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Section 1: 10-K (FOM10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018

OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
Commission File Number 001-34762
FIRST FINANCIAL BANCORP.
(Exact name of registrant as specified in its charter)
Ohio
 
31-1042001
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
255 East Fifth Street, Suite 800
 
45202
Cincinnati, Ohio
 
(Zip Code)
(Address of principal executive offices)
 
 
Registrant's telephone number, including area code:  (877) 322-9530
Securities registered pursuant to Section 12(b) of the Act:
Common Shares, no par value
Name of exchange on which registered:
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes     o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 o Yes     x  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes     o  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
x Yes     o  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (subpart 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes    x  No
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the sales price of the last trade of such stock as of June 30, 2018, was $2,938,239,000.  (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)
As of February 21, 2019, there were issued and outstanding 98,389,491 common shares of the registrant.
Documents Incorporated by Reference:
Portions of the registrant’s Annual Report to Shareholders for the year ended December 31, 2018 are incorporated by reference into Parts I and II.
Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 28, 2019 are incorporated by reference into Part III.


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FORM 10-K CROSS REFERENCE INDEX

 
 
 
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FORWARD-LOOKING STATEMENTS


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

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

Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those predicted by the forward-looking statements because of various factors and possible events, including those factors and events identified (i) in "Item 1A. Risk Factors" of the Annual Report on Form 10-K and (ii) in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of First Financial's 2018 Annual Report (included within Exhibit 13 to this Annual Report on Form 10-K and incorporated by reference into Item 7 of this Annual Report on Form 10-K).

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



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PART I

Item 1.  Business.

First Financial Bancorp.

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

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

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

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

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

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

Commercial real estate loans are secured by a mortgage lien on the real property.  The credit underwriting for both owner-occupied and investor income producing real estate loans includes detailed market analysis, historical and projected cash flow analysis, appropriate equity margins, assessment of lessees and lessors, type of real estate and other analyses.  Market diversification within First Financial’s service area and industry diversification are other means by which First Financial manages the risk.  First Financial does not have a significant exposure to residential builders and developers.

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

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

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

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

First Financial has a limited number of foreign currency transactions and, in general, does not have significant exposure to loss from foreign currencies. Foreign currency activities are generally related to services provided to commercial customers.

Information regarding statistical disclosure required by the Securities and Exchange Commission’s Industry Guide 3 is included on the "Statistical Information" page in First Financial's Annual Report to Shareholders for the year ended December 31, 2018, and is incorporated herein by reference.

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

Employees

At December 31, 2018, First Financial and its subsidiaries had 2,131 full-time and part-time employees.

Subsidiaries

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

Business Combinations

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

Market and Competitive Information

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

We also compete on a nationwide basis through Oak Street which lends to the insurance industry, registered investment advisors, certified public accountants and indirect auto finance companies and First Franchise which lends to restaurants franchisees.

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

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

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

Supervision and Regulation

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

Bank Holding Company Regulation

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

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

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


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

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

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

Economic Growth, Regulatory Relief and Consumer Protection Act

On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Regulatory Relief Act") was signed into law. The Regulatory Relief Act was designed to provide regulatory relief for banking organizations, particularly for all but the very largest, those with assets in excess of $250 billion. Bank holding companies with assets of less than $100 billion are no longer subject to enhanced prudential standards, and those with assets between $100 billion and $250 billion will be relieved of those requirements in 18 months, unless the Federal Reserve Board takes action to maintain those standards. Certain regulatory requirements applied only to banks with assets in excess of $50 billion and so did not apply to the Company even before the enactment of the Regulatory Relief Act.

The Regulatory Relief Act also provides that the banking regulators must adopt regulations implementing the provision that banking organizations with assets of less than $10 billion are permitted to satisfy capital standards and be considered "well capitalized" under the prompt corrective action framework if their leverage ratios of tangible assets to average consolidated assets is between 8% and 10%, unless the banking organization's federal banking agency determines that the banking organization's risk profile warrants a more stringent leverage ratio. The OCC, the Federal Reserve Board and the FDIC have proposed for comment the leverage ratio framework for any banking organization with total consolidated assets of less than $10 billion, limited amounts of certain types of assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9%. The community bank leverage ratio would be calculated as the ratio of tangible equity capital divided by average total consolidated assets. Tangible equity capital would be defined as total bank equity capital or total holding company equity capital, as applicable, prior to including minority interests, and excluding accumulated other comprehensive income, deferred tax assets arising from net operating loss and tax credit carry forwards, goodwill and other intangible assets (other than mortgage servicing assets). Average total assets would be calculated in a manner similar to the current tier 1 leverage ratio denominator in that amounts deducted from the community bank leverage ratio numerator would also be excluded from the community bank leverage ratio denominator.

The Office of the Comptroller of the Currency (OCC), the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) also adopted a rule providing banking organizations with the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of new current expected credit loss methodology accounting under U. S. generally accepted accounting principles.

The Regulatory Relief Act also relieves bank holding companies and banks with assets of less than $100 billion in assets from certain record-keeping, reporting and disclosure requirements.




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Depository Institution Regulation

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

Regulatory Capital

Financial institutions and their holding companies are required to maintain capital as a way of absorbing losses that can and cannot be predicted. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies as well as state banks that are members of a Federal Reserve Bank. The OCC and the FDIC have adopted risk-based capital guidelines for national banks and state non-member banks, respectively. The guidelines provide a systematic analytical framework that makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of prompt corrective action regulatory provisions.         

In July 2013, the United States banking regulators issued new capital rules applicable to smaller banking organizations, which First Financial was at the time. These capital rules implement certain of the provisions of the Dodd-Frank Act (the Basel III Capital Rules). Community banking organizations, including First Financial and the Bank, began transitioning to the new rules when the new minimum capital requirements became effective on January 1, 2015. A capital conservation buffer (i.e. common equity) and additional deductions from common equity capital were phased in through January 1, 2019.

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

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

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

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

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

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

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


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In accordance with the Basel III Capital Rules, in order to be “well-capitalized” under the prompt corrective action guidelines, a bank must have a common equity tier 1 capital ratio of at least 6.5%, a total risk-based capital ratio of at least 10.0%, a Tier 1 risk-based capital ratio of at least 8.0% and a leverage ratio of at least 5.0%, and the bank must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level or any capital measure. At December 31, 2018, the Bank met the capital ratio requirements to be deemed “well-capitalized” according to the guidelines previously described.

A bank with a capital level that might qualify for well capitalized or adequately capitalized status may nevertheless be treated as though the bank is in the next lower capital category if the bank’s primary federal banking supervisory authority determines that an unsafe or unsound condition or practice warrants that treatment. A bank’s operations can be significantly affected by its capital classification under the prompt corrective action rules. For example, a bank that is not well capitalized generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market without advance regulatory approval. These deposit-funding limitations can have an adverse effect on the bank’s liquidity. At each successively lower capital category, an insured depository institution is subject to additional restrictions. Undercapitalized banks are required to take specified actions to increase their capital or otherwise decrease the risks to the federal deposit insurance fund. Bank regulatory agencies generally are required to appoint a receiver or conservator within 90 days after a bank becomes critically undercapitalized with a leverage ratio of less than 2%. The Federal Deposit Insurance Act provides that a federal bank regulatory authority may require a bank holding company to divest itself of an undercapitalized bank subsidiary if the agency determines that divestiture will improve the bank’s financial condition and prospects.

In September 2017, the Federal Reserve Board, along with other bank regulatory agencies, proposed amendments to its capital requirements to simplify various aspects of the capital rules and thereby reduce regulatory burden for “non-advanced approaches” banking organizations. The Bank is a non-advanced approach bank because it has total consolidated assets less than $250 billion and balance sheet foreign exposures of less than the maximum amount for a non-advanced approach bank. Because the amendments were proposed with a request for comments and have not been finalized, we do not yet know what effect the final rules will have on the Bank’s capital calculations. In November 2017, the federal banking agencies extended, for such non-advanced approaches banks, the existing capital requirements for certain items that were scheduled to change effective January 1, 2018, in light of the simplification amendments being considered.

Debit Card Interchange Fees
The Dodd-Frank Act requires that interchange transaction fees for electronic debit transactions be “reasonable” and proportional to certain costs related to processing the transactions. The Federal Reserve Board established certain standards and prohibitions, including setting interchange fees and allowing for an upward adjustment if the debit card issuer implements policies and procedures designed to prevent fraud. The debit card interchange rules became applicable to First Financial after First Financial’s assets exceeded $10 billion. First Financial expects noninterest income to decline by approximately $13.0 million on an annual basis as a result of the Durbin Amendment, beginning in the third quarter of 2019, with the first full year impact in 2020.

Limitations on Dividends and Other Payments

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

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

The ability of First Financial to obtain funds for the payment of dividends, for the servicing of indebtedness and for other cash requirements is largely dependent on the amount of dividends that may be declared by the Bank. However, because the Federal Reserve Board expects us to serve as a source of strength to the Bank, as discussed above, payment of dividends by the Bank

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may be restricted at any time at the discretion of the Federal Reserve Board if the Federal Reserve Board deems such dividends to constitute an unsafe and/or unsound banking practice.

The Federal Reserve Board has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that, as a matter of prudent banking, a bank holding company should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the bank holding company’s capital needs, asset quality, and overall financial condition. Accordingly, a bank holding company generally should not pay cash dividends that exceed its net income or can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Under certain circumstances, a bank holding company must provide notice to the Federal Reserve Board of an intended dividend payment, to which the Federal Reserve Board might object if it determines the payment would be an unsafe or unsound practice.

Insurance of Accounts

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

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

Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (DRR), which is the ratio of the DIF to insured deposits of the total industry. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act.  The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%.  The FDIC’s rules reduced assessment rates on all banks but imposed a surcharge on banks with assets of $10 billion or more until the DRR reaches 1.35% and will provide assessment credits to banks with assets of less than $10 billion for the portion of their assessments that contribute to the increase of the DRR to 1.35%. The rules also changed the method to determine risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than less risky banks. The reserve ratio reached 1.36% on September 30, 2018, and as a result the surcharge on banks with assets of $10 billion or more will cease with the first assessment invoice in 2019. In addition, once the DRR reaches 1.38%, the FDIC will apply the assessment credits to banks that had assets below $10 billion at any time during the credit calculation period, which includes the Bank. The Bank will also be entitled to assessment credits attributable to MainSource.

In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the DIF.  These assessments will continue until the Financing Corporation bonds mature in September 2019. The Financing Corporation has projected that the last assessment will be collected on the March 2019, FDIC invoice.

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

Consumer Protection Laws and Regulations

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

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

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

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

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

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

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

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

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

In October 2017, the CFPB issued a final rule, referred to as the “Payday Rule,” that addresses commercial lending practices with respect to certain consumer loans. The Payday Rule was effective on January 16, 2018, although compliance with most of its provisions will not be required until August 19, 2019. The first major part of the rule makes it an unfair and abusive practice for a lender to make short-term and longer-term loans with balloon payments (with certain exceptions) without reasonably determining that the borrower has the ability to repay the loan. The second major part of the rule applies to the same types of loans as well as longer-term loans with an annual percentage rate greater than 36% that are repaid directly from the borrower’s account. The rule states that it is an unfair and abusive practice for the lender to withdraw payment from the borrower’s account after two consecutive payment attempts have failed, unless the lender obtains the consumer’s new and specific authorization to make further withdrawals from the account. The rule also requires lenders to provide certain notices to the borrower before attempting to withdraw payment from the borrower’s account.

On February 6, 2019, the CFPB issued two proposals with respect to the Payday Rule. First, the CFPB proposed to delay the compliance date for the mandatory underwriting provisions of the Payday Rule to November 19, 2020. It has requested comments on the proposed delay to be made within 30 days. Second, the CFPB proposed to rescind provisions of the Payday Rule that (1) provide that it is an unfair and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan without reasonably determining that the consumer has the ability to repay the loan according to its terms; (2) prescribe mandatory underwriting requirements for making the ability-to-repay determination; (3) provide exemptions of certain loans from the mandatory underwriting requirements; and (4) provide related definitions, reporting and recordkeeping requirements. The CFPB has requested comments to be made within 90 days on this proposal. These proposals do not change the provisions of the Payday Rule. The CFPB also stated that it will be considering other changes to the Payday Rule in response to requests received for exemptions of certain types of lenders or loan products and may commence separate additional rulemaking initiatives.

The Company does not currently expect the new Payday Rules to have a material effect on the Company’s financial condition or results of operations.

Community Reinvestment Act

Under the Community Reinvestment Act (CRA), every FDIC-insured institution is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low and moderate income neighborhoods.  The CRA requires the appropriate federal banking regulator, in connection with the examination of an insured institution, to assess the institution's record of meeting the credit needs of its community and to consider this record in its evaluation of

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certain applications to banking regulators, such as an application for approval of a merger or the establishment of a branch.  An unsatisfactory rating may be used as the basis for the denial of an application and will prevent a bank holding company of the institution from making an election to become a financial holding company. As of its last examination, the Bank received a CRA rating of “satisfactory.”

Privacy Rules

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

Fiscal and Monetary Policies

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

Volcker Rule

In December 2013, five federal agencies adopted a final regulation implementing the so-called Volcker Rule provision of the Dodd-Frank Act (the Volcker Rule). The Volcker Rule places limits on the trading activity of insured depository institutions and entities affiliated with a depository institution, subject to certain exceptions. The trading activity includes a purchase or sale as principal of a security or a derivative, commodity future or option on a security in order to benefit from short-term price movements or to realize short-term profits. The Volcker Rule exempts specified U.S. government, agency and/or municipal obligations, and it excludes trading conducted in certain capacities, including as a broker or other agent, through a deferred compensation or pension plan, as a fiduciary on behalf of customers, to satisfy a debt previously contracted, repurchase and securities lending agreements and risk-mitigating hedging activities. The Volcker Rule also prohibits a banking entity from having an ownership interest in, or certain relationships with, a hedge fund or private equity fund, with a number of various exceptions. The Bank from time to time may engage in trading activities or own the types of funds regulated by the Volcker Rule.

Transactions with Affiliates, Directors, Executive Officers and Shareholders

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

limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate;
limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates; and
require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate.

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

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


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Executive and Incentive Compensation

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

In May 2016, the federal bank regulatory agencies approved a joint notice of proposed rules (the Proposed Joint Rules) designed to prohibit incentive-based compensation arrangements that encourage inappropriate risks at financial institutions. The Proposed Joint Rules apply to covered financial institutions with total assets of $1 billion or more. For all covered institutions, including Level 3 institutions like us, the proposed rule:

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

Further, as stock exchanges impose additional listing requirements under the Dodd-Frank Act, public companies are required to implement “clawback” procedures for incentive compensation payments and to disclose the details of the procedures, which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating a restatement due to material noncompliance with financial reporting requirements. This clawback policy is intended to apply to compensation paid within a three-year look-back window of the restatement and would cover all executives who received incentive awards.

Patriot Act

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

State Law

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

In 2017, the State of Ohio completed a substantial re-writing of Ohio’s banking laws that became effective on January 1, 2018. One of the primary purposes of the revision of the law was to adopt one universal bank charter for depository institutions chartered by the state, rather than having separate types of state depository institution charters with different powers and limitations for banks, savings banks and savings and loan associations. The result is that all Ohio-chartered depository institutions are now considered to have full commercial bank powers, unless an institution elects to continue to be governed by federal restrictions applicable to federal savings and loan associations and federal savings banks. While the most substantial changes in the law affect institutions chartered by Ohio as savings banks or savings and loan associations prior to the effectiveness of the new law, some changes also apply to institutions, like the Bank, that were chartered as commercial banks

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prior to the change in the law. The changes for all Ohio-chartered banks include provisions allowing Ohio-chartered banks to exercise the same powers, perform all acts, and provide all services that are permitted for federally chartered depository institutions, with the exception of laws and regulations dealing with interest rates, thereby enhancing opportunities for Ohio-chartered banks to compete with other financial institutions. Other provisions clarify previous laws addressing, or allow more flexibility with respect to, corporate governance matters, mergers and acquisitions and additional reliance on Ohio corporate law generally.

In addition, in October 2017, Ohio-chartered banks received notices of required assessments to be paid to the ODFI.  For two years, the ODFI was funded by State of Ohio excess unclaimed funds allocated to the ODFI by the State of Ohio.  That funding source has ceased to be available, and assessments are once again required.
 
Item 1A.  Risk Factors.

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

Risks Related to Economic and Market Conditions

Weakness in the economy and in the real estate market, including specific weakness within our geographic footprint, may adversely affect us, including requiring us to record additional loan loss provisions or to write down loans.
First Financial’s success depends, in part, on economic and political conditions, local and national, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy and other factors beyond First Financial’s control may adversely affect its deposit levels and composition, demand for loans, the ability of borrowers to repay their loans and the value of the collateral securing the loans it makes. Economic turmoil in different regions of the world affect the economy and stock prices in the United States, which can affect First Financial’s earnings and capital and the ability of its customers to repay loans. Due to First Financial's volume of real estate loans, declining real estate values could adversely affect the value of property used as collateral as well as First Financial’s ability to sell the collateral upon foreclosure.
If the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations decline, this could result in, among other things, a deterioration of credit quality or a reduced demand for credit, including a resultant effect on our loan portfolio and allowance for loan and lease losses. These factors could also result in higher delinquencies and greater charge-offs in future periods, which would materially and adversely affect our financial condition and results of operations.
There is no assurance that our non-impaired loans will not become impaired or that our impaired loans will not suffer further deterioration in value. The fluctuations in national, regional and local economic conditions, including those related to local residential, commercial real estate and construction markets, may result in increased charge-offs and, consequently, reduce our net income. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition even if other favorable events occur.
Weakness in the real estate market, including the secondary residential mortgage loan markets, could adversely affect us.
Disruptions in the secondary market for residential mortgage loans limit the market for and liquidity of many mortgage loans. The effects of mortgage market challenges, combined with reductions in residential real estate market prices and reduced levels of home sales, could adversely affect the value of collateral securing mortgage loans that we hold, mortgage loan originations and profits on sales of mortgage loans. Such conditions could result in higher losses, write downs and impairment charges in our mortgage loan portfolio and other lines of business. Declines in real estate values, home sale volumes, financial stress on borrowers as a result of job losses, interest rate resets on adjustable rate mortgage loans or other factors could have further adverse effects on borrowers that could result in higher delinquencies and greater charge-offs in future periods, which would adversely affect our financial condition or results of operations. Additionally, decclines in real estate values might adversely affect the creditworthiness of state and local governments, resulting in decreased profitability or credit losses from loans made to such governments. A decline in home values or overall economic weakness could also have an adverse impact upon the value of real estate or other assets which we own upon foreclosing a loan and our ability to realize value on such assets.

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Changes in market interest rates or capital markets could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital or liquidity.
Given our business mix, and the fact that most of our assets and liabilities are financial in nature, we tend to be sensitive to market interest rate movements and the performance of the financial markets. Our primary source of income is net interest income, which is the difference between the interest income generated by our interest-earning assets (consisting primarily of loans and, to a lesser extent, securities) and the interest expense generated by our interest-bearing liabilities (consisting primarily of deposits and wholesale borrowings). Prevailing economic conditions, fiscal and monetary policies and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which, in turn, significantly affect financial institutions’ net interest income. If the interest we pay on deposits and other borrowings increases at a faster rate than increases in the interest we receive on loans and investments, net interest income, and, therefore, our earnings, could be adversely affected. Earnings could also be adversely affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings.
In addition to the impact of the general economy, changes in interest rates or in valuations in the debt or equity markets could directly impact us in one or more of the following ways:

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

Although we have implemented procedures we believe will reduce the potential effects of changes in interest rates on our results of operations, these procedures may not always be successful. In addition, any substantial or prolonged change in market interest rates could adversely affect our financial condition, results of operations and liquidity.
A transition away from LIBOR as a reference rate for financial contracts could negatively affect our income and expenses and the value of various financial contracts.

LIBOR is used extensively in the United States and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which may stop reporting such information after 2021. It is uncertain at this time whether LIBOR will change or cease to exist or the extent to which those entering into financial contracts will transition to any other particular benchmark. Other benchmarks may perform differently than LIBOR or alternative benchmarks have performed in the past or have other consequences that cannot currently be anticipated. It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain outstanding if LIBOR ceases to exist.

We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.

Declining values of real estate, increases in unemployment, insurance market disruptions and the related effects on local economies may increase our credit losses, which would negatively affect our financial results.

We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential and commercial) within our market area. A major change in the real estate market, such as deterioration in the value of collateral, or in the local or national economy, could adversely affect our customers' ability to pay these loans, which in turn could adversely impact our results of operations and financial condition. Additionally, increases in unemployment also may adversely affect the ability of

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certain clients to repay loans and the financial results of commercial clients in localities with higher unemployment, may result in loan defaults and foreclosures and may impair the value of our collateral. Loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our exposure to this risk by monitoring carefully our extensions of credit.
Additionally, a concentration of natural disasters or a significant disruption in the insurance market could adversely impact the risk relating to our insurance lending business. We cannot fully eliminate credit risk, and as a result, credit losses may increase in the future.
Our financial instruments carried at fair value expose us to certain market risks.
We maintain an available-for-sale investment securities portfolio, which includes assets with various types of instruments and maturities. At times, we also maintain certain assets that are classified and accounted for as trading assets. The changes in fair value of the available-for-sale securities are recognized in shareholders' equity as a component of other comprehensive income. The changes in fair value of financial instruments classified as trading assets are carried at fair value with changes in fair value recognized in earnings. The fair value of financial instruments carried at fair value is exposed to market risks related to changes in interest rates and market liquidity. We manage the market risks associated with these instruments through broad asset/liability management strategies. Changes in the market values of these financial instruments could have a material adverse impact on our financial condition or results of operations. We may classify additional financial assets or financial liabilities at fair value in the future.
Risks Related to Our Business
When we loan money, commit to loan money or enter into a letter of credit or other contract with a counterparty, we incur credit risk, or the risk of loss if our borrowers do not repay their loans or our counterparties fail to perform according to the terms of their contracts.
As lending is one of our primary business activities, the credit quality of our portfolio can have a significant impact on our earnings. We estimate and establish reserves for credit risks and probable incurred credit losses inherent in our loan portfolio. This process, which is critical to our financial results and condition, requires difficult, subjective and complex judgments, including reviews of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. As is the case with any such assessments, there is always the chance that we will fail to identify the proper factors or that we will fail to accurately estimate the impacts of factors that we identify. In addition, large loans, letters of credit and contracts with individual counterparties in our portfolio magnify the credit risk that we face, as the impact of large borrowers and counterparties not repaying their loans or performing according to the terms of their contracts has a disproportionately significant impact on our credit losses and reserves.
The information that we use in managing our credit risk may be inaccurate or incomplete, which may result in an increased risk of default and otherwise have an adverse effect on our business, results of operations and financial condition.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. Although we regularly review our credit exposure to specific clients and counterparties and to specific industries that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect, such as fraud. Moreover, such circumstances, including fraud, may become more likely to occur or be detected in periods of general economic uncertainty. We may also fail to receive full information with respect to the risks of a counterparty. In addition, in cases where we have extended credit against collateral, we may find that we are under-secured, for example, as a result of sudden declines in market values that reduce the value of collateral or due to fraud with respect to such collateral. If such events or circumstances were to occur, it could result in a potential loss of revenue and have an adverse effect on our business, results of operations and financial condition.
Our allowance for loan and lease losses may prove to be insufficient to absorb losses in our loan portfolio.
Like all financial institutions, we maintain an allowance for loan and lease losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for loan and lease losses is maintained at a level adequate to absorb probable incurred losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our allowance for loan and lease losses may not be sufficient to cover actual loan losses, and future provision for loan losses could materially and adversely affect our operating results. The accounting measurements related to impairment and the allowance for loan and lease losses require significant estimates which are subject to uncertainty and change related to new information and changing circumstances. Our estimates of the risk of loss and amount of loss on any loan are complicated by the

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significant uncertainties surrounding our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.
Our regulators, as an integral part of their examination process, periodically review our allowance for loan and lease losses and may require us to increase our allowance for loan and lease losses by recognizing additional provision for losses charged to expense, or to decrease our allowance for loan and lease losses by recognizing loan charge-offs, net of recoveries. Any such additional provision for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.
Projections for new business initiatives and strategies may prove inaccurate.
The introduction, implementation, withdrawal, success and timing of business initiatives and strategies, including, but not limited to, the opening of new banking centers or entering into new product lines, may be less successful or may be different than anticipated, which could adversely affect our business.
The Bank makes certain projections and develops plans and strategies for its banking and financial products. If we do not accurately determine demand for our banking and financial products, it could result in us incurring significant expenses without the anticipated increases in revenue, which could result in a material adverse effect on the Bank’s business.
We may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud, or certain borrower defaults, which could harm our liquidity, results of operations and financial condition.
When we sell mortgage loans, whether as whole loans or pursuant to a securitization, we are required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Our whole loan sale agreements require us to repurchase or substitute mortgage loans in the event we breach any of these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of borrower fraud. While we have taken steps to enhance our underwriting policies and procedures, there can be no assurance that these steps will be effective or reduce risk associated with loans sold in the past. If the level of repurchase and indemnity activity becomes material, our liquidity, results of operations and financial condition may be adversely affected.
Competition in the financial services industry is intense and could result in our losing business or experiencing reduced margins.
We operate in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes, and continued consolidation. We face aggressive competition from other domestic and foreign lending institutions as well as from numerous other providers of financial services. The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition. Because non-banking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures. Securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The OCC has recently announced that it will accept applications for national bank charters from non-depository financial technology companies engaged in banking activities. These developments may significantly change the competitive environment in which we conduct business. Some of our competitors have greater financial resources and/or face fewer regulatory constraints. Credit unions that compete with us have advantages that allow them to price products and services more competitively. As a result of these various sources of competition, we could lose business to competitors or be forced to price products and services on less advantageous terms to retain or attract clients, either of which would adversely affect our profitability.
Clients could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding.
Checking and savings account balances and other forms of client deposits could decrease if clients perceive alternative investments as providing superior expected returns. When clients move money out of bank deposits in favor of alternative investments, we can lose a relatively inexpensive source of funds, increasing our funding costs.

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Consumers may decide not to use banks to complete their financial transactions, or deposit funds electronically with banks having no branches within our market area, which could affect net income.
Technology and other changes allow parties to complete financial transactions without banks. For example, consumers can pay bills and transfer funds directly without banks. Consumers can also shop for higher deposit interest rates at banks across the country, which may offer higher rates because they have few or no physical branches and open deposit accounts electronically. This process could result in the loss of fee income, as well as the loss of client deposits and the income generated from those deposits, in addition to increasing our funding costs.
Our wealth management business subjects us to a variety of investment and market risks.
At December 31, 2018, we had $2.6 billion in assets under management. A sharp decline in the stock market could negatively impact the amount of assets under management and thus subject our earnings to additional risks and uncertainties.
Negative public opinion could damage our reputation and adversely impact business operations and revenues.
As a financial institution, our earnings and capital are subject to risks associated with negative public opinion. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, the failure of any product or service sold by us to meet our clients’ expectations or applicable regulatory requirements, corporate governance and acquisitions, or from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and/or retain clients and can expose us to litigation and regulatory action. Actual or alleged misconduct by one of our businesses can result in negative public opinion about our other businesses. Negative public opinion could also affect our ability to borrow funds in the unsecured wholesale debt markets.
We rely on other companies to provide key components of our business infrastructure, creating risks of failures by such companies and cybersecurity incidents involving our customers’ information.
Third parties provide key components of our business infrastructure, such as banking services, processing and Internet connections and network access. Any disruption in such services provided by these third parties or any failure of these third parties to handle current or higher volumes of use could adversely affect our ability to deliver products and services to clients and otherwise to conduct business. Technological or financial difficulties of a third-party service provider could adversely affect our business to the extent those difficulties result in the interruption or discontinuation of services provided by that party. These vendors provide services that support our operations, including the storage and processing of sensitive consumer and business customer data, as well as our sales efforts. A cybersecurity breach of a vendor's system may result in theft of our data or disruption of business processes. A material breach of customer data security at a service provider's site may negatively impact our business reputation and cause a loss of customers, result in increased expense to contain the event and/or require that we provide credit monitoring services for affected customers, result in regulatory fines and sanctions, and may result in litigation. We may experience liability to our customers for losses arising from a breach of a vendor's data security system. We rely on our outsourced service providers to implement and maintain prudent cybersecurity controls. Furthermore, we may not be insured against all types of losses as a result of third-party failures, and our insurance coverage may be inadequate to cover all losses resulting from system failures or other disruptions. Failures in our business infrastructure could interrupt the operations or increase the costs of doing business.
We rely on our systems, employees and certain counterparties, and certain failures could adversely affect our operations.

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

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

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

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

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

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

Our success depends, in part, on our ability to adapt products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices, which can reduce net interest income and noninterest income from fee-based products and services. In addition, the widespread adoption of new technologies could require us to make substantial capital expenditures to modify or adapt existing products and services or develop new products and services. We may not be successful in introducing new products and services in response to industry trends or developments in technology or those new

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products may not achieve market acceptance. As a result, we could lose business, be forced to price products and services on less advantageous terms to retain or attract clients, or be subject to increased costs.
We may not pay dividends on our common shares.
Holders of our common shares are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common shares, we are not required to do so and may reduce or eliminate our common share dividend in the future. Additionally, our funds to pay dividends on common shares are dependent upon dividends paid to us by the Bank, which are subject to regulatory restrictions in certain circumstances. A reduction in our dividend rate could adversely affect the market price of our common shares.
Our liquidity is dependent upon our ability to receive dividends from our subsidiaries, which accounts for most of our revenue and could affect our ability to pay dividends, and we may be unable to enhance liquidity from other sources.
We are a separate and distinct legal entity from our subsidiaries, notably First Financial Bank. We receive substantially all of our revenue from dividends from our subsidiaries. These dividends are the principal source of funds to pay dividends on our common shares and interest and principal on outstanding debt. Various federal and/or state laws and regulations limit or restrict the amount of dividends that the Bank and certain of our non-bank subsidiaries may pay us. Additionally, if our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, we may not be able to make dividend payments to our common shareholders. As of December 31, 2018, the Bank had $181.3 million available to pay dividends to First Financial without prior regulatory approval.
To enhance liquidity, we may from time to time borrow under credit facilities or other indebtedness. Turbulence in the capital and credit markets may cause many lenders and institutional investors to reduce or cease to provide funding to borrowers and, as a result, we may not be able to further increase liquidity through additional borrowings.
Limitations on our ability to receive dividends from our subsidiaries or an inability to increase liquidity through additional borrowings, or inability to maintain, renew or replace existing credit facilities, could have a material adverse effect on our liquidity and on our ability to pay dividends on our common shares and interest and principal on our debt.
As of December 31, 2018, we had indebtedness of $1.6 billion.
Disruptions in our ability to access capital markets may negatively affect our capital resources, liquidity and business.

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


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We may feel challenged in retaining key officers and employees.
Our future operating results depend substantially upon the continued service of our executive officers and key personnel. Our future operating results also depend in significant part upon our ability to attract and retain qualified management, lending, financial, technical, marketing, sales, and support personnel. Competition for qualified personnel is intense and we cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for us to hire personnel over time.
Our ability to retain key officers and employees may be further impacted by legislation and regulation affecting the financial services industry. For example, legislation and bank regulatory action that places restrictions on executive compensation at, and the pay practices of, financial institutions may further impact our ability to compete for talent with other industries that are not subject to the same limitations as financial institutions.
Our business, financial condition, or results of operations could be materially adversely affected by the loss of any of our key employees, or our inability to attract and retain skilled employees.
Potential acquisitions may disrupt our business and dilute shareholder value, and we may not be able to successfully consummate or integrate such acquisitions.
Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:
potential exposure to unknown or contingent liabilities of the target company;
exposure to potential asset quality issues of the target company;
difficulty and expense of integrating the operations and personnel of the target company;
difficulty or added costs in the wind-down of non-strategic operations;
potential disruption to our business;
potential diversion of our management’s time and attention;
the possible loss of key employees and customers of the target company;
difficulty in estimating the value (including goodwill) of the target company;
difficulty in receiving appropriate regulatory approval for any proposed transaction;
difficulty in estimating the fair value of acquired assets, liabilities and derivatives of the target company; and
potential changes in banking, or tax laws or regulations or accounting rules that may affect the target company.

We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases negotiations, may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions could involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, any difficulty integrating businesses acquired as a result of a merger or acquisition and the failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have an adverse impact on our liquidity, results of operations and financial condition and any such integration could divert management’s time and attention from managing our company in an effective manner.
Any merger or acquisition opportunity that we decide to pursue will ultimately be subject to regulatory approval or other closing conditions. We may expend substantial time and resources pursuing potential acquisitions which may not be consummated because regulatory approval or other closing requirements are not satisfied. Additionally, the banking regulators and applicable laws and regulations may restrict our ability to engage in acquisitions under certain circumstances.
Our accounting policies and processes are critical to how we report our financial condition and results of operations. They require management to make estimates about matters that are uncertain.
Accounting policies and processes are fundamental to how we record and report our financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and processes so they comply with Generally Accepted Accounting Principles in the United States (GAAP).
Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate valuation that is made when recording income, recognizing an expense, recovering an asset, valuing an asset or liability, or

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reducing a liability. We have established detailed policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. In addition, our policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding our judgments and the estimates pertaining to these matters, we cannot guarantee that we will not be required to adjust accounting policies or re-state prior period financial statements.
See the “Critical Accounting Policies” in the Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1- Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements, in our 2018 Annual Report (included within Exhibit 13 to this Annual Report on Form 10-K) for more information.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.
From time to time, the Financial Accounting Standards Board (FASB) and SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements.

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

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

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

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

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

First Financial and its subsidiaries are subject to the supervision and regulation of various state and federal regulators, including the Federal Reserve Board, the FDIC, the SEC, the Consumer Financial Protection Bureau (CFPB), the Financial Industry

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

Item 1B.  Unresolved Staff Comments.
None.


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Item 2.  Properties.
At December 31, 2018, the Company operated 159 banking centers, 37 of which are leased facilities.  Our core banking operating markets are located within the four state region of Ohio, Indiana, Kentucky and Illinois. First Financial's executive office is a leased facility located in Cincinnati, Ohio and we operate 67 banking centers in Ohio, three banking centers in Illinois, 73 banking centers in Indiana and 16 banking centers in Kentucky. In addition, we operate our Commercial Finance division, responsible for our insurance lending business and franchise lending business, from a non-banking center location in Indiana.

Item 3.  Legal Proceedings.
We are from time to time engaged in various litigation matters including the defense of claims of improper or fraudulent loan practices or lending violations, and other matters, and we have a number of unresolved claims pending. In addition, as part of the ordinary course of business, we are parties to litigation involving claims to the ownership of funds in particular accounts, the collection of delinquent accounts, challenges to security interests in collateral, and foreclosure interests, that are incidental to our regular business activities. While the ultimate liability with respect to these other litigation matters and claims cannot be determined at this time, we believe that damages, if any, and other amounts relating to pending matters are not likely to be material to our consolidated financial position or results of operations, except as described above. Reserves are established for these various matters of litigation, when appropriate under FASB ASC Topic 450, Contingencies, based in part upon the advice of legal counsel.

Item 4. Mine Safety Disclosures.
Not applicable.

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Supplemental Item. Executive Officers of the Registrant.

The following table sets forth information concerning the executive officers of First Financial as of February 21, 2019. The executive officers perform policy-making functions for First Financial. The officers are elected annually at the organizational meeting of the board of directors and serve until the next organizational meeting, or until their successors are elected and duly qualified.
 
 
Position with
First Financial Bancorp
 
Age
Claude E. Davis
 
Executive Chairman
 
58
 
 
 
 
 
Archie M. Brown, Jr.
 
President and Chief Executive Officer
 
58
 
 
 
 
 
James M. Anderson
 
EVP, Chief Financial Officer
 
47
 
 
 
 
 
Anthony M. Stollings
 
EVP, Commercial Banking
 
64
 
 
 
 
 
Catherine M. Myers
 
EVP, Consumer Banking
 
57
 
 
 
 
 
John M. Gavigan
 
EVP, Advanced Solutions and Digital Banking
 
40
 
 
 
 
 
Karen B. Woods
 
EVP, General Counsel and Chief Risk Officer
 
50
 
 
 
 
 
William R. Harrod
 
EVP, Chief Credit Officer
 
51
 
 
 
 
 
Amanda N. Neeley
 
EVP, Chief Marketing Officer
 
38
 
 
 
 
 
Scott T. Crawley
 
Corporate Controller and Principal Accounting Officer
 
38

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

Claude E. Davis - Claude Davis became the Executive Chairman of First Financial effective April 1, 2018. Prior to that date, he served as Chief Executive Officer of First Financial and the Bank since October 1, 2004.  He has served on the board of directors of each of First Financial and the Bank since October 1, 2004 and also has been Chairman of the Board of Directors of the Bank since October 1, 2004.  From October 1, 2004 until December 1, 2014, Mr. Davis held the title of President of First Financial.  From October 1, 2004 until August 20, 2013, Mr. Davis held the title of President of the Bank.  Mr. Davis has over 30 years of experience in the financial services industry.

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

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

Anthony M. Stollings - Tony Stollings is presently the Executive Vice President, Commercial Banking of First Financial and the Bank. He previously served as President, Chief Banking Officer from April 2017 to January 2018 and as the President of

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Consumer Banking from January 2017 to April 2017.  From December 2014 to January 2017 Mr. Stollings served as the President and Chief Operating Officer of First Financial and Chief Operating Officer of the Bank and from January 2013 through November 2014 he served as the Chief Financial Officer of both companies.  Mr. Stollings has also previously served as the Chief Risk Officer and the Chief Accounting Officer of both companies.

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

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

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

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

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

Scott T. Crawley - Scott Crawley is the Corporate Controller and Principal Accounting Officer of both First Financial and the Bank, where he is responsible for the Company’s Accounting department. He was appointed to these roles in December 2014, and January 2017, respectively. He joined First Financial in January 2012 as the Assistant Controller, a position he held until December 2014. Mr. Crawley is a certified public accountant.

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PART II

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

(a)           Market information, holders, dividends

First Financial's common shares are listed on The NASDAQ Global Select Stock Market® under the symbol "FFBC." The information contained in the “Quarterly Financial And Common Stock Data” in First Financial’s Annual Report to Shareholders for the year ended December 31, 2018 with respect to our stock price and dividends, is incorporated herein by reference in response to this item.

As of February 21, 2019, our common shares were held by approximately 4,339 shareholders of record, a number that does not include beneficial owners who hold shares in “street name,” or shareholders from previously acquired companies that have not exchanged their stock. At December 31, 2018, a total of 62,410 stock options and 462,446 shares of restricted stock were outstanding. Additional information about stock options, restricted stock and restricted stock units is included in Note 19 - Stock Options and Awards in the Notes to Consolidated Financial Statements in First Financial’s 2018 Annual Report and in Item 12 below.
The payment of future cash dividends is at the discretion of our Board of Directors and subject to a number of factors, including results of operations, general business conditions, growth, financial condition, regulatory limitation and other factors deemed relevant by the Board. Further, our ability to pay future cash dividends is subject to certain regulatory requirements and restrictions discussed in the Supervision and Regulation section in Item 1 above. For further information see Note 3 - Restrictions on Cash and Dividends in the Notes to Consolidated Financial Statements of First Financial's 2018 Annual Report (included as Exhibit 13 of this report), which is incorporated by reference in response to this item.

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2018 with respect to compensation plans under which our common shares may be issued:

Securities authorized for issuance under equity compensation plans

 
 
Number of securities to be issued
upon exercise of
 outstanding options,
warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights
 
Number of securities
 remaining available for
 future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
Plan category
 
(a)
 
(b)
 
(c) (1)
Equity compensation plans approved by security holders
 
62,410

 
$
9.08

 
1,882,484

Equity compensation plans not approved by security holders
 
N/A

 
N/A

 
N/A


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



24

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Stock Performance Graph

The stock performance graph contained in “Total Return to Shareholders” of First Financial's 2018 Annual Report (included as Exhibit 13 of this report), is incorporated herein by reference in response to this item.

(b)
Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
 
(c)
The following table shows the total number of shares repurchased in the fourth quarter of 2018.

Issuer Purchases of Equity Securities
 
 
(a)
 
(b)
 
(c)
 
(d)
Period
 
Total Number 
of Shares 
Purchased (1)
 
Average 
Price Paid 
Per Share
 
Total Number of 
Shares Purchased as 
Part of Publicly 
Announced Plans (2)
 
Maximum Number of
Shares that may yet 
be purchased Under 
the Plans
October 1 to October 31, 2018
 
 
 
 
 
 
 
 
Share repurchase program
 
0

 
$
0.00

 
0

 
3,509,133

Stock Plans
 
0

 
0.00

 
N/A

 
N/A

November 1 to November 30, 2018
 
 

 
 

 
 

 
 

Share repurchase program
 
0

 
$
0.00

 
0

 
3,509,133

Stock Plans
 
0

 
0.00

 
N/A

 
N/A

December 1 to December 31, 2018
 
 

 
 

 
 

 
 

Share repurchase program
 
0

 
$
0.00

 
0

 
3,509,133

Stock Plans
 
0

 
0.00

 
N/A

 
N/A

Total
 
 

 
 

 
 

 
 

Share repurchase program
 
0

 
$
0.00

 
0

 
 

Stock Plans
 
0

 
$
0.00

 
N/A

 
 


(1)
The number of shares purchased in column (a) and the average price paid per share in column (b) include the purchase of shares other than through publicly announced plans.  The shares purchased other than through publicly announced plans were purchased pursuant to First Financial’s 1999 Stock Incentive Plan for Officers and Employees, Amended and Restated 2009 Non-Employee Director Stock Plan, 2012 Stock Plan, and Amended and Restated 2012 Stock Plan (collectively referred to hereafter as the Stock Plans).  The table shows the number of shares purchased pursuant to the Stock Plans and the average price paid per share.  Under the Stock Plans, shares were purchased from plan participants at the then current market value in satisfaction of stock option exercise prices.
(2)
In October 2012, the Board of Directors of First Financial approved a stock repurchase plan under which it authorized the purchase of up to 5,000,000 of its common stock.   The plan has no expiration date.  The table that follows provides additional information regarding this plan.  

Announcement
Date
 
Total Shares
 Approved for
 Repurchase
 
Total Shares
Repurchased
Under
The Plan
 
Expiration
 Date
10/25/2012
 
5,000,000

 
1,490,867

 
None


In January 2019, the Board of Directors announced that it approved a new stock repurchase plan in replacement of the plan approved in 2012. The 2019 plan authorizes the purchase of up to 5,000,000 shares of the Company’s common stock.


25

TABLE OF CONTENTS

Item 6.  Selected Financial Data.
The information contained in Table 1 of the Management’s Discussion and Analysis section of First Financial's 2018 Annual Report (included as Exhibit 13 of this report), is incorporated herein by reference in response to this item.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results Of Operations.
The information contained in the Management’s Discussion and Analysis section (including certain forward looking statements) of First Financial’s 2018 Annual Report (included as Exhibit 13 of this report) is incorporated herein by reference in response to this item.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk.
The information contained in the Market Risk section and in Table 14 - Market Risk Disclosure of the Management’s Discussion and Analysis section in First Financial's 2018 Annual Report (included as Exhibit 13 of this report), is incorporated herein by reference in response to this item.

Item 8.  Financial Statements and Supplementary Data.
The consolidated financial statements and the reports of our independent registered public accounting firm included in the Consolidated Financial Statements and the Notes to Consolidated Financial Statements in First Financial’s 2018 Annual Report (included as Exhibit 13 of this report), are incorporated herein by reference.

The Quarterly Financial and Common Stock Data at the end of the Notes to Consolidated Financial Statements in First Financial’s 2018 Annual Report (included as Exhibit 13 of this report), is incorporated herein by reference.

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

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

Internal Control Over Financial Reporting
Management's Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm included in First Financial’s 2018 Annual Report (included as Exhibit 13 of this report), are incorporated herein by reference.

Changes in Internal Controls Over Financial Reporting
There were no changes in First Financial’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, First Financial’s internal control over financial reporting.

Item 9B.  Other Information.
None.


26

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PART III

Item 10.  Directors, Executive Officers and Corporate Governance.
Certain information concerning executive officers of First Financial has been supplied in the “Supplemental Item. Executive Officers of the Registrant” of this Form 10-K. Information appearing under “Election of Directors,” “Corporate Governance - Board Committees,” and “Shareholder Nominations for Election to the Board” of First Financial's Definitive Proxy Statement with respect to the Annual Meeting of Shareholders to be held on May 28, 2019, and which is expected to be filed with the SEC, pursuant to Regulation 14A of the Exchange Act (First Financial’s Proxy Statement) within 120 days of the close of our fiscal year, is incorporated herein by reference in response to this item.

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

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information appearing under the headings “Securities Authorized for Issuance Under Equity Compensation Plans” set forth in Part II, Item 5 and “Shareholdings of Directors, Executive Officers, and Nominees for Director” of First Financial’s Proxy Statement is incorporated herein by reference in response to this item.

Item 13.  Certain Relationships and Related Transactions.
The information appearing in Note 13 - Loans to Related Parties in the Notes to Consolidated Financial Statements included in First Financial’s 2018 Annual Report (included as Exhibit 13 of this report) is incorporated herein by reference in response to this item.  Reference is also made to information appearing under the heading “Corporate Governance-Transactions with Related Parties” in First Financial’s Proxy Statement in response to this item.

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



27

TABLE OF CONTENTS

PART IV

Item 15.  Exhibits, Financial Statement Schedules.

(a)
(1)
The consolidated financial statements (and report thereon) listed below are incorporated herein by reference from First Financial’s 2018 Annual Report (included as Exhibit 13 of this report) as noted:
 
 
 
 
 
Reports of Independent Registered Public Accounting Firm - Incorporated by reference from First Financial’s 2018 Annual Report
 
 
 
 
 
Consolidated Balance Sheets as of December 31, 2018 and 2017 - Incorporated by reference from First Financial’s 2018 Annual Report
 
 
 
 
 
Consolidated Statements of Income for years ended December 31, 2018, 2017, and 2016 - Incorporated by reference from First Financial’s 2018 Annual Report
 
 
 
 
 
Consolidated Statements of Comprehensive Income for years ended December 31, 2018, 2017, and 2016 - Incorporated by reference from First Financial’s 2018 Annual Report
 
 
 
 
 
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2018, 2017, and 2016 - Incorporated by reference from First Financial’s 2018 Annual Report
 
 
 
 
 
Consolidated Statements of Cash Flows for years ended December 31, 2018, 2017, and 2016 - Incorporated by reference from First Financial’s 2018 Annual Report
 
 
 
 
 
Notes to Consolidated Financial Statements - Incorporated by reference from First Financial’s 2018 Annual Report
 
 
 
 
(2)
Financial Statement Schedules: Schedules to the consolidated financial statements required by Regulation S-X are not required under the related instructions, or are inapplicable, and therefore have been omitted
 
 
 
 
(3)
Exhibits:

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

Exhibit
Number
2.1
2.2
2.3
2.4
2.5

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3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15

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4.16
4.17
4.18
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17

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10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36

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10.37
10.38
10.39
13
14.1
14.2
21
23
31.1
31.2
32.1
32.2
101.1
Financial statements from the Annual Report on Form 10-K of the Company for the year ended December 31, 2018, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Shareholders’ Equity, and (v) Notes to Consolidated Financial Statements, as blocks of text and in detail.**

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

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


Item 16. Form 10-K Summary.
None.


32

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SIGNATURES

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

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

Date 
2/22/2019

Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
  /s/ Archie M. Brown, Jr.
 
/s/ James M. Anderson
Archie M. Brown, Jr., Director
President and Chief Executive Officer
 
James M. Anderson, Executive Vice President and Chief Financial Officer
 
 
 
 
Date
2/22/2019
 
Date
2/22/2019
 
 
 
 
/s/ Claude E. Davis
 
/s/ Scott Crawley
Claude E. Davis, Director
 
Scott T. Crawley, First Vice President and Controller
Executive Chairman of the Board
 
(Principal Accounting Officer)
 
 
 
 
 
Date
2/22/2019
 
Date
2/22/2019
 
 
 
 
/s/ J. Wickliffe Ach
 
/s/ Kathleen L. Bardwell
J. Wickliffe Ach, Director
 
Kathleen L. Bardwell, Director
 
 
 
 
Date
2/22/2019
 
Date
2/22/2019
 
 
 
 
/s/ William G. Barron
 
/s/ Vincent A. Berta
Wiliam G. Barron, Director
 
Vincent A. Berta, Director
 
 
 
 
Date
2/22/2019
 
Date
2/22/2019
 
 
 
 
/s/ Cynthia O. Booth
 
/s/ Corinne R. Finnerty
Cynthia O. Booth, Director
 
Corinne R. Finnerty, Director
 
 
 
 
Date
2/22/2019
 
Date
2/22/2019
 
 
 
 
/s/ Erin P. Hoeflinger
 
/s/ Susan L. Knust
Erin P. Hoeflinger, Director
 
Susan L. Knust, Director
 
 
 
 
 
Date
2/22/2019
 
Date
2/22/2019

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/s/ William J. Kramer
 
/s/ John T. Neighbours
William J. Kramer, Director
 
John T. Neighbours, Director
 
 
 
 
Date
2/22/2019
 
Date
2/22/2019
 
 
 
 
/s/ Thomas M. O'Brien
 
/s/ Richard E. Olszewski
Thomas M. O'Brien, Director
 
Richard E. Olszewski, Director
 
 
 
Date
2/22/2019
 
Date
2/22/2019
 
 
 
 
 
/s/ Maribeth S. Rahe
 
 
 
Maribeth S. Rahe, Director
 
 
 
 
 
 
 
 
Date
2/22/2019
 
 
 


34
(Back To Top)

Section 2: EX-13 (EXHIBIT 13)

Exhibit
EXHIBIT 13CELEBRATING 25 YEARS OF PROFITABILITY First Financial Bancorp 2015 Annual Report396847521_a2018annualreportfinal001.jpg

first First Financial Bancorp A Foundation for Continuous Growth 2018 ANNUAL REPORT




396847521_a2018annualreportfinal002.jpg
Dear Fellow Shareholders, 2018 was a year of significant change and exciting accomplishments. First Financial Bancorp and MainSource Financial Group started the year as two separate companies sharing common business goals, and after the execution of the largest merger in either Company’s history, ended 2018 as a successfully integrated Company under the First Financial Bancorp name. As a combined Company, we have gained scale and strength across commercial and retail banking, wealth management and specialty finance to more effectively serve our clients and communities. In addition, we improved the depth of our talent, enhanced our product and service offerings and increased our operating capacity. The implementation of our new strategic plan and risk framework, along with increased scale and improved market share position across our key markets, has strongly positioned the Company for continued growth and success in a rapidly evolving industry. Carefully merging two entities into a successful, forward-looking company is challenging. I am proud of our merger integration work not only because we accomplished a successful systems conversion, but we also made significant strides in our cultural integration while remaining focused on our clients and our communities. At the same time, we took substantial steps in positioning First Financial for future success by developing our new corporate strategic plan, properly aligning our organization, implementing an impressive brand refresh, opening new banking locations, investing in new technologies and impacting the places we live and work. The Company also engaged in the most successful United Way campaign we’ve ever had. I am highly encouraged by the Company’s ability to come together and perform financially. Our strong performance in 2018 enabled us to announce a stock repurchase plan and 10% dividend increase in the first quarter of 2019. We remain confident in our ability to sustain these financial results, and our outlook of future performance continues to be very optimistic. 2018 Highlights Successful completion of $1 billion merger between First Financial Bancorp and MainSource Financial Group Total assets increased $5.1 billion to $14.0 billion Net income increased 78.3% to $172.6 million or $1.93 per diluted share Total deposits increased 47.1% to $10.1 billion Return on average assets increased to 1.37% Strong loan pipelines and robust demand deposit balance growth in the fourth quarter created a strong base for positive momentum in 2019 Significant talent additions across the Company Looking Ahead - 2019 The Company’s growth and solid performance over the past year have added to our strong foundation, which will allow us to operate strategically in the future. In the year ahead, we will drive superior financial results while pursuing continuous improvement and innovation through the implementation of new process, distribution, client experience and technology initiatives. Additionally, we will continue to invest in our associates and build the Company’s reputation as a highly desired place to work. With deeply engaged associates, we can better deliver on our promise of excellent service while improving our level of client satisfaction and loyalty. Finally, we remain committed to making a meaningful impact locally through the work of the First Financial Foundation and that of our associates leading and volunteering in each of the communities we serve. I look forward to what 2019 holds for the Company as we strive to achieve our long-term goals of growth, innovation and positive impact in our communities. Thank you for your continued support. Archie M. Brown, Jr. President & Chief Executive Officer



396847521_a2018annualreportfinal003.jpg
A history of strength CONSECUTIVE YEARS OF QUARTERS OF STRENGTH and stability 113 PROFITABILITY 155 & STABILITY Client Associate Product A scalable platform Innovation Credit Relationships Engagement Delivery & Administration to facilitate growth & Experience & Technology Strategy Channels $8.8 $10.1 $14.0 Solid financial Total Loans Total Deposits Total Assets performance (dollars in billions) (dollars in billions) (dollars in billions) $6.0 $5.8 $8.9 $5.4 $6.9 $8.4 $6.5 $8.1 $4.8 $6.2 $5.7 $7.2 $172.6 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Earnings Per Share Return on Assets Return on Equity 1.37% $1.93 1.12% 10.78% Net Income 1.07% 10.48% 1.00% 9.85% $1.56 0.96% 9.33% $1.43 8.94% (dollars in millions) $1.21 $1.09 $96.8 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 $88.5 $75.1 $65.0 Total Shareholder Return First Financial Bancorp KBW Regional Bank Index NASDAQ Composite 80% 59% 69% 43% 30% 37% 27% 17% -20% -8% -3% -17% 2014 2015 2016 2017 2018 1 Year 3 Year 5 Year

First Financial Bancorp 2018 Annual Report 1


396847521_a2018annualreportfinal004.jpg
Leadership Senior Management Claude E. Davis John M. Gavigan James R. Shank Executive Chairman EVP, Advanced Solutions Chief Internal Auditor and Digital Banking Archie M. Brown, Jr. Anthony M. Stollings President and Chief Executive Officer William R. Harrod EVP, Commercial Banking Chief Credit Officer James M. Anderson Karen B. Woods Chief Financial Officer Andrew K. Hauck General Counsel and Commercial Banking Executive Chief Risk Officer Scott T. Crawley Corporate Controller and Catherine M. Myers Principal Accounting Officer EVP, Consumer Banking Richard S. Dennen Amanda N. Neeley President, Oak Street Funding Chief Marketing Officer Board of Directors Claude E. Davis Erin P. Hoeflinger Executive Chairman Senior Vice President, Business Strategy Chairman of the Board, First Financial Bancorp and Execution Aetna J. Wickliffe Ach Lead Independent Director Susan L. Knust Board of Directors of First Financial Bancorp Owner and President Omega Warehouse Services Kathleen L. Bardwell Senior Vice President, Chief Compliance Officer William J. Kramer STERIS Corporation Vice President of Operations Valco Companies, Inc. William G. Barron Chairman and President John T. Neighbours William G. Barron Enterprises General Counsel AmeriQual Group Holdings Vincent A. Berta President and Managing Director Thomas M. O’Brien Covington Capital, LLC Senior Advisor Boston Consulting Group Cynthia O. Booth President and Chief Executive Officer Richard E. Olszewski COBCO Enterprises, LLC Owner/Operator 7 Eleven Food Stores Archie M. Brown, Jr. President and Chief Executive Officer Maribeth S. Rahe First Financial Bancorp and First Financial Bank President and Chief Executive Officer Fort Washington Investment Advisors, Inc. Corinne R. Finnerty Principal McConnell Finnerty PC

2 First Financial Bancorp 2018 Annual Report



FINANCIAL HIGHLIGHTS
 
 
 
 
 
 
 
(Dollars in thousands, except per share data)
 
2018
 
2017
 
% Change
Earnings
 
 
 
 
 
 
Net interest income
 
$
449,235

 
$
283,545

 
58.4
 %
Net income
 
172,595

 
96,787

 
78.3
 %
 
 
 
 
 
 
 
Per Share
 
 
 
 
 
 
Net income per common share-basic
 
$
1.95

 
$
1.57

 
24.2
 %
Net income per common share-diluted
 
1.93

 
1.56

 
23.7
 %
Cash dividends declared per common share
 
0.78

 
0.68

 
14.7
 %
Tangible book value per common share (end of year)
 
11.72

 
11.62

 
0.9
 %
Market price (end of year)
 
23.72

 
26.35

 
(10.0
)%
 
 
 
 
 
 
 
Balance Sheet - End of Year
 
 
 
 
 
 
Total assets
 
$
13,986,660

 
$
8,896,923

 
57.2
 %
Loans
 
8,824,214

 
6,013,183

 
46.7
 %
Investment securities
 
3,324,243

 
2,056,556

 
61.6
 %
Deposits
 
10,140,394

 
6,895,046

 
47.1
 %
Shareholders' equity
 
2,078,249

 
930,664

 
123.3
 %
 
 
 
 
 
 
 
Ratios
 
 
 
 
 
 
Return on average assets
 
1.37
%
 
1.12
%
 
 
Return on average shareholders' equity
 
9.85
%
 
10.78
%
 
 
Return on average tangible shareholders' equity
 
17.32
%
 
14.08
%
 
 
Net interest margin
 
4.05
%
 
3.59
%
 
 
Net interest margin (fully tax equivalent)
 
4.10
%
 
3.66
%
 
 



First Financial Bancorp 2018 Annual Report 3









 
2018 Financial Highlights






4 First Financial Bancorp 2018 Annual Report


Glossary of Abbreviations and Acronyms

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

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


First Financial Bancorp 2018 Annual Report 5


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

Table 1 • Financial Summary
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
(Dollars in thousands, except per share data)
 
2018
 
2017
 
2016
 
2015
 
2014
Summary of operations
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
540,382

 
$
333,073

 
$
305,950

 
$
269,759

 
$
247,859

Tax equivalent adjustment (1)
 
5,147

 
5,259

 
4,215

 
4,017

 
3,224

Interest income tax – equivalent (1)
 
545,529

 
338,332

 
310,165

 
273,776

 
251,083

Interest expense
 
91,147

 
49,528

 
33,279

 
23,257

 
19,234

  Net interest income tax – equivalent (1)
 
$
454,382

 
$
288,804

 
$
276,886

 
$
250,519

 
$
231,849

Interest income
 
$
540,382

 
$
333,073

 
$
305,950

 
$
269,759

 
$
247,859

Interest expense
 
91,147

 
49,528

 
33,279

 
23,257

 
19,234

  Net interest income
 
449,235

 
283,545

 
272,671

 
246,502

 
228,625

Provision for loan and lease losses
 
14,586

 
3,582

 
10,140

 
9,641

 
1,528

Noninterest income
 
103,382

 
76,142

 
69,601

 
75,202

 
63,965

Noninterest expenses
 
323,810

 
239,942

 
201,401

 
201,130

 
196,034

Income before income taxes
 
214,221

 
116,163

 
130,731

 
110,933

 
95,028

Income tax expense
 
41,626

 
19,376

 
42,205

 
35,870

 
30,028

   Net income
 
$
172,595

 
$
96,787

 
$
88,526

 
$
75,063

 
$
65,000

 
 
 
 
 
 
 
 
 
 
 
Per share data
 
 
 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.95

 
$
1.57

 
$
1.45

 
$
1.23

 
$
1.11

Diluted
 
$
1.93

 
$
1.56

 
$
1.43

 
$
1.21

 
$
1.09

Cash dividends declared per common share
 
$
0.78

 
$
0.68

 
$
0.64

 
$
0.64

 
$
0.61

Average common shares outstanding–basic (in thousands)
 
88,582

 
61,529

 
61,206

 
61,063

 
58,663

Average common shares outstanding–diluted (in thousands)
 
89,614

 
62,172

 
61,985

 
61,848

 
59,393

 
 
 
 
 
 
 
 
 
 
 
Selected year-end balances
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
13,986,660

 
$
8,896,923

 
$
8,437,967

 
$
8,147,411

 
$
7,217,821

Earning assets
 
12,190,567

 
8,117,115

 
7,719,285

 
7,431,707

 
6,594,626

Investment securities (2)
 
3,324,243

 
2,056,556

 
1,854,201

 
1,970,626

 
1,761,090

Total loans and leases
 
8,824,214

 
6,013,183

 
5,757,482

 
5,388,760

 
4,777,235

Interest-bearing demand deposits
 
2,307,071

 
1,453,463

 
1,513,771

 
1,414,291

 
1,225,378

Savings deposits
 
3,167,325

 
2,462,420

 
2,142,189

 
1,945,805

 
1,889,473

Time deposits
 
2,173,564

 
1,317,105

 
1,321,843

 
1,406,124

 
1,255,364

Noninterest-bearing demand deposits
 
2,492,434

 
1,662,058

 
1,547,985

 
1,413,404

 
1,285,527

Total deposits
 
10,140,394

 
6,895,046

 
6,525,788

 
6,179,624

 
5,655,742

Short-term borrowings
 
1,040,691

 
814,565

 
807,912

 
938,425

 
661,392

Long-term debt
 
570,739

 
119,654

 
119,589

 
119,540

 
48,241

Shareholders’ equity
 
2,078,249

 
930,664

 
865,224

 
809,376

 
784,077

 
 
 
 
 
 
 
 
 
 
 
Select Financial Ratios
 
 
 
 
 
 
 
 
 
 
Average loans to average deposits (3)
 
87.49
%
 
88.12
%
 
89.33
%
 
84.00
%
 
83.20
%
Net charge-offs to average loans and leases
 
0.15
%
 
0.13
%
 
0.10
%
 
0.18
%
 
0.27
%
Average shareholders’ equity to average total assets
 
13.89
%
 
10.42
%
 
10.24
%
 
10.73
%
 
10.75
%
Return on average assets
 
1.37
%
 
1.12
%
 
1.07
%
 
1.00
%
 
0.96
%
Return on average equity
 
9.85
%
 
10.78
%
 
10.48
%
 
9.33
%
 
8.94
%
Net interest margin
 
4.05
%
 
3.59
%
 
3.62
%
 
3.60
%
 
3.71
%
Net interest margin (tax equivalent basis) (1)
 
4.10
%
 
3.66
%
 
3.68
%
 
3.66
%
 
3.76
%
Dividend payout
 
40.00
%
 
43.31
%
 
44.14
%
 
52.03
%
 
54.95
%
(1) Tax equivalent basis was calculated using a 21.00% tax rate for 2018 and a 35.00% tax rate for 2017, 2016, 2015 and 2014.
(2) Includes investment securities held-to-maturity, investment securities available-for-sale and other investments.
(3) Includes loans held for sale.


6 First Financial Bancorp 2018 Annual Report


This annual report contains forward-looking statements. See the Forward-Looking Statements section that follows for further information on the risks and uncertainties associated with forward-looking statements. The following discussion and analysis is presented to facilitate the understanding of the financial position and results of operations of First Financial Bancorp. The discussion and analysis identifies trends and material changes that occurred during the reporting periods presented and should be read in conjunction with the Statistical Data, Consolidated Financial Statements and accompanying Notes.

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

EXECUTIVE SUMMARY

First Financial is a $14.0 billion financial holding company headquartered in Cincinnati, Ohio and operates through its subsidiaries, primarily in Ohio, Indiana, Kentucky and Illinois.  These subsidiaries include a commercial bank, First Financial Bank, with 159 banking centers and 196 ATMs. First Financial provides traditional banking and financial services products to business and retail clients through its six lines of business: Commercial, Retail Banking, Mortgage Banking, Wealth Management, Investment Commercial Real Estate and Commercial Finance. Commercial Finance provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and commission-based financing, primarily to insurance agents and brokers, throughout the United States. Wealth Management had $2.6 billion in assets under management as of December 31, 2018 and provides the following services: wealth planning, portfolio management, trust and estate, brokerage and retirement planning.

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

MARKET STRATEGY

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

BUSINESS COMBINATIONS

In April 2018, First Financial completed its acquisition of MainSource Financial Group, Inc. and its banking subsidiary,
MainSource Bank. The merger positioned the combined company to better serve the complementary geographies of Ohio,
Indiana, Kentucky and Illinois by creating a higher performing bank with greater scale and capabilities. Under the terms of the
merger agreement, shareholders of MainSource received 1.3875 common shares of First Financial common stock for each
share of MainSource common stock. Including outstanding options and warrants on MainSource common stock, total purchase
consideration was $1.1 billion. In the merger, First Financial acquired total assets of $4.4 billion, loans of $2.8 billion and
deposits of $3.3 billion, resulting in goodwill of $676.2 million.

The MainSource transaction was accounted for using the acquisition method of accounting and accordingly, assets acquired,
liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date, in accordance
with FASB ASC Topic 805, Business Combinations. The fair value measurements of assets acquired and liabilities assumed
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. As a result, the fair value adjustments are preliminary and may change as information
becomes available, but no later than the second quarter of 2019.

See Note 22 – Business Combinations in the Notes to Consolidated Financial Statements, for further discussion of the merger
with MSFG.



First Financial Bancorp 2018 Annual Report 7

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

OVERVIEW OF OPERATIONS
 
Net income for the year ended December 31, 2018 was $172.6 million, resulting in earnings per diluted common share of $1.93. This compares to net income of $96.8 million and earnings per diluted common share of $1.56 in 2017. First Financial’s return on average shareholders’ equity for 2018 was 9.85%, compared to 10.78% for 2017, and First Financial’s return on average assets was 1.37% and 1.12% for 2018 and 2017, respectively.
  
Net interest income in 2018 increased $165.7 million, or 58.4%, from 2017, to $449.2 million, primarily driven by higher post-merger earning asset balances as well as higher yields earned on the investment and loan portfolios from rising interest rates. The net interest margin on a fully tax equivalent basis was 4.10% for 2018 compared to 3.66% in 2017.
 
Noninterest income increased $27.2 million, or 35.8%, during the year, from $76.1 million in 2017 to $103.4 million in 2018. The increase in 2018 was driven by higher deposit service charges, bankcard income and other noninterest income.

Noninterest expense increased $83.9 million, or 35.0%, from $239.9 million in 2017 to $323.8 million in 2018. This increase included $37.8 million of merger related expenses.

Income tax expense increased $22.3 million, or 114.8%, from $19.4 million in 2017 to $41.6 million in 2018, with the effective tax rate increasing from 16.7% in 2017 to 19.4% in 2018. The higher effective tax rate in 2018 was primarily related to the recognition of a significant historic tax credit investment in the prior year, which was partially offset by the impact of tax reform.
 
Total loans increased $2.8 billion, or 46.7%, from $6.0 billion at December 31, 2017 to $8.8 billion at December 31, 2018, primarily as a result of the merger. Total deposits increased $3.2 billion, or 47.1%, from $6.9 billion at December 31, 2017 to $10.1 billion as of December 31, 2018.
 
The ALLL was $56.5 million, or 0.64% of total loans at December 31, 2018, compared to $54.0 million, or 0.90% of total loans at December 31, 2017. The decline in the ALLL as a percentage of loans reflects the impact of accounting for acquired loans, which are recorded at fair value at acquisition and as such have no related allowance. First Financial's credit quality performance remained strong in 2018, reflecting disciplined underwriting and credit monitoring procedures, as well as stable economic conditions in the Company's markets.

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

NET INCOME
 
2018 vs. 2017. First Financial’s net income increased $75.8 million, or 78.3%, to $172.6 million in 2018, compared to net income of $96.8 million in 2017. The increase was primarily related to a $165.7 million, or 58.4%, increase in net interest income, combined with a $27.2 million, or 35.8%, increase in noninterest income. These increases were partially offset by an $83.9 million, or 35.0%, increase in noninterest expenses and a $22.3 million, or 114.8%, increase in income tax expense during 2018.

2017 vs. 2016. First Financial’s net income increased $8.3 million, or 9.3%, to $96.8 million in 2017, compared to net income
of $88.5 million in 2016. The increase was primarily related to a $22.8 million, or 54.1%, decline in income tax expense, a
$10.9 million, or 4.0%, increase in net interest income and a $6.5 million, or 9.4%, increase in noninterest income. These
increases were partially offset by a $38.5 million, or 19.1%, increase in noninterest expenses during 2017.

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


8 First Financial Bancorp 2018 Annual Report


NET INTEREST INCOME
 
First Financial’s net interest income for the years 2014 through 2018 is shown in Table 1 – Financial Summary. First Financial’s principal source of income is net interest income, which is the excess of interest received from earning assets, including loan-related fees, less interest paid on interest-bearing liabilities. The amount of net interest income is determined by the volume and mix of earning assets, the rates earned on such assets and the volume, mix and rates paid for the deposits and borrowed money that support the earning assets. Earning assets consist of interest-bearing loans to customers as well as marketable investment securities.
 
For analytical purposes, net interest income is also presented in Table 1 – Financial Summary on a tax equivalent basis assuming a 35.00% marginal tax rate for years 2014 through 2017 and a 21.00% marginal tax rate for 2018. Net interest income is presented on a tax equivalent basis to consistently reflect income from tax-exempt assets, such as municipal loans and investments, in order to facilitate a comparison between taxable and tax-exempt amounts.  Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully tax equivalent basis as these measures provide useful information to make peer comparisons. First Financial's tax equivalent net interest margin was 4.10%, 3.66% and 3.68% for 2018, 2017 and 2016, respectively.

Table 2 – Volume/Rate Analysis - Tax Equivalent Basis describes the extent to which changes in interest rates as well as changes in the volume of earning assets and interest-bearing liabilities have affected First Financial’s net interest income on a tax equivalent basis during the years presented. Nonaccrual loans and loans held for sale were included in the average loan balances used to determine the yields in Table 2 – Volume/Rate Analysis - Tax Equivalent Basis, which should be read in conjunction with the Statistical Information table.
 
Loan fees included in the interest income computation for 2018, 2017 and 2016 were $9.1 million, $7.4 million, and $9.9 million, respectively. Loan fees increased in 2018 as a result of higher loan balances subsequent to the merger.

2018 vs. 2017. Net interest income increased $165.7 million, or 58.4%, from $283.5 million in 2017 to $449.2 million in 2018, primarily due to an increase in average earning assets and higher yields earned during 2018. Average earning assets increased from $7.9 billion in 2017 to $11.1 billion in 2018, while the yield on earning assets increased from 4.22% in 2017 to 4.88% in 2018.

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

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

2017 vs. 2016. Net interest income increased $10.9 million, or 4.0%, from $272.7 million in 2016 to $283.5 million in 2017,
primarily due to an increase in average earning assets and higher yields earned during 2017. Average earning assets increased
from $7.5 billion in 2016 to $7.9 billion in 2017, while the yield on earning assets increased from 4.07% in 2016 to 4.22% in
2017.

Interest income was $333.1 million in 2017, a $27.1 million, or 8.9%, increase from 2016. The increase was primarily
attributable to interest income from loans, which increased $17.4 million, or 6.6%, from $262.7 million in 2016 to $280.1
million in 2017 as well as a $7.5 million, or 17.3%, increase in taxable interest income earned on investment securities during
the period. The increase in interest income on loans resulted from an increase in average loan balances of $219.3 million, or
3.9%, as well as higher loan yields resulting from rising interest rates. Higher loan balances in 2017 resulted from solid organic
loan growth during the period. The increase in interest income on investment securities was driven by a $142.5 million, or
7.7%, increase in average investment balances as well as higher yields earned during the period.

First Financial Bancorp 2018 Annual Report 9

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

Interest expense was $49.5 million in 2017, which was a $16.2 million, or 48.8%, increase from 2016. Interest expense
increased as the average balance of interest-bearing deposits increased $249.6 million, or 5.2%, due to the Company's strong
deposit generation efforts during the period. Additionally, rising interest rates and a higher mix of variable rate deposit balances
during 2017 contributed to the cost of funds related to these deposits increasing to 69 bps for 2017 from 47 bps in 2016. In an effort to contain rising funding costs, First Financial converted approximately $1.5 billion of previously indexed deposits to managed rate products during the third quarter of 2017, while also lowering the rates paid on these products by a weighted average of 35 bps. Interest expense was also impacted in 2017 by an increase in short-term borrowing rates from 51 bps in 2016 to 99 bps in 2017 as a result of rising interest rates.

Table 2 • Volume/Rate Analysis - Tax Equivalent Basis (1) 
 
 
 
 
 
 
2018 change from 2017 due to
 
2017 change from 2016 due to
(Dollars in thousands)
 
Volume
Rate
 
Total
 
Volume
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 
 
 
 
 
Loans (2)
 
$
126,901

 
$
39,681

 
$
166,582

 
$
10,487

 
$
7,220

 
$
17,707

Indemnification asset
 
0

 
3,871

 
3,871

 
2,150

 
(1,512
)
 
638

Investment securities (3)
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
21,278

 
7,230

 
28,508

 
2,783

 
4,682

 
7,465

Tax-exempt
 
9,004

 
(1,112
)
 
7,892

 
1,906

 
222

 
2,128

Total investment securities interest (3)
 
30,282

 
6,118

 
36,400

 
4,689

 
4,904

 
9,593

Interest-bearing deposits with other banks
 
25

 
319

 
344

 
101

 
128

 
229

Total
 
157,208

 
49,989

 
207,197

 
17,427

 
10,740

 
28,167

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
 
2,641

 
1,563

 
4,204

 
72

 
2,051

 
2,123

Savings deposits
 
3,488

 
(1,379
)
 
2,109

 
2,578

 
7,804

 
10,382

Time deposits
 
11,766

 
3,701

 
15,467

 
(2,091
)
 
2,155

 
64

Short-term borrowings
 
2,228

 
7,612

 
9,840

 
(494
)
 
4,181

 
3,687

Long-term debt
 
11,703

 
(1,704
)
 
9,999

 
60

 
(67
)
 
(7
)
Total
 
31,826

 
9,793

 
41,619

 
125

 
16,124

 
16,249

Net interest income
 
$
125,382

 
$
40,196

 
$
165,578

 
$
17,302

 
$
(5,384
)
 
$
11,918


(1) Tax equivalent basis was calculated using a 21.00% tax rate for 2018 and a 35.00% tax rate for 2017 and 2016.
(2) Includes nonaccrual loans and loans held-for-sale.
(3) Includes HTM securities, AFS securities and other investments.

NONINTEREST INCOME AND NONINTEREST EXPENSES
 
Noninterest income and noninterest expenses for 2018, 2017 and 2016 are shown in Table 3 – Noninterest Income and Noninterest Expenses.
 
NONINTEREST INCOME
 
2018 vs. 2017. Noninterest income increased $27.2 million, or 35.8%, from $76.1 million in 2017 to $103.4 million in 2018. The increase was primarily related to a $15.3 million, or 77.5%, increase in service charges on deposits, a $6.9 million, or 52.2% increase in bankcard income, a $3.6 million, or 22.8%, increase in other noninterest income, a $1.3 million, or 19.7%, increase in client derivative fees, and a $1.0 million, or 7.2%, increase in trust and wealth management fees. These increases were partially offset by $1.8 million, or 109.8%, decrease in gains on sale of investment securities.

The increases in service charges on deposits, bankcard income, other noninterest income, derivative fees and wealth management fees were primarily driven by increased scale created by the merger.

2017 vs. 2016. Noninterest income increased $6.5 million, or 9.4%, from $69.6 million in 2016 to $76.1 million in 2017. The
increase was primarily related to a $2.0 million, or 14.8%, increase in other noninterest income, a $1.8 million, or 40.4%
increase in client derivative fees, a $1.4 million, or 604.7%, increase in net gains on sales of investment securities and a $1.2

10 First Financial Bancorp 2018 Annual Report


million, or 9.6%, increase in bankcard income, partially offset by a $1.6 million, or 24.0%, decrease in net gains from sales of
loans.

Other noninterest income increased from $13.7 million in 2016 to $15.8 million in 2017, primarily related to $5.8 million of
income from the early redemption of certain off balance sheet securitizations associated with the 2009 FDIC-assisted
transactions, which was partially offset by a $3.5 million decrease in income from the accelerated discount on covered/formerly
covered loans.

Higher client derivative fees in 2017 reflected strong loan demand and net gains on sales of investment securities increased in
2017 as proceeds from the sale of $190.0 million of AFS securities resulted in gains of $1.8 million and losses of
$0.2 million during the year. Bankcard income increased as a result of deeper client penetration and increased customer activity
during 2017.

Partially offsetting the increase in noninterest income was a decrease in net gains on sales of loans from $6.8 million in 2016 to
$5.2 million in 2017 primarily due to lower sales volume during the period.


Table 3 • Noninterest Income and Noninterest Expenses
 
 
2018
 
2017
 
2016
(Dollars in thousands)
 
Total
 
% Change
 
Total
 
% Change
 
Total
 
% Change
Noninterest income
 
 
 
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
 
$
35,108

 
77.5
 %
 
$
19,775

 
4.4
 %
 
$
18,933

 
(0.4
)%
Trust and wealth management fees
 
15,082

 
7.2
 %
 
14,073

 
6.6
 %
 
13,200

 
0.5
 %
Bankcard income
 
20,245

 
52.2
 %
 
13,298

 
9.6
 %
 
12,132

 
4.8
 %
Client derivative fees
 
7,682

 
19.7
 %
 
6,418

 
40.4
 %
 
4,570

 
4.1
 %
Net gains from sales of loans
 
6,071

 
17.5
 %
 
5,169

 
(24.0
)%
 
6,804

 
5.1
 %
Other
 
19,355

 
22.8
 %
 
15,760

 
14.8
 %
 
13,728

 
(28.2
)%
Subtotal
 
103,543

 
39.0
 %
 
74,493

 
7.4
 %
 
69,367

 
(5.9
)%
Gains on sales of investment securities
 
(161
)
 
N/M

 
1,649

 
N/M

 
234

 
(84.5
)%
Total
 
$
103,382

 
35.8
 %
 
$
76,142

 
9.4
 %
 
$
69,601

 
(7.4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expenses
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
$
188,990

 
37.7
 %
 
$
137,240

 
6.8
 %
 
$
128,549

 
15.0
 %
Net occupancy
 
24,215

 
39.2
 %
 
17,397

 
(5.1
)%
 
18,329

 
0.5
 %
Furniture and equipment
 
14,908

 
76.6
 %
 
8,443

 
(2.5
)%
 
8,663

 
(0.7
)%
Data processing
 
28,077

 
100.2
 %
 
14,022

 
22.9
 %
 
11,406

 
5.0
 %
Marketing
 
7,598

 
137.4
 %
 
3,201

 
(19.3
)%
 
3,965

 
6.5
 %
Communication
 
3,167

 
74.1
 %
 
1,819

 
(3.7
)%
 
1,889

 
(12.6
)%
Professional services
 
12,272

 
(18.3
)%
 
15,023

 
138.3
 %
 
6,303

 
(34.5
)%
State intangible tax
 
4,152

 
56.4
 %
 
2,655

 
30.5
 %
 
2,034

 
(12.7
)%
FDIC assessments
 
3,969

 
0.6
 %
 
3,944

 
(8.1
)%
 
4,293

 
(3.4
)%
Loss (gain)-other real estate owned
 
373

 
(41.9
)%
 
642

 
(153.0
)%
 
(1,212
)
 
(165.1
)%
Other
 
36,089

 
1.5
 %
 
35,556

 
106.9
 %
 
17,182

 
(37.2
)%
Total
 
$
323,810

 
35.0
 %
 
$
239,942

 
19.1
 %
 
$
201,401

 
0.1
 %



First Financial Bancorp 2018 Annual Report 11

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

NONINTEREST EXPENSES

2018 vs. 2017. Noninterest expenses increased $83.9 million, or 35.0%, in 2018 compared to 2017, primarily due to a $51.8 million, or 37.7%, increase in salaries and employee benefits, a $14.1 million, or 100.2%, increase in data processing expenses, a $6.8 million, or 39.2%, increase in net occupancy expenses, a $6.5 million, or 76.6%, increase in furniture and equipment expenses, and a $4.4 million, or 137.4%, increase in marketing expenses during the period. These increases were partially offset by a $0.5 million, or 1.5%, increase in other noninterest expenses and a $2.8 million, or 18.3%, decrease in professional services.
  
Higher salaries and employee benefits in 2018 were attributed to merger related increases in staffing levels, higher severance and retention costs, higher performance-based compensation, increased health care costs and annual compensation adjustments. The increases in data processing, net occupancy, furniture and equipment and marketing expenses were largely attributable to merger related expenses combined with the larger scale of the Company post-merger. Lower other noninterest expenses and professional services in 2018 were mainly due to elevated costs in 2017 as detailed in the section that follows.

2017 vs. 2016. Noninterest expenses increased $38.5 million, or 19.1%, in 2017 compared to 2016, primarily due to an $18.4
million, or 106.9%, increase in other noninterest expenses, an $8.7 million, or 6.8%, increase in salaries and employee benefits,
an $8.7 million, or 138.3%, increase in professional services and a $2.6 million, or 22.9%, increase in data processing expenses
during the period. These increases were partially offset by a $0.9 million, or 5.1%, decrease in net occupancy expenses and an
$0.8 million, or 19.3%, decrease in marketing expenses.

Higher other noninterest expenses during 2017 were primarily driven by an $11.3 million historic tax credit investment writedown, a $5.1 million impairment charge resulting from the preliminary agreement to early terminate the Company's FDIC loss sharing agreements and a $3.0 million charitable contribution to the First Financial Foundation, partially offset by a $1.2
million decrease in regulatory fees. Higher salaries and employee benefits were primarily attributable to $3.4 million of
severance costs related to efficiency efforts during 2017 as well as higher performance-based compensation and health
care costs, in addition to annual compensation adjustments. Elevated professional service costs were primarily the result of
merger-related expenses, while data processing expenses resulted from investments in enterprise data management and system
upgrades, in addition to other software license expenses.

Lower net occupancy expenses were primarily driven by branch consolidation activities during the year, while marketing expenses declined in 2017 as a result of the Company's cost reduction efforts.

INCOME TAXES
 
First Financial’s income tax expense in 2018 totaled $41.6 million compared to $19.4 million in 2017 and $42.2 million in 2016, resulting in effective tax rates of 19.4%, 16.7% and 32.3% in 2018, 2017 and 2016, respectively. The higher effective tax rate in 2018 was related to the recognition of a significant historic tax credit investment in 2017, which was partially offset by the impact of tax reform. The historic tax credit investment reduced income tax expense by $12.5 million in 2017, and resulted in a $1.1 million increase to net income for the year when netted against the investment write-down included in noninterest expense.
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