FIRST FINANCIAL BANCORP /OH/ - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 001-34762
| FIRST FINANCIAL BANCORP /OH/ | ||
| (Exact name of registrant as specified in its charter) | ||
| Ohio | 31-1042001 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (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 | ||||||||||||
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 Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The registrant has one class of common stock (no par value) with 94,442,505 shares outstanding at May 4, 2022.
FIRST FINANCIAL BANCORP.
INDEX
| Page No. | |||||
Glossary of Abbreviations and Acronyms
First Financial has identified the following list of abbreviations and acronyms that are used in the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
| ABL | Asset backed lending | FTE | Fully tax equivalent | |||||||||||
| ACL | Allowance for credit losses | GAAP | U.S. Generally Accepted Accounting Principles | |||||||||||
| AFS | Available-for-sale | HTC | Historic tax credit | |||||||||||
| Allowance | Collectively or individually, Allowance for credit losses | HTM | Held-to-maturity | |||||||||||
| AOCI | Accumulated other comprehensive income | Insignificant | Less than $0.1 million | |||||||||||
| ASC | Accounting standards codification | IRLC | Interest rate lock commitment | |||||||||||
| ASU | Accounting standards update | LGD | Loss Given Default | |||||||||||
| Bank | First Financial Bank | LIHTC | Low income housing tax credit | |||||||||||
| Basel III | Basel Committee regulatory capital reforms, Third Basel Accord | MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||||||
| BGF or Bannockburn | Bannockburn Global Forex, LLC | MSFG | MainSource Financial Group, Inc. | |||||||||||
| Bp/bps | Basis point(s) | N/A | Not applicable | |||||||||||
| BOLI | Bank owned life insurance | NII | Net interest income | |||||||||||
| CARES Act | Coronavirus Aid, Relief, and Economic Security Act | NMTC | New market tax credit | |||||||||||
| CDs | Certificates of deposit | OBS | Off-balance sheet | |||||||||||
| C&I | Commercial & industrial | OREO | Other real estate owned | |||||||||||
| CRE | Commercial real estate | PCA | Prompt corrective action | |||||||||||
| Company | First Financial Bancorp. | PCD | Purchased credit deteriorated | |||||||||||
| DDA | Demand deposit account | PCI | Purchase credit impaired | |||||||||||
| Dodd-Frank | Dodd–Frank Wall Street Reform and Consumer Protection Act | PD | Probability of default | |||||||||||
| EAD | Exposure at Default | PPP | Paycheck Protection Program | |||||||||||
| ERM | Enterprise risk management | PPPLF | Paycheck Protection Program Liquidity Facility | |||||||||||
| EVE | Economic value of equity | R&S | Reasonable and Supportable | |||||||||||
| Fair Value Topic | FASB ASC Topic 820, Fair Value Measurement | ROU | Right-of-use | |||||||||||
| FASB | Financial Accounting Standards Board | SEC | U.S. Securities and Exchange Commission | |||||||||||
| FDIC | Federal Deposit Insurance Corporation | SFG or Summit | Summit Funding Group, Inc. | |||||||||||
| FHLB | Federal Home Loan Bank | SOFR | Secured Overnight Financing Rate | |||||||||||
| First Financial | First Financial Bancorp. | Topic 842 | FASB ASC Topic 842, Leasing | |||||||||||
| Form 10-K | First Financial Bancorp. Annual Report on Form 10-K | TDR | Troubled debt restructuring | |||||||||||
| FRB | Federal Reserve Bank | TTC | Through the cycle | |||||||||||
| USD | United States dollars | |||||||||||||
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
See Notes to Consolidated Financial Statements.
| March 31, 2022 | December 31, 2021 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Cash and due from banks | $ | 230,428 | $ | 220,031 | |||||||
| Interest-bearing deposits with other banks | 227,147 | 214,811 | |||||||||
Investment securities available-for-sale, at fair value (amortized cost $4,113,169 at March 31, 2022 and $4,180,589 at December 31, 2021) | 3,957,882 | 4,207,846 | |||||||||
Investment securities held-to-maturity (fair value $90,001 at March 31, 2022 and $99,898 at December 31, 2021) | 92,597 | 98,420 | |||||||||
| Other investments | 114,563 | 102,971 | |||||||||
| Loans held for sale, at fair value | 12,670 | 29,482 | |||||||||
| Loans and leases | |||||||||||
| Commercial & industrial | 2,800,209 | 2,720,028 | |||||||||
| Lease financing | 125,867 | 109,624 | |||||||||
| Construction real estate | 479,744 | 455,894 | |||||||||
| Commercial real estate | 4,031,484 | 4,226,614 | |||||||||
| Residential real estate | 913,838 | 896,069 | |||||||||
| Home equity | 707,973 | 708,399 | |||||||||
| Installment | 132,197 | 119,454 | |||||||||
| Credit card | 50,305 | 52,217 | |||||||||
| Total loans and leases | 9,241,617 | 9,288,299 | |||||||||
| Less: Allowance for credit losses | (124,130) | (131,992) | |||||||||
| Net loans and leases | 9,117,487 | 9,156,307 | |||||||||
| Premises and equipment | 190,975 | 193,040 | |||||||||
| Operating leases | 87,432 | 73,857 | |||||||||
| Goodwill | 999,959 | 1,000,749 | |||||||||
| Other intangibles | 85,891 | 88,898 | |||||||||
| Accrued interest and other assets | 892,119 | 942,729 | |||||||||
| Total assets | $ | 16,009,150 | $ | 16,329,141 | |||||||
| Liabilities | |||||||||||
| Deposits | |||||||||||
| Interest-bearing demand | $ | 3,246,646 | $ | 3,198,745 | |||||||
| Savings | 4,188,867 | 4,157,374 | |||||||||
| Time | 1,121,966 | 1,330,263 | |||||||||
| Total interest-bearing deposits | 8,557,479 | 8,686,382 | |||||||||
| Noninterest-bearing | 4,261,429 | 4,185,572 | |||||||||
| Total deposits | 12,818,908 | 12,871,954 | |||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 0 | 51,203 | |||||||||
| FHLB short-term borrowings | 185,000 | 225,000 | |||||||||
| Other short-term borrowings | 0 | 20,000 | |||||||||
| Total short-term borrowings | 185,000 | 296,203 | |||||||||
| Long-term debt | 379,840 | 409,832 | |||||||||
| Total borrowed funds | 564,840 | 706,035 | |||||||||
| Accrued interest and other liabilities | 487,957 | 492,210 | |||||||||
| Total liabilities | 13,871,705 | 14,070,199 | |||||||||
| Shareholders' equity | |||||||||||
| Common stock - no par value | |||||||||||
| Authorized - 160,000,000 shares; Issued - 104,281,794 shares at both March 31, 2022 and December 31, 2021 | 1,634,903 | 1,640,358 | |||||||||
| Retained earnings | 857,178 | 837,473 | |||||||||
| Accumulated other comprehensive income (loss) | (142,477) | (433) | |||||||||
Treasury stock, at cost, 9,830,298 shares at March 31, 2022 and 10,132,554 shares at December 31, 2021 | (212,159) | (218,456) | |||||||||
| Total shareholders' equity | 2,137,445 | 2,258,942 | |||||||||
| Total liabilities and shareholders' equity | $ | 16,009,150 | $ | 16,329,141 | |||||||
1
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
| Three months ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Interest income | |||||||||||
| Loans and leases, including fees | $ | 87,182 | $ | 98,931 | |||||||
| Investment securities | |||||||||||
| Taxable | 22,096 | 18,607 | |||||||||
| Tax-exempt | 4,431 | 5,043 | |||||||||
| Total interest on investment securities | 26,527 | 23,650 | |||||||||
| Other earning assets | 121 | 28 | |||||||||
| Total interest income | 113,830 | 122,609 | |||||||||
| Interest expense | |||||||||||
| Deposits | 2,623 | 4,333 | |||||||||
| Short-term borrowings | 317 | 67 | |||||||||
| Long-term borrowings | 4,544 | 4,333 | |||||||||
| Total interest expense | 7,484 | 8,733 | |||||||||
| Net interest income | 106,346 | 113,876 | |||||||||
| Provision for credit losses - loans and leases | (5,589) | 3,450 | |||||||||
| Provision for credit losses - unfunded commitments | (226) | 538 | |||||||||
| Net interest income after provision for credit losses | 112,161 | 109,888 | |||||||||
| Noninterest income | |||||||||||
| Service charges on deposit accounts | 7,729 | 7,146 | |||||||||
| Trust and wealth management fees | 6,060 | 5,630 | |||||||||
| Bankcard income | 3,337 | 3,128 | |||||||||
| Client derivative fees | 799 | 1,556 | |||||||||
| Foreign exchange income | 10,151 | 10,757 | |||||||||
| Leasing business income | 6,076 | 0 | |||||||||
| Net gain from sales of loans | 3,872 | 9,454 | |||||||||
| Net gain (loss) on sales/transfers of investment securities | 3 | (166) | |||||||||
| Net gain (loss) on equity securities | (199) | 112 | |||||||||
| Other | 3,465 | 2,705 | |||||||||
| Total noninterest income | 41,293 | 40,322 | |||||||||
| Noninterest expenses | |||||||||||
| Salaries and employee benefits | 63,947 | 61,253 | |||||||||
| Net occupancy | 5,746 | 5,704 | |||||||||
| Furniture and equipment | 3,567 | 3,969 | |||||||||
| Data processing | 8,264 | 7,287 | |||||||||
| Marketing | 1,700 | 1,361 | |||||||||
| Communication | 666 | 838 | |||||||||
| Professional services | 2,159 | 1,450 | |||||||||
| State intangible tax | 1,131 | 1,202 | |||||||||
| FDIC assessments | 1,459 | 1,349 | |||||||||
| Intangible assets amortization | 2,914 | 2,479 | |||||||||
| Leasing business expense | 3,869 | 0 | |||||||||
| Other | 7,383 | 5,614 | |||||||||
| Total noninterest expenses | 102,805 | 92,506 | |||||||||
| Income before income taxes | 50,649 | 57,704 | |||||||||
| Income tax expense | 9,348 | 10,389 | |||||||||
| Net income | $ | 41,301 | $ | 47,315 | |||||||
| Net earnings per common share - basic | $ | 0.44 | $ | 0.49 | |||||||
| Net earnings per common share - diluted | $ | 0.44 | $ | 0.48 | |||||||
| Average common shares outstanding - basic | 93,383,932 | 96,873,940 | |||||||||
| Average common shares outstanding - diluted | 94,263,925 | 97,727,527 | |||||||||
See Notes to Consolidated Financial Statements.
2
| FIRST FINANCIAL BANCORP. AND SUBSIDIARIES | |||||||||||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||||||||
| (Dollars in thousands) | |||||||||||
| (Unaudited) | |||||||||||
| Three months ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income | $ | 41,301 | $ | 47,315 | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Unrealized gain (loss) on debt securities arising during the period | (142,401) | (30,968) | |||||||||
| Change in retirement obligation | 346 | 405 | |||||||||
| Unrealized gain (loss) on foreign currency exchange | 11 | 0 | |||||||||
| Other comprehensive income (loss) | (142,044) | (30,563) | |||||||||
| Comprehensive income (loss) | $ | (100,743) | $ | 16,752 | |||||||
| See Notes to Consolidated Financial Statements. | |||||||||||
3
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year-to-date
(Dollars in thousands except per share data)
(Unaudited)
| Common Stock | Retained | Accumulated other comprehensive | Treasury stock | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Earnings | income (loss) | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | 104,281,794 | $ | 1,638,947 | $ | 720,429 | $ | 48,664 | (6,259,865) | $ | (125,970) | $ | 2,282,070 | |||||||||||||||||||||||||||||
| Net income | 47,315 | 47,315 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (30,563) | (30,563) | |||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||
| Common stock at $0.23 per share | (22,524) | (22,524) | |||||||||||||||||||||||||||||||||||||||
| Purchase of common stock | (840,115) | (17,982) | (17,982) | ||||||||||||||||||||||||||||||||||||||
| Exercise of stock options, net of shares purchased | (36) | 3,468 | 70 | 34 | |||||||||||||||||||||||||||||||||||||
| Restricted stock awards, net of forfeitures | (8,616) | 332,411 | 6,366 | (2,250) | |||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 2,842 | 2,842 | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 104,281,794 | $ | 1,633,137 | $ | 745,220 | $ | 18,101 | (6,764,101) | $ | (137,516) | $ | 2,258,942 | |||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 104,281,794 | $ | 1,640,358 | $ | 837,473 | $ | (433) | (10,132,554) | $ | (218,456) | $ | 2,258,942 | |||||||||||||||||||||||||||||
| Net income | 41,301 | 41,301 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (142,044) | (142,044) | |||||||||||||||||||||||||||||||||||||||
| Cash dividends declared: | |||||||||||||||||||||||||||||||||||||||||
| Common stock at $0.23 per share | (21,596) | (21,596) | |||||||||||||||||||||||||||||||||||||||
| Exercise of stock options, net of shares purchased | (160) | 15,660 | 337 | 177 | |||||||||||||||||||||||||||||||||||||
| Restricted stock awards, net of forfeitures | (8,802) | 286,596 | 5,960 | (2,842) | |||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 3,507 | 3,507 | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 104,281,794 | $ | 1,634,903 | $ | 857,178 | $ | (142,477) | (9,830,298) | $ | (212,159) | $ | 2,137,445 | |||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
4
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Three months ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities | |||||||||||
| Net income | $ | 41,301 | $ | 47,315 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Provision for (recapture of) credit losses | (5,815) | 3,988 | |||||||||
| Depreciation and amortization | 8,107 | 8,233 | |||||||||
| Stock-based compensation expense | 3,507 | 2,842 | |||||||||
| Pension expense (income) | 625 | 850 | |||||||||
| Net amortization (accretion) on investment securities | 4,092 | 9,136 | |||||||||
| Net (gain) loss on sales of investment securities | (3) | 166 | |||||||||
| Net (gain) loss from equity securities | 199 | (112) | |||||||||
| Originations of loans held for sale | (98,958) | (206,222) | |||||||||
| Net gains from sales of loans held for sale | (3,872) | (9,454) | |||||||||
| Proceeds from sales of loans held for sale | 113,939 | 220,374 | |||||||||
| Deferred income taxes | 334 | 3,303 | |||||||||
| Amortization of operating leases | 1,899 | 1,851 | |||||||||
| Payments for operating leases | (1,942) | (1,790) | |||||||||
| Decrease (increase) cash surrender value of life insurance | (652) | (479) | |||||||||
| Decrease (increase) in interest receivable | 1,846 | (777) | |||||||||
| (Decrease) increase in interest payable | 164 | (518) | |||||||||
| Decrease (increase) in other assets | 52,590 | 117,134 | |||||||||
| (Decrease) increase in other liabilities | 26,454 | (48,806) | |||||||||
| Net cash provided by (used in) operating activities | 143,815 | 147,034 | |||||||||
| Investing activities | |||||||||||
| Proceeds from sales of securities available-for-sale | 5,003 | 50,451 | |||||||||
| Proceeds from calls, paydowns and maturities of securities available-for-sale | 232,267 | 279,426 | |||||||||
| Purchases of securities available-for-sale | (173,954) | (665,723) | |||||||||
| Proceeds from calls, paydowns and maturities of securities held-to-maturity | 5,906 | 10,799 | |||||||||
| Purchases of securities held-to-maturity | 0 | (1,000) | |||||||||
| Purchases of other investment securities | (11,799) | (992) | |||||||||
| Proceeds from calls, paydowns and maturities of other securities | 8 | 2,488 | |||||||||
| Net decrease (increase) in interest-bearing deposits with other banks | (12,336) | 1,125 | |||||||||
| Net decrease (increase) in loans and leases | 49,580 | (40,390) | |||||||||
| Proceeds from disposal of other real estate owned | 98 | 433 | |||||||||
| Purchases of premises and equipment | (3,181) | (2,717) | |||||||||
| Net change in operating leases | (12,085) | 0 | |||||||||
| Life insurance death benefits | 3,316 | 0 | |||||||||
| Net cash provided by (used in) investing activities | 82,823 | (366,100) | |||||||||
| Financing activities | |||||||||||
| Net (decrease) increase in total deposits | (53,046) | 416,066 | |||||||||
| Net (decrease) increase in short-term borrowings | (111,203) | 14,793 | |||||||||
| Payments on long-term debt | (30,183) | (192,508) | |||||||||
| Cash dividends paid on common stock | (21,986) | (22,200) | |||||||||
| Treasury stock purchase | 0 | (17,982) | |||||||||
| Proceeds from exercise of stock options | 177 | 34 | |||||||||
| Net cash provided by (used in) financing activities | (216,241) | 198,203 | |||||||||
| Cash and due from banks | |||||||||||
| Change in cash and due from banks | 10,397 | (20,863) | |||||||||
| Cash and due from banks at beginning of period | 220,031 | 231,054 | |||||||||
| Cash and due from banks at end of period | $ | 230,428 | $ | 210,191 | |||||||
5
| Supplemental disclosures | |||||||||||
| Interest paid | $ | 7,321 | $ | 9,252 | |||||||
| Income taxes paid, net of refunds | $ | 170 | $ | 147 | |||||||
| Supplemental schedule for investing activities | |||||||||||
| Business combinations | |||||||||||
| Assets acquired, net of purchase consideration | $ | 1,028 | $ | 0 | |||||||
| Liabilities assumed | 238 | 0 | |||||||||
| Goodwill | $ | (790) | $ | 0 | |||||||
See Notes to Consolidated Financial Statements.
6
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The Consolidated Financial Statements of First Financial Bancorp., a financial holding company principally serving Ohio, Indiana, Kentucky and Illinois, include the accounts and operations of First Financial and its wholly-owned subsidiary, First Financial Bank. All significant intercompany transactions and accounts have been eliminated in consolidation. Certain reclassifications of prior periods' amounts have been made to conform to current year presentation. Such reclassifications had no effect on net earnings.
These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and accompanying notes necessary to constitute a complete set of financial statements required by GAAP and should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Management believes these unaudited consolidated financial statements reflect all adjustments of a normal recurring nature which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. The Consolidated Balance Sheet as of December 31, 2021 has been derived from the audited financial statements in the Company’s 2021 Form 10-K.
Use of estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual realized amounts could differ materially from these estimates.
COVID-19. First Financial's operations and financial results were significantly impacted by the COVID-19 pandemic. 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 from the pandemic 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.
NOTE 2: ACCOUNTING STANDARDS RECENTLY ADOPTED OR ISSUED
Standards Adopted in 2022
There have been no new accounting standards adopted in 2022.
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 Issued But Not Yet Adopted
In March, 2022, the FASB issued ASU 2022-02 - Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminates the accounting guidance on TDRs for creditors in ASC 310-40 and amends the guidance on “vintage disclosures” to require disclosure of current period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities are permitted to early adopt these amendments, including adoption in any interim period, provided that the amendments are adopted as of the beginning of the annual reporting period that includes the interim period of
7
adoption. The adoption of this standard is expected to result in amended disclosures in the Company's Consolidated Financial Statements, however it is not expected to materially impact the Company's results of operations.
NOTE 3: INVESTMENTS
For the three months ended March 31, 2022, there were sales of $5.0 million of AFS securities with insignificant gross realized gains and gross realized losses. For the three months ended March 31, 2021, there were $52.1 million sales of AFS securities with $0.6 million gross realized gains and $0.7 million gross realized losses.
The following is a summary of HTM and AFS investment securities as of March 31, 2022:
| 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 | $ | 34,967 | $ | 1 | $ | (2,244) | $ | 32,724 | ||||||||||||||||||||||||||||||||||
| Securities of U.S. government agencies and corporations | 0 | 0 | 0 | 0 | 79,338 | 0 | (5,665) | 73,673 | ||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities - residential | 0 | 0 | 0 | 0 | 709,888 | 602 | (43,418) | 667,072 | ||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities - commercial | 42,211 | 0 | (1,403) | 40,808 | 754,978 | 355 | (17,903) | 737,430 | ||||||||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | 10,780 | 0 | (287) | 10,493 | 621,240 | 1,277 | (27,662) | 594,855 | ||||||||||||||||||||||||||||||||||||||||||
| Obligations of state and other political subdivisions | 8,356 | 317 | 0 | 8,673 | 1,071,171 | 10,441 | (49,260) | 1,032,352 | ||||||||||||||||||||||||||||||||||||||||||
| Asset-backed securities | 0 | 0 | 0 | 0 | 713,587 | 361 | (21,321) | 692,627 | ||||||||||||||||||||||||||||||||||||||||||
| Other securities | 31,250 | 0 | (1,223) | 30,027 | 128,000 | 710 | (1,561) | 127,149 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 92,597 | $ | 317 | $ | (2,913) | $ | 90,001 | $ | 4,113,169 | $ | 13,747 | $ | (169,034) | $ | 3,957,882 | ||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||
8
The following table provides a summary of investment securities by contractual maturity as of March 31, 2022, except for residential and commercial mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, which are shown as single totals due to the unpredictability of the timing in principal repayments.
| Held-to-maturity | Available-for-sale | |||||||||||||||||||||||||
| (Dollars in thousands) | Amortized cost | Fair value | Amortized cost | Fair value | ||||||||||||||||||||||
| By Contractual Maturity: | ||||||||||||||||||||||||||
| Due in one year or less | $ | 0 | $ | 0 | $ | 11,539 | $ | 11,556 | ||||||||||||||||||
| Due after one year through five years | 1,072 | 1,092 | 89,910 | 89,562 | ||||||||||||||||||||||
| Due after five years through ten years | 36,271 | 35,340 | 357,140 | 348,300 | ||||||||||||||||||||||
| Due after ten years | 2,263 | 2,268 | 854,887 | 816,480 | ||||||||||||||||||||||
| Mortgage-backed securities - residential | 0 | 0 | 709,888 | 667,072 | ||||||||||||||||||||||
| Mortgage-backed securities - commercial | 42,211 | 40,808 | 754,978 | 737,430 | ||||||||||||||||||||||
| Collateralized mortgage obligations | 10,780 | 10,493 | 621,240 | 594,855 | ||||||||||||||||||||||
| Asset-backed securities | 0 | 0 | 713,587 | 692,627 | ||||||||||||||||||||||
| Total | $ | 92,597 | $ | 90,001 | $ | 4,113,169 | $ | 3,957,882 | ||||||||||||||||||
Unrealized gains and losses on debt securities available for sale are generally due to fluctuations in current market yields relative to the yields of the securities at their amortized cost. All AFS securities with unrealized losses are reviewed quarterly to determine if any impairment exists, requiring a write-down to fair value. For AFS 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 March 31, 2022 or December 31, 2021.
As of March 31, 2022, the Company's investment securities portfolio consisted of 1,440 securities, of which 667 were in an unrealized loss position. 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.
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 March 31, 2022 or December 31, 2021. Therefore, the Company did not record an ACL for these securities as of March 31, 2022 or December 31, 2021.
The following tables provide the fair value and gross unrealized losses on investment securities in an unrealized loss position for which an ACL has not been recorded, aggregated by investment category and the length of time the individual securities have been in a continuous loss position:
9
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| 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 | $ | 32,624 | $ | (2,244) | $ | 0 | $ | 0 | $ | 32,624 | $ | (2,244) | ||||||||||||||||||||||||||
| Securities of U.S. Government agencies and corporations | 73,673 | (5,665) | 0 | 0 | 73,673 | (5,665) | ||||||||||||||||||||||||||||||||
| Mortgage-backed securities - residential | 388,740 | (26,406) | 187,705 | (17,012) | 576,445 | (43,418) | ||||||||||||||||||||||||||||||||
| Mortgage-backed securities - commercial | 636,688 | (16,831) | 28,585 | (2,475) | 665,273 | (19,306) | ||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | 449,683 | (22,616) | 52,838 | (5,333) | 502,521 | (27,949) | ||||||||||||||||||||||||||||||||
| Obligations of state and other political subdivisions | 496,869 | (38,448) | 132,317 | (10,812) | 629,186 | (49,260) | ||||||||||||||||||||||||||||||||
| Asset-backed securities | 625,241 | (19,707) | 22,710 | (1,614) | 647,951 | (21,321) | ||||||||||||||||||||||||||||||||
| Other securities | 98,897 | (2,103) | 11,569 | (681) | 110,466 | (2,784) | ||||||||||||||||||||||||||||||||
| Total | $ | 2,802,415 | $ | (134,020) | $ | 435,724 | $ | (37,927) | $ | 3,238,139 | $ | (171,947) | ||||||||||||||||||||||||||
| 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) | ||||||||||||||||||||||||||
For further detail on the fair value of investment securities, see Note 17 – Fair Value Disclosures.
10
NOTE 4: LOANS AND LEASES
First Financial offers clients a variety of commercial and consumer loan and lease products with diverse interest rates and payment terms. Commercial loan categories include C&I, CRE, construction real estate and lease financing. Consumer loan categories include residential real estate, home equity, installment and credit card.
Lending activities are primarily concentrated in states where the Bank operates banking centers (Ohio, Indiana, Kentucky and Illinois). First Financial also offers two nationwide lending platforms, one that provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and another that primarily provides loans that are secured by commissions and cash collateral to insurance agents and brokers.
In accordance with the CARES Act 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 March 31, 2022, First Financial had $21.2 million in PPP loans, net of unearned fees of $1.0 million. As of December 31, 2021, First Financial had $55.6 million in PPP loans, net of unearned fees of $2.6 million.
Credit Quality. To facilitate the monitoring of credit quality for commercial loans, First Financial utilizes the following categories of credit grades:
Pass - Higher quality loans that do not fit any of the other categories described below.
Special Mention - First Financial assigns a special mention rating to loans and leases with potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan, lease or First Financial's credit position at some future date.
Substandard - First Financial assigns a substandard rating to loans or leases that are inadequately protected by the current sound financial worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans and leases have well-defined weaknesses that jeopardize repayment of the debt. Substandard loans and leases are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not addressed.
Doubtful - First Financial assigns a doubtful rating to loans and leases with all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.
The credit grades previously described are derived from standard regulatory rating definitions and are assigned upon initial approval of credit to borrowers and updated periodically thereafter.
First Financial considers repayment performance to be the best indicator of credit quality for consumer loans. Consumer loans that have principal and interest payments that are past due by 90 days or more are generally classified as nonperforming. Additionally, consumer loans that have been modified in a TDR are classified as nonperforming.
The following table sets forth the Company's loan portfolio at March 31, 2022 by risk attribute and origination date:
| (Dollars in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Term Total | Revolving | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial & industrial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 150,380 | $ | 674,218 | $ | 431,251 | $ | 306,741 | $ | 149,846 | $ | 244,872 | $ | 1,957,308 | $ | 771,029 | $ | 2,728,337 | ||||||||||||||||||||||||||||||||||||||
| Special mention | 0 | 366 | 4,536 | 5,619 | 14,446 | 4,512 | 29,479 | 13,895 | 43,374 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 446 | 1,977 | 372 | 3,037 | 1,132 | 11,493 | 18,457 | 8,410 | 26,867 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | 0 | 0 | 0 | 0 | 0 | 1,631 | 1,631 | 0 | 1,631 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 150,826 | $ | 676,561 | $ | 436,159 | $ | 315,397 | $ | 165,424 | $ | 262,508 | $ | 2,006,875 | $ | 793,334 | $ | 2,800,209 | ||||||||||||||||||||||||||||||||||||||
| Lease financing | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 12,252 | $ | 34,717 | $ | 24,430 | $ | 20,619 | $ | 16,885 | $ | 11,283 | $ | 120,186 | $ | 0 | $ | 120,186 | ||||||||||||||||||||||||||||||||||||||
11
| (Dollars in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Term Total | Revolving | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Special mention | 0 | 0 | 5,681 | 0 | 0 | 0 | 5,681 | 0 | 5,681 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 12,252 | $ | 34,717 | $ | 30,111 | $ | 20,619 | $ | 16,885 | $ | 11,283 | $ | 125,867 | $ | 0 | $ | 125,867 | ||||||||||||||||||||||||||||||||||||||
| Construction real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 8,621 | $ | 184,917 | $ | 149,551 | $ | 78,048 | $ | 10,417 | $ | 12,178 | $ | 443,732 | $ | 20,477 | $ | 464,209 | ||||||||||||||||||||||||||||||||||||||
| Special mention | 0 | 0 | 6,531 | 0 | 9,004 | 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 | $ | 8,621 | $ | 184,917 | $ | 156,082 | $ | 78,048 | $ | 19,421 | $ | 12,178 | $ | 459,267 | $ | 20,477 | $ | 479,744 | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate - investor | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 71,292 | $ | 552,818 | $ | 355,042 | $ | 861,599 | $ | 379,791 | $ | 663,270 | $ | 2,883,812 | $ | 37,072 | $ | 2,920,884 | ||||||||||||||||||||||||||||||||||||||
| Special mention | 0 | 0 | 20,438 | 27,176 | 17,903 | 27,716 | 93,233 | 0 | 93,233 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 0 | 1,550 | 6 | 22,638 | 3,816 | 16,992 | 45,002 | 0 | 45,002 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | 0 | 0 | 0 | 0 | 2,546 | 0 | 2,546 | 0 | 2,546 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 71,292 | $ | 554,368 | $ | 375,486 | $ | 911,413 | $ | 404,056 | $ | 707,978 | $ | 3,024,593 | $ | 37,072 | $ | 3,061,665 | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate - owner | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 20,749 | $ | 171,894 | $ | 176,879 | $ | 113,416 | $ | 129,873 | $ | 316,827 | $ | 929,638 | $ | 9,121 | $ | 938,759 | ||||||||||||||||||||||||||||||||||||||
| Special mention | 0 | 295 | 2,261 | 2,577 | 3,603 | 3,287 | 12,023 | 0 | 12,023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 0 | 1,467 | 423 | 718 | 12,334 | 4,095 | 19,037 | 0 | 19,037 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 20,749 | $ | 173,656 | $ | 179,563 | $ | 116,711 | $ | 145,810 | $ | 324,209 | $ | 960,698 | $ | 9,121 | $ | 969,819 | ||||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 52,459 | $ | 262,465 | $ | 222,466 | $ | 129,617 | $ | 59,558 | $ | 182,217 | $ | 908,782 | $ | 0 | $ | 908,782 | ||||||||||||||||||||||||||||||||||||||
| Nonperforming | 0 | 268 | 466 | 1,168 | 643 | 2,511 | 5,056 | 0 | 5,056 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 52,459 | $ | 262,733 | $ | 222,932 | $ | 130,785 | $ | 60,201 | $ | 184,728 | $ | 913,838 | $ | 0 | $ | 913,838 | ||||||||||||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 6,787 | $ | 38,358 | $ | 43,585 | $ | 14,145 | $ | 10,466 | $ | 34,215 | $ | 147,556 | $ | 556,832 | $ | 704,388 | ||||||||||||||||||||||||||||||||||||||
| Nonperforming | 0 | 21 | 117 | 41 | 19 | 432 | 630 | 2,955 | 3,585 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 6,787 | $ | 38,379 | $ | 43,702 | $ | 14,186 | $ | 10,485 | $ | 34,647 | $ | 148,186 | $ | 559,787 | $ | 707,973 | ||||||||||||||||||||||||||||||||||||||
| Installment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 17,114 | $ | 51,736 | $ | 11,031 | $ | 7,034 | $ | 4,678 | $ | 5,327 | $ | 96,920 | $ | 34,866 | $ | 131,786 | ||||||||||||||||||||||||||||||||||||||
| Nonperforming | 0 | 229 | 0 | 24 | 33 | 48 | 334 | 77 | 411 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 17,114 | $ | 51,965 | $ | 11,031 | $ | 7,058 | $ | 4,711 | $ | 5,375 | $ | 97,254 | $ | 34,943 | $ | 132,197 | ||||||||||||||||||||||||||||||||||||||
| Credit cards | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 49,719 | $ | 49,719 | ||||||||||||||||||||||||||||||||||||||
| Nonperforming | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 586 | 586 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 50,305 | $ | 50,305 | ||||||||||||||||||||||||||||||||||||||
| Grand Total | $ | 340,100 | $ | 1,977,296 | $ | 1,455,066 | $ | 1,594,217 | $ | 826,993 | $ | 1,542,906 | $ | 7,736,578 | $ | 1,505,039 | $ | 9,241,617 | ||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||||||||||||
12
| (Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Term Total | Revolving | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||||
13
| (Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Term Total | Revolving | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||||
Delinquency. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the date of the scheduled payment.
Loan delinquency, including loans classified as nonaccrual, was as follows:
| As of March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| (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 | $ | 236 | $ | 262 | $ | 3,622 | $ | 4,120 | $ | 2,796,089 | $ | 2,800,209 | $ | 0 | ||||||||||||||||||||||||||||||
| Lease financing | 856 | 270 | 93 | 1,219 | 124,648 | 125,867 | 93 | |||||||||||||||||||||||||||||||||||||
| Construction real estate | 0 | 0 | 0 | 0 | 479,744 | 479,744 | 0 | |||||||||||||||||||||||||||||||||||||
| Commercial real estate-investor | 16 | 0 | 6,403 | 6,419 | 3,055,246 | 3,061,665 | 0 | |||||||||||||||||||||||||||||||||||||
| Commercial real estate-owner | 187 | 0 | 2,269 | 2,456 | 967,363 | 969,819 | 0 | |||||||||||||||||||||||||||||||||||||
| Residential real estate | 2,504 | 1,079 | 1,472 | 5,055 | 908,783 | 913,838 | 0 | |||||||||||||||||||||||||||||||||||||
| Home equity | 1,826 | 265 | 1,494 | 3,585 | 704,388 | 707,973 | 0 | |||||||||||||||||||||||||||||||||||||
| Installment | 112 | 13 | 63 | 188 | 132,009 | 132,197 | 0 | |||||||||||||||||||||||||||||||||||||
| Credit card | 341 | 334 | 133 | 808 | 49,497 | 50,305 | 87 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 6,078 | $ | 2,223 | $ | 15,549 | $ | 23,850 | $ | 9,217,767 | $ | 9,241,617 | $ | 180 | ||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||
Nonaccrual. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful or when principal or interest payments are 90 days or more past due. Generally, loans are classified as nonaccrual due to the continued failure to adhere to contractual payment terms by the borrower, coupled with other pertinent factors. When a loan is classified as nonaccrual, the accrual of interest income is discontinued and previously accrued but unpaid interest is reversed. Any payments received while a loan is on nonaccrual status are applied as a reduction to the carrying value of the loan. A loan classified as nonaccrual may return to accrual status if none of the principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual principal and interest.
Troubled Debt Restructurings. A loan modification is considered a TDR when the borrower is experiencing financial difficulty and a concession is made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. The most common types of modifications include interest rate reductions, maturity extensions and modifications to principal amortization, including interest-only structures. Modified terms are dependent upon the financial position and needs of the individual borrower. If the modification agreement is violated, the loan is managed by the Company’s credit administration group for resolution, which may result in foreclosure in the case of real estate.
14
TDRs are generally classified as nonaccrual for a minimum period of six months and may qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement.
First Financial had 142 TDRs totaling $24.2 million at March 31, 2022, including $8.1 million on accrual status and $16.2 million classified as nonaccrual. First Financial had insignificant commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs, and the ACL included reserves of $3.7 million related to TDRs at March 31, 2022. Additionally, as of March 31, 2022, $4.8 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year.
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 classified as nonaccrual. First Financial had $0.2 million commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2021, the ACL included reserves of $6.3 million related to TDRs, and $5.0 million of the accruing TDRs had been performing in accordance with the restructured terms for more than one year.
The following tables provide information on loan modifications classified as TDRs during the three months ended March 31, 2022 and 2021:
| Three months ended | ||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | March 31, 2021 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Number of loans | Pre-modification loan balance | Period end balance | Number of loans | Pre-modification loan balance | Period end balance | ||||||||||||||||||||||||||||||||
| Commercial & industrial | 3 | $ | 4,465 | $ | 3,241 | 4 | $ | 3,206 | $ | 3,070 | ||||||||||||||||||||||||||||
| Construction real estate | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 1 | 387 | 80 | 7 | 10,015 | 9,046 | ||||||||||||||||||||||||||||||||
| Residential real estate | 3 | 340 | 326 | 10 | 1,023 | 1,000 | ||||||||||||||||||||||||||||||||
| Home equity | 1 | 32 | 32 | 1 | 14 | 14 | ||||||||||||||||||||||||||||||||
| Installment | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
| Total | 8 | $ | 5,224 | $ | 3,679 | 22 | $ | 14,258 | $ | 13,130 | ||||||||||||||||||||||||||||
For TDRs identified during the three months ended March 31, 2022, there were $2.5 million of charge-offs for the portion of TDRs determined to be uncollectible. For TDRs identified during the three months ended March 31, 2021, there were insignificant charge-offs for the portion of TDRs determined to be uncollectible.
The following table provides information on how TDRs were modified during the three months ended March 31, 2022 and 2021:
| Three months ended | ||||||||||||||
| March 31, | ||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | ||||||||||||
| Extended maturities | $ | 0 | $ | 0 | ||||||||||
| Adjusted interest rates | 0 | 0 | ||||||||||||
| Combination of rate and maturity changes | 0 | 0 | ||||||||||||
| Forbearance | 3,647 | 6,163 | ||||||||||||
| Bankruptcies | 0 | 6,559 | ||||||||||||
Other (1) | 32 | 408 | ||||||||||||
| Total | $ | 3,679 | $ | 13,130 | ||||||||||
(1) Includes covenant modifications and other concessions, or combination of concessions, that do not consist of interest rate adjustments, forbearance, bankruptcy and maturity extensions
First Financial considers repayment performance as an indication of the effectiveness of the Company's loan modifications. Borrowers that are 90 days or more past due on any principal or interest payments, or who prematurely terminate a restructured loan agreement without paying off the contractual principal balance, are considered to be in default of the terms of the TDR agreement.
15
For each of the three month periods ended March 31, 2022 and March 31, 2021, there were no TDR relationships for which there was a payment default during the period that occurred within twelve months of the loan modifications.
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 January 1, 2022 are not required to be reported as TDR.
As of March 31, 2022 and December 31, 2021, the Company's loan portfolio included $16.7 million and $16.5 million, respectively, 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 for both periods.
Nonperforming loans. Loans classified as nonaccrual and loans modified as TDRs are considered nonperforming. The following table provides information on nonperforming loans:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| (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 | ||||||||||||||||||||||||||||||||
Nonaccrual loans (1) | ||||||||||||||||||||||||||||||||||||||
| Commercial & industrial | $ | 8,621 | $ | 5,769 | $ | 14,390 | $ | 11,077 | $ | 6,285 | $ | 17,362 | ||||||||||||||||||||||||||
| Lease financing | 0 | 249 | 249 | 0 | 203 | 203 | ||||||||||||||||||||||||||||||||
| Construction real estate | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 6,362 | 13,481 | 19,843 | 17,716 | 1,796 | 19,512 | ||||||||||||||||||||||||||||||||
| Residential real estate | 0 | 7,432 | 7,432 | 0 | 8,305 | 8,305 | ||||||||||||||||||||||||||||||||
| Home equity | 0 | 3,377 | 3,377 | 0 | 2,922 | 2,922 | ||||||||||||||||||||||||||||||||
| Installment | 0 | 163 | 163 | 0 | 88 | 88 | ||||||||||||||||||||||||||||||||
| Total nonaccrual loans | $ | 14,983 | $ | 30,471 | $ | 45,454 | $ | 28,793 | $ | 19,599 | $ | 48,392 | ||||||||||||||||||||||||||
(1) Nonaccrual loans include nonaccrual TDRs of $16.2 million and $16.0 million as of March 31, 2022 and December 31, 2021, respectively.
| Three months ended | ||||||||||||||
| March 31, | ||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | ||||||||||||
| Interest income effect on nonperforming loans | ||||||||||||||
| Gross amount of interest that would have been recorded under original terms | $ | 773 | $ | 1,487 | ||||||||||
| Interest included in income | ||||||||||||||
| Nonaccrual loans | 290 | 483 | ||||||||||||
| Troubled debt restructurings | 51 | 86 | ||||||||||||
| Total interest included in income | 341 | 569 | ||||||||||||
| Net impact on interest income | $ | 432 | $ | 918 | ||||||||||
First Financial individually reviews all nonperforming loan relationships greater than $250,000 to determine if an individually evaluated allowance is necessary based on the borrower’s overall financial condition, resources and payment record, support from guarantors and the realizable value of any collateral. Individually evaluated allowances are based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.
16
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.
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Type of Collateral | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollar in thousands) | Business assets | Commercial real estate | Equipment | Land | Residential real estate | Other | Total | |||||||||||||||||||||||||||||||||||||
| Class of loan | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial & industrial | $ | 11,399 | $ | 0 | $ | 1,560 | $ | 0 | $ | 0 | $ | 1,431 | $ | 14,390 | ||||||||||||||||||||||||||||||
| Lease financing | 0 | 0 | 249 | 0 | 0 | 0 | 249 | |||||||||||||||||||||||||||||||||||||
| Commercial real estate-investor | 0 | 6,362 | 0 | 41 | 106 | 0 | 6,509 | |||||||||||||||||||||||||||||||||||||
| Commercial real estate-owner | 0 | 7,523 | 5,703 | 37 | 71 | 0 | 13,334 | |||||||||||||||||||||||||||||||||||||
| Residential real estate | 0 | 0 | 0 | 0 | 7,432 | 0 | 7,432 | |||||||||||||||||||||||||||||||||||||
| Home equity | 0 | 0 | 0 | 0 | 3,377 | 0 | 3,377 | |||||||||||||||||||||||||||||||||||||
| Installment | 0 | 0 | 0 | 0 | 0 | 163 | 163 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 11,399 | $ | 13,885 | $ | 7,512 | $ | 78 | $ | 10,986 | $ | 1,594 | $ | 45,454 | ||||||||||||||||||||||||||||||
| 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 | $ | 13,050 | $ | 6,973 | $ | 38 | $ | 11,729 | $ | 3,431 | $ | 48,392 | ||||||||||||||||||||||||||||||
Lease financing - Lessor. 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 $41.8 million of financing leases, which were included in Loans and leases on the Consolidated Balance Sheets. For further detail on the acquisition, see Note 18 - Business Combinations.
17
The components of the Company's net investments in direct financing and sales-type leases, which are included in Lease financing on the Consolidated Balance Sheets are as follows:
| (Dollar in thousands) | March 31, 2022 | December 31, 2021 | ||||||||||||
| Direct finance leases | ||||||||||||||
| Lease receivables | $ | 46,856 | $ | 17,164 | ||||||||||
| Unguaranteed residual values | 8,007 | 4,431 | ||||||||||||
| Sales-type leases | ||||||||||||||
| Lease receivables | 17,653 | 17,925 | ||||||||||||
| Unguaranteed residual values | 0 | 0 | ||||||||||||
| Total net investment in direct financing and sales-type leases | $ | 72,516 | $ | 39,520 | ||||||||||
There were no significant changes in the balance of the Company's unguaranteed residual assets for the three months ended March 31, 2022 or March 31, 2021. Interest income for direct financing and sales-type leases was $0.5 million and $0.4 million for the three months ended March 31, 2022 and March 31, 2021, respectively.
The remaining maturities of lease receivables were as follows:
| (Dollars in thousands) | Direct financing and Sales-type | |||||||
| Remainder of 2022 | $ | 5,781 | ||||||
| 2023 | 7,481 | |||||||
| 2024 | 17,136 | |||||||
| 2025 | 10,190 | |||||||
| 2026 | 14,500 | |||||||
| Thereafter | 21,478 | |||||||
| Total lease payments | 76,566 | |||||||
| Less: unearned interest income and guaranteed residual value | (8,762) | |||||||
| Net lease receivables | $ | 67,804 | ||||||
OREO. OREO consists of properties acquired by the Company primarily through the loan foreclosure or repossession process, that results in partial or total satisfaction of problem loans.
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Changes in OREO were as follows:
| Three months ended | ||||||||||||||
| March 31, | ||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | ||||||||||||
| Balance at beginning of period | $ | 98 | $ | 1,287 | ||||||||||
| Additions | ||||||||||||||
| Commercial & industrial | 0 | 0 | ||||||||||||
| Residential real estate | 72 | 0 | ||||||||||||
| Total additions | 72 | 0 | ||||||||||||
| Disposals | ||||||||||||||
| Commercial & industrial | (98) | (246) | ||||||||||||
| Residential real estate | 0 | (187) | ||||||||||||
| Total disposals | (98) | (433) | ||||||||||||
| Valuation adjustment | ||||||||||||||
| Commercial & industrial | 0 | 0 | ||||||||||||
| Residential real estate | 0 | 0 | ||||||||||||
| Total valuation adjustment | 0 | 0 | ||||||||||||
| Balance at end of period | $ | 72 | $ | 854 | ||||||||||
NOTE 5: ALLOWANCE FOR CREDIT LOSSES
Allowance for credit losses - loans and leases. The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The ACL is increased by provision expense and decreased by charge-offs, net of recoveries of amounts previously charged-off. First Financial's policy is to charge-off all or a portion of a loan when, in management's opinion, it is unlikely to collect the principal amount owed in full either through payments from the borrower or a guarantor or from the liquidation of collateral. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable on loans and leases, which totaled $28.2 million and $29.5 million as of March 31, 2022 and December 31, 2021, 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 provides the basis for the quantitatively modeled estimation of expected credit losses. First Financial adjusts its quantitative model, as necessary, to reflect conditions not already considered by the quantitative model. These adjustments are commonly known as the Qualitative Framework.
The 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.
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.
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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 support in addition to other considerations.
The ACL model for leases sources expected default rates from the C&I portfolio model. Therefore, changes in forecasted expectations for the treasury term spread and market volatility index could result in volatility in the Company's ACL in future periods.
Construction real estate – Real estate construction loans are term loans to individuals, companies or developers used for the construction or development of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property. Generally, these loans are for construction projects that have been pre-sold, pre-leased or have secured permanent financing, as well as loans to real estate companies with significant equity invested in the project. An independent credit team underwrites construction real estate loans, which are managed by experienced lending officers and monitored through the construction phase by a centralized funding desk that manages loan disbursements.
The construction ACL model is adjusted for forecasted changes in rental vacancy rates in the Bank's geographic footprint and the housing price index. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Commercial real estate - owner & investor – Commercial real estate loans consist of term loans secured by a mortgage lien on real estate properties such as apartment buildings, office and industrial buildings and retail shopping centers. Additionally, the Company's franchise lending activities discussed in the "Commercial and Industrial" section often include the financing of real estate in addition to equipment. The credit underwriting for both owner-occupied and investor income producing real estate loans includes detailed market analysis, historical and projected cash flow analysis, appropriate equity margins, assessment of lessees and lessors, environmental risks and the type, age, condition and location of real estate, among other factors.
First Financial models owner-occupied and investor CRE separately when determining the ACL. For owner occupied CRE, current period default rates are utilized in the modeling, and are adjusted for forecasted changes in the BAA bond spread, national rental vacancy rates and the consumer confidence index. Current period default rates are also utilized in the modeling of investor CRE loans, and are adjusted for forecasted changes in the BAA bond spread, multifamily building permits within the Bank’s geographic footprint and national rental vacancy rates. Changes in current period defaults and forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Residential real estate – Residential real estate loans represent loans to consumers for the financing of a residence. These loans generally have a 15 to 30 year term and a fixed interest rate, but may have a shorter term to maturity with an adjustable interest rate. In most cases, these loans are extended to borrowers to finance their primary residence. First Financial sells residential real estate loan originations into the secondary market on both servicing retained and servicing released bases. Residential real estate loans are generally underwritten to secondary market lending standards, utilizing underwriting processes that rely on empirical data to assess credit risk as well as analysis of the borrower's ability to repay their obligations, credit history, the amount of any down payment and the market value or other characteristics of the property. First Financial also offers a residential mortgage product that features similar borrower credit characteristics but a more streamlined underwriting process than typically required to sell to government-sponsored enterprises and thus is retained on the Consolidated Balance Sheets.
The residential real estate ACL model is adjusted for forecasted changes in the housing price index, housing starts within the Bank’s geographic footprint and national single-family existing home sales. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
Home equity – Home equity lending includes both home equity loans and revolving lines of credit secured by a first or second lien on the borrower’s residence. Home equity lending underwriting considerations include the borrower's credit history as well as to debt-to-income and loan-to-value policy limits.
The home equity ACL model is adjusted for forecasted changes in the consumer credit growth rate within the Bank’s geographic footprint and the working-age labor participation rate. Changes in forecasted expectations for these economic variables could result in volatility in the Company's ACL in future periods.
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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 March 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. 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 three months ended March 31, 2022, the ACL declined due to improvements in economic forecasts and the Company's improved credit outlook.
Changes in the allowance by loan category were as follows:
| Three months ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (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 | $ | 44,052 | $ | 1,633 | $ | 11,874 | $ | 53,420 | $ | 6,225 | $ | 9,643 | $ | 1,097 | $ | 4,048 | $ | 131,992 | ||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | (3,803) | 558 | (464) | (2,130) | (141) | (211) | 134 | 468 | (5,589) | |||||||||||||||||||||||||||||||||||||||||||||||
| Loans charged off | (2,845) | (131) | 0 | 0 | (22) | (21) | (177) | (246) | (3,442) | |||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 379 | 33 | 0 | 222 | 90 | 265 | 21 | 159 | 1,169 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total net charge-offs | (2,466) | (98) | 0 | 222 | 68 | 244 | (156) | (87) | (2,273) | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending allowance for credit losses | $ | 37,783 | $ | 2,093 | $ | 11,410 | $ | 51,512 | $ | 6,152 | $ | 9,676 | $ | 1,075 | $ | 4,429 | $ | 124,130 | ||||||||||||||||||||||||||||||||||||||
| Three months ended March 31, 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: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance, prior to adoption of ASC 326 | $ | 51,454 | $ | 995 | $ | 21,736 | $ | 76,795 | $ | 8,560 | $ | 11,869 | $ | 1,215 | $ | 3,055 | $ | 175,679 | ||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | 1,258 | 20 | 1,000 | 2,929 | (855) | (675) | 22 | (249) | 3,450 | |||||||||||||||||||||||||||||||||||||||||||||||
| Loans charged off | (7,910) | 0 | (2) | (1,250) | (1) | (611) | (36) | (222) | (10,032) | |||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 337 | 0 | 0 | 195 | 44 | 177 | 34 | 39 | 826 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total net charge-offs | (7,573) | 0 | (2) | (1,055) | 43 | (434) | (2) | (183) | (9,206) | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending allowance for credit losses | $ | 45,139 | $ | 1,015 | $ | 22,734 | $ | 78,669 | $ | 7,748 | $ | 10,760 | $ | 1,235 | $ | 2,623 | $ | 169,923 | ||||||||||||||||||||||||||||||||||||||
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
21
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.
The ACL on unfunded commitments was $13.2 million as of March 31, 2022 and $13.4 million as of December 31, 2021. Additionally, First Financial recorded a provision recapture related to the allowance on unfunded commitments of $0.2 million for the three months ended March 31, 2022 and a provision for credit losses on unfunded commitments of $0.5 million for the three months ended March 31, 2021.
NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill. Assets and liabilities acquired in a business combination are recorded at their estimated fair values as of the acquisition date. The excess of the purchase price of the acquisition over the fair value of net assets acquired is recorded as goodwill.
Changes in the carrying amount of goodwill for the three months ended March 31, 2022 and March 31, 2021 were as follows:
| Three months ended | ||||||||||||||
| March 31, | ||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | ||||||||||||
| Balance at beginning of period | $ | 1,000,749 | $ | 937,771 | ||||||||||
| Goodwill resulting from business combinations | (790) | 0 | ||||||||||||
| Balance at end of period | $ | 999,959 | $ | 937,771 | ||||||||||
In December 2021, First Financial recorded $63.0 million of goodwill resulting from the acquisition of Summit Funding Group, Inc. In the first quarter of 2022, First Financial recorded an adjustment of $0.8 million to goodwill from the Summit merger. The fair value measurements of Summit's assets and liabilities 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. For further detail on various mergers or acquisitions, see Note 18 - 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 impairment test as of October 1, 2021 and no impairment was indicated. As of March 31, 2022, 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 6.0 years.
First Financial recorded a 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 and was $29.5 million and $30.1 million at March 31, 2022 and December 31, 2021, respectively. Additionally, First Financial recorded a 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 Bannockburn customer list net intangible asset was $30.2 million and $31.1 million at March 31, 2022 and December 31, 2021, respectively.
Amortization expense recognized on intangible assets for the three months ended March 31, 2022 and March 31, 2021 was $2.9 million and $2.5 million, respectively.
22
The gross carrying amount and accumulated amortization of other intangible assets at March 31, 2022 and December 31, 2021 were as follows:
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||
| Gross carrying amount | Accumulated amortization | Gross carrying amount | Accumulated amortization | |||||||||||||||||||||||
| Amortized intangible assets | ||||||||||||||||||||||||||
| Core deposit intangibles | $ | 45,256 | $ | (27,710) | $ | 45,256 | $ | (26,911) | ||||||||||||||||||
| Customer list | 69,563 | (9,886) | 69,563 | (8,362) | ||||||||||||||||||||||
| Other | 14,589 | (5,921) | 14,589 | (5,237) | ||||||||||||||||||||||
| Total | $ | 129,408 | $ | (43,517) | $ | 129,408 | $ | (40,510) | ||||||||||||||||||
NOTE 7: LEASES - LESSEE
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. 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 under which it is the lessee are classified as operating leases, and therefore, were previously not recognized on the Company’s Consolidated Balance Sheets. The majority of these leases are for real estate property for branches, ATM locations or office space.
With the adoption of Topic 842, operating lease agreements were required to be recognized on the Consolidated Balance Sheets as an ROU asset and a corresponding lease liability. The Company's right to use an asset over the life of a lease is recorded as a "right of use" asset in Accrued interest and other assets on the Consolidated Balance Sheets and was $55.8 million and $57.2 million at March 31, 2022 and December 31, 2021, 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 $66.2 million and $67.6 million lease liability in Accrued interest and other liabilities on the Consolidated Balance Sheet at March 31, 2022 and December 31, 2021, 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.
23
The components of lease expense were as follows:
| Three months ended | ||||||||||||||
| March 31, | ||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | ||||||||||||
| Operating lease cost | $ | 1,899 | $ | 1,851 | ||||||||||
| Short-term lease cost | 3 | 29 | ||||||||||||
| Variable lease cost | 739 | 679 | ||||||||||||
| Total operating lease cost | $ | 2,641 | $ | 2,559 | ||||||||||
Future minimum commitments due under these lease agreements as of March 31, 2022 are as follows:
| (Dollars in thousands) | Operating leases | |||||||
| 2022 (remaining nine months) | $ | 5,887 | ||||||
| 2023 | 7,736 | |||||||
| 2024 | 7,313 | |||||||
| 2025 | 6,668 | |||||||
| 2026 | 6,262 | |||||||
| Thereafter | 50,151 | |||||||
| Total lease payments | 84,017 | |||||||
| Less imputed interest | 17,852 | |||||||
| Total | $ | 66,165 | ||||||
The weighted average remaining lease term and discount rate for the Company's operating leases were as follows:
| March 31, 2022 | December 31, 2021 | |||||||||||||
| Operating leases | ||||||||||||||
| Weighted-average remaining lease term | 13.5 years | 13.9 years | ||||||||||||
| Weighted-average discount rate | 3.22 | % | 3.25 | % | ||||||||||
Supplemental cash information at March 31, 2022 and 2021 related to leases was as follows:
| Three months ended | ||||||||||||||
| March 31, | ||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
| Operating cash flows from operating leases | $ | 1,942 | $ | 1,790 | ||||||||||
| ROU assets obtained in exchange for lease obligations | ||||||||||||||
| Operating leases | 2,001 | 5,761 | ||||||||||||
NOTE 8: OPERATING LEASES - LESSOR
First Financial provides financing for various types of equipment through a variety of leasing arrangements. Operating leases are carried at cost less accumulated depreciation in the Consolidated Balance Sheets. Operating leases were $87.4 million and $73.9 million at March 31, 2022 and December 31, 2021, respectively, net of accumulated depreciation of $28.0 million and $25.5 million at March 31, 2022 and December 31, 2021, respectively. The Company recorded lease income of $4.7 million relating to lease payments for operating leases in leasing business revenue in the Consolidated Statement of Income for the three months ended March 31, 2022. Depreciation expense related to operating lease equipment was $3.9 million for the three months ended March 31, 2022.
First Financial performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. First Financial recognized no impairment losses associated with operating
24
lease assets for the three months ended March 31, 2022. Recognized impairment losses, if any, would be recorded in Leasing business income in the Consolidated Statements of Income.
The future lease payments receivable from operating leases as of March 31, 2022 are as follows:
| (Dollars in thousands) | Undiscounted cash flows | |||||||
| 2022 (remaining nine months) | $ | 13,371 | ||||||
| 2023 | 14,659 | |||||||
| 2024 | 8,424 | |||||||
| 2025 | 2,868 | |||||||
| 2026 | 1,288 | |||||||
| Thereafter | 103 | |||||||
| Total operating lease payments | $ | 40,713 | ||||||
NOTE 9: 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. As of March 31, 2022, the Bank had no securities sold under agreements to repurchase. At December 31, 2021, the Bank had $51.3 million of securities sold under agreements to repurchase.
First Financial had no federal funds purchased at either March 31, 2022 and December 31, 2021. The Company had $185.0 million in short-term borrowings with the FHLB at March 31, 2022 and $225.0 million at December 31, 2021. These short-term borrowings are used to manage normal liquidity needs and support the Company's asset and liability management strategies.
The following is a summary of First Financial's short-term borrowings:
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | ||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | $ | 0 | $ | 51,203 | ||||||||||
| FHLB short-term borrowings | 185,000 | 225,000 | ||||||||||||
| Other short-term borrowings | 0 | 20,000 | ||||||||||||
| Total short-term borrowings | $ | 185,000 | $ | 296,203 | ||||||||||
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 March 31, 2022, First Financial had no outstanding balance and at 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 both March 31, 2022 and 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.
First Financial had $379.8 million and $409.8 million of long-term debt as of March 31, 2022 and December 31, 2021 respectively, which included subordinated notes, capital lease liabilities and an interest free loan with a municipality.
25
The following is a summary of First Financial's long-term debt:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Average rate | Amount | Average rate | ||||||||||||||||||||||
| Subordinated notes | $ | 313,363 | 4.96 | % | $ | 313,248 | 4.86 | % | ||||||||||||||||||
| Unamortized debt issuance costs | (2,288) | N/A | (2,384) | N/A | ||||||||||||||||||||||
| Capital lease liabilities | 1,761 | 3.81 | % | 1,781 | 3.81 | % | ||||||||||||||||||||
| Capital loan with municipality | 775 | 0.00 | % | 775 | 0.00 | % | ||||||||||||||||||||
| Subtotal | 313,611 | 4.98 | % | 313,420 | 4.88 | % | ||||||||||||||||||||
| Acquired in Summit acquisition | ||||||||||||||||||||||||||
| Bank lines of credit | 0 | 0.00 | % | 23,030 | 2.77 | % | ||||||||||||||||||||
| Notes issued in conjunction with acquisition of property and equipment | 66,229 | 4.50 | % | 73,382 | 4.09 | % | ||||||||||||||||||||
| Total notes payable acquired in Summit acquisition | 66,229 | 4.50 | % | 96,412 | 3.77 | % | ||||||||||||||||||||
| Total long-term debt | $ | 379,840 | 4.90 | % | $ | 409,832 | 4.62 | % | ||||||||||||||||||
In April 2020, First Financial issued $150.0 million of fixed to floating rate subordinated notes. These 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. These notes were recorded at fair value at the date of the MSFG merger and the Consolidated Balance Sheet includes $43.4 million and $43.2 million for these notes at March 31, 2022 and December 31, 2021, respectively. 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. 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%. These lines of credit were paid off in January 2022. Additionally, acquired long term borrowings included $66.2 million and $73.4 million of term notes, both with and without recourse, with an average interest rate of 4.50% and 4.09% at March 31, 2022 and December 31, 2021, respectively. These term notes were used to finance Summit's equity investment in the purchase of equipment to be leased to customers.
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NOTE 10: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Shareholders’ equity is affected by transactions and valuations of asset and liability positions that require adjustments to accumulated other comprehensive income (loss). The related tax effects allocated to other comprehensive income and reclassifications out of accumulated other comprehensive income (loss) are as follows:
| Three months ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | (182,479) | $ | (3) | $ | (182,476) | $ | 40,075 | $ | (142,401) | $ | 21,038 | $ | (142,401) | $ | (121,363) | ||||||||||||||||||||||||||||||||||
| Retirement obligation | 0 | (325) | 325 | 21 | 346 | (20,846) | 346 | (20,500) | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | 11 | 0 | 11 | 0 | 11 | (625) | 11 | (614) | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | (182,468) | $ | (328) | $ | (182,140) | $ | 40,096 | $ | (142,044) | $ | (433) | $ | (142,044) | $ | (142,477) | ||||||||||||||||||||||||||||||||||
| Three months ended March 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 | $ | (39,658) | $ | (166) | $ | (39,492) | $ | 8,524 | $ | (30,968) | $ | 73,576 | $ | (30,968) | $ | 42,608 | ||||||||||||||||||||||||||||||||||
| Retirement obligation | 0 | (525) | 525 | (120) | 405 | (24,912) | 405 | (24,507) | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | (39,658) | $ | (691) | $ | (38,967) | $ | 8,404 | $ | (30,563) | $ | 48,664 | $ | (30,563) | $ | 18,101 | ||||||||||||||||||||||||||||||||||
The following table presents the activity reclassified from accumulated other comprehensive income into income during the three month periods ended March 31, 2022 and 2021, respectively:
| Amount reclassified from accumulated other comprehensive income (loss) | ||||||||||||||||||||
| Three months ended | ||||||||||||||||||||
| March 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | Affected Line Item in the Consolidated Statements of Income | |||||||||||||||||
| Realized gain (loss) on securities available-for-sale | $ | (3) | $ | (166) | Net gains (losses) on sales of investments securities | |||||||||||||||
| Defined benefit pension plan | ||||||||||||||||||||
Amortization of prior service cost (1) | 75 | 100 | Other noninterest expense | |||||||||||||||||
Recognized net actuarial loss (1) | (400) | (625) | Other noninterest expense | |||||||||||||||||
| Defined benefit pension plan total | (325) | (525) | ||||||||||||||||||
| Total reclassifications for the period, before tax | $ | (328) | $ | (691) | ||||||||||||||||
(1) Included in the computation of net periodic pension cost (see Note 14 - Employee Benefit Plans for additional details).
NOTE 11: DERIVATIVES
First Financial uses certain derivative instruments, including interest rate caps, floors, swaps and foreign exchange contracts, to meet the needs of its clients while managing the interest and currency rate risk associated with certain transactions. First Financial may also utilize interest rate swaps to manage the interest rate risk profile of the Company. Interest rate payments are exchanged with counterparties, based on the notional amount established in the interest rate agreement. As only interest rate payments are exchanged, the cash requirements and credit risk associated with interest rate swaps are significantly less than the notional amount and the Company’s credit risk exposure is limited to the market value of the instruments. First Financial does not use derivatives for speculative purposes.
First Financial manages market value credit risk through counterparty credit policies including a review of total derivative notional position to total assets, total credit exposure to total capital and counterparty credit exposure risk.
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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 March 31, 2022, for the interest rate derivatives, the Company had a total counterparty notional amount outstanding of $2.3 billion, spread among six counterparties, with an estimated fair value of $40.2 million. At December 31, 2021, the Company had interest rate derivatives with a total counterparty notional amount outstanding of $2.4 billion, spread among six counterparties, with an estimated fair value of $74.2 million.
First Financial monitors its derivative credit exposure to borrowers by monitoring the creditworthiness of the related loan customers through the Company's normal credit review processes. Additionally, the Company's ACL Committee monitors derivative credit risk exposure related to problem loans through the Company's ACL committee. First Financial considers the market value of a derivative instrument to be part of the carrying value of the related loan for these purposes as the borrower is contractually obligated to pay First Financial this amount in the event the derivative contract is terminated.
In connection with its use of derivative instruments, First Financial and its counterparties may be required to post cash collateral to offset the market position of the derivative instruments. First Financial maintains the right to offset these derivative positions with the collateral posted against them by or with the relevant counterparties.
Foreign exchange contracts. First Financial may enter into foreign exchange derivative contracts for the benefit of commercial customers to hedge their exposure to foreign currency fluctuations. Similar to the hedging of interest rate risk from interest rate derivative contracts, First Financial also enters into foreign exchange contracts with major financial institutions to economically hedge a substantial portion of the exposure from client driven foreign exchange activity. These derivatives are classified as free-standing instruments with the revaluation gain or loss recorded in Foreign exchange income in the Consolidated Statements of Income. The Company has risk limits and internal controls in place to help ensure excessive risk is not being taken in providing this service to customers. These controls include an independent determination of currency volatility and credit equivalent exposure on these contracts, counterparty credit approvals and country limits performed by independent risk management. At March 31, 2022, the Company had total counterparty notional amount outstanding of $6.4 billion spread among four counterparties, with an estimated fair value of $25.2 million. At December 31, 2021, the Company had total counterparty notional amounts outstanding of $6.4 billion spread among four counterparties, with an estimated fair value of $15.2 million.
In connection with its use of foreign exchange contracts, First Financial and its counterparties may be required to post cash collateral to offset the market position of the derivative instruments. First Financial maintains the right to offset these derivative positions with the collateral posted against them by or with the relevant counterparties.
The following table details the classification and amounts of client derivatives and foreign exchange contracts recognized in the Consolidated Balance Sheets:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||
| Estimated fair value | Estimated fair value | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Balance sheet classification | Notional amount | Gain | Loss | Notional amount | Gain | Loss | |||||||||||||||||||||||||||||||||||||
| Client derivatives - instruments associated with loans | ||||||||||||||||||||||||||||||||||||||||||||
| Matched interest rate swaps with borrower | Accrued interest and other assets | $ | 2,348,703 | $ | 18,399 | $ | (55,970) | $ | 2,430,587 | $ | 84,694 | $ | (7,508) | |||||||||||||||||||||||||||||||
| Matched interest rate swaps with counterparty | Accrued interest and other liabilities | 2,348,703 | 55,970 | (18,399) | 2,430,587 | 7,508 | (84,701) | |||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | ||||||||||||||||||||||||||||||||||||||||||||
Matched foreign exchange contracts with customers | Accrued interest and other assets | 6,406,294 | 85,265 | (60,111) | 6,423,085 | 67,988 | (52,780) | |||||||||||||||||||||||||||||||||||||
Match foreign exchange contracts with counterparty | Accrued interest and other liabilities | 6,376,299 | 60,111 | (85,265) | 6,399,432 | 52,780 | (67,988) | |||||||||||||||||||||||||||||||||||||
| Total | $ | 17,479,999 | $ | 219,745 | $ | (219,745) | $ | 17,683,691 | $ | 212,970 | $ | (212,977) | ||||||||||||||||||||||||||||||||
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The following table discloses the gross and net amounts of client derivatives and foreign exchange contracts recognized in the Consolidated Balance Sheets:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| (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 (1) | ||||||||||||||||||||||||||||||||||||||
| Matched interest rate swaps with counterparty | $ | 74,369 | $ | (127,096) | $ | (52,727) | $ | 92,209 | $ | (149,647) | $ | (57,438) | ||||||||||||||||||||||||||
| Foreign exchange contracts with counterparty | 145,376 | (71,386) | 73,990 | 120,768 | (56,443) | 64,325 | ||||||||||||||||||||||||||||||||
| Total | $ | 219,745 | $ | (198,482) | $ | 21,263 | $ | 212,977 | $ | (206,090) | $ | 6,887 | ||||||||||||||||||||||||||
| (1) Includes accrued interest receivable and collateral. | ||||||||||||||||||||||||||||||||||||||
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 March 31, 2022:
| (Dollars in thousands) | Notional amount | Average maturity (years) | Fair value | |||||||||||||||||
| Client derivatives-interest rate contracts | ||||||||||||||||||||
| Receive fixed, matched interest rate swaps with borrower | $ | 2,348,703 | 5.6 | $ | (37,571) | |||||||||||||||
| Pay fixed, matched interest rate swaps with counterparty | 2,348,703 | 5.6 | 37,571 | |||||||||||||||||
Client derivatives-foreign exchange contracts | ||||||||||||||||||||
Foreign exchange contracts-pay USD | $ | 6,406,294 | 0.6 | 25,154 | ||||||||||||||||
Foreign exchange contracts-receive USD | $ | 6,376,299 | 0.6 | (25,154) | ||||||||||||||||
| Total client derivatives | $ | 17,479,999 | 1.9 | $ | 0 | |||||||||||||||
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 $370.0 million as of March 31, 2022 and $362.8 million as of December 31, 2021. The fair value of these agreements is recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets and was insignificant at March 31, 2022 and $0.1 million at December 31, 2021.
Mortgage derivatives. First Financial enters into IRLCs and forward commitments for the future delivery of mortgage loans to third party investors, which are considered derivatives. When borrowers secure IRLCs with First Financial and the loans are intended to be sold, First Financial will enter into forward commitments for the future delivery of the loans to third party investors in order to hedge against the effect of changes in interest rates impacting IRLCs and loans held for sale. At March 31, 2022, the notional amount of the IRLCs was $53.1 million and the notional amount of forward commitments was $62.5 million. As of December 31, 2021, the notional amount of IRLCs was $45.0 million and the notional amount of forward commitments was $62.5 million. The fair value on these agreements was $0.9 million and $3.3 million at March 31, 2022 and December 31, 2021, respectively, and was recorded in accrued interest and other assets on the Consolidated Balance Sheets.
NOTE 12: COMMITMENTS AND CONTINGENCIES
First Financial offers a variety of financial instruments including loan commitments and letters of credit to assist clients in meeting their requirement for liquidity and credit enhancement. GAAP does not require these financial instruments to be recorded in the Consolidated Financial Statements.
First Financial utilizes the same credit policies in issuing commitments and conditional obligations as it does for credit instruments recorded on the Consolidated Balance Sheets. First Financial’s exposure to credit loss in the event of non-performance by the counterparty was represented by the contractual amounts of those instruments. First Financial adopted ASC 326 and therefore estimates expected credit losses over the contractual period in which the Company is exposed to credit risk
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via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life consistent with the Company's ACL methodology for loans and leases. Adjustments to the reserve for unfunded commitments are recorded in Provision for credit losses - unfunded commitments in the Consolidated Statements of Income. First Financial had $13.2 million and $13.4 million of reserves for unfunded commitments recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets at March 31, 2022 and December 31, 2021, respectively.
Loan commitments. Loan commitments are agreements to extend credit to a client, absent any violation of conditions established in the commitment agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments will expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by First Financial upon extension of credit, is based on management’s credit evaluation of the client. The collateral held varies, but may include securities, real estate, inventory, plant or equipment. First Financial had commitments outstanding to extend credit totaling $4.1 billion at March 31, 2022 and $4.0 billion at December 31, 2021. As of March 31, 2022, loan commitments with a fixed interest rate totaled $136.1 million while commitments with variable interest rates totaled $4.0 billion. At December 31, 2021, loan commitments with a fixed interest rate totaled $129.2 million while commitments with variable interest rates totaled $3.8 billion. First Financial's fixed rate loan commitments have interest rates ranging from 0.00% to 21.00% for both March 31, 2022 and December 31, 2021 and have maturities ranging from less than one year to 30.2 years for March 31, 2022 and less than one year to 30.9 years for December 31, 2021.
The following table presents by type First Financial's active loan balances and related obligations to extend credit:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| (dollars in thousands) | Unfunded commitment | Loan balance | Unfunded commitment | Loan balance | ||||||||||||||||||||||
| Commercial & industrial | $ | 1,586,554 | $ | 2,800,209 | $ | 1,545,995 | $ | 2,720,028 | ||||||||||||||||||
| Lease financing | 16,420 | 125,867 | 18,037 | 109,624 | ||||||||||||||||||||||
| Construction real estate | 527,550 | 479,744 | 484,038 | 455,894 | ||||||||||||||||||||||
| Commercial real estate-investor | 98,455 | 3,061,665 | 65,660 | 3,154,755 | ||||||||||||||||||||||
| Commercial real estate-owner | 29,300 | 969,819 | 29,824 | 1,071,859 | ||||||||||||||||||||||
| Residential real estate | 51,915 | 913,838 | 50,043 | 896,069 | ||||||||||||||||||||||
| Home equity | 834,319 | 707,973 | 822,343 | 708,399 | ||||||||||||||||||||||
| Installment | 13,998 | 132,197 | 15,985 | 119,454 | ||||||||||||||||||||||
| Credit card | 222,072 | 50,305 | 217,006 | 52,217 | ||||||||||||||||||||||
| Total | $ | 3,380,583 | $ | 9,241,617 | $ | 3,248,931 | $ | 9,288,299 | ||||||||||||||||||
Letters of credit. Letters of credit are conditional commitments issued by First Financial to guarantee the performance of a client to a third party. First Financial’s letters of credit consist of performance assurances made on behalf of clients who have a contractual commitment to produce or deliver goods or services. The risk to First Financial arises from its obligation to make payment in the event of the client's contractual default to produce the contracted good or service to a third party. First Financial issued letters of credit aggregating $40.4 million and $41.1 million at March 31, 2022 and December 31, 2021, 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 $370.0 million and $362.8 million at March 31, 2022 and December 31, 2021, 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 March 31, 2022, 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.
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| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||
| Investment | Accounting Method | Investment | Unfunded commitment | Investment | Unfunded commitment | |||||||||||||||||||||||||||
| LIHTC | Proportional amortization | $ | 112,653 | $ | 58,641 | $ | 108,974 | $ | 57,341 | |||||||||||||||||||||||
| HTC | Equity | 2,581 | 56 | 2,581 | 56 | |||||||||||||||||||||||||||
| NMTC | Equity | 3,660 | 0 | 3,895 | 0 | |||||||||||||||||||||||||||
| Renewable energy | Equity | 18,575 | 12,601 | 18,585 | 15,114 | |||||||||||||||||||||||||||
| Total | $ | 137,469 | $ | 71,298 | $ | 134,035 | $ | 72,511 | ||||||||||||||||||||||||
The following tables summarize First Financial's amortization expense and tax benefit recognized in affordable housing projects and other tax credit investments.
| Three months ended | ||||||||||||||||||||||||||||||||
| March 31, 2022 | March 31, 2021 | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amortization expense (1) | Tax expense (benefit) recognized (2) | Amortization expense (1) | Tax expense (benefit) recognized (2) | ||||||||||||||||||||||||||||
| LIHTC | $ | 3,048 | $ | (2,959) | $ | 2,036 | $ | (2,183) | ||||||||||||||||||||||||
| HTC | 0 | (80) | 155 | (80) | ||||||||||||||||||||||||||||
| NMTC | 104 | (53) | 53 | (53) | ||||||||||||||||||||||||||||
| Renewable energy | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||
| Total | $ | 3,152 | $ | (3,092) | $ | 2,244 | $ | (2,316) | ||||||||||||||||||||||||
| (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 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 Statements of Income during 2021. No legal settlement expenses were accrued or paid in either of the three months ended March 31, 2022 or 2021.
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 March 31, 2022. 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 March 31, 2022 or December 31, 2021.
NOTE 13: INCOME TAXES
For the first three months of 2022, income tax expense was $9.3 million, resulting in an effective tax rate of 18.5% compared with income tax expense of $10.4 million and an effective tax rate of 18.0% for the comparable period in 2021. The increase in the effective tax rate is primarily due to increases in executive compensation and nondeductible acquisition costs in the first three months of 2022 compared to the first three months of 2021.
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At both March 31, 2022 and December 31, 2021, First Financial had $1.9 million of unrecognized tax benefits, as determined under FASB ASC Topic 740-10, Income Taxes, that if recognized would favorably impact the effective income tax rate in future periods. The unrecognized tax benefits relate to state income tax exposures where the Company believes it is likely that, upon examination, a state may take a position contrary to the position taken by First Financial. The Company believes that resolution regarding its 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 March 31, 2022 and December 31, 2021, 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.
NOTE 14: EMPLOYEE BENEFIT PLANS
First Financial sponsors a non-contributory defined benefit pension plan which covers substantially all employees and uses a December 31 measurement date for the plan. Plan assets are primarily invested in fixed income and publicly traded equity mutual funds. The pension plan does not directly own any shares of First Financial common stock or any other First Financial security or product.
First Financial made no cash contributions to fund the pension plan during the three months ended March 31, 2022 or the year ended December 31, 2021, and does not expect to make cash contributions to the plan through the remainder of 2022.
As a result of the plan’s actuarial projections, First Financial recorded expense as set forth in the following table. The amounts are recognized in First Financial’s Consolidated Statements of Income related to the Company's pension plan.
| Three months ended | ||||||||||||||
| March 31, | ||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | ||||||||||||
| Service cost | $ | 2,425 | $ | 2,350 | ||||||||||
| Interest cost | 625 | 525 | ||||||||||||
| Expected return on assets | (2,750) | (2,550) | ||||||||||||
| Amortization of prior service cost | (75) | (100) | ||||||||||||
| Net actuarial loss | 400 | 625 | ||||||||||||
| Net periodic benefit cost (income) | $ | 625 | $ | 850 | ||||||||||
NOTE 15: REVENUE RECOGNITION
The majority of the Company’s revenues come from sources that are outside of the scope of ASU 2014-09, Revenue from Contracts with Customers. Income sources that are outside of this standard include income earned on loans, leases, securities, derivatives and foreign exchange The Company's services that fall within the scope of ASU 2014-09 are presented within Noninterest income and are recognized as revenue when the Company satisfies its obligation to the customer. Services within the scope of this guidance include service charges on deposits, trust and wealth management fees, bankcard income, gain/loss on the sale of OREO and investment brokerage fees.
Service charges on deposit accounts. The Company earns revenues from its deposit customers for transaction-based fees, account maintenance fees and overdraft fees. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Similarly, overdraft fees are recognized at the point in time that the overdraft occurs as this corresponds with the Company's performance obligation. Service charges on deposit accounts are withdrawn from the customer's deposit account.
Trust and wealth management fees. Trust and wealth management fees are primarily asset-based, but can also include flat fees based upon a specific service rendered, such as tax preparation services. The Company’s performance obligation is
32
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 the first quarter of 2022 was $6.9 million, which was partially offset by $3.6 million of expenses within Noninterest income. Similarly, gross interchange income for the first quarter of 2021 was $5.7 million, which was partially offset by $3.0 million of expenses.
Other. Other noninterest income includes 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 time 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.
NOTE 16: EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share:
| Three months ended | ||||||||||||||
| March 31, | ||||||||||||||
| (Dollars in thousands, except per share data) | 2022 | 2021 | ||||||||||||
| Numerator | ||||||||||||||
| Net income available to common shareholders | $ | 41,301 | $ | 47,315 | ||||||||||
| Denominator | ||||||||||||||
| Weighted average shares outstanding for basic earnings per common share | 93,383,932 | 96,873,940 | ||||||||||||
| Effect of dilutive securities | ||||||||||||||
| Employee stock awards | 879,993 | 853,587 | ||||||||||||
| Adjusted weighted average shares for diluted earnings per common share | 94,263,925 | 97,727,527 | ||||||||||||
| Earnings per share available to common shareholders | ||||||||||||||
| Basic | $ | 0.44 | $ | 0.49 | ||||||||||
| Diluted | $ | 0.44 | $ | 0.48 | ||||||||||
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Stock options and warrants with exercise prices greater than the average market price of the common shares were not included in the computation of net income per diluted share, as they would have been antidilutive. Using the end of period price of the Company's common shares, there were no antidilutive options at March 31, 2022 and March 31, 2021.
NOTE 17: 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 | |||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||
| Financial assets | ||||||||||||||||||||||||||||||||
| Cash and short-term investments | $ | 457,575 | $ | 457,575 | $ | 457,575 | $ | 0 | $ | 0 | ||||||||||||||||||||||
| Investment securities held-to-maturity | 92,597 | 90,001 | 0 | 90,001 | 0 | |||||||||||||||||||||||||||
| Other investments | 114,563 | 114,563 | 1,133 | 103,815 | 9,615 | |||||||||||||||||||||||||||
| Loans and leases | 9,117,487 | 9,074,978 | 0 | 0 | 9,074,978 | |||||||||||||||||||||||||||
| Accrued interest receivable | 42,623 | 42,623 | 0 | 14,410 | 28,213 | |||||||||||||||||||||||||||
| Financial liabilities | ||||||||||||||||||||||||||||||||
| Deposits | 12,818,908 | 12,807,327 | 0 | 12,807,327 | 0 | |||||||||||||||||||||||||||
| Short-term borrowings | 185,000 | 185,000 | 185,000 | 0 | 0 | |||||||||||||||||||||||||||
| Long-term debt | 379,840 | 381,097 | 0 | 381,097 | 0 | |||||||||||||||||||||||||||
| Accrued interest payable | 4,662 | 4,662 | 25 | 4,637 | 0 | |||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||
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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 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 $15.0 million and $28.8 million at March 31, 2022 and December 31, 2021, respectively, with a valuation allowance of $6.7 million and $9.7 million at March 31, 2022 and December 31, 2021, 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).
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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.
Operating leases. First Financial performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable and therefore, the carrying value of Operating leases is not re-measured to fair value on a recurring basis. When evaluating whether an individual asset is impaired, First Financial considers the current fair value of the asset, the changes in overall market demand for the asset and the rate of change in advancements associated with technological improvements that impact the demand for the specific asset under review. First Financial determines whether the carrying values of certain operating leases are not recoverable and as a result, records an impairment loss equal to the amount by which the carrying value of the assets exceeds the fair value. The fair value amounts are generally based on appraised values of the assets, resulting in a classification within Level 3 of the valuation hierarchy.
The financial assets and liabilities measured at fair value on a recurring basis in the consolidated financial statements were as follows:
| Fair value measurements using | ||||||||||||||||||||||||||
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Assets/liabilities at fair value | ||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Investment securities available-for-sale | $ | 32,724 | $ | 3,887,697 | $ | 37,461 | $ | 3,957,882 | ||||||||||||||||||
| Loans held for sale | 0 | 12,670 | 0 | 12,670 | ||||||||||||||||||||||
| Interest rate derivative contracts | 0 | 74,438 | 0 | 74,438 | ||||||||||||||||||||||
| Foreign exchange derivative contracts | 0 | 145,376 | 0 | 145,376 | ||||||||||||||||||||||
| Total | $ | 32,724 | $ | 4,120,181 | $ | 37,461 | $ | 4,190,366 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Interest rate derivative contracts | $ | 0 | $ | 74,475 | $ | 0 | $ | 74,475 | ||||||||||||||||||
| Foreign exchange derivative contracts | 0 | 145,376 | 0 | 145,376 | ||||||||||||||||||||||
| Total | $ | 0 | $ | 219,851 | $ | 0 | $ | 219,851 | ||||||||||||||||||
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| Fair value measurements using | ||||||||||||||||||||||||||
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Assets/liabilities 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 | ||||||||||||||||||
The following table presents a reconciliation for certain AFS securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2022 and March 31, 2021.
| Three months ended | ||||||||||||||
| March 31, | ||||||||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||||||||
| Beginning balance | $ | 38,181 | $ | 40,575 | ||||||||||
| Accretion (amortization) | (13) | (9) | ||||||||||||
| Increase (decrease) in fair value | 13 | 12 | ||||||||||||
| Settlements | (720) | (900) | ||||||||||||
| Ending balance | $ | 37,461 | $ | 39,678 | ||||||||||
Certain financial assets and liabilities are measured at fair value on a nonrecurring basis. Adjustments to the fair 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 | |||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Collateral dependent loans | ||||||||||||||||||||
| Commercial | $ | 0 | $ | 0 | $ | 4,448 | ||||||||||||||
| Commercial real estate | 0 | 0 | 3,803 | |||||||||||||||||
| OREO | 0 | 0 | 0 | |||||||||||||||||
| Operating leases | 0 | 0 | 0 | |||||||||||||||||
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| 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 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 March 31, 2022 and December 31, 2021 was $12.7 million and $29.5 million, respectively. The aggregate unpaid principal balance of the Company’s residential mortgage loans held for sale as of March 31, 2022 and December 31, 2021 was $11.7 million and $27.2 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 $0.9 million and $2.3 million as of March 31, 2022 and December 31, 2021, 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. The change in fair value of the Company’s residential mortgage loans held for sale resulted in a net loss of $1.3 million for each of the three months ended March 31, 2022 and March 31, 2021.
NOTE 18: BUSINESS COMBINATIONS
On December 31, 2021, the Company completed its acquisition of Summit Funding Group, Inc. and its subsidiaries. Formerly privately held, Summit is a 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, but are included in the Consolidated Statement of Income for the three months ended March 31, 2022.
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 $0.2 million in the first quarter of 2022 and $2.6 million during the year ended December 31, 2021.
38
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 $186.8 million and $121.9 million, respectively, and included $41.8 million of financing leases and $75.3 million of operating leases. Acquisition accounting adjustments are considered preliminary at March 31, 2022. 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 $62.2 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 6 – Goodwill and Other Intangible Assets.
The following table provides the purchase price calculation as of the acquisition date, identifiable assets purchased and liabilities assumed at their estimated fair value.
| (Dollars in thousands) | Summit | ||||
| Purchase consideration | |||||
| Cash consideration | $ | 102,994 | |||
| Liabilities paid with cash concurrent with close | 10,487 | ||||
| Stock consideration | 10,000 | ||||
| Earn out | 3,606 | ||||
| Total purchase consideration | 127,087 | ||||
| Assets acquired | |||||
| Cash | 4,456 | ||||
| Finance leases | 41,840 | ||||
| Premises and equipment | 707 | ||||
| Operating leases | 75,347 | ||||
| Intangible assets | 34,585 | ||||
| Other assets | 29,865 | ||||
| Total assets acquired | 186,800 | ||||
| Liabilities assumed | |||||
| Long-term borrowings | 96,412 | ||||
| Other liabilities | 25,489 | ||||
| Total liabilities assumed | 121,901 | ||||
| Net identifiable assets | 64,899 | ||||
| Goodwill | $ | 62,188 | |||
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
(Unaudited)
All reclassifications of prior period amounts, if applicable, have been made to conform to the current period’s presentation and had no effect on the Company's previously reported net income or financial condition.
In November 2020, the SEC adopted amendments to Regulation S-K to eliminate certain disclosure requirements and to revise several others to make the disclosures provided in the MD&A more useful for investors. When providing a discussion and analysis of interim period results, the amendments provide a registrant with the option to discuss its interim results by comparing its most recent quarter to the immediately preceding quarter rather than to the same quarter of the prior year. The Company elected to exercise this option as it believes that the comparison of current quarter results to a linked quarter, rather than the prior year comparable quarter, more accurately reflects management's perspective of the organization and its results. In the first quarter of 2022, which is the first period of transition, the Company provided comparisons to both the immediately preceding quarter and the comparable quarter of the prior year, as required in the amendments.
EXECUTIVE SUMMARY
First Financial Bancorp. is a $16.0 billion financial holding company headquartered in Cincinnati, Ohio, which operates through its subsidiaries. These subsidiaries include First Financial Bank, an Ohio-chartered commercial bank, which operated 135 full service banking centers as of March 31, 2022. First Financial provides banking and financial services products to business and retail clients through its six lines of business: Commercial, Retail Banking, Mortgage Banking, Wealth Management, Investment Commercial Real Estate and Commercial Finance. Commercial Finance provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and commission-based financing, primarily to insurance agents and brokers, throughout the United States. Wealth Management had $3.3 billion in assets under management as of March 31, 2022 and provides a range of services which includes financial planning, investment management, trust administration, estate settlement, brokerage services and retirement planning.
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
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.
40
First Financial acquired 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, $10.0 million of First Financial common stock, and a $3.6 million earn-out payment. Under the purchase agreement, “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 $0.2 million in the first quarter of 2022 and $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 $186.8 million and $121.9 million, respectively, and included $41.8 million of financing leases and $75.3 million of operating leases. These present value measurements are considered preliminary and are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values become available. The measurement period for the Summit acquisition ends in December 2022.
Goodwill arising from the Summit acquisition was $62.2 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 6 – Goodwill and Other Intangible Assets.
See Note 18 – Business Combinations in the Notes to Consolidated Financial Statements, for further discussion of the Summit transaction.
COVID-19 CONSIDERATIONS
The Company's operations and financial results have been substantially influenced by the COVID-19 pandemic. At the onset of the pandemic, the Company updated operating protocols to continuously provide virtually all 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.
Sales associates, support teams and management returned to corporate offices and operations centers in the second and third quarters of 2021. The Company has continued to prioritize the health and safety of clients and associates, although without the significant disruptions to our workforce that occurred at the onset of the pandemic.
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, and as of March 31, 2022, the Company had outstanding PPP loans totaling $21.2 million in balances, net of $1.0 million of unearned fees compared to $55.6 million in balances, net of $2.6 million of unearned fees, as of of December 31, 2021.
Further, to provide relief to borrowers adversely impacted by the pandemic, the Company had $16.7 million of loans with principal amounts deferred and interest-only payments required as of March 31, 2022, and $16.5 million of similar COVID-19 related deferrals as of December 31, 2021. As provided in the CARES Act and subsequently amended by the Consolidated Appropriations Act, loan modifications in response to COVID-19 that were executed between March 1, 2020 and January 1, 2022 on a loan that was not more than 30 days past due as of December 31, 2019 are not required to be reported as TDR.
OVERVIEW OF OPERATIONS
First quarter 2022 net income was $41.3 million and earnings per diluted common share were $0.44. This compares with fourth quarter 2021 net income of $46.9 million and earnings per diluted common share of $0.50, and first quarter 2021 net income of $47.3 million and earnings per diluted common share of $0.48.
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Return on average assets for the first quarter of 2022 was 1.03% compared to 1.16% for the fourth quarter of 2021 and 1.20% for the comparable period in 2021. Return on average shareholders’ equity for the first quarter of 2022 was 7.53% compared to 8.31% or the fourth quarter of 2021 and 8.44% for the first quarter of 2021.
| For the three months ended | ||||||||||||||||||||
| (Dollars in thousands, except per share data) | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
| Earnings | ||||||||||||||||||||
| Net interest income | $ | 106,346 | $ | 110,806 | $ | 113,876 | ||||||||||||||
| Net income | 41,301 | $ | 46,945 | $ | 47,315 | |||||||||||||||
| Per Share | ||||||||||||||||||||
| Net income per common share-basic | $ | 0.44 | $ | 0.51 | $ | 0.49 | ||||||||||||||
| Net income per common share-diluted | 0.44 | 0.50 | 0.48 | |||||||||||||||||
| Cash dividends declared per common share | 0.23 | 0.23 | 0.23 | |||||||||||||||||
| Tangible book value per common share (end of period) | 10.97 | 12.26 | 12.78 | |||||||||||||||||
| Market price (end of period) | 23.05 | 24.38 | 24.00 | |||||||||||||||||
| Balance Sheet - End of Period | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
| Total assets | $ | 16,009,150 | $ | 16,329,141 | $ | 16,175,071 | ||||||||||||||
| Loans | 9,241,617 | 9,288,299 | 9,933,969 | |||||||||||||||||
| Investment securities | 4,165,042 | 4,409,237 | 4,007,522 | |||||||||||||||||
| Deposits | 12,818,908 | 12,871,954 | 12,648,069 | |||||||||||||||||
| Shareholders' equity | 2,137,445 | 2,258,942 | 2,258,942 | |||||||||||||||||
| For the three months ended | ||||||||||||||||||||
| Ratios | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
| Return on average assets | 1.03 | % | 1.16 | % | 1.20 | % | ||||||||||||||
| Return on average shareholders' equity | 7.53 | % | 8.31 | % | 8.44 | % | ||||||||||||||
| Return on average tangible shareholders' equity | 14.93 | % | 15.11 | % | 15.24 | % | ||||||||||||||
| Net interest margin | 3.12 | % | 3.19 | % | 3.35 | % | ||||||||||||||
| Net interest margin (fully tax equivalent) | 3.17 | % | 3.23 | % | 3.40 | % | ||||||||||||||
A discussion of First Financial's operating results for the three month periods ended March 31, 2022 follows.
NON-GAAP FINANCIAL MEASURES
The company utilizes certain non-GAAP financial measures, which we believe provide useful insight to the reader of the Consolidated Financial Statements. These non-GAAP measures should be supplemental to primary GAAP measures and should not be read in isolation or relied upon as a substitute for the primary GAAP measures.
For analytical purposes, net interest income is presented in the following table adjusted to a tax equivalent basis assuming a 21% marginal tax rate. Net interest income is disclosed on a tax equivalent basis to consistently reflect income from tax-exempt assets, such as municipal loans and investments, in order to facilitate a comparison between taxable and tax-exempt amounts. Management believes it is a standard practice in the banking industry to present net interest margin and net interest income on a fully tax equivalent basis as these measures provide useful information to make peer comparisons.
42
| Three months ended | ||||||||||||||||||||
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
| Net interest income | $ | 106,346 | $ | 110,806 | $ | 113,876 | ||||||||||||||
| Tax equivalent adjustment | 1,467 | 1,386 | 1,652 | |||||||||||||||||
| Net interest income - tax equivalent | $ | 107,813 | $ | 112,192 | $ | 115,528 | ||||||||||||||
| Average earning assets | $ | 13,809,520 | $ | 13,793,644 | $ | 13,781,760 | ||||||||||||||
Net interest margin (1) | 3.12 | % | 3.19 | % | 3.35 | % | ||||||||||||||
Net interest margin (fully tax equivalent) (1) | 3.17 | % | 3.23 | % | 3.40 | % | ||||||||||||||
(1) Calculated using annualized net interest income divided by average earning assets.
First Financial believes return on average tangible common equity is an important measure for comparative purposes with other financial institutions, but is not defined under GAAP, and therefore is considered a non-GAAP financial measure. This measure is useful for evaluating the performance of a business as it calculates the return available to common shareholders without the impact of intangible assets and their related amortization.
In addition, First Financial considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio and tangible common equity ratio, in addition to capital ratios defined by the U.S. banking agencies. These calculations are intended to complement the capital ratios defined by the U.S. banking agencies for both absolute and comparative purposes. As GAAP does not include capital ratio measures, the Company believes there are no comparable GAAP financial measures to these ratios. These ratios are not formally defined by GAAP or codified in the federal banking regulations and, therefore, are considered to be non-GAAP financial measures. First Financial encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely on any single financial measure.
The following table reconciles non-GAAP capital ratios to GAAP:
| Three months ended | ||||||||||||||||||||
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
Net income (a) | $ | 41,301 | $ | 46,945 | $ | 47,315 | ||||||||||||||
| Average total shareholders' equity | 2,225,495 | 2,241,820 | 2,272,749 | |||||||||||||||||
| Less: | ||||||||||||||||||||
| Goodwill | (1,000,238) | (938,453) | (937,771) | |||||||||||||||||
| Other intangibles | (87,602) | (56,120) | (63,529) | |||||||||||||||||
| MSR's | (15,431) | (14,886) | (12,749) | |||||||||||||||||
Average tangible equity (b) | 1,122,224 | 1,232,361 | 1,258,700 | |||||||||||||||||
| Total shareholders' equity | 2,137,445 | 2,258,942 | 2,258,942 | |||||||||||||||||
| Less: | ||||||||||||||||||||
| Goodwill | (999,959) | (1,000,749) | (937,771) | |||||||||||||||||
| Other intangibles | (85,891) | (88,898) | (61,984) | |||||||||||||||||
| MSR's | (15,782) | (15,469) | (13,156) | |||||||||||||||||
Ending tangible equity (c) | 1,035,813 | 1,153,826 | 1,246,031 | |||||||||||||||||
| Total assets | 16,009,150 | 16,329,141 | 16,175,071 | |||||||||||||||||
| Less: | ||||||||||||||||||||
43
| Goodwill | (999,959) | (1,000,749) | (937,771) | |||||||||||||||||
| Other intangibles | (85,891) | (88,898) | (61,984) | |||||||||||||||||
| MSR's | (15,782) | (15,469) | (13,156) | |||||||||||||||||
Ending tangible assets (d) | 14,907,518 | 15,224,025 | 15,162,160 | |||||||||||||||||
Risk-weighted assets (e) | 11,704,681 | 11,645,666 | 11,304,012 | |||||||||||||||||
| Total average assets | 16,184,919 | 16,036,417 | 16,042,654 | |||||||||||||||||
| Less: | ||||||||||||||||||||
| Goodwill | (1,000,238) | (938,453) | (937,771) | |||||||||||||||||
| Other intangibles | (87,602) | (56,120) | (63,529) | |||||||||||||||||
| MSR's | (15,431) | (14,886) | (12,749) | |||||||||||||||||
Average tangible assets (f) | 15,081,648 | 15,026,958 | 15,028,605 | |||||||||||||||||
Ending common shares outstanding (g) | 94,451,496 | 94,149,240 | 97,517,693 | |||||||||||||||||
| Ratios | ||||||||||||||||||||
Return on average tangible shareholders' equity (a)/(b) | 14.93 | % | 15.11 | % | 15.24 | % | ||||||||||||||
| Ending tangible shareholders' equity as a percent of: | ||||||||||||||||||||
Ending tangible assets (c)/(d) | 6.95 | % | 7.58 | % | 8.22 | % | ||||||||||||||
Risk-weighted assets (c)/(e) | 8.85 | % | 9.91 | % | 11.02 | % | ||||||||||||||
Average tangible shareholders' equity of average tangible assets (b)/(f) | 7.44 | % | 8.20 | % | 8.38 | % | ||||||||||||||
Tangible book value per share (c)/(g) | $ | 10.97 | $ | 12.26 | $ | 12.78 | ||||||||||||||
44
NET INTEREST INCOME
First Financial’s principal source of income is net interest income, which is interest received from earning assets, including loan-related fees and purchase accounting accretion, minus 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.
| Three months ended | ||||||||||||||||||||
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
| Interest income | ||||||||||||||||||||
| Loans and leases, including fees | $ | 87,182 | $ | 92,682 | $ | 98,931 | ||||||||||||||
| Investment securities | ||||||||||||||||||||
| Taxable | 22,096 | 20,993 | 18,607 | |||||||||||||||||
| Tax-exempt | 4,431 | 4,127 | 5,043 | |||||||||||||||||
| Total interest on investment securities | 26,527 | 25,120 | 23,650 | |||||||||||||||||
| Other earning assets | 121 | 71 | 28 | |||||||||||||||||
| Total interest income | 113,830 | 117,873 | 122,609 | |||||||||||||||||
| Interest expense | ||||||||||||||||||||
| Deposits | 2,623 | 3,089 | 4,333 | |||||||||||||||||
| Short-term borrowings | 317 | 10 | 67 | |||||||||||||||||
| Long-term borrowings | 4,544 | 3,968 | 4,333 | |||||||||||||||||
| Total interest expense | 7,484 | 7,067 | 8,733 | |||||||||||||||||
| Net interest income | $ | 106,346 | $ | 110,806 | $ | 113,876 | ||||||||||||||
First quarter 2022 vs. fourth quarter 2021: Net interest income for the first quarter of 2022 was $106.3 million, a decrease of $4.5 million, or 4.0%, from the fourth quarter of 2021. Net interest margin on a fully tax equivalent basis for the quarter ended March 31, 2022 was 3.17%, a decrease of 6 bps when compared to the fourth quarter of 2021 FTE net interest margin of 3.23%.
Interest income decreased $4.0 million, or 3.4%, in the first quarter of 2022 when compared to the fourth quarter of 2021 due to a 14 bp decrease in the yield on loans, which was driven by lower prepayment and PPP forgiveness fees. Average earning assets of $13.8 billion in the first quarter of 2022 were relatively flat compared to the fourth quarter of 2021.
Interest expense of $7.5 million increased $0.4 million, or 5.9% in the first quarter of 2022 when compared to the fourth quarter of 2021 largely due to an increase in borrowings. The cost of interest-bearing deposits was 0.12% in the first quarter of 2022 compared to 0.14% in the linked quarter, while average deposits decreased $101.3 million, or 0.8%, to $12.8 billion in the first quarter of 2022 when compared to the fourth quarter of 2021. Average borrowed funds increased $304.5 million, or 76.8%, compared to the linked quarter due the full quarter impact from the Summit acquisition and a funding shift from brokered CD's to short-term borrowings.
First quarter 2022 vs. first quarter 2021: First quarter 2022 net interest income decreased $7.5 million, or 6.6%, compared to the first quarter of 2021. Net interest margin on a fully tax equivalent basis for the quarter ended March 31, 2022 decreased 23 bps when compared to the first quarter of 2021 FTE net interest margin of 3.40%.
In addition, interest income declined $8.8 million, or 7.2%, to $113.8 million compared to $122.6 million for the same period of the prior year. Similar to the linked quarter change, the current quarter decline compared to the first quarter in 2021 was driven by lower loan fees, which include PPP forgiveness fees. Average earning assets of $13.8 billion in the first quarter of 2022 increased $27.8 million from the same quarter of 2021 as the acquisition of Summit and higher investment security balances offset a decline in average loan balances.
45
Interest expense for the three months ended March 31, 2022 was $7.5 million compared to $8.7 million for the same period in the prior year. The decline was driven by a 9 bp decrease in the cost of interest bearing deposits from 21 bps in the first quarter of 2021 to 12 bps in the first quarter of 2022, despite average deposits for the three months ended March 31, 2022 increasing $412.1 million, or 3.3%. The decline in cost of deposits reflected strategic cost adjustments made by the Company in reaction to a low interest rate environment. In addition, average borrowed funds decreased $185.1 million, or 20.9%, compared to the comparable period in the prior year due to the repayment of PPPLF borrowings over the course of 2021, which were used to fund PPP activity.
46
CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
| Quarterly Averages | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Balance | Interest | Yield | Balance | Interest | Yield | Balance | Interest | Yield | |||||||||||||||||||||||||||||||||||||||||||||||
| Earning assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investment securities | $ | 4,308,059 | $ | 26,527 | 2.50 | % | $ | 4,343,513 | $ | 25,120 | 2.29 | % | $ | 3,782,993 | $ | 23,650 | 2.54 | % | ||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits with other banks | 234,687 | 121 | 0.21 | % | 166,904 | 71 | 0.17 | % | 46,912 | 28 | 0.24 | % | ||||||||||||||||||||||||||||||||||||||||||||
Gross loans and leases (1) | 9,266,774 | 87,182 | 3.82 | % | 9,283,227 | 92,682 | 3.96 | % | 9,951,855 | 98,931 | 4.03 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total earning assets | 13,809,520 | 113,830 | 3.34 | % | 13,793,644 | 117,873 | 3.39 | % | 13,781,760 | 122,609 | 3.61 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Nonearning assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | (129,601) | (144,756) | (177,863) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 248,517 | 253,091 | 232,275 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued interest and other assets | 2,256,483 | 2,134,438 | 2,206,482 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 16,184,919 | $ | 16,036,417 | $ | 16,042,654 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposits | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing demand | $ | 3,246,919 | $ | 492 | 0.06 | % | $ | 3,069,416 | $ | 461 | 0.06 | % | $ | 2,948,682 | $ | 534 | 0.07 | % | ||||||||||||||||||||||||||||||||||||||
| Savings | 4,145,615 | 850 | 0.08 | % | 4,195,504 | 901 | 0.09 | % | 3,815,314 | 1,178 | 0.13 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Time | 1,231,266 | 1,281 | 0.42 | % | 1,428,872 | 1,727 | 0.48 | % | 1,767,826 | 2,621 | 0.60 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 8,623,800 | 2,623 | 0.12 | % | 8,693,792 | 3,089 | 0.14 | % | 8,531,822 | 4,333 | 0.21 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Borrowed funds | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 316,047 | 317 | 0.41 | % | 82,481 | 10 | 0.05 | % | 251,705 | 67 | 0.11 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt | 385,240 | 4,544 | 4.78 | % | 314,262 | 3,968 | 5.01 | % | 634,674 | 4,333 | 2.77 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total borrowed funds | 701,287 | 4,861 | 2.81 | % | 396,743 | 3,978 | 3.98 | % | 886,379 | 4,400 | 2.01 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 9,325,087 | 7,484 | 0.33 | % | 9,090,535 | 7,067 | 0.31 | % | 9,418,201 | 8,733 | 0.38 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 4,160,175 | 4,191,457 | 3,840,046 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 474,162 | 512,605 | 511,658 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders' equity | 2,225,495 | 2,241,820 | 2,272,749 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 16,184,919 | $ | 16,036,417 | $ | 16,042,654 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 106,346 | $ | 110,806 | $ | 113,876 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest spread | 3.01 | % | 3.08 | % | 3.23 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Contribution of noninterest-bearing sources of funds | 0.11 | % | 0.11 | % | 0.12 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin (2) | 3.12 | % | 3.19 | % | 3.35 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax equivalent adjustment | 0.05 | % | 0.04 | % | 0.05 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin (fully tax equivalent) (2) | 3.17 | % | 3.23 | % | 3.40 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Loans held for sale and nonaccrual loans are included in gross loans.
(2) The net interest margin exceeds the interest spread as noninterest-bearing funding sources, demand deposits, other liabilities and shareholders' equity also support earning assets.
47
RATE/VOLUME ANALYSIS
The impact on net interest income from changes in interest rates and volume of interest-earning assets and interest-bearing liabilities is illustrated in the table below:
| Changes for the three months ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Linked quarter income variance | Comparable quarter income variance | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Rate | Volume | Total | Rate | Volume | Total | ||||||||||||||||||||||||||||||||
| Earning assets | ||||||||||||||||||||||||||||||||||||||
| Investment securities | $ | 2,220 | $ | (813) | $ | 1,407 | $ | (356) | $ | 3,233 | $ | 2,877 | ||||||||||||||||||||||||||
| Interest-bearing deposits with other banks | 17 | 33 | 50 | (4) | 97 | 93 | ||||||||||||||||||||||||||||||||
Gross loans and leases (1) | (3,404) | (2,096) | (5,500) | (5,304) | (6,445) | (11,749) | ||||||||||||||||||||||||||||||||
| Total earning assets | (1,167) | (2,876) | (4,043) | (5,664) | (3,115) | (8,779) | ||||||||||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | $ | (386) | $ | (80) | (466) | (1,738) | 28 | (1,710) | ||||||||||||||||||||||||||||||
| Borrowed funds | ||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 75 | 232 | 307 | 185 | 65 | 250 | ||||||||||||||||||||||||||||||||
| Long-term debt | (179) | 755 | 576 | 3,153 | (2,942) | 211 | ||||||||||||||||||||||||||||||||
| Total borrowed funds | (104) | 987 | 883 | 3,338 | (2,877) | 461 | ||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | (490) | 907 | 417 | 1,600 | (2,849) | (1,249) | ||||||||||||||||||||||||||||||||
Net interest income | $ | (677) | $ | (3,783) | $ | (4,460) | $ | (7,264) | $ | (266) | $ | (7,530) | ||||||||||||||||||||||||||
(1) Loans held for sale and nonaccrual loans are included in gross loans.
NONINTEREST INCOME
| Three months ended | ||||||||||||||||||||
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
| Noninterest income | ||||||||||||||||||||
| Service charges on deposit accounts | $ | 7,729 | $ | 8,645 | $ | 7,146 | ||||||||||||||
| Trust and wealth management fees | 6,060 | 6,038 | 5,630 | |||||||||||||||||
| Bankcard income | 3,337 | 3,602 | 3,128 | |||||||||||||||||
| Client derivative fees | 799 | 2,303 | 1,556 | |||||||||||||||||
| Foreign exchange income | 10,151 | 12,808 | 10,757 | |||||||||||||||||
| Leasing business income | 6,076 | 0 | 0 | |||||||||||||||||
| Net gain from sales of loans | 3,872 | 6,492 | 9,454 | |||||||||||||||||
| Net gain (loss) on sales/transfers of investment securities | 3 | (14) | (166) | |||||||||||||||||
| Net gain (loss) on equity securities | (199) | 321 | 112 | |||||||||||||||||
| Other | 3,465 | 5,465 | 2,705 | |||||||||||||||||
| Total noninterest income | $ | 41,293 | $ | 45,660 | $ | 40,322 | ||||||||||||||
First quarter 2022 vs. fourth quarter 2021: First quarter 2022 noninterest income was $41.3 million, decreasing $4.4 million, or 9.6% compared to $45.7 million for the fourth quarter 2021. The decrease compared to the linked quarter was primarily driven by declines in foreign exchange income, client derivative fees, gains on sales of loans, service charges on deposits and other noninterest income, partially offset by leasing business income. Foreign exchange income for the first quarter of 2022 decreased $2.7 million, or 20.7%, and client derivative fees decreased $1.5 million, or 65.3% from the fourth quarter 2021 as demand for those services moderated. Gains on sales of loans declined $2.6 million, or 40.4%, from the linked quarter due to lower origination volumes resulting from rising interest rates. Service charges on deposits decreased $0.9 million, or 10.6%, from the linked quarter due to seasonal pressures and fee reductions resulting from changes in the Company's overdraft program, while other noninterest income decreased $2.0 million, or 36.6%, due to higher syndication fees received in the fourth quarter 2021. These declines were partially offset by leasing business income, which was $6.1 million in the first quarter of 2022, reflecting new activity from the Summit transaction.
First quarter 2022 vs. first quarter 2021: First quarter 2022 noninterest income of $41.3 million increased $1.0 million, or 2.4%, from $40.3 million for the first quarter of 2021. The increase over the comparable quarter in 2021 was primarily ttributed to leasing business income, higher wealth management fees and elevated other noninterest income, partially offset by
48
lower gains on sales of loans and lower client derivative fees. Similar to the linked quarter increase, the comparable quarter increase in leasing business income is due to the acquisition of Summit. Wealth management fees for first quarter of 2022 increased $0.4 million, or 7.6%, compared to the same quarter of 2021 due to strong sales efforts and the market recovery from the pandemic uncertainty. Other noninterest income increased $0.8 million, or 28.1%, due to the lower amortization of mortgage servicing rights during the period. Gains on sales of loans decreased $5.6 million, or 59.0% from the comparable quarter due to higher originations and premiums in the first quarter of 2021 due to lower interest rates, while client derivative income declined $0.8 million, or 48.7%, due to moderated demand.
NONINTEREST EXPENSE
| Three months ended | ||||||||||||||||||||
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
| Noninterest expenses | ||||||||||||||||||||
| Salaries and employee benefits | $ | 63,947 | $ | 62,170 | $ | 61,253 | ||||||||||||||
| Net occupancy | 5,746 | 5,332 | 5,704 | |||||||||||||||||
| Furniture and equipment | 3,567 | 3,161 | 3,969 | |||||||||||||||||
| Data processing | 8,264 | 8,261 | 7,287 | |||||||||||||||||
| Marketing | 1,700 | 2,152 | 1,361 | |||||||||||||||||
| Communication | 666 | 677 | 838 | |||||||||||||||||
| Professional services | 2,159 | 5,998 | 1,450 | |||||||||||||||||
| State intangible tax | 1,131 | 651 | 1,202 | |||||||||||||||||
| FDIC assessments | 1,459 | 1,453 | 1,349 | |||||||||||||||||
| Intangible assets amortization | 2,914 | 2,401 | 2,479 | |||||||||||||||||
| Leasing business expense | 3,869 | 0 | 0 | |||||||||||||||||
| Other | 7,383 | 17,349 | 5,614 | |||||||||||||||||
| Total noninterest expenses | $ | 102,805 | $ | 109,605 | $ | 92,506 | ||||||||||||||
First quarter 2022 vs. fourth quarter 2021: First quarter 2022 noninterest expense was $102.8 million, decreasing $6.8 million, or 6.2%, from $109.6 million for the fourth quarter 2021. This change was primarily driven by reductions in other noninterest expenses and professional services, partially offset by leasing business expense and higher salaries and employee benefits. Other noninterest expenses declined $10.0 million, or 57.4%, largely due to a $3.3 million legal settlement and $6.1 million of tax credit investment write-downs in the fourth quarter of 2021. Professional services decreased $3.8 million, or 64.0%, as the prior period's expenses included $2.6 million of acquisition related costs. Leasing business expense of $3.9 million for the first quarter 2022 reflected new activity due to the Summit acquisition, while the $1.8 million, or 2.9%, increase in salaries and benefits expenses was driven by annual merit increases, the addition of 65 associates from the Summit acquisition and higher healthcare costs.
First quarter 2022 vs. first quarter 2021: First quarter 2022 noninterest expense was $10.3 million, or 11.1%, higher than the first quarter of 2021 primarily due to leasing business expenses, higher salary and benefits costs, increased other noninterest expenses and elevated data processing costs. Similar to the linked quarter, the increase in leasing business expenses were a result of the Summit acquisition. Salaries and employee benefits during the first quarter of 2022 were $2.7 million, or 4.4%, higher than the comparable period in 2021 due to annual merit increases, the addition of Summit and higher healthcare costs. First quarter 2022 other noninterest expenses increased $1.8 million, or 31.5%, over the comparable quarter in 2021 largely due to higher fixed asset write-downs, travel expenses and fraud losses during the period. Data processing expenses increased $1.0 million, or 13.4%, in the first quarter of 2022 compared to the same period in 2021 as the Company continued to make strategic investments to enhance its digital capabilities.
See Note 11 – Commitments and Contingencies in the Notes to Consolidated Financial Statements for further discussion of legal settlement costs.
49
INCOME TAXES
First quarter 2022 Income tax expense was $9.3 million, resulting in an effective tax rate of 18.5%. This compared to income tax expense of $7.6 million with an effective tax rate of 14.0% for the fourth quarter 2021 and $10.4 million of income tax expense and an effective tax rate of 18.0% for the first quarter of 2021. The increase in effective tax rate compared to the fourth quarter of 2021 was primarily due to tax credit investments realized during the linked quarter, while the increase in rate compared to the first quarter of 2021 was primarily due to increases in executive compensation and nondeductible acquisition costs in the first three months of 2022 compared to the first three months of 2021.
The Company's effective tax rate may fluctuate from period to period due to changes in tax jurisdictions, tax-enhanced assets and tax credit investments.
INVESTMENTS
First Financial's investment portfolio totaled $4.2 billion, or 26.0% of total assets, at March 31, 2022 and $4.4 billion, or 27.0% of total assets, at December 31, 2021. AFS securities totaled $4.0 billion at March 31, 2022 and $4.2 billion at December 31, 2021, while HTM securities totaled $92.6 million at March 31, 2022 and $98.4 million at December 31, 2021. The effective duration of the investment portfolio increased to 4.2 years at March 31, 2022 from 3.8 years as of December 31, 2021.
The Company invests in certain securities whose realization is dependent on future principal and interest repayments, thus carrying credit risk. 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 enhance the overall performance of the portfolio.
At March 31, 2022, the Company's Consolidated Financial Statements reflected a $121.4 million unrealized after-tax loss on debt securities and a $21.0 million unrealized after-tax gain as of December 31, 2021, which was included as a component of equity in accumulated other comprehensive income on the Consolidated Balance Sheets. The Company had a $0.2 million unrealized loss on equity securities recorded in noninterest income for the three months ended March 31, 2022 compared to a $0.3 million unrealized gain for the three months ended December 31, 2021. The unrealized losses in the first quarter of 2022 were a result of rising interest rates during the period.
First Financial will continue to monitor loan demand and deposit activity, as well as balance sheet composition, capital sensitivity and the interest rate environment, when considering future investment strategies.
LOANS
Loans, excluding Loans held for sale, decreased $46.7 million, or 0.5% to $9.2 billion as of March 31, 2022 from $9.3 billion as of December 31, 2021. This decrease was partially driven by a $34.4 million decline in PPP loans during the period. Commercial real estate loan balances decreased $195.1 million, or 4.6%, to $4.0 billion as of March 31, 2022 and and Home equity decreased $0.4 million, or 0.1%, to $708.0 million. Partially offsetting these declines, C&I loans increased $80.2 million, or 2.9%, to $2.8 billion; Residential real estate loans increased by $17.8 million, or 2.0%, to $913.8 million; Lease financing increased by $16.2 million, or 14.8%, to $125.9 million; and Installment loans increased by $12.7 million, or 10.7%, to $132.2 million.
First quarter 2022 average loans of $9.3 billion, excluding Loans held for sale, decreased $7.6 million, or 0.08%, from the fourth quarter 2021 and decreased $671.0 million, or 6.8%, from the first quarter of 2021 largely due to PPP forgiveness.
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 $4.1 billion and $4.0 billion at March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022, loan commitments with a fixed interest rate totaled $136.1 million while commitments with variable interest rates totaled $4.0 billion. Comparatively, 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 March 31, 2022 and
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December 31, 2021 and maturities ranging from less than 1 year to 30.2 years at March 31, 2022 and less than 1 year to 30.9 years at December 31, 2021.
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 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 $40.4 million and $41.1 million at March 31, 2022 and December 31, 2021, 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 $370.0 million and $362.8 million at March 31, 2022 and December 31, 2021, 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 $71.3 million and $72.5 million at March 31, 2022 and December 31, 2021, 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
March 31, 2022. 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 March 31, 2022 and December 31, 2021.
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.
Nonaccrual loans were $45.5 million, or 0.49% of total loans as of March 31, 2022. This represents a $2.9 million, or 6.1%, decline from $48.4 million as of December 31, 2021. The decline in nonaccrual loans was a result of the Company's resolution efforts, in addition to risk rating upgrades as borrower performance improved. Nonperforming assets were $53.6 million, or 0.33% of total assets, at March 31, 2022 compared to $60.1 million, or 0.37% of total assets, at December 31, 2021. This $6.5 million, or 10.9%, decline was due to the resolution of nonaccrual relationships outpacing the volume of loans downgraded to nonaccrual during the period.
TDRs totaled $24.2 million at March 31, 2022, which represents an decrease of $3.4 million, or 12.3%, from $27.6 million at December 31, 2021.
Classified assets, which are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse, totaled $106.8 million as of March 31, 2022 compared to $104.8 million at December 31, 2021. Classified assets were 67 bps as a percentage of total assets at March 31, 2022, compared to 64 bps as of December 31, 2021.
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
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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.
The ACL on loans and leases was $124.1 million as of March 31, 2022 and $132.0 million as of December 31, 2021. As a percentage of period-end loans, the ACL was 1.34% as of March 31, 2022 and 1.42% as of December 31, 2021. The decline in ACL was primarily driven by improvements in economic forecasts in addition to the Company's improved credit quality and outlook.
The Company utilized the Moody's March baseline forecast as its R&S forecast in the quantitative model at March 31, 2022. 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.
The Company recorded net charge-offs of $2.3 million, or 0.10% of average loans and leases on an annualized basis, in the first quarter 2022, compared to net charge-offs of $7.4 million, or 0.32%, for the fourth quarter of 2021 and net charge-offs of $9.2 million, or 0.38%, for the comparable quarter of 2021. The decline in net-charge-offs in the current period was due to loan sale activity in the linked quarter and pandemic-related charge-offs in the first quarter of 2021.
The ACL as a percentage of nonaccrual loans was 273.1% at March 31, 2022 and 272.8% at December 31, 2021. The increase in this ratio was primarily driven by a $2.9 million, or 6.1%, decline in nonaccrual loans during the period. The ACL as a percentage of nonperforming loans, including accruing TDRs, was 232.0% as of March 31, 2022 and 220.0% as of December 31, 2021. The increase in this ratio was driven by the decline in nonperforming loans outpacing the decline in the ACL during the period.
Provision expense is a product of the Company's ACL model combined with net charge-off activity during the period. During the first quarter of 2022, the Company recorded $5.6 million of provision recapture for loans and leases compared to provision recapture of $9.5 million during the fourth quarter of 2021. The continued recapture of provision during the first quarter of 2022 was driven by the Company's improved credit outlook and economic forecasts. For the three months ended March 31, 2021, the Company recorded provision expense of $3.5 million.
The ACL on unfunded commitments was $13.2 million as of March 31, 2022 and $13.4 million as of December 31, 2021. First Financial recorded $0.2 million of provision recapture for credit losses on unfunded commitments for the three months ended March 31, 2022, compared to a $1.8 million of expense in the fourth quarter 2021 and $0.5 million of provision expense for the same period of 2021.
See Note 5 – Allowance for Credit Losses in the Notes to Consolidated Financial Statements for further discussion of First Financial's ACL.
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The table that follows includes the activity in the ACL for the quarterly periods presented.
| Three months ended | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Mar. 31, | Dec. 31, | Sep. 30, | June 30, | Mar. 31, | |||||||||||||||||||||||||||
| Allowance for credit loss activity | ||||||||||||||||||||||||||||||||
| Balance at beginning of period | $131,992 | $148,903 | $159,590 | $169,923 | $175,679 | |||||||||||||||||||||||||||
| Purchase accounting ACL for PCD | 0 | 17 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Provision for loan losses | (5,589) | (9,525) | (8,193) | (4,756) | 3,450 | |||||||||||||||||||||||||||
| Gross charge-offs | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 2,845 | 1,364 | 2,617 | 3,729 | 7,910 | |||||||||||||||||||||||||||
| Lease financing | 131 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Construction real estate | 0 | 1,496 | 0 | 0 | 2 | |||||||||||||||||||||||||||
| Commercial real estate | 0 | 9,150 | 1,030 | 2,041 | 1,250 | |||||||||||||||||||||||||||
| Residential real estate | 22 | 6 | 74 | 46 | 1 | |||||||||||||||||||||||||||
| Home equity | 21 | 22 | 200 | 240 | 611 | |||||||||||||||||||||||||||
| Installment | 177 | 184 | 37 | 77 | 36 | |||||||||||||||||||||||||||
| Credit card | 246 | 149 | 230 | 179 | 222 | |||||||||||||||||||||||||||
| Total gross charge-offs | 3,442 | 12,371 | 4,188 | 6,312 | 10,032 | |||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 379 | 201 | 869 | 205 | 337 | |||||||||||||||||||||||||||
| Lease financing | 33 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Construction real estate | 0 | 0 | 0 | 3 | 0 | |||||||||||||||||||||||||||
| Commercial real estate | 222 | 4,292 | 223 | 75 | 195 | |||||||||||||||||||||||||||
| Residential real estate | 90 | 74 | 56 | 54 | 44 | |||||||||||||||||||||||||||
| Home equity | 265 | 303 | 426 | 317 | 177 | |||||||||||||||||||||||||||
| Installment | 21 | 27 | 53 | 37 | 34 | |||||||||||||||||||||||||||
| Credit card | 159 | 71 | 67 | 44 | 39 | |||||||||||||||||||||||||||
| Total recoveries | 1,169 | 4,968 | 1,694 | 735 | 826 | |||||||||||||||||||||||||||
| Total net charge-offs | 2,273 | 7,403 | 2,494 | 5,577 | 9,206 | |||||||||||||||||||||||||||
| Ending allowance for credit losses | $124,130 | $131,992 | $148,903 | $159,590 | $169,923 | |||||||||||||||||||||||||||
| Net charge-offs to average loans and leases (annualized) | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 0.37 | % | 0.18 | % | 0.26 | % | 0.48 | % | 1.01 | % | ||||||||||||||||||||||
| Lease financing | 0.34 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||||||||||||
| Construction real estate | 0.00 | % | 1.29 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||||||||||||
| Commercial real estate | (0.02) | % | 0.44 | % | 0.07 | % | 0.18 | % | 0.10 | % | ||||||||||||||||||||||
| Residential real estate | (0.03) | % | (0.03) | % | 0.01 | % | 0.00 | % | (0.02) | % | ||||||||||||||||||||||
| Home equity | (0.14) | % | (0.16) | % | (0.13) | % | (0.04) | % | 0.24 | % | ||||||||||||||||||||||
| Installment | 0.50 | % | 0.59 | % | (0.07) | % | 0.19 | % | 0.01 | % | ||||||||||||||||||||||
| Credit card | 0.67 | % | 0.58 | % | 1.29 | % | 1.12 | % | 1.59 | % | ||||||||||||||||||||||
| Total net charge-offs | 0.10 | % | 0.32 | % | 0.10 | % | 0.23 | % | 0.38 | % | ||||||||||||||||||||||
| Nonperforming assets | ||||||||||||||||||||||||||||||||
Nonaccrual loans (1) | $45,454 | $48,392 | $65,966 | $86,370 | $85,246 | |||||||||||||||||||||||||||
| Accruing troubled debt restructurings | 8,055 | 11,616 | 11,448 | 12,070 | 11,608 | |||||||||||||||||||||||||||
| Total nonperforming loans | 53,509 | 60,008 | 77,414 | 98,440 | 96,854 | |||||||||||||||||||||||||||
| Other real estate owned | 72 | 98 | 340 | 340 | 854 | |||||||||||||||||||||||||||
| Total nonperforming assets | 53,581 | 60,106 | 77,754 | 98,780 | 97,708 | |||||||||||||||||||||||||||
| Accruing loans past due 90 days or more | 87 | 137 | 104 | 155 | 92 | |||||||||||||||||||||||||||
| Total underperforming assets | $53,668 | $60,243 | $77,858 | $98,935 | $97,800 | |||||||||||||||||||||||||||
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| Total classified assets | $106,839 | $104,815 | $165,462 | $182,516 | $196,782 | |||||||||||||||||||||||||||
| Credit quality ratios | ||||||||||||||||||||||||||||||||
| As a percent of period-end loans, net of unearned income: | ||||||||||||||||||||||||||||||||
| Allowance for credit losses | 1.34 | % | 1.42 | % | 1.59 | % | 1.68 | % | 1.71 | % | ||||||||||||||||||||||
| Nonaccrual loans | 0.49 | % | 0.52 | % | 0.70 | % | 0.91 | % | 0.86 | % | ||||||||||||||||||||||
| Nonperforming loans | 0.58 | % | 0.65 | % | 0.83 | % | 1.03 | % | 0.97 | % | ||||||||||||||||||||||
| Allowance for credit losses to nonaccrual loans | 273.09 | % | 272.76 | % | 225.73 | % | 184.77 | % | 199.33 | % | ||||||||||||||||||||||
| Allowance for credit losses to nonperforming loans | 231.98 | % | 219.96 | % | 192.35 | % | 162.12 | % | 175.44 | % | ||||||||||||||||||||||
(1) Nonaccrual loans include nonaccrual TDRs of $16.2 million, $16.0 million, $20.3 million, $21.5 million and $20.9 million as of March 31, 2022, December 31, 2021, September 30, 2021, June 30, 2021 and March 31, 2021, respectively. | ||||||||||||||||||||||||||||||||
DEPOSITS AND FUNDING
Total deposits were $12.8 billion as of March 31, 2022 and $12.9 billion as of December 31, 2021. This change was driven by a $208.3 million, or 15.7%, decrease in time deposits due to seasonal declines in brokered CD balances. This decrease was partially offset by a $75.9 million, or 1.8%, increase in noninterest bearing demand deposits and a $31.5 million, or 0.8%, increase in savings deposits.
Average deposits for the first quarter of 2022 were $12.8 billion, a decrease of $101.3 million, or 0.8%, from $12.9 billion for the quarter ended December 31, 2021. This decrease was driven by a $197.6 million, or 13.8% decline in average time deposits, a decrease of $49.9 million, or 1.2%, in average savings deposits and a $31.3 million, or 0.7% decline in average noninterest bearing deposits. These changes were partially offset by an increase in average interest-bearing demand accounts, of $177.5 million, or 5.8%.
Borrowed funds were $564.8 million as of March 31, 2022 compared to $706.0 million as of December 31, 2021. Borrowings declined during the period largely as a result of no longer utilizing repurchase agreements, paying down Summit lines of credit and paying down the Company's existing line of credit. First Financial may utilize short-term borrowings and long-term advances from the FHLB as wholesale funding sources to meet liquidity needs.
First Financial had short-term borrowings of $185.0 million and $296.2 million as of March 31, 2022 and December 31, 2021, respectively. These totals included $185.0 million of short-term borrowings with the FHLB at March 31, 2022, compared to $225.0 million as of December 31, 2021. There were no repurchase agreements at March 31, 2022 compared to $51.2 million at December 31, 2021. In addition, there were no Federal funds purchased as of March 31, 2022 and December 31, 2021.
Long-term debt, which included FRB and FHLB long-term advances, subordinated notes and an interest free loan with a municipality, was $379.8 million and $409.8 million at March 31, 2022 and December 31, 2021, respectively. Outstanding subordinated debt totaled $311.1 million as of March 31, 2022 and $310.9 million as of December 31, 2021.
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%. These lines of credit were paid off in January 2022. Additionally, acquired long term borrowings included $66.2 million and $73.4 million of term notes, both with and without recourse, with an average interest rate of 4.50% and 4.09% at March 31, 2022 and December 31, 2021, respectively. These term notes were used to finance Summit's equity investment in the purchase of equipment to be leased to customers.
First Financial had no FHLB long-term advances at March 31, 2022 and December 31, 2021. First Financial's total remaining borrowing capacity from the FHLB was $1.4 billion as of March 31, 2022.
See Note 8 – Borrowings in the Notes to Consolidated Financial Statements for further discussion of First Financial's borrowed funds.
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
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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 other short and long-term funding sources, which include subordinated notes, longer-term advances from the FRB and FHLB and its short-term line of credit.
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 March 31, 2022, First Financial had no outstanding balance and at 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 March 31, 2022 and December 31, 2022. 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.
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 ability 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 March 31, 2022 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 $5.6 billion of certain eligible residential, commercial and farm real estate loans, home equity lines of credit and government, agency and CMBS securities as collateral for borrowings from the FHLB as of March 31, 2022.
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 $4.0 billion and $4.2 billion at March 31, 2022 and December 31, 2021, respectively. HTM securities that are maturing within a short period of time can be an additional source of liquidity. As of both March 31, 2022 and December 31, 2021, the Company had no HTM securities maturing within one year.
Other sources of liquidity include cash and due from banks plus interest-bearing deposits with other banks. At March 31, 2022, these balances totaled $457.6 million, and First Financial had unused and available overnight wholesale funding sources of $5.1 billion, or 32.0% of total assets, to fund loan and deposit activities in addition to other 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 $50.0 million for the first three months of 2022. As of March 31, 2022, the Bank had retained earnings of $719.0 million, of which $143.6 million was available for distribution to the Bancorp without prior regulatory approval. As an additional source of liquidity, First Financial had $51.1 million in cash at the parent company as of March 31, 2022.
Share repurchases also impact First Financial's liquidity. For further information regarding share repurchases, see the Capital section that follows.
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Capital expenditures were $3.2 million and $2.7 million for the first three months of 2022 and 2021, respectively. Management believes that sufficient liquidity exists to fund its future capital expenditure commitments.
Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on First Financial’s liquidity.
CAPITAL
Risk-based capital. 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 includes 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 required 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 remained relatively stable at 11.24% at March 31, 2022 compared to 11.22% at December 31, 2021. The total capital ratio decreased to 13.97% at March 31, 2022 from 14.10% at December 31, 2021, and the leverage ratio decreased to 8.64% at March 31, 2022 compared to 8.70% as of December 31, 2021. The Company’s tangible common equity ratio decreased to 6.95% at March 31, 2022 from 7.58% at December 31, 2021. The decline in the tangible common equity ratio was primarily driven by the decline in accumulated other comprehensive income during the period, which was due to higher unrealized losses in the investment portfolio as a result of rising interest rates.
As of March 31, 2022, management believes that First Financial met all capital adequacy requirements to which it was subject. 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 $406.0 million on a consolidated basis at March 31, 2022.
The following tables present the actual and required capital amounts and ratios as of March 31, 2022 and December 31, 2021 under the Basel III Capital Rules and include the minimum required capital levels based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered "well capitalized" are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
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| 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 | ||||||||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 1,272,115 | 10.87 | % | $ | 819,328 | 7.00 | % | N/A | N/A | ||||||||||||||||||||||||||||
| First Financial Bank | 1,498,654 | 12.82 | % | 818,205 | 7.00 | % | $ | 759,762 | 6.50 | % | ||||||||||||||||||||||||||||
| Tier 1 capital to risk-weighted assets | ||||||||||||||||||||||||||||||||||||||
| Consolidated | 1,316,020 | 11.24 | % | 994,898 | 8.50 | % | N/A | N/A | ||||||||||||||||||||||||||||||
| First Financial Bank | 1,499,196 | 12.83 | % | 993,535 | 8.50 | % | 935,091 | 8.00 | % | |||||||||||||||||||||||||||||
| Total capital to risk-weighted assets | ||||||||||||||||||||||||||||||||||||||
| Consolidated | 1,635,003 | 13.97 | % | 1,228,992 | 10.50 | % | N/A | N/A | ||||||||||||||||||||||||||||||
| First Financial Bank | 1,557,967 | 13.33 | % | 1,227,307 | 10.50 | % | 1,168,864 | 10.00 | % | |||||||||||||||||||||||||||||
| Leverage ratio | ||||||||||||||||||||||||||||||||||||||
| Consolidated | 1,316,020 | 8.64 | % | 609,014 | 4.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||
| First Financial Bank | 1,499,196 | 9.86 | % | 608,128 | 4.00 | % | 760,160 | 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, 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 ratio | ||||||||||||||||||||||||||||||||||||||
| 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 | % | |||||||||||||||||||||||||||||
Shareholder dividends. First Financial paid a dividend of $0.23 per common share on March 15, 2022 to shareholders of record as of March 1, 2022. Additionally, First Financial's board of directors authorized a dividend of $0.23 per common share, payable on June 15, 2022 to shareholders of record as of June 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 authorized the purchase of up to 5,000,000 shares of the Company's common stock and will expire
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in December 2023. First Financial did not repurchase any shares under this plan in the first quarter of 2022. Therefore, at March 31, 2022, all 5,000,000 common shares remained available for repurchase under the 2022 Repurchase Plan.
The 2020 Repurchase Plan was authorized in December of 2020 and authorized the repurchase of up to 5,000,000 shares of the Company's common stock. First Financial did not repurchase any shares in the fourth quarter of 2021 under this plan, but repurchased 840,115 shares at an average price of $21.40 in the first quarter of 2021.
Shareholders' equity. Total shareholders’ equity was $2.1 billion at March 31, 2022 and $2.3 billion at December 31, 2021.
For further detail, see the Consolidated Statements of Changes in Shareholders’ Equity.
ENTERPRISE RISK MANAGEMENT
First Financial manages risk through a structured ERM approach that routinely assesses the overall level of risk, identifies specific risks and evaluates specific actions to mitigate those risks. First Financial continues to enhance its risk management capabilities and has embedded risk awareness into the culture of the Company. First Financial has identified the following types of risk that it monitors in its ERM framework: credit, market (composed of interest rate, liquidity, capital, foreign exchange and financial risk), operational, compliance, strategic, reputation, information technology, cyber and legal.
For a full discussion of these risks, see the Enterprise Risk Management section in Management's Discussion and Analysis in First Financial’s 2021 Annual Report on Form 10-K. The sections that follow provide additional discussion related to credit risk and market risk.
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 process, 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 source of market risk for First Financial is 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 35% in its interest rate risk modeling as of March 31, 2022.
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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 bps scenario, thereby increasing deposit costs and reducing asset sensitivity.
Presented below is the estimated impact on First Financial’s NII and EVE position as of March 31, 2022, assuming immediate, parallel shifts in interest rates:
| % Change from base case for immediate parallel changes in rates | |||||||||||||||||
-100 bps(1) | +100 bps | +200 bps | |||||||||||||||
| NII-Year 1 | (6.86) | % | 9.76 | % | 19.37 | % | |||||||||||
| NII-Year 2 | (10.45) | % | 12.10 | % | 21.95 | % | |||||||||||
| EVE | (5.85) | % | 4.54 | % | 8.52 | % | |||||||||||
(1) Because certain current interest rates are at or below 1.00%, the 100 basis point downward shock assumes that certain corresponding interest rates approach an implied floor that, in effect, reflects a decrease of less than the full 100 basis point downward shock. | |||||||||||||||||
“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 March 31, 2022. The projected results for NII and EVE reflected an asset sensitive position, due to a strong funding mix of low cost transactional deposits supporting loans primarily priced off the short end of the rate curve. First Financial continues to manage its balance sheet with a bias toward 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 March 31, 2022 assuming a 25% increase and a 25% reduction to the beta assumption on managed rate deposits:
| Beta sensitivity (% change from base) | |||||||||||||||||||||||
| +100 BP | +200 BP | ||||||||||||||||||||||
| Beta 25% lower | Beta 25% higher | Beta 25% lower | Beta 25% higher | ||||||||||||||||||||
| NII-Year 1 | 11.13 | % | 8.38 | % | 20.70 | % | 18.04 | % | |||||||||||||||
| NII-Year 2 | 13.44 | % | 10.76 | % | 23.25 | % | 20.65 | % | |||||||||||||||
See the Net Interest Income section of Management’s Discussion and Analysis for further discussion.
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 controls liquidity while seeking to maintain diversification of funding sources, both on- and off-balance-sheet.
The bank has continued to update liquidity risk management processes, such as refining the contingency funding plan, proactively meeting frequently, securing additional contingent borrowing capacity, and developing additional ad-hoc liquidity reporting to monitor funding inflows and outflows. Management is closely monitoring overall loan and deposit trends as the broader macroeconomic environment responds to changing monetary policy. For further discussion of the Company's liquidity, please see the Liquidity section within Management's Discussion and Analysis.
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CRITICAL ACCOUNTING POLICIES
First Financial’s Consolidated Financial Statements are prepared based on the application of the Company's accounting policies. 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, certain accounting policies have a more significant impact than others on First Financial’s financial reporting. For First Financial, these policies currently include accounting for the ACL - loans and leases, goodwill, pension and income taxes. These accounting policies are discussed in detail in the Critical Accounting Policies section of Management’s Discussion and Analysis in First Financial’s 2021 Annual Report. There were no changes to the accounting policies for the ACL, goodwill, pension or income taxes during the three months ended March 31, 2022.
ACCOUNTING AND REGULATORY MATTERS
Note 2 - Recently Adopted and Issued Accounting Standards in the Notes to Consolidated Financial Statements discusses new accounting standards adopted by First Financial in 2022 and 2021, as well as the expected impact of accounting standards issued but not yet adopted. To the extent the adoption of new accounting standards materially affects financial condition, results of operations or liquidity, the impacts are discussed in the applicable Notes to the Consolidated Financial Statements and sections of Management’s Discussion and Analysis.
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;
•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 changes in housing prices, fluctuations in 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 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;
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•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;
•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.
Additional factors that may cause our actual results to differ materially from those described in our forward-looking statements can be found in our Form 10-K for the year ended December 31, 2021, as well as our other filings with the SEC, which are available on the SEC website at www.sec.gov.
All forward-looking statements included in this filing are made as of the date hereof and are based on information available at the time of the filing. Except as required by law, the Company does not assume any obligation to update any forward-looking statement.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk” of this report is incorporated herein by reference in response to this item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under
Rule 13a-15 of the Securities Exchange Act of 1934, that are designed to cause the material information required to be disclosed by First Financial in the reports it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized, and reported to the extent applicable within the time periods required by the Securities and Exchange Commission’s rules and forms. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
As of the end of the period covered by this report, First Financial performed an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective at the reasonable assurance level.
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 1.7% of total consolidated assets as of the period covered by this report.
Changes in Internal Control 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 period covered by this report that have materially affected, or are reasonably likely to materially affect, First Financial's internal control over financial reporting.
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PART II-OTHER INFORMATION
Item 1.Legal Proceedings.
There have been no material changes to the disclosure in response to "Part I - Item 3. Legal Proceedings" in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Item 1A.Risk Factors.
There are a number of factors that may adversely affect the Company's business, financial results, or stock price. See "Risk Factors" as disclosed in response to "Item 1A. to Part I - Risk Factors" of Form 10-K for the year ended December 31, 2021.
There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
On December 22, 2020, the Board announced that it authorized a stock repurchase plan that provided for the purchase of up to 5,000,000 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 2022 Repurchase Plan in the first quarter of 2022.
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Item 6. Exhibits
| (a) | Exhibits: | ||||||||||
| Exhibit Number | |||||||||||
| 3.1 | |||||||||||
| 3.2 | |||||||||||
| 31.1 | |||||||||||
| 31.2 | |||||||||||
| 32.1 | |||||||||||
| 32.2 | |||||||||||
| 101.INS | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. * | ||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema. * | ||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase. * | ||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase. * | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase. * | ||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase. * | ||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). * | ||||||||||
First Financial will furnish, without charge, to a security holder upon request a copy of the documents and will furnish any other Exhibit upon payment of reproduction costs. Unless as otherwise noted, documents incorporated by reference involve File No. 001-34762.
* 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.
** Compensatory plan or arrangement
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| FIRST FINANCIAL BANCORP. | ||||||||||||||||||||
| (Registrant) | ||||||||||||||||||||
| /s/ James M. Anderson | /s/ Scott T. Crawley | |||||||||||||||||||
| James M. Anderson | Scott T. Crawley | |||||||||||||||||||
| Executive Vice President and Chief Financial Officer | Senior Vice President and Controller | |||||||||||||||||||
| (Principal Accounting Officer) | ||||||||||||||||||||
| Date | 5/5/2022 | Date | 5/5/2022 | |||||||||||||||||
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