First Financial Bancorp: Form 10-Q for the period ended Sep 30, 2023

CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

All significant reclassifications of prior period amounts, if applicable, have been made to conform to the current period’s presentation and had no effect on the Company's previously reported net income or financial condition.

EXECUTIVE SUMMARY

First Financial Bancorp. is a $17.1 billion financial holding company headquartered in Cincinnati, Ohio. The Company primarily operates through First Financial Bank, an Ohio-chartered commercial bank with 130 full service banking centers at September 30, 2023. First Financial provides banking and financial services products to business and retail clients through its six lines of business: Commercial, Retail Banking, Mortgage Banking, Wealth Management, Investment Commercial Real Estate and Commercial Finance. The Commercial Finance business lends to targeted industry verticals on a nationwide basis. Operating under the brand of Yellow Cardinal Advisory Group, Wealth Management had $3.3 billion in assets under management as of September 30, 2023 and provides the following services: financial planning, investment management, trust administration, estate settlement, business succession planning services, brokerage services and retirement planning.

Additional information about First Financial, including its products, services and banking locations, is available on the

Company's website at www.bankatfirst.com (http://www.bankatfirst.com).

The major components of First Financial’s operating results for the current and prior year are discussed in greater detail in the sections that follow.

MARKET STRATEGY

First Financial develops a competitive advantage by utilizing a local market focus to provide superior service and build long-term relationships with clients while helping them achieve greater financial success. First Financial serves a combination of metropolitan and community markets in Ohio, Indiana, Kentucky and Illinois through its full-service banking centers. First Financial also has certain lending platforms that extend beyond the geographic banking center footprint to provide financing to franchise owners and clients within the financial services industry as well as equipment lease financing to commercial businesses. First Financial's investment in community markets is an important part of the Bank's core funding base and has historically provided stable, low-cost funding sources.

First Financial’s market selection process includes multiple factors, but markets are primarily chosen for their potential for long-term profitability and growth. First Financial intends to concentrate plans for future growth and capital investment within its current markets, and will continue to evaluate additional growth opportunities in metropolitan markets located within, or in close proximity to, the Company's current geographic footprint. Additionally, First Financial may assess strategic acquisitions that provide product line extensions or additional industry verticals that complement its existing business and diversify its product suite and revenue streams.

BUSINESS COMBINATIONS

In the first quarter of 2023, First Financial purchased the assets of Brady Ware Capital, LLC (Brady Ware). Located in Miamisburg, Ohio, Brady Ware was an advisory firm for mergers and acquisitions, focusing primarily on business succession planning. First Financial acquired all of the assets of Brady Ware for aggregate consideration of approximately $4.3 million, consisting of $3.4 million in cash and a $0.9 million earn-out payment. Pursuant to the purchase agreement, the earn-out payments are payable annually for each of the five years following the closing of the acquisition, contingent upon the results of Brady Ware's operations.

The 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. Goodwill arising from the Brady Ware acquisition was $4.2 million and reflects the business’s growth potential and the expectation that the acquisition will provide additional revenue growth with the expansion of the Bank's advisory business. In May 2023, First Financial also acquired Brady Ware Corporate Finance, a broker-dealer and member of FINRA. First Financial recorded $0.1 million of goodwill in connection with the acquisition of Brady Ware Corporate Finance. The fair value measurements of Brady Ware assets and liabilities are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values become available, and the measurement period ends in January 2024 for Brady Ware Capital. The measurement period for recording adjustments to the fair value of assets and liabilities ends in May 2024 for Brady Ware Corporate Finance.

NON-GAAP FINANCIAL MEASURES

The Company utilizes certain non-GAAP financial measures, which we believe provide useful insight to the reader of the Consolidated Financial Statements. These non-GAAP measures should be supplemental to primary GAAP measures and should not be read in isolation or relied upon as a substitute for the primary GAAP measures.

For analytical purposes, net interest income is presented in the following table adjusted to a tax equivalent basis assuming a 21% marginal tax rate. Net interest income is disclosed on a tax equivalent basis to consistently reflect income from tax-exempt assets, such as municipal loans and investments, in order to facilitate a comparison between taxable and tax-exempt amounts. Management believes it is a standard practice in the banking industry to present net interest margin and net interest income on a fully tax equivalent basis as these measures provide useful information to make peer comparisons.

(Dollars in thousands)

(1) Calculated using annualized net interest income divided by average earning assets.

In addition to capital ratios defined by the U.S. banking agencies, First Financial considers various measures when evaluating capital utilization and adequacy, including the return on average tangible shareholder's equity and the tangible common equity ratio. These calculations are intended to complement the capital ratios defined by the U.S. banking agencies for both absolute and comparative purposes and may be useful for evaluating the performance of a business as the ratios calculate the capital and return available to common shareholders without the impact of intangible assets and their related amortization. As GAAP does not include capital ratio measures, the Company believes there are no comparable GAAP financial measures to these ratios. These ratios are not formally defined by GAAP or codified in the federal banking regulations and, therefore, are considered to be non-GAAP financial measures.

First Financial encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely upon any single financial measure.

The following table reconciles non-GAAP capital ratios to GAAP:

(Dollars in thousands)

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(Dollars in thousands)

OVERVIEW OF OPERATIONS

Linked quarter comparison: Third quarter 2023 net income was $63.1 million and earnings per diluted common share were $0.66. This compares with second quarter 2023 net income of $65.7 million and earnings per diluted common share of $0.69. Return on average assets was 1.48% for the third quarter of 2023 compared to 1.55% for the second quarter of 2023. Return on average shareholders’ equity was 11.62% for the third quarter of 2023 compared to 12.32% for the second quarter of 2023.

Year-to-date comparison: For the nine months ended September 30, 2023, net income was $199.1 million and earnings per diluted common share were $2.09. This compares with net income of $148.5 million and earnings per diluted common share of $1.57 for the first nine months of 2022. Return on average assets for the nine months ended September 30, 2023 was 1.57% compared to 1.22% for the same period in 2022, and return on average shareholders' equity was 12.53% and 9.29% for the first nine months of 2023 and 2022, respectively.

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(Dollars in thousands, except per share data)

(1) Non-GAAP financial measure. For details on the calculation of this non-GAAP financial measure, see "Non-GAAP Financial Measures" section.

A discussion of First Financial's operating results for the three and nine month periods ended September 30, 2023 follows.

NET INTEREST INCOME

First Financial’s principal source of income is net interest income, which is the excess of interest received from earning assets, including loan-related fees and purchase accounting accretion, minus interest paid on interest-bearing liabilities. The amount of net interest income is determined by the volume and mix of earning assets, the rates earned on such assets and the volume, mix and rates paid for the deposits and borrowed money that support the earning assets. Earning assets consist of interest-bearing loans to customers as well as marketable investment securities.

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Linked quarter comparison: Net interest income for the third quarter of 2023 was $155.5 million, a decrease of $3.8 million, or 2.4%, from the second quarter of 2023. Net interest margin on a fully tax equivalent basis for the quarter ended September 30, 2023 was 4.33%, a decrease of 15 bp when compared to 4.48% in the second quarter of 2023. Net interest margin declined during the period as deposit pricing pressure led to an increase in interest expense during the period, which outpaced the increase in interest income.

Interest income increased $8.2 million, or 3.7%, in the third quarter of 2023 when compared to the second quarter of 2023 largely due to a 15 bp increase in loan yields, which were driven by an increase in interest rates. In addition, investment yields increased 6 bps to 4.07% due to the repricing of floating rate investments and slower prepayments on mortgage-backed securities. Average earning assets of $14.4 billion in the third quarter of 2023 were relatively flat when compared to the second quarter of 2023 as modest loan growth during the period was offset by a decline in investment securities.

Interest expense of $76.6 million increased $12.0 million, or 18.5%, in the third quarter of 2023 when compared to the second quarter of 2023 largely due to higher interest rates coupled with increases in time deposits and borrowings. The Company's total cost of interest bearing deposits increased 48 bps to 2.44% in the third quarter of 2023, while average deposit balances increased $73.3 million, or 0.6%, to $12.8 billion. The increase in average deposits was driven primarily by increases in money market accounts and retail CDs. Average borrowed funds decreased $120.6 million, or 7.9%.

To mitigate interest rate risk on certain variable-rate commercial loan pools, First Financial entered into interest rate collars and floors, which are designated as cash flow hedges. The structure of the interest rate collars is such that First Financial pays the counterparty an incremental amount if the collar index exceeds the cap rate. Conversely, First Financial receives an incremental amount if the index falls below the floor rate. No payments are required if the collar index falls between the cap and floor rates. The structure of First Financial's interest rate floors is such that First Financial receives an incremental amount if the index falls below the floor strike rate. No payments are required if the index remains above the floor strike rate.

The notional value of the Company's cash flow hedges was $600.0 million as of September 30, 2023, with the $1.8 million change in the fair value recorded in AOCI in the Consolidated Balance Sheet. As of September 30, 2023, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is 60 months.

Year-to-date comparison: Net interest income for the first nine months of 2023 increased $112.8 million, or 31.2%, compared to the same period of 2022. Net interest margin on a fully tax equivalent basis was 4.45% for the nine months ended September 30, 2023, an increase of 92 bps when compared to the same period in 2022.

Interest income for the nine months ended September 30, 2023 grew $269.5 million, or 68.2%, to $664.6 million compared to $395.1 million for the same period of the prior year due to higher interest rates. Average earning assets of $14.4 billion for the first nine months of 2023 increased $529.3 million, or 3.8%, when compared to the same period of 2022, driven primarily by increases in the C&I loan portfolio.

Interest expense for the nine months ended September 30, 2023 was $190.6 million compared to $33.8 million for the same period in the prior year. The increase was driven by a $693.2 million, or 8.3%, increase in average interest bearing deposits coupled with a 177 bp increase in rates on those deposits. Additionally, average borrowed funds increased $381.7 million from the same period of the prior year, while the cost of those borrowed funds increased 258 bps due to higher interest rates.

CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

(Dollars in thousands)

(1) Loans held for sale and nonaccrual loans are included in gross loans.

(2) The net interest margin exceeds the interest spread as noninterest-bearing funding sources, demand deposits, other liabilities and shareholders' equity also support earning assets.

RATE/VOLUME ANALYSIS

The impact on net interest income from changes in interest rates and volume of interest-earning assets and interest-bearing liabilities is illustrated in the table below:

(Dollars in thousands)

(1) Loans held for sale and nonaccrual loans are included in gross loans.

NONINTEREST INCOME

(Dollars in thousands)

Linked quarter comparison: Third quarter 2023 noninterest income was $56.6 million, increasing $3.4 million, or 6.3%, compared to $53.3 million for the second quarter 2023. The increase from the linked quarter was primarily driven by higher leasing business income, partially offset by lower foreign exchange income. Leasing business income increased $4.3 million, or 41.6%, primarily driven by an increase in operating lease income and an increase in remarketing fees. Foreign exchange income decreased $1.7 million, or 11.0%, as demand softened from higher levels in the prior quarter.

Year-to-date comparison: Noninterest income of $165.4 million for the first nine months of 2023 increased $31.8 million, or 23.8%, from $133.6 million in the comparable period of 2022. The increase was primarily attributed to higher leasing business income, foreign exchange income, other noninterest income, wealth management fees and gains on equity securities. Leasing business income increased $18.0 million, or 88.1%, due to sustained growth in leasing balances since the acquisition of Summit in December of 2021, and foreign exchange income increased $9.9 million, or 28.1%, due to higher demand in 2023. Other noninterest income increased $2.9 million, or 22.0%, primarily due to BOLI gains and higher loan syndication fees in the current year; wealth management fees grew by $2.1 million, or 11.9%, primarily due to increases of managed assets; gains on equity securities increased $2.0 million, or 100.2%. Partially offsetting these increases, gains on sales of loans decreased $2.6 million, or 20.1%, from the comparable period in 2022 as demand for mortgage loans slowed with rising interest rates, while service charges on deposits were $1.2 million, or 5.6%, lower than prior year as a result of program changes made during 2022.

NONINTEREST EXPENSE

(Dollars in thousands)

Linked quarter comparison: Third quarter 2023 noninterest expense was $122.0 million, an increase of $1.4 million, or 1.2%, from $120.6 million for the second quarter 2023. This increase was primarily driven by higher leasing business expense and salaries and benefits, partially offset by lower data processing and other noninterest expenses. Leasing business expenses increased $2.1 million, or 31.9%, for the third quarter of 2023 as a result of increased production. Salaries and benefits expenses increased $1.4 million, or 1.9%, as a result of higher incentive compensation, which is tied to elevated fee income. Partially offsetting these increases, data processing costs decreased $1.4 million or 14.2%, due to online banking conversion costs incurred in the prior quarter. Other noninterest expenses decreased $0.9 million, or 10.7%, from the linked quarter primarily due to a $1.0 million tax credit investment write-down in the second quarter, partially offset by higher fraud losses.

Year-to-date comparison: Noninterest expenses of $359.4 million for the first nine months of 2023 increased $28.4 million, or 8.6%, compared to the same period in 2022 primarily due higher salaries and benefits expenses, leasing business expenses, FDIC assessments, marketing costs and data processing expenses, partially offset by lower other noninterest expense. Salaries and benefits expenses increased $26.3 million, or 13.5%, due to annual salary increases, higher incentive compensation and an increase in restricted stock awards in the current period. Leasing business expense increased $9.2 million, or 64.6%, as a result of the growth of the leasing portfolio, while FDIC assessments expense increased $3.3 million, or 65.2%, as the result of an increase in assessment rates. Data processing expenses increased $2.3 million, or 9.0%, largely due to the Company's online banking system conversion, while marketing expenses increased $1.0 million or 15.5%, due to increased promotional activity. Other noninterest expense decreased $13.0 million, or 35.2%, primarily due to larger tax credit investment write-downs and higher losses on sales of fixed assets in the prior year.

INCOME TAXES

Linked quarter comparison: In the third quarter of 2023, First Financial recorded income tax expense of $15.3 million on pre-tax income of $78.4 million, resulting in an effective tax rate of 19.5%. This compared to income tax expense of $15.5 million on pre-tax income of $81.2 million with an effective tax rate of 19.1% for the second quarter 2023. The modest increase in the effective tax rate in the current quarter was primarily driven increased taxable income.

Year-to-date comparison: For the first nine months of 2023, income tax expense was $48.1 million on pre-tax income of $247.2 million, resulting in an effective tax rate of 19.4%. This compared to income tax expense of $13.7 million on pre-tax income of $162.3 million and an effective tax rate of 8.5% for the comparable period in 2022. The increase in the effective tax rate is primarily driven by tax credits realized in the 2022 as well as increased taxable income and the resolution of unrecognized tax benefits.

The Company's effective tax rate may fluctuate from period to period due to changes in tax jurisdictions, forecasted income, tax-enhanced assets and tax credit investments.

INVESTMENTS

First Financial's investment portfolio totaled $3.3 billion, or 19.1% of total assets, at September 30, 2023 and $3.6 billion, or 21.4% of total assets, at December 31, 2022. AFS securities totaled $3.0 billion at September 30, 2023 and $3.4 billion December 31, 2022, while HTM securities totaled $81.2 million at September 30, 2023 and $84.0 million at December 31, 2022.

The effective duration of the investment portfolio was 4.5 years at September 30, 2023, which was relatively unchanged from 4.6 years as of December 31, 2022.

The Company invests in certain securities whose realization is dependent on future principal and interest repayments. As such, these securities carry a certain amount of credit risk. Prior to purchase, First Financial performs a detailed collateral and structural analysis on these securities and strategically invests in asset classes in which First Financial has expertise and experience, as well as a senior position in the capital structure. First Financial continuously monitors credit risk and geographic concentration risk in its evaluation of market opportunities that enhance the overall performance of the portfolio.

The Company's Consolidated Financial Statements reflected a $375.7 million and $325.9 million unrealized after-tax loss on debt securities as of September 30, 2023 and December 31, 2022, respectively. These unrealized losses were included as a component of equity in accumulated other comprehensive income on the Consolidated Balance Sheets and were driven by an increase in interest rates throughout 2022 and 2023.

The Company had net unrealized losses of $11.4 million and $7.5 million on its HTM securities as of September 30, 2023 and December 31, 2022, respectively. Similar to the unrealized losses on AFS securities, this unrealized loss was driven by higher interest rates in 2022 and 2023. The unrealized losses on HTM securities have no impact on the Consolidated Financial Statements of the Company.

The Company had a $0.1 million unrealized loss on equity securities recorded in noninterest income for the three months ended both September 30, 2023 and June 30, 2023. For the first nine months 2023, the Company had an insignificant unrealized gain on equity securities compared to a $2.0 million unrealized loss for the same period of 2022.

First Financial will continue to monitor loan demand and deposit activity, as well as balance sheet composition, capital sensitivity and the interest rate environment, when considering future investment strategies.

LOANS

Excluding loans held for sale, loan balances increased $347.8 million, or 3.4%, to $10.6 billion as of September 30, 2023 from $10.3 billion as of December 31, 2022. This increase was primarily driven by residential real estate loans, which increased by $201.2 million, or 18.4%, to $1.3 billion, and finance leases, which increased by $163.8 million, or 69.4%, to $400.0 million. Additionally, construction loans increased $66.8 million, or 13.0%, to $578.8 million; C&I loans increased $10.6 million, or 0.3%, to $3.4 billion; and home equity increased $10.2 million, or 1.4%, to $744.0 million. Partially offsetting these areas of loan growth, commercial real estate loans decreased $60.1 million, or 1.5%, to $4.0 billion, and installment loans decreased $49.2 million, or 23.5%, to $160.6 million.

Third quarter 2023 average loans of $10.6 billion, excluding loans held for sale, increased $106.7 million, or 1.0%, from the second quarter 2023. The growth over the linked quarter was primarily driven by residential real estate, which increased $79.2 million, or 6.7%, and lease financing, which increased $47.8 million, or 14.8%.

Through the first nine months of 2023, average loans of $10.5 billion, excluding loans held for sale, increased $1.1 billion, or 11.7%, from the comparable period of 2022. The increase from prior year reflected broad-based growth across most loan categories, including a $568.3 million, or 19.7%, increase in commercial loans; a $239.8 million or 25.3%, increase in residential real estate; a $179.9 million, or 131.9%, increase in lease financing; and a $66.1 million, or 14.1%, increase in real estate construction.

COMMITMENTS AND CONTINGENCIES

Off-balance sheet arrangements include commitments to extend credit and financial guarantees. Loan commitments are agreements to extend credit to a client absent any violation of any condition established in the commitment agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. First Financial had outstanding commitments to extend credit, including overdraft lending lines, totaling $4.5 billion at September 30, 2023 and $4.4 billion at December 31, 2022. As of September 30, 2023, commitments with a fixed interest rate totaled $111.5 million while commitments with variable interest rates totaled $4.4 billion. At December 31, 2022, commitments with a fixed interest rate totaled $126.3 million while commitments with variable interest rates totaled $4.2 billion. The fixed rate commitments have interest rates ranging from 0% to 21% and maturities ranging from less than 1 year to 31.1 years at September 30, 2023 and maturities ranging from less than one year to 31.6 years for December 31, 2022.

Letters of credit are conditional commitments issued by First Financial to guarantee the performance of a client to a third party. First Financial’s letters of credit consist primarily of performance assurances made on behalf of clients who have a contractual commitment to produce or deliver goods or services. First Financial has issued letters of credit aggregating $32.4 million and $31.5 million at September 30, 2023 and December 31, 2022, respectively. Management conducts regular reviews of these instruments on an individual client basis.

First Financial is a party in risk participation transactions of interest rate swaps, which had total notional amount of $318.1 million and $379.3 million at September 30, 2023 and December 31, 2022, respectively. Under a risk participation agreement, the Company either assumes or sells a portion of the credit exposure associated with an interest rate swap with a counterparty. The Company's exposure is limited to instances where the loan customer defaults on its obligation to perform under the interest rate swap agreement.

First Financial is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects. These investments are included in accrued interest and other assets in the Consolidated Balance Sheets, with any unfunded commitments included in accrued interest and other liabilities in the Consolidated Balance Sheets. As of September 30, 2023, First Financial expects to recover its remaining investments through the use of the tax credits that are generated by the investments. First Financial had unfunded commitments related to tax credit investments of $101.9 million and $84.3 million at September 30, 2023 and December 31, 2022, respectively.

Additionally, as part of the ordinary course of business, First Financial and its subsidiaries are parties to litigation, including claims to the ownership of funds in particular accounts, the collection of delinquent accounts, challenges to security interests in collateral, foreclosure interests that are incidental to our regular business activities and other matters. While the ultimate liability with respect to these litigation matters and claims cannot be determined at this time, First Financial believes that damages, if any, and other amounts relating to pending matters are not probable or cannot be reasonably estimated as of September 30, 2023. Reserves are established for these various matters of litigation, when appropriate, under FASB ASC Topic 450, Contingencies, based in part upon the advice of legal counsel. First Financial had no reserves related to litigation matters as of September 30, 2023 and December 31, 2022.

ASSET QUALITY AND ALLOWANCE FOR CREDIT LOSSES

Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful or when principal or interest payments are 90 days or more past due. Generally, loans are classified as nonaccrual due to a borrower's continued failure to adhere to contractual payment terms, coupled with other pertinent factors. When a loan is placed into nonaccrual status, any unpaid accrued interest is reversed and the recognition of interest income is suspended.

As detailed in Note 2, the Company prospectively adopted ASU 2022-02 effective as of January 1, 2023. The new rule eliminated the accounting for TDRs while establishing a new standard for the treatment of modifications made to borrowers experiencing financial difficulties, defined by First Financial as FDMs. Effective with the adoption of the standard, the Company prospectively will not include FDMs in the calculation of nonperforming loans, nonperforming assets or classified assets. Prior period data, which included TDRs, has not been adjusted.

Nonaccrual loans were $74.9 million, or 0.70% of total loans, as of September 30, 2023, reflecting a $46.3 million, or 161.8%, increase from $28.6 million as of December 31, 2022. The increase in nonaccrual loans was primarily due to the downgrade of two large commercial real estate relationships and one large C&I relationship during the period. Nonperforming assets were $75.1 million, or 0.44% of total assets, at September 30, 2023 compared to $39.8 million, or 0.23% of total assets, at December 31, 2022.

Classified assets, which are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse, totaled $140.6 million as of September 30, 2023 compared to $128.1 million at December 31, 2022. Classified assets were 82 bps as a percentage of total assets at September 30, 2023, compared to 75 bps as of December 31, 2022. Similar to the increase in nonaccrual loans, the increase in classified assets during the period was primarily due to the downgrade of two large commercial real estate relationships and one large C&I relationship during the period, partially offset by payoffs of one large C&I relationship and one large CRE relationship.

Allowance for credit losses. The ACL is a reserve accumulated on the Consolidated Balance Sheets through the recognition of the provision for loan and lease losses. First Financial records provision expense in the Consolidated Statements of Income to maintain the ACL at a level considered sufficient to absorb expected credit losses for financial assets in the portfolio over their expected remaining lives with consideration given to current and forward-looking information.

The recorded adjustments to remove or reduce values of the loans and leases from the Consolidated Balance Sheets due to credit deterioration are referred to as charge-offs. First Financial's policy is to charge-off all or a portion of a loan when, in management's opinion, it is unlikely to collect the principal amount owed in full either through payments from the borrower or from the liquidation of collateral. All loans charged-off are subject to continuous review and concerted efforts are made to maximize any recovery. In most cases, the borrower’s debt obligation is not canceled even though the loan balance may have been charged-off. Actual losses on loans and leases are posted against the ACL as a charge-off. Any subsequent collection of a previously charged-off loan is credited back to the ACL as a recovery.

Management estimates the allowance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience paired with economic forecasts provide the basis for the quantitatively modeled estimation of expected credit losses. First Financial adjusts its quantitative model, as necessary, to reflect conditions not already considered therein. These adjustments are commonly known as the Qualitative Framework. The evaluation of these factors is the responsibility of the ACL committee, which is comprised of senior officers from the risk management, credit administration, finance and lending areas.

The Company utilized the Moody's September baseline forecast as its R&S forecast in the quantitative model at September 30, 2023. For reasonableness, the Company also considered the impact to the model from alternative, more adverse economic forecasts, slower prepayment speeds and increased default rates. These alternative analyses were utilized to inform the Company's qualitative adjustments. Additionally, First Financial considered its credit exposure to certain industries believed to be at risk for future credit stress, such as franchise, hotel and investor commercial real estate lending, when making qualitative adjustments to the ACL model.

The total ACL, which includes both funded and unfunded reserves, was $162.2 million at September 30, 2023 and $151.4 million as of December 31, 2022.

ACL - loans and leases. The ACL on loans and leases was $145.2 million as of September 30, 2023 and $133.0 million as of December 31, 2022. As a percentage of period-end loans, the ACL was 1.36% as of September 30, 2023 and 1.29% as of December 31, 2022. The increase in the ACL was driven by slower prepayment speeds, which effectively increased the duration of the loan portfolio, as well as loan growth and changes in economic forecasts.

In the third quarter of 2023, the Company recorded net charge-offs of $16.4 million, or 61 bp of average loans and leases on an annualized basis, compared to net charge-offs of $5.7 million, or 22 bps, for the second quarter of 2023. The elevated charge-offs in the third quarter included a $6.9 million loss on a single C&I loan whose business model was impacted by Covid, while another $6.1 million in charge-offs were incurred as the result of a $32 million loan sale consummated in an attempt manage portfolio risk. Through the first nine months of 2023, the Company recorded net charge-offs of $22.0 million, or 28 bp on an annualized basis compared to net charge-offs of $5.9 million, or 8 bps, for the same period of 2022.

The ACL as a percentage of nonaccrual loans was 193.8% at September 30, 2023 and 464.6% at December 31, 2022. The decrease in this ratio was primarily driven by a $46.3 million, or 161.8%, increase in nonaccrual loans during the period outpacing the increase in the reserve. The ACL as a percentage of nonperforming loans was 193.8% as of September 30, 2023 and 335.9% as of December 31, 2022. The decrease in this ratio was driven by the increase in nonaccrual loans, as well as the accounting change regarding FDMs.

Provision expense is a product of the Company's ACL model combined with net charge-off activity during the period. During the third quarter of 2023, the Company recorded $12.9 million of provision expense for loans and leases compared to provision expense of $12.7 million during the second quarter of 2023. The third quarter increase in provision expense was driven by higher net chargeoffs. Through the first nine months of 2023, the Company recorded a provision expense of $34.3 million compared to a provision recapture of $2.0 million for the same period of 2022.

ACL - unfunded commitments. The ACL on unfunded commitments was $17.0 million as of September 30, 2023 and $18.4 million as of December 31, 2022. First Financial recorded $1.2 million of provision recapture for credit losses on unfunded commitments for the three months ended September 30, 2023, compared to $2.0 million of recapture in the second quarter 2023. Through the first nine months of 2023, the Company recorded provision recapture of $1.4 million compared to provision expense of $3.6 million for the same period of 2022.

See Note 5 – Allowance for Credit Losses in the Notes to Consolidated Financial Statements for further discussion of First Financial's ACL.

The table that follows includes the activity in the ACL for the quarterly periods presented.

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DEPOSITS AND FUNDING

Total deposits were $12.9 billion as of September 30, 2023, an increase of $214.4 million, or 1.7%, from December 31, 2022. With the rise in interest rates, the Company's deposit mix has shifted to higher cost interest bearing deposit balances, with lower transaction deposit balances. As such, time deposits increased $872.2 million, or 51.3%, while savings deposits increased $195.3 million, or 5.1%. Noninterest bearing deposits decreased $696.6 million, or 16.8%, while interest bearing demand deposits decreased $156.5 million, or 5.2%, during the period.

Average deposits for the third quarter of 2023 were $12.8 billion, an increase of $73.3 million, or 0.6%, from $12.7 billion for the second quarter of 2023. Similar to the year to date discussion, the third quarter reflected further customer migration from noninterest bearing accounts into retail CD and money market accounts. As such, average savings deposits increased $169.7 million, or 4.5%, from the linked quarter; average time deposits increased $53.1 million, or 2.2%, increase; and interest bearing demand deposits increased $20.6 million, or 0.7%. These increases were partially offset by a $170.1 million, or 4.6%, decrease in average noninterest bearing deposits during the quarter.

Through the first nine months of 2023, average deposits increased $208.2 million, or 1.7%, when compared to the same period of 2022.

Uninsured deposit balances were $5.3 billion, or 40.7% of total deposits, as of September 30, 2023. The Company reviews uninsured deposits for concentration risk, and typically evaluates this risk by excluding public funds and intercompany deposits to arrive at an adjusted uninsured deposit amount. As such, excluding public funds and intercompany accounts, adjusted uninsured deposits were $3.0 billion, or 23.3% of total deposits, at the end of the third quarter.

First Financial maintains diverse funding sources, including Fed Funds, the Fed discount window, brokered CDs, FHLB borrowings and deposit placement services. The Company believes its funding capacity provides sufficient flexibility to respond to any event that would stress its deposit balances.

Borrowed funds were $1.3 billion as of September 30, 2023 compared to $1.6 billion at December 31, 2022. Borrowings declined due to increases in deposits outpacing modest loan growth. First Financial had short-term borrowings of $1.0 billion and $1.3 billion as of September 30, 2023 and December 31, 2022, respectively. Short-term borrowings with the FHLB were $0.8 billion at September 30, 2023 and $1.1 billion at December 31, 2022. There were no federal funds purchased included in short-term borrowings at September 30, 2023 or December 31, 2022.

Long-term debt, which may include subordinated notes, FRB/FHLB long-term advances or other borrowings, was $340.9 million and $346.7 million at September 30, 2023 and December 31, 2022, respectively. Outstanding subordinated debt totaled $312.3 million as of September 30, 2023 and $311.7 million as of December 31, 2022.

First Financial had no FHLB long-term advances at September 30, 2023 or December 31, 2022. First Financial's total remaining borrowing capacity from the FHLB was $723.2 million as of September 30, 2023.

See Note 8 – Borrowings in the Notes to Consolidated Financial Statements for further discussion of First Financial's borrowed funds.

LIQUIDITY

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

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

Both First Financial and the Bank received investment grade credit ratings from Kroll Bond Rating Agency, Inc, an independent rating agency. These credit ratings impact the cost and availability of financing to First Financial, and a downgrade to these credit ratings could affect First Financial's or the Bank’s ability to access the credit markets and potentially increase borrowing costs, negatively impacting financial condition and liquidity. Key factors in maintaining high credit ratings include consistent and diverse earnings, strong credit quality and capital ratios, diverse funding sources and disciplined liquidity monitoring procedures. The ratings of First Financial and the Bank at September 30, 2023 were as follows:

For ease of borrowing execution, First Financial utilizes a blanket collateral agreement with the FHLB. First Financial pledged $6.2 billion of certain eligible residential, commercial and farm real estate loans, home equity lines of credit and government, agency, and CMBS securities as collateral for borrowings from the FHLB as of September 30, 2023.

First Financial's principal source of asset-funded liquidity is marketable investment securities, particularly those of shorter maturities. AFS securities were 97.4% and 97.6% of the total investment portfolio as of September 30, 2023 and December 31, 2022, respectively. The market value of investment securities classified as AFS totaled $3.0 billion and $3.4 billion at September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, $1.6 billion of AFS securities were unpledged and there were $53.8 million of securities available to be sold at breakeven. Additionally, $624.4 million of AFS securities have floating rates and could be sold with minimal losses at September 30, 2023.

HTM securities that are maturing within a short period of time can be an additional source of liquidity. As of both September 30, 2023 and December 31, 2022, the Company had no HTM securities maturing within one year.

In total, First Financial expects $662.5 million of cash flows from its investment portfolio in the next 12 months.

Other sources of liquidity include interest-bearing deposits with other banks. At September 30, 2023, these balances totaled $452.9 million. Additionally, First Financial had unused and available overnight wholesale funding sources of $5.2 billion, or 30.6% of total assets, to fund loan and deposit activities in addition to other general corporate requirements.

First Financial also has a $40.0 million short-term credit facility with an unaffiliated bank that matures in December, 2023. This facility has a variable interest rate and provides First Financial additional liquidity, if needed, for various corporate activities including the repurchase of First Financial common stock and the payment of dividends to shareholders. First Financial had no outstanding balance on this short-term credit facility as of September 30, 2023 and December 31, 2022. The credit agreement requires First Financial to comply with certain covenants including those related to asset quality and capital levels, and First Financial was in compliance with all covenants associated with this facility as of September 30, 2023 and December 31, 2022. This credit facility also required First Financial to pledge as collateral the Bank's common stock where the lender is granted a security interest in this collateral.

Certain restrictions exist regarding the Bank's ability to transfer funds to First Financial in the form of cash dividends, loans, other assets or advances and the approval of the Bank's primary federal regulator is required to pay dividends in excess of regulatory limitations. Dividends paid to First Financial from the Bank totaled $120.0 million for the first nine months of 2023. As of September 30, 2023, the Bank had retained earnings of $896.5 million, of which $226.3 million was available for distribution to the Bancorp without prior regulatory approval. As an additional source of liquidity, First Financial had $118.1 million in cash at the parent company as of September 30, 2023.

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

Capital expenditures were $18.1 million and $9.8 million for the first nine months of 2023 and 2022, respectively. Management believes that sufficient liquidity exists to fund its future capital expenditure commitments.

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

CAPITAL

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

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

First Financial's tier 1 capital increased 77 bps to 11.94% at September 30, 2023 compared to 11.17% at December 31, 2022, while the total capital ratio increased to 13.51% at September 30, 2023 compared to 13.09% at December 31, 2022. The leverage ratio increased to 9.59% at September 30, 2023 from 8.89% at December 31, 2022. The Company’s tangible common equity ratio increased to 6.50% at September 30, 2023 from 5.95% at December 31, 2022. The 55 bp increase in the tangible common equity ratio was driven by the Company's strong earnings during the period.

As of September 30, 2023, management believes that First Financial met all capital adequacy requirements to which it was subject. The Company's most recent regulatory notifications categorized First Financial as "well-capitalized" under the regulatory framework for prompt corrective action. There have been no conditions or events since those notifications that management believes have changed the Company's categorization. Total regulatory capital exceeded the minimum requirement by $396.1 million on a consolidated basis at September 30, 2023.

The following tables present the actual and required capital amounts and ratios as of September 30, 2023 and December 31, 2022 under the Basel III Capital Rules and include the minimum required capital levels based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered "well capitalized" are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

(Dollars in thousands)

(Dollars in thousands)

Shareholder dividends. First Financial paid a dividend of $0.23 per common share on September 15, 2023 to shareholders of record as of September 1, 2023. Additionally, First Financial's board of directors authorized a dividend of $0.23 per common share, payable on December 15, 2023 to shareholders of record as of December 1, 2023.

Share repurchases. Effective January 2022, First Financial's board of directors approved a stock repurchase plan (the 2022 Stock Repurchase Plan), replacing the 2020 Repurchase Plan which became effective in January 2021. The 2022 Stock Repurchase Plan continues for two years and authorized the purchase of up to 5,000,000 shares of the Company's common stock and will expire in December 2023. First Financial did not repurchase any shares under this plan in 2022 or through three quarters in 2023. Therefore, at September 30, 2023, all 5,000,000 common shares remained available for repurchase under the 2022 Stock Repurchase Plan.

Shareholders' equity. Total shareholders’ equity was $2.1 billion at September 30, 2023 and $2.0 billion at December 31, 2022.

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

ENTERPRISE RISK MANAGEMENT

First Financial manages risk through a structured ERM approach that routinely assesses the overall level of risk, identifies specific risks and evaluates specific actions to mitigate those risks. First Financial continues to enhance its risk management capabilities and has embedded risk awareness into the culture of the Company. First Financial has identified the following types of risk that it monitors in its ERM framework: credit, market (composed of interest rate, liquidity, capital, foreign exchange and financial risk), operational, compliance, strategic, reputation, information technology, cyber and legal.

For a full discussion of these risks, see the Enterprise Risk Management section in Management's Discussion and Analysis in First Financial’s 2022 Annual Report on Form 10-K. The sections that follow provide additional discussion related to credit risk and market risk.

CREDIT RISK

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

MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, foreign exchange rates and equity prices. The primary source of market risk for First Financial is interest rate risk and liquidity risk.

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

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

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

Non-maturity deposit modeling is particularly dependent on the assumption for repricing sensitivity known as a beta. Beta is the amount by which First Financial’s interest bearing non-maturity deposit rates will increase when short-term interest rates rise. The Company utilized a weighted average deposit beta of 40% in its interest rate risk modeling as of September 30, 2023. First Financial also includes an assumption for the migration of non-maturity deposit balances into CDs for all upward rate scenarios beginning with the +100 bps scenario, thereby increasing deposit costs and reducing asset sensitivity.

Presented below is the estimated impact on First Financial’s NII and EVE position as of September 30, 2023, assuming immediate, parallel shifts in interest rates:

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

The projected results for NII and EVE reflected an asset sensitive position, due to a strong funding mix of low cost transactional deposits supporting loans priced primarily off the short end of the rate curve. First Financial's total cost of deposits increased 40 bps in the quarter, and consequently, the down rate shock sensitivity declined. As deposit costs increase in the future, asset sensitivity is expected to moderate further. First Financial continues to manage its balance sheet with a bias toward asset sensitivity while simultaneously balancing the potential earnings impact of this strategy.

First Financial continually evaluates the sensitivity of its interest rate risk position to modeling assumptions. The following table reflects First Financial’s estimated NII sensitivity profile as of September 30, 2023 assuming a 25% increase and a 25% reduction to the beta assumption on managed rate deposits:

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

Liquidity risk is the potential that an entity will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain funding or that it cannot easily unwind or offset exposures without significantly lowering market prices because of inadequate market depth or market disruptions. Management focuses on maintaining and enhancing liquidity by maximizing collateral based liquidity availability. When managing liquidity risk, First Financial considers the trend and stability of deposits, the degree and utilization of short-term, volatile sources of funds, and reliance on borrowings or brokered deposits. Management identifies, measures, monitors and controls liquidity while seeking to maintain diversification of funding sources, both on- and off-balance-sheet.

The bank has continued to update liquidity risk management processes, such as refining the contingency funding plan, proactively meeting frequently, securing additional contingent borrowing capacity, and developing additional ad hoc liquidity reporting to monitor funding inflows and outflows. Management closely monitors overall loan and deposit trends as the broader macroeconomic environment responds to changing monetary policy. For further discussion of the Company's liquidity, please see the Liquidity section within Management's Discussion and Analysis.

CRITICAL ACCOUNTING POLICIES

First Financial’s Consolidated Financial Statements are prepared based on the application of the Company's accounting policies. These policies require the reliance on estimates and assumptions which are inherently subjective and may be susceptible to significant change. Changes in underlying factors, assumptions or estimates could have a material impact on First Financial’s future financial condition and results of operations. In management’s opinion, certain accounting policies have a more significant impact than others on First Financial’s financial reporting. For First Financial, these policies currently include accounting for the ACL - loans and leases, goodwill, pension and income taxes. These accounting policies are discussed in detail in the Critical Accounting Policies section of Management’s Discussion and Analysis in First Financial’s 2022 Annual Report. There were no changes to the accounting policies for the ACL, goodwill, pension or income taxes during the three or nine months ended September 30, 2023.

ACCOUNTING AND REGULATORY MATTERS

Note 2 - Recently Adopted and Issued Accounting Standards in the Notes to Consolidated Financial Statements discusses new accounting standards adopted by First Financial in 2023 and 2022, as well as the expected impact of accounting standards issued but not yet adopted. To the extent the adoption of new accounting standards materially affects financial condition, results of operations or liquidity, the impacts are discussed in the applicable Notes to the Consolidated Financial Statements and sections of Management’s Discussion and Analysis.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as ‘‘believes,’’ ‘‘anticipates,’’ “likely,” “expected,” “estimated,” ‘‘intends’’ and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Examples of forward-looking statements include, but are not limited to, statements we make about (i) our future operating or financial performance, including revenues, income or loss and earnings or loss per share, (ii) future common stock dividends, (iii) our capital structure, including future capital levels, (iv) our plans, objectives and strategies, and (v) the assumptions that underlie our forward-looking statements.

As with any forecast or projection, forward-looking statements are subject to inherent uncertainties, risks and changes in circumstances that may cause actual results to differ materially from those set forth in the forward-looking statements. Forward-looking statements are not historical facts but instead express only management’s beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management’s control. It is possible that actual results and outcomes may differ, possibly materially, from the anticipated results or outcomes indicated in these forward-looking statements. Important factors that could cause actual results to differ materially from those in our forward-looking statements include the following, without limitation:

• economic, market, liquidity, credit, interest rate, operational and technological risks associated with the Company’s business;
• future credit quality and performance, including our expectations regarding future loan losses and our allowance for credit losses;
• the effect of and changes in policies and laws or regulatory agencies, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and other legislation and regulation relating to the banking industry;
• Management’s ability to effectively execute its business plans;
• mergers and acquisitions, including costs or difficulties related to the integration of acquired companies;
• the possibility that any of the anticipated benefits of the Company’s acquisitions will not be realized or will not be realized within the expected time period;
• the effect of changes in accounting policies and practices;
• changes in consumer spending, borrowing and saving and changes in unemployment;
• changes in customers’ performance and creditworthiness;
• the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;
• current and future economic and market conditions, including the effects of changes in housing prices, fluctuations in unemployment rates, U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth;
• the adverse impact on the U.S. economy, including the markets in which we operate, of the novel coronavirus, which causes the Coronavirus disease 2019 (“COVID-19”), global pandemic, and the impact on the performance of our loan and lease portfolio, the market value of our investment securities, the availability of sources of funding and the demand for our products;
• our capital and liquidity requirements (including under regulatory capital standards, such as the Basel III capital standards) and our ability to generate capital internally or raise capital on favorable terms;
• financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services;
• the effect of the current interest rate environment or changes in interest rates or in the level or composition of our assets or liabilities on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgage loans held for sale;
• the effect of a fall in stock market prices on our brokerage, asset and wealth management businesses;
• a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber attacks;
• the effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin; and
• our ability to develop and execute effective business plans and strategies.

These and other risk factors are more fully described in First Financial's Annual Report on Form 10-K for the year ended December 31, 2022 under the section entitled “Item 1A. Risk Factors” and from time to time, in other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, First Financial undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

The information contained in “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk” of this report is incorporated herein by reference in response to this item.

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under

Rule 13a-15 of the Securities Exchange Act of 1934, that are designed to cause the material information required to be disclosed by First Financial in the reports it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized, and reported to the extent applicable within the time periods required by the Securities and Exchange Commission’s rules and forms. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

As of the end of the period covered by this report, First Financial performed an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in First Financial's internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, First Financial's internal control over financial reporting.

There are a number of factors that may adversely affect the Company's business, financial results, or stock price. See "Risk Factors" as disclosed in response to "Item 1A. to Part I - Risk Factors" of Form 10-K for the year ended December 31, 2022.

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.