and in good standing under the laws of the State of Ohio and has all requisite power and authority to carry on its business as now conducted, to enter into this Agreement and the Pledge Agreement and to issue the Note and to perform its obligations under the Loan Documents. Each Subsidiary is duly organized and validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite power and authority to carry on its business as now conducted. Each of the Borrower and the Subsidiaries (a) holds all certificates of authority, licenses and permits necessary to carry on its business as presently conducted in each jurisdiction in which it is carrying on such business, except where the failure to hold such certificates, licenses or permits could not reasonably be expected to constitute a Material Adverse Occurrence and (b) is duly qualified and in good standing as a foreign corporation (or other organization) in each jurisdiction in which the character of the properties owned, leased or operated by it or the business conducted by it makes such qualification necessary and the failure so to qualify would permanently preclude the Borrower or such Subsidiary from enforcing its rights with respect to any assets or expose the Borrower to any Material Adverse Occurrence.
Section 4.2Authorization and Validity The execution, delivery and performance by the Borrower of the Loan Documents have been duly authorized by all necessary corporate action by the Borrower. This Agreement constitutes, and the Note and other Loan Documents when executed and delivered will constitute, the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, moratorium and other similar laws affecting creditors’ rights generally and subject to limitations on the availability of equitable remedies.
Section 4.3No Conflict; No Default The execution, delivery and performance by the Borrower of the Loan Documents will not (a) violate any provision of any law, statute, rule or regulation or any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to the Borrower, (b) violate or contravene any provision of the Articles of Incorporation or Bylaws of the Borrower, or (c) result in a breach of or constitute a default under any
indenture, loan or credit agreement or other material agreement, lease or instrument to which the Borrower is a party or by which it or any of its properties may be bound or result in the creation of any Lien thereunder, except, in each case, to the extent that such violation, breach or default would not reasonably be expected to constitute a Material Adverse Occurrence. No Event of Default exists or would result from the incurrence by the Borrower of any Indebtedness hereunder or under any other Loan Document. Neither the Borrower nor any Subsidiary is in default under or in violation of any such law, statute, rule or regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, loan or credit agreement or other agreement, lease or instrument in any case in which the consequences of such default or violation could reasonably be expected to constitute a Material Adverse Occurrence. The Borrower, its Subsidiaries and their respective officers and employees and to the knowledge of the Borrower its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects. None of the Borrower, any Subsidiary or to the knowledge of the Borrower or such Subsidiary any of their respective directors, officers or employees is a Sanctioned Person. No Uncommitted Loan, use of the proceeds of any Uncommitted Loan or other transactions contemplated hereby will violate Anti-Corruption Laws or applicable Sanctions. The Borrower and its Subsidiaries have all permits, licenses and approvals required by such laws, copies of which have been provided to the Lender. The Borrower and its Subsidiaries are in compliance in all material respects with the PATRIOT Act. Neither the making of any Uncommitted Loan nor the use of the proceeds thereof will violate the PATRIOT Act, the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto or successor statute thereto.
Section 4.4Government Consent No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on the part of the Borrower to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, the Loan Documents.
Section 4.5Financial Statements and Condition. The Borrower’s audited consolidated financial statements as of December 31, 2020, and the Borrower’s unaudited quarterly financial statements as of September 30, 2021 (or, in each case, as of the date of the most recently delivered financial statements), as heretofore furnished to the Lender, have been prepared in accordance with GAAP on a consistent basis (except, in the case of the unaudited quarterly financial statements, for the absence of footnotes and for year-end audit adjustments) and fairly present in all material respects the financial condition of the Borrower and its Subsidiaries, taken as a consolidated enterprise, as at such dates and the results of their operations for the period then ended. As of the dates of such initial consolidated financial statements, neither the Borrower nor any Subsidiary had any material obligation, contingent liability, liability for taxes or long term lease obligation which is not reflected in such consolidated financial statements or in the notes thereto. The Borrower’s regulatory reports, including without limitation FRY-9C, and FRY-9LP reports, as heretofore furnished to the Lender, fairly present the financial condition of the Borrower and its Subsidiaries as at such dates and the results of their operations and changes in financial position for the respective periods then ended. As of the dates of such reports, neither the Borrower nor any Subsidiary had any material obligation, contingent liability, liability for taxes or long-term lease obligation which is not reflected in such FRY-9C, and FRY-9LP reports other than its obligations related to its acquisition of State Bank Financial Corporation. Since December 31, 2020, there has been no Material Adverse Occurrence.
Section 4.6Litigation There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened in writing against or affecting the Borrower or any Subsidiary or any of their material properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which could reasonably
be expected to constitute a Material Adverse Occurrence, and there are no unsatisfied judgments against the Borrower or Subsidiary, the satisfaction or payment of which could reasonably be expected to constitute a Material Adverse Occurrence.
Section 4.7Environmental, Health and Safety Laws There does not exist any violation by the Borrower or any Subsidiary of any applicable federal, state or local law, rule or regulation or order of any government, governmental department, board, agency or other instrumentality relating to environmental, pollution, health, safety or other matters which has, will or threatens to impose a liability on the Borrower or a Subsidiary or which has required or would require a material expenditure by the Borrower or a Subsidiary to cure in each case to the extent that such liability or expenditure would reasonably be likely to constitute a Material Adverse Occurrence. Neither the Borrower nor any Subsidiary has received any notice to the effect that any part of its operations or properties is not in material compliance with any such law, rule, regulation or order or notice that it or its property is the subject of any governmental investigation evaluating whether any remedial action is needed to respond to any release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to constitute a Material Adverse Occurrence.
Section 4.8ERISA Each Plan is in substantial compliance with all applicable requirements of ERISA and the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and the Code setting forth those requirements. No Reportable Event has occurred and is continuing with respect to any Plan which could reasonably be expected to constitute a Material Adverse Occurrence. All of the minimum funding standards applicable to such Plans have been satisfied and there exists no event or condition which would reasonably be expected to result in the institution of proceedings to terminate any Plan under Section 4042 of ERISA. With respect to each Plan subject to Title IV of ERISA, as of the most recent valuation date for such Plan, the present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Plan and previously furnished in writing to the Lender) of such Plan’s projected benefit obligations did not exceed the fair market value of such Plan’s assets.
Section 4.9Federal Reserve Regulations Neither the Borrower nor any Subsidiary is engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (as defined in Regulation U of the Board). The value of all margin stock owned by the Borrower does not constitute more than 25% of the value of the assets of the Borrower.
Section 4.10Title to Property; Leases; Liens Each of the Borrower and the Subsidiaries has (a) good and marketable title to its material real properties and (b) good and sufficient title to, or valid, subsisting and enforceable leasehold interest in, its other material properties, including all real properties, other properties and assets, referred to as owned or leased by the Borrower and its Subsidiaries in the most recent financial statement referred to in Section 5.1 (other than property disposed of since the date of such financial statements). None of such properties is subject to a Lien, except as allowed under Section 6.11.
Section 4.11Taxes Each of the Borrower and each Subsidiary has filed all federal, state and local tax returns required to be filed and has paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property and all other taxes, fees and other charges imposed on it or any of its property by any governmental authority (other than (i) taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower, or (ii) to the extent the failure to do so could not reasonably be expected to constitute a Material Adverse Occurrence).
Section 4.12Trademarks, Patents Each of the Borrower and the Subsidiaries possesses or has the right to use all of the patents, trademarks, trade names, service marks and copyrights, and applications therefor, and all technology, know-how, processes, methods and designs necessary for the conduct of its business without known conflict with the rights of others, except to the extent that such failure to possess or have the right to use could not reasonably be expected to constitute a Material Adverse Occurrence.
Section 4.13Burdensome Restrictions Neither the Borrower nor any Subsidiary is a party to or otherwise bound by any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter, corporate or partnership restriction which could reasonably be expected to constitute a Material Adverse Occurrence.
Section 4.14Investment Company Act Neither the Borrower nor any Subsidiary is an “investment company” or a company “controlled” by an investment company within the meaning of the Investment Company Act of 1940, as amended.
Section 4.15Retirement Benefits Except as required under Section 4980B of the Code, Section 601 of ERISA or applicable state law, neither the Borrower nor any of its Subsidiaries is obligated to provide post-retirement medical or insurance benefits with respect to employees or former employees.
Section 4.16Full Disclosure The information included in the most recent Beneficial Ownership Certification delivered to the Lender is true and correct in all respects.
Section 4.17Subsidiaries. Schedule 4.17 sets forth, as of the date of this Agreement and as the same may be amended from time to time in connection with delivery of Compliance Certificates pursuant to Section 5.1(c), a list of all Subsidiaries (including Subsidiary Banks) and the number and percentage of the shares of each class of Equity Interests owned beneficially or of record by the Borrower or any Subsidiary therein, and the jurisdiction of incorporation of each Subsidiary. None of the Subsidiary Banks is subject to any Regulatory Action which has not been disclosed in the Borrower’s Call Reports or otherwise disclosed to the Lender.
Section 4.18Labor Matters There are no pending or threatened strikes, lockouts or slowdowns against the Borrower or any Subsidiary. Neither the Borrower nor any Subsidiary has been or is in violation in any material respect of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters. All payments due from the Borrower or any Subsidiary on account of wages and employee health and welfare insurance and other benefits have been paid or accrued as a liability on the books of the Borrower or such Subsidiary. The consummation of the transactions contemplated under the Loan Documents will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which the Borrower or any Subsidiary is bound.
Section 4.19Bank Holding Company Act The Borrower has complied in all material respects with all federal, state and local laws pertaining to bank holding companies, including without limitation, the Bank Holding Company Act of 1956, as amended.
Section 4.20Capital Stock Neither the Borrower nor any Subsidiary Bank has issued any unregistered securities in violation of the registration requirements of the Securities Act of 1933, as amended, or any other law; or violated any rule, regulation or requirement under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in either case, where the effect of such violation could reasonably be expected to cause a Material Adverse Occurrence.
Section 4.21Insurance The Borrower maintains, and has caused each Subsidiary to maintain, with financially sound and reputable insurance companies insurance on all their Property in such amounts, subject to such deductibles and self-insurance retentions and covering such properties and risks as are consistent with sound business practice and as are customarily carried by companies engaged in similar business and owning similar properties in localities where the Borrower and its Subsidiaries operate.
Section 4.22Restrictive Agreements Neither the Borrower nor any Subsidiary is a party to or bound by any agreement, bond, note or other instrument of the type described in Section 6.6.
Article V
AFFIRMATIVE COVENANTS
Until the Note and all of the other Obligations have been paid in full, unless the Lender shall otherwise consent in writing:
Section 5.1Financial Statements and Reports The Borrower will furnish to the Lender (subject to the last sentence of this Section 5.1):
(a)As soon as available and in any event within 75 days after the end of each fiscal year of the Borrower, the consolidated financial statements of the Borrower and its Subsidiaries consisting of at least statements of income, cash flow and changes in stockholders’ equity, and a consolidated balance sheet as at the end of such year, setting forth in each case in comparative form corresponding figures from the previous annual financial statements, certified without a “going concern” or like qualification, or a qualification arising out of the scope of the audit, compiled by independent certified public accountants of recognized national standing selected by the Borrower and acceptable to the Lender (it being agreed that the furnishing of the Borrower’s annual report on Form 10-K for such year, as filed with the SEC, will satisfy the Borrower’s obligation under this Section 5.1(a) with respect to such year except with respect to the requirement that such financial statements be reported on without a “going concern” or like qualification, or a qualification arising out of the scope of the audit).
(b)As soon as available and in any event within 50 days after the end of each fiscal quarter of the Borrower, other than the last fiscal quarter of each fiscal year of the Borrower, unaudited consolidated statements of income, cash flow and changes in stockholders’ equity for the Borrower and its Subsidiaries for such quarter and for the period from the beginning of such fiscal year to the end of such quarter, and a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such quarter, setting forth in comparative form figures for the corresponding period for the preceding fiscal year, accompanied by a certificate signed by the Chief Financial Officer of the Borrower stating that such financial statements present fairly the financial condition of the Borrower and its Subsidiaries and that the same have been prepared in accordance with GAAP (except for the absence of footnotes and subject to year-end audit adjustments as to the interim statements) (it being agreed that the furnishing of the Borrower’s quarterly report on Form 10-Q for such quarter, as filed with the SEC, will satisfy the Borrower’s obligation under this Section 5.1(b) with respect to such quarter).
(c)As soon as available and in any event within 50 days after the end of the first three fiscal quarters of the Borrower and within 75 days after the end of the last fiscal quarter in each fiscal year of the Borrower, a Compliance Certificate in the form attached as Exhibit B signed by the Chief Financial Officer of the Borrower demonstrating in reasonable detail compliance (or noncompliance, as the case may be) with Section 6.13, Section 6.14 and Section 6.15, as at the end of such quarter and stating that as at the end of such fiscal quarter there did not exist any Default or Event of Default or, if such Default or Event of Default existed, specifying the nature and period of existence thereof and what action the Borrower proposes to take with respect thereto.
(d)As soon as available, but in any event within 50 days after the last day of each fiscal quarter, copies of the quarterly (and where appropriate, annual) Call Reports and other regulatory reports including, without limitation, FFIEC 041 reports filed by any Subsidiary Bank with any Bank Regulatory Authority.
(e)As soon as available, but in any event within 50 days after the last day of each fiscal quarter, copies of the quarterly (and where appropriate, annual) FRY-9C and FRY-9LP reports filed by the Borrower or any Subsidiary with any Bank Regulatory Authority.
(f)As soon as available, to the extent not otherwise provided under this Section 5.1, to the extent permitted by applicable law, (i) copies of all reports or materials submitted or distributed to stockholders of the Borrower or filed with the SEC, any national securities exchange or any Bank Regulatory Authority having jurisdiction over the Borrower or any of its Subsidiaries, (ii) copies of all Regulatory Actions which have not been disclosed in the Borrower’s or any Subsidiary’s most recent FRY-9C, FRY-9LP reports and Call Reports affecting or pertaining to the Borrower or any Subsidiary Bank, including without limitation, FFIEC 041 reports, and (iii) upon any officer of the Borrower becoming aware of any adverse development which occurs in any Regulatory Action previously disclosed by the Borrower, a notice from the Borrower describing the nature thereof, stating the nature and status of such Regulatory Action, and what action the Borrower proposes to take with respect thereto. Notwithstanding the foregoing, nothing in this Agreement shall be deemed to require the Borrower to disclose confidential supervisory information regarding it or any Subsidiary Bank.
(g)Promptly upon any Specified Officer becoming aware of any Default or Event of Default, a notice describing the nature thereof and what action Borrower proposes to take with respect thereto.
(h)Promptly upon any Specified Officer becoming aware of the occurrence, with respect to any Plan, of any Reportable Event or any Prohibited Transaction, a notice specifying the nature thereof and what action the Borrower proposes to take with respect thereto, and, when received, copies of any notice from PBGC of intention to terminate or have a trustee appointed for any Plan.
(i)Promptly upon any Specified Officer becoming aware of any matter that has resulted or could reasonably be expected to result in a Material Adverse Occurrence, a notice from the Borrower describing the nature thereof and what action Borrower proposes to take with respect thereto.
(j)Promptly upon any Specified Officer becoming aware of any violation as to any material environmental matter by the Borrower or any Subsidiary or of the commencement of any judicial or administrative proceeding relating to health, safety or environmental matters (i) in which an adverse determination or result could result in the revocation of or have a material adverse effect on any operating permits, air emission permits, water discharge permits, hazardous waste permits or other permits held by the Borrower or any Subsidiary which are material to the operations of the Borrower or such Subsidiary, or (ii) which will or is reasonably likely to cause a Material Adverse Occurrence or which will require a material expenditure by the Borrower or such Subsidiary to cure any alleged problem or violation, a notice from the Borrower describing the nature thereof and what action the Borrower proposes to take with respect thereto.
(k)Promptly upon any Specified Officer becoming aware of either (i) the commencement of any action, suit or proceeding before any court or arbitrator or any governmental department, board, agency or other instrumentality directly affecting the Borrower or any Subsidiary or any property of the Borrower or a Subsidiary or to which the Borrower or a Subsidiary is a party which could reasonably be expected to result in a Material Adverse Occurrence, or (ii) any adverse development which occurs in any action,
suit or proceeding before any court or arbitrator or any governmental department, board, agency or other instrumentality previously disclosed by the Borrower to the Lender which could reasonably be expected to result in a Material Adverse Occurrence, a notice from the Borrower describing the nature thereof, stating the nature and status of such action, suit or proceeding and what action the Borrower proposes to take with respect thereto.
(l)The Borrower will give prompt written notice to the Lender of any material change in the accounting or financial reporting practices of the Borrower or any of its Subsidiaries, except those changes required by GAAP.
(m)Such information and evidence of actions taken as reasonably requested by the Lender in order to assist the Lender in maintaining compliance with the Patriot Act.
(n)Any change in the information provided in the most recent Beneficial Ownership Certification delivered to the Lender that would result in a change to the list of beneficial owners identified in parts (c) or (d) of such certification.
(o)From time to time, such other information regarding the business, operation and financial condition of the Borrower and the Subsidiaries as the Lender may reasonably request.
The Borrower shall be deemed to be in compliance with its delivery obligations under Section 5.1(a) and (b) with respect to any documents or information that is publicly filed or delivered electronically and if so filed or delivered electronically, shall be deemed to have been delivered for purposes of this Agreement on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower’s website on the Internet, and has notified the Lender thereof; or (ii) on which such documents are posted on the Borrower’s behalf on an Internet or intranet website, if any, to which the Lender has access (whether a commercial or governmental, third-party website or whether sponsored by the Lender), and has notified the Lender thereof.
Section 5.2Existence The Borrower will maintain, and cause each Subsidiary to maintain, its corporate existence in good standing under the laws of its jurisdiction of organization and its qualification to transact business in each jurisdiction where failure so to qualify would permanently preclude the Borrower or such Subsidiary from enforcing its rights with respect to any material asset or would expose the Borrower or such Subsidiary to any liability that could reasonably be expected to constitute a Material Adverse Occurrence; provided, however, that nothing herein shall prohibit the merger or liquidation of any Subsidiary allowed under Section 6.1.
Section 5.3Insurance The Borrower shall maintain, and shall cause each Subsidiary to maintain, with financially sound and reputable insurance companies such insurance as may be required by law and such other insurance in such amounts and against such hazards as is customary in the case of reputable firms engaged in the same or similar business and similarly situated.
Section 5.4Payment of Taxes and Claims The Borrower shall file, and cause each Subsidiary to file, all tax returns and reports which are required by law to be filed by it and will pay, and cause each Subsidiary to pay, before they become delinquent all taxes, assessments and governmental charges and levies imposed upon it or its property and all claims or demands of any kind (including but not limited to those of suppliers, mechanics, carriers, warehouses, landlords and other like Persons) which, if unpaid, could reasonably be expected to result in the creation of a Lien upon its property; provided that the foregoing items need not be filed or paid if (i) they are being contested in good faith by appropriate proceedings, and adequate reserves with respect thereto have been set aside on Borrower’s or such Subsidiary’s books in accordance with GAAP, or (ii) the failure to file or pay such items could not reasonably be expected to constitute a Material Adverse Occurrence.
Section 5.5Inspection The Borrower shall permit any Person designated by the Lender to visit and inspect any of the properties, books and financial records of the Borrower and the Subsidiaries, to examine and to make copies of the books of accounts and other financial records of the Borrower and the Subsidiaries, and to discuss the affairs, finances and accounts of the Borrower and the Subsidiaries with, and to be advised as to the same by, its officers at such reasonable times and intervals as the Lender may designate.
Section 5.6Maintenance of Properties The Borrower will maintain, and cause each Subsidiary to maintain its properties used or useful in the conduct of its business in good condition, repair and working order ordinary wear and tear excepted, and supplied with all necessary equipment, and make all necessary repairs, renewals, replacements, betterments and improvements thereto except to the extent the failure to do so could not reasonably be expected to constitute a Material Adverse Occurrence.
Section 5.7Books and Records The Borrower will keep, and will cause each Subsidiary to keep, adequate and proper records and books of account in which entries that are full and correct in all material respects will be made of its dealings, business and affairs.
Section 5.8Compliance. The Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject; provided, however, that failure so to comply shall not be a breach of this covenant if such failure does not constitute a Material Adverse Occurrence. The Borrower and each Subsidiary will comply in all material respects with all Anti-Corruption Laws and applicable Sanctions, and will obtain all permits, licenses and approvals required by such laws, copies of which will be provided to the Lender upon request.
Section 5.9ERISA The Borrower will maintain, and cause each Subsidiary to maintain, each Plan in compliance with all material applicable requirements of ERISA and of the Code and with all applicable rulings and regulations issued under the provisions of ERISA and of the Code and will not, and will not permit any of the ERISA Affiliates to (a) engage in any transaction in connection with which the Borrower or any of the ERISA Affiliates would be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, in either case in an amount exceeding $1,000,000, (b) fail to make full payment when due of all amounts which, under the provisions of any Plan, the Borrower any ERISA Affiliate is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency (as such term is defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, with respect to any Plan in an aggregate amount exceeding $1,000,000 or (c) fail to make any payments in an aggregate amount exceeding $1,000,000 to any Multiemployer Plan that the Borrower or any of the ERISA Affiliates may be required to make under any agreement relating to such Multiemployer Plan or any law pertaining thereto.
Section 5.10Environmental Matters; Reporting The Borrower will observe and comply with, and cause each Subsidiary to observe and comply with, all laws, rules, regulations and orders of any government or government agency relating to health, safety, pollution, hazardous materials or other environmental matters to the extent non-compliance could result in a material liability or otherwise could reasonably be expected to constitute a Material Adverse Occurrence.
Section 5.11Further Assurances The Borrower shall promptly correct any defect or error that may be discovered in any Loan Document or in the execution, acknowledgment or recordation thereof. The Borrower shall furnish to the Lender evidence satisfactory to the Lender of every such recording, filing or registration. The Borrower and each of its Subsidiaries shall take such actions reasonably requested by the Lender in order to assist the Lender in maintaining compliance with the Patriot Act.
Article VI
NEGATIVE COVENANTS
Until the Note and all of the other Obligations have been paid in full, unless the Lender shall otherwise consent in writing:
Section 6.1Merger or Sale of Assets The Borrower shall not merge or consolidate or enter into any analogous reorganization or transaction with any Person or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), acquire all or substantially all of the Equity Interests of another person, nor permit any Subsidiary to do any of the foregoing; provided, however, (a) any Subsidiary or Person acquired in connection with a Permitted Acquisition may be merged with or liquidated into the Borrower or any wholly-owned Subsidiary (if the Borrower or such wholly-owned Subsidiary is the surviving corporation), and (b) Permitted Acquisitions shall be permitted. The Borrower shall not (x) effect a Change in Bank Control, (y) convey, transfer or lease all or substantially all of its properties and assets to any person (whether in one transaction or series of related transactions) or (z) convey, transfer or lease any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except: (i) dispositions of used, worn-out or surplus equipment, all in the ordinary course of business; (ii) dispositions in the ordinary course of business, including dispositions of mortgage loans in the secondary markets, loan participations, loan sales, OREO sales, closing of branch bank locations, or sales of bonds and investments in the Borrower’s investment portfolio; and (iii) dispositions of any other asset of the Borrower or any of its Subsidiaries provided that any such dispositions do not exceed, in the aggregate, ten (10%) percent of the total assets of the Borrower and its Subsidiaries on a consolidated basis in any fiscal year.
Section 6.2Plans The Borrower will not permit, nor will allow any Subsidiary to permit, any event to occur or condition to exist which would permit any Plan to terminate under any circumstances which would cause the Lien provided for in Section 4068 of ERISA to attach to any assets of the Borrower or any Subsidiary; and the Borrower will not permit, as of the most recent valuation date for any Plan subject to Title IV of ERISA, the present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Plan and previously furnished in writing to the Lender) of such Plan’s projected benefit obligations to exceed the fair market value of such Plan’s assets.
Section 6.3Change in Nature of Business The Borrower will not, nor will permit any Subsidiary to, make any material change in the nature of the business of the Borrower or such Subsidiary, as carried on at the date hereof.
Section 6.4Loan Proceeds The Borrower will not, nor will permit any Subsidiary to, use any part of the proceeds of any Uncommitted Loan directly or indirectly, and whether immediately, incidentally or ultimately, (a) to purchase or carry margin stock (as defined in Regulation U of the Board) or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund Indebtedness originally incurred for such purpose or (b) for any purpose which entails a violation of, or which is inconsistent with, the provisions of Regulations U or X of the Board.
Section 6.5Negative Pledges; Subsidiary Restrictions The Borrower will not, nor will permit any Subsidiary to, enter into any agreement, bond, note or other instrument with or for the benefit of any Person other than the Lender which would (a) prohibit the Borrower or such Subsidiary from granting, or otherwise limit the ability of the Borrower or such Subsidiary to grant to the Lender any Lien on the Equity Interests of any Subsidiary or on any assets or properties of the Borrower or such Subsidiary (other than pursuant to agreements creating Liens under Section 6.11(j), or (b) require the Borrower or such Subsidiary to grant a Lien to any other Person if the Borrower or such Subsidiary grants any Lien to the Lender. The Borrower will not permit any Subsidiary to enter into any agreement that would place or allow any restriction, directly or indirectly, on the ability of
such Subsidiary to (i) pay Restricted Payments on or with respect to such Subsidiary’s capital stock or (ii) make loans or other cash payments to the Borrower.
Section 6.6Restricted Payments The Borrower shall not pay Restricted Payments on any class of Equity Interests unless (a) the Borrower is “well capitalized” for regulatory capital purposes both before and after giving effect to the proposed Restricted Payment, (b) no Default or Event of Default has occurred and is continuing, and (c) the proposed Restricted Payment has received all necessary prior approvals required from all Bank Regulatory Authorities.
Section 6.7Transactions with Affiliates The Borrower will not, nor will permit any Subsidiary to, enter into any transaction with any Affiliate of the Borrower other than another Subsidiary, except upon fair and reasonable terms no less favorable than the Borrower, or such Subsidiary, would obtain in a comparable arm’s-length transaction with a Person not an Affiliate of the Borrower or such Subsidiary.
Section 6.8Accounting Changes The Borrower will not, nor will permit any Subsidiary to, make any significant change in accounting treatment or reporting practices, except as required by GAAP, or change its fiscal year or the fiscal year of any Subsidiary.
Section 6.9Subordinated Debt The Borrower will not, nor will permit any Subsidiary to, (a) make any scheduled payment of the principal of or interest on any Subordinated Debt which would be prohibited by the terms of such Subordinated Debt and any related subordination agreement, except for any Subordinated Debt owed by a Subsidiary to the Borrower; (b) directly or indirectly make any prepayment on or purchase, redeem or defease any Subordinated Debt or offer to do so (whether such prepayment, purchase or redemption, or offer with respect thereto, is voluntary or mandatory) unless no Default or Event of Default has occurred and is continuing; (c) amend or cancel the subordination provisions applicable to any Subordinated Debt; (d) take or omit to take any action if as a result of such action or omission the subordination of such Subordinated Debt, or any part thereof, to the Obligations might be terminated, impaired or adversely affected; or (e) fail to give the Lender prompt notice of any notice received from any holder of Subordinated Debt, or any trustee therefor, or of any default under any agreement or instrument relating to any Subordinated Debt by reason whereof such Subordinated Debt might become or be declared to be due or payable.
Section 6.10Indebtedness The Borrower will not, nor will permit any Subsidiary to, incur, create, issue, assume or suffer to exist any Indebtedness, unless the Lender has provided its prior written consent, other than (a) the Obligations and other Indebtedness owing to the Lender, (b) Indebtedness disclosed on Schedule 6.10 and any amendments, modifications, refinancings and restructurings of the same which do not require additional fees, increase the principal of or rates applicable thereto, or shorten the maturity thereof, (c) trade and accounts payable and similar operational liabilities incurred in the ordinary course of business consistent with past practice, (d) Contingent Obligations incurred by a Subsidiary Bank in the ordinary course of business, (e) Indebtedness consisting of federal funds lines of credit provided by the Federal Reserve Bank or other financial institutions, (f) Indebtedness consisting of financing provided by the Federal Home Loan Bank, (g) Subordinated Indebtedness, (h) unsecured Indebtedness of Persons acquired in connection with Permitted Acquisitions and (i) other Indebtedness consented to by the Lender in writing.
Section 6.11Liens The Borrower will not, nor will permit any Subsidiary to, create, incur, assume or suffer to exist any Lien, or enter into, or make any commitment to enter into, any arrangement for the acquisition of any property through conditional sale, lease-purchase or other title retention agreements, with respect to any property now owned or hereafter acquired by the Borrower or a Subsidiary, including, without limitation, Equity Interests in any Subsidiary Bank or any Subsidiary that owns any Subsidiary Bank, directly or indirectly, except: Liens granted to the Lender to secure the Obligations;
deposits or pledges to secure payment of workers’ compensation, unemployment insurance, old age pensions or other social security obligations, in the ordinary course of business of the Borrower or a Subsidiary; Liens for taxes, fees, assessments and governmental charges not delinquent or to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of Section 5.4; Liens of carriers, warehousemen, mechanics and materialmen, and other like Liens arising in the ordinary course of business, for sums not due or to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of Section 5.4; Liens incurred or deposits or pledges made or given in connection with, or to secure payment of, indemnity, performance or other similar bonds; Liens arising solely by virtue of any statutory or common law provision relating to banker’s liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restriction against access by the Borrower or a Subsidiary in excess of those set forth by regulations promulgated by the Board, and (ii) such deposit account is not intended by the Borrower or any Subsidiary to provide collateral to the depository institution securing Indebtedness owed to such depository institution; Liens related to repurchase agreements with deposit customers of a Subsidiary Bank; Liens created by virtue of accepting deposits from governmental and quasi-governmental entities; Encumbrances in the nature of zoning restrictions, easements and rights or restrictions of record on the use of real property and landlord’s Liens under leases on the premises rented, which do not materially detract from the value of such property or impair the use thereof in the business of the Borrower or a Subsidiary; Liens to secure Indebtedness owing to the Federal Reserve Bank permitted under Section 6.10; Liens to secure Indebtedness owing to the Federal Home Loan Bank permitted under Section 6.10; the interest of any lessor under any Capitalized Lease entered into after the Closing Date or purchase money Liens on property acquired after the Closing Date; provided, that, (i) the Indebtedness secured thereby is otherwise permitted by this Agreement and (ii) such Liens are limited to the property acquired and do not secure Indebtedness other than the related Capitalized Lease Obligations or the purchase price of such property; and Liens on the assets or Equity Interests of any Subsidiary that is not a Subsidiary Bank or any Subsidiary that owns any Subsidiary Bank, directly or indirectly.
Section 6.12Contingent Liabilities The Borrower will not, nor will permit any Subsidiary to, be or become liable on any Contingent Obligations except (i) Contingent Obligations for the benefit of the Lender, (ii) letters of credit and letters of credit guarantees issued by a Subsidiary Bank on behalf of a customer in the ordinary course of business, and (iii) Contingent Obligations with respect to Indebtedness that is permitted pursuant to Section 6.10.
Section 6.13Risk-Based Capital Ratios The Borrower will not permit: (a) the Total Risk-Based Capital Ratio of the Borrower and its Subsidiaries, on a consolidated basis (expressed as a percentage) as of the last day of any fiscal quarter to be less than eight percent (8.00%); the Tier 1 risk-based capital ratio of the Borrower and its Subsidiaries, on a consolidated basis (expressed as a percentage) as of the last day of any fiscal quarter to be less than six percent (6.00%); (c) the common equity Tier 1 risk-based capital ratio of the Borrower and its Subsidiaries, on a consolidated basis (expressed as a percentage) as of the last day of any fiscal quarter to be less than four and one-half percent (4.50%).
Section 6.14Non-Performing Assets The Borrower will not permit the ratio of Non-Performing Assets to total assets of First Financial Bank, as calculated by the Borrower in the ordinary course of business and consistent with past practices, to be greater than four percent (4.0%).
Section 6.15Regulatory Capital At all times the Borrower shall (a) be “well capitalized,” as defined in the Holding Company Guidelines, and (b) cause each Subsidiary Bank to be “well capitalized” (as defined in 12 CFR § 6.4(b)(1)).
Section 6.16Hedging Agreements The Borrower will not, nor will permit any Subsidiary to, enter into any hedging arrangements, other than any Rate Protection Agreements entered into in the ordinary course of the Borrower’s or any Subsidiary’s business.
Section 6.17Investments The Borrower will not, nor will permit any Subsidiary to, acquire for value, make, have or hold any Investments, or acquire or create any Subsidiary other than in connection with a Permitted Acquisition, except: Investments existing on the date of this Agreement and disclosed in the financial statements of the Borrower described in Section 4.5; advances to management personnel, employees and agents in the ordinary course of business; Investments in readily marketable direct obligations issued or guaranteed by the United States or any agency thereof and supported by the full faith and credit of the United States; certificates of deposit or bankers’ acceptances issued by any commercial bank organized under the laws of the United States or any State thereof which has a credit rating with respect to its unsecured indebtedness from a nationally recognized rating service that is satisfactory to the Lender; commercial paper given the highest rating by a nationally recognized rating service; repurchase agreements relating to securities issued or guaranteed as to principal and interest by the United States of America with a term of not more than seven (7) days; provided all such agreements shall require physical delivery of the securities securing such repurchase agreement, except those delivered through the Federal Reserve Book Entry System; Investments in municipal bonds which are rated A or higher by Moody’s or S&P; Investments in other bonds which are rated “investment grade” or higher by Moody’s or S&P; other readily marketable Investments in debt securities which are reasonably acceptable to the Lender; Investments by a Subsidiary in the Borrower or by Borrower in a Subsidiary; with respect to any Subsidiary, Investments made in the ordinary course of the banking business of such Subsidiary; and Investments that constitute or are made in connection with Permitted Acquisitions.
Any Investments under Subsections (e) or (f) above must mature within one year of the acquisition thereof by the Borrower or a Subsidiary.
Section 6.18Additional Subsidiaries The Borrower shall not create or acquire any Subsidiary without the prior written consent of the Lender; provided that no such prior written consent shall be required for a Subsidiary acquired in a Permitted Acquisition.
Article VII
EVENTS OF DEFAULT AND REMEDIES
Section 7.1Events of Default The occurrence of any one or more of the following events shall constitute an Event of Default:
(a)The Borrower shall fail to make when due, whether by acceleration or otherwise, any payment of principal of or interest on the Note or any other Obligation required to be made to the Lender pursuant to this Agreement.
(b)Any representation or warranty made by or on behalf of the Borrower or any Subsidiary in this Agreement or any other Loan Document or by or on behalf of the Borrower or any Subsidiary in any certificate, statement, report or document herewith or hereafter furnished to the Lender pursuant to this Agreement or any other Loan Document shall prove to have been false or misleading in any material respect on the date as of which the facts set forth are stated or certified.
(c)The Borrower shall fail to comply with Section 5.2, or Section 5.3 or the Borrower shall fail to comply with any Section of Article VI.
(d)The Borrower shall fail to comply with any other default or event of default however denominated under any other Loan Document, agreement, covenant, condition, provision or term contained in this Agreement (other than those hereinabove set
forth in this Section 7.1Section 7.1) and such failure to comply shall continue for 30 calendar days after whichever of the following dates is the earliest: (i) the date the Borrower gives notice of such failure to the Lender, (ii) the date the Borrower should have given notice of such failure to the Lender pursuant to Section 5.1, and (iii) the date the Lender gives notice of such failure to the Borrower.
(e)The Borrower or any Subsidiary shall become insolvent or shall generally not pay its debts as they mature or shall apply for, shall consent to, or shall acquiesce in the appointment of a custodian, trustee or receiver of the Borrower or such Subsidiary or for a substantial part of the property thereof or, in the absence of such application, consent or acquiescence, a custodian, trustee or receiver shall be appointed for the Borrower or a Subsidiary or for a substantial part of the property thereof and shall not be discharged within 60 days, or the Borrower or any Subsidiary shall make an assignment for the benefit of creditors.
(f)Any bankruptcy, reorganization, debt arrangement or other proceedings under any bankruptcy or insolvency law shall be instituted by or against the Borrower or any Subsidiary, and, if instituted against the Borrower or any Subsidiary, shall have been consented to or acquiesced in by the Borrower or such Subsidiary, or shall remain undismissed for 60 days, or an order for relief shall have been entered against the Borrower or such Subsidiary.
(g)Any dissolution or liquidation proceeding not permitted by Section 6.1 shall be instituted by or against the Borrower or a Subsidiary, and, if instituted against the Borrower or any Subsidiary, shall be consented to or acquiesced in by the Borrower or such Subsidiary or shall remain for 60 days undismissed.
(h)A judgment or judgments for the payment of money in excess of the sum of $5,000,000 in the aggregate shall be rendered against the Borrower or a Subsidiary and either (i) the judgment creditor executes on such judgment or (ii) such judgment remains unpaid or undischarged for more than 60 days from the date of entry thereof or such longer period during which execution of such judgment shall be stayed during an appeal from such judgment.
(i)The Borrower or any Subsidiary shall (i) fail to pay any amount owing to the Lender on any Indebtedness other than the Obligations, or (ii) shall be in default of any provision of any agreement or instrument governing such Indebtedness and such default shall not have been cured or waived prior to the expiration of any notice or cure period.
(j)The maturity of any Indebtedness with an outstanding principal balance in excess of $1,000,000 of the Borrower (other than Indebtedness under this Agreement) or a Subsidiary shall be accelerated, or the Borrower or a Subsidiary shall fail to pay any such Indebtedness when due (after the lapse of any applicable grace period) or, in the case of such Indebtedness payable on demand, when demanded (after the lapse of any applicable grace period), or any event shall occur or condition shall exist and shall continue for more than the period of grace, if any, applicable thereto and shall have the effect of causing, or permitting the holder of any such Indebtedness or any trustee or other Person acting on behalf of such holder to cause, such Indebtedness to become due prior to its stated maturity or to realize upon any collateral given as security therefor.
(k)Any execution or attachment shall be issued whereby any substantial part of the property of the Borrower or any Subsidiary shall be taken or attempted to be taken and the same shall not have been vacated or stayed within 60 days after the issuance thereof.
(l)The Borrower or any Subsidiary Bank shall become subject to any Regulatory Action affecting or pertaining to the Borrower or any Subsidiary Bank which could reasonably be expected to cause a Material Adverse Occurrence.
(m)Any Subsidiary Bank shall be unable for any reason to pay dividends or make other distributions of any nature (cash, Equity Interests, assets or otherwise) with respect to, and all other payments on account of, any class of Equity Interests (including warrants, options or rights therefor) issued by such Subsidiary Bank to the Borrower, without the prior approval of a Bank Regulatory Authority as a result of a restriction that is not generally applicable to similarly situated depository institutions.
(n)The Borrower or any Subsidiary Bank shall become subject to any Regulatory Action affecting or pertaining to the Borrower or any Subsidiary Bank which could reasonably be expected to cause a Material Adverse Occurrence.
(o)Any Change of Control shall occur.
(p)Any material provision of any Loan Document after its execution and delivery and for any reason other than as expressly permitted hereunder, fails to remain in full force or effect or any action is taken by the Borrower to discontinue or to assert the invalidity or unenforceability of any Loan Document.
(q)Any of the following shall occur: (i) any Reportable Event, (ii) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (iii) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (iv) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (v) the receipt by the Borrower or any of its ERISA Affiliates from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (vi) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal of the Borrower or any of its ERISA Affiliates from any Plan or Multiemployer Plan; or (vii) the receipt by the Borrower or any of its ERISA Affiliates of any notice, or the receipt by any Multiemployer Plan from the Borrower or any of its ERISA Affiliates of any notice, concerning the imposition upon the Borrower or any of its ERISA Affiliates of withdrawal liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA, in any case where such occurrence could reasonably be expected to cause a Material Adverse Occurrence.
Section 7.2Remedies If any Event of Default described in Section 7.1(e), (f) or (g) shall occur with respect to the Borrower, the Note and all other Obligations shall automatically become immediately due and payable. If any other Event of Default shall occur and be continuing, the Lender may terminate or suspend the obligations of the Lender under the Uncommitted Revolving Line to make Uncommitted Loans hereunder and the Lender may declare the outstanding unpaid principal balance of the Note, the accrued and unpaid interest thereon and all other Obligations to be forthwith due and payable, whereupon the Note, all accrued and unpaid interest thereon and all such Obligations shall immediately become due and payable, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything in this Agreement or in the Note to the contrary notwithstanding. Upon the occurrence of any of the events described in this Section 7.2, the Lender may exercise all rights and remedies under any of the Loan Documents, and enforce all rights and remedies under any applicable law.
Section 7.3Deposit Accounts; Offset In addition to the remedies set forth in Section 7.2, upon the occurrence of any Acceleration Event and thereafter while the same
be continuing, the Borrower hereby irrevocably authorizes the Lender to set off any Obligations against all Deposits of the Borrower with, and any and all claims of the Borrower against, the Lender. Such right shall exist whether or not the Lender shall have made any demand hereunder or under any other Loan Document, whether or not the Obligations, or any part thereof are matured or unmatured, and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to the Lender. The Lender agrees that, as promptly as is reasonably possible after the exercise of any such setoff right, it shall notify the Borrower of its exercise of such setoff right; provided, however, that the failure of the Lender to provide such notice shall not affect the validity of the exercise of such setoff rights. Nothing in this Agreement shall be deemed a waiver or prohibition of or restriction on the Lender to all rights of banker’s Lien, setoff and counterclaim available pursuant to law.
Article VIII
MISCELLANEOUS
Section 8.1Modifications Notwithstanding any provisions to the contrary herein, any term of this Agreement may be amended with the written consent of the Borrower; provided that no amendment, modification or waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such amendment, modification, waiver or consent shall be effective only in the specific instance and for the purpose for which given.
Section 8.2Expenses Whether or not the transactions contemplated hereby are consummated, the Borrower agrees to pay or reimburse the Lender upon demand for all reasonable and documented out-of-pocket expenses paid or incurred by the Lender, including filing and recording costs and reasonable fees, charges and disbursements of outside counsel to the Lender incurred from time to time, in connection with the negotiation, preparation, approval, review, execution, delivery, administration, amendment, modification, interpretation, collection and enforcement of this Agreement and the other Loan Documents and any commitment letters relating thereto paid or incurred by the Lender in connection with the collection and enforcement of this Agreement and any other Loan Document.
Section 8.3Waivers, etc. No failure on the part of the Lender or the holder of the Note to exercise and no delay in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The remedies herein and in the other Loan Documents provided are cumulative and not exclusive of any remedies provided by law.
Section 8.4Notices Except when telephonic notice is expressly authorized by this Agreement, any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by facsimile transmission, from the first Business Day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed; provided, however, that any notice to the Lender under Article II shall be deemed to have been given only when received by the Lender.
Section 8.5Taxes The Borrower agrees to pay, and save the Lender harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Agreement or the issuance of the Note, other than any
Excluded Taxes, which obligation of the Borrower shall survive the termination of this Agreement.
Section 8.6Successors and Assigns; Participations; Purchasing Banks
(a)This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lender, all future holders of the Note, and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Lender, and the Lender may not assign or transfer all or a portion of the Uncommitted Revolving Line or Loan except as set forth in Section 8.6(b) without the prior written consent of the Borrower unless an Event of Default has occurred and is continuing (in which case such consent shall not be required).
(b)The Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more Persons (each, a “Participant”) participating interests in a minimum amount of $1,000,000 in the Uncommitted Loans or other Obligation owing to the Lender, the Note, or any other interest of the Lender hereunder. In the event of any such sale by the Lender of participating interests to a Participant, (i) the Lender’s obligations under this Agreement to the other parties to this Agreement shall remain unchanged, (ii) the Lender shall remain solely responsible for the performance thereof, (iii) the Lender shall remain the holder of the Note for all purposes under this Agreement, (iv) the Borrower shall continue to deal solely and directly with the Lender in connection with the Lender’s rights and obligations under this Agreement, (v) the Lender shall provide the Borrower with notice of the sale of such participation; and (vi) the agreement pursuant to which such Participant acquires its participating interest herein shall provide that the Lender shall retain the sole right and responsibility to enforce the Obligations, including, without limitation the right to consent or agree to any amendment, modification, consent or waiver with respect to this Agreement or any other Loan Document, provided that such agreement may provide that the Lender will not, without the prior consent of such Participant, consent or agree to any such amendment, modification, consent or waiver which would (A) extend the maturity of any Obligation, (B) postpone any scheduled payment of principal or interest, (C) reduce the rates of interest or fees required under this Agreement, or (D) reduce any guaranty of the Obligations. The Borrower agrees that if amounts outstanding under this Agreement, the Note and the Loan Documents are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have, to the extent permitted by applicable law, the right of setoff in respect of its participating interest in amounts owing under this Agreement and the Note or other Loan Document to the same extent as if the amount of its participating interest were owing directly to it as the Lender under this Agreement, the Note or other Loan Document. The Borrower also agrees that each Participant shall be entitled to the benefits of Section 2.12, Section 2.13, Section 8.2, Section 8.5 and Section 8.12 with respect to its participation in the Uncommitted Loans; provided, that no Participant shall be entitled to receive any greater amount pursuant to such subsections than the Lender would have been entitled to receive in respect of the amount of the participation transferred by the Lender to such Participant had no such transfer occurred.
(c)The Borrower shall not be liable for any costs incurred by the Lender in effecting any participation under Subsection (b) of this Section.
(d)The Lender may disclose to any of its successors or assigns of the Lender’s interests in the Uncommitted Revolving Line, Uncommitted Loans, Note or any other Loan Document (each, an “Assignee”) or Participant any and all financial information in the Lender’s possession concerning the Borrower or any of its Subsidiaries (if any) which has been delivered to the Lender by or on behalf of the Borrower or any of its Subsidiaries pursuant to this Agreement or which has been delivered to the Lender by or on behalf of the Borrower or any of their Subsidiaries in connection with the Lender’s credit evaluation of
the Borrower or any of its Subsidiaries prior to entering into this Agreement, provided that prior to disclosing such information, the Lender shall first obtain the agreement of such prospective Assignee or Participant to comply with the provisions of Section 8.7.
(e)Notwithstanding any other provision in this Agreement, the Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any note held by it in favor of any federal reserve bank in accordance with Regulation A of the Board or U. S. Treasury Regulation 31 CFR § 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law.
Section 8.7Confidentiality of Information The Lender shall use reasonable efforts to assure that information about the Borrower and its operations, affairs and financial condition, not generally disclosed to the public, which is furnished to the Lender by the Borrower pursuant to the provisions hereof is used only for the purposes of this Agreement and any other relationship between the Lender and the Borrower and shall not be divulged to any Person other than the Lender, its Affiliates and their respective officers, directors, employees and agents, except: (a) to their attorneys and accountants, (b) in connection with the enforcement of the rights of the Lender hereunder and under the Loan Documents or otherwise in connection with applicable litigation, (c) in connection with assignments and participations and the solicitation of prospective assignees and participants referred to in the immediately preceding Section, (d) if such information is generally available to the public other than as a result of disclosure by the Lender, (e) to any nationally recognized rating agency that requires information about the Lender’s investment portfolio in connection with ratings issued with respect to the Lender, and (f) as may otherwise be required or requested by any Bank Regulatory Authority having jurisdiction over the Lender or by any applicable law, rule, regulation or judicial process, the opinion of the Lender’s counsel concerning the making of such disclosure to be binding on the parties hereto. The Lender shall not incur any liability to the Borrower by reason of any disclosure permitted by this Section.
Section 8.8Governing Law and Construction THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MISSOURI, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF. Whenever possible, each provision of this Agreement and the other Loan Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto.
Section 8.9Consent to Jurisdiction AT THE OPTION OF THE LENDER, THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY BE ENFORCED IN ANY FEDERAL COURT OR MISSOURI STATE COURT SITTING IN ST. LOUIS, MISSOURI; AND THE BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.
Section 8.10Waiver of Jury Trial EACH OF THE BORROWER AND THE LENDER IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
Section 8.11Survival of Agreement All representations, warranties, covenants and agreement made by the Borrower herein or in the other Loan Documents and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be deemed to have been relied upon by the Lender and shall survive the making of the Uncommitted Loans by the Lender and the execution and delivery to the Lender by the Borrower of the Note, regardless of any investigation made by or on behalf of the Lender, and shall continue in full force and effect as long as any Obligation is outstanding and unpaid and so long as the Uncommitted Revolving Line has not been terminated; provided, however, that the obligations under Section 2.12, Section 2.13, Section 8.2, Section 8.5 and Section 8.12 shall survive payment in full of the Obligations and the termination of the Uncommitted Revolving Line.
Section 8.12Indemnification The Borrower hereby agrees to defend, protect, indemnify and hold harmless the Lender and its Affiliates and the directors, officers, employees, attorneys and agents of the Lender and its Affiliates (each of the foregoing being an “Indemnitee” and all of the foregoing being collectively the “Indemnitees”) from and against any and all claims, actions, damages, liabilities, judgments, costs and expenses (including all reasonable fees and disbursements of counsel which may be incurred in the investigation or defense of any matter) imposed upon, incurred by or asserted against any Indemnitee, whether direct, indirect or consequential and whether based on any federal, state, local or foreign laws or regulations (including securities laws, environmental laws, commercial laws and regulations), under common law or on equitable cause, or on contract or otherwise:
(a)by reason of, relating to or in connection with the execution, delivery, performance or enforcement of any Loan Document, any commitments relating thereto, or any transaction contemplated by any Loan Document; or
(b)by reason of, relating to or in connection with any credit extended or used under the Loan Documents or any act done or omitted by any Person, or the exercise of any rights or remedies thereunder, including the acquisition of any collateral by the Lender by way of foreclosure of the Lien thereon, deed or bill of sale in lieu of such foreclosure or otherwise;
provided; however, that the Borrower shall not be liable to any Indemnitee for any portion of such claims, damages, liabilities and expenses resulting from such Indemnitee’s gross negligence or willful misconduct as determined by a nonappealable judgment of a court of competent jurisdiction. In the event this indemnity is unenforceable as a matter of law as to a particular matter or consequence referred to herein, it shall be enforceable to the full extent permitted by law.
This indemnification applies, without limitation, to any act, omission, event or circumstance existing or occurring on or prior to the later of the Termination Date or the date of payment in full of the Obligations, including specifically Obligations arising under Subsection (b) of this Section. The indemnification provisions set forth above shall be in addition to any liability the Borrower may otherwise have. Without prejudice to the survival of any other obligation of the Borrower hereunder the indemnities and obligations of the Borrower contained in this Section shall survive the payment in full of the other Obligations.
Section 8.13Captions The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement.
Section 8.14Entire Agreement This Agreement and the other Loan Documents embody the entire agreement and understanding between the Borrower and the Lender with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. Nothing contained in this Agreement or in any other Loan Document, expressed or implied, is intended to confer upon any Persons other than the parties hereto any rights, remedies, obligations or liabilities hereunder or thereunder.
Section 8.15Counterparts This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart.
Section 8.16Borrower Acknowledgements The Borrower hereby acknowledges that (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents, (b) the Lender has no fiduciary relationship to the Borrower, the relationship being solely that of debtor and creditor, (c) no joint venture exists between the Borrower and the Lender, and (d) the Lender undertakes no responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the business or operations of the Borrower and the Borrower shall rely entirely upon its own judgment with respect to its business, and any review, inspection or supervision of, or information supplied to, the Borrower by the Lender is for the protection of the Lender and neither the Borrower nor any third party is entitled to rely thereon.
Section 8.17Interest Rate Limitation Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Uncommitted Loan, together with all fees, charges and other amounts that are treated as interest on such Uncommitted Loan under applicable law (collectively, the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) that may be contracted for, charged, taken, received or reserved by the Lender in accordance with applicable law, the rate of interest payable in respect of such Uncommitted Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Uncommitted Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to the Lender in respect of other Uncommitted Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by the Lender.
Section 8.18Electronic Records The Borrower hereby acknowledges the receipt of a copy of this Agreement and all other Loan Documents. The Lender may, on behalf of the Borrower, create a microfilm or optical disk or other electronic image of this Agreement and any or all of the Loan Documents. The Lender may store the electronic image of this Agreement and Loan Documents in its electronic form and then destroy the paper original as part of the Lender’s normal business practices, with the electronic image deemed to be an original and of the same legal effect, validity and enforceability as the paper originals. The Lender is authorized, when appropriate, to convert any promissory note into a “transferable record” under the Uniform Electronic Transactions Act.
Section 8.19USA PATRIOT Act Notification The following notification is provided to the Borrower pursuant to Section 326 of the USA PATRIOT Act of 2001, 31 U.S.C. Section 5318:
The Lender is subject to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the
“Act”) and hereby notifies the Borrower that pursuant to the requirements of the Act, it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow the Lender to identify the Borrower in accordance with the Act.
Section 8.20Agreements must be in Writing The following notification is provided to the Borrower pursuant to Section 432.047 of the Revised Statutes of Missouri:
Oral or unexecuted agreements or commitments to loan money, extend credit or to forbear from enforcing repayment of a debt including promises to extend or renew such debt are not enforceable, regardless of the legal theory upon which it is based that is in any way related to this Agreement. To protect you (borrower) and us (lender) from misunderstanding or disappointment, any agreements we reach covering such matters are contained in this writing, which is the complete and exclusive statement of the agreement between us, except as we may later agree in writing to modify it.
[The next page is the signature page.]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.
FIRST FINANCIAL BANCORP.
By: /s/ Jamie Anderson
Name: Jamie Anderson
Title: Chief Financial Officer
Address for Borrower:
255 East 5th Street, 29th Floor
Cincinnati, Ohio 45202
Attention: Jamie Anderson
Email: Jamie.Anderson@bankatfirst.com
STIFEL BANK & TRUST
By: /s/ George W. Kriegshauser
Name: George W. Kriegshauser
Title: Vice President
Address for Lender:
Stifel Bank & Trust
501 N. Broadway, Floor 10
St. Louis, Missouri 63102
Attention: George W. Kriegshauser
Email: kriegshauserg@stifelbank.com
[Signature Page to Credit Agreement]
EXHIBIT A TO
CREDIT AGREEMENT
FORM OF NOTE
$40,000,000 December 29, 2021
St. Louis, Missouri
FOR VALUE RECEIVED, FIRST FINANCIAL BANCORP., a corporation organized under the laws of the State of Ohio, hereby promises to pay to the order of STIFEL BANK & TRUST (the “Lender”) at its primary office in St. Louis, Missouri, in lawful money of the United States of America in Immediately Available Funds (as such term and each other capitalized term used herein are defined in the Credit Agreement hereinafter referred to) on the Termination Date the principal amount of FORTY MILLION DOLLARS ($40,000,000) or, if less, the aggregate unpaid principal amount of all Uncommitted Loans made by the Lender under the Credit Agreement, and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement.
This note is the Note referred to in the Credit Agreement dated of even date herewith (as the same may hereafter be from time to time amended, restated or otherwise modified, the “Credit Agreement”) between the undersigned and the Lender. This note’s maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement.
In the event of default hereunder, the undersigned agrees to pay all costs and expenses of collection, including reasonable attorneys’ fees. The undersigned waives demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor.
THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MISSOURI WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
FIRST FINANCIAL BANCORP.
By:
Name:
Title:
EXHIBIT B TO
CREDIT AGREEMENT
FORM OF COMPLIANCE CERTIFICATE
To: Stifel Bank & Trust
THE UNDERSIGNED HEREBY CERTIFIES THAT:
(1) I am the duly elected chief financial officer of FIRST FINANCIAL BANCORP. (the “Borrower”);
(2) I have reviewed the terms of the Credit Agreement dated as of December 29, 2021 between the Borrower and Stifel Bank& Trust (as amended, the “Credit Agreement”) and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower during the accounting period covered by the Attachment hereto;
(3) The examination described in paragraph (2) did not disclose, and I have no knowledge, whether arising out of such examinations or otherwise, of the existence of any condition or event which constitutes a Default or an Event of Default (as such terms are defined in the Credit Agreement) during or at the end of the accounting period covered by the Attachment hereto or as of the date of this Certificate, except as described below (or on a separate attachment to this Certificate). The exceptions listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking or proposes to take with respect to each such condition or event are as follows:
The foregoing certification, together with the computations in the Attachment hereto and the Call Reports delivered with this Certificate in support hereof, are made and delivered this _____ day of ____________, ____ pursuant to Section 5.1 of the Credit Agreement.
FIRST FINANCIAL BANCORP.
By:
Name:
Title:
ATTACHMENT TO COMPLIANCE CERTIFICATE
AS TO FINANCIAL COVENANTS AS OF ______________, ____WHICH PERTAINS
TO THE PERIOD FROM ________________, ______
TO ________________, _______
Reference to Sections and definitions of the Credit Agreement should be made for a more complete description of requirements.
| | | | | | | | |
Section 6.13 Risk-Based Capital Ratios | | |
| | |
Section 6.14 Non-Performing Assets to Tangible Primary Capital | | |
| | |
Section 6.15 Regulatory Capital | | |
| Borrower [is] / [is not] “well capitalized” | [Yes] [No] | |
| Each Subsidiary Bank [is] / [is not] “well capitalized” on an individual basis [and the Subsidiary Banks on a combined basis [are] / [are not] “well capitalized] | [Yes] [No] | |
To the extent the covenant is not maintained, the following Subsidiary Bank(s) [is] [are] not “well capitalized.”
. | | |
| | |
EXHIBIT C TO
CREDIT AGREEMENT
MATTERS TO BE ADDRESSED BY OPINION OF COUNSEL
The opinion of counsel to the Borrower and its Subsidiaries which is called for by Article III of the Credit Agreement (the “Credit Agreement”) shall be addressed to the Lender and dated the Closing Date. It shall be satisfactory in form and substance to the Lender and shall cover the matters set forth below, subject to such assumptions, exceptions and qualifications as may be acceptable to the Lender and counsel to the Lender. Capitalized terms used herein have the respective meanings given such terms in the Credit Agreement.
(a)Based solely on a recently dated certificate of good standing issued by the Secretary of State of the State of Ohio, the Borrower is a corporation duly incorporated and validly existing and in good standing under the laws of the State of Ohio. The Borrower has all requisite corporate power and authority to carry on its business as now conducted, to enter into the Loan Documents and to perform all of its obligations under each and all of the foregoing.
(b)The execution, delivery and performance by the Borrower of the Loan Documents have been duly authorized by all necessary corporate action by the Borrower.
(c)The Loan Documents constitute the valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms.
(d)The execution, delivery and performance by the Borrower of the Loan Documents will not (i) violate any provision of any law, statute, rule or regulation or, to the best knowledge of such counsel, any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator to which the Borrower is presently subject or which has been entered against the Borrower, (ii) violate or contravene any provision of the Charter or bylaws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture, loan or credit agreement known to such counsel to which the Borrower is a party or result in the creation of any Lien thereunder.
(e)No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on the part of the Borrower to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, the Loan Documents.
(f)The provisions of the Pledge Agreement are effective to create in favor of the Lender, as security for the payment of the Obligations, a security interest in the Collateral described therein that are of a type in which a security interest may be created under Article 9 of the NY UCC (“Article 9 Collateral”).
(g)Upon the proper filing of the Financing Statement with the Filing Office, the Lender will have a perfected security interest in the Article 9 Collateral under the Missouri UCC to the extent perfection may be accomplished by the filing of a financing statement under the Missouri UCC (the “Filing Collateral”).
(h)Upon delivery to the Lender in the State of Missouri of the certificates representing the Pledged Securities, together with duly executed instruments of endorsement in blank, and provided that the same remain in the possession of the Lender in the State of Missouri, the Lender will have a perfected security interest in the Pledged Securities.
(i)The Borrower is not an “investment company” or a company controlled by an “investment company” within the meaning of the Investment Company Act of 1940.
SCHEDULE 4.17 TO
CREDIT AGREEMENT
SUBSIDIARY BANKS
| | | | | | | | | | | |
Subsidiary
Bank | Number of Shares Issued and Outstanding | Percentage Owned by the Borrower | Jurisdiction of Incorporation or Formation |
First Financial Bank | 1,259,333 | 100% | Ohio |
OTHER SUBSIDIARIES
| | | | | | | | | | | |
| Subsidiary | Number of Shares Issued and Outstanding |
Percentage Owned by the Borrower | Jurisdiction of Incorporation or Formation |
| First Financial Collateral, Inc. | 10,000 common | 100% (indirect) | Indiana |
| First Financial Equipment Finance, LLC | N/A | 100% (indirect) | Ohio |
| First Franchise Capital Corporation | 100 common | 100% (indirect) | Indiana |
| Irwin Home Equity Corporation | 13,753 preferred 90 common | 100% (indirect) | Indiana |
| IHE Funding Corp. II | 1,000 common | 100% (indirect) | Delaware |
| Irwin Union Realty Corporation | 1,000 common | 100% (indirect) | Indiana |
| MSB Investments of Nevada, Inc. | 1,000 common | 100% (indirect) | Nevada |
| MSB Holdings of Nevada, Inc. | 1,000 common | 100% (indirect) | Nevada |
| MSB of Nevada, LLC | N/A | 100% (indirect) | Nevada |
| First Financial Preferred Capital, Inc. | 1,000 common | 100% (indirect) | Ohio |
| Oak Street Holdings Corporation | 7,315 common | 100% (indirect) | Delaware |
| Oak Street Funding LLC | N/A | 100% (indirect) | Delaware |
| Oak Street Servicing, LLC | N/A | 100% (indirect) | Delaware |
| CDE Fifty-One Service Corporation | 10,000 common | 100% (indirect) | Indiana |
| | | | | | | | | | | |
| FCBKY Holding, LLC | N/A | 100% (indirect) | Kentucky |
| Peoples Building and Savings Service Corporation of Troy, Ohio | 500 common | 100% (indirect) | Ohio |
| MainSource Risk Management, Inc. | 2,500 common | 100% | Nevada |
| MainSource Statutory Trust I | N/A | 100% | Connecticut |
| MainSource Statutory Trust II | N/A | 100% | Connecticut |
| MainSource Statutory Trust III | N/A | 100% | Delaware |
| MainSource Statutory Trust IV | N/A | 100% | Delaware |
| FCB Bancorp Statutory Trust I | N/A | 100% | Delaware |
| OSF Insurance Receivables, LLC | N/A | 100% | Indiana |
SCHEDULE 6.10 TO
CREDIT AGREEMENT
INDEBTEDNESS
None.
EXHIBIT 10.35
Execution Version
PLEDGE AND SECURITY AGREEMENT
THIS PLEDGE AND SECURITY AGREEMENT dated as of December 29, 2021 (this “Agreement”), is by and between FIRST FINANCIAL BANCORP., a corporation organized under the laws of the State of Ohio (the “Pledgor”) and STIFEL BANK & TRUST (the “Lender”).
W I T N E S S E T H:
WHEREAS, the Lender has extended an uncommitted credit facility to the Pledgor pursuant to that certain Credit Agreement between the Lender and the Pledgor of even date herewith (the “Credit Agreement”), and all capitalized terms used but not otherwise defined in this Agreement shall have the same meaning as set out in the Credit Agreement; and
WHEREAS, pursuant to the Credit Agreement, the Lender is willing to extend such loan and credit facilities to the Pledgor only upon the Pledgor executing this Agreement for the purpose of securing all Obligations (as hereinafter defined) of the Pledgor to the Lender.
NOW THEREFORE, in consideration of the premises and the covenants and agreements contained herein, and to enable the Pledgor to obtain loans and other extensions of credit from the Lender and to induce the Lender to enter into transactions with the Pledgor, the Pledgor agrees as follows:
1.Pledge. As collateral security for the payment and performance in full of the Obligations, the Pledgor hereby pledges, hypothecates, assigns, transfers, sets over and delivers unto the Lender, and hereby grants to the Lender a first lien security interest in, the collateral described in Schedule A, together with the proceeds thereof and all cash, additional securities or other property at any time and from time to time receivable or otherwise distributable in respect of, in exchange for, or in substitution for any and all such pledged securities (all such pledged securities, the proceeds thereof, cash, dividends, additional securities and other property now or hereafter pledged hereunder are hereinafter collectively called the “Pledged Securities”);
TO HAVE AND TO HOLD the Pledged Securities, together with all rights, titles, interests, powers, privileges and preferences pertaining or incidental thereto, unto the Lender, its successors and assigns; subject, however, to the terms, covenants and conditions hereinafter set forth. Pledgee agrees to hold the Pledged Securities to secure the payment of the Obligations and shall not encumber or otherwise dispose of such Pledged Securities except in accordance with the terms and provisions of this Agreement.
Upon delivery to the Lender, the Pledged Securities shall be accompanied by executed stock powers in blank and by such other instruments or documents as the Lender or its counsel may reasonably request. Each delivery of certificates for such Pledged Securities shall be accompanied by a schedule showing the number of shares and the numbers of the certificates theretofore and then pledged hereunder, which schedule shall be attached hereto as Schedule A and made a part hereof. Each schedule so delivered shall supersede any prior schedule so delivered.
2.Obligations Secured. This Agreement is made, and the security interest created hereby is granted to the Lender, to secure full payment and performance of that certain Forty Million Dollar ($40,000,000.00) uncommitted revolving credit facility governed by the Credit Agreement, and all other indebtedness or obligations of the Pledgor under or evidenced by the Note, the Credit Agreement and the other Loan Documents, as each of them may be amended from time to time and (b) all indebtedness, liabilities, obligations, covenants and duties of the Pledgor to the Lender, of every kind, nature and description arising under or in respect of any Lender Product (hereinafter defined) (including arising under or in respect of any guaranty thereof), whether direct or indirect,
absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, in each case now existing or hereafter arising (all of the foregoing, collectively, the “Obligations”). As used herein, “Lender Products” means any of the following that the Lender provides, to or enters into with the Pledgor: (i) any deposit, lockbox, Cash Management Services (hereinafter defined), or other cash management agreement, (ii) any Interest Rate Swap, (iii) any credit cards, purchase cards and/or debit cards, and (iv) any other product, service or agreement pursuant to which the Pledgor is indebted to the Lender. As used herein, “Cash Management Services” means any services provided from time to time by the Lender to the Pledgor in connection with the operating, collections, payroll, trust or other depository or disbursement accounts, including automated clearinghouse, e-payable, electronic funds transfer, wire transfer, controlled disbursement, overdraft, depository, information reporting, lockbox and stop payment services
3.Representations and Warranties. The Pledgor hereby represents and warrants to the Lender (a) that the Pledgor is the legal and equitable owner of the Pledged Securities, that the Pledgor has the complete and unconditional authority to pledge the Pledged Securities being pledged by it, and holds the same free and clear of all liens, charges, encumbrances and security interests of every kind and nature except Liens permitted pursuant to Section 6.11 of the Credit Agreement (“Permitted Liens”); (b) that no consent or approval of any governmental body or regulatory authority, or of any other party, which was or is necessary to the validity of this pledge, has not been obtained and is not in full force and effect; and (c) that the Pledged Securities represent one hundred percent (100%) of the issued and outstanding Capital Stock of First Financial Bank and any other Subsidiary Banks (collectively, the “Banks”). The Pledgor further represents and warrants that no part of the Obligations will be used to purchase or carry any “margin stock”, as defined in Regulation U of the Board of Governors of the Federal Reserve System, 12 CFR § 221.1 et seq.
4.Covenants. The Pledgor hereby further covenants and agrees with the Lender as follows, until all Obligations have been fully paid and performed (or unless specifically waived by the Lender in writing):
(a)No Disposition, Etc. The Pledgor shall not sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, any of the Pledged Securities, nor will it create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, charge, option or any other encumbrance with respect to any of the Pledged Securities, or any interest therein, or any proceeds thereof, except for the lien and security interest provided for by this Agreement and Permitted Liens.
(b)Share Adjustments. All new, substitute, and additional shares, or other securities, issued by reason of any share dividend, reclassification, recapitalization, adjustment or other change declared or made in the capital structure of any of the Banks (subject to obtaining the Pledgor’s prior written consent thereto to the extent required by the Loan Documents), which are issued in respect of the Pledged Securities, shall be delivered to and held by the Pledgor under the terms of this Agreement in the same manner as the Pledged Securities originally pledged hereunder.
(c)Warrants and Rights. In the event that subscription warrants or any other rights or options shall be issued in connection with any of the Pledged Securities (subject to obtaining the Pledgor’s prior written consent thereto to the extent required by the Loan Documents), such warrants, rights, and options shall be immediately assigned to the Pledgor to be held under the terms of this Agreement in the same manner as the Pledged Securities originally pledged hereunder.
(d)No Dilution. The Pledgor shall not consent to, approve, or permit to occur any change in the capital structure of any of the Banks which would result in
any dilution of the percentage of stock ownership represented by the Pledged Securities as determined immediately prior to the acquisition of the Pledged Securities by the Pledgor.
5.Registration in Nominee Name; Denominations. The Lender shall have the right (in its sole and absolute discretion) to hold the certificates representing the Pledged Securities in its own name or in the name of the Pledgor, endorsed or assigned in blank or in favor of the Lender. Following the occurrence of an Event of Default, upon Lender’s request and delivery of certificates representing the Pledged Securities to the issuer of the Pledged Securities, the Lender may have such Pledged Securities registered in the name of the Lender or any nominee or nominees of the Lender. The Lender shall at all times have the right to exchange the certificates representing Pledged Securities for certificates of smaller or larger denominations for any purpose consistent with this Agreement.
6.Dividends. Notwithstanding anything in this Agreement to the contrary, so long as an Event of Default is not then in existence, all cash dividends paid in respect of the Pledged Securities, if any (subject to obtaining the Lender’s prior written consent thereto, if required by the Loan Documents), shall be the property of the Pledgor. If any Event of Default has occurred and is continuing, then, at the Lender’s election (and upon notice to the Pledgor), all such cash dividends shall thereafter be paid to the Lender and applied in reduction of the Obligations, in such order of priority as the Lender shall determine in its sole discretion.
7.Voting Rights.
(a)Provided that no Event of Default shall have occurred and be continuing:
(i)the Pledgor shall be entitled to exercise or refrain from exercising the voting rights attributable to the Pledged Securities or any part thereof for any purpose not in violation of the terms and conditions of this Agreement and the other Loan Documents, and
(e)the Lender will execute and deliver any proxies or other instruments reasonably requested by the Pledgor for the purpose of enabling the Pledgor to exercise the voting rights that it is entitled to exercise pursuant to subparagraph 7(a)(1).
(b)Upon the occurrence and during the continuance of an Event of Default, at the election of the Lender (and upon notice to the Pledgor), all rights of the Pledgor to exercise or refrain from exercising the voting rights attributable to the Pledged Securities or any part thereof pursuant to subparagraph 7(a)(1) or otherwise shall cease, and the Lender and its successors and assigns shall have the sole right to exercise or refrain from exercising such rights after obtaining all necessary regulatory approvals. In furtherance of the foregoing, the Pledgor hereby makes, constitutes and appoints the Lender and its officers as the proxies and attorneys-in-fact of and for the Pledgor, with full power to exercise or to refrain from exercising any and all voting rights attributable to the Pledged Securities upon the occurrence and during the continuance of any such Event of Default. The foregoing appointment and power, being coupled with an interest, are irrevocable until the Obligations have been fully and irreversibly satisfied.
8.Remedies Upon Default.
(a)Upon the occurrence and during the continuance of an Event of Default, the Lender shall have all of the rights, powers, privileges, options and remedies of a secured party under the Uniform Commercial Code as in effect in the State of Missouri, and without limiting the foregoing, the Lender may (1) collect any
and all amounts payable in respect of the Pledged Securities and exercise any and all rights, powers, privileges, options and remedies of the holder and owner thereof, and (2) sell, transfer or negotiate the Pledged Securities, or any part thereof, at public or private sale, for cash, upon credit or for future delivery as the Lender shall deem appropriate, including without limitation, at the Lender’s option, the purchase of all or any part of the Pledged Securities at any public sale by the Lender. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Upon consummation of any sale, the Lender shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Pledged Securities so sold. Each such purchaser at any such sale shall hold the property sold absolutely, free from any claim or right on the part of the Pledgor, and the Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay or appraisal that the Pledgor now has or may at any time in the future have under any rule of law or statute now existing or hereinafter enacted. Except as otherwise expressly set forth above, the Pledgor hereby expressly waives notice to redeem and notice of the time, place and manner of such sale.
(b)The Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the “Securities Act”), applicable state securities laws, and other applicable laws, rules and regulations (including without limitation the rules and regulations of any Bank Regulatory Authority), the Lender may be compelled, with respect to any sale of all or any part of the Pledged Securities, to limit purchasers to those who agree, among other things, to acquire such Pledged Securities for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act), and, notwithstanding such circumstances, the Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Lender shall have no obligation to engage in public sales and no obligation to delay the sale of any of the Pledged Securities for the period of time necessary to permit the issuer thereof to register such sale under the Securities Act or under applicable state securities laws, even if the Pledgor would agree to do so.
(c)If the Lender determines to exercise its right to sell any or all of the Pledged Securities, upon written request, the Pledgor from time to time shall, and shall cause each issuer of the Pledged Securities to be sold hereunder to, furnish to the Lender all such information as the Lender may request in order to determine the number of shares and other instruments included in the Pledged Securities that may be sold by the Lender as exempt transactions under the Securities Act and the rules of the Securities and Exchange Commission thereunder, as the same are from time to time in effect.
9.Application of Proceeds. The proceeds of the sale of Pledged Securities sold pursuant to Section 8, and the proceeds of the exercise of any of the Lender’s other remedies hereunder, shall be applied by the Lender as follows:
First: To the payment of all costs and expenses incurred by the Lender in connection with any such sale, including, but not limited to, all court costs and the reasonable fees and expenses of counsel for the Lender in connection therewith, and
Second: To the payment in full of the Obligations, in such order of priority as the Lender shall determine, in its sole discretion, and
Third: The excess, if any, shall be paid to the Pledgor or any other person lawfully thereunto entitled.
At the Pledgor’s request, the Lender shall provide calculations, in commercially reasonable form, setting forth the allocation of proceeds in accordance with this Section 9.
10.Reimbursement of the Lender. The Pledgor agrees to reimburse the Lender, upon demand, for all expenses, including without limitation reasonable attorney’s fees, incurred by it in connection with the administration and enforcement of this Agreement, and agrees to indemnify the Lender and hold it harmless from and against any and all liability incurred by it hereunder or in connection herewith, unless such liability shall be due to willful misconduct or gross negligence on the part of the Lender.
11.No Waiver. No failure on the part of the Lender to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy by the Lender preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies are cumulative and are not exclusive of any other remedies provided by law.
12.Limitation of Liability. The powers conferred on the Lender hereunder are solely to protect its interests in the Pledged Securities, and shall not impose any duty upon the Lender to exercise any such powers. Except for the exercise of reasonable care in the custody and preservation of the certificates or other instruments representing Pledged Securities in its possession and the accounting for monies actually received by it hereunder, the Lender shall have no duty as to any Pledged Securities. Without limiting the generality of the foregoing, the Lender shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Securities, regardless of whether the Lender has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps in accordance with the standard of care set forth above to maintain possession of the certificates or other instruments representing Pledged Securities in its possession) to preserve rights against any parties with respect to the Pledged Securities, (c) taking any necessary steps to collect or realize upon any of the Obligations or any of the Pledged Securities, or (d) initiating any action to protect the Pledged Securities against the possibility of a decline in market value. The Lender shall be deemed to have exercised reasonable care in the custody and preservation of the certificates or other instruments representing Pledged Securities in its possession if such items are accorded treatment substantially equal to that which the Lender accords its own property consisting of negotiable securities.
13.Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart.
14.Binding Agreement. This Agreement and the terms, covenants and conditions hereof shall be binding upon and inure to the benefit of the parties hereto and to all holders of indebtedness secured hereby and their respective successors and assigns.
15.Further Assurances. The Pledgor agrees to do such further acts and things, and to execute and deliver such additional conveyances, assignments, agreements and instruments (including but not limited to the execution and delivery and filing of Uniform Commercial Code financing statements with respect to the security interests of this Agreement), as the Lender at any time may request in connection with the administration and enforcement of this Agreement or relative to the Pledged Securities or any part thereof or in order to assure and confirm unto the Lender its rights and remedies hereunder.
16.Severability. If any provision of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder
of this Agreement or the application of such provision to other persons or circumstances shall not be affected thereby and shall be enforceable to the greatest extent permitted by law.
17.Miscellaneous.
(a)THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MISSOURI, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF.
(b)Neither this Agreement nor any provision hereof may be altered, amended, modified or changed, nor may any of the Pledged Securities be released, except by an instrument in writing signed by the party against whom enforcement of such alteration, amendment, modification, change or release is sought.
(c)The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement.
(d)Any reference herein to any instrument, document or agreement, by whatever terminology used, shall be deemed to include any and all past, present or future amendments, restatements, modifications, supplements, extensions, renewals or replacements thereof, as the context may require.
(e)All references herein to the preamble, the recitals or sections, paragraphs, subparagraphs, schedules or exhibits are to the preamble, recitals, sections, paragraphs, subparagraphs, schedules and exhibits of or to this Agreement unless otherwise specified. The words “hereof”, “herein” and “hereunder” and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision of this Agreement.
(f)When used herein, (1) the singular shall include the plural, and vice versa, and the use of the masculine, feminine or neuter gender shall include all other genders, as appropriate, (2) “include”, “includes” and “including” shall be deemed to be followed by “without limitation” regardless of whether such words or words of like import in fact follow same, and (3) unless the context clearly indicates otherwise, the disjunctive “or” shall include the conjunctive “and”.
(g)Any reference herein to any law shall be a reference to such law as in effect from time to time and shall include any rules and regulations promulgated or published thereunder and published interpretations thereof.
[The balance of this page is intentionally left blank.]
IN WITNESS WHEREOF, the Pledgor and the Lender have executed this Agreement, or have caused this Agreement to be duly executed by a duly authorized officer, all as of the day first above written.
PLEDGOR:
FIRST FINANCIAL BANCORP.
By: /s/ Jamie Anderson
Name: Jamie Anderson
Title: Chief Financial Officer
LENDER:
STIFEL BANK & TRUST
By: /s/ George W. Kriegshauser
Name: George W. Kriegshauser
Title: Vice President
The undersigned Bank executes this Pledge and Security Agreement for the sole purpose of acknowledging the pledge of the Pledged Securities.
BANK:
FIRST FINANCIAL BANK
By: /s/ James Anderson
Name: James Anderson
Title: CFO
Signature Page to Pledge and Security Agreement
SCHEDULE A
Pledged Securities
| | | | | | | | | | | |
| Issuer | No. of Shares | Class | Certificate Nos. |
| | | |
| First Financial Bank | 1,259,333 | Common, $8.00 par value | 5426 |
EXHIBIT 13
Annual Report 2021 Moving forward… together First First Financial Bancorp
2017 2018 2019 20212020 Net Income (dollars in millions) $172.6 $155.8 $96.8 $198.1 $205.2 2018 $8.8 2017 $6.0 2019 $9.2 2020 $9.9Total Loans (dollars in billions) 2021 $9.3 2018 $10.1 2017 $6.9 2019 $10.2 2020 $12.2 Total Deposits (dollars in billions) 2021 $12.9 2018 $14.0 2017 $8.9 2019 $14.5 2020 $16.0 Total Assets (dollars in billions) 2021 $16.3 2017 $1.56 2020 $1.59 2018 $1.93 2019 $2.00 Diluted Earnings Per Share 2021 $2.14 9.08% 20212017 2018 2019 2020 7.02% 10.78% 9.85% 9.11% Return On Equity 1.00% 20202017 1.12% 2018 1.37% 2019 1.39% Return On Assets 1.28% 2021 Archie M. Brown President & Chief Executive Officer
Dear Fellow Shareholders, As I look back on 2020, I recall how routinely the year began, as we prepared the previous year’s annual report to shareholders. We were coming off a strong 2019 performance and had developed solid strategic and execution plans that would set the direction for the coming 12 months. Or so we thought. At that same time, a novel coronavirus was migrating from country to country. Over the course of weeks, a health crisis became a pandemic, and economic disruption evolved into a global recession. By March, we launched our crisis management procedures, unaware that those conditions would remain the standard for the balance of the year. Everything that we once took for granted seemed to vanish overnight – daily commutes, the workplace, personal interactions, even handshakes and casual conversations. Everything seemed to change, except First Financial Bank’s commitment to our clients, communities, and each other. The pandemic forced us to limit access to our banking centers, so we adapted to serve our clients in creative ways, with a combination of in-person, remote, and digital solutions. We made tens of thousands of calls to check on the personal and financial wellbeing of our clients, and created relief programs to help those impacted by sudden financial challenges. These efforts complemented the swift action taken by the Federal Reserve and our national, state, and local governments. Although the impact of this health crisis was felt throughout the economy, our financial systems were strong and moved quickly to lessen the immediate impact of the pandemic. Much needed stimulus came in the form of a reduction in interest rates, the passing of the CARES Act, and the establishment of the Small Business Administration’s Payroll Protection Program, to name a few. Implementing these programs was challenging, complicated by the fact that we shifted 90 percent of our associates to remote work arrangements. This tested the mettle of our technology teams, our networks, and the ability of our associates to reimagine and redesign everyday tasks and processes on the fly. Not surprisingly, our teams demonstrated their innovation and implemented new programs without sacrificing the quality of their work and our commitment to customer service. Throughout 2020, First Financial produced solid earnings as a result of record revenue, disciplined credit and expense management, historic production from key lines of business like our Mortgage and Bannockburn Global Forex divisions, record Commercial and Industrial loan production, and assets under management in our Wealth Management division. Despite pandemic-related headwinds, our careful management of resources positions us well as we rebound from this historic event. Looking to 2021, we will focus on leveraging the goodwill we established over the past year, growing core client relationships, building greater confidence and trust with our clients, and becoming a more integral part of their day-to-day financial activities. We want our associates to thrive in all aspects of their lives, promoting positive outcomes for themselves and our company. To accomplish this, we are creating a more engaged workplace, one that celebrates our diversity and addresses the complete wellbeing of our associates. As always, we will continue to advocate for our clients, make a difference in our communities, break traditional industry norms, improve functionality, be good corporate stewards, and diligently manage credit. Great challenges reveal true character. Many of the individual acts of adaptation, commitment, and selflessness on the part of our First Financial associates will never be known. However, the willingness to work long hours at night, on weekends, under incredible deadlines and during unparalleled times is, to me, the epitome of leadership. Our associates gave their all for those in need. This is what makes me so proud of the First Financial team, and so honored to present you with the results of this incomparable year. Archie M. Brown President & Chief Executive Officer “ Despite pandemic-related headwinds, our careful management of resources positions us well as we rebound from this historic event.
dear fellow shareholders, By almost every measure, 2021 was a highly successful year for First Financial Bank. I’m incredibly proud of our team and deeply grateful for their resilience and commitment in the face of extraordinary challenges. Navigating the COVID-19 pandemic has helped us learn how to rapidly respond to changing conditions, and that adaptability is a strength and defining characteristic of First Financial Bank. In 2021, we took the lessons learned from the previous year and focused on delivering positive results for our clients and the Bank. We helped individuals, families, and businesses begin to work their way back from the financial and economic challenges of the pandemic. Because of those efforts, our clients and communities can begin to turn their attention to growth opportunities. This commitment also resulted in favorable financial performance for our Bank. We exceeded our net income targets, experienced impressive growth in deposit balances and strong fee income, and improved loan growth. Most importantly, we did this together, at a time when many of our associates were returning to the workplace. As it has been since the beginning of our pandemic response, safety was a top concern during this time of transition. Our adaptability served us well during the early stages of the pandemic, but we believe our associates and clients collectively benefit when we’re working together in person, sharing ideas, and feeding off the energy and diverse perspectives that each of us brings to work every day. This sense of community is foundational to our culture, and it helps us better serve our stakeholders. The results in this annual report reinforce this belief and are a testament to our team’s commitment and strength as we find ourselves again moving forward…together. Financial Management and Performance Our consistent approach to financial management has kept us competitive through prosperous times and in moments of crisis. Staying true to this principle helped us produce exceptional financial results in 2021, including a record level of net income totaling $205.2 million. Income from the Small Business Administration’s Paycheck Protection Program helped offset pressure from a historically low interest rate environment, while low credit costs drove strong earnings and reflected credit trends that improved dramatically over the course of the year. We successfully managed expenses, while continuing to invest in technology and rewarding our associates for our strong results. Funding costs were managed in a way that kept us competitive with clients without sacrificing financial results. Our capital ratios remain strong, and we delivered industry leading returns through aggressively repurchasing shares and maintaining our common dividend. Despite a record level of commercial loan paydowns in 2021, our Commercial Banking team generated loans in excess of $1.2 billion, 21 percent over 2020 results. Additionally, we experienced record fee income, validating our strategic focus on diversifying revenue streams. Our Bannockburn Global Forex division generated nearly $45 million in fees, up 14 percent over the previous year. And our Wealth Management team enjoyed a record year, surpassing $3.3 billion in managed assets and bringing in $24 million in fees. Disciplined credit administration resulted in excellent asset quality by the close of 2021. We fully executed on our stock repurchase plan by repurchasing approximately 4.6 million shares at an average price of $23.33. When combined with the common dividend, the share repurchases approximate a return to shareholders of 95.6% of yearly earnings. 125 CONSECUTIVE QUARTERS OF PROFITABILITY 158 YEARS OF STRENGTH & STABILITY 1first financial bank 2021 annual report
First Financial Bancorp 2021 Annual Report 1
We continue to focus on financial goals and targets by implementing scalable and consistent processes across the Bank, and through continuous investment in new growth initiatives. We remain committed to strong foundational performance in the following areas: • Continually pursuing opportunities for consistent organic growth in all lines of business, • Following a prudent corporate development and capital plan that ensures the safety and soundness of the Bank and optimizes long- term shareholder return, • Maintaining disciplined credit management by working together to achieve common goals and objectives for the benefit of the Bank, • And making sound investments to provide financial stability and fund new growth opportunities. Proudly Local Throughout 2021, we took steps to build an even stronger First Financial Bank, a company committed to cultivating and nurturing lifelong client relationships. This begins with our local connections. We are members of the communities we serve…neighbors to our clients. We provide businesses with access to the capital they need to keep our local economies vibrant. We know what’s important to them and what they need to succeed. Clients come to our financial centers for expert advice on consumer deposit solutions, mortgages, lending, wealth management services, business banking, and other financial wellness needs. In 2021, we refined our regional and district financial center structure to align physical and associate resources closer to our clients for better collaboration, communication, and information sharing. This connectivity helps us build stronger relationships that enable clients to thrive at every stage of their lives. By coupling this high-touch approach to customer service with our expanded and more robust digital banking suite, we offer clients the access and tools they need to better manage financial assets. First Financial Bank’s extensive network of ATMs and ITMs, online banking, mobile banking applications, online loan originations and e-signature technology provides clients the ability to engage with us whenever, wherever, and however they choose. We work more efficiently than other banks because we deliver local decision making and expertise in business and commercial banking, treasury management, wealth management, private and preferred banking, and lending solutions of all kinds. We call the shots…not an algorithm or a faceless committee 500 miles away. This makes us different. This is what we mean by being proudly local. A Diversified Client Experience Providing a full spectrum of core banking and specialty financial services enables us to meet the needs of consumers and businesses and makes us an attractive choice for current and potential investors. Just as importantly, our diversified specialty business offerings expand our ability to capitalize on opportunities during strong market conditions, while reducing our exposure to downturns in the face of economic headwinds. In 2021, we worked diligently to build new capabilities in our wealth management division, while creating a brand identity that exhibits the uniqueness of the clients we serve. With the launch of our Yellow Cardinal Advisory Group brand, we are offering clients expanded services, deeper industry knowledge through the addition of key talent, and digital capabilities that provide a more robust and holistic view of their holdings, transactions, and performance. Our Bannockburn Global Forex division produced record-setting foreign exchange fees in 2021. Bannockburn is a leading provider of capital markets trading, specializing in foreign currency advisory and hedge analytics, and providing a tailored perspective on market activity, direction, and strategy. 2 first financial bank 2021 annual report
2 First Financial Bancorp 2021 Annual Report
access to capital for businesses financial centers extensive network local connections deposit solutions expert advice mortgages & lending wealth management business banking ATMs & ITMs online banking mobile banking online loan origination Yellow Cardinal Advisory Group A Yellow Cardinal is one of the rarest occurrences in nature – literally one-in-a-million. Unique, just like you. With comprehensive wealth solutions for you, your family, and your business, we’re here to support the goals that set you apart. From the big picture to the most subtle detail – let us help you live your one-in-a-million life. Upstart Referral Network FFB joined the Upstart Referral Network to help deepen our knowledge of digital lending, and to increase lending opportunities for borrowers in the unsecured lending market. Upstart has been introduced throughout our Ohio, Kentucky, Indiana, and Illinois footprint, resulting in nearly $44 million in loan originations in 2021. 3
First Financial Bancorp 2021 Annual Report 3
FFB earned the highest overall rating of Outstanding from the Federal Reserve Board for our performance under the Community Reinvestment Act, based on our lending, investment and service levels from 2017-2020. Summit Funding Group • Fourth largest independent U.S. equipment leasing firm • Operates in all 50 states and in Canada • Exceptional industry reputation and brand recognition 4
4 First Financial Bancorp 2021 Annual Report
We also continue to explore opportunities to add market share and depth of services through mergers and strategic acquisitions. These opportunities could drive immediate growth in market share, financial resources and expertise, product and service capabilities, and geographic expansion while staying true to our corporate values. We took advantage of one such opportunity in December of 2021 with the acquisition of Summit Funding Group, the fourth largest independent equipment financing platform in the United States. As an independent subsidiary of First Financial, Summit Funding offers high-quality full payout and residual- based equipment leases through its two operating divisions – Middle Market and Vendor Finance. First Financial’s scale and product breadth, combined with Summit’s extensive leasing capabilities and leading nationwide position in the equipment finance sector, will enable both organizations to capitalize on significant growth opportunities. Committed to Our Associates The past year has underscored the importance of creating a workplace environment well suited to attract and retain talented people. There is a direct correlation between a person’s sense of wellbeing and their level of engagement in the workplace. We believe that when you bring “your best self” to work and experience support and respect from peers, you are more likely to succeed and remain engaged. As a result, we’ve made investments in leadership and development programs to provide our managers and associates with the tools and insights to help everyone on our team reach new levels of success and happiness. We’ve placed a premium on the development of our associates by helping them sharpen their existing abilities while providing access to career training and guidance to grow personally and professionally. By offering insightful learning and development resources, along with manager and leader training programs, we’re helping our team build skills and relationships to guide each associate along their respective career paths. We have established a Mentoring Program that is designed to empower associates of all experience levels to network across our organization and work in a mentor/mentee partnership to foster additional development goals. By connecting associates with internal career professionals who provide direction, development, coaching and feedback, we’re tapping into the diverse talents and expertise of our leaders to help create a stronger workforce. Committed to Our Communities First Financial exists to be a positive influence on our clients and communities alike. This is demonstrated by our commitment to serving all customers across the income spectrum, and by the generosity our associates display through the gifts of their time and treasure. We received the highest overall rating of Outstanding in 2021 from the Federal Reserve Board for our performance under the Community Reinvestment Act. We take great pride in this rating and the attributes for which we were recognized: • Our excellent record of serving the credit needs of low-income individuals and areas and very small businesses, • Acting as a leader in providing an excellent level of qualified community development investments and donations, • And for providing Retail Banking services that are accessible to neighborhoods and people from all income levels and businesses of different revenue sizes. We developed Your Money, Own It – a financial education program featuring webinars and in-person classes presented by First Financial associates. Through classes and self-guided learning tools, we help our communities better understand the fundamentals of personal money management, with topics on budgeting, home ownership, maximizing credit scores, paying down debt, protecting your identity, and retirement to name a few. The best part? All Your Money, Own It webinars and classes are totally free. 5first financial bank 2021 annual report
Our 2021 Fir
First Financial Bancorp 2021 Annual Report 5
The First Financial Foundation was established to help support programs and organizations that enhance and develop the communities in which we do business. In 2021, the First Financial Foundation contributed more than $2.2 million to our communities, with a particular focus on neighborhood development, workforce development and education, and culture and the arts. And our associates stepped up in heroic fashion in 2021 with direct support of our communities and neighbors. Our United Way Associate Giving Campaign was our most successful to date. More than 95 percent of First Financial associates pledged nearly $742,000 in support of United Way and its agencies throughout our communities. And, despite pandemic limitations, we logged nearly 12,000 volunteer hours this year, proving that we are truly woven into the communities we serve. Details of these efforts are chronicled in our 2020 Community Development report, which can be found on our website at www.bankatfirst.com. Corporate Responsibility Effective corporate social responsibility requires focused attention to an organization’s impact on its stakeholders. This year, we announced the appointment of Roddell McCullough to the newly created role of Chief Corporate Responsibility Officer. Roddell is the first person to serve in this position for the Bank and will lead our corporate responsibility strategy, focusing on community development; corporate governance; diversity, equity and inclusion; and sustainability. First Financial’s Diversity, Equity and Inclusion Program was developed in 2020 to further our goal of serving our communities, understanding needs, and making lives better. In 2021, 10 associates were selected as members of our first Diversity Council, which is responsible for bring our DEI plans to life. One highly successful initiative developed by the Diversity Council was our Unconscious Bias Training program, which had more than 90 percent participation from our associates. First Financial’s Supplier Diversity Program continues to provide greater opportunities for businesses that are owned by women, veterans, disabled persons, and minority members of our communities. We exceeded our goal of achieving 10 percent of our sourceable spending with diverse vendors in every quarter during 2021. As I reflect on these accomplishments, I am both proud and profoundly humbled by the level of commitment that was necessary to deliver these results. Behind this list of accomplishments are incredible efforts that were made by individuals and teams from every part of our company. Together, we moved First Financial Bank in a positive direction during 2021. I’m looking forward to the opportunities that are ahead of us as we build on these successes in 2022. Bank On Certification First Financial’s NoWorry Checking has received national Bank On certification from the Cities for Financial Empowerment (CFE) Fund for meeting Bank On National Account Standards for 2021- 2022. These standards require over 25 features for safe and affordable consumer transaction accounts. Archie M. Brown President & Chief Executive Officer 6 first financial bank 2021 annual report
6 First Financial Bancorp 2021 Annual Report
First Financial Bancorp 2021 Annual Report 7
leadership Board of Directors Claude E. Davis Board Chair, First Financial Bancorp President, Brixey and Meyer Capital William G. Barron Past Chairman and President William G. Barron Enterprises Vincent A. Berta Lead Independent Director Board of Directors of First Financial Bancorp President and Managing Director Covington Capital, LLC Cynthia O. Booth President and Chief Executive Officer COBCO Enterprises, LLC Archie M. Brown President and Chief Executive Officer First Financial Bancorp and First Financial Bank Corinne R. Finnerty Principal McConnell Finnerty PC Susan L. Knust Owner and President Omega Warehouse Services K.P. Properties William J. Kramer Vice President of Operations Valco Industries, Inc. John T. Neighbours Senior Advisor Celerant Capital Thomas M. O’Brien Founder of Simpactful Consulting Maribeth S. Rahe President and Chief Executive Officer Fort Washington Investment Advisors, Inc. Senior Management Archie M. Brown President and Chief Executive Officer James M. Anderson Chief Financial Officer Richard S. Dennen Chief Corporate Banking Officer John M. Gavigan Chief Operating Officer Gregory A. Harris President, Wealth Management & Affluent Banking William R. Harrod Chief Credit Officer Amanda N. Neeley Chief Consumer Banking & Strategy Officer James R. Shank Chief Internal Auditor Karen B. Woods General Counsel and Chief Risk Officer 8
8 First Financial Bancorp 2021 Annual Report
| | | | | | | | | | | | | | | | | | | | |
| FINANCIAL HIGHLIGHTS |
| | | | | | |
| (Dollars in thousands, except per share data) | | 2021 | | 2020 | | % Change |
| Earnings | | | | | | |
| Net interest income | | $ | 452,118 | | | $ | 456,511 | | | (1.0) | % |
| Net income | | 205,160 | | | 155,810 | | | 31.7 | % |
| | | | | | |
| Per Share | | | | | | |
| Net income per common share-basic | | $ | 2.16 | | | $ | 1.60 | | | 35.0 | % |
| Net income per common share-diluted | | 2.14 | | | 1.59 | | | 34.6 | % |
| Cash dividends declared per common share | | 0.92 | | | 0.92 | | | 0.0 | % |
| Tangible book value per common share (end of year) | | 12.26 | | | 12.93 | | | (5.2) | % |
| Market price (end of year) | | 24.38 | | | 17.53 | | | 39.1 | % |
| | | | | | |
| Balance Sheet - End of Year | | | | | | |
| Total assets | | $ | 16,329,141 | | | $ | 15,973,134 | | | 2.2 | % |
| Loans | | 9,288,299 | | | 9,900,970 | | | (6.2) | % |
| Investment securities | | 4,409,237 | | | 3,689,465 | | | 19.5 | % |
| Deposits | | 12,871,954 | | | 12,232,003 | | | 5.2 | % |
| Shareholders' equity | | 2,258,942 | | | 2,282,070 | | | (1.0) | % |
| | | | | | |
| Ratios | | | | | | |
| Return on average assets | | 1.28 | % | | 1.00 | % | | |
| Return on average shareholders' equity | | 9.08 | % | | 7.02 | % | | |
| Return on average tangible shareholders' equity | | 16.43 | % | | 12.97 | % | | |
| Net interest margin | | 3.27 | % | | 3.46 | % | | |
| Net interest margin (fully tax equivalent) | | 3.31 | % | | 3.51 | % | | |
First Financial Bancorp 2021 Annual Report 9
| | | | | |
| 2021 Financial Highlights |
10 First Financial Bancorp 2021 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 backed loans | | Form 10-K | First Financial Bancorp. Annual Report on Form 10-K |
| ACL | Allowance for credit losses | | FRB | Federal Reserve Bank |
| AFS | Available-for-sale | | GAAP | U.S. Generally Accepted Accounting Principles |
| ALLL | Allowance for loan and lease losses | | GNMA | Government National Mortgage Association |
| Allowance | Collectively or individually, Allowance for credit losses and Allowance for loan and lease losses | | HTC | Historic tax credit |
| AOCI | Accumulated other comprehensive income | | HTM | Held-to-maturity |
| ASC | Accounting standards codification | | Insignificant | Less than $0.1 million |
| ASU | Accounting standards update | | IRLC | Interest Rate Lock Commitment |
| ATM | Automated teller machine | | LIHTC | Low income housing tax credit |
| Bank | First Financial Bank | | MBSs | Mortgage-backed securities |
| Basel III | Basel Committee regulatory capital reforms, Third Basel Accord | | MSFG | MainSource Financial Group, Inc. |
| BGF or Bannockburn | Bannockburn Global Forex, LLC | | N/A | Not applicable |
| Bp/bps | Basis point(s) | | NII | Net interest income |
| BOLI | Bank owned life insurance | | NMTC | New markets tax credit |
| CDs | Certificates of deposit | | N/M | Not meaningful |
| CARES Act | Coronavirus Aid, Relief, and Economic Security Act | | Oak Street | Oak Street Holdings Corporation |
| CECL | Current Expected Credit Loss | | ODFI | Ohio Department of Financial Institutions |
| C&I | Commercial & industrial | | OREO | Other real estate owned |
| CMOs | Collateralized mortgage obligations | | PCA | Prompt corrective action |
| CRE | Commercial real estate | | PCD | Purchase credit deteriorated |
| Company | First Financial Bancorp. | | PCI | Prompt corrective action |
| DDA | Demand deposit account | | PD | Probability of default |
| Dodd-Frank | Dodd-Frank Wall Street Reform and Consumer Protection Act | | PPP | Paycheck Protection Program |
| EAD | Exposure at Default | | PPPLF | Paycheck Protection Program Liquidity Facility |
| ERISA | Employee Retirement Income Security Act | | R&S | Reasonable and supportable |
| ERM | Enterprise Risk Management | | ROU | Right-of-use |
| EVE | Economic value of equity | | SEC | United States Securities and Exchange Commission |
| Fair Value Topic | FASB ASC Topic 825, Financial Instruments | | SFG or Summit | Summit Funding Group, Inc |
| FASB | Financial Accounting Standards Board | | SOFR | Secured Overnight Financing Rate |
| FDIC | Federal Deposit Insurance Corporation | | Topic 842 | FASB ASC Topic 842, Leasing |
| FHLB | Federal Home Loan Bank | | Special Assets | Special Assets Division |
| FHLMC | Federal Home Loan Mortgage Corporation | | TDR | Troubled debt restructuring |
| First Financial | First Financial Bancorp. | | TTC | Through the cycle |
| FNMA | Federal National Mortgage Association | | USD | United States dollars |
First Financial Bancorp 2021 Annual Report 11
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) | | 2021 | | 2020 | | 2019 | | | | |
| Summary of operations | | | | | | | | | | |
| Interest income | | $ | 483,217 | | | $ | 524,963 | | | $ | 607,578 | | | | | |
Tax equivalent adjustment (1) | | 6,091 | | | 6,529 | | | 6,328 | | | | | |
Interest income tax – equivalent (1) | | 489,308 | | | 531,492 | | | 613,906 | | | | | |
| Interest expense | | 31,099 | | | 68,452 | | | 123,324 | | | | | |
Net interest income tax – equivalent (1) | | $ | 458,209 | | | $ | 463,040 | | | $ | 490,582 | | | | | |
| Interest income | | $ | 483,217 | | | $ | 524,963 | | | $ | 607,578 | | | | | |
| Interest expense | | 31,099 | | | 68,452 | | | 123,324 | | | | | |
| Net interest income | | 452,118 | | | 456,511 | | | 484,254 | | | | | |
| Provision for credit losses | | (18,121) | | | 70,559 | | | 30,433 | | | | | |
| Noninterest income | | 171,506 | | | 189,123 | | | 131,373 | | | | | |
| Noninterest expenses | | 400,812 | | | 390,664 | | | 342,332 | | | | | |
| Income before income taxes | | 240,933 | | | 184,411 | | | 242,862 | | | | | |
| Income tax expense | | 35,773 | | | 28,601 | | | 44,787 | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income | | $ | 205,160 | | | $ | 155,810 | | | $ | 198,075 | | | | | |
| | | | | | | | | | |
| Per share data | | | | | | | | | | |
| Earnings per common share | | | | | | | | | | |
| Basic | | $ | 2.16 | | | $ | 1.60 | | | $ | 2.01 | | | | | |
| Diluted | | $ | 2.14 | | | $ | 1.59 | | | $ | 2.00 | | | | | |
| Cash dividends declared per common share | | $ | 0.92 | | | $ | 0.92 | | | $ | 0.90 | | | | | |
| Average common shares outstanding–basic (in thousands) | | 95,035 | | | 97,364 | | | 98,306 | | | | | |
| Average common shares outstanding–diluted (in thousands) | | 95,897 | | | 98,093 | | | 98,851 | | | | | |
| | | | | | | | | | |
| Selected year-end balances | | | | | | | | | | |
| Total assets | | $ | 16,329,141 | | | $ | 15,973,134 | | | $ | 14,511,625 | | | | | |
| Earning assets | | 13,941,829 | | | 13,651,843 | | | 12,392,259 | | | | | |
| Investment securities | | 4,409,237 | | | 3,689,465 | | | 3,119,966 | | | | | |
| Total loans and leases | | 9,288,299 | | | 9,900,970 | | | 9,201,665 | | | | | |
| | | | | | | | | | |
| Interest-bearing demand deposits | | 3,198,745 | | | 2,914,787 | | | 2,364,881 | | | | | |
| Savings deposits | | 4,157,374 | | | 3,680,774 | | | 2,960,979 | | | | | |
| Time deposits | | 1,330,263 | | | 1,872,733 | | | 2,240,441 | | | | | |
| Noninterest-bearing demand deposits | | 4,185,572 | | | 3,763,709 | | | 2,643,928 | | | | | |
| Total deposits | | 12,871,954 | | | 12,232,003 | | | 10,210,229 | | | | | |
| Short-term borrowings | | 296,203 | | | 166,594 | | | 1,316,181 | | | | | |
| Long-term debt | | 409,832 | | | 776,202 | | | 414,376 | | | | | |
| | | | | | | | | | |
| Shareholders’ equity | | 2,258,942 | | | 2,282,070 | | | 2,247,705 | | | | | |
| | | | | | | | | | |
| Select Financial Ratios | | | | | | | | | | |
Average loans to average deposits (2) | | 76.15 | % | | 87.13 | % | | 88.59 | % | | | | |
| Net charge-offs to average loans and leases | | 0.26 | % | | 0.14 | % | | 0.33 | % | | | | |
| Average shareholders’ equity to average total assets | | 14.06 | % | | 14.30 | % | | 15.30 | % | | | | |
| | | | | | | | | | |
| Return on average assets | | 1.28 | % | | 1.00 | % | | 1.39 | % | | | | |
| | | | | | | | | | |
| Return on average equity | | 9.08 | % | | 7.02 | % | | 9.11 | % | | | | |
| Net interest margin | | 3.27 | % | | 3.46 | % | | 3.95 | % | | | | |
Net interest margin (tax equivalent basis) (1) | | 3.31 | % | | 3.51 | % | | 4.00 | % | | | | |
| Dividend payout | | 42.59 | % | | 57.50 | % | | 44.78 | % | | | | |
(1) Tax equivalent basis was calculated using a 21.0% tax rate.
(2) Includes loans held for sale.
12 First Financial Bancorp 2021 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 condition, cash flows, other changes in financial condition 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 $16.3 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 139 full service banking centers as of December 31, 2021. 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.
The Commercial Finance business lends into targeted industry verticals on a nationwide basis. Wealth Management had $3.4 billion in assets under management as of December 31, 2021 and provides the following services: financial planning, investment management, trust administration, estate settlement, brokerage services and retirement planning.
Additional information about First Financial, including its products, services and banking locations, is available on the Company's website at www.bankatfirst.com.
The major components of First Financial’s operating results for the previous three years are summarized in Table 1 – Financial Summary and are discussed in greater detail in the sections that follow.
MARKET STRATEGY
First Financial develops 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 investment in community markets is an important part of the Bank's core funding base and has historically provided
stable, low-cost funding sources.
First Financial’s market selection process includes multiple factors, but markets are primarily chosen for their potential for
long-term profitability and growth. First Financial intends to concentrate plans for future growth and capital investment within
its current 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 complement its existing business and diversify its
product suite and revenue streams.
BUSINESS COMBINATIONS
The transactions discussed in this section 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.
In December 2021, the Company completed its acquisition of Summit Funding Group, Inc. and its subsidiaries. Summit was a privately held, full service, equipment financing company that originates, purchases, sells and services equipment leases to commercial businesses in the United States and Canada. Upon completion of the transaction, Summit became a subsidiary of the Bank and continues to operate as Summit Funding Group, taking advantage of its existing brand recognition within the equipment financing industry.
First Financial Bancorp 2021 Annual Report 13
Pursuant to the purchase agreement, First Financial agreed to acquire all of the issued and outstanding equity securities of Summit for aggregate consideration of approximately $127.1 million consisting of $113.5 million in cash and $10.0 million of First Financial common stock, and a $3.6 million earn-out payment. Pursuant to the purchase agreement, the “earn-out” payments are payable annually for each of the five years following the closing of the acquisition, contingent upon the results of Summit's operations. First Financial incurred expenses related to the Summit acquisition of $2.6 million during the year ended December 31, 2021.
The fair value measurements of assets acquired and liabilities assumed in the SFG acquisition were $185.8 million and $125.9 million, respectively, and included $42.3 million of financing leases and $73.9 million of operating leases. Given the timing of the transaction closing, acquisition accounting adjustments are considered preliminary at December 31, 2021. These fair value measurements 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 become available, and the measurement period ends in December 2022. Goodwill arising from the Summit acquisition was $63.0 million and reflects the business’s high growth potential and the expectation that the acquisition will provide additional revenue growth with the expansion of the Bank's leasing business. 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.
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 $57.5 million of goodwill on the Consolidated Balance Sheet, which reflects BGF'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.
See Note 23 – Business Combinations in the Notes to Consolidated Financial Statements, for further discussion of these transactions.
COVID-19 CONSIDERATIONS
The Company's operations and financial results for the majority of 2021 and 2020 were substantially influenced by the
COVID-19 pandemic. At the onset of the pandemic, the Company updated operating protocols to continuously provide
essential banking services, while prioritizing the health and safety of both its clients and associates. Banking centers offered
drive through services without interruption, while lobbies were fully open or accessible to clients via appointment, conditional
to virus trends at any point in time. Sales associates, support teams and management largely worked remotely.
The Company continued to prioritize the health and safety of clients and associates in 2021, although without the significant disruptions to our workforce that occurred in 2020. Banking centers offered drive through services without interruption, while lobbies were fully open and accessible to clients. Sales associates, support teams and management returned to corporate offices and operations centers in the second and third quarters of 2021.
To assist clients during the pandemic, the Company implemented distinct COVID-19 relief programs to provide payment
deferrals and fee waivers, in addition to temporarily suspending vehicle repossessions and residential property foreclosures.
Further, the Company continuously monitored the actions of federal and state governments to proactively assist clients and
ensure awareness of each financial assistance program available to them, while focusing internally on enhancing remote, mobile
and online processes to better support a bank anytime, anywhere environment.
The Bank underwent a significant level of cross training and redeployment of associate resources to rapidly meet the influx of
client requests in response to the passage of the CARES Act, the establishment of the Paycheck Protection Program and the
approval of the Consolidated Appropriations Act. The Company's response to the PPP resulted in successes in providing
customer relief, although the program and assistance had substantially wound down by the end of 2021. As such, the Company had outstanding PPP loans totaling $55.6 million in balances, net of $2.6 million of unearned fees, as of of December 31, 2021, compared to $594.6 million of PPP loans, net of $13.7 million of unearned fees, as of December 31, 2020.
14 First Financial Bancorp 2021 Annual Report
Further, as of December 31, 2021, the Company had $16.5 million in loans that were still in a payment deferral to provide relief to borrowers adversely impacted by the pandemic, compared to $320.2 million as of December 31, 2020. As provided in the CARES Act and subsequently amended by the Consolidated Appropriations Act, loan modifications in response to COVID-19 that were executed on a loan that was not more than 30 days past due as of December 31, 2019 and executed between March 1, 2020 and January 1, 2022 are not required to be reported as TDR.
OVERVIEW OF OPERATIONS
Net income for the year ended December 31, 2021 was $205.2 million, resulting in earnings per diluted common share of $2.14. This compares to net income of $155.8 million and earnings per diluted common share of $1.59 in 2020. First Financial’s return on average shareholders’ equity for 2021 was 9.08%, compared to 7.02% for 2020, and First Financial’s return on average assets was 1.28% and 1.00% for 2021 and 2020, respectively.
Net interest income in 2021 decreased $4.4 million, or 1.0%, from 2020, to $452.1 million, primarily driven by lower yields earned on the loan and investment portfolios resulting from a lower interest rate environment. The net interest margin on a fully tax equivalent basis was 3.31% for 2021 compared to 3.51% in 2020.
Noninterest income decreased $17.6 million, or 9.3%, to $171.5 million during 2021 from $189.1 million in 2020. The decrease in 2021 was primarily driven by a decline in gains on sales of mortgage loans following record production in 2020.
Noninterest expense increased $10.1 million, or 2.6%, from $390.7 million in 2020 to $400.8 million in 2021. This increase was impacted by higher salaries and benefits directly related to the Company's financial performance, as well as higher data processing expenses, tax credit investment write-downs and legal settlement costs.
Income tax expense increased $7.2 million, or 25.1%, to $35.8 million in 2021 from $28.6 million in 2020, with the effective tax rate decreasing to 14.8% in 2021 from 15.5% in 2020. The lower effective tax rate in 2021 was primarily related to tax credit investments realized during the period.
Total loans decreased $612.7 million, or 6.2%, to $9.3 billion at December 31, 2021 from $9.9 billion at December 31, 2020, primarily driven by the runoff of PPP balances. Total deposits increased $640.0 million, or 5.2%, to $12.9 billion as of December 31, 2021 from $12.2 billion at December 31, 2020. This increase is attributed to an increase in consumer savings rates resulting from retaining stimulus payments, PPP loan proceeds and tax refunds.
The ACL was $132.0 million, or 1.42% of total loans at December 31, 2021, compared to $175.7 million, and 1.77% of total loans at December 31, 2020. In addition, First Financial recorded $19.0 million in provision recapture during 2021, compared to $70.8 million of provision expense in 2020, as the Company's classified asset balances declined $37.2 million, or 26.2%, and economic forecasts improved.
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
2021 vs. 2020. First Financial’s net income increased $49.4 million, or 31.7%, to $205.2 million in 2021, compared to net income of $155.8 million in 2020. The increase in 2021 was primarily related to a $89.8 million, or 126.9%, decrease in provision expense, which was partially offset by a $17.6 million, or 9.3%, decline in noninterest income, a $10.1 million, or 2.6%, increase in noninterest expenses, a $7.2 million, or 25.1%, increase in income tax expense, and a $4.4 million, or 1.0%, decrease in net interest income.
2020 vs. 2019. First Financial’s net income decreased $42.3 million, or 21.3%, to $155.8 million in 2020, compared to net
income of $198.1 million in 2019. The decrease was primarily related to a $27.7 million, or 5.7%, decrease in net interest
income as well as a $40.1 million, or 131.9%, increase in provision expense and a $48.3 million, or 14.1%, increase in
noninterest expenses, which was partially offset by a $57.8 million, or 44.0%, increase in noninterest income and a $16.2
million, or 36.1%, decrease in income tax expense during 2020.
First Financial Bancorp 2021 Annual Report 15
Management’s Discussion and Analysis of Financial Condition and Results of Operations
For more detail, refer to the Net interest income, Noninterest income, Noninterest expenses, Income taxes and Asset quality and credit risk sections that follow.
NET INTEREST INCOME
First Financial’s net interest income for the years 2019 through 2021 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% marginal tax rate. Net interest income on a taxable equivalent basis adjusts for the tax-favored status of income from certain loans and securities held by First Financial that are not taxable for federal income tax purposes 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 3.31%, 3.51% and 4.00% for 2021, 2020 and 2019, 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 2021, 2020 and 2019 were $46.8 million, $32.8 million and $15.9 million, respectively. Interest income also included purchase accounting accretion of $12.3 million, $20.0 million and $26.8 million for 2021, 2020 and 2019, respectively.
2021 vs. 2020. Net interest income decreased $4.4 million, or 1.0%, from $456.5 million in 2020 to $452.1 million in 2021, as interest rates declined and purchase accounting accretion moderated during 2021. The tax equivalent yield on earning assets declined due to lower interest rates and more than offset an increase in average earning asset balances during the period. Additionally, PPP fees increased $12.6 million, or 73.3%, in 2021, partially offsetting the impact from a challenging interest rate environment.
Net interest margin on a fully tax equivalent basis decreased 20 bps to 3.31% for 2021 compared to 3.51% in 2020 as a decline in interest rates drove a 49 bp decline in asset yields. These lower rates more than offset higher earning asset balances and a 39 bp decline in funding costs.
Interest income declined $41.7 million, or 8.0%, in 2021 when compared to the prior year as the yield on earning assets declined to 3.54% from 4.03%, which more than offset the impact of higher earning asset balances. Average earning assets increased to $13.8 billion as of December 31, 2021 from $13.2 billion in 2020 as the Company invested excess liquidity into investment securities.
Interest expense decreased due to a 35 basis point decline in the cost of interest-bearing deposits and lower borrowing balances. The low interest rate environment drove the decline in the cost of interest-bearing deposits, which was 0.17% in 2021 compared to 0.52% for the same period in the prior year. Average borrowed funds declined $811.5 million in 2021, while the cost of these borrowed funds increased to 2.57% in 2021 from 1.82% during 2020. Both the decline in balances and the increase in rate were attributable to the repayment of PPPLF borrowings in 2021, which were used to fund PPP activity and carried a relatively modest interest rate of 0.35%.
2020 vs. 2019. Net interest income decreased $27.7 million, or 5.7%, from $484.3 million in 2019 to $456.5 million in 2020,
as interest rates declined and purchase accounting accretion moderated during 2020. Average earning assets increased from
$12.3 billion in 2019 to $13.2 billion in 2020 primarily due to PPP activity, while the tax equivalent yield on earning assets
decreased from 5.00% in 2019 to 4.03% in 2020.
16 First Financial Bancorp 2021 Annual Report
Net interest margin on a fully tax equivalent basis decreased 49 bps to 3.51% for 2020 compared to 4.00% in 2019 as a decline
in interest rates drove a 97 bp decline in asset yields, which combined with higher earning asset balances to more than offset a
61 bp decline in funding costs.
Interest income decreased $82.6 million, or 13.6%, in 2020 when compared to 2019 as the yield on earning assets
declined to 4.03% from 5.00%, which more than offset the impact of higher earning asset balances. The declining yield on
earning assets resulted from an approximate 150 bp reduction in the fed funds target rate from December 31, 2019. Average
earning assets increased to $13.2 billion as of December 31, 2020 from $12.3 billion in 2019 as loan balances grew largely due
to PPP activity.
Interest expense decreased due to lower rates paid on deposits, the Company's aggressive and deliberate management of
funding costs and lower borrowing balances. Lower interest rates led to a 52 bp decline in the cost of interest-bearing deposits,
which was 0.52% in 2020 compared to 1.04% for the same period in the prior year. The cost of borrowed funds decreased to
1.82% in 2020 from 2.65% during 2019, reflecting the decline in interest rates and a shift to FRB long-term borrowings, which
were used to fund PPP activity and carried an interest rate of 0.35%.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 2 • Volume/Rate Analysis - Tax Equivalent Basis (1) | | | | |
| | 2021 change from 2020 due to | | 2020 change from 2019 due to |
| (Dollars in thousands) | | Volume | Rate | | Total | | Volume | Rate | | Total |
| Interest income | | | | | | | | | | | | |
Loans (2) | | $ | (10,528) | | | $ | (35,788) | | | $ | (46,316) | | | $ | 41,726 | | | $ | (109,315) | | | $ | (67,589) | |
| | | | | | | | | | | | |
Investment securities (3) | | | | | | | | | | | | |
| Taxable | | 19,634 | | | (14,210) | | | 5,424 | | | (6,725) | | | (9,654) | | | (16,379) | |
| Tax-exempt | | 2,488 | | | (3,652) | | | (1,164) | | | 4,780 | | | (2,696) | | | 2,084 | |
Total investment securities interest (3) | | 22,122 | | | (17,862) | | | 4,260 | | | (1,945) | | | (12,350) | | | (14,295) | |
| Interest-bearing deposits with other banks | | (12) | | | (116) | | | (128) | | | 150 | | | (680) | | | (530) | |
| Total | | 11,582 | | | (53,766) | | | (42,184) | | | 39,931 | | | (122,345) | | | (82,414) | |
| | | | | | | | | | | | |
| Interest expense | | | | | | | | | | | | |
| Interest-bearing demand deposits | | 234 | | | (2,838) | | | (2,604) | | | 518 | | | (8,732) | | | (8,214) | |
| Savings deposits | | 816 | | | (3,926) | | | (3,110) | | | 517 | | | (14,668) | | | (14,151) | |
| Time deposits | | (2,964) | | | (18,809) | | | (21,773) | | | (777) | | | (13,968) | | | (14,745) | |
| Short-term borrowings | | (374) | | | (5,870) | | | (6,244) | | | (6,059) | | | (12,734) | | | (18,793) | |
| Long-term debt | | (15,810) | | | 12,188 | | | (3,622) | | | 7,997 | | | (6,966) | | | 1,031 | |
| Total | | (18,098) | | | (19,255) | | | (37,353) | | | 2,196 | | | (57,068) | | | (54,872) | |
| Net interest income | | $ | 29,680 | | | $ | (34,511) | | | $ | (4,831) | | | $ | 37,735 | | | $ | (65,277) | | | $ | (27,542) | |
(1) Tax equivalent basis was calculated using a 21.00% tax rate.
(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 2021, 2020 and 2019 are shown in Table 3 – Noninterest Income and Noninterest Expenses.
NONINTEREST INCOME
2021 vs. 2020. Noninterest income decreased $17.6 million, or 9.3%, from $189.1 million in 2020 to $171.5 million in 2021. The decline was attributed to an $18.2 million, or 35.5%, decrease in Gain on sale of loans, an $8.3 million, or 92.2%, decrease in Unrealized gain (loss) on equity securities, a $5.3 million, or 116.6%, decrease on Sales of investment securities and a $2.4 million, or 23.1%, decrease in Client derivative fees. These declines were partially offset by a $5.4 million, or 13.8%, increase in Foreign exchange income, a $3.7 million, or 30.1%, increase in Other noninterest income, a $2.6 million, or 22.0%, increase in Bankcard income, a $2.5 million, or 11.7%, increase in Trust and wealth management fees, and a $2.4 million, or 8.3%, increase in Service charges on deposit accounts.
First Financial Bancorp 2021 Annual Report 17
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Gains on the sales of retail mortgage loans declined from record levels in the prior year, as loan demand softened and premiums moderated in 2021. Gains from sales of investment securities and unrealized gains on equity securities both declined in 2021 due to sales of Visa Class B shares and recording the remaining shares at fair value during 2020. Client derivatives fees declined from prior year as demand moderated in 2021 in line with a decrease in loan balances.
Partially offsetting those declines, Bannockburn produced record foreign exchange income in 2021 due to an increased demand for currency transactions, while other noninterest income increased due to an increase in limited partnership income and syndication fees during the period. In addition, wealth management, bankcard and service charge income all increased in 2021 as the economy began to recover from pandemic-related uncertainty.
2020 vs. 2019. Noninterest income increased $57.8 million, or 44.0%, from $131.4 million in 2019 to $189.1 million in 2020.
The increase was primarily related to a $36.3 million, or 244.6%, increase in Gain on sale of loans, a $31.6 million, or 408.8%,
increase in Foreign exchange income, a $5.0 million increase on Sales of investment securities and an $8.5 million increase in
Unrealized gain (loss) on equity securities. These increases were partially offset by an $8.5 million, or 22.4%, decrease in
Service charges on deposit accounts, a $7.1 million, or 37.6%, decrease in Bankcard income and a $5.3 million, or 34.2%,
decrease in Client derivative fees.
Higher gain on sale of loans in 2020 was a result of record mortgage banking origination activity driven by historically low interest rates, while foreign exchange income was attributable to the full-year impact of the BGF acquisition, which closed in August of 2019 and generated record income in the back half 2020. The Company recorded net realized gain on sale of Visa Class B shares of $4.5 million during the year, driving the increase in gain on sale of investment securities, while the Company recorded unrealized gains on its remaining investment in Visa Class B shares of $8.8 million in noninterest income when recording those shares on the Consolidated Balance Sheet at their estimated fair value, resulting in the increase in unrealized gain on equity securities.
Service charges on deposit accounts declined during 2020 due to pandemic related fee waivers and lower transaction activity,
while the decline in bankcard income was due to the full-year impact of the Durbin Amendment cap on interchange fees, which
became applicable to First Financial in the third quarter of 2019, along with lower transaction volumes due to the pandemic.
Demand for back to back swaps slowed as loan growth moderated, resulting in lower client derivative fees during the year.
18 First Financial Bancorp 2021 Annual Report
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 3 • Noninterest Income and Noninterest Expenses |
| | 2021 | | 2020 | | 2019 |
| (Dollars in thousands) | | Total | | % Change | | Total | | % Change | | Total | | % Change |
| Noninterest income | | | | | | | | | | | | |
| Service charges on deposit accounts | | $ | 31,876 | | | 8.3 | % | | $ | 29,446 | | | (22.4) | % | | $ | 37,939 | | | 8.1 | % |
| Trust and wealth management fees | | 23,780 | | | 11.7 | % | | 21,286 | | | 2.7 | % | | 20,728 | | | 3.7 | % |
| Bankcard income | | 14,300 | | | 22.0 | % | | 11,726 | | | (37.6) | % | | 18,804 | | | (7.1) | % |
| Client derivative fees | | 7,927 | | | (23.1) | % | | 10,313 | | | (34.2) | % | | 15,662 | | | 103.9 | % |
| Foreign exchange income | | 44,793 | | | 13.8 | % | | 39,377 | | | 408.8 | % | | 7,739 | | | N/M |
| Net gains from sales of loans | | 33,021 | | | (35.5) | % | | 51,176 | | | 244.6 | % | | 14,851 | | | 144.6 | % |
| | | | | | | | | | | | |
| Unrealized gain (loss) on equity securities | | 702 | | | (92.2) | % | | 9,045 | | | N/M | | 575 | | | 376.4 | % |
| Other | | 15,866 | | | 30.1 | % | | 12,191 | | | (21.3) | % | | 15,481 | | | 5.6 | % |
| Subtotal | | 172,265 | | | (6.7) | % | | 184,560 | | | 40.1 | % | | 131,779 | | | 27.3 | % |
| Net gain (loss) on sales/transfers of investment securities | | (759) | | | (116.6) | % | | 4,563 | | | N/M | | (406) | | | N/M |
| Total | | $ | 171,506 | | | (9.3) | % | | $ | 189,123 | | | 44.0 | % | | $ | 131,373 | | | 27.1 | % |
| | | | | | | | | | | | |
| Noninterest expenses | | | | | | | | | | | | |
| Salaries and employee benefits | | $ | 245,924 | | | 3.9 | % | | $ | 236,779 | | | 13.3 | % | | $ | 209,061 | | | 10.6 | % |
| | | | | | | | | | | | |
| Net occupancy | | 22,142 | | | (4.8) | % | | 23,266 | | | (3.3) | % | | 24,069 | | | (0.6) | % |
| Furniture and equipment | | 13,819 | | | (7.7) | % | | 14,968 | | | (5.9) | % | | 15,903 | | | 6.7 | % |
| Data processing | | 31,363 | | | 14.0 | % | | 27,514 | | | 25.7 | % | | 21,881 | | | (22.1) | % |
| Marketing | | 7,983 | | | 24.5 | % | | 6,414 | | | (7.2) | % | | 6,908 | | | (9.1) | % |
| Communication | | 2,930 | | | (16.1) | % | | 3,492 | | | 6.9 | % | | 3,267 | | | 3.2 | % |
| Professional services | | 11,676 | | | 17.2 | % | | 9,961 | | | (11.5) | % | | 11,254 | | | (8.3) | % |
| Debt extinguishment | | 0 | | | (100.0) | % | | 7,257 | | | N/M | | 0 | | | N/M |
| State intangible tax | | 4,256 | | | (29.7) | % | | 6,058 | | | 3.9 | % | | 5,829 | | | 40.4 | % |
| FDIC assessments | | 5,630 | | | 10.2 | % | | 5,110 | | | 159.0 | % | | 1,973 | | | (50.3) | % |
| Intangible assets amortization | | 9,839 | | | (11.6) | % | | 11,126 | | | 15.0 | % | | 9,671 | | | 31.4 | % |
| Other | | 45,250 | | | 16.9 | % | | 38,719 | | | 19.1 | % | | 32,516 | | | 12.8 | % |
| Total | | $ | 400,812 | | | 2.6 | % | | $ | 390,664 | | | 14.1 | % | | $ | 342,332 | | | 5.8 | % |
NONINTEREST EXPENSES
2021 vs. 2020. Noninterest expenses increased $10.1 million, or 2.6%, in 2021 compared to 2020, primarily due to a $9.1 million, or 3.9%, increase in Salaries and employee benefits, a $3.8 million, or 14.0%, increase in Data processing expenses, a $1.7 million, or 17.2%, increase in Professional services, a $1.6 million, or 24.5%, increase in Marketing expenses, and a $6.5 million, or 16.9%, increase in Other noninterest expenses. These increases were partially offset by a $7.3 million, or 100.0% decrease in Debt extinguishment costs, a $1.8 million, or 29.7%, decrease in State intangible taxes, a $1.3 million, or 11.6%, decrease in Intangible asset amortization expense, a $1.1 million, or 7.7%, decrease in Furniture and equipment expenses and $1.1 million, or 4.8%, decrease in Net occupancy expenses.
Higher salaries and employee benefits in 2021 were driven by annual compensation adjustments and performance related incentives tied to the Company's financial results. Data processing and professional services increased in 2021 due to Company's continued investment in technology and expenses associated with the Summit acquisition, respectively, while marketing expenses increased due to an increase in events sponsored in 2021 compared to 2020, which was impacted by the pandemic.
Other noninterest expenses rose primarily as a result of an increase in tax credit investment write-downs in 2021, as well as $7.1 million of costs related to overdraft litigation settled during the year. Like many banks, First Financial has been the subject of lawsuits relating to overdraft fees. This type of litigation is time consuming and expensive in large part due to the amount of data to be sorted and disclosed, in some cases going back multiple years. During 2021, First Financial determined
First Financial Bancorp 2021 Annual Report 19
Management’s Discussion and Analysis of Financial Condition and Results of Operations
that it was in its best interest to settle lawsuits in the states of Indiana and Ohio and have signed settlement agreements that are being presented to the court for approval, resulting in higher litigation settlement expense in the year.
Debt extinguishment costs declined in 2021 as 2020 included $7.3 million of charges that did not recur in 2021 related to the prepayment of $120.0 million of higher cost long-term FHLB debt. The decline in net occupancy expenses in 2021 was primarily a result of branch consolidation efforts, while state intangible taxes decreased during the current year due to the state of Kentucky changing their taxation method from a franchise tax to an income tax. Additionally, intangible asset amortization declined in 2021 due to accelerated amortization on intangible assets associated with the MSFG merger in prior years, while furniture and equipment expenses declined in 2021 as certain assets became fully depreciated.
2020 vs. 2019. Noninterest expenses increased $48.3 million, or 14.1%, in 2020 compared to 2019, primarily due to a $27.7
million, or 13.3%, increase in Salaries and employee benefits, $7.3 million of Debt extinguishment expenses, a $6.2 million, or
19.1%, increase in Other noninterest expenses, a $5.6 million, or 25.7%, increase in Data processing expenses and a $3.1
million, or 159.0% increase in FDIC assessments.
Higher salaries and employee benefits in 2020 were driven by performance related incentives and commissions, as well as
higher healthcare costs and annual compensation adjustments. Noninterest expenses also increased as the Company incurred
$7.3 million of debt extinguishment costs related to the prepayment of $120.0 million of higher cost long-term FHLB debt as
the Company strategically repositioned its funding mix to take advantage of its liquidity position. The increase in other
noninterest expenses was primarily due to a $5.3 million increase in contributions made to the First Financial Foundation
during 2020 as well higher write downs of tax credit investments, while data processing expenses increased as the Company continued to make strategic investments to enhance its digital capabilities and establish required PPP lending processes. FDIC
assessments increased in 2020 due to the recognition of a $3.4 million small bank assessment credit from the FDIC in 2019.
INCOME TAXES
2021 vs. 2020. First Financial’s income tax expense in 2021 totaled $35.8 million compared to $28.6 million in 2020, resulting in effective tax rates of 14.8% and 15.5% for 2021 and 2020, respectively. The lower effective tax rate in 2021 was primarily related to an increase in tax credit activity during the year, partially offset by higher pre-tax income.
2020 vs. 2019. First Financial’s income tax expense in 2020 totaled $28.6 million compared to $44.8 million in 2019, resulting
in effective tax rates of 15.5% and 18.4% for 2020 and 2019, respectively. The lower effective tax rate in 2020 was primarily
related to lower pre-tax income, coupled with stable non-taxable revenue sources, as well as an increase in tax credit activity during the year.
For further information on income taxes, see Note 15 – Income Taxes in the Notes to Consolidated Financial Statements.
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 MBS. The investment portfolio is also managed with consideration to prepayment, extension and maturity risk. First Financial invests primarily in MBS 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 55.5% and 52.9% of First Financial's investment securities portfolio as of December 31, 2021 and 2020, 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. Prior to purchase, First Financial performs a detailed collateral and structural analysis on these securities and strategically invests in asset classes in which First Financial 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 44.5% and 47.1% of First Financial's investment securities portfolio as of December 31, 2021 and 2020, respectively.
The other investments category in the Consolidated Balance Sheets consists primarily of First Financial’s investments in FRB stock, FHLB stock and class B Visa shares.
20 First Financial Bancorp 2021 Annual Report
2021 vs. 2020. First Financial’s investment portfolio at December 31, 2021 totaled $4.3 billion, compared to $3.6 billion at December 31, 2020, and represented 26.4% of total assets at December 31, 2021. The $750.0 million, or 21.1%, increase in the investment portfolio during 2021 was primarily related to Company's strategic redeployment of balance sheet liquidity resulting from an increase in deposits.
First Financial classified $4.2 billion, or 97.7%, and $3.4 billion, or 96.3%, of investment securities as AFS at December 31, 2021 and 2020, respectively. First Financial classified $98.4 million, or 2.3%, and $131.7 million, or 3.7%, of investment securities as HTM at December 31, 2021 and 2020, respectively.
First Financial recorded a $21.0 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, 2021. This unrealized after-tax gain decreased $52.5 million in 2021 from a $73.6 million unrealized after-tax gain at December 31, 2020.
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 was not meaningful as a percentage of the portfolio at either December 31, 2021 or December 31, 2020.
Investments in MBS securities, which include CMOs, represented 51.4% and 57.9% of First Financial's total investment portfolio at December 31, 2021 and 2020, respectively. MBS 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 $1.1 billion as of December 31, 2021 and $912.4 million as of December 31, 2020, comprising 25.4% and 25.7% of the investment portfolio at December 31, 2021 and 2020, 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 $719.6 million, or 16.7% of the investment portfolio at December 31, 2021 and $481.9 million, or 13.5% of the investment portfolio at December 31, 2020. 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, in addition to debt securities issued by corporations, were $166.1 million, or 3.9% of the investment portfolio, at December 31, 2021 and $104.0 million, or 2.9% of the investment portfolio, at December 31, 2020.
The overall duration of the investment portfolio increased to 3.8 years as of December 31, 2021 from 3.2 years as of December 31, 2020. 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.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 4 • Investment Securities as of December 31 | | | | | | | | |
| | 2021 | | 2020 |
| | | | Percent of | | | | Percent of |
| (Dollars in thousands) | | Amount | | Portfolio | | Amount | | Portfolio |
| U.S. Treasuries | | $ | 34,776 | | | 0.8 | % | | $ | 103 | | | 0.0 | % |
| Securities of U.S. government agencies and corporations | | 79,117 | | | 1.8 | % | | 60 | | | 0.0 | % |
| Mortgage-backed securities-residential | | 724,137 | | | 16.8 | % | | 734,173 | | | 20.7 | % |
| Mortgage-backed securities-commercial | | 778,252 | | | 18.1 | % | | 662,673 | | | 18.6 | % |
| Collateralized mortgage obligations | | 709,622 | | | 16.5 | % | | 660,920 | | | 18.6 | % |
| Obligations of state and other political subdivisions | | 1,094,658 | | | 25.4 | % | | 912,429 | | | 25.7 | % |
| Asset-backed securities | | 719,581 | | | 16.7 | % | | 481,871 | | | 13.5 | % |
| Other securities | | 166,123 | | | 3.9 | % | | 104,038 | | | 2.9 | % |
| Total | | $ | 4,306,266 | | | 100.0 | % | | $ | 3,556,267 | | | 100.0 | % |
The estimated maturities and weighted-average yields of HTM and AFS investment securities as of December 31, 2021 are shown in Table 5 – Investment Securities. Tax-equivalent adjustments using a rate of 21% were included in calculating yields on tax-exempt obligations of state and other political subdivisions.
First Financial held cash on deposit with the Federal Reserve of $214.8 million and $20.3 million at December 31, 2021 and 2020, 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.
22 First Financial Bancorp 2021 Annual Report
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 5 • Investment Securities as of December 31, 2021 |
| | 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 | % | | 0 | | | 0.00 | % | | 0 | | | 0.00 | % | | 0 | | | 0.00 | % |
| Mortgage-backed securities-commercial | | 0 | | | 0.00 | % | | 46,362 | | | 2.34 | % | | 0 | | | 0.00 | % | | 0 | | | 0.00 | % |
| Collateralized mortgage obligations | | 1,967 | | | 1.75 | % | | 9,915 | | | 2.14 | % | | 0 | | | 0.00 | % | | 0 | | | 0.00 | % |
| Obligations of state and other political subdivisions | | 0 | | | 0.00 | % | | 639 | | | 3.02 | % | | 5,401 | | | 3.58 | % | | 2,886 | | | 2.23 | % |
| Other securities | | 0 | | | 0.00 | % | | 15,250 | | | 4.42 | % | | 16,000 | | | 4.95 | % | | 0 | | | 0.00 | % |
| Total | | $ | 1,967 | | | 1.75 | % | | $ | 72,166 | | | 2.76 | % | | $ | 21,401 | | | 4.60 | % | | $ | 2,886 | | | 2.23 | % |
| | | | | | | | | | | | | | | | |
| Available-for-Sale | | | | | | | | | | | | | | | | |
| U.S. treasuries | | $ | 101 | | | 1.97 | % | | $ | 0 | | | 0.00 | % | | $ | 34,675 | | | 1.32 | % | | $ | 0 | | | 0.00 | % |
| Securities of other U.S. government agencies and corporations | | 0 | | | 0.00 | % | | 0 | | | 0.00 | % | | 79,117 | | | 1.74 | % | | 0 | | | 0.00 | % |
| Mortgage-backed securities-residential | | 9,744 | | | 0.62 | % | | 288,657 | | | 2.00 | % | | 336,948 | | | 1.66 | % | | 88,788 | | | 1.71 | % |
| Mortgage-backed securities-commercial | | 138,074 | | | 3.94 | % | | 436,556 | | | 3.52 | % | | 144,267 | | | 1.81 | % | | 12,993 | | | 2.04 | % |
| Collateralized mortgage obligations | | 127,494 | | | 2.39 | % | | 380,609 | | | 2.21 | % | | 137,581 | | | 2.07 | % | | 52,056 | | | 1.91 | % |
| Obligations of state and other political subdivisions | | 57,012 | | | 3.26 | % | | 276,695 | | | 2.84 | % | | 493,123 | | | 2.11 | % | | 258,902 | | | 2.00 | % |
| Asset-backed securities | | 43,901 | | | 2.93 | % | | 414,834 | | | 2.21 | % | | 249,443 | | | 2.07 | % | | 11,403 | | | 2.14 | % |
| Other securities | | 24,925 | | | 5.46 | % | | 87,793 | | | 5.42 | % | | 17,659 | | | 4.47 | % | | 4,496 | | | 4.08 | % |
| Total | | $ | 401,251 | | | 3.26 | % | | $ | 1,885,144 | | | 2.71 | % | | $ | 1,492,813 | | | 1.96 | % | | $ | 428,638 | | | 1.95 | % |
(1) Tax equivalent basis was calculated using a 21% tax rate and yields were based on amortized cost.
(2) Maturity represents estimated life of investment securities.
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.
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
First Financial Bancorp 2021 Annual Report 23
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 ACL. 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
2021 vs. 2020. Loans, excluding loans held for sale, totaled $9.3 billion at December 31, 2021, decreasing $612.7 million, or 6.2%, compared to December 31, 2020. C&I loans decreased $287.5 million, or 9.6%, largely due to the forgiveness of PPP loans originated in response to COVID-19. Construction real estate loans decreased $180.2 million, or 28.3%, while Commercial real estate loans decreased $81.2 million, or 1.9%. The decline in CRE loans was driven by the sale of $143.5 million of loans in the fourth quarter of 2021 in order to address various portfolio concentrations. Residential real estate loans declined $107.0 million, or 10.7%, and Home equity loans decreased $34.7 million, or 4.7%, as demand for these loans moderated in 2021. Partially offsetting these declines were increases in both installment loans and lease financing. Finance lease balances increased $36.6 million, or 50.2%, primarily due to the acquisition of $42.3 million of leases in the Summit acquisition. Installment loans increased $37.6 million, or 45.9%, during 2021 as a result of First Financial's partnership with Upstart lending, which sourced $43.8 million of loans during the year. Average loan balances, including loans held for sale, were $9.6 billion at December 31, 2021, a decrease of $262.4 million, or 2.7%, compared to December 31, 2020.
Table 6 – Loan Maturity/Rate Sensitivity indicates the contractual maturity of all loans outstanding at December 31, 2021 as well as their sensitivity to changes in interest rates.
For discussion of risks associated with the loan portfolio and First Financial's ACL, see the Asset Quality and Credit Risk section included in Management’s Discussion and Analysis.
24 First Financial Bancorp 2021 Annual Report
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 6 • Loan Maturity/Rate Sensitivity |
| | December 31, 2021 |
| | Maturity |
| | | | After one | | After five | | | | |
| | Within | | but within | | but within | | After | | |
| (Dollars in thousands) | | one year | | five years | | fifteen years | | fifteen years | | Total |
| Commercial & industrial | | $ | 704,058 | | | $ | 1,626,372 | | | $ | 386,415 | | | $ | 3,183 | | | $ | 2,720,028 | |
| Lease financing | | 30,133 | | | 74,467 | | | 5,024 | | | 0 | | | 109,624 | |
| Construction real estate | | 163,587 | | | 203,477 | | | 38,701 | | | 50,129 | | | 455,894 | |
| Commercial real estate | | 687,329 | | | 2,063,317 | | | 1,431,225 | | | 44,743 | | | 4,226,614 | |
| Residential real estate | | 35,639 | | | 117,635 | | | 313,007 | | | 429,788 | | | 896,069 | |
| Home equity | | 24,883 | | | 119,239 | | | 191,635 | | | 372,642 | | | 708,399 | |
| Installment | | 27,205 | | | 75,122 | | | 15,396 | | | 1,731 | | | 119,454 | |
| Credit card | | 0 | | | 0 | | | 0 | | | 52,217 | | | 52,217 | |
| Total | | $ | 1,672,834 | | | $ | 4,279,629 | | | $ | 2,381,403 | | | $ | 954,433 | | | $ | 9,288,299 | |
| | | | | | | | | | |
| | | | After one | | After five | | | | |
| | Within | | but within | | but within | | After | | |
| (Dollars in thousands) | | one year | | five years | | fifteen years | | fifteen years | | Total |
| Fixed rate | | | | | | | | | | |
| Commercial & industrial | | $ | 153,461 | | | $ | 252,689 | | | $ | 99,564 | | | $ | 1,265 | | | $ | 506,979 | |
| Lease financing | | 30,133 | | | 74,467 | | | 5,024 | | | 0 | | | 109,624 | |
| Construction real estate | | 6,805 | | | 566 | | | 3,436 | | | 41,900 | | | 52,707 | |
| Commercial real estate | | 105,840 | | | 289,597 | | | 75,303 | | | 1,847 | | | 472,587 | |
| Residential real estate | | 27,418 | | | 82,227 | | | 222,022 | | | 331,931 | | | 663,598 | |
| Home equity | | 13,070 | | | 51,688 | | | 72,346 | | | 22,671 | | | 159,775 | |
| Installment | | 23,480 | | | 73,602 | | | 15,270 | | | 1,625 | | | 113,977 | |
| Credit card | | 0 | | | 0 | | | 0 | | | 374 | | | 374 | |
| Total | | $ | 360,207 | | | $ | 824,836 | | | $ | 492,965 | | | $ | 401,613 | | | $ | 2,079,621 | |
| | | | | | | | | | |
| Variable rate | | | | | | | | | | |
| Commercial & industrial | | $ | 550,597 | | | $ | 1,373,683 | | | $ | 286,851 | | | $ | 1,918 | | | $ | 2,213,049 | |
| Lease financing | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Construction real estate | | 156,782 | | | 202,911 | | | 35,265 | | | 8,229 | | | 403,187 | |
| Commercial real estate | | 581,489 | | | 1,773,720 | | | 1,355,922 | | | 42,896 | | | 3,754,027 | |
| Residential real estate | | 8,221 | | | 35,408 | | | 90,985 | | | 97,857 | | | 232,471 | |
| Home equity | | 11,813 | | | 67,551 | | | 119,289 | | | 349,971 | | | 548,624 | |
| Installment | | 3,725 | | | 1,520 | | | 126 | | | 106 | | | 5,477 | |
| Credit card | | 0 | | | 0 | | | 0 | | | 51,843 | | | 51,843 | |
| Total | | $ | 1,312,627 | | | $ | 3,454,793 | | | $ | 1,888,438 | | | $ | 552,820 | | | $ | 7,208,678 | |
COMMITMENTS AND CONTINGENCIES
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 $4.0 billion and $3.4 billion at December 31, 2021 and 2020, respectively. This increase in commitments was driven by the Company's strong origination efforts during the year. As of December 31, 2021, loan commitments with a fixed interest rate totaled $129.2 million while commitments with variable interest rates totaled $3.8 billion. The fixed rate loan commitments have interest rates ranging from 0% to 21% for both
First Financial Bancorp 2021 Annual Report 25
December 31, 2021 and 2020 and have maturities ranging from less than 1 year to 30.9 years at December 31, 2021 and less than 1 year to 30.8 years at December 31, 2020.
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 $41.1 million and $36.1 million at December 31, 2021, and 2020, respectively. Management conducts regular reviews of these instruments on an individual client basis.
First Financial is a party in risk participation transactions of interest rate swaps, which had total notional amount of $362.8 million and $242.4 million at December 31, 2021 and 2020, respectively.
First Financial is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects. These investments are included in Accrued interest and other assets in the Consolidated Balance Sheets, with any unfunded commitments included in Accrued interest and other liabilities in the Consolidated Balance Sheets. As of December 31, 2021, First Financial expects to recover its remaining investments through the use of the tax credits that are generated by the investments. First Financial had unfunded commitments related to tax credit investments of $72.5 million and $55.6 million at December 31, 2021 and 2020, respectively.
Additionally, as part of the ordinary course of business, First Financial and its subsidiaries are parties to other litigation, including claims to the ownership of funds in particular accounts, the collection of delinquent accounts, challenges to security interests in collateral, foreclosure interests that are incidental to our regular business activities and other matters. 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, 2021. 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, 2021 or December 31, 2020.
ASSET QUALITY AND ALLOWANCE FOR CREDIT LOSSES
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.
Nonperforming assets consist of nonaccrual loans, accruing TDRs (collectively, nonperforming loans) and OREO.
See Table 7 – Summary of the ACL and Selected Statistics for a summary of First Financial’s nonaccrual loans, TDRs and OREO.
2021 vs. 2020. Nonaccrual loans were $48.4 million, or 0.52% of total loans as of December 31, 2021. This represents a $32.4 million, or 40.1%, decline from $80.8 million as of December 31, 2020. The decline in nonaccrual loans was a result of strong resolution efforts during the year, in addition to risk rating upgrades as borrower performance improved since the beginning of the pandemic. Total nonperforming assets declined $29.0 million, or 32.6%, to $60.1 million at December 31, 2021 from $89.1 million at December 31, 2020. The decline in nonperforming assets was driven by the decline in nonaccrual loans as well as a $1.2 million decline in OREO balances, which was partially offset by a $4.5 million increase in accruing TDRs.
Classified asset balances declined $37.2 million, or 26.2%, to $104.8 million at December 31, 2021 from $142.0 million at December 31, 2020. The improvement in classified asset balances during 2021 was driven by strong resolution efforts during the year, including the loan sales, as well as an improvement in general economic conditions.
26 First Financial Bancorp 2021 Annual Report
Allowance for credit losses. The ACL is a reserve accumulated on the Consolidated Balance Sheets through the recognition of the provision for loan and lease losses. First Financial records provision expense in the Consolidated Statements of Income to maintain the ACL at a level considered sufficient to absorb expected credit losses for financial assets in the portfolio over their expected remaining lives with consideration given to current and forward-looking information.
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 ACL. Any subsequent recovery of a previously charged-off loan is credited back to the ACL.
Management estimates the allowance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience paired with economic forecasts provide the basis for the quantitatively modeled estimation of expected credit losses. First Financial adjusts its quantitative model, as necessary, to reflect conditions not already considered therein. These adjustments are commonly known as the Qualitative Framework. The evaluation of these factors is the responsibility of the ACL committee, which is comprised of senior officers from the risk management, credit administration, finance and lending areas.
See Table 7 – Summary of the ACL and Selected Statistics for a summary of activity impacting the ACL and Table 13 – Allocation of the ACL for detail on its composition.
2021 vs. 2020. The ACL at December 31, 2021 was $132.0 million, or 1.42% of loans, which was a $43.7 million, or 24.9%, decrease from $175.7 million, and 1.77% of loans at December 31, 2020. Provision expense decreased $89.8 million, or 126.9%, to $19.0 million of provision recapture in 2021 from $70.8 million of provision expense in 2020. The ACL and corresponding provision expense was elevated in 2020 due to the adverse economic impact of COVID-19, however, the ACL declined in 2021 as the Company's economic outlook and credit trends improved.
The Company utilized the Moody's December baseline forecast as its R&S forecast in the quantitative model as of December 31, 2021. For reasonableness, the Company also considered the impact to the model from alternative, more adverse economic forecasts, slower prepayment speeds and increased default rates. These alternative analyses were utilized to inform the Company's qualitative adjustments. Additionally, First Financial considered its credit exposure to certain industries believed to be at risk for future credit stress related to the COVID-19 pandemic, such as franchise, hotel and investor commercial real estate lending when making qualitative adjustments to the ACL model.
Net charge-offs increased $10.4 million, or 72.9%, to $24.7 million for 2021 compared to $14.3 million for 2020, while the ratio of net charge-offs as a percentage of average loans outstanding increased to 0.26% in 2021 from 0.14% in 2020. This increase in net charge-offs was primarily driven by the sale of $133.8 million of hotel loans in 2021, which resulted in $9.2 million of additional net charge-offs. This loan sale was executed to address various portfolio concentrations.
The ACL as a percentage of nonaccrual loans was 272.8% at December 31, 2021 and 217.6% at December 31, 2020. The increase in this ratio was attributed to the decline in nonaccrual loans during the period, which more than offset the decrease in the ACL. The ACL as a percentage of nonperforming loans, including accruing TDRs was 220.0% at December 31, 2021 compared with 200.0% at December 31, 2020.
Provision expense is a product of the Company's ACL model combined with net charge-off activity during the period. Provision expense decreased $89.8 million during 2021 as the Company recorded $19.0 million of provision recapture during the period compared to $70.8 million of provision expense in 2020.
The ACL on unfunded commitments was $13.4 million as of December 31, 2021 and $12.5 million as of December 31, 2020.
Additionally, First Financial recorded $0.9 million of provision expense on unfunded commitments for the year ended
December 31, 2021 compared to $0.2 million of provision recapture for the same period of 2020. The increases in both the ACL and provision expense on unfunded commitments were driven by an increase in the volume of outstanding commitments due to strong origination efforts during 2021.
See Note 6 – Allowance for Credit Losses in the Notes to Consolidated Financial Statements for further discussion of First
First Financial Bancorp 2021 Annual Report 27
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial's ACL.
28 First Financial Bancorp 2021 Annual Report
For further discussion of First Financial's ACL, see Note 6 – Allowance for Credit Losses in the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 7 • Summary of the ACL and Selected Statistics |
| (Dollars in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
| Transactions in the allowance for credit losses: | | | | | | | | | | |
| Balance at January 1 | | $ | 175,679 | | | $ | 57,650 | | | $ | 56,542 | | | $ | 54,021 | | | $ | 57,961 | |
| Day one adoption impact of ASC 326 | | 0 | | | 61,505 | | | 0 | | | 0 | | | 0 | |
| Purchase accounting ACL for PCD | | 17 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Provision for credit losses | | (19,024) | | | 70,796 | | | 30,598 | | | 14,586 | | | 3,582 | |
| Loans charged-off: | | | | | | | | | | |
| Commercial & industrial | | 15,620 | | | 5,345 | | | 26,676 | | | 11,533 | | | 10,194 | |
| Lease financing | | 0 | | | 852 | | | 162 | | | 0 | | | 0 | |
| Construction real estate | | 1,498 | | | 0 | | | 0 | | | 0 | | | 1 | |
| Commercial real estate | | 13,471 | | | 12,100 | | | 3,689 | | | 4,835 | | | 1,038 | |
| Real estate-residential | | 127 | | | 488 | | | 677 | | | 422 | | | 435 | |
| Home equity | | 1,073 | | | 1,541 | | | 2,591 | | | 1,725 | | | 913 | |
| Installment | | 334 | | | 148 | | | 223 | | | 435 | | | 225 | |
| Credit card | | 780 | | | 885 | | | 1,547 | | | 1,720 | | | 857 | |
| Total loans charged-off | | 32,903 | | | 21,359 | | | 35,565 | | | 20,670 | | | 13,663 | |
| | | | | | | | | | |
| Recoveries of loans previously charged-off: | | | | | | | | | | |
| Commercial & industrial | | 1,612 | | | 2,907 | | | 2,883 | | | 2,066 | | | 1,650 | |
| Lease financing | | 0 | | | 0 | | | 0 | | | 1 | | | 1 | |
| Construction real estate | | 3 | | | 17 | | | 68 | | | 146 | | | 89 | |
| Commercial real estate | | 4,785 | | | 2,262 | | | 1,113 | | | 4,106 | | | 2,719 | |
| Real estate-residential | | 228 | | | 381 | | | 273 | | | 211 | | | 215 | |
| Home equity | | 1,223 | | | 1,132 | | | 1,335 | | | 1,309 | | | 1,027 | |
| Installment | | 151 | | | 158 | | | 251 | | | 575 | | | 234 | |
| Credit card | | 221 | | | 230 | | | 152 | | | 191 | | | 206 | |
| Total recoveries | | 8,223 | | | 7,087 | | | 6,075 | | | 8,605 | | | 6,141 | |
| Net charge-offs | | 24,680 | | | 14,272 | | | 29,490 | | | 12,065 | | | 7,522 | |
| Balance at December 31 | | $ | 131,992 | | | $ | 175,679 | | | $ | 57,650 | | | $ | 56,542 | | | $ | 54,021 | |
| | | | | | | | | | |
| Net charge-offs to average loans and leases | | | | | | | | | | |
| Commercial & industrial | | 0.50 | % | | 0.08 | % | | 0.95 | % | | 0.38 | % | | 0.47 | % |
| Lease financing | | 0.00 | % | | 1.07 | % | | 0.17 | % | | 0.00 | % | | 0.00 | % |
| Construction real estate | | 0.26 | % | | 0.00 | % | | (0.01) | % | | (0.03) | % | | (0.02) | % |
| Commercial real estate | | 0.20 | % | | 0.23 | % | | 0.07 | % | | 0.02 | % | | (0.07) | % |
| Real estate-residential | | (0.01) | % | | 0.01 | % | | 0.04 | % | | 0.03 | % | | 0.05 | % |
| Home equity | | (0.02) | % | | 0.05 | % | | 0.16 | % | | 0.06 | % | | (0.02) | % |
| Installment | | 0.20 | % | | (0.01) | % | | (0.03) | % | | (0.15) | % | | (0.02) | % |
| Credit card | | 1.13 | % | | 1.39 | % | | 2.81 | % | | 3.19 | % | | 1.44 | % |
| Total net charge-offs | | 0.26 | % | | 0.14 | % | | 0.33 | % | | 0.15 | % | | 0.13 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Nonperforming assets | | | | | | | | | | |
Nonaccrual loans (2) | | $ | 48,392 | | | $ | 80,752 | | | $ | 48,165 | | | $ | 70,700 | | | $ | 24,082 | |
Accruing troubled debt restructurings | | 11,616 | | | 7,099 | | | 11,435 | | | 16,109 | | | 17,545 | |
| Total nonperforming loans | | 60,008 | | | 87,851 | | | 59,600 | | | 86,809 | | | 41,627 | |
| Other real estate owned (OREO) | | 98 | | | 1,287 | | | 2,033 | | | 1,401 | | | 2,781 | |
| Total nonperforming assets | | 60,106 | | | 89,138 | | | 61,633 | | | 88,210 | | | 44,408 | |
| Accruing loans past due 90 days or more | | 137 | | | 169 | | | 201 | | | 63 | | | 61 | |
| Total underperforming assets | | $ | 60,243 | | | $ | 89,307 | | | $ | 61,834 | | | $ | 88,273 | | | $ | 44,469 | |
| Total classified assets | | $ | 104,815 | | | $ | 142,021 | | | $ | 89,250 | | | $ | 131,668 | | | $ | 87,293 | |
| | | | | | | | | | |
| Credit quality ratios: | | | | | | | | | | |
| As a percent of year-end loans, net of unearned income: | | | | | | | | | | |
| Allowance for credit losses | | 1.42 | % | | 1.77 | % | | 0.63 | % | | 0.64 | % | | 0.90 | % |
| Nonaccrual loans | | 0.52 | % | | 0.82 | % | | 0.52 | % | | 0.80 | % | | 0.40 | % |
Nonperforming loans (1) | | 0.65 | % | | 0.89 | % | | 0.65 | % | | 0.98 | % | | 0.69 | % |
| Allowance for credit losses to nonaccrual loans | | 272.76 | % | | 217.55 | % | | 119.69 | % | | 79.97 | % | | 224.32 | % |
| Allowance for credit losses to nonperforming loans | | 219.96 | % | | 199.97 | % | | 96.73 | % | | 65.13 | % | | 129.77 | % |
(1) Includes loans classified as nonaccrual and troubled debt restructurings.
(2) Nonaccrual loans include nonaccrual TDRs of $16.0 million, $14.7 million, $18.5 million, $22.4 million, and $6.4 million, as of December 31, 2021, 2020, 2019, 2018, and 2017, respectively.
First Financial Bancorp 2021 Annual Report 29
Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 8 • Allocation of the ACL |
| | December 31, |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
| (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 | | $ | 44,052 | | | 29.3 | % | | $ | 51,454 | | | 30.4 | % | | $ | 18,584 | | | 32.6 | % | | $ | 18,746 | | | 28.5 | % | | $ | 17,598 | | | 31.8 | % |
| Lease financing | | 1,633 | | | 1.2 | % | | 995 | | | 0.8 | % | | 971 | | | 0.8 | % | | 1,130 | | | 1.1 | % | | 675 | | | 1.5 | % |
| Real estate – construction | | 11,874 | | | 4.9 | % | | 21,736 | | | 6.4 | % | | 2,381 | | | 5.0 | % | | 3,413 | | | 6.2 | % | | 3,577 | | | 7.8 | % |
| Real estate – commercial | | 53,420 | | | 45.5 | % | | 76,795 | | | 43.5 | % | | 23,579 | | | 42.6 | % | | 21,048 | | | 42.5 | % | | 20,930 | | | 41.4 | % |
| Real estate – residential | | 6,225 | | | 9.6 | % | | 8,560 | | | 10.1 | % | | 5,299 | | | 10.3 | % | | 4,964 | | | 10.8 | % | | 4,683 | | | 7.8 | % |
| Installment, home equity & credit card | | 14,788 | | | 9.5 | % | | 16,139 | | | 8.8 | % | | 6,836 | | | 8.7 | % | | 7,241 | | | 10.9 | % | | 6,558 | | | 9.7 | % |
| Total | | $ | 131,992 | | | 100.0 | % | | $ | 175,679 | | | 100.0 | % | | $ | 57,650 | | | 100.0 | % | | $ | 56,542 | | | 100.0 | % | | $ | 54,021 | | | 100.0 | % |
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, which 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.
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.
2021 vs. 2020. First Financial's total deposits increased $640.0 million, or 5.2%, to $12.9 billion as of December 31, 2021 from $12.2 billion at December 31, 2020. This increase was driven by an increase in noninterest bearing deposits of $421.9 million, or 11.2%, an increase in savings deposits of $476.6 million, or 12.9%, and an increase in interest-bearing checking deposits of $284.0 million, or 9.7%. These increases were partially offset by a $542.5 million, or 29.0%, decline in time deposits. Total non-time deposit balances were $11.5 billion as of December 31, 2021 and $10.4 billion as of December 31, 2020.
30 First Financial Bancorp 2021 Annual Report
Total average deposits for 2021 increased $1.3 billion, or 11.4%, from 2020 primarily due to an increase in average noninterest bearing deposits of $694.6 million, or 21.0%, an increase in average interest-bearing demand deposits of $362.1 million, or 13.8%, and an increase in average savings deposits $804.8 million, or 24.7%, partially offset by a decrease in average time deposits of $566.3 million, or 26.1%. The year-over-year growth in average deposits was largely attributable to customers retaining stimulus payments, PPP loan proceeds and tax refunds.
Table 9 – Uninsured Deposits-Maturities of Time Deposits Greater Than or Equal to $250,000 details the contractual maturity of deposits that are not FDIC insured. Time Deposits Greater Than or Equal to $250,000 represent 1.5% and 1.8% of total deposits outstanding at December 31, 2021 and 2020 respectively.
| | | | | | | | | | | | | | | | | | | | | | |
| Table 9 • Uninsured Deposits-Maturities of Time Deposits Greater than or Equal to $250,000 |
| | |
| (Dollars in thousands) | | CDs | | IRAs | | | | Total |
| December 31, 2021 | | | | | | | | |
| Maturing in | | | | | | | | |
| 3 months or less | | $ | 37,198 | | | $ | 2,274 | | | | | $ | 39,472 | |
| 3 months to 6 months | | 46,053 | | | 1,215 | | | | | 47,268 | |
| 6 months to 12 months | | 51,377 | | | 4,571 | | | | | 55,948 | |
| over 12 months | | 49,945 | | | 2,993 | | | | | 52,938 | |
| Total | | $ | 184,573 | | | $ | 11,053 | | | | | $ | 195,626 | |
| | | | | | | | |
| December 31, 2020 | | | | | | | | |
| Maturing in | | | | | | | | |
| 3 months or less | | 59,960 | | | 2,610 | | | | | $ | 62,570 | |
| 3 months to 6 months | | 37,064 | | | 851 | | | | | 37,915 | |
| 6 months to 12 months | | 49,996 | | | 3,912 | | | | | 53,908 | |
| over 12 months | | 60,691 | | | 5,371 | | | | | 66,062 | |
| Total | | $ | 207,711 | | | $ | 12,744 | | | | | $ | 220,455 | |
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, FRB borrowings, FHLB long-term advances, repurchase agreements utilizing investment securities pledged as collateral and a capital loan from a municipality.
2021 vs. 2020. Short-term borrowings increased $129.6 million, or 77.8%, to $296.2 million at December 31, 2021, from $166.6 million at December 31, 2020.
First Financial utilizes short-term borrowings and long-term advances from the FHLB as wholesale funding sources. First Financial had $225.0 million of short-term borrowings from the FHLB at December 31, 2021 compared to none at December 31, 2020. Short term borrowings also included repurchase agreements of $51.2 million and $126.6 million at December 31, 2021 and 2020, respectively. The Company had no federal funds purchased as of December 31, 2021 compared to $40.0 million at December 31, 2020.
Total long-term debt was $409.8 million and $776.2 million at December 31, 2021 and 2020, respectively. Outstanding subordinated debt totaled $313.2 million and $321.4 million as of December 31, 2021 and 2020, respectively. The Company issued $150.0 million of fixed to floating rate subordinated notes in the second quarter of 2020. The subordinated debt is treated as Tier 2 capital for regulatory capital purposes and also included unamortized valuation and debt issuance costs of $8.6 million and $9.3 million as of December 31, 2021 and 2020, respectively.
Additionally, in conjunction with the acquisition of Summit, First Financial assumed $96.4 million in outstanding long-term borrowings at December 31, 2021. These outstanding long-term borrowings consisted of $23.0 million of lines of credit with
First Financial Bancorp 2021 Annual Report 31
Management’s Discussion and Analysis of Financial Condition and Results of Operations
other banks utilized to operate the business and carried an average interest rate of 2.77%. Additionally, acquired long term borrowings included $73.4 million of term notes, both with and without recourse, with an average interest rate of 4.09%, that were used to finance Summit's equity investment in the purchase of equipment to be leased to customers. Shortly after year-end, First Financial paid off and terminated the outstanding bank lines of credit acquired in the Summit transaction and anticipates paydowns of the existing term loans in 2022.
The Company had no FRB advances from the PPPLF included in long-term borrowings as of December 31, 2021 compared to $435.0 million as of December 31, 2020. The PPPLF was established by the Federal Reserve to supply a source of liquidity and term financing to financial institutions participating in the PPP. These borrowings carried an interest rate of 0.35% and were secured by the Company's PPP loans.
The Company also had no FHLB long-term advances as of December 31, 2021, compared to $20.0 million at December 31, 2020. First Financial's total remaining borrowing capacity from the FHLB was $1.4 billion at December 31, 2021. For ease of borrowing execution, First Financial utilizes a blanket collateral agreement with the FHLB. First Financial pledged $5.8 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, 2021.
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. For further information regarding the company's liability-funded liquidity, see Note 10 - Deposits and Note 11 - Borrowings.
First Financial has a $40.0 million short-term credit facility with an unaffiliated bank that matures in December, 2022. This facility has a variable 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, 2021, First Financial had an outstanding balance of $20.0 million. 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, 2021.
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, negatively impacting 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, 2021 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 |
For ease of borrowing execution, First Financial utilizes a blanket collateral agreement with the FHLB. First Financial pledged $5.8 billion of certain eligible residential, commercial and farm real estate loans, home equity lines of credit and government, agency and CMBS investments as collateral for borrowings from the FHLB as of December 31, 2021.
32 First Financial Bancorp 2021 Annual Report
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 $4.2 billion and $3.4 billion at December 31, 2021 and 2020, respectively. HTM securities that are maturing within a short period of time can be an additional source of liquidity. As of December 31, 2021 and 2020, the Company had no 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, 2021, these balances totaled $434.8 million, and First Financial had unused and available overnight wholesale funding sources of $4.8 billion, or 29.5% 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 First Financial from the Bank totaled $200.0 million, $80.0 million and $196.8 million for 2021, 2020 and 2019, respectively. As of December 31, 2021, the bank had retained earnings of $722.2 million, of which $166.2 million was available for distribution to First Financial without prior regulatory approval. As an additional source of liquidity, First Financial had $49.7 million in cash at the parent company as of December 31, 2021.
Share repurchases also impact First Financial's liquidity. For further information regarding share repurchases, see the Capital section that follows.
Capital expenditures, such as banking center expansion, remodeling and technology investments, were $15.3 million for 2021, $16.5 million for 2020 and $20.9 million for 2019. Material commitments for capital expenditures as of December 31, 2021, were $33.7 million. Management believes that sufficient liquidity exists to fund its future capital expenditure commitments.
Management is not aware of any other trends, events or regulatory requirements that, if implemented, are likely to have a material effect on First Financial’s liquidity.
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).
Basel III includes a minimum ratio of Common equity Tier 1 capital to risk-weighted assets of 7.0% and a fully phased-in capital conservation buffer of 2.5% of risk-weighted assets. Further, the minimum ratio of Tier 1 capital to risk-weighted assets is 8.5% and all banks are subject to a 4.0% minimum leverage ratio, while the minimum Total risk-based capital ratio is 10.5%. Failure to maintain the required Common equity Tier 1 capital 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 11.22% at December 31, 2021 from 12.20% at December 31, 2020, while the total capital ratio decreased to 14.10% from 15.55% during the same period. The leverage ratio decreased to 8.70% at December 31, 2021,compared to 9.55% at December 31, 2020, while the Company’s tangible common equity ratio decreased to 7.58% at December 31, 2021 from 8.47% at December 31, 2020. The decline in the Company's capital ratios during 2021 was primarily driven by the acquisition of Summit and share repurchases during the year.
As of December 31, 2021, First Financial met all capital adequacy requirements to which it was subject. At December 31, 2021 and 2020, regulatory notifications categorized First Financial Bank as well-capitalized under the regulatory framework for
First Financial Bancorp 2021 Annual Report 33
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2021, see Note 19 – Capital in the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | |
| Table 10 • Capital Adequacy | | |
| | | December 31, |
| (Dollars in thousands) | | 2021 | | 2020 |
| Consolidated capital calculations | | |
| Common stock | | $ | 1,640,358 | | | $ | 1,638,947 | |
| Retained earnings | | 837,473 | | | 720,429 | |
| Accumulated other comprehensive loss | | (433) | | | 48,664 | |
| Treasury stock, at cost | | (218,456) | | | (125,970) | |
| Total shareholders' equity | | 2,258,942 | | | 2,282,070 | |
| Common equity tier 1 capital adjustments | | | | |
| Goodwill and other intangibles | | (1,105,116) | | | (1,015,132) | |
| Total tangible equity | | $ | 1,153,826 | | | $ | 1,266,938 | |
| Total assets | | $ | 16,329,141 | | | $ | 15,973,134 | |
| Goodwill and other intangibles | | (1,105,116) | | | (1,015,132) | |
| Total tangible assets | | $ | 15,224,025 | | | $ | 14,958,002 | |
| Common tier 1 capital | | $ | 1,262,789 | | | $ | 1,325,922 | |
| Tier 1 capital | | 1,306,571 | | | 1,368,818 | |
| Total capital | | 1,642,549 | | | 1,744,802 | |
| Total risk-weighted assets | | 11,645,666 | | | 11,219,114 | |
Average assets (1) | | 15,010,256 | | | 14,338,156 | |
| | | | | |
| Regulatory capital | | | | |
| Common tier 1 ratio | | 10.84 | % | | 11.82 | % |
| Tier 1 ratio | | 11.22 | % | | 12.20 | % |
| Total capital ratio | | 14.10 | % | | 15.55 | % |
| Leverage ratio | | 8.70 | % | | 9.55 | % |
| | | | | |
| Other capital ratios | | | | |
| Total shareholders' equity to ending assets | | 13.83 | % | | 14.29 | % |
| Total tangible shareholders' equity to ending tangible assets | | 7.58 | % | | 8.47 | % |
| | | | | |
(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 42.6%, 57.5% and 44.8% for the years 2021, 2020 and 2019, 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 2022, the board of directors authorized a dividend of $0.23 per common share, payable on March 15, 2022 to all shareholders of record as of March 1, 2022.
Share Repurchases. Effective January 2022, First Financial's board of directors approved a stock repurchase plan (the 2022 Repurchase Plan), replacing the 2020 Repurchase Plan which became effective in January 2021. The 2022 Repurchase Plan continues for two years and authorizes the purchase of up to 5,000,000 shares of the Company's common stock and will expire in December 2023.
34 First Financial Bancorp 2021 Annual Report
The 2020 Repurchase Plan was authorized in December of 2020, and replaced the 2019 Repurchase Plan, which expired on December 31, 2020. The 2020 Repurchase Plan authorized the repurchase of up to 5,000,000 shares of the Company's common stock. In 2021, First Financial repurchased 4,633,355 shares at an average market price of $23.33 under the 2020 Plan.
Under the 2019 Repurchase Plan, First Financial repurchased 880,000 shares at an average market price of $18.96 during 2020 and 2,753,272 shares at an average market price of $24.05 during 2019.
Shareholders' Equity. Total shareholders’ equity at both December 31, 2021 and December 31, 2020 was $2.3 billion.
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 2021 and 2020, 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, 2021, 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 | | $ | 6,532 | | | $ | (4,731) | | | N/A | | N/A | | $ | (639) | | | $ | 1,379 | |
| Change in Pension Expense | | 231 | | | (222) | | | $ | 1,396 | | | $ | (1,396) | | | (450) | | | 585 | |
Based upon the plan’s current funding status and updated actuarial projections for 2021, First Financial recorded expense related to its pension plan of $3.4 million for 2021, $2.5 million for 2020 and $1.0 million for 2019 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 2021, 2020 or 2019 nor does it expect to make a cash contribution in 2022.
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 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 (composed of interest rate, liquidity, capital, foreign exchange and financial risk), operational, compliance, strategic, reputation, information technology, cyber and legal.
First Financial Bancorp 2021 Annual Report 35
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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:
•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, main effective controls and analyze risk and control 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 and where the particular business or business unit risk exists; how the business unit’s management of its risks affects the Company’s strategy, earnings, reputation and other key success factors; whether the line of business objectives are aligned with enterprise objectives, how effective internal procedures are integral to successful
business operations , and whether internal controls and their maintenance are reliable.
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;
36 First Financial Bancorp 2021 Annual Report
•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 governance 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.
Management must identify which processes and activities are critical to achieving the Company’s business objectives within 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. Management analyzes and monitors risk management performance with key risk indicator (KRI) and key performance indicator (KPI) dashboards.
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 and assurance. 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 and control 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;
•encourage employees in all units to develop a working understanding of upstream and downstream activities;
First Financial Bancorp 2021 Annual Report 37
Management’s Discussion and Analysis of Financial Condition and Results of Operations
•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 residual 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/mitigation 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 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 and ongoing administration practices, periodically reviewing and approving its credit exposures using credit policies and guidelines approved by the board of directors.
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 sources of market risk for First Financial are interest rate risk and liquidity 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 its 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 36% in its interest rate risk modeling as of December 31, 2021.
38 First Financial Bancorp 2021 Annual Report
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.
Presented below is the estimated impact on First Financial’s NII and EVE as of December 31, 2021, 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 | | (4.62)% | | 8.55% | | 16.36% |
| NII - Year 2 | | (6.70)% | | 12.14% | | 22.82% |
| EVE | | (9.10)% | | 6.40% | | 11.60% |
“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, 2021. The projected
results for NII and EVE reflected an asset sensitive position due to significant growth in low cost transactional deposits, which have replaced wholesale borrowings in the Company's funding mix. First Financial continues to manage its balance sheet with a bias toward modest 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, 2021 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 | | 9.94 | % | | 7.15 | % | | 17.70 | % | | 15.01 | % |
| NII-Year 2 | | 13.56 | % | | 10.71 | % | | 24.20 | % | | 21.45 | % |
See the Net Interest Income section of Management’s Discussion and Analysis for further discussion.
Table 11 – Market Risk Disclosure projects the principal maturities and yields of First Financial’s interest-bearing financial instruments at December 31, 2021 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 MBS and CMO, 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 2021 Annual Report 39
Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 11 • Market Risk Disclosure |
| | | | Fair Value |
| | Principal Amount Maturing In | | December 31, |
| (Dollars in thousands) | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total | | 2021 |
| Rate sensitive assets | | | | | | | | | | | | | | | | |
Fixed interest rate loans (1) | | $ | 375,759 | | | $ | 245,285 | | | $ | 232,079 | | | $ | 197,991 | | | $ | 152,213 | | | $ | 869,669 | | | $ | 2,072,996 | | | $ | 2,108,197 | |
| Average interest rate | | 4.06 | % | | 4.79 | % | | 4.70 | % | | 4.40 | % | | 4.36 | % | | 3.78 | % | | 4.14 | % | | |
Variable interest rate loans (1) | | 1,323,413 | | | 969,489 | | | 1,041,841 | | | 643,965 | | | 851,411 | | | 2,282,674 | | | 7,112,793 | | | 7,093,396 | |
| Average interest rate | | 3.14 | % | | 3.27 | % | | 3.06 | % | | 2.99 | % | | 3.46 | % | | 3.25 | % | | 3.21 | % | | |
| Fixed interest rate securities | | 198,968 | | | 264,052 | | | 426,054 | | | 308,440 | | | 437,107 | | | 1,798,380 | | | 3,433,001 | | | 3,434,788 | |
| Average interest rate | | 3.01 | % | | 2.64 | % | | 2.40 | % | | 2.40 | % | | 2.42 | % | | 1.94 | % | | 2.22 | % | | |
| Variable interest rate securities | | 204,250 | | | 225,822 | | | 138,540 | | | 44,994 | | | 112,302 | | | 147,357 | | | 873,265 | | | 872,956 | |
| Average interest rate | | 3.48 | % | | 4.00 | % | | 3.25 | % | | 3.54 | % | | 2.45 | % | | 2.52 | % | | 3.29 | % | | |
| Other earning assets | | 214,811 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 214,811 | | | 214,811 | |
| Average interest rate | | 0.15 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.15 | % | | |
| | | | | | | | | | | | | | | | |
| Rate sensitive liabilities | | | | | | | | | | | | | | | | |
Noninterest-bearing checking (2) | | $ | 4,185,572 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 4,185,572 | | | $ | 4,185,572 | |
Savings and interest-bearing checking (2) | | 7,356,119 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 7,356,119 | | | 7,356,119 | |
| Average interest rate | | 0.07 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.07 | % | | |
| Time deposits | | 1,131,574 | | | 83,589 | | | 50,983 | | | 32,569 | | | 31,352 | | | 196 | | | 1,330,263 | | | 1,327,876 | |
| Average interest rate | | 0.41 | % | | 0.60 | % | | 0.65 | % | | 0.43 | % | | 0.63 | % | | 0.86 | % | | 0.44 | % | | |
| Fixed interest rate borrowings | | 268,714 | | | 12,269 | | | 12,706 | | | 129,346 | | | 13,625 | | | 150,172 | | | 586,832 | | | 589,196 | |
| Average interest rate | | 0.76 | % | | 3.50 | % | | 3.50 | % | | 5.11 | % | | 3.50 | % | | 5.35 | % | | 3.07 | % | | |
| Variable interest rate borrowings | | 71,203 | | | 0 | | | 0 | | | 0 | | | 0 | | | 48,000 | | | 119,203 | | | 118,576 | |
| Average interest rate | | 0.55 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 2.79 | % | | 1.45 | % | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
(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.
Liquidity risk is the potential that an entity will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain funding or that it cannot easily unwind or offset exposures without significantly lowering market prices because of inadequate market depth or market disruptions. Management focuses on maintaining and enhancing liquidity by maximizing collateral-based liquidity availability. First Financial manages liquidity in relation to the trend and stability of deposits; degree and reliance on short-term, volatile sources of funds, including any undue reliance on borrowings or brokered deposits to fund longer-term assets. Management identifies, measures, monitors and manages liquidity while seeking to maintain diversification of funding sources, both on- and off-balance-sheet.
In 2021, the Company continued to update liquidity risk management processes, such as refining the contingency funding plan, proactively meeting more frequently during the pandemic, securing additional contingent borrowing capacity, and developing additional ad-hoc liquidity reporting to monitor funding inflows and outflows related to the PPP funding and forgiveness. Management is closely monitoring the usage of excess business deposits, the balance of personal deposits and the broader macroeconomic environment. For further discussion of the Company's liquidity, please see the Liquidity section within Management's Discussion and Analysis.
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.
40 First Financial Bancorp 2021 Annual Report
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 ongoing management 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, inability to effectively manage human capital risk factors such as satisfaction, engagement, attrition, retention, and diversity, equity and, inclusion (DEI) 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
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. First Financial also seeks to build social responsibility into its brand and has formed a corporate responsibility working group to develop an initial corporate social responsibility (CSR) report, which will highlight First Financial’s efforts, goals, and plans to help the environment and our communities.
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 and client feedback response and mitigation routines that analyze and share feedback data with business lines for client experience and process improvements.
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.
In 2021, there were multiple high-profile, highly successful supply chain attacks across multiple industries. In December, the Cybersecurity and Infrastructure Security Agency announced a critical vulnerability in the logging utility maintained by the Apache Software Foundation which affects Log4j, which is part of the Java programming language and is widely used by well-known software vendors and manufacturers to operate enterprise applications and cloud services. Successful exploitation of the vulnerability can be used to deploy malicious software (e.g. ransomware), steal data and disrupt operations. First Financial has assessed the risk to internal operations, customers and consumers based upon the evolving information and has taken action to mitigate the risk from this vulnerability.
First Financial Bancorp 2021 Annual Report 41
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
FOURTH QUARTER REVIEW
For the three months ended December 31, 2021, the Company reported net income of $46.9 million, or $0.50 per diluted common share. These results compare to net income of $60.0 million, or $0.63 per diluted common share, for the third quarter of 2021 and $48.3 million, or $0.49 per diluted common share, for the fourth quarter of 2020. Return on average assets for the fourth quarter of 2021 was 1.16% compared to a return on assets of 1.49% in the third quarter of 2021 and 1.20% in the fourth quarter of 2020.
Loan balances declined $72.6 million from the third quarter of 2021 primarily due to declines in PPP and ICRE loans. Loan balances increased $148.8 million, or 6.3% on an annualized basis, excluding PPP forgiveness of $120.2 million, $143.5 million of CRE loan sales, and $42.3 million in Summit finance leases acquired during the quarter.
Net interest margin for the fourth quarter of 2021 was 3.19% or 3.23% on a fully tax-equivalent basis. This was a 9 basis point decrease from the third quarter of 2021, and was driven by a decline in PPP forgiveness fees and lower asset yields. Asset yields declined modestly during the quarter due to continued pressure from the low interest rate environment and the growth of the investment securities portfolio. The impact on the net interest margin from these changes was partially offset by an increase in other non-PPP loan fees during the quarter.
Noninterest income was $45.7 million and included record Bannockburn income of $12.8 million, as well as elevated Wealth management fees of $6.0 million. In addition, Other noninterest income increased 23.9% during the period due to a $1.2 million increase in syndication fees.
Noninterest expenses of $109.6 million, increased $10.5 million, or 10.6% during the quarter, primarily driven by incentive compensation tied to the Company's strong financial performance, Summit acquisition expenses, tax credit investment write-downs and legal settlements.
The ACL, including both funded and unfunded reserves, was $145.4 million at December 31, 2021, and the Company recorded $7.7 million in total provision recapture during the fourth quarter. The provision recapture was driven by a 36.7% decline in classified asset balances and improved economic forecasts. Net charge-offs as a percentage of loans increased to 32 basis points on an annualized basis for the fourth quarter. Higher net charge-offs were driven by $9.2 million of net charge-offs resulting from a $133.8 million hotel loan loan sale during the period, which was executed in order to address various portfolio concentrations.
CRITICAL ACCOUNTING ESTIMATES
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 ACL - loans and leases, goodwill, pension and income taxes. The estimates and assumptions made are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.
42 First Financial Bancorp 2021 Annual Report
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 of 1995. Words such as ‘‘believes,’’ ‘‘anticipates,’’ “likely,” “expected,” “estimated,” ‘‘intends’’ and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Examples of forward-looking statements include, but are not limited to, statements we make about (i) our future operating or financial performance, including revenues, income or loss and earnings or loss per share, (ii) future common stock dividends, (iii) our capital structure, including future capital levels, (iv) our plans, objectives and strategies, and (v) the assumptions that underlie our forward-looking statements.
As with any forecast or projection, forward-looking statements are subject to inherent uncertainties, risks and changes in circumstances that may cause actual results to differ materially from those set forth in the forward-looking statements. Forward-looking statements are not historical facts but instead express only management’s beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management’s control. It is possible that actual results and outcomes may differ, possibly materially, from the anticipated results or outcomes indicated in these forward-looking statements. Important factors that could cause actual results to differ materially from those in our forward-looking statements include the following, without limitation:
•economic, market, liquidity, credit, interest rate, operational and technological risks associated with the Company’s business;
•future credit quality and performance, including our expectations regarding future loan losses and our allowance for credit losses;
•the effect of and changes in policies and laws or regulatory agencies, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and other legislation and regulation relating to the banking industry; (iv) management’s ability to effectively execute its business plans;
•mergers and acquisitions, including costs or difficulties related to the integration of acquired companies;
•the possibility that any of the anticipated benefits of the Company’s acquisitions will not be realized or will not be realized within the expected time period;
•the effect of changes in accounting policies and practices;
•changes in consumer spending, borrowing and saving and changes in unemployment;
•changes in customers’ performance and creditworthiness;
•the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;
•current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates, U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth;
•the adverse impact on the U.S. economy, including the markets in which we operate, of the novel coronavirus, which causes the Coronavirus disease 2019 (“COVID-19”), global pandemic, and the impact of a slowing U.S. economy and increased unemployment on the performance of our loan and lease portfolio, the market value of our investment securities, the availability of sources of funding and the demand for our products;
•our capital and liquidity requirements (including under regulatory capital standards, such as the Basel III capital standards) and our ability to generate capital internally or raise capital on favorable terms;
•financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services;
First Financial Bancorp 2021 Annual Report 43
Management’s Discussion and Analysis of Financial Condition and Results of Operations
•the effect of the current interest rate environment or changes in interest rates or in the level or composition of our assets or liabilities on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgage loans held for sale;
•the effect of a fall in stock market prices on our brokerage, asset and wealth management businesses;
•a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber attacks;
•the effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin; and
•our ability to develop and execute effective business plans and strategies.
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, 2021 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.
44 First Financial Bancorp 2021 Annual Report
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Statistical Information | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| (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) | | $ | 2,790,733 | | | $ | 137,841 | | | 4.94 | % | | $ | 2,999,223 | | | $ | 143,720 | | | 4.79 | % | | $ | 2,505,615 | | | $ | 153,128 | | | 6.11 | % |
Lease financing (2) | | 67,822 | | | 2,739 | | | 4.04 | % | | 79,882 | | | 3,769 | | | 4.72 | % | | 92,902 | | | 3,964 | | | 4.27 | % |
| Construction-real estate | | 575,883 | | | 18,743 | | | 3.25 | % | | 535,740 | | | 20,497 | | | 3.83 | % | | 491,503 | | | 26,637 | | | 5.42 | % |
Commercial-real estate (2) | | 4,379,325 | | | 152,251 | | | 3.48 | % | | 4,317,396 | | | 177,038 | | | 4.10 | % | | 3,906,992 | | | 216,757 | | | 5.55 | % |
| Residential-real estate | | 971,692 | | | 40,275 | | | 4.14 | % | | 1,077,430 | | | 48,001 | | | 4.46 | % | | 1,025,394 | | | 47,635 | | | 4.65 | % |
| Installment and other consumer | | 854,780 | | | 34,906 | | | 4.08 | % | | 892,985 | | | 40,046 | | | 4.48 | % | | 926,129 | | | 52,539 | | | 5.67 | % |
| Total loans and leases | | 9,640,235 | | | 386,755 | | | 4.01 | % | | 9,902,656 | | | 433,071 | | | 4.37 | % | | 8,948,535 | | | 500,660 | | | 5.59 | % |
| | | | | | | | | | | | | | | | | | |
Investment securities (3) | | | | | | | | | | | | | | | | | | |
| Taxable | | 3,271,601 | | | 79,213 | | | 2.42 | % | | 2,460,707 | | | 73,789 | | | 3.00 | % | | 2,684,973 | | | 90,168 | | | 3.36 | % |
Tax-exempt (2) | | 841,639 | | | 23,193 | | | 2.76 | % | | 751,344 | | | 24,357 | | | 3.24 | % | | 603,902 | | | 22,273 | | | 3.69 | % |
Total investment securities (3) | | 4,113,240 | | | 102,406 | | | 2.49 | % | | 3,212,051 | | | 98,146 | | | 3.06 | % | | 3,288,875 | | | 112,441 | | | 3.42 | % |
| Interest-bearing deposits with other banks | | 73,170 | | | 147 | | | 0.20 | % | | 78,943 | | | 275 | | | 0.35 | % | | 35,814 | | | 805 | | | 2.25 | % |
| Total earning assets | | 13,826,645 | | | 489,308 | | | 3.54 | % | | 13,193,650 | | | 531,492 | | | 4.03 | % | | 12,273,224 | | | 613,906 | | | 5.00 | % |
| | | | | | | | | | | | | | | | | | |
| Nonearning assets | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses | | (162,477) | | | | | | | (153,596) | | | | | | | (58,504) | | | | | |
| Cash and due from banks | | 242,201 | | | | | | | 245,436 | | | | | | | 191,864 | | | | | |
| Accrued interest and other assets | | 2,165,991 | | | | | | | 2,243,654 | | | | | | | 1,804,135 | | | | | |
| Total assets | | $ | 16,072,360 | | | | | | | $ | 15,529,144 | | | | | | | $ | 14,210,719 | | | | | |
| | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities | | | | | | | | | | | | | | | | | | |
| Deposits | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand | | $ | 2,988,359 | | | $ | 1,930 | | | 0.06 | % | | $ | 2,626,252 | | | $ | 4,534 | | | 0.17 | % | | $ | 2,326,193 | | | $ | 12,748 | | | 0.55 | % |
| Savings | | 4,065,654 | | | 4,122 | | | 0.10 | % | | 3,260,882 | | | 7,232 | | | 0.22 | % | | 3,027,725 | | | 21,383 | | | 0.71 | % |
| Time | | 1,601,295 | | | 8,383 | | | 0.52 | % | | 2,167,553 | | | 30,156 | | | 1.39 | % | | 2,223,429 | | | 44,901 | | | 2.02 | % |
| Total interest-bearing deposits | | 8,655,308 | | | 14,435 | | | 0.17 | % | | 8,054,687 | | | 41,922 | | | 0.52 | % | | 7,577,347 | | | 79,032 | | | 1.04 | % |
| Borrowed funds | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | 204,503 | | | 198 | | | 0.10 | % | | 590,903 | | | 6,442 | | | 1.09 | % | | 1,146,719 | | | 25,235 | | | 2.20 | % |
| Long-term debt | | 442,720 | | | 16,466 | | | 3.72 | % | | 867,798 | | | 20,088 | | | 2.31 | % | | 522,340 | | | 19,057 | | | 3.65 | % |
| | | | | | | | | | | | | | | | | | |
| Total borrowed funds | | 647,223 | | | 16,664 | | | 2.57 | % | | 1,458,701 | | | 26,530 | | | 1.82 | % | | 1,669,059 | | | 44,292 | | | 2.65 | % |
| Total interest-bearing liabilities | | 9,302,531 | | | 31,099 | | | 0.33 | % | | 9,513,388 | | | 68,452 | | | 0.72 | % | | 9,246,406 | | | 123,324 | | | 1.33 | % |
| Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing demand deposits | | 4,005,034 | | | | | | | 3,310,483 | | | | | | | 2,524,011 | | | | | |
| Other liabilities | | 504,988 | | | | | | | 484,628 | | | | | | | 265,623 | | | | | |
| Shareholders' equity | | 2,259,807 | | | | | | | 2,220,645 | | | | | | | 2,174,679 | | | | | |
| Total liabilities and shareholders' equity | | $ | 16,072,360 | | | | | | | $ | 15,529,144 | | | | | | | $ | 14,210,719 | | | | | |
| Net interest income and interest rate spread (fully tax equivalent) | | | | $ | 458,209 | | | 3.21 | % | | | | $ | 463,040 | | | 3.31 | % | | | | $ | 490,582 | | | 3.67 | % |
| Net interest margin (fully tax equivalent) | | | | | | 3.31 | % | | | | | | 3.51 | % | | | | | | 4.00 | % |
| Interest income and yield | | | | $ | 483,217 | | | 3.49 | % | | | | $ | 524,963 | | | 3.98 | % | | | | $ | 607,578 | | | 4.95 | % |
| Interest expense and rate | | | | 31,099 | | | 0.33 | % | | | | 68,452 | | | 0.72 | % | | | | 123,324 | | | 1.33 | % |
| Net interest income and spread | | | | $ | 452,118 | | | 3.16 | % | | | | $ | 456,511 | | | 3.26 | % | | | | $ | 484,254 | | | 3.62 | % |
| Net interest margin | | | | | | 3.27 | % | | | | | | 3.46 | % | | | | | | 3.95 | % |
| | | | | | | | | | | | | | | | | | |
(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% tax rate for 2020, 2019 and 2018. |
(3) Includes HTM securities, AFS securities and other investments. |
(4) Includes loans held-for-sale. | | | | | | | | | | | | | | | | | | |
| N/M = not meaningful | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
First Financial Bancorp 2021 Annual Report 45
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, 2021, 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, 2021, our internal control over financial reporting is effective based on those criteria.
As permitted, First Financial has excluded the operations of Summit Funding Group, Inc. acquired during 2021, which is described in Note 23 of the consolidated financial statements, from the scope of management’s report on internal control over financial reporting.
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, 2021. The report, which expresses an unqualified opinion on First Financial’s internal control over financial reporting as of December 31, 2021, is included in the information that follows under the heading “Report of Independent Registered Public Accounting Firm."
| | | | | | | | | | | |
| /s/ Archie M. Brown | | /s/ James M. Anderson | |
| President and Chief Executive Officer | | Executive Vice President and Chief Financial Officer | |
| February 18, 2022 | | February 18, 2022 | |
46 First Financial Bancorp 2021 Annual Report
| | | | | | | | |
| | 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, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 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, 2021, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.
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
First Financial Bancorp 2021 Annual Report 47
evaluating the design and operating effectiveness of internal control based on the assessed risk. As permitted, the Company has excluded the operations of Summit Funding Group, Inc. acquired during 2021, which is described in Note 23 of the consolidated financial statements, from the scope of management’s report on internal control over financial reporting. As such, it has also been excluded from the scope of our audit of internal control over financial reporting. 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.
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 financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the 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 Credit Losses - Refer to Notes 1, 2 and 6 to the financial statements
The allowance for credit losses (the “ACL”) is an accounting estimate of expected credit losses over the estimated life of financial assets carried at amortized cost and off-balance-sheet credit exposures in accordance with ASC 326. The standard requires a financial asset (or a group of financial assets), including the Company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. Estimates of expected credit losses for loans are based on historical experience, current conditions and reasonable and supportable forecasts over the estimated life of the loans. In order to estimate the expected credit losses, the Company utilizes a loss estimation model.
Management quantitatively models expected credit loss using Probability of Default (“PD”), Loss Given Default (“LGD”), and Exposure at Default (“EAD”) over the Reasonable and Supportable (“R&S”) forecast, reversion and post-reversion periods. Utilizing third-party software, the Company forecasts PD by using transition matrices to evaluate when events are more or less likely to occur based on previous events. The transition matrices are adjusted under forward-looking macroeconomic expectations to obtain R&S forecasts. Management utilizes third-party software for estimating LGD. The PD multiplied by LGD produces an expected loss rate that, when calculating the ACL, is applied to contractual loan cash flows, adjusted for expected future rates of principal prepayments. The Company adjusts its quantitative model for certain qualitative factors to reflect the extent to which management expects current conditions and R&S forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The qualitative framework reflects changes related to relevant data, such as changes in asset quality trends, portfolio growth and composition, national and local economic factors, credit policy and administration and other factors not considered in the base model. The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The ACL is influenced by loan volumes, risk rating migration, delinquency status and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.
The Allowance for Credit Losses for Loans was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management. The principal considerations resulting in our determination included the following:
•Significant auditor judgment and effort were used in evaluating the qualitative factors used in the calculation.
48 First Financial Bancorp 2021 Annual Report
•Significant audit effort related to the completeness and accuracy of the high volume of data used in the model computation.
The primary procedures performed to address the critical audit matter included:
•Testing the effectiveness of management’s internal controls over the preparation and evaluation of the ACL calculation, significant model assumptions, development and reasonableness of qualitative factors, completeness and accuracy of data used in the calculation, systems used in the development of the estimate, and the appropriateness of the overall calculation.
•Substantively testing management’s process for developing qualitative factors and assessing relevance, and reliability of data used to develop factors, including evaluating management’s judgments and assumptions for reasonableness.
•Substantively testing the mathematical accuracy of the EAD model including the completeness and accuracy of loan data used in the model to estimate ACL.
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.
| | | | | |
| Louisville, Kentucky | |
| February 18, 2022 |
First Financial Bancorp 2021 Annual Report 49
Consolidated Balance Sheets
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2021 | | 2020 |
| Assets | | | | |
| Cash and due from banks | | $ | 220,031 | | | $ | 231,054 | |
| Interest-bearing deposits with other banks | | 214,811 | | | 20,305 | |
| Investment securities available-for-sale, at fair value (amortized cost $4,180,589 at December 31, 2021 and $3,330,029 at December 31, 2020) | | 4,207,846 | | | 3,424,580 | |
| Investment securities held-to-maturity (fair value $99,898 at December 31, 2021 and $136,698 at December 31, 2020) | | 98,420 | | | 131,687 | |
| Other investments, at fair value | | 102,971 | | | 133,198 | |
| Loans held for sale, at fair value | | 29,482 | | | 41,103 | |
| Loans and leases | | | | |
| Commercial & industrial | | 2,720,028 | | | 3,007,509 | |
| Lease financing | | 109,624 | | | 72,987 | |
| Construction real estate | | 455,894 | | | 636,096 | |
| Commercial real estate | | 4,226,614 | | | 4,307,858 | |
| Residential real estate | | 896,069 | | | 1,003,086 | |
| Home equity | | 708,399 | | | 743,099 | |
| Installment | | 119,454 | | | 81,850 | |
| Credit card | | 52,217 | | | 48,485 | |
| Total loans and leases | | 9,288,299 | | | 9,900,970 | |
| Less: Allowance for credit losses | | (131,992) | | | (175,679) | |
| Net loans and leases | | 9,156,307 | | | 9,725,291 | |
| Premises and equipment | | 193,040 | | | 207,211 | |
| Operating leases | | 73,857 | | | 0 | |
| Goodwill | | 1,000,749 | | | 937,771 | |
| Other intangibles | | 88,898 | | | 64,552 | |
| Accrued interest and other assets | | 942,729 | | | 1,056,382 | |
| Total assets | | $ | 16,329,141 | | | $ | 15,973,134 | |
| | | | |
| Liabilities | | | | |
| Deposits | | | | |
| Interest-bearing demand | | $ | 3,198,745 | | | $ | 2,914,787 | |
| Savings | | 4,157,374 | | | 3,680,774 | |
| Time | | 1,330,263 | | | 1,872,733 | |
| Total interest-bearing deposits | | 8,686,382 | | | 8,468,294 | |
| Noninterest-bearing | | 4,185,572 | | | 3,763,709 | |
| Total deposits | | 12,871,954 | | | 12,232,003 | |
| Federal funds purchased and securities sold under agreements to repurchase | | 51,203 | | | 166,594 | |
| FHLB short-term borrowings | | 225,000 | | | 0 | |
| Other short-term borrowings | | 20,000 | | | 0 | |
| Total short-term borrowings | | 296,203 | | | 166,594 | |
| Long-term debt | | 409,832 | | | 776,202 | |
| Total borrowed funds | | 706,035 | | | 942,796 | |
| Accrued interest and other liabilities | | 492,210 | | | 516,265 | |
| Total liabilities | | 14,070,199 | | | 13,691,064 | |
| | | | |
| Shareholders' equity | | | | |
| Common stock - no par value | | | | |
| Authorized - 160,000,000 shares; Issued - 104,281,794 shares in 2021 and in 2020 | | 1,640,358 | | | 1,638,947 | |
| Retained earnings | | 837,473 | | | 720,429 | |
| Accumulated other comprehensive income (loss) | | (433) | | | 48,664 | |
| Treasury stock, at cost,10,132,554 shares in 2021 and 6,259,865 shares in 2020 | | (218,456) | | | (125,970) | |
| Total shareholders' equity | | 2,258,942 | | | 2,282,070 | |
| Total liabilities and shareholders' equity | | $ | 16,329,141 | | | $ | 15,973,134 | |
See Notes to Consolidated Financial Statements.
50 First Financial Bancorp 2021 Annual Report
Consolidated Statements of Income
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| (Dollars in thousands except per share data) | | 2021 | | 2020 | | 2019 |
| Interest income | | | | | | |
| Loans and leases, including fees | | $ | 385,535 | | | $ | 431,657 | | | $ | 499,009 | |
| Investment securities | | | | | | |
| Taxable | | 79,212 | | | 73,789 | | | 90,168 | |
| Tax-exempt | | 18,323 | | | 19,242 | | | 17,596 | |
| Total interest on investment securities | | 97,535 | | | 93,031 | | | 107,764 | |
| Other earning assets | | 147 | | | 275 | | | 805 | |
| Total interest income | | 483,217 | | | 524,963 | | | 607,578 | |
| Interest expense | | | | | | |
| Deposits | | 14,435 | | | 41,922 | | | 79,032 | |
| Short-term borrowings | | 198 | | | 6,442 | | | 25,235 | |
| Long-term borrowings | | 16,466 | | | 20,088 | | | 19,057 | |
| Total interest expense | | 31,099 | | | 68,452 | | | 123,324 | |
| Net interest income | | 452,118 | | | 456,511 | | | 484,254 | |
| Provision for credit losses- loan and lease losses | | (19,024) | | | 70,796 | | | 30,598 | |
| Provision for credit losses- unfunded commitments | | 903 | | | (237) | | | (165) | |
| Net interest income after provision for credit losses | | 470,239 | | | 385,952 | | | 453,821 | |
| | | | | | |
| Noninterest income | | | | | | |
| Service charges on deposit accounts | | 31,876 | | | 29,446 | | | 37,939 | |
| Trust and wealth management fees | | 23,780 | | | 21,286 | | | 20,728 | |
| Bankcard income | | 14,300 | | | 11,726 | | | 18,804 | |
| Client derivative fees | | 7,927 | | | 10,313 | | | 15,662 | |
| Foreign exchange income | | 44,793 | | | 39,377 | | | 7,739 | |
| Net gain from sales of loans | | 33,021 | | | 51,176 | | | 14,851 | |
| Net gain (loss) on sales/transfers of investment securities | | (759) | | | 4,563 | | | (406) | |
| Unrealized gain (loss) on equity securities | | 702 | | | 9,045 | | | 575 | |
| Other | | 15,866 | | | 12,191 | | | 15,481 | |
| Total noninterest income | | 171,506 | | | 189,123 | | | 131,373 | |
| | | | | | |
| Noninterest expenses | | | | | | |
| Salaries and employee benefits | | 245,924 | | | 236,779 | | | 209,061 | |
| Net occupancy | | 22,142 | | | 23,266 | | | 24,069 | |
| Furniture and equipment | | 13,819 | | | 14,968 | | | 15,903 | |
| Data processing | | 31,363 | | | 27,514 | | | 21,881 | |
| Marketing | | 7,983 | | | 6,414 | | | 6,908 | |
| Communication | | 2,930 | | | 3,492 | | | 3,267 | |
| Professional services | | 11,676 | | | 9,961 | | | 11,254 | |
| Debt extinguishment | | 0 | | | 7,257 | | | 0 | |
| State intangible tax | | 4,256 | | | 6,058 | | | 5,829 | |
| FDIC assessments | | 5,630 | | | 5,110 | | | 1,973 | |
| Intangible assets amortization | | 9,839 | | | 11,126 | | | 9,671 | |
| Other | | 45,250 | | | 38,719 | | | 32,516 | |
| Total noninterest expenses | | 400,812 | | | 390,664 | | | 342,332 | |
| Income before income taxes | | 240,933 | | | 184,411 | | | 242,862 | |
| Income tax expense | | 35,773 | | | 28,601 | | | 44,787 | |
| Net income | | $ | 205,160 | | | $ | 155,810 | | | $ | 198,075 | |
| | | | | | |
| Earnings per common share | | | | | | |
| Basic | | $ | 2.16 | | | $ | 1.60 | | | $ | 2.01 | |
| Diluted | | $ | 2.14 | | | $ | 1.59 | | | $ | 2.00 | |
| Average common shares outstanding - basic | | 95,034,690 | | | 97,363,952 | | | 98,305,570 | |
| Average common shares outstanding - diluted | | 95,897,385 | | | 98,093,098 | | | 98,851,471 | |
See Notes to Consolidated Financial Statements.
First Financial Bancorp 2021 Annual Report 51
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| (Dollars in thousands) | | 2021 | | 2020 | | 2019 |
| Net income | | $ | 205,160 | | | $ | 155,810 | | | $ | 198,075 | |
| Other comprehensive income (loss), net of tax: | | | | | | |
| Unrealized gain (loss) on debt securities arising during the period | | (52,538) | | | 32,312 | | | 51,959 | |
| Change in retirement obligation | | 4,066 | | | 3,029 | | | 4,649 | |
| Unrealized gain (loss) on derivatives | | 0 | | | 0 | | | 217 | |
| Unrealized gain (loss) on foreign currency exchange | | (625) | | | 0 | | | 0 | |
| Other comprehensive income (loss) | | (49,097) | | | 35,341 | | | 56,825 | |
| Comprehensive income | | $ | 156,063 | | | $ | 191,151 | | | $ | 254,900 | |
See Notes to Consolidated Financial Statements.
First Financial Bancorp 2021 Annual Report 52
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, 2019 | | 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 | |
| | | | | | | | | | | | | | |
| Impact of cumulative effect of adoption of new accounting principles | | | | | | (56,882) | | | | | | | | | (56,882) | |
| Net income | | | | | | 155,810 | | | | | | | | | 155,810 | |
| Other comprehensive income (loss) | | | | | | | | 35,341 | | | | | | | 35,341 | |
| Cash dividends declared: | | | | | | | | | | | | | | |
| Common stock at $0.92 per share | | | | | | (89,748) | | | | | | | | | (89,748) | |
| Purchase of common stock | | | | | | | | | | (880,000) | | | (16,686) | | | (16,686) | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Exercise of stock options, net of shares purchased | | | | (140) | | | | | | | 10,405 | | | 212 | | | 72 | |
| Restricted stock awards, net of forfeitures | | | | (9,362) | | | | | | | 400,526 | | | 8,142 | | | (1,220) | |
| Share-based compensation expense | | | | 7,678 | | | | | | | | | | | 7,678 | |
| Balance at December 31, 2020 | | 104,281,794 | | | 1,638,947 | | | 720,429 | | | 48,664 | | | (6,259,865) | | | (125,970) | | | 2,282,070 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Net income | | | | | | 205,160 | | | | | | | | | 205,160 | |
| Other comprehensive income (loss) | | | | | | | | (49,097) | | | | | | | (49,097) | |
| Cash dividends declared: | | | | | | | | | | | | | | |
| Common stock at $0.92 per share | | | | | | (88,116) | | | | | | | | | (88,116) | |
| Purchase of common stock | | | | | | | | | | (4,633,355) | | | (108,077) | | | (108,077) | |
| Common stock issued in connection with business combinations | | | | 1,251 | | | | | | | 405,805 | | | 8,749 | | | 10,000 | |
| Exercise of stock options, net of shares purchased | | | | (81) | | | | | | | 6,936 | | | 145 | | | 64 | |
| Restricted stock awards, net of forfeitures | | | | (9,394) | | | | | | | 347,925 | | | 6,697 | | | (2,697) | |
| Share-based compensation expense | | | | 9,635 | | | | | | | | | | | 9,635 | |
| Balance at December 31, 2021 | | 104,281,794 | | | $ | 1,640,358 | | | $ | 837,473 | | | $ | (433) | | | (10,132,554) | | | $ | (218,456) | | | $ | 2,258,942 | |
See Notes to Consolidated Financial Statements.
First Financial Bancorp 2021 Annual Report 53
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2021 | | 2020 | | 2019 |
| Operating activities | | | | | | |
| Net income | | $ | 205,160 | | | $ | 155,810 | | | $ | 198,075 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | |
| Provision for credit losses | | (18,121) | | | 70,559 | | | 30,598 | |
| Depreciation and amortization | | 32,136 | | | 33,337 | | | 28,138 | |
| Stock-based compensation expense | | 9,635 | | | 7,678 | | | 7,969 | |
| Pension expense (income) | | 3,365 | | | 2,484 | | | 1,041 | |
| Net amortization (accretion) on investment securities | | 28,987 | | | 21,053 | | | 11,430 | |
| Net (gain) loss on sales/transfers of investments securities | | 759 | | | (4,563) | | | 406 | |
| Net (gain) loss on equity securities | | (702) | | | (9,045) | | | (575) | |
| Originations of loans held for sale | | (794,524) | | | (942,207) | | | (390,578) | |
| Net (gains) losses on sales of loans held for sale | | (33,021) | | | (51,176) | | | (14,851) | |
| Proceeds from sales of loans held for sale | | 825,102 | | | 965,960 | | | 396,121 | |
| Deferred income taxes | | 12,087 | | | (8,380) | | | 12,590 | |
| Amortization of operating leases | | 7,425 | | | 7,897 | | | 7,324 | |
| Payment of operating lease liability | | (6,860) | | | (8,196) | | | (7,335) | |
| Decrease (increase) cash surrender value of life insurance | | 472 | | | (1,506) | | | (3,748) | |
| Decrease (increase) in interest receivable | | 6,463 | | | (9,697) | | | 2,117 | |
| (Decrease) increase in interest payable | | (1,889) | | | (7,431) | | | 1,545 | |
| Decrease (increase) in other assets | | 138,225 | | | (288,857) | | | (165,902) | |
| (Decrease) increase in other liabilities | | (24,237) | | | 176,168 | | | 71,964 | |
| Net cash provided by (used in) operating activities | | 390,462 | | | 109,888 | | | 186,329 | |
| Investing activities | | | | | | |
| Proceeds from sales of investment securities available-for-sale | | 375,276 | | | 122,248 | | | 519,136 | |
| Proceeds from calls, paydowns and maturities of securities available-for-sale | | 1,139,498 | | | 904,821 | | | 557,034 | |
| Purchases of securities available-for-sale | | (2,418,290) | | | (1,551,952) | | | (834,743) | |
| | | | | | |
| Proceeds from calls, paydowns and maturities of securities held-to-maturity | | 34,563 | | | 41,736 | | | 18,062 | |
| Purchases of securities held-to-maturity | | (1,000) | | | (30,250) | | | 0 | |
| Proceeds from calls, paydowns and maturities of other securities | | 42,403 | | | 29,526 | | | 0 | |
| Purchases of other investment securities | | (11,474) | | | (28,659) | | | (12,120) | |
| Net decrease (increase) in interest-bearing deposits with other banks | | (194,506) | | | 36,643 | | | (19,210) | |
| Proceeds from sales of loans and leases held for investment | | 141,072 | | | 0 | | | 0 | |
| Net decrease (increase) in loans and leases | | 503,203 | | | (714,594) | | | (409,557) | |
| Proceeds from disposal of other real estate owned | | 1,278 | | | 2,076 | | | 1,453 | |
| Purchases of premises and equipment | | (15,333) | | | (16,466) | | | (20,934) | |
| | | | | | |
| | | | | | |
| Net cash acquired (paid) from business combinations | | (109,024) | | | 0 | | | (51,663) | |
| Net cash (paid) received for branch divestitures | | 0 | | | 0 | | | 118 | |
| Net cash provided by (used in) investing activities | | (512,334) | | | (1,204,871) | | | (252,424) | |
| Financing activities | | | | | | |
| Net (decrease) increase in total deposits | | 639,951 | | | 2,021,774 | | | 69,953 | |
| Net (decrease) increase in short-term borrowings | | 129,609 | | | (1,149,587) | | | 275,490 | |
| Payments on long-term borrowings | | (463,382) | | | (681,511) | | | (159,653) | |
| Proceeds from long-term borrowings | | 0 | | | 1,040,975 | | | 0 | |
| | | | | | |
| Cash dividends paid on common stock | | (87,316) | | | (89,691) | | | (89,097) | |
| Purchases of common stock | | (108,077) | | | (16,686) | | | (66,218) | |
| Proceeds from exercise of stock options | | 64 | | | 72 | | | 90 | |
| Net cash provided by (used in) financing activities | | 110,849 | | | 1,125,346 | | | 30,565 | |
| | | | | | |
| Cash and due from banks | | | | | | |
| Net (decrease) increase in Cash and due from banks | | (11,023) | | | 30,363 | | | (35,530) | |
| Cash and due from banks at beginning of year | | 231,054 | | | 200,691 | | | 236,221 | |
| Cash and due from banks at end of year | | $ | 220,031 | | | $ | 231,054 | | | $ | 200,691 | |
54 First Financial Bancorp 2021 Annual Report
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Supplemental disclosures | | | | | | |
| Interest paid | | $ | 32,841 | | | $ | 75,884 | | | $ | 121,779 | |
| Income taxes paid | | $ | 17,689 | | | $ | 32,579 | | | $ | 27,497 | |
| Acquisition of other real estate owned through foreclosure | | $ | 98 | | | $ | 1,017 | | | $ | 2,448 | |
| Issuance of restricted stock awards | | $ | 12,231 | | | $ | 9,370 | | | $ | 10,488 | |
| Securities transferred from HTM to AFS | | $ | 0 | | | $ | 0 | | | $ | 268,703 | |
| Common stock issued in acquisitions | | $ | 10,000 | | | $ | 0 | | | $ | 60,934 | |
| Initial recognition of operating lease right of use asset | | $ | 0 | | | $ | 0 | | | $ | 60,249 | |
| Initial recognition of operating lease liabilities | | $ | 0 | | | $ | 0 | | | $ | 65,799 | |
| | | | | | |
| Supplemental schedule for investing activities | | | | | | |
| Business combinations | | | | | | |
| Assets acquired, net of purchase consideration | | $ | 62,916 | | | $ | 0 | | | (39,140) | |
| Liabilities assumed | | 125,894 | | | 0 | | | 18,380 | |
| Goodwill | | $ | 62,978 | | | $ | 0 | | | $ | 57,520 | |
See Notes to Consolidated Financial Statements.
First Financial Bancorp 2021 Annual Report 55
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.
COVID-19. First Financial's operations and financial results were significantly impacted by the COVID-19 pandemic in both 2020 and 2021. The spread of COVID-19 caused significant economic disruption throughout the United States as state and local governments issued stay at home orders and temporarily closed non-essential businesses. The full financial impact from the pandemic is unknown at this time, however prolonged disruption may adversely impact several industries within the Company's geographic footprint and impair the ability of First Financial's customers to fulfill their contractual obligations to the Company. This could cause First Financial to experience a material adverse effect on business operations, asset valuations, financial condition and results of operations. Material adverse impacts may include all or a combination of valuation impairments on First Financial's intangible assets, investments, loans, mortgage servicing rights or counter-party risk derivatives.
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 on purchased callable debt securities is adjusted for amortization of premiums to the earliest call date if the call feature meets certain criteria. Otherwise, premiums are amortized to maturity similar to discounts on callable debt securities, 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.
Other investments. Other investments include holdings in FRB and FHLB stock, which are both carried at cost as well as equity securities, including class B Visa shares which are carried at fair value. Changes in the fair value of equity securities are recorded in Unrealized gain (loss) on securities 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
56 First Financial Bancorp 2021 Annual Report
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.
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.
Allowance for credit losses - held-to-maturity securities. Management measures expected credit losses on held-to-maturity debt securities on a collective basis by security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management classifies the held-to-maturity portfolio into the following major security types: Mortgage-backed, CMOs, Obligations of state and other political subdivisions and Other.
Nearly all of the HTM securities held by the Company are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The remainder of the Company's HTM securities are non-agency collateralized mortgage obligations and obligations of state and other political subdivisions which currently carry ratings no lower than A+. Accrued interest receivable on held-to maturity debt securities, which totaled $0.2 million and $0.3 million as of December 31, 2021 and 2020, respectively, is excluded by policy election from the estimate of credit losses.
Allowance for credit losses - available-for-sale securities. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.
If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities, which totaled $14.9 million and $12.9 million as of December 31, 2021 and 2020, respectively, is excluded from the estimate of credit losses.
Allowance for credit losses - loans and leases. The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Management's determination of the adequacy of the ACL is based on an assessment of the expected credit losses on loan and leases over their expected life. The ACL is increased by provision expense and decreased by charge-offs, net of recoveries of amounts previously charged-off. Loans are charged off when management believes that the collection of the principal amount owed in full, either through payments from the borrower or a guarantor or from the liquidation of collateral is unlikely. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Any interest that is accrued but not collected is reversed against interest income when a loan is placed on nonaccrual status, which typically occurs prior to charging off all, or a portion, of a loan. The Company made the policy election to exclude accrued interest receivable on loans and leases from the estimate of credit losses.
First Financial Bancorp 2021 Annual Report 57
Notes to Consolidated Financial Statements
Management estimates the allowance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience paired with economic forecasts provide the basis for the quantitatively modeled estimation of expected credit losses. First Financial adjusts its quantitative model, as necessary, to reflect conditions not already considered therein. These adjustments are commonly known as the Qualitative Framework.
First Financial quantitatively models expected credit loss using PD, LGD and EAD over the R&S forecast period, reversion and post-reversion periods.
Utilizing third-party software, the Bank forecasts PD by using a parameterized transition matrix approach. Average transition matrices are calculated over the TTC period, which was defined as the period from December 2007 to December 2016. TTC transition matrices are adjusted under forward-looking macroeconomic expectations to obtain R&S forecasts.
First Financial is not required to develop forecasts over the full contractual term of the financial asset or group of financial assets. Rather, for periods beyond which the entity is able to make or obtain R&S forecasts of expected credit losses, the Company reverts in a straight line manner over a one year period to an average TTC loss level that is reflective of the prepayment adjusted contractual term of the financial asset or group of financial assets. The R&S period, elected by the bank to be two years, is forecasted using econometric data sourced from Moody's, an industry-leading independent third party.
FFB utilizes a non-parametric loss curve approach embedded within a third-party software for estimating LGD. The PD multiplied by LGD produces an expected loss rate that, when calculating the ACL, is applied to contractual loan cash flows, adjusted for expected future rates of principal prepayments.
The Company adjusts its quantitative model for certain qualitative factors to reflect the extent to which management expects current conditions and R&S forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The Qualitative Framework reflects changes related to relevant data, such as changes in asset quality trends, portfolio growth and composition, national and local economic factors, credit policy and administration and other factors not considered in the base quantitative model.
Loans that do not share risk characteristics are evaluated on an individual basis. First Financial will typically evaluate on an individual basis any loans that are on nonaccrual, designated as a TDR, or reasonably expected to be designated as a TDR that are greater than $250,000. When management determines that foreclosure is probable or when repayment is expected to be provided substantially through the operation or sale of underlying collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs. For loans evaluated on an individual basis that are not determined to be collateral dependent, a discounted cash flow analysis is performed to determine expected credit losses.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Credit card receivables do not have stated maturities. In determining the estimated life of a credit card receivable, management first estimates the future cash flows expected to be received and then applies those expected future cash flows to the credit card balance.
Significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations.
Allowance for credit losses - unfunded commitments. First Financial estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life consistent with the Company's ACL methodology for loans and leases. Adjustments to the reserve for unfunded commitments are recorded in Provision for credit losses - unfunded commitments in the Consolidated Statements of Income. The reserve for unfunded commitments is included in Accrued interest and other liabilities on the Consolidated Balance Sheets.
58 First Financial Bancorp 2021 Annual Report
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.
Operating Leases. First Financial provides financing for various types of equipment through a variety of leasing arrangements. Operating leases are carried at the aggregate of lease payments plus estimated residual value of the leased equipment, less unearned income. The Company recognizes income over the term of the lease using the constant effective yield method. Lease residual values are reviewed for impairment at least annually.
Bank-owned life insurance. First Financial purchases and is the owner and beneficiary of the life insurance policies on the lives of certain employees . 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. Changes in the cash surrender value of these policies are 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. Our quantitative impairment analysis utilized the discounted cash flow model for the income approach and the market multiple methodology and comparable transaction methodology as the market approach. These valuation methodologies utilize key assumptions that include forecasts of revenues and expenses derived from internal management projections for a period of five years, changes in working capital estimates, company specific discount rate derived from a rate build up approach, externally sourced bank peer group market multiples and externally sourced bank peer group change in control premium, all of which are highly subjective and require significant management judgment. Changes in these key assumptions, as well as downturns in economic or business conditions, could materially affect our estimate of the reporting unit fair value and could affect our conclusion regarding the existence of potential impairment.
In 2020, First Financial engaged a third-party to perform a quantitative analysis of its goodwill to determine whether any impairment existed for its annual impairment test. This third-party quantitative analysis was performed due to the on-going economic market disruption, the movement of the Company’s stock price in relation to other bank indexes and the length of time that the market value of the reporting unit has been below its book value. This analysis indicated that no impairment existed as of the issue date.
Additionally, in response to the COVID-19 pandemic and the related deterioration in general economic conditions, First Financial performed an interim qualitative impairment test as of the end of each quarter in 2020. Likewise, the results of these interim qualitative tests did not indicate that the Company's goodwill was impaired.
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 amortized on an accelerated basis over their estimated useful lives.
First Financial recorded a customer list intangible asset in conjunction with the Bannockburn and Summit mergers to account for the obligation or advantage on the part of either the Company or the customer to continue pre-existing relationships
First Financial Bancorp 2021 Annual Report 59
Notes to Consolidated Financial Statements
subsequent to the mergers. Customer list intangible assets are amortized on a straight-line basis over their estimated useful lives.
Other intangible assets also include purchase commissions, non-compete agreements and trade name intangibles.
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). Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Losses arising at the time of acquisition of such properties are charged against the ACL. 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 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 while any unfunded commitment is recorded with Accrued interest and other liabilities. These investments 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 that finance the rehabilitation and re-use of historic buildings. These unconsolidated 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 the Company’s recorded investment in these entities is carried in Accrued interest and other assets on the Consolidated Balance Sheets with any unfunded commitment recorded in Accrued interest and other liabilities. Impairment of these investments is recorded in Other noninterest expense, while the tax credits and other net tax benefits received are recognized as a component of income tax expense in the Consolidated Statements of Income.
Investments in renewable energy credits. First Financial has investments in renewable energy projects where it has noncontrolling interest which is not consolidated. This investment 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 renewable energy 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 with any unfunded commitment recorded in Accrued interest and other liabilities. These tax credits and other net tax benefits received are recognized as a component of income tax expense in the Consolidated Statements of Income and is evaluated for impairment at the end of each reporting period.
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.
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.
60 First Financial Bancorp 2021 Annual Report
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.
In establishing a provision for income tax expense, we must make judgments and interpretations about the application of complex tax laws as well as make estimates about when in the future certain items will affect taxable income. 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.
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 and economic forecasts, 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
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.
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.
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.
First Financial Bancorp 2021 Annual Report 61
Notes to Consolidated Financial Statements
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 2021
During the first quarter of 2021, the Company adopted ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes. This standard simplified the accounting for income taxes by removing certain exceptions to the general
principles in Topic 740 and added new requirements with the intention of simplifying and clarifying existing guidance. This
update did not have a material impact on the Company’s Consolidated Financial Statements.
Standards Adopted in 2020
On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments, which replaced the previously required incurred loss methodology with an expected
loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected
credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan
receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as
insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments
in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting
for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as
a write-down on available-for-sale debt securities that management does not intend to sell or believes that it is more likely than
not they will be required to sell. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $56.9 million as of January 1, 2020 for the cumulative effect of adopting ASC 326. As detailed in the following table, the transition adjustment included a $61.5 million increase to the ACL, a $12.2 million increase in the ACL for unfunded commitments and a $16.8 million decrease in Deferred tax liability.
The Company adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as purchased credit impaired and accounted for under ASC 310-30. In accordance with the standard, First Financial did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption.
62 First Financial Bancorp 2021 Annual Report
In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule
to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule
maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate
of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a
three-year transition period. First Financial is adopting the capital transition relief over the five year permissible period.
The impact of adopting ASC 326 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | January 1, 2020 |
| (dollars in thousands) | | As Reported under ASC 326 | | Pre-ASC 326 | | Impact of ASC 326 Adoption |
| Assets | | | | | | |
| Loans | | | | | | |
| Commercial and industrial | | $ | 28,485 | | | $ | 18,584 | | | $ | 9,901 | |
| Lease financing | | 1,089 | | 971 | | 118 |
| Construction real estate | | 13,960 | | 2,381 | | 11,579 |
| Commercial real estate | | 47,697 | | 23,579 | | 24,118 |
| Residential real estate | | 10,789 | | 5,299 | | 5,490 |
| Home equity | | 13,217 | | 4,787 | | 8,430 |
| Installment | | 1,193 | | 392 | | 801 |
| Credit card | | 2,725 | | 1,657 | | 1,068 |
| Allowance for credit losses on loans | | $ | 119,155 | | | $ | 57,650 | | | $ | 61,505 | |
| | | | | | |
| Liabilities | | | | | | |
| Deferred tax liability | | $ | 16,252 | | | $ | 33,030 | | | $ | (16,778) | |
| Allowance for credit losses on OBS credit exposures | | 12,740 | | 585 | | 12,155 |
For more information on the calculation of the ACL, please refer to Note 1 - Summary of Significant Accounting Policies and Note 5 - Allowance for Credit Losses.
3. Restrictions on Cash and Dividends
As of December 31, 2021 and 2020, First Financial had $34.0 million and $38.0 million, respectively, in cash restricted for withdrawal and usage due to the centrally cleared derivative initial margin requirement. Additionally, First Financial had no required reserves with the FRB as of December 31, 2021 and 2020.
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, 2021, First Financial's subsidiaries had retained earnings of $727.9 million, of which $166.2 million was available for distribution to First Financial without prior regulatory approval.
4. Investment Securities
During the year ended December 31, 2021, proceeds on the sale of $375.3 million of AFS securities resulted in gains of $6.8 million and losses of $7.6 million. During the year ended December 31, 2020, proceeds on the sale of $117.8 million of AFS securities resulted in gains of $0.9 million and losses of $0.8 million. 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. The impact to income tax expense from these sales was insignificant in all three years.
First Financial Bancorp 2021 Annual Report 63
Notes to Consolidated Financial Statements
In 2021 and 2020, there were no reclassifications of HTM securities to AFS securities. However, in the first quarter of 2019, in addition to the sale of certain securities, First Financial reclassified $268.7 million of HTM securities to AFS in conjunction with the adoption of ASU 2017-12, resulting in a $0.2 million realized loss recorded in the Consolidated Statement of Income.
The carrying value of investment securities pledged as collateral to secure public deposits, repurchase agreements and for other purposes as required by law totaled $1.5 billion at both December 31, 2021 and December 31, 2020.
The following is a summary of HTM and AFS investment securities as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | | $ | 34,961 | | | $ | 4 | | | $ | (189) | | | $ | 34,776 | |
| Securities of U.S. government agencies and corporations | | 0 | | | 0 | | | 0 | | | 0 | | | 78,998 | | | 248 | | | (129) | | | 79,117 | |
| Mortgage-backed securities - residential | | 0 | | | 0 | | | 0 | | | 0 | | | 728,050 | | | 6,635 | | | (10,548) | | | 724,137 | |
| Mortgage-backed securities - commercial | | 46,362 | | | 651 | | | 0 | | | 47,013 | | | 729,948 | | | 4,294 | | | (2,352) | | | 731,890 | |
| Collateralized mortgage obligations | | 11,882 | | | 221 | | | 0 | | | 12,103 | | | 696,258 | | | 7,979 | | | (6,497) | | | 697,740 | |
| Obligations of state and other political subdivisions | | 8,926 | | | 915 | | | 0 | | | 9,841 | | | 1,058,735 | | | 35,591 | | | (8,594) | | | 1,085,732 | |
| Asset-backed securities | | 0 | | | 0 | | | 0 | | | 0 | | | 720,638 | | | 1,521 | | | (2,578) | | | 719,581 | |
| Other securities | | 31,250 | | | 176 | | | (485) | | | 30,941 | | | 133,001 | | | 2,114 | | | (242) | | | 134,873 | |
| Total | | $ | 98,420 | | | $ | 1,963 | | | $ | (485) | | | $ | 99,898 | | | $ | 4,180,589 | | | $ | 58,386 | | | $ | (31,129) | | | $ | 4,207,846 | |
The following is a summary of HTM and AFS investment securities as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Held-to-maturity | | Available-for-sale |
| (Dollars in thousands) | | Amortized
cost | | Unrecognized
gain | | Unrecognized
loss | | Fair
value | | Amortized
cost | | Unrealized
gain | | Unrealized
loss | | Fair
value |
| U.S. Treasuries | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 99 | | | $ | 4 | | | $ | 0 | | | $ | 103 | |
| Securities of U.S. government agencies and corporations | | 0 | | | 0 | | | 0 | | | 0 | | | 60 | | | 0 | | | 0 | | | 60 | |
| Mortgage-backed securities - residential | | 13,990 | | | 197 | | | 0 | | | 14,187 | | | 704,482 | | | 15,938 | | | (237) | | | 720,183 | |
| Mortgage-backed securities - commercial | | 71,737 | | | 3,485 | | | 0 | | | 75,222 | | | 584,125 | | | 10,395 | | | (3,584) | | | 590,936 | |
| Collateralized mortgage obligations | | 5,799 | | | 79 | | | 0 | | | 5,878 | | | 634,418 | | | 21,148 | | | (445) | | | 655,121 | |
| Obligations of state and other political subdivisions | | 9,911 | | | 1,239 | | | 0 | | | 11,150 | | | 856,054 | | | 46,755 | | | (291) | | | 902,518 | |
| Asset-backed securities | | 0 | | | 0 | | | 0 | | | 0 | | | 478,539 | | | 4,158 | | | (826) | | | 481,871 | |
| Other securities | | 30,250 | | | 11 | | | 0 | | | 30,261 | | | 72,252 | | | 1,544 | | | (8) | | | 73,788 | |
| Total | | $ | 131,687 | | | $ | 5,011 | | | $ | 0 | | | $ | 136,698 | | | $ | 3,330,029 | | | $ | 99,942 | | | $ | (5,391) | | | $ | 3,424,580 | |
64 First Financial Bancorp 2021 Annual Report
The following table provides a summary of investment securities by contractual maturity as of December 31, 2021, 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 | | | $ | 18,824 | | | $ | 18,910 | |
| Due after one year through five years | | 639 | | | 699 | | | 84,773 | | | 86,693 | |
| Due after five years through ten years | | 36,651 | | | 37,166 | | | 355,693 | | | 364,968 | |
| Due after ten years | | 2,886 | | | 2,917 | | | 846,405 | | | 863,927 | |
| Mortgage-backed securities - residential | | 0 | | | 0 | | | 728,050 | | | 724,137 | |
| Mortgage-backed securities - commercial | | 46,362 | | | 47,013 | | | 729,948 | | | 731,890 | |
| Collateralized mortgage obligations | | 11,882 | | | 12,103 | | | 696,258 | | | 697,740 | |
| Asset-backed securities | | 0 | | | 0 | | | 720,638 | | | 719,581 | |
| Total | | $ | 98,420 | | | $ | 99,898 | | | $ | 4,180,589 | | | $ | 4,207,846 | |
Unrealized gains and losses on debt securities are generally due to fluctuations in current market yields relative to the yields of the debt securities at their amortized cost. All securities with unrealized losses are reviewed quarterly to determine if any impairment exists, requiring a write-down to fair value through income. For securities in an unrealized loss position, the Company first assesses whether it intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis.
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. The Company recorded no reserves on investment securities for the twelve months ended December 31, 2021 or 2020.
As of December 31, 2021, the Company's investment securities portfolio consisted of 1,418 securities, of which 327 were in an unrealized loss position. As of December 31, 2020, the Company's investment securities portfolio consisted of 1,351 securities, of which 94 were in an unrealized loss position.
Primarily all of First Financial’s HTM debt securities are issued by U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. The remainder of the Company's HTM securities are non-agency collateralized mortgage obligations and obligations of state and other political subdivisions which currently carry ratings no lower than A+. There were no HTM securities on nonaccrual status or past due as of December 31, 2021, however, there were $0.5 million of other HTM securities in a loss position as of December 31, 2021. There were no HTM securities on nonaccrual status, past due or in a loss position as of December 31, 2020. The Company did not record an allowance for credit losses for these securities as of December 31, 2021 or 2020.
First Financial Bancorp 2021 Annual Report 65
Notes to Consolidated Financial Statements
The following tables provide the fair value and gross unrealized losses on investment securities in an unrealized loss position for which an allowance for credit losses was not recorded, aggregated by investment category and the length of time the individual securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| | | 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 | | $ | 24,755 | | | $ | (190) | | | $ | 0 | | | $ | 0 | | | $ | 24,755 | | | $ | (190) | |
| Securities of U.S. government agencies and corporations | | 17,382 | | | (128) | | | 0 | | | 0 | | | 17,382 | | | (128) | |
| Mortgage-backed securities - residential | | 459,098 | | | (8,375) | | | 78,090 | | | (2,173) | | | 537,188 | | | (10,548) | |
| Mortgage-backed securities - commercial | | 205,520 | | | (2,149) | | | 13,818 | | | (203) | | | 219,338 | | | (2,352) | |
| Collateralized mortgage obligations | | 369,318 | | | (6,110) | | | 12,485 | | | (387) | | | 381,803 | | | (6,497) | |
| Obligations of state and other political subdivisions | | 380,735 | | | (7,543) | | | 55,568 | | | (1,051) | | | 436,303 | | | (8,594) | |
| Asset-backed securities | | 482,118 | | | (2,578) | | | 0 | | | 0 | | | 482,118 | | | (2,578) | |
| Other securities | | 31,896 | | | (354) | | | 11,877 | | | (373) | | | 43,773 | | | (727) | |
| Total | | $ | 1,970,822 | | | $ | (27,427) | | | $ | 171,838 | | | $ | (4,187) | | | $ | 2,142,660 | | | $ | (31,614) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| | | Less than 12 months | | 12 months or more | | Total |
| (Dollars in thousands) | | Fair
value | | Unrealized
loss | | Fair
value | | Unrealized
loss | | Fair
value | | Unrealized
loss |
| U.S. Treasuries | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Securities of U.S. Government agencies and corporations | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Mortgage-backed securities - residential | | 57,872 | | | (237) | | | 0 | | | 0 | | | 57,872 | | | (237) | |
| Mortgage-backed securities - commercial | | 169,825 | | | (986) | | | 48,158 | | | (2,598) | | | 217,983 | | | (3,584) | |
| Collateralized mortgage obligations | | 49,161 | | | (445) | | | 1 | | | 0 | | | 49,162 | | | (445) | |
| Obligations of state and other political subdivisions | | 60,008 | | | (291) | | | 0 | | | 0 | | | 60,008 | | | (291) | |
| Asset-backed securities | | 84,749 | | | (435) | | | 68,967 | | | (391) | | | 153,716 | | | (826) | |
| Other securities | | 4,992 | | | (8) | | | 0 | | | 0 | | | 4,992 | | | (8) | |
| Total | | $ | 426,607 | | | $ | (2,402) | | | $ | 117,126 | | | $ | (2,989) | | | $ | 543,733 | | | $ | (5,391) | |
For further detail on the fair value of investment securities, see Note 22 – Fair Value Disclosures.
66 First Financial Bancorp 2021 Annual Report
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 that are secured by commissions and cash collateral accounts to insurance agents and brokers.
In accordance with the CARES Act and the 2021 Consolidated Appropriations Act, First Financial participated in offering PPP loans to its customers. These loans provide a direct incentive for small businesses to keep their workers on the payroll and to maintain their operations during the COVID-19 pandemic. PPP loans are eligible to be forgiven provided certain conditions are met. As of December 31, 2021, First Financial had $55.6 million in PPP loans, net of unearned fees of $2.6 million. As of December 31, 2020, First Financial had $594.6 million in PPP loans, net of unearned income of $13.7 million.
Credit quality. To facilitate the monitoring of credit quality for commercial loans, First Financial utilizes the following categories of credit grades:
Pass - Higher quality loans that do not fit any of the other categories described below.
Special Mention - First Financial assigns a special mention rating to loans and leases with potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan 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.
The credit grades previously described are derived from standard regulatory rating definitions and are assigned upon initial approval of credit to borrowers and updated periodically thereafter.
First Financial considers repayment performance to be the best indicator of credit quality for consumer loans. Consumer loans that have principal and interest payments that are past due by 90 days or more are generally classified as nonperforming. Additionally, consumer loans that have been modified in a TDR are classified as nonperforming.
First Financial Bancorp 2021 Annual Report 67
Notes to Consolidated Financial Statements
The following table sets forth the Company's loan portfolio at December 31, 2021 by risk attribute and origination date:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Term Total | | Revolving | | Total |
| Commercial & industrial | | | | | | | | | | | | | | | | |
| Pass | | $ | 711,198 | | | $ | 442,064 | | | $ | 339,507 | | | $ | 164,273 | | | $ | 119,580 | | | $ | 154,835 | | | $ | 1,931,457 | | | $ | 700,246 | | | $ | 2,631,703 | |
| Special mention | | 389 | | | 4,867 | | | 5,993 | | | 16,057 | | | 6,511 | | | 4,918 | | | 38,735 | | | 21,505 | | | 60,240 | |
| Substandard | | 2,220 | | | 434 | | | 2,843 | | | 1,224 | | | 12,640 | | | 1,465 | | | 20,826 | | | 7,259 | | | 28,085 | |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 713,807 | | | $ | 447,365 | | | $ | 348,343 | | | $ | 181,554 | | | $ | 138,731 | | | $ | 161,218 | | | $ | 1,991,018 | | | $ | 729,010 | | | $ | 2,720,028 | |
| Lease financing | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 31,697 | | | $ | 21,536 | | | $ | 19,095 | | | $ | 15,494 | | | $ | 6,821 | | | $ | 4,765 | | | $ | 99,408 | | | $ | 0 | | | $ | 99,408 | |
| Special mention | | 0 | | 10,216 | | 0 | | 0 | | 0 | | 0 | | 10,216 | | 0 | | 10,216 |
| Substandard | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 |
| Doubtful | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 |
| Total | | $ | 31,697 | | | $ | 31,752 | | | $ | 19,095 | | | $ | 15,494 | | | $ | 6,821 | | | $ | 4,765 | | | $ | 109,624 | | | $ | 0 | | | $ | 109,624 | |
| Construction real estate | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 95,991 | | | $ | 200,421 | | | $ | 96,726 | | | $ | 15,886 | | | $ | 317 | | | $ | 12,719 | | | $ | 422,060 | | | $ | 18,299 | | | $ | 440,359 | |
| Special mention | | 0 | | | 6,531 | | | 0 | | | 9,004 | | | 0 | | | 0 | | | 15,535 | | | 0 | | | 15,535 | |
| Substandard | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 95,991 | | | $ | 206,952 | | | $ | 96,726 | | | $ | 24,890 | | | $ | 317 | | | $ | 12,719 | | | $ | 437,595 | | | $ | 18,299 | | | $ | 455,894 | |
| Commercial real estate - investor | | | | | | | | | | | | | | | | |
| Pass | | $ | 537,183 | | | $ | 379,217 | | | $ | 944,915 | | | $ | 367,946 | | | $ | 294,147 | | | $ | 434,641 | | | $ | 2,958,049 | | | $ | 66,579 | | | $ | 3,024,628 | |
| Special mention | | 0 | | | 7,479 | | | 18,136 | | | 18,006 | | | 15,566 | | | 34,153 | | | 93,340 | | | 0 | | | 93,340 | |
| Substandard | | 1,616 | | | 6 | | | 21,312 | | | 6,628 | | | 6,918 | | | 307 | | | 36,787 | | | 0 | | | 36,787 | |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 538,799 | | | $ | 386,702 | | | $ | 984,363 | | | $ | 392,580 | | | $ | 316,631 | | | $ | 469,101 | | | $ | 3,088,176 | | | $ | 66,579 | | | $ | 3,154,755 | |
| Commercial real estate - owner | | | | | | | | | | | | | | | | |
| Pass | | $ | 204,291 | | | $ | 184,564 | | | $ | 121,150 | | | $ | 135,463 | | | $ | 119,489 | | | $ | 259,504 | | | $ | 1,024,461 | | | $ | 7,565 | | | $ | 1,032,026 | |
| Special mention | | 970 | | | 2,283 | | | 2,262 | | | 3,751 | | | 1,381 | | | 5,512 | | | 16,159 | | | 0 | | | 16,159 | |
| Substandard | | 162 | | | 727 | | | 6,541 | | | 12,513 | | | 1,730 | | | 1,963 | | | 23,636 | | | 38 | | | 23,674 | |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 205,423 | | | $ | 187,574 | | | $ | 129,953 | | | $ | 151,727 | | | $ | 122,600 | | | $ | 266,979 | | | $ | 1,064,256 | | | $ | 7,603 | | | $ | 1,071,859 | |
| Residential real estate | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 258,537 | | | $ | 230,699 | | | $ | 138,239 | | | $ | 64,310 | | | $ | 34,606 | | | $ | 162,924 | | | $ | 889,315 | | | $ | 0 | | | $ | 889,315 | |
| Nonperforming | | 236 | | | 970 | | | 1,193 | | | 598 | | | 339 | | | 3,418 | | | 6,754 | | | 0 | | | 6,754 | |
| Total | | $ | 258,773 | | | $ | 231,669 | | | $ | 139,432 | | | $ | 64,908 | | | $ | 34,945 | | | $ | 166,342 | | | $ | 896,069 | | | $ | 0 | | | $ | 896,069 | |
| Home equity | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 42,298 | | | $ | 45,638 | | | $ | 14,713 | | | $ | 11,221 | | | $ | 7,603 | | | $ | 30,588 | | | $ | 152,061 | | | $ | 553,245 | | | $ | 705,306 | |
| Nonperforming | | 72 | | | 161 | | | 44 | | | 67 | | | 56 | | | 234 | | | 634 | | | 2,459 | | | 3,093 | |
| Total | | $ | 42,370 | | | $ | 45,799 | | | $ | 14,757 | | | $ | 11,288 | | | $ | 7,659 | | | $ | 30,822 | | | $ | 152,695 | | | $ | 555,704 | | | $ | 708,399 | |
| Installment | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 58,209 | | | $ | 12,768 | | | $ | 8,213 | | | $ | 5,541 | | | $ | 3,925 | | | $ | 2,201 | | | $ | 90,857 | | | $ | 28,353 | | | $ | 119,210 | |
| Nonperforming | | 6 | | | 61 | | | 32 | | | 9 | | | 1 | | | 56 | | | 165 | | | 79 | | | 244 | |
| Total | | $ | 58,215 | | | $ | 12,829 | | | $ | 8,245 | | | $ | 5,550 | | | $ | 3,926 | | | $ | 2,257 | | | $ | 91,022 | | | $ | 28,432 | | | $ | 119,454 | |
| Credit cards | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 51,772 | | | $ | 51,772 | |
| Nonperforming | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 445 | | | 445 | |
| Total | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 52,217 | | | $ | 52,217 | |
| Grand Total | | $ | 1,945,075 | | | $ | 1,550,642 | | | $ | 1,740,914 | | | $ | 847,991 | | | $ | 631,630 | | | $ | 1,114,203 | | | $ | 7,830,455 | | | $ | 1,457,844 | | | $ | 9,288,299 | |
68 First Financial Bancorp 2021 Annual Report
The following table sets forth the Company's loan portfolio at December 31, 2020 by risk attribute and origination date:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Term Total | | Revolving | | Total |
| Commercial & industrial | | | | | | | | | | | | | | | | |
| Pass | | $ | 1,141,163 | | | $ | 460,210 | | | $ | 296,221 | | | $ | 208,077 | | | $ | 122,686 | | | $ | 138,307 | | | $ | 2,366,664 | | | $ | 502,286 | | | $ | 2,868,950 | |
| Special mention | | 24,668 | | | 10,281 | | | 18,118 | | | 6,893 | | | 6,668 | | | 6,090 | | | 72,718 | | | 10,470 | | | 83,188 | |
| Substandard | | 6,709 | | | 2,370 | | | 8,022 | | | 26,565 | | | 5,124 | | | 1,192 | | | 49,982 | | | 5,389 | | | 55,371 | |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 1,172,540 | | | $ | 472,861 | | | $ | 322,361 | | | $ | 241,535 | | | $ | 134,478 | | | $ | 145,589 | | | $ | 2,489,364 | | | $ | 518,145 | | | $ | 3,007,509 | |
| Lease financing | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 22,916 | | | $ | 22,397 | | | $ | 12,942 | | | $ | 6,967 | | | $ | 4,802 | | | $ | 2,368 | | | $ | 72,392 | | | $ | 0 | | | $ | 72,392 | |
| Special mention | | 290 | | 0 | | 0 | | 0 | | 0 | | 0 | | 290 | | 0 | | 290 | |
| Substandard | | 5 | | 0 | | 0 | | 180 | | 120 | | 0 | | 305 | | 0 | | 305 | |
| Doubtful | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Total | | $ | 23,211 | | | $ | 22,397 | | | $ | 12,942 | | | $ | 7,147 | | | $ | 4,922 | | | $ | 2,368 | | | $ | 72,987 | | | $ | 0 | | | $ | 72,987 | |
| Construction real estate | | | | | | | | | | | | | | | | |
| Pass | | $ | 96,410 | | | $ | 259,524 | | | $ | 182,625 | | | $ | 23,185 | | | $ | 24,786 | | | $ | 426 | | | $ | 586,956 | | | $ | 19,671 | | | $ | 606,627 | |
| Special mention | | 0 | | | 621 | | | 18,203 | | | 9,984 | | | 661 | | | 0 | | | 29,469 | | | 0 | | | 29,469 | |
| Substandard | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 96,410 | | | $ | 260,145 | | | $ | 200,828 | | | $ | 33,169 | | | $ | 25,447 | | | $ | 426 | | | $ | 616,425 | | | $ | 19,671 | | | $ | 636,096 | |
| Commercial real estate - investor | | | | | | | | | | | | | | | | |
| Pass | | $ | 515,950 | | | $ | 1,011,898 | | | $ | 427,077 | | | $ | 378,536 | | | $ | 286,587 | | | $ | 361,403 | | | $ | 2,981,451 | | | $ | 56,398 | | | $ | 3,037,849 | |
| Special mention | | 0 | | | 17,463 | | | 15,534 | | | 44,426 | | | 32,408 | | | 43,704 | | | 153,535 | | | 559 | | | 154,094 | |
| Substandard | | 6,198 | | | 2,043 | | | 22,497 | | | 7,067 | | | 68 | | | 14,724 | | | 52,597 | | | 0 | | | 52,597 | |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 522,148 | | | $ | 1,031,404 | | | $ | 465,108 | | | $ | 430,029 | | | $ | 319,063 | | | $ | 419,831 | | | $ | 3,187,583 | | | $ | 56,957 | | | $ | 3,244,540 | |
| Commercial real estate - owner | | | | | | | | | | | | | | | | |
| Pass | | $ | 185,692 | | | $ | 162,480 | | | $ | 147,236 | | | $ | 125,275 | | | $ | 128,755 | | | $ | 211,519 | | | $ | 960,957 | | | $ | 36,721 | | | $ | 997,678 | |
| Special mention | | 4,292 | | | 11,380 | | | 2,891 | | | 8,230 | | | 3,017 | | | 19,384 | | | 49,194 | | | 59 | | | 49,253 | |
| Substandard | | 668 | | | 504 | | | 7,054 | | | 5,496 | | | 306 | | | 2,321 | | | 16,349 | | | 38 | | | 16,387 | |
| Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 190,652 | | | $ | 174,364 | | | $ | 157,181 | | | $ | 139,001 | | | $ | 132,078 | | | $ | 233,224 | | | $ | 1,026,500 | | | $ | 36,818 | | | $ | 1,063,318 | |
| Residential real estate | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 290,277 | | | $ | 241,601 | | | $ | 115,747 | | | $ | 64,220 | | | $ | 60,094 | | | $ | 224,281 | | | $ | 996,220 | | | $ | 0 | | | $ | 996,220 | |
| Nonperforming | | 321 | | | 429 | | | 673 | | | 643 | | | 87 | | | 4,713 | | | 6,866 | | | 0 | | | 6,866 | |
| Total | | $ | 290,598 | | | $ | 242,030 | | | $ | 116,420 | | | $ | 64,863 | | | $ | 60,181 | | | $ | 228,994 | | | $ | 1,003,086 | | | $ | 0 | | | $ | 1,003,086 | |
| Home equity | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 60,967 | | | $ | 20,200 | | | $ | 17,445 | | | $ | 11,308 | | | $ | 9,744 | | | $ | 41,571 | | | $ | 161,235 | | | $ | 577,609 | | | $ | 738,844 | |
| Nonperforming | | 0 | | | 0 | | | 0 | | | 39 | | | 28 | | | 138 | | | 205 | | | 4,050 | | | 4,255 | |
| Total | | $ | 60,967 | | | $ | 20,200 | | | $ | 17,445 | | | $ | 11,347 | | | $ | 9,772 | | | $ | 41,709 | | | $ | 161,440 | | | $ | 581,659 | | | $ | 743,099 | |
| Installment | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 21,584 | | | $ | 15,614 | | | $ | 11,041 | | | $ | 8,812 | | | $ | 1,954 | | | $ | 3,185 | | | $ | 62,190 | | | $ | 19,479 | | | $ | 81,669 | |
| Nonperforming | | 15 | | | 53 | | | 23 | | | 35 | | | 17 | | | 36 | | | 179 | | | 2 | | | 181 | |
| Total | | $ | 21,599 | | | $ | 15,667 | | | $ | 11,064 | | | $ | 8,847 | | | $ | 1,971 | | | $ | 3,221 | | | $ | 62,369 | | | $ | 19,481 | | | $ | 81,850 | |
| Credit cards | | | | | | | | | | | | | | | | | | |
| Performing | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 47,845 | | | $ | 47,845 | |
| Nonperforming | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 640 | | | 640 | |
| Total | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 48,485 | | | $ | 48,485 | |
| Grand Total | | $ | 2,378,125 | | | $ | 2,239,068 | | | $ | 1,303,349 | | | $ | 935,938 | | | $ | 687,912 | | | $ | 1,075,362 | | | $ | 8,619,754 | | | $ | 1,281,216 | | | $ | 9,900,970 | |
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 2021 Annual Report 69
Notes to Consolidated Financial Statements
Loan delinquency, including nonaccrual loans, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2021 |
| (Dollars in thousands) | | 30 – 59
days
past due | | 60 – 89
days
past due | | > 90 days
past due | | Total
past
due | | Current | | Total | | > 90 days
past due
and still
accruing |
| Loans | | | | | | | | | | | | | | |
| Commercial & industrial | | $ | 303 | | | $ | 2,006 | | | $ | 2,775 | | | $ | 5,084 | | | $ | 2,714,944 | | | $ | 2,720,028 | | | $ | 0 | |
| Lease financing | | 93 | | | 0 | | | 0 | | | 93 | | | 109,531 | | | 109,624 | | | 0 | |
| Construction real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 455,894 | | | 455,894 | | | 0 | |
| Commercial real estate-investor | | 89 | | | 42 | | | 6,409 | | | 6,540 | | | 3,148,215 | | | 3,154,755 | | | 0 | |
| Commercial real estate-owner | | 56 | | | 2,207 | | | 637 | | | 2,900 | | | 1,068,959 | | | 1,071,859 | | | 0 | |
| Residential real estate | | 4,379 | | | 262 | | | 2,114 | | | 6,755 | | | 889,314 | | | 896,069 | | | 0 | |
| Home equity | | 1,214 | | | 692 | | | 1,186 | | | 3,092 | | | 705,307 | | | 708,399 | | | 0 | |
| Installment | | 162 | | | 37 | | | 45 | | | 244 | | | 119,210 | | | 119,454 | | | 0 | |
| Credit card | | 223 | | | 134 | | | 137 | | | 494 | | | 51,723 | | | 52,217 | | | 137 | |
| Total | | $ | 6,519 | | | $ | 5,380 | | | $ | 13,303 | | | $ | 25,202 | | | $ | 9,263,097 | | | $ | 9,288,299 | | | $ | 137 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2020 |
| (Dollars in thousands) | | 30 - 59
days
past due | | 60 - 89
days
past due | | > 90 days
past due | | Total
past
due | | Current | | Total | | > 90 days
past due and still accruing |
| Loans | | | | | | | | | | | | | | |
| Commercial & industrial | | $ | 6,532 | | | $ | 0 | | | $ | 1,861 | | | $ | 8,393 | | | $ | 2,999,116 | | | $ | 3,007,509 | | | $ | 0 | |
| Lease financing | | 0 | | | 0 | | | 0 | | | 0 | | | 72,987 | | | 72,987 | | | 0 | |
| Construction real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 636,096 | | | 636,096 | | | 0 | |
| Commercial real estate-investor | | 136 | | | 0 | | | 24,422 | | | 24,558 | | | 3,219,982 | | | 3,244,540 | | | 0 | |
| Commercial real estate-owner | | 6,480 | | | 174 | | | 400 | | | 7,054 | | | 1,056,264 | | | 1,063,318 | | | 0 | |
| Residential real estate | | 2,809 | | | 370 | | | 3,687 | | | 6,866 | | | 996,220 | | | 1,003,086 | | | 0 | |
| Home equity | | 1,483 | | | 835 | | | 1,937 | | | 4,255 | | | 738,844 | | | 743,099 | | | 0 | |
| Installment | | 94 | | | 35 | | | 51 | | | 180 | | | 81,670 | | | 81,850 | | | 0 | |
| Credit card | | 303 | | | 163 | | | 174 | | | 640 | | | 47,845 | | | 48,485 | | | 169 | |
| Total | | $ | 17,837 | | | $ | 1,577 | | | $ | 32,532 | | | $ | 51,946 | | | $ | 9,849,024 | | | $ | 9,900,970 | | | $ | 169 | |
Nonaccrual. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful or when principal or interest payments are 90 days or more past due. Generally, loans are classified as nonaccrual due to the continued failure to adhere to contractual payment terms by the borrower, coupled with other pertinent factors. When a loan is classified as nonaccrual, the accrual of interest income is discontinued and previously accrued but unpaid interest is reversed. Any payments received while a loan is on nonaccrual status are applied as a reduction to the carrying value of the loan. A loan classified as nonaccrual may return to accrual status if none of the principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual principal and interest.
Troubled debt restructurings. A loan modification is considered a TDR when the borrower is experiencing financial difficulty and 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, bankruptcies, maturity extensions and modifications to principal amortization, including interest-only structures. Modified terms are dependent upon the financial position and needs of the individual borrower. If the modification agreement is violated, the loan is managed by the Company’s credit administration group for resolution, which may result in foreclosure in the case of real estate. In accordance with the CARES Act, performing loans that demonstrated limited signs of credit deterioration, but were modified to provide borrowers relief during the COVID-19 pandemic were not considered to be TDR as of December 31, 2021 or 2020.
TDRs are generally classified as nonaccrual for a minimum period of six months and may qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement.
70 First Financial Bancorp 2021 Annual Report
First Financial had 150 TDRs totaling $27.6 million at December 31, 2021, including $11.6 million of loans on accrual status and $16.0 million of loans classified as nonaccrual. First Financial had $0.2 million of commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs, and the ACL included reserves of $6.3 million related to TDRs as of December 31, 2021. For the year ended December 31, 2021, First Financial charged off $1.7 million for the portion of TDRs determined to be uncollectible. Additionally, as of December 31, 2021, approximately $5.0 million of the accruing TDRs have been performing in accordance with the restructured terms for more than one year.
First Financial had 155 TDRs totaling $21.8 million at December 31, 2020, including $7.1 million of loans on accrual status and $14.7 million of loans classified as nonaccrual. First Financial had $0.3 million of commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs and the ACL included reserves of $8.8 million related to TDRs as of December 31, 2020. For the year ended December 31, 2020, First Financial charged off $1.7 million for the portion of TDRs determined to be uncollectible. Additionally, as of December 31, 2020, approximately $5.0 million of the accruing TDRs have been performing in accordance with the restructured terms for more than one year.
First Financial had 157 TDRs totaling $30.0 million at December 31, 2019, including $11.4 million of loans on accrual status and $18.5 million of loans classified as nonaccrual. First Financial had $2.5 million of commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. Additionally, First Financial charged off $2.6 million for the portion of TDRs determined to be uncollectible for the year ended December 31, 2019.
The following table provides information on loan modifications classified as TDRs during the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2021 | | 2020 | | 2019 |
| (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 | | 7 | | | $ | 9,311 | | | $ | 8,039 | | | 8 | | $ | 14,984 | | | $ | 14,984 | | | 8 | | $ | 25,009 | | | $ | 25,071 | |
Construction
real estate | | 0 | | | 0 | | | 0 | | | 0 | | 0 | | | 0 | | | 0 | | 0 | | | 0 | |
Commercial
real estate | | 8 | | | 16,850 | | | 9,807 | | | 0 | | 0 | | | 0 | | | 9 | | 3,024 | | | 2,932 | |
Residential
real estate | | 17 | | | 1,585 | | | 1,553 | | | 24 | | 1,953 | | | 1,847 | | | 30 | | 3,415 | | | 3,062 | |
| Home equity | | 2 | | | 30 | | | 30 | | | 11 | | 351 | | | 349 | | | 14 | | 395 | | | 366 | |
| Installment | | 1 | | | 0 | | | 0 | | | 2 | | 35 | | | 22 | | | 2 | | 41 | | | 39 | |
| Total | | 35 | | | $ | 27,776 | | | $ | 19,429 | | | 45 | | | $ | 17,323 | | | $ | 17,202 | | | 63 | | | $ | 31,884 | | | $ | 31,470 | |
The following table provides information on how TDRs were modified during the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (Dollars in thousands) | | 2021 | | 2020 | | 2019 |
| Extended maturities | | $ | 0 | | | $ | 0 | | | $ | 2,877 | |
| Adjusted interest rates | | 0 | | 0 | | 5,284 |
| Combination of rate and maturity changes | | 0 | | 0 | | | 516 | |
| Forbearance | | 7,328 | | 4,759 | | | 20,320 | |
Other (1) | | 12,101 | | 12,443 | | | 2,473 | |
| Total | | $ | 19,429 | | | $ | 17,202 | | | $ | 31,470 | |
(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 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.
First Financial Bancorp 2021 Annual Report 71
Notes to Consolidated Financial Statements
For the twelve months ended December 31, 2021 and 2020, 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, 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.
As stated in the CARES Act and subsequently modified by the Consolidated Appropriations Act, loan modifications in response to COVID-19 executed on loans that were not more than 30 days past due as of December 31, 2019 and executed between March 1, 2020, and the earlier of 60 days after the date of termination of the National Emergency or January 1, 2022 are not required to be reported as a TDR.
As of December 31, 2021, the Company's loan portfolio included $16.5 million of active loan modifications made under the guidance of the CARES Act that were not classified as TDR. These modifications were comprised of two commercial loans making interest only payments.
As of December 31, 2020, the Company's loan portfolio included $320.2 million of active loan modifications made under the guidance of the CARES Act that were not classified as TDR. These modifications included $291.5 million of borrowers making interest only payments at year end, and full principal and interest deferrals of $28.7 million. Active modifications as of December 31, 2020 were primarily hotel and franchise loans, which were $186.2 million and $44.3 million respectively as of December 31, 2020, or 58.2% and 13.8% of the total active modifications at December 31, 2020. As of December 31, 2020, the Company's loan portfolio included 90 commercial loans with balances of $312.5 million and 53 consumer loans with balances of $7.7 million that were modified in response to COVID-19 that were not considered TDRs.
Nonperforming loans. Loans classified as nonaccrual and loans modified as TDRs are considered nonperforming. The following table provides information on nonperforming loans as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| (Dollars in thousands) | | Nonaccrual loans with a related ACL | | Nonaccrual loans with no related ACL | | Total nonaccrual | | Nonaccrual loans with a related ACL | | Nonaccrual loans with no related ACL | | Total nonaccrual | | Total nonaccrual |
Nonaccrual loans (1) | | | | | | | | | | | | | | |
| Commercial & industrial | | $ | 11,077 | | | $ | 6,285 | | | $ | 17,362 | | | $ | 18,711 | | | $ | 10,519 | | | $ | 29,230 | | | $ | 24,346 | |
| Lease financing | | 0 | | | 203 | | | 203 | | | 0 | | | 0 | | | 0 | | | 223 | |
| Construction real estate | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Commercial real estate | | 17,716 | | | 1,796 | | | 19,512 | | | 6,957 | | | 27,725 | | | 34,682 | | | 7,295 | |
| Residential real estate | | 0 | | | 8,305 | | | 8,305 | | | 251 | | | 11,350 | | | 11,601 | | | 10,892 | |
| Home equity | | 0 | | | 2,922 | | | 2,922 | | | 0 | | | 5,076 | | | 5,076 | | | 5,242 | |
| Installment | | 0 | | | 88 | | | 88 | | | 0 | | | 163 | | | 163 | | | 167 | |
| Total nonaccrual loans | | $ | 28,793 | | | $ | 19,599 | | | $ | 48,392 | | | $ | 25,919 | | | $ | 54,833 | | | $ | 80,752 | | | $ | 48,165 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Interest income effect | | | | | | | | | | 2021 | | 2020 | | 2019 |
| Gross amount of interest that would have been recorded under original terms | | | | | | | | $ | 5,132 | | | $ | 5,892 | | | $ | 5,813 | |
| Interest included in income | | | | | | | | | | | | | | |
| Nonaccrual loans | | | | | | | | | | 1,618 | | | 1,636 | | | 1,042 | |
| Troubled debt restructurings | | | | | | | | 314 | | | 426 | | | 801 | |
| Total interest included in income | | | | | | | | 1,932 | | | 2,062 | | | 1,843 | |
| Net impact on interest income | | | | | | | | $ | 3,200 | | | $ | 3,830 | | | $ | 3,970 | |
| | | | | | | | | | | | | | |
| Commitments outstanding to borrowers with nonaccrual loans | | | | | | | | $ | 0 | | | $ | 0 | | | $ | 3 | |
(1) Nonaccrual loans include nonaccrual TDRs of $16.0 million, $14.7 million and $18.5 million as of December 31, 2021, 2020 and 2019, respectively.
First Financial individually reviews all nonperforming loan relationships greater than $250,000 to determine if an individually evaluated allowance is necessary based on the borrower’s overall financial condition, resources and payment record, support
72 First Financial Bancorp 2021 Annual Report
from guarantors and the realizable value of any collateral. Individually evaluated allowances are based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.
| | | | | | | | | | | | | | |
| First Financial's investment in impaired loans was as follows: | | | | |
| | Year ended December 31, |
| | | 2019 |
| (Dollars in thousands) | | Average
balance | | Interest
income
recognized |
| Loans with no related allowance recorded | | | | |
| Commercial & industrial | | $ | 31,846 | | | $ | 926 | |
| Lease financing | | 168 | | | 0 | |
| Construction real estate | | 6 | | | 0 | |
| Commercial real estate | | 18,757 | | | 357 | |
| Residential real estate | | 15,915 | | | 307 | |
| Home equity | | 5,893 | | | 121 | |
| Installment | | 170 | | | 2 | |
| Total | | 72,755 | | | 1,713 | |
| | | | |
| Loans with an allowance recorded | | | |
| Commercial & industrial | | 4,721 | | | 87 | |
| Lease financing | | 57 | | | 0 | |
| Construction real estate | | 0 | | | 0 | |
| Commercial real estate | | 1,339 | | | 31 | |
| Residential real estate | | 446 | | | 12 | |
| Home equity | | 0 | | | 0 | |
| Installment | | 0 | | | 0 | |
| Total | | 6,563 | | | 130 | |
| | | | |
| Total | | | | |
| Commercial & industrial | | 36,567 | | | 1,013 | |
| Lease financing | | 225 | | | 0 | |
| Construction real estate | | 6 | | | 0 | |
| Commercial real estate | | 20,096 | | | 388 | |
| Residential real estate | | 16,361 | | | 319 | |
| Home equity | | 5,893 | | | 121 | |
| Installment | | 170 | | | 2 | |
| Total | | $ | 79,318 | | | $ | 1,843 | |
First Financial Bancorp 2021 Annual Report 73
Notes to Consolidated Financial Statements
A loan is considered to be collateral dependent when the borrower is experiencing financial difficulty and the repayment is expected to be provided substantially through the operation or sale of collateral. The following table presents the amortized cost basis of collateral dependent loans by class of loan.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Type of Collateral |
| (Dollar in thousands) | | Business assets | | Commercial real estate | | Equipment | | Land | | Residential real estate | | Other | | Total |
| Class of loan | | | | | | | | | | | | | | |
| Commercial & industrial | | $ | 13,171 | | | $ | 15 | | | $ | 833 | | | $ | 0 | | | $ | 0 | | | $ | 3,343 | | | $ | 17,362 | |
| Leasing | | 0 | | 0 | | | 203 | | | 0 | | | 0 | | | 0 | | | 203 | |
| Commercial real estate-investor | | 0 | | 6,362 | | | 0 | | | 0 | | | 422 | | | 0 | | | 6,784 | |
| Commercial real estate-owner | | 0 | | 6,673 | | | 5,937 | | | 38 | | | 80 | | | 0 | | | 12,728 | |
| Residential real estate | | 0 | | 0 | | | 0 | | | 0 | | | 8,305 | | | 0 | | | 8,305 | |
| Home equity | | 0 | | 0 | | 0 | | 0 | | 2,922 | | | 0 | | 2,922 | |
| Installment | | 0 | | 0 | | 0 | | 0 | | 0 | | 88 | | 88 | |
| Total | | $ | 13,171 | | 13171000 | $ | 13,050 | | | $ | 6,973 | | | $ | 38 | | | $ | 11,729 | | | $ | 3,431 | | | $ | 48,392 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Type of Collateral |
| (Dollar in thousands) | | Business assets | | Commercial real estate | | Equipment | | Land | | Residential real estate | | Other | | Total |
| Class of loan | | | | | | | | | | | | | | |
| Commercial & industrial | | $ | 30,961 | | | $ | 6,130 | | | $ | 2,608 | | | $ | 865 | | | $ | 0 | | | $ | 4,892 | | | $ | 45,456 | |
| Commercial real estate-investor | | 0 | | 20,212 | | 661 | | 5,537 | | 872 | | 0 | | 27,282 | |
| Commercial real estate-owner | | 5,842 | | 3,495 | | 0 | | 42 | | 344 | | 0 | | 9,723 | |
| Residential real estate | | 0 | | 0 | | 0 | | 0 | | 11,601 | | 0 | | 11,601 | |
| Home equity | | 0 | | 0 | | 0 | | 0 | | 5,076 | | 0 | | 5,076 | |
| Installment | | 0 | | 0 | | 0 | | 0 | | 0 | | 163 | | 163 | |
| Total | | $ | 36,803 | | | $ | 29,837 | | | $ | 3,269 | | | $ | 6,444 | | | $ | 17,893 | | | $ | 5,055 | | | $ | 99,301 | |
Lease financing. First Financial originates both sales-type and direct financing leases, and the Company manages and reviews lease residuals in accordance with its credit policies. Sales-type lease contracts contain the ability to purchase the underlying equipment at lease maturity and profit or loss is recognized at lease commencement. Direct financing leases are generally three to five years in length and may be extended at maturity, however, early cancellation may result in a fee to the borrower. For direct financing leases, the net unearned income is deferred and amortized over the life of the lease. Effective December 31, 2021, First Financial acquired Summit Funding Group, Inc., which is a full-service equipment leasing company. In conjunction with this acquisition, First Financial acquired $42.3 million of financing leases, which were included in Loans and leases on the Consolidated Balance Sheets. For further detail on the acquisition, see Note 23 - Business Combinations.
74 First Financial Bancorp 2021 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) | | 2021 | | 2020 | | 2019 |
| Balance at beginning of year | | $ | 1,287 | | | $ | 2,033 | | | $ | 1,401 | |
| Additions | | | | | | |
| Commercial | | 98 | | | 510 | | | 415 | |
| Residential | | 0 | | | 507 | | | 2,033 | |
| Total additions | | 98 | | | 1,017 | | | 2,448 | |
| Disposals | | | | | | |
| Commercial | | (947) | | | (217) | | | (541) | |
| Residential | | (331) | | | (1,859) | | | (912) | |
| Total disposals | | (1,278) | | | (2,076) | | | (1,453) | |
| Valuation adjustments | | | | | | |
| Commercial | | (9) | | | 448 | | | (112) | |
| Residential | | 0 | | | (135) | | | (251) | |
| Total valuation adjustments | | (9) | | | 313 | | | (363) | |
| Balance at end of year | | $ | 98 | | | $ | 1,287 | | | $ | 2,033 | |
6. Allowance for Credit Losses
Allowance for credit losses - loans and leases. The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The ACL is increased by provision expense and decreased by charge-offs, net of recoveries of amounts previously charged-off. First Financial's policy is to charge-off all or a portion of a loan when, in management's opinion, it is unlikely to collect the principal amount owed in full either through payments from the borrower or a guarantor or from the liquidation of collateral. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable on loans and leases, which totaled $29.5 million and $37.7 million as of December 31, 2021 and December 31, 2020, respectively, is excluded from the estimate of credit losses.
Management estimates the allowance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience paired with economic forecasts provide the basis for the quantitatively modeled estimation of expected credit losses. First Financial adjusts its quantitative model, as necessary, to reflect conditions not already considered by the quantitative model. These adjustments are commonly known as the Qualitative Framework.
The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the ACL using the following methods:
Commercial and industrial – C&I loans include revolving lines of credit and term loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, leasehold improvements or other projects. C&I loans are generally underwritten individually and secured with the assets of the Company and/or the personal guarantee of the business owners. C&I loans also include ABL, equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and commission-based loans to insurance agents and brokers. ABL transactions typically involve larger commercial clients and are secured by specific assets, such as inventory, accounts receivable, machinery and equipment. In the franchise lending space, First Financial focuses on a limited number of restaurant concepts that have sound economics, low closure rates and strong brand awareness within specified local, regional or national markets. Within the insurance lending platform, First Financial serves insurance agents and brokers that are looking to maximize their book-of-business value and grow their agency business.
First Financial Bancorp 2021 Annual Report 75
Notes to Consolidated Financial Statements
Current period default rates are utilized in the modeling of the ACL for C&I loans, and are adjusted for forecasted changes in the treasury term spread and market volatility index. Changes in current period defaults or forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Lease financing – Lease financing consists of lease transactions for the acquisition of both new and used business equipment for commercial clients. Lease products may include tax leases, finance leases, lease lines of credit and interim funding. The credit underwriting for lease transactions includes detailed analysis of the lessee's industry and business model, nature of the equipment, equipment resale values, historical and projected cash flow analysis, secondary sources of repayment and guarantor, in addition to other considerations.
The ACL model for leases sources expected default rates from the C&I portfolio model. Therefore, changes in forecasted expectations for the treasury term spread and market volatility index could result in volatility in the Company's ACL in future periods.
Construction real estate – Real estate construction loans are term loans to individuals, companies or developers used for the construction or development of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Generally, these loans are for construction projects that have been pre-sold, pre-leased or have secured permanent financing, as well as loans to real estate companies with significant equity invested in the project. An independent credit team underwrites construction real estate loans, which are managed by experienced lending officers and monitored through the construction phase by a centralized funding desk that manages loan disbursements.
The construction ACL model is adjusted for forecasted changes in rental vacancy rates in the Bank's geographic footprint and the housing price index. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Commercial real estate - owner & investor – Commercial real estate loans consist of term loans secured by a mortgage lien on real estate properties such as apartment buildings, office and industrial buildings and retail shopping centers. Additionally, the Company's franchise lending activities discussed in the "Commercial and Industrial" section often include the financing of real estate in addition to equipment. The credit underwriting for both owner-occupied and investor income producing real estate loans includes detailed market analysis, historical and projected cash flow analysis, appropriate equity margins, assessment of lessees and lessors, environmental risks and the type, age, condition and location of real estate, among other factors.
First Financial models owner-occupied and investor CRE separately when determining the ACL. For owner occupied CRE, current period default rates are utilized in the modeling, and are adjusted for forecasted changes in the BAA bond spread, national rental vacancy rates and the consumer confidence index. Current period default rates are also utilized in the modeling of investor CRE loans, and are adjusted for forecasted changes in the BAA bond spread, multifamily building permits within the Bank’s geographic footprint, and national rental vacancy rates. Changes in current period defaults and forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Residential real estate – Residential real estate loans represent loans to consumers for the financing of a residence. These loans generally have a 15 to 30 year term and a fixed interest rate, but may have a shorter term to maturity with an adjustable interest rate. In most cases, these loans are extended to borrowers to finance their primary residence. First Financial sells residential real estate loan originations into the secondary market on both servicing retained and servicing released bases. Residential real estate loans are generally underwritten to secondary market lending standards, utilizing underwriting processes that rely on empirical data to assess credit risk as well as analysis of the borrower's ability to repay their obligations, credit history, the amount of any down payment and the market value or other characteristics of the property. First Financial also offers a residential mortgage product that features similar borrower credit characteristics but a more streamlined underwriting process than typically required to sell to government-sponsored enterprises and thus is retained on the Consolidated Balance Sheets.
The residential real estate ACL model is adjusted for forecasted changes in the housing price index, housing starts within the Bank’s geographic footprint and national single-family existing home sales. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Home equity – Home equity lending includes both home equity loans and revolving lines of credit secured by a first or second lien on the borrower’s residence. Home equity lending underwriting considerations include the borrower's credit history as well as to debt-to-income and loan-to-value policy limits.
76 First Financial Bancorp 2021 Annual Report
The home equity ACL model is adjusted for forecasted changes in the consumer credit growth rate within the Bank’s geographic footprint and the working-age labor participation rate. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Installment – Installment lending consists of consumer loans not secured by real estate, including loans secured by automobiles and unsecured personal loans.
The ACL model for installment loans sources expected default rates from the residential real estate and home equity portfolio models and is paired with installment specific LGD rates. Changes in forecasted expectations for the consumer credit growth rate within the Bank’s geographic footprint, the working-age labor participation rate, the housing price index, housing starts within the Bank’s geographic footprint and national existing single-family existing home sales could result in volatility in the Company's ACL in future periods.
Credit card – Credit card lending consists of secured and unsecured revolving lines of credit to consumer and business customers. Credit card lines are generally available for an indefinite period of time as long as the borrower's credit characteristics do not materially or adversely change, but lines are unconditionally cancellable by the Company at any time.
The ACL model for credit card loans sources expected default rates from the residential real estate and home equity portfolio models and is paired with credit card specific LGD rates. Changes in forecasted expectations for the consumer credit growth rate within the Bank’s geographic footprint, the working-age labor participation rate, the housing price index, housing starts within the Bank’s geographic footprint and national existing single-family existing home sales could result in volatility in the Company's ACL in future periods.
The Company utilized the Moody's December baseline forecast as its R&S forecast in the quantitative model, which included consideration of the impact from both the COVID-19 pandemic and the related government stimulus response at the time. For reasonableness, the Company also considered the impact to the model from alternative, more adverse economic forecasts, slower prepayment speeds and increased default rates. These alternative analyses were utilized to inform the Company's qualitative adjustments. Additionally, First Financial considered its credit exposure to certain industries believed to be at risk for future credit stress related to the COVID-19 pandemic, such as franchise, hotel and investor commercial real estate lending when making qualitative adjustments to the ACL model.
First Financial's ACL is influenced by loan volumes, risk rating migration or delinquency status, and other conditions impacting loss expectations, such as reasonable and supportable forecasts of economic conditions. For the twelve months ended December 31, 2021, the ACL declined due to improvements in economic forecasts and the Company's improved credit outlook. Over the course of 2021, Moody's economic forecasts gradually improved as the economy showed significant signs of recovery from the beginning of the pandemic. The Company's improved credit outlook considered the impact from loan sales that addressed various portfolio concentrations, a significant decline in classified asset balances and relatively stable net charge-offs, excluding the impact from loan sales. For the twelve months ended, December 31, 2020, the ACL increased due to First Financial's adoption of ASC 326 and management's expectation of higher credit losses resulting from the COVID-19 pandemic.
First Financial Bancorp 2021 Annual Report 77
Notes to Consolidated Financial Statements
Changes in the allowance by loan category as of December 31 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| (Dollars in thousands) | | Commercial & industrial | | Lease financing | | Construction real estate | | Commercial real estate | | Residential real estate | | Home equity | | Installment | | Credit card | | Total |
| Allowance for credit losses | | | | | | | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 51,454 | | | $ | 995 | | | $ | 21,736 | | | $ | 76,795 | | | $ | 8,560 | | | $ | 11,869 | | | $ | 1,215 | | | $ | 3,055 | | | $ | 175,679 | |
| Purchase accounting ACL for PCD | | 0 | | | 17 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 17 | |
| Provision for credit losses | | 6,606 | | | 621 | | | (8,367) | | | (14,689) | | | (2,436) | | | (2,376) | | | 65 | | | 1,552 | | | (19,024) | |
| Gross charge-offs | | (15,620) | | | 0 | | | (1,498) | | | (13,471) | | | (127) | | | (1,073) | | | (334) | | | (780) | | | (32,903) | |
| Recoveries | | 1,612 | | | 0 | | | 3 | | | 4,785 | | | 228 | | | 1,223 | | | 151 | | | 221 | | | 8,223 | |
| Total net charge-offs | | (14,008) | | | 0 | | | (1,495) | | | (8,686) | | | 101 | | | 150 | | | (183) | | | (559) | | | (24,680) | |
| Ending allowance for credit losses | | $ | 44,052 | | | $ | 1,633 | | | $ | 11,874 | | | $ | 53,420 | | | $ | 6,225 | | | $ | 9,643 | | | $ | 1,097 | | | $ | 4,048 | | | $ | 131,992 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 |
| (Dollars in thousands) | | Commercial & industrial | | Lease financing | | Construction real estate | | Commercial real estate | | Residential real estate | | Home equity | | Installment | | Credit card | | Total |
| Allowance for credit losses | | | | | | | | | | | | | | | | | | |
| Beginning balance, prior to adoption of ASC 326 | | $ | 18,584 | | | $ | 971 | | | $ | 2,381 | | | $ | 23,579 | | | $ | 5,299 | | | $ | 4,787 | | | $ | 392 | | | $ | 1,657 | | | $ | 57,650 | |
| Impact of adopting ASC 326 | | 9,901 | | | 118 | | | 11,579 | | | 24,118 | | | 5,490 | | | 8,430 | | | 801 | | | 1,068 | | | $ | 61,505 | |
| Provision for credit losses | | 25,407 | | | 758 | | | 7,759 | | | 38,936 | | | (2,122) | | | (939) | | | 12 | | | 985 | | | 70,796 | |
| Gross charge-offs | | (5,345) | | | (852) | | | 0 | | | (12,100) | | | (488) | | | (1,541) | | | (148) | | | (885) | | | (21,359) | |
| Recoveries | | 2,907 | | | 0 | | | 17 | | | 2,262 | | | 381 | | | 1,132 | | | 158 | | | 230 | | | 7,087 | |
| Total net charge-offs | | (2,438) | | | (852) | | | 17 | | | (9,838) | | | (107) | | | (409) | | | 10 | | | (655) | | | (14,272) | |
| Ending allowance for credit losses | | $ | 51,454 | | | $ | 995 | | | $ | 21,736 | | | $ | 76,795 | | | $ | 8,560 | | | $ | 11,869 | | | $ | 1,215 | | | $ | 3,055 | | | $ | 175,679 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2019 |
| (Dollars in thousands) | | Commercial & industrial | | Lease financing | | Construction real estate | | Commercial real estate | | Residential real estate | | Home equity | | Installment | | Credit card | | Total |
| Allowance for credit losses | | | | | | | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 18,746 | | | $ | 1,130 | | | $ | 3,413 | | | $ | 21,048 | | | $ | 4,964 | | | $ | 5,348 | | | $ | 362 | | | $ | 1,531 | | | $ | 56,542 | |
| Provision for credit 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 credit losses | | $ | 18,584 | | | $ | 971 | | | $ | 2,381 | | | $ | 23,579 | | | $ | 5,299 | | | $ | 4,787 | | | $ | 392 | | | $ | 1,657 | | | $ | 57,650 | |
Allowance for credit losses - unfunded commitments. First Financial estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life consistent with the Company's ACL methodology for loans and leases.
Prior to the adoption of ASC 326, First Financial maintained its reserve to absorb probable losses incurred in standby letters of credit and outstanding loan commitments. First Financial determined the adequacy of this reserve based upon an evaluation of the unfunded credit facilities, which included consideration of historical commitment utilization experience, credit risk ratings and historical loss rates, consistent with the Company's ALLL methodology at the time.
The ACL on unfunded commitments was $13.4 million as of December 31, 2021 and $12.5 million as of December 31, 2020. Due to the adoption of ASC 326, First Financial recorded $12.2 million in the ACL on unfunded commitments effective January 1, 2020. Additionally, First Financial recorded $0.9 million of provision expense related to the ACL on unfunded commitments for the twelve months ended December 31, 2021 and a provision recapture of $0.2 million for both December 31, 2020 and December 31, 2019.
78 First Financial Bancorp 2021 Annual Report
7. Premises and Equipment
Premises and equipment at December 31 were as follows:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2021 | | 2020 |
| Land and land improvements | | $ | 49,402 | | | $ | 52,373 | |
| Buildings | | 155,337 | | | 161,371 | |
| Furniture and fixtures | | 70,847 | | | 70,177 | |
| Leasehold improvements | | 30,190 | | | 29,525 | |
| Construction in progress | | 8,145 | | | 8,434 | |
| | 313,921 | | | 321,880 | |
| | | | |
| Less: Accumulated depreciation and amortization | | 120,881 | | | 114,669 | |
| Total | | $ | 193,040 | | | $ | 207,211 | |
Depreciation expense recorded in 2021, 2020 and 2019 was $14.1 million, $15.4 million and $16.1 million, respectively.
8. Leases - Lessees
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 $57.2 million and $63.9 million at December 31, 2021 and 2020, respectively. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received. First Financial recorded a $67.6 million and $71.7 million lease liability in Accrued interest and other liabilities on the Consolidated Balance Sheet at December 31, 2021 and 2020, respectively.
The calculated amount of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of minimum lease payments. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate was based upon the remaining lease term as of that date.
Leases with an initial term of 12 months or less are not recorded on the balance sheet and First Financial recognizes lease expense for these leases on a straight-line basis over the term of the lease. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years or more. The exercise of renewal options on operating leases is at the Company's sole discretion, and certain leases may include options to purchase the leased property. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. First Financial does not enter into lease agreements which contain material residual value guarantees or material restrictive covenants.
Certain leases provide for increases in future minimum annual rental payments as defined in the lease agreements and leases generally also include real estate taxes and common area maintenance charges in the annual rental payments.
The components of lease expense for the years ended December 31, 2021, 2020 and 2019 were as follows:
First Financial Bancorp 2021 Annual Report 79
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Operating lease cost | | $ | 7,425 | | | $ | 7,897 | | | $ | 7,324 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Short-term lease cost | | 108 | | | 142 | | | 55 | |
| Variable lease cost | | 2,621 | | | 2,532 | | | 2,553 | |
| Total operating lease cost | | $ | 10,154 | | | $ | 10,571 | | | $ | 9,932 | |
Future minimum commitments due under these lease agreements as of December 31, 2021 are as follows:
| | | | | | | | | | | | |
| (Dollars in thousands) | | Operating leases | | | | |
| 2022 | | $ | 7,784 | | | | | |
| 2023 | | 7,683 | | | | | |
| 2024 | | 7,288 | | | | | |
| 2025 | | 6,673 | | | | | |
| 2026 | | 6,269 | | | | | |
| Thereafter | | 50,311 | | | | | |
| Total lease payments | | 86,008 | | | | | |
| Less imputed interest | | 18,456 | | | | | |
| Total | | $ | 67,552 | | | | | |
The weighted average lease term and discount rate for the Company's operating leases were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Operating leases | | | | | | |
| Weighted-average remaining lease term | | 13.9 years | | 15.1 years | | 15.6 years |
| | | | | | |
| | | | | | |
| | | | | | |
| Weighted-average discount rate | | 3.25 | % | | 3.07 | % | | 3.43 | % |
| | | | | | |
Supplemental cash information at year end related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | | | | |
| Operating cash flows from operating leases | | $ | 6,860 | | | $ | 8,196 | | | $ | 7,335 | |
| | | | | | |
| | | | | | |
| ROU assets obtained in exchange for lease obligations | | | | |
| Operating leases | | 6,076 | | | 9,725 | | | 64,902 | |
| | | | | | |
80 First Financial Bancorp 2021 Annual Report
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 of the purchase price of the acquisition over the fair value of net assets acquired is recorded as goodwill.
Changes in the carrying amount of goodwill for the years ended December 31, 2021, 2020 and 2019 are shown below.
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2021 | | 2020 | | 2019 |
| Balance at beginning of year | | $ | 937,771 | | | $ | 937,771 | | | $ | 880,251 | |
| Goodwill resulting from business combinations | | 62,978 | | | 0 | | | 57,520 | |
| Balance at end of year | | $ | 1,000,749 | | | $ | 937,771 | | | $ | 937,771 | |
In December 2021, First Financial recorded $63.0 million of goodwill resulting from the acquisition of Summit Funding Group, Inc. During 2019, First Financial recorded $57.5 million of goodwill resulting from the Bannockburn acquisition, in addition to its final adjustments to goodwill resulting from the MSFG merger. For further detail on various mergers or acquisitions, 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 most recent annual qualitative impairment test as of October 1, 2021 and no impairment was indicated. As of December 31, 2021, no events or changes in circumstances indicated that the fair value of the reporting unit was below its carrying value.
Other intangible assets. Other intangible assets consist primarily of core deposit, customer list and other miscellaneous intangibles, such as purchase commissions, non-compete agreements and trade name 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 6.2 years.
First Financial recorded a $30.1 million customer list intangible asset in conjunction with the Summit acquisition 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 being amortized on a straight-line basis over its estimated useful life of 12 years. Additionally, First Financial recorded a $39.4 million customer list intangible asset in conjunction with the Bannockburn acquisition which is being amortized on a straight-line basis over its estimated useful life of 11 years.
The gross carrying amount and accumulated amortization of other intangible assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | December 31, 2021 | | December 31, 2020 |
| Amortized intangible assets | | | | | | | | |
| Core deposit intangibles | | $ | 45,256 | | | $ | (26,911) | | | $ | 51,031 | | | $ | (27,524) | |
| Customer list | | 69,563 | | | (8,362) | | | 39,420 | | | (4,778) | |
| Other | | 14,589 | | | (5,237) | | | 10,113 | | | (3,710) | |
| | | | | | | | |
| | | | | | | | |
| Total | | $ | 129,408 | | | $ | (40,510) | | | $ | 100,564 | | | $ | (36,012) | |
Amortization expense recognized on intangible assets for 2021, 2020 and 2019 was $9.8 million, $11.1 million and $9.7 million, respectively. The estimated amortization expense of intangible assets for the next five years is as follows:
First Financial Bancorp 2021 Annual Report 81
Notes to Consolidated Financial Statements
| | | | | | | | |
| (Dollars in thousands) | | Intangible amortization |
| 2022 | | $ | 11,515 | |
| 2023 | | 10,536 | |
| 2024 | | 9,193 | |
| 2025 | | 9,145 | |
| 2026 | | 9,092 | |
10. Deposits
Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2021 and 2020 were $195.6 million and $220.5 million, respectively.
Scheduled maturities of all time deposits for the next five years were as follows:
| | | | | | | | |
| (Dollars in thousands) | | Time deposits |
| 2022 | | $ | 1,131,574 | |
| 2023 | | 83,589 | |
| 2024 | | 50,983 | |
| 2025 | | 32,569 | |
| 2026 | | 31,352 | |
| Thereafter | | 196 | |
| Total | | $ | 1,330,263 | |
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, federal funds purchased, 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 is a summary of short-term borrowings for the last three years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| (Dollars in thousands) | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
| At December 31, | | | | | | | | | | | | |
| Federal funds purchased and securities sold under agreements to repurchase | | $ | 51,203 | | | 0.01 | % | | $ | 166,594 | | | 0.05 | % | | $ | 165,181 | | | 0.85 | % |
| FHLB borrowings | | 225,000 | | | 0.18 | % | | 0 | | | 0.00 | % | | 1,151,000 | | | 1.73 | % |
| Other short-term borrowings | | 20,000 | | | 1.90 | % | | 0 | | | 0.00 | % | | 0 | | | 0.00 | % |
| Total | | $ | 296,203 | | | 0.27 | % | | $ | 166,594 | | | 0.05 | % | | $ | 1,316,181 | | | 1.62 | % |
| | | | | | | | | | | | |
| Average for the year | | | | | | | | | | | | |
| Federal funds purchased and securities sold under agreements to repurchase | | $ | 160,967 | | | 0.07 | % | | $ | 149,036 | | | 0.26 | % | | $ | 155,859 | | | 1.15 | % |
| FHLB borrowings | | 43,371 | | | 0.20 | % | | 441,867 | | | 1.37 | % | | 990,860 | | | 2.37 | % |
| Other short-term borrowings | | 165 | | | 1.92 | % | | 0 | | | 0.00 | % | | 0 | | | 0.00 | % |
| Total | | $ | 204,503 | | | 0.10 | % | | $ | 590,903 | | | 1.09 | % | | $ | 1,146,719 | | | 1.90 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
82 First Financial Bancorp 2021 Annual Report
Securities sold under agreements to repurchase are secured by securities with a carrying amount of $51.3 million and $126.7 million, as of December 31, 2021 and 2020, respectively.
The following shows the remaining contractual maturity of repurchase agreements by collateral pledged:
| | | | | | | | |
| (Dollars in thousands) | | Overnight and Continuous |
| Repurchase agreements | | |
| Mortgage-backed securities | | $ | 48,370 | |
| Collateralized mortgage obligations | | 2,833 | |
| Total | | $ | 51,203 | |
First Financial had outstanding FHLB advances included in short-term borrowings of $225.0 million as of December 31, 2021 and no outstanding short-term FHLB advances as of December 31, 2020.
First Financial also has a $40.0 million short-term credit facility with an unaffiliated bank that matures in December, 2022, which is included in short-term borrowings. This facility has a variable 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, 2021, First Financial had an outstanding balance of $20.0 million. 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, 2021. This credit facility also required First Financial to pledge as collateral the Bank's common stock where the lender is granted a security interest in this collateral.
The following is a summary of First Financial's long-term debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
(Dollars in thousands) | | Amount | | Average Rate | | Amount | | Average Rate |
| FRB borrowings | | $ | 0 | | | 0.00 | % | | $ | 434,982 | | | 0.35 | % |
| FHLB borrowings | | 0 | | | 0.00 | % | | 19,971 | | | 1.43 | % |
| Subordinated debt | | 313,248 | | | 4.86 | % | | 321,384 | | | 4.86 | % |
| Unamortized debt issuance costs | | (2,384) | | | n/a | | (2,770) | | | n/a |
| Capital lease liability | | 1,781 | | | 3.81 | % | | 1,860 | | | 3.81 | % |
| Capital loan with municipality | | 775 | | | 0.00 | % | | 775 | | | 0.00 | % |
| Subtotal | | 313,420 | | | 4.88 | % | | 776,202 | | | 2.25 | % |
| | | | | | | | |
| Acquired in Summit acquisition | | | | | | | | |
| Bank lines of credit | | 23,030 | | | 2.77 | % | | 0 | | | 0.00 | % |
| Notes issued in conjunction with acquisition of property and equipment | | 73,382 | | | 4.09 | % | | 0 | | | 0.00 | % |
| Total notes payable acquired in Summit acquisition | | 96,412 | | | 3.77 | % | | 0 | | | 0.00 | % |
| Total long-term debt | | $ | 409,832 | | | 4.62 | % | | $ | 776,202 | | | 2.25 | % |
First Financial Bancorp 2021 Annual Report 83
Notes to Consolidated Financial Statements
As of December 31, 2021, First Financial's long-term debt matures as follows:
| | | | | | | | | | |
(Dollars in thousands) | | Long-term debt | | |
| 2022 | | $ | 28,091 | | | |
| 2023 | | 15,086 | | | |
| 2024 | | 23,091 | | | |
| 2025 | | 12,301 | | | |
| 2026 | | 16,765 | | | |
| Thereafter | | 314,498 | | | |
| Total | | $ | 409,832 | | | |
First Financial participated in the PPPLF, which is a program created by the FRB to extend credit to eligible financial institutions that originate PPP loans. As of December 31, 2021, the bank had no outstanding PPPLF advances. As of December 31, 2020, the bank had oustanding PPPLF advances of $435.0 million with an average interest rate of 35 basis points. These borrowings were secured by pledged PPP loans and prepay in conjunction with reductions in the principal balances of those loans.
In April 2020, First Financial issued $150.0 million of fixed to floating rate subordinated notes. The subordinated notes have an initial fixed interest rate of 5.25% to, but excluding, May 15, 2025, payable semi-annually in arrears. From, and including, May 15, 2025, the interest rate on the subordinated notes will reset quarterly to a floating rate per annum equal to a benchmark rate, which is expected to be the then-current three-month term SOFR, plus 509 basis points, payable quarterly in arrears. The subordinated notes mature on May 15, 2030. These notes are redeemable by the Company in whole or in part beginning with the interest payment date of May 15, 2025.
In 2015, First Financial issued $120.0 million of subordinated notes, which have a fixed interest rate of 5.13% 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. These acquired subordinated notes mature 30 years after the date of original issuance and may be called at par following the 5 year anniversary of issuance. First Financial also acquired $8.4 million of 6.00% fixed rate private placement subordinated debt in conjunction with the MSFG merger that was issued in 2015 and matured in 2025. These notes were redeemable by the Company at par following the 5 year anniversary of issuance. These subordinated notes were redeemed by the Company in the first quarter of 2021. 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.
Additionally, in conjunction with the acquisition of Summit, First Financial assumed $96.4 million in outstanding long-term borrowings at December 31, 2021. These outstanding long-term borrowings consisted of $23.0 million of lines of credit with other banks utilized to operate the business and carried an average interest rate of 2.77%. Additionally, acquired long term borrowings included $73.4 million of term notes, both with and without recourse, with an average interest rate of 4.09%. These term notes were used to finance Summit's equity investment in the purchase of equipment to be leased to customers.
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, 2021, had collateral pledged with a book value of $5.8 billion.
84 First Financial Bancorp 2021 Annual Report
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, 2021, for interest rate derivatives, the Company had a total counterparty notional amount outstanding of $2.4 billion, spread among six counterparties, with an estimated fair value of $74.2 million. At December 31, 2020, the Company had interest rate derivatives with a total counterparty notional amount outstanding of $2.3 billion, spread among twenty counterparties, with an estimated fair value of $182.3 million.
First Financial monitors its derivative credit exposure to borrowers by monitoring the creditworthiness of the related loan
customers through the Company's normal credit review processes. Additionally, the Company's ACL Committee monitors
derivative credit risk exposure associated with problem loans through the Company's ACL committee. First Financial considers the market value of a derivative instrument to be part of the carrying value of the related loan for these purposes as the borrower is contractually obligated to pay First Financial this amount in the event the derivative contract is terminated.
In connection with its use of derivative instruments, First Financial and its counterparties may be required to post cash collateral to offset the market position of the derivative instruments. First Financial maintains the right to offset these derivative positions with the collateral posted against them by or with the relevant counterparties.
Foreign Exchange Contracts. First Financial may enter into foreign exchange derivative contracts for the benefit of commercial customers to hedge their exposure to foreign currency fluctuations. Similar to the hedging of interest rate risk from interest rate derivative contracts, First Financial also enters into foreign exchange contracts with major financial institutions to economically hedge a substantial portion of the exposure from client driven foreign exchange activity. These derivatives are classified as free-standing instruments with the revaluation gain or loss recorded in Foreign exchange income in the Consolidated Statements of Income. The Company has risk limits and internal controls in place to help ensure excessive risk is not being taken in providing this service to customers. At December 31, 2021, the Company had total counterparty notional amount outstanding of $6.4 billion spread among four counterparties, with an estimated fair value of $15.2 million at December 31, 2021 related to foreign exchange contracts, which is included in Accrued interest and other liabilities in the Consolidated Balance Sheets. At December 31, 2020, the Company had total counterparty notional amounts outstanding of $3.6 billion spread among six counterparties, with an estimated fair value of $33.1 million.
In connection with its use of foreign exchange contracts, First Financial and its counterparties may be required to post cash collateral to offset the market position of the derivative instruments. First Financial maintains the right to offset these derivative positions with the collateral posted against them by or with the relevant counterparties.
First Financial Bancorp 2021 Annual Report 85
Notes to Consolidated Financial Statements
The following table details the location and amounts of client derivatives and foreign exchange contracts recognized in the Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2021 | | December 31, 2020 |
| | | | | | | 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 | | $ | 2,430,587 | | | $ | 84,694 | | | $ | (7,508) | | | $ | 2,300,336 | | | $ | 184,777 | | | $ | (107) | |
| Matched interest rate swaps with counterparty | | Accrued interest and other liabilities | | 2,430,587 | | | 7,508 | | | (84,701) | | | 2,300,336 | | | 107 | | | (184,884) | |
| Foreign exchange contracts | | | | | | | | | | | | | | |
| Matched foreign exchange contracts with customers | | Accrued interest and other assets | | 6,423,085 | | | 67,988 | | | (52,780) | | | 3,637,509 | | | 60,366 | | | (27,249) | |
| Match foreign exchange contracts with counterparty | | Accrued interest and other liabilities | | 6,399,432 | | | 52,780 | | | (67,988) | | | 3,637,509 | | | 27,249 | | | (60,366) | |
| Total | | | | $ | 17,683,691 | | | $ | 212,970 | | | $ | (212,977) | | | $ | 11,875,690 | | | $ | 272,499 | | | $ | (272,606) | |
The following table discloses the gross and net amounts of client derivatives and foreign exchange contracts recognized in the Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| (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 | | $ | 92,209 | | | $ | (149,647) | | | $ | (57,438) | | | $ | 184,991 | | | $ | (385,088) | | | $ | (200,097) | |
Foreign exchange contracts with counterparty | | 120,768 | | | (56,443) | | | 64,325 | | | 87,615 | | | (17,392) | | | 70,223 | |
| Total | | $ | 212,977 | | | $ | (206,090) | | | $ | 6,887 | | | $ | 272,606 | | | $ | (402,480) | | | $ | (129,874) | |
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, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Notional
amount | | Average
maturity
(years) | | Fair
value | | | | |
| Client derivatives-interest rate contracts | | | | | | | | | | |
| Receive fixed, matched interest rate swaps with borrower | | $ | 2,430,587 | | | 5.7 | | $ | 77,186 | | | | | |
| Pay fixed, matched interest rate swaps with counterparty | | 2,430,587 | | | 5.7 | | (77,193) | | | | | |
| Client derivatives-foreign exchange contracts | | | | | | | | | | |
| Foreign exchange contracts - pay USD | | 6,423,085 | | | 0.6 | | 15,208 | | | | | |
| Foreign exchange contracts - receive USD | | 6,399,432 | | | 0.6 | | (15,208) | | | | | |
| Total client derivatives | | $ | 17,683,691 | | | 2.0 | | $ | (7) | | | | | |
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 $362.8 million as of December 31, 2021 and $242.4 million as of December 31, 2020. The fair value of these agreements were recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets was $0.1 million at December 31, 2021 and $0.3 million at December 31, 2020.
86 First Financial Bancorp 2021 Annual Report
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, 2021, the notional amount of the IRLCs was $45.0 million and the notional amount of forward commitments was $62.5 million. As of December 31, 2020, the notional amount of IRLCs was $114.2 million and the notional amount of forward commitments was $112.6 million. The fair value of these agreements was $3.3 million at December 31, 2021 and was $2.7 million at December 31, 2020 and was recorded in Accrued interest and other assets on the Consolidated Balance Sheets.
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 was represented by the contractual amounts of those instruments. Effective January 1, 2020, First Financial adopted ASC 326, at which time First Financial estimated credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated useful life consistent with the Company's ACL methodology for loans and leases. Adjustments to the reserve for unfunded commitments are recorded in Provision for credit losses - unfunded commitments in the Consolidated Statements of Income. First Financial had $13.4 million and $12.5 million of reserves for unfunded commitments recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets as of December 31, 2021 and 2020.
Loan commitments. Loan commitments are agreements to extend credit to a client absent any violation of conditions established in the commitment agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments 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 $4.0 billion and $3.4 billion at December 31, 2021 and 2020, respectively. As of December 31, 2021, loan commitments with a fixed interest rate totaled $129.2 million while commitments with variable interest rates totaled $3.8 billion. At December 31, 2020, loan commitments with a fixed interest rate totaled $123.6 million while commitments with variable interest rates totaled $3.3 billion. The fixed rate loan commitments have interest rates ranging from 0.00% to 21.00% for both December 31, 2021 and 2020 and have maturities ranging from less than 1 year to 30.9 years for December 31, 2021 and less than 1 year to 30.8 years for December 31, 2020.
First Financial Bancorp 2021 Annual Report 87
Notes to Consolidated Financial Statements
The following table presents by type First Financial's loan balances and contractual obligations to extend credit:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| (dollars in thousands) | | Unfunded commitment | | Loan balance | | Unfunded commitment | | Loan balance |
| Commercial & industrial | | $ | 1,545,995 | | | $ | 2,720,028 | | | $ | 1,270,765 | | | $ | 3,007,509 | |
| Lease financing | | 18,037 | | 109,624 | | 0 | | 72,987 |
| Construction real estate | | 484,038 | | 455,894 | | 374,008 | | 636,096 |
| Commercial real estate-investor | | 65,660 | | 3,154,755 | | 139,754 | | 3,244,540 |
| Commercial real estate-owner | | 29,824 | | 1,071,859 | | 51,637 | | 1,063,318 |
| Residential real estate | | 50,043 | | 896,069 | | 28,895 | | 1,003,086 |
| Home equity | | 822,343 | | 708,399 | | 762,406 | | 743,099 |
| Installment | | 15,985 | | 119,454 | | 18,229 | | 81,850 |
| Credit card | | 217,006 | | 52,217 | | 207,365 | | 48,485 |
| Total | | $ | 3,248,931 | | | $ | 9,288,299 | | | $ | 2,853,059 | | | $ | 9,900,970 | |
Letters of credit. Letters of credit are conditional commitments issued by First Financial to guarantee the performance of a client to a third party. First Financial’s letters of credit consist of performance assurances made on behalf of clients who have a contractual commitment to produce or deliver goods or services. The risk to First Financial arises from its obligation to make payment in the event of the client's contractual default to produce the contracted good or service to a third party. First Financial has issued letters of credit aggregating $41.1 million and $36.1 million at December 31, 2021, and 2020, respectively. Management conducts regular reviews of these instruments on an individual client basis.
Risk participation agreements. First Financial is a party in risk participation transactions of interest rate swaps, which had total notional amount of $362.8 million and $242.4 million at December 31, 2021 and 2020, respectively.
Affordable housing projects and other tax credit investments. First Financial is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects. These investments are included in Accrued interest and other assets in the Consolidated Balance Sheets, with any unfunded commitments included in Accrued interest and other liabilities in the Consolidated Balance Sheets. As of December 31, 2021, First Financial expects to recover its remaining investments through the use of the tax credits that are generated by the investments.
The following table summarizes First Financial's investments in affordable housing projects and other tax credit investments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | December 31, 2021 | | December 31, 2020 |
| Investment | | Accounting Method | | Investment | | Unfunded commitment | | Investment | | Unfunded commitment |
| LIHTC | | Proportional amortization | | $ | 108,974 | | | $ | 57,341 | | | $ | 90,401 | | | $ | 47,531 | |
| HTC | | Equity | | 2,581 | | | 56 | | | 3,607 | | | 364 | |
| NMTC | | Equity | | 3,895 | | | 0 | | | 1,165 | | | 0 | |
| Renewable energy | | Equity | | 18,585 | | | 15,114 | | | 5,244 | | | 7,661 | |
| Total | | | | $ | 134,035 | | | $ | 72,511 | | | $ | 100,417 | | | $ | 55,556 | |
The following tables summarize First Financial's amortization expense and tax benefit recognized in affordable housing projects and other tax credit investments.
88 First Financial Bancorp 2021 Annual Report
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve months ended |
| | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| (Dollars in thousands) | | Amortization expense (1) | | Tax expense (benefit) recognized (2) | | Amortization expense (1) | | Tax expense (benefit) recognized (2) | | Amortization expense (1) | | Tax expense (benefit) recognized (2) |
| LIHTC | | $ | 8,894 | | | $ | (8,581) | | | $ | 8,076 | | | $ | (7,629) | | | $ | 6,931 | | | $ | (6,397) | |
| HTC | | 1,116 | | | (263) | | | 474 | | | (563) | | | 2,862 | | | (3,342) | |
| NMTC | | 210 | | | (210) | | | 175 | | | (175) | | | 350 | | | (350) | |
| Renewable energy | | 11,467 | | | (12,216) | | | 4,756 | | | (4,777) | | | 0 | | | 0 | |
| Total | | $ | 21,687 | | | $ | (21,270) | | | $ | 13,481 | | | $ | (13,144) | | | $ | 10,143 | | | $ | (10,089) | |
| | | | | | | | | | | | |
| (1) The amortization expense for the LIHTC investments is included in income tax expense. The amortization expense for the HTC, NMTC, and Renewable energy tax credits is included in other noninterest expense. |
| (2) All of the tax benefits recognized are included in Income tax expense. The tax benefit recognized for the HTC, NMTC, and Renewable energy investments primarily reflects the tax credits generated from the investments and excludes the net tax expense (benefit) and deferred tax liability of the investments’ income (loss). |
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.
Like many banks, First Financial has been the subject of lawsuits relating to overdraft fees. This type of litigation is time consuming and expensive in large part due to the amount of data to be sorted and disclosed, in some cases going back multiple years. During the second and fourth quarters of 2021, First Financial determined that it was in its best interest to settle lawsuits in the states of Indiana and Ohio and have signed settlement agreements that are being presented to the court for approval. As such, First Financial recorded legal settlement expenses of $7.1 million, which were recorded in Other noninterest expenses in the Consolidated statement of income.
Additionally, as part of the ordinary course of business, First Financial and its subsidiaries are parties to other litigation, including claims to the ownership of funds in particular accounts, the collection of delinquent accounts, challenges to security interests in collateral, foreclosure interests that are incidental to our regular business activities and other matters. 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, 2021. 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, 2021 or December 31, 2020.
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) | | 2021 |
| Beginning balance | | $ | 5,097 | |
| Additions | | 1,463 | |
| Deductions | | (3,078) | |
| Ending balance | | $ | 3,482 | |
| 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.
First Financial Bancorp 2021 Annual Report 89
Notes to Consolidated Financial Statements
15. Income Taxes
Income tax expense consisted of the following components:
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2021 | | 2020 | | 2019 |
| Current expense | | | | | | |
| Federal | | $ | 21,397 | | | $ | 34,632 | | | $ | 31,343 | |
| State | | 2,289 | | | 2,349 | | | 854 | |
| Total current expense | | 23,686 | | | 36,981 | | | 32,197 | |
| Deferred expense (benefit) | | | | | | |
| Federal | | 10,944 | | | (8,624) | | | 10,946 | |
| State | | 1,143 | | | 244 | | | 1,644 | |
| Total deferred expense (benefit) | | 12,087 | | | (8,380) | | | 12,590 | |
| Income tax expense | | $ | 35,773 | | | $ | 28,601 | | | $ | 44,787 | |
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) | | 2021 | | 2020 | | 2019 |
| Income taxes computed at federal statutory rate (21%) on income before income taxes | | $ | 50,596 | | | $ | 38,726 | | | $ | 51,001 | |
| Benefit from tax-exempt income | | (5,613) | | | (5,901) | | | (5,964) | |
| Tax credits | | (21,561) | | | (13,064) | | | (10,075) | |
| | | | | | |
| Basis reduction on tax credit | | 1,346 | | | 657 | | | 738 | |
| Tax expense (benefit) of equity compensation | | (243) | | | 340 | | | (140) | |
| State income taxes, net of federal tax benefit | | 2,711 | | | 2,049 | | | 1,973 | |
| Affordable housing investments | | 7,194 | | | 6,635 | | | 5,825 | |
| Other | | 1,343 | | | (841) | | | 1,429 | |
| Income tax expense | | $ | 35,773 | | | $ | 28,601 | | | $ | 44,787 | |
90 First Financial Bancorp 2021 Annual Report
The major components of the temporary differences that gave rise to deferred tax assets and liabilities at December 31, 2021, and 2020, were as follows:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2021 | | 2020 |
| Deferred tax assets | | | | |
| Allowance for credit losses | | $ | 29,754 | | | $ | 39,671 | |
| Fair value adjustments on business combinations | | 0 | | | 3,870 | |
| Deferred compensation | | 292 | | | 235 | |
| Postretirement benefits other than pension liability | | 652 | | | 684 | |
| Accrued stock-based compensation | | 1,836 | | | 1,654 | |
| OREO write-downs | | 0 | | | 8 | |
| Interest on nonaccrual loans | | 442 | | | 1,712 | |
| Accrued expenses | | 7,286 | | | 5,647 | |
| State net operating loss | | 1,746 | | | 1,959 | |
| Leasing liability | | 15,794 | | | 16,947 | |
| Reserve for unfunded commitments | | 3,049 | | | 2,854 | |
| Deferred loan fees and costs | | 0 | | | 1,691 | |
| Other | | 565 | | | 577 | |
| Total deferred tax assets | | 61,416 | | | 77,509 | |
| | | | |
| Deferred tax liabilities | | | | |
| Tax depreciation in excess of book depreciation | | (9,117) | | | (11,923) | |
| FHLB and FRB stock | | (3,836) | | | (4,043) | |
| Mortgage-servicing rights | | (3,518) | | | (2,925) | |
| Leasing activities | | (10,860) | | | (6,661) | |
| Retirement obligation | | (13,754) | | | (10,984) | |
| Intangible assets | | (16,081) | | | (13,942) | |
| Deferred loan fees and costs | | (933) | | | 0 | |
| Prepaid expenses | | (680) | | | (619) | |
| Limited partnership investments | | (2,957) | | | (2,471) | |
| Fair value adjustments on business combinations | | (6,900) | | | 0 | |
| Net unrealized gains on investment securities | | (5,791) | | | (20,253) | |
| Foreign exchange deferred income | | (428) | | | (2,080) | |
| ASU 2016-01 unrealized gain/loss-equity securities | | (2,339) | | | (2,179) | |
| Right of use assets | | (13,390) | | | (15,053) | |
| Other | | (2,426) | | | (2,035) | |
| Total deferred tax liabilities | | (93,010) | | | (95,168) | |
| Total net deferred tax liability | | $ | (31,594) | | | $ | (17,659) | |
At December 31, 2021 and 2020, the Company had a state net operating loss carryforward from MSFG of $2.3 million and $2.5 million. This carryforward begins to expire in 2025. The Company expects to fully utilize this net operating loss and, therefore, a valuation allowance was not required at December 31, 2021 and 2020. 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, 2021 and 2020.
The Bank’s retained earnings at December 31, 2021 and 2020 included base-year bad debt reserves of $16.1 million. Base-year reserves are subject to recapture in the event the Bank redeems its stock, makes distributions in excess of current and
First Financial Bancorp 2021 Annual Report 91
Notes to Consolidated Financial Statements
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.
At both December 31, 2021 and 2020, First Financial had $1.9 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, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2021 | | 2020 |
| Balance at beginning of year | | $ | 2,386 | | | $ | 3,006 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Settlements | | 0 | | | (620) | |
| Balance at end of year | | $ | 2,386 | | | $ | 2,386 | |
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, 2021 and 2020, 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 2018 have been closed and are no longer subject to U.S. federal income tax examinations. Tax years 2018 through 2021 remain open to examination by the federal taxing authority. With limited exception, First Financial is no longer subject to state and local income tax examinations for years prior to 2017.
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 long-term asset class return estimates developed by the Plan advisor, as well as a consensus of estimates from similarly managed portfolios of expected future returns.
First Financial recorded expense related to its pension plan of $3.4 million for 2021, $2.5 million for 2020 and $1.0 million for 2019. 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 2021, 2020 or 2019 and does not expect to make any contributions in 2022.
92 First Financial Bancorp 2021 Annual Report
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) | | 2021 | | 2020 |
| Change in benefit obligation | | | | |
| Benefit obligation at beginning of year | | $ | 87,494 | | | $ | 75,044 | |
| Service cost | | 9,128 | | | 7,932 | |
| Interest cost | | 2,157 | | | 2,455 | |
| Actuarial (gain) loss | | 2,588 | | | 9,171 | |
| Benefits paid, excluding settlement | | (8,096) | | | (7,108) | |
| Benefit obligation at end of year | | 93,271 | | | 87,494 | |
| | | | |
| Change in plan assets | | | | |
| Fair value of plan assets at beginning of year | | 155,704 | | | 141,816 | |
| Actual return on plan assets | | 15,774 | | | 20,996 | |
| Benefits paid, excluding settlement | | (8,096) | | | (7,108) | |
| Fair value of plan assets at end of year | | 163,382 | | | 155,704 | |
| | | | |
| Amounts recognized in the Consolidated Balance Sheets | | | | |
| Assets | | 70,111 | | | 68,210 | |
| Liabilities | | 0 | | 0 |
| Net amount recognized | | $ | 70,111 | | | $ | 68,210 | |
| | | | |
| Amounts recognized in accumulated other comprehensive income (loss) | | | | |
| Net actuarial loss | | $ | 27,264 | | | $ | 32,943 | |
| Net prior service cost | | (270) | | | (682) | |
| Deferred tax assets | | (6,148) | | | (7,349) | |
| Net amount recognized | | $ | 20,846 | | | $ | 24,912 | |
| | | | |
| Change in accumulated other comprehensive income (loss) | | $ | (4,066) | | | $ | (3,029) | |
| | | | |
| Accumulated benefit obligation | | $ | 92,316 | | | $ | 86,327 | |
The change in the defined benefit obligations for the period was driven primarily by an update to the interest crediting rate to reflect the known rate used at year-end 2021, which increased the liability, partially offset by a 34 bp increase in the discount rate from the prior year.
First Financial Bancorp 2021 Annual Report 93
Notes to Consolidated Financial Statements
The components of net periodic benefit cost are shown in the table that follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2021 | | 2020 | | 2019 |
| Service cost | | $ | 9,128 | | | $ | 7,932 | | | $ | 6,591 | |
| Interest cost | | 2,157 | | | 2,455 | | | 2,778 | |
| Expected return on assets | | (10,118) | | | (9,824) | | | (9,718) | |
| Amortization of prior service cost | | (413) | | | (413) | | | (413) | |
| Recognized net actuarial loss | | 2,611 | | | 2,334 | | | 1,803 | |
| Net periodic benefit (income) cost | | 3,365 | | | 2,484 | | | 1,041 | |
| | | | | | |
| Other changes recognized in accumulated other comprehensive income (loss) | | | | |
| Net actuarial (gain) loss | | (3,068) | | | (2,001) | | | (4,630) | |
| Prior service cost | | 0 | | | 0 | | | 0 | |
| Amortization of prior service cost | | 413 | | | 413 | | | 413 | |
| Amortization of gain | | (2,611) | | | (2,334) | | | (1,803) | |
| Total recognized in accumulated other comprehensive income (loss) | | (5,266) | | | (3,922) | | | (6,020) | |
| Total recognized in net periodic benefit cost and accumulated other comprehensive income (loss) | | $ | (1,901) | | | $ | (1,438) | | | $ | (4,979) | |
| | | | | | |
| | | | |
| | | | | | |
| | | | | | |
The pension plan assumptions are shown in the table that follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| Benefit obligations | | | | | | |
| Discount rate | | 2.89 | % | | 2.55 | % | | 3.33 | % |
| Rate of compensation increase | | 3.50 | % | | 3.50 | % | | 3.50 | % |
| Weighted average interest crediting rate | | 2.58 | % | | 2.14 | % | | 2.82 | % |
| | | | | | |
| Net periodic benefit cost | | | | | | |
| Discount rate | | 2.55 | % | | 3.33 | % | | 4.31 | % |
| Expected return on plan assets | | 7.25 | % | | 7.25 | % | | 7.25 | % |
| Rate of compensation increase | | 3.50 | % | | 3.50 | % | | 3.50 | % |
| Weighted average interest crediting rate | | 2.14 | % | | 2.82 | % | | 3.61 | % |
The fair value of the plan assets as of December 31, 2021 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 | | $ | 122 | | | $ | 122 | | | $ | 0 | | | $ | 0 | | | |
| U. S. Government agencies | | 3,535 | | | 0 | | | 3,535 | | | 0 | | | |
| Fixed income mutual funds | | 63,526 | | | 63,526 | | | 0 | | | 0 | | | |
| Equity mutual funds | | 83,000 | | | 83,000 | | | 0 | | | 0 | | | |
| Other assets | | 13,199 | | | 0 | | | 13,199 | | | 0 | | | |
| Total | | $ | 163,382 | | | $ | 146,648 | | | $ | 16,734 | | | $ | 0 | | | |
94 First Financial Bancorp 2021 Annual Report
The fair value of the plan assets as of December 31, 2020 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 | | $ | 129 | | | $ | 129 | | | $ | 0 | | | $ | 0 | |
| U. S. Government agencies | | 4,193 | | | 0 | | | 4,193 | | | 0 | |
| Fixed income mutual funds | | 65,443 | | | 65,443 | | | 0 | | | 0 | |
| Equity mutual funds | | 85,939 | | | 85,939 | | | 0 | | | 0 | |
| Total | | $ | 155,704 | | | $ | 151,511 | | | $ | 4,193 | | | $ | 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 |
| 2022 | | $ | 5,753 | |
| 2023 | | 5,848 | |
| 2024 | | 6,664 | |
| 2025 | | 6,931 | |
| 2026 | | 7,099 | |
| Thereafter | | 41,728 | |
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, 2021, 2020 or 2019.
17. Revenue Recognition
The majority of the Company's revenues come from sources that are outside of the scope of ASU 2014-09, Revenue from Contracts with Customers. Income sources that are outside of this standard include income earned on loans, leases, securities, derivatives and foreign exchange. The Company's services that fall within the scope of ASU 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 revenues from its deposit customers for transaction-based fees, account maintenance fees and overdraft fees. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Similarly, overdraft fees are recognized at the point in time that the overdraft occurs as this corresponds with the Company's performance obligation. Service charges on deposit accounts are withdrawn from the customer's deposit account.
Trust and wealth management fees. Trust and wealth management fees are primarily asset-based, but can also include flat fees based upon a specific service rendered, such as tax preparation services. The Company’s performance obligation is
First Financial Bancorp 2021 Annual Report 95
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.
Trust and wealth management fees also includes brokerage revenue. 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.
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 2021 was $27.9 million, and was partially offset by $13.6 million of expenses within Noninterest income. Gross interchange income for 2020 was $23.9 million, and was partially offset by $12.2 million of expenses within Noninterest income, while gross interchange income for 2019 was $30.4 million, and was partially offset by $11.9 million of expenses within Noninterest income.
Other. Other noninterest income includes other recurring revenue streams such as transaction fees, safe deposit rental income, insurance commissions, merchant referral income and gain (loss) on sale of OREO. 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 removed and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.
96 First Financial Bancorp 2021 Annual Report
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, 2021 |
| | | 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 | | $ | (67,759) | | | $ | (759) | | | $ | (67,000) | | | $ | 14,462 | | | $ | (52,538) | | | $ | 73,576 | | | $ | (52,538) | | | | | $ | 21,038 | |
| | | | | | | | | | | | | | | | | | |
| Retirement obligation | | 3,068 | | | (2,198) | | | 5,266 | | | (1,200) | | | 4,066 | | | (24,912) | | | 4,066 | | | | | (20,846) | |
| Foreign currency translation | | (625) | | | 0 | | | (625) | | | 0 | | | (625) | | | 0 | | | (625) | | | | | (625) | |
| Total | | $ | (65,316) | | | $ | (2,957) | | | $ | (62,359) | | | $ | 13,262 | | | $ | (49,097) | | | $ | 48,664 | | | $ | (49,097) | | | | | $ | (433) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| | | Total other comprehensive income (loss) | | Total accumulated other
comprehensive income (loss) |
| (Dollars in thousands) | | Prior to
reclass | | Reclass
from | | Pre-tax | | Tax-effect | | Net of tax | | Beginning Balance | | Net Activity | | | | Ending Balance |
| Unrealized gain (loss) on debt securities | | $ | 36,643 | | | $ | (4,563) | | | $ | 41,206 | | | $ | (8,894) | | | $ | 32,312 | | | $ | 41,264 | | | $ | 32,312 | | | | | $ | 73,576 | |
| | | | | | | | | | | | | | | | | | |
| Retirement obligation | | 2,001 | | | (1,921) | | | 3,922 | | | (893) | | | 3,029 | | | (27,941) | | | 3,029 | | | | | (24,912) | |
| | | | | | | | | | | | | | | | | | |
| Total | | $ | 38,644 | | | $ | (6,484) | | | $ | 45,128 | | | $ | (9,787) | | | $ | 35,341 | | | $ | 13,323 | | | $ | 35,341 | | | | | $ | 48,664 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
First Financial Bancorp 2021 Annual Report 97
Notes to Consolidated Financial Statements
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) | | 2021 | | 2020 | | 2019 | | Affected Line Item in the Consolidated Statements of Income |
| | | | | | | | |
| | | | | | | | |
| Realized gains and losses on securities available-for-sale | | $ | (759) | | | $ | (4,563) | | | $ | (370) | | | 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) | | (2,611) | | | (2,334) | | | (1,803) | | | Other noninterest expense |
| Amortization and settlement charges of defined benefit pension items | | (2,198) | | | (1,921) | | | (1,390) | | | |
| Total reclassifications for the period, before tax | | $ | (2,957) | | | $ | (6,484) | | | $ | (1,760) | | | |
(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 7.0% and a fully phased-in capital conservation buffer of 2.5% of risk-weighted assets. Further, the minimum ratio of Tier 1 capital to risk-weighted assets is 8.5% and all banks are subject to a 4.0% minimum leverage ratio, while the required Total risk-based capital ratio is 10.50%. Failure to maintain the required Common equity Tier 1 capital 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, 2021, 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 $419.8 million on a consolidated basis at December 31, 2021.
98 First Financial Bancorp 2021 Annual Report
The following tables present the actual and required capital amounts and ratios as of December 31, 2021 and 2020 under the Basel III Capital Rules. Capital levels required to be considered "well capitalized" are based upon prompt corrective action regulations, as reflected in 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, 2021 | | | | | | | | | | | | | | | | |
| Common equity tier 1 capital to risk-weighted assets | | | | | | | | | | | | |
| Consolidated | | $ | 1,262,789 | | | 10.84 | % | | $ | 815,197 | | | 7.00 | % | | N/A | | N/A | | | | |
| First Financial Bank | | 1,513,175 | | | 13.01 | % | | 813,974 | | | 7.00 | % | | $ | 755,833 | | | 6.50 | % | | | | |
| | | | | | | | | | | | | | | | |
| Tier 1 capital to risk-weighted assets | | | | | | | | | | | | | | |
| Consolidated | | 1,306,571 | | | 11.22 | % | | 989,882 | | | 8.50 | % | | N/A | | N/A | | | | |
| First Financial Bank | | 1,513,708 | | | 13.02 | % | | 988,397 | | | 8.50 | % | | 930,256 | | | 8.00 | % | | | | |
| | | | | | | | | | | | | | | | |
| Total capital to risk-weighted assets | | | | | | | | | | | | | | |
| Consolidated | | 1,642,549 | | | 14.10 | % | | 1,222,795 | | | 10.50 | % | | N/A | | N/A | | | | |
| First Financial Bank | | 1,589,570 | | | 13.67 | % | | 1,220,960 | | | 10.50 | % | | 1,162,820 | | | 10.00 | % | | | | |
| | | | | | | | | | | | | | | | |
| Leverage | | | | | | | | | | | | | | | | |
| Consolidated | | 1,306,571 | | | 8.70 | % | | 600,410 | | | 4.00 | % | | N/A | | N/A | | | | |
| First Financial Bank | | 1,513,708 | | | 10.10 | % | | 599,578 | | | 4.00 | % | | 749,472 | | | 5.00 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2020 | | | | | | | | | | | | |
| Common equity tier 1 capital to risk-weighted assets | | | | | | | | |
| Consolidated | | $ | 1,325,922 | | | 11.82 | % | | $ | 785,338 | | | 7.00 | % | | N/A | | N/A |
| First Financial Bank | | 1,452,403 | | | 12.95 | % | | 784,807 | | | 7.00 | % | | $ | 728,749 | | | 6.50 | % |
| | | | | | | | | | | | |
| Tier 1 capital to risk-weighted assets | | | | | | | | | | |
| Consolidated | | 1,368,818 | | | 12.20 | % | | 953,625 | | | 8.50 | % | | N/A | | N/A |
| First Financial Bank | | 1,452,507 | | | 12.96 | % | | 952,980 | | | 8.50 | % | | 896,922 | | | 8.00 | % |
| | | | | | | | | | | | |
| Total capital to risk-weighted assets | | | | | | | | | | |
| Consolidated | | 1,744,802 | | | 15.55 | % | | 1,178,007 | | | 10.50 | % | | N/A | | N/A |
| First Financial Bank | | 1,560,457 | | | 13.92 | % | | 1,177,211 | | | 10.50 | % | | 1,121,153 | | | 10.00 | % |
| | | | | | | | | | | | |
| Leverage | | | | | | | | | | | | |
| Consolidated | | 1,368,818 | | | 9.55 | % | | 573,526 | | | 4.00 | % | | N/A | | N/A |
| First Financial Bank | | 1,452,507 | | | 10.14 | % | | 573,094 | | | 4.00 | % | | 716,367 | | | 5.00 | % |
Share repurchases. Effective January 2022, First Financial's board of directors approved a stock repurchase plan (the 2021 Repurchase Plan), replacing the 2020 Repurchase Plan which became effective in January 2021 (the 2020 Repurchase Plan). The 2021 Repurchase Plan continues for two years and authorizes the purchase of up to 5,000,000 shares of the Company's common stock and will expire in December 2023. Under the 2020 Repurchase Plan, First Financial repurchased 4,633,355 shares at an average market price of $23.33 during 2021.
First Financial Bancorp 2021 Annual Report 99
Notes to Consolidated Financial Statements
The 2020 Repurchase Plan replaced the plan that expired on December 31, 2020 (the 2019 Repurchase Plan). Under the 2019 Repurchase Plan, First Financial repurchased 880,000 shares at an average market price of $18.96 during 2020 and repurchased 2,753,272 shares at an average market price of $24.05 during 2019.
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 $9.6 million, $7.7 million and $8.0 million for the years ended December 31, 2021, 2020 and 2019, respectively, related to stock options and restricted stock awards. Total unrecognized compensation cost related to non-vested share-based compensation was $10.2 million at December 31, 2021 and is expected to be recognized over a weighted average period of 1.93 years.
As of December 31, 2021, First Financial had two active stock-based compensation plans, the Amended and Restated 2012 Stock Plan and the 2020 Stock Plan. New awards may only be granted from the 2020 Stock Plan. At December 31, 2021, there were 3,803,798 shares available for issuance under the 2020 Stock Plan.
In April 2018, in conjunction with the MSFG merger, First Financial assumed existing MSFG stock options, which were converted into options to purchase 83,551 shares of 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, 2021, 20,515 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 2021, 2020 or 2019.
Stock option activity for the year ended December 31, 2021, 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 | | 27,451 | | | $ | 10.53 | | | | | |
| Granted | | 0 | | 0.00 | | | | | |
| | | | | | | | |
| Exercised | | (6,936) | | | 9.21 | | | | | |
| Forfeited or expired | | 0 | | | 0.00 | | | | | |
| Outstanding at end of year | | 20,515 | | | $ | 10.98 | | | 1.78 years | | $ | 275 | |
| Exercisable at end of year | | 20,515 | | | $ | 10.98 | | | 1.78 years | | $ | 275 | |
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.
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Total intrinsic value of options exercised | | $ | 114 | | | $ | 86 | | | $ | 462 | |
| Cash received from exercises | | $ | 64 | | | $ | 72 | | | $ | 90 | |
| Tax benefit from exercises | | $ | 2,229 | | | $ | 1,776 | | | $ | 1,844 | |
100 First Financial Bancorp 2021 Annual Report
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| | 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 | | 763,283 | | | $ | 22.04 | | | 530,569 | | | $ | 27.19 | | | 462,446 | | | $ | 26.39 | |
| Granted | | 539,020 | | | 22.69 | | | 503,311 | | | 18.62 | | | 395,023 | | | 26.55 | |
| Vested | | (386,848) | | | 22.24 | | | (233,828) | | | 26.07 | | | (295,633) | | | 24.94 | |
| Forfeited | | (75,722) | | | 22.86 | | | (36,769) | | | 23.79 | | | (31,267) | | | 28.63 | |
| Nonvested at end of year | | 839,733 | | | $ | 22.30 | | | 763,283 | | | $ | 22.04 | | | 530,569 | | | $ | 27.19 | |
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 2021, 2020 and 2019 was $8.6 million, $6.1 million and $7.4 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) | | 2021 | | 2020 | | 2019 |
| Numerator | | | | | | |
| Net income | | $ | 205,160 | | | $ | 155,810 | | | $ | 198,075 | |
| | | | | | |
| Denominator | | | | | | |
| Basic earnings per common share - weighted average shares | | 95,034,690 | | | 97,363,952 | | | 98,305,570 | |
| Effect of dilutive securities | | | | | | |
| Employee stock awards | | 862,695 | | | 729,146 | | | 545,901 | |
| | | | | | |
| Diluted earnings per common share - adjusted weighted average shares | | 95,897,385 | | | 98,093,098 | | | 98,851,471 | |
| | | | | | |
| Earnings per share available to common shareholders | | | | | | |
| Basic | | $ | 2.16 | | | $ | 1.60 | | | $ | 2.01 | |
| Diluted | | $ | 2.14 | | | $ | 1.59 | | | $ | 2.00 | |
Stock options and warrants with exercise prices greater than the average market price of the common shares are excluded from the computation of net income per diluted share, as they would be antidilutive. Using the end of period price of the Company's common shares, there were no antidilutive options at December 31, 2021, 2020, or 2019.
As of December 31, 2021, 2020, and 2019, 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, 2021 | | | | | | | | | | | | | | |
| Financial assets | | | | | | | | | | | | | | |
| Cash and short-term investments | | $ | 434,842 | | | $ | 434,842 | | | $ | 434,842 | | | $ | 0 | | | $ | 0 | | | | | |
| Investment securities held-to-maturity | | 98,420 | | | 99,898 | | | 0 | | | 99,898 | | | 0 | | | | | |
| Other investments | | 102,971 | | | 102,971 | | | 1,331 | | | 92,025 | | | 9,615 | | | | | |
| | | | | | | | | | | | | | |
| Loans and leases | | 9,156,307 | | | 9,172,111 | | | 0 | | | 0 | | | 9,172,111 | | | | | |
| Accrued interest receivable | | 44,627 | | | 44,627 | | | 0 | | | 15,170 | | | 29,457 | | | | | |
| | | | | | | | | | | | | | |
| Financial liabilities | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Deposits | | 12,871,954 | | | 12,869,567 | | | 0 | | | 12,869,567 | | | 0 | | | | | |
| Short-term borrowings | | 296,203 | | | 296,203 | | | 296,203 | | | 0 | | | 0 | | | | | |
| Long-term debt | | 409,832 | | | 411,569 | | | 0 | | | 411,569 | | | 0 | | | | | |
| Accrued interest payable | | 4,498 | | | 4,498 | | | 0 | | | 4,498 | | | 0 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying | | Estimated Fair Value |
| (Dollars in thousands) | | Value | | Total | | Level 1 | | Level 2 | | Level 3 |
| December 31, 2020 | | | | | | | | | | |
| Financial assets | | | | | | | | | | |
| Cash and short-term investments | | $ | 251,359 | | | $ | 251,359 | | | $ | 251,359 | | | $ | 0 | | | $ | 0 | |
| Investment securities held-to-maturity | | 131,687 | | | 136,698 | | | 0 | | | 136,698 | | | 0 | |
| Other investments | | 133,198 | | | 133,198 | | | 837 | | | 122,953 | | | 9,408 | |
| | | | | | | | | | |
| Loans and leases | | 9,725,291 | | | 9,743,497 | | | 0 | | | 0 | | | 9,743,497 | |
| Accrued interest receivable | | 50,903 | | | 50,903 | | | 0 | | | 13,221 | | | 37,682 | |
| | | | | | | | | | |
| Financial liabilities | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Deposits | | 12,232,003 | | | 12,238,058 | | | 0 | | | 12,238,058 | | | 0 | |
| Short-term borrowings | | 166,594 | | | 166,594 | | | 166,594 | | | 0 | | | 0 | |
| Long-term debt | | 776,202 | | | 774,674 | | | 0 | | | 774,674 | | | 0 | |
| Accrued interest payable | | 6,240 | | | 6,240 | | | 14 | | | 6,226 | | | 0 | |
The following methods, assumptions and valuation techniques were used by First Financial to measure different financial assets and liabilities at fair value on a recurring or nonrecurring basis.
Investment securities. Investment securities classified as available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar investment securities. First Financial compiles prices from various sources who may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value
investment securities without relying exclusively on quoted prices for the specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Any investment securities not valued based upon the methods previously described are considered Level 3.
First Financial utilizes values provided by third-party pricing vendors to price the investment securities portfolio in accordance with the fair value hierarchy of the Fair Value Topic and reviews the pricing methodologies utilized by the pricing vendors to ensure that the fair value determination is consistent with the applicable accounting guidance. First Financial’s pricing process includes a series of quality assurance activities where prices are compared to recent market conditions, historical prices and other independent pricing services. Further, the Company periodically validates the fair value of a sample of securities in the portfolio by comparing the fair values to prices from other independent sources for the same or similar securities. First Financial analyzes unusual or significant variances, conducts additional research with the pricing vendor, and if necessary, takes appropriate action based on its findings. The results of the quality assurance process are incorporated into the selection of pricing providers by the portfolio manager.
Loans held for sale. The fair value of the Company’s residential mortgage loans held for sale is determined on a recurring basis based on quoted prices for similar loans in active markets, and therefore, is classified as a Level 2 measurement.
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.
Collateral dependent loans. Collateral dependent loans carried at fair value have been partially charged-off or receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is generally based on real estate appraisals, a calculation of enterprise value or a valuation of business assets including equipment, inventory and accounts receivable. These loans had a principal amount of $28.8 million and $45.3 million at December 31, 2021 and December 31, 2020, respectively, with a valuation allowance of $9.7 million and $13.5 million at December 31, 2021 and December 31, 2020, respectively.
The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed third-party appraiser (Level 3). These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and the client’s business, resulting in a Level 3 fair value classification. Collateral dependent loans are evaluated on a quarterly basis for additional write-downs and are adjusted accordingly.
Enterprise value is defined as imputed value for the entire underlying business. To determine an appropriate range of enterprise value, FFB relies on a standardized set of valuation methodologies that take into account future projected cash flows, market based multiples as well as asset values. Valuations involve both quantitative and qualitative considerations and professional judgments concerning differences in financial and operating characteristics in addition to other factors that may impact values over time (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).
The fair value of collateral dependent loans is measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated Statements of Income.
OREO. Assets acquired through loan foreclosure are recorded at fair value less costs to sell, with any difference between the fair value of the property and the carrying value of the loan recorded as a charge-off establishing a new cost basis. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in noninterest expense. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value differs from the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals and is updated at least annually. The Company classifies OREO in level 3 of the fair value hierarchy.
The financial assets and liabilities measured at fair value on a recurring basis in the consolidated financial statements, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements Using | | Assets/Liabilities |
| (Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | at Fair Value |
| December 31, 2021 | | | | | | | | |
| Assets | | | | | | | | |
| Investment securities available-for-sale | | $ | 34,776 | | | $ | 4,134,889 | | | $ | 38,181 | | | $ | 4,207,846 | |
| Loans held for sale | | 0 | | | 29,482 | | | 0 | | | 29,482 | |
| Interest rate derivative contracts | | 0 | | | 92,328 | | | 0 | | | 92,328 | |
| Foreign exchange derivative contracts | | 0 | | | 120,768 | | | 0 | | | 120,768 | |
| Total | | $ | 34,776 | | | $ | 4,377,467 | | | $ | 38,181 | | | $ | 4,450,424 | |
| | | | | | | | |
| Liabilities | | | | | | | | |
| Interest rate derivative contracts | | $ | 0 | | | $ | 92,444 | | | $ | 0 | | | $ | 92,444 | |
| Foreign exchange derivative contracts | | 0 | | | 120,768 | | | 0 | | | 120,768 | |
| Total | | $ | 0 | | | $ | 213,212 | | | $ | 0 | | | $ | 213,212 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements Using | | Assets/Liabilities |
| (Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | at Fair Value |
| December 31, 2020 | | | | | | | | |
| Assets | | | | | | | | |
| Investment securities available-for-sale | | $ | 103 | | | $ | 3,383,902 | | | $ | 40,575 | | | $ | 3,424,580 | |
| Loans held for sale | | 0 | | | 41,103 | | | 0 | | | 41,103 | |
| Interest rate derivative contracts | | 0 | | | 185,032 | | | 0 | | | 185,032 | |
| Foreign exchange derivative contracts | | 0 | | | 87,615 | | | 0 | | | 87,615 | |
| Total | | $ | 103 | | | $ | 3,697,652 | | | $ | 40,575 | | | $ | 3,738,330 | |
| | | | | | | | |
| Liabilities | | | | | | | | |
| Interest rate derivative contracts | | $ | 0 | | | $ | 186,124 | | | $ | 0 | | | $ | 186,124 | |
| Foreign exchange derivative contracts | | 0 | | | 87,615 | | | 0 | | | 87,615 | |
| Total | | $ | 0 | | | $ | 273,739 | | | $ | 0 | | | $ | 273,739 | |
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 years ended December 31, 2021 and 2020.
| | | | | | | | | | | | | | |
| (dollars in thousands) | | December 31, 2021 | | December 31, 2020 |
| Beginning balance | | $ | 40,575 | | | $ | 9,190 | |
| Accretion (amortization) | | (38) | | | 1 | |
| Increase (decrease) in fair value | | 44 | | | (17) | |
| Purchases (settlements) | | (2,400) | | | 31,401 | |
| Ending balance | | $ | 38,181 | | | $ | 40,575 | |
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, 2021 | | | | | | |
| Assets | | | | | | |
| Collateral dependent loans | | | | | | |
| Commercial | | $ | 0 | | | $ | 0 | | | $ | 4,449 | |
| Commercial real estate | | 0 | | | 0 | | | 14,618 | |
| | | | | | |
| OREO | | 0 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements Using |
| (Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 |
| December 31, 2020 | | | | | | |
| Assets | | | | | | |
| Collateral dependent loans | | | | | | |
| Commercial | | $ | 0 | | | $ | 0 | | | $ | 25,367 | |
| Commercial real estate | | 0 | | | 0 | | | 6,432 | |
| | | | | | |
| OREO | | 0 | | | 0 | | | 54 | |
Fair value option. First Financial may elect to report most financial instruments and certain other items at fair value on an instrument-by instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made.
The Company elected the fair value option for residential mortgage loans held for sale. This election allows for a more effective offset of the changes in fair values of the loans held for sale and the derivative financial instruments used to financially hedge them without having to apply complex hedge accounting requirements. The fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets.
The aggregate fair value of the Company’s residential mortgage loans held for sale as of December 31, 2021 and 2020 was $29.5 million and $41.1 million, respectively. The aggregate unpaid principal balance of the Company’s residential mortgage loans held for sale as of December 31, 2021 and 2020 was $27.2 million and $35.5 million, respectively. The resulting difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected was $2.3 million and $5.6 million as of December 31, 2021 and 2020, respectively.
Changes in the estimated fair value of residential mortgage loans held for sale are reported as a component of Net gain from sales of loans in the Company’s consolidated statements of income. For the year ended December 31, 2021, the change in fair value of the Company’s residential mortgage loans held for sale was a net loss of $3.3 million. For the year ended December 31, 2020, the change in fair value of the Company’s residential mortgage loans held for sale was a net gain of $4.6 million.
First Financial Bancorp 2021 Annual Report 101
Notes to Consolidated Financial Statements
23. Business Combination
On December 31, 2021, the Company completed its acquisition of Summit Funding Group, Inc. and its subsidiaries. Summit is a privately held, full service, equipment financing company that originates, purchases, sells and services equipment leases to commercial businesses in the United States and Canada. Upon completion of the transaction, Summit became a subsidiary of the Bank and continues to operate as Summit Funding Group, taking advantage of its existing brand recognition within the equipment financing industry. Operating results related to the Summit acquisition were immaterial to 2021 consolidated financial statements.
Pursuant to the purchase agreement, First Financial agreed to acquire all of the issued and outstanding equity securities of Summit for aggregate consideration of approximately $127.1 million consisting of $113.5 million in cash and $10.0 million of First Financial common stock, and a $3.6 million earn-out payment. Pursuant to the purchase agreement, the “earn-out” payments are payable annually for each of the five years following the closing of the acquisition, contingent upon the results of Summit's operations. First Financial incurred expenses related to the Summit acquisition of $2.6 million during the year ended December 31, 2021.
The Summit 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 $185.8 million and $125.9 million, respectively, and included $42.3 million of financing leases and $73.9 million of operating leases. Given the timing of the transaction closing, acquisition accounting adjustments are considered preliminary at December 31, 2021. These present value measurements 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 become available, and the measurement period ends in December 2022. Goodwill arising from the Summit acquisition was $63.0 million and reflects the business’s high growth potential and the expectation that the acquisition will provide additional revenue growth with the expansion of the Bank's leasing business. 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.
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 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 value of assets acquired and liabilities assumed were considered final as of August 2020. Goodwill arising from the BGF acquisition was $57.5 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.
102 First Financial Bancorp 2021 Annual Report
24. First Financial Bancorp. (Parent Company Only) Financial Information
Balance Sheets
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2021 | | 2020 |
| Assets | | | | |
| Cash | | $ | 49,746 | | | $ | 172,902 | |
| Investment securities | | 1,836 | | | 1,388 | |
| Subordinated notes from subsidiaries | | 7,500 | | | 7,500 | |
| Investment in subsidiaries | | | | |
| Commercial bank | | 2,447,095 | | | 2,346,009 | |
| Non-banks | | 10,417 | | | 9,559 | |
| Total investment in subsidiaries | | 2,457,512 | | | 2,355,568 | |
| Premises and equipment | | 1,311 | | | 1,328 | |
| Other assets | | 77,132 | | | 68,812 | |
| Total assets | | $ | 2,595,037 | | | $ | 2,607,498 | |
| | | | |
| Liabilities | | | | |
| Short-term borrowings | | $ | 20,000 | | | $ | 0 | |
| Subordinated notes | | 310,864 | | | 320,615 | |
| Dividends payable | | 1,042 | | | 674 | |
| Other liabilities | | 4,189 | | | 4,139 | |
| Total liabilities | | 336,095 | | | 325,428 | |
| Shareholders’ equity | | 2,258,942 | | | 2,282,070 | |
| Total liabilities and shareholders’ equity | | $ | 2,595,037 | | | $ | 2,607,498 | |
First Financial Bancorp 2021 Annual Report 103
Notes to Consolidated Financial Statements
Statements of Income and Comprehensive Income
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (Dollars in thousands) | | 2021 | | 2020 | | 2019 |
| Income | | | | | | |
| Interest income | | $ | 34 | | | $ | 27 | | | $ | 30 | |
| Noninterest income | | 663 | | | 272 | | | 191 | |
| Dividends from subsidiaries | | 202,000 | | | 81,725 | | | 196,800 | |
| Total income | | 202,697 | | | 82,024 | | | 197,021 | |
| | | | | | |
| Expenses | | | | | | |
| Interest expense | | 15,900 | | | 14,172 | | | 9,552 | |
| Salaries and employee benefits | | 9,784 | | | 8,004 | | | 8,169 | |
| Professional services | | 2,343 | | | 1,160 | | | 1,040 | |
| Other | | 5,186 | | | 5,163 | | | 6,599 | |
| Total expenses | | 33,213 | | | 28,499 | | | 25,360 | |
Income before income taxes and equity in undistributed net earnings of subsidiaries | | 169,484 | | | 53,525 | | | 171,661 | |
| Income tax expense (benefit) | | (7,787) | | | (6,145) | | | (5,975) | |
| Equity in undistributed earnings (loss) of subsidiaries | | 27,889 | | | 96,140 | | | 20,439 | |
| Net income | | $ | 205,160 | | | $ | 155,810 | | | $ | 198,075 | |
| | | | | | |
| Comprehensive income | | $ | 156,063 | | | $ | 191,151 | | | $ | 254,900 | |
104 First Financial Bancorp 2021 Annual Report
Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (Dollars in thousands) | | 2021 | | 2020 | | 2019 |
| Operating activities | | | | | | |
| Net income | | $ | 205,160 | | | $ | 155,810 | | | $ | 198,075 | |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | |
| Equity in undistributed (earnings) loss of subsidiaries | | (27,889) | | | (96,140) | | | (20,439) | |
| Depreciation and amortization | | 859 | | | 712 | | | 584 | |
| Stock-based compensation expense | | 9,635 | | | 7,678 | | | 7,969 | |
| Unrealized (gain) loss on equity securities | | (448) | | | (272) | | | (191) | |
| Deferred income taxes | | (224) | | | (158) | | | 1,255 | |
| (Decrease) increase in dividends payable | | 368 | | | (175) | | | 384 | |
| (Decrease) increase in other liabilities | | (751) | | | (22) | | | (244) | |
| Decrease (increase) in other assets | | (8,096) | | | 8,907 | | | (6,996) | |
| Net cash provided by (used in) operating activities | | 178,614 | | | 76,340 | | | 180,397 | |
| | | | | | |
| Investing activities | | | | | | |
| Capital contributions to subsidiaries | | (113,152) | | | 0 | | | 0 | |
| Net cash acquired (paid) in business combinations | | 0 | | | 0 | | | (53,660) | |
| | | | | | |
| Proceeds from sales and maturities of investment securities | | 0 | | | 0 | | | 264 | |
| Purchases of investment securities | | 0 | | | 0 | | | (500) | |
| | | | | | |
| Net cash (used in) provided by investing activities | | (113,152) | | | 0 | | | (53,896) | |
| | | | | | |
| Financing activities | | | | | | |
| (Decrease) increase in short-term borrowings | | 20,000 | | | 0 | | | 0 | |
| Proceeds from long-term borrowings | | (10,592) | | | 150,000 | | | 0 | |
| Cash dividends paid on common stock | | (87,316) | | | (89,691) | | | (89,097) | |
| Purchases of common stock | | (108,077) | | | (16,686) | | | (66,218) | |
| Proceeds from exercise of stock options, net of shares purchased | | 64 | | | 72 | | | 90 | |
| Other | | (2,697) | | | (3,002) | | | (2,285) | |
| Net cash provided by (used in) financing activities | | (188,618) | | | 40,693 | | | (157,510) | |
| Net increase (decrease) in cash | | (123,156) | | | 117,033 | | | (31,009) | |
| Cash at beginning of year | | 172,902 | | | 55,869 | | | 86,878 | |
| Cash at end of year | | $ | 49,746 | | | $ | 172,902 | | | $ | 55,869 | |
First Financial Bancorp 2021 Annual Report 105
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, 2016 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
| | | | | | | | | | | | | | | | | | | | |
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| First Financial Bancorp | 100.00 | | 95.05 | | 87.87 | | 97.79 | | 71.49 | | 103.36 | |
| Nasdaq Composite Index | 100.00 | | 129.73 | | 126.08 | | 172.40 | | 250.06 | | 305.60 | |
| KBW Regional Bank Index | 100.00 | | 101.81 | | 84.00 | | 104.05 | | 95.02 | | 129.84 | |
106 First Financial Bancorp 2021 Annual Report
shareholder information Annual Meeting of Shareholders The annual meeting of shareholders will be held on Tuesday, May 24, 2022, at 10:00 AM (EDT) via a virtual shareholder meeting. Common Stock Listing First Financial Bancorp’s common stock trades on the Nasdaq Stock Market (NASDAQ) under the symbol FFBC. Registrar and Transfer Agent Computershare Shareholder Services serves as the registrar and transfer agent for First Financial Bancorp common stock for registered shareholders. Shareholder account inquiries, including changes of address or ownership, transferring stock and replacing lost certificates or dividend checks should be directed to Computershare Shareholder Services at: Transfer Agent Computershare Shareholder Services P.O. Box 505000 Louisville, KY 40233 (800) 368-5948 Shareholders of record can also access their shareholder account records and request information related to their shareholder account via the internet. To register for online account access, go to: www.computershare.com/investor. Dividend Reinvestment and Stock Purchase Plan 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 Relations Corporate and investor information, including news releases, webcasts, investor presentations, annual reports, proxy statements and SEC filings, as well as information on the Company’s corporate governance practices are available within the Investor Relations section of our website at www.bankatfirst.com. Shareholders, analysts and other investment professionals who would like corporate and financial information on First Financial Bancorp should contact: James M. Anderson Chief Financial Officer First Financial Bancorp 255 East Fifth Street, 29th Floor Cincinnati, OH 45202 (513) 887-5400 Email: InvestorRelations@bankatfirst.com Securities and Exchange Commission Filings All reports filed electronically by First Financial Bancorp with the United States Securities and Exchange Commission (SEC), including the Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments to those reports, are accessible at no cost within the Investor Relations section of our website at www.bankatfirst.com, or by contacting Investor Relations. These filings are also accessible on the SEC’s website at www.sec.gov.
First Financial Bancorp 2021 Annual Report 107
First Financial Bank First Financial Center 255 East Fifth Street Cincinnati, OH 45202-4248 bankatfirst.com ©2022 First Financial Bancorp
EXHIBIT 21
FIRST FINANCIAL BANCORP. SUBSIDIARIES (as of 12/31/21)
| | | | | | | | |
| 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 Franchise Capital Corporation | | Indiana |
| Irwin Home Equity Corporation | | Indiana |
| IHE Funding Corp. II | | Delaware |
| MSB Investments of Nevada, Inc. | | Nevada |
| MSB Holdings of Nevada, Inc. | | Nevada |
| MSB of Nevada, LLC | | Nevada |
| First Financial Preferred Capital, Inc. | | Ohio |
| 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 |
| Summit Funding Group, Inc. | | Ohio |
| New York Systems Exchange, Inc. | | Ohio |
| Summit RFG Corp. | | Ohio |
| SFG Titling Co. | | Ohio |
| PRC SFG, LLC | | Ohio |
| Summit Financial Services, Inc.-Consolidated | | Ohio |
| Summit-Northlake Canadian Leasing Corporation | | Ohio |
| Summit MFR Leasing II, LLC | | Ohio |
| Summit MFR Leasing, LLC | | Ohio |
| PRC SFG II, LLC | | Ohio |
| Summit Continental Leasing, LLC | | Ohio |
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
Form S-8 No. 333-238698
of our report dated February 18, 2022 relating to the 2021 consolidated financial statements and effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K.
Crowe LLP
Louisville, Kentucky
February 18, 2022
EXHIBIT 31.1
CERTIFICATIONS
I, Archie M. Brown, 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: | 2/18/2022 | | /s/ Archie M. Brown |
| | | | Archie M. Brown
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: | 2/18/2022 | | /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, 2021, of First Financial Bancorp. (the “Company”), as filed with the Securities and Exchange Commission on February 18, 2022 (the “Report”), I, Archie M. Brown, 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 |
Archie M. Brown
President and Chief Executive Officer |
| |
| February 18, 2022 |
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, 2021, of First Financial Bancorp. (the “Company”), as filed with the Securities and Exchange Commission on February 18, 2022 (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 18, 2022 |
