First Financial Bancorp. (FFBC) 10-Q 2002 Q2 Quarterly report

FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

[x]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended                      JUNE 30, 2002               

OR

[  ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                                

Commission file number  0-12379

FIRST FINANCIAL BANCORP.

(Exact name of registrant as specified in its charter)

Ohio	31-1042001
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

300 High Street, Hamilton, Ohio	45011
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code       (513) 867-4700      

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     X         No        

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at July 23, 2002
Common stock, No par value	45,812,693

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF EARNINGS
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II-OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES

FIRST FINANCIAL BANCORP.

INDEX

Page No.

Part I-Financial Information

Consolidated Balance Sheets - June 30, 2002 and December 31, 2001	1
Consolidated Statements of Earnings - Six and Three Months Ended June 30, 2002 and 2001	2
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2002 and 2001	3
Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2002 and 2001	5
Notes to Consolidated Financial Statements	6
Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

Part II-Other Information

Item 4	Submission of Matters to a Vote of Security Holders	17
Item 5	Other Information	17
Item 6	Exhibits and Reports on Form 8-K	18

Signatures 19

PART I — FINANCIAL INFORMATION

FIRST FINANCIAL BANCORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in thousands)

				June 30,			December 31,
				2002			2001
Assets
Cash and due from banks				$	162,710		$	211,130
Interest-bearing deposits with other banks					10,083			13,671
Federal funds sold and securities purchased under agreements to resell					3,160			3,381
Investment securities held-to-maturity, at cost (market value - $22,128 at June 30, 2002 and $21,547 at December 31, 2001)					21,507			20,890
Investment securities available-for-sale, at market value					614,358			595,600
Loans
	Commercial				780,555			804,683
	Real estate-construction				82,221			75,785
	Real estate-mortgage				1,305,000			1,346,235
	Installment				575,870			588,549
	Credit card				21,039			22,846
	Lease financing				28,239			36,139
			Total loans		2,792,924			2,874,237
	Less
		Unearned income			1,046			1,988
		Allowance for loan losses			47,709			46,784
			Net loans		2,744,169			2,825,465
Premises and equipment					58,125			60,575
Goodwill					27,379			27,379
Other intangibles					9,120			8,842
Accrued interest and other assets					84,236			87,861
			Total assets	$	3,734,847		$	3,854,794
Liabilities
Deposits
	Noninterest-bearing			$	409,468		$	448,330
	Interest-bearing				2,536,640			2,636,763
			Total deposits		2,946,108			3,085,093
Short-term borrowings
	Federal funds purchased and securities sold under agreements to repurchase				46,027			67,641
	Other				64,648			25,811
			Total short-term borrowings		110,675			93,452
Long-term borrowings					261,294			260,345
Deferred income taxes payable					2,307			1,388
Accrued interest and other liabilities					28,480			29,973
			Total liabilities		3,348,864			3,470,251
Shareholders’ equity
Common stock - no par value
	Authorized - 160,000,000 shares
	Issued - 48,558,614 in 2002 and 48,570,346 in 2001				396,375			396,631
Retained earnings					30,204			18,244
Accumulated comprehensive income					9,307			5,348
Restricted stock awards					(4,792	)		(2,563	)
Treasury stock, at cost, 2,632,507 shares in 2002 and 1,970,411 shares in 2001					(45,111	)		(33,117	)
			Total shareholders’ equity		385,983			384,543
			Total liabilities and shareholders’ equity	$	3,734,847		$	3,854,794

See notes to consolidated financial statements.

1

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share data)

					Six months ended				Three months ended
					June 30,				June 30,
					2002		2001		2002		2001
Interest income
	Loans, including fees				$	106,845	$	132,232	$	52,768	$	64,645
	Investment securities					13,158		14,035		6,708		6,928
		Taxable
		Tax-exempt				3,663		3,932		1,815		1,937
				Total investment interest		16,821		17,967		8,523		8,865
	Interest-bearing deposits with other banks					234		285		97		217
	Federal funds sold and securities purchased under agreements to resell					295		1,368		97		1,126
				Total interest income		124,195		151,852		61,485		74,853
Interest expense
	Deposits					33,690		62,541		15,867		30,406
	Short-term borrowings					808		2,001		421		630
	Long-term borrowings					6,970		6,778		3,516		3,730
				Total interest expense		41,468		71,320		19,804		34,766
				Net interest income		82,727		80,532		41,681		40,087
	Provision for loan losses					9,044		11,055		3,404		8,527
				Net interest income after provision for loan losses		73,683		69,477		38,277		31,560
Noninterest income
	Service charges on deposit accounts					9,674		10,009		4,927		5,119
	Trust income					7,854		7,878		3,868		3,840
	Investment securities gains					9		190		5		42
	Other					11,189		8,417		5,158		4,632
			Total noninterest income			28,726		26,494		13,958		13,633
Noninterest expenses
	Salaries and employee benefits					35,954		31,880		18,159		15,838
	Net occupancy expenses					3,933		3,903		2,003		1,933
	Furniture and equipment expenses					3,530		3,253		1,785		1,659
	Data processing expenses					3,881		3,639		2,014		1,869
	Deposit insurance expense					287		301		142		151
	State taxes					935		1,006		448		509
	Amortization of intangibles					435		1,350		212		669
	Other					14,924		14,502		7,657		7,371
			Total noninterest expenses			63,879		59,834		32,420		29,999
Income before income taxes						38,530		36,137		19,815		15,194
Income tax expense						12,698		12,293		6,384		5,363
			Net earnings		$	25,832	$	23,844	$	13,431	$	9,831
Net earnings per share-basic					$	0.56	$	0.50	$	0.29	$	0.21
Net earnings per share-diluted					$	0.56	$	0.50	$	0.29	$	0.21
Cash dividends declared per share					$	0.30	$	0.30	$	0.15	$	0.15
Average basic shares outstanding						46,316,229		47,865,021		46,129,716		47,638,323
Average diluted shares outstanding						46,445,758		48,000,132		46,214,803		47,705,288

See notes to consolidated financial statements.

2

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)

					Six months ended
					June 30,
					2002			2001
Operating activities
		Net earnings			$	25,832		$	23,844
		Adjustments to reconcile net earnings to net cash provided by operating activities
			Provision for loan losses			9,044			11,055
			Provision for depreciation and amortization			4,830			4,522
			Net amortization of investment security premiums and accretion of discounts			398			(112	)
			Realized investment security gains			(9	)		(190	)
			Originations of mortgage loans held for sale			(123,386	)		(89,365	)
			Gains from sales of mortgage loans held for sale			(2,339	)		(1,241	)
			Proceeds from sale of mortgage loans held for sale			124,424			89,579
			Deferred income taxes			(1,553	)		216
			Decrease in interest receivable			2,782			3,042
			Increase in cash surrender value of life insurance			(371	)		(1,227	)
			Increase in prepaid expenses			(1,797	)		(1,163	)
			Increase (decrease) in accrued expenses			616			(4,362	)
			Decrease in interest payable			(1,771	)		(1,488	)
			Other			4,105			(1,906	)
				Net cash provided by operating activities		40,805			31,204
Investing activities
		Proceeds from calls, paydowns and maturities of investment securities available-for-sale				109,480			107,986
		Purchases of investment securities available-for-sale				(122,317	)		(108,524	)
		Proceeds from calls, paydowns and maturities of investment securities held-to-maturity				2,495			6,628
		Purchases of investment securities held-to-maturity				(2,991	)		(4,300	)
		Net decrease (increase) in interest-bearing deposits with other banks				3,588			(16,663	)
		Net decrease (increase) in federal funds sold and securities purchased under agreements to resell				221			(49,165	)
		Net decrease in loans and leases				67,708			84,063
		Recoveries from loans and leases previously charged off				1,648			1,109
		Proceeds from disposal of other real estate owned				2,609			848
		Purchases of premises and equipment				(1,738	)		(1,666	)
				Net cash provided by investing activities		60,703			20,316
Financing activities
		Net decrease in total deposits				(138,985	)		(13,400	)
		Net increase (decrease) in short-term borrowings				17,223			(61,632	)
		Net increase in long-term borrowings				949			47,085
		Cash dividends declared				(13,872	)		(14,332	)
		Purchase of common stock				(16,008	)		(16,044	)
		Proceeds from exercise of stock options, net of shares purchased				765			9
				Net cash used in financing activities		(149,928	)		(58,314	)
				Decrease in cash and cash equivalents		(48,420	)		(6,794	)
	Cash and cash equivalents at beginning of period					211,130			182,058
				Cash and cash equivalents at end of period	$	162,710		$	175,264

3

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(Dollars in thousands)

		Six months ended
		June 30,
		2002		2001
Supplemental disclosures
	Interest paid	$	43,240	$	72,808
	Income taxes paid	$	9,206	$	15,451
	Recognition of deferred tax liabilities attributable to FASB Statement No. 115	$	(2,472)	$	(2,067	)
	Acquisition of other real estate owned through foreclosure	$	2,896	$	1,559
	Issuance of restricted stock award	$	3,190	$	2,826

See notes to consolidated financial statements.

4

FIRST FINANCIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in Thousands)

	Six months ended
	June 30,
	2002			2001
Balances at January 1	$	384,543		$	395,132
Net Earnings		25,832			23,844
Other comprehensive income, net of taxes:
Changes in unrealized gains on securities,   Available for sale		3,959			3,551
Comprehensive income		29,791			27,395
Cash dividends declared		(13,872	)		(14,332	)
Purchase of common stock		(16,008	)		(16,044	)
Exercise of stock options, net of shares purchased		765			9
Restricted stock awards		(197	)		0
Amortization of restricted stock awards		961			557
Balance at June 30	$	385,983		$	392,717

See notes to consolidated financial statements.

5

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2002
(Unaudited)

The consolidated financial statements for interim periods are unaudited; however, in the opinion of the management of First Financial Bancorp. (Bancorp), all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation have been included.

NOTE 1: BASIS OF PRESENTATION

The consolidated financial statements of Bancorp, a financial holding company as of June 30, 2002, include the accounts of Bancorp and its wholly-owned subsidiaries — First National Bank of Southwestern Ohio, Community First Bank & Trust, Indiana Lawrence Bank, Fidelity Federal Savings Bank, Citizens First State Bank, Heritage Community Bank, The Clyde Savings Bank Company, Bright National Bank, National Bank of Hastings, Sand Ridge Bank, Hebron Deposit Bank, First Financial Bancorp Service Corporation, and Flagstone Insurance and Financial Services Holding Company (Flagstone Insurance HC). All significant intercompany transactions and accounts have been eliminated in consolidation.

The accompanying financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary to be in conformity with accounting principles generally accepted in the United States.

Under a previously approved program to repurchase common shares for general corporate purposes, Bancorp repurchased 906,995 shares during the first half of 2002.

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combination, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives, if any, will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Core deposit intangibles and mortgage servicing rights will continue to be amortized over their useful lives. Core deposit balances are being amortized over varying periods, none of which exceeds 10 years.

Bancorp applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $1,172,000 ($0.02 per share) per year. Bancorp performed the first of the required impairment tests of goodwill and intangible assets with indefinite lives as of January 1, 2002 and found no adjustment was necessary.

NOTE 2: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In the normal course of business, Bancorp offers a variety of financial instruments with off-balance sheet risk to its customers to aid them in meeting their requirements for liquidity and credit enhancement and to reduce its own exposure to fluctuations in interest rates. These financial instruments include standby letters of credit and commitments outstanding to extend credit. Accounting principles generally accepted in the United States do not require these financial instruments to be recorded in the consolidated balance sheets, statements of earnings, changes in shareholders’ equity or cash flows. However, a discussion of these instruments follows.

6

Bancorp’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit and commitments outstanding to extend credit is represented by the contractual amounts of those instruments. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Following is a discussion of these transactions.

Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Bancorp’s portfolio of standby letters of credit consists primarily of performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. The risk to Bancorp arises from its obligation to make payment in the event of the customers’ contractual default. As of June 30, 2002, Bancorp had issued standby letters of credit aggregating $26,602,000 compared to $24,516,000 issued as of December 31, 2001. Management conducts regular reviews of these instruments on an individual customer basis, and the results are considered in assessing the adequacy of Bancorp’s allowance for loan losses. Management does not anticipate any material losses as a result of these letters of credit.

Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp evaluates each customer’s creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by Bancorp upon extension of credit, is based on management’s credit evaluation of the counterparty. The collateral held varies, but may include securities, real estate, inventory, plant, or equipment. Bancorp had commitments outstanding to extend credit totaling $472,070,000 at June 30, 2002 and $477,689,000 at December 31, 2001. Management does not anticipate any material losses as a result of these commitments.

NOTE 3: COMPREHENSIVE INCOME

Bancorp discloses comprehensive income in the “Consolidated Statements of Changes in Shareholders’ Equity”. Disclosure of the reclassification adjustments for the six months ended June 30, 2002 and 2001 are shown in the table below.

		Six months ended
		June 30,
		2002		2001
		(Dollars in thousands)
Net Income		$	25,832	$	23,844
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period			3,966		3,669
Less: reclassification adjustment for gains included in net income			7		118
	Other comprehensive income (loss)		3,959		3,551
Comprehensive income		$	29,791	$	27,395

7

NOTE 4: ACCOUNTING FOR DERIVATIVES

Bancorp follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” in accounting for its derivative activities. Bancorp has two interest rate swaps that are accounted for as fair value hedges under SFAS No. 133 since their purpose is to swap long term fixed rate assets to floating interest rates. The contracts are an exchange of interest payments with no effect on the principal amounts of the underlying hedged assets. Both swaps are accounted for under the short-cut method. These contracts are designated as hedges of specific assets. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the hedged asset. At June 30, 2002 Bancorp had interest rate swaps with a notional value of $1,900,000.

Bancorp is exposed to losses if a counterparty fails to make its payment under a contract in which Bancorp is in the receiving position. Although collateral or other security may not be obtained, Bancorp minimizes its credit risk by monitoring the credit standing of each counterparty and believes that each will be able to fully satisfy their obligation under the agreement.

8

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

SELECTED QUARTERLY FINANCIAL DATA
			2002						2001
			Jun. 30			Mar. 31			Dec. 31			Sep. 30			Jun. 30
			(Dollars in thousands)
Net Earnings			$	13,431		$	12,401		$	7,353		$	12,112		$	9,831
Net earnings per share-basic				0.29			0.27			0.16			0.26			0.21
Net earnings per share-diluted				0.29			0.27			0.16			0.26			0.21
Net earnings per share-diluted-cash basis (a)				0.29			0.27			0.17			0.27			0.21
Average consolidated balance sheet items:
	Loans less unearned income			2,789,773			2,824,667			2,851,415			2,890,307			2,934,168
	Investment securities			645,240			626,323			604,463			591,386			586,151
	Other earning assets			39,025			72,936			81,911			66,161			126,961
		Total Earning Assets		3,474,038			3,523,926			3,537,789			3,547,854			3,647,280
	Total assets			3,736,305			3,796,324			3,821,300			3,825,105			3,917,884
	Deposits			2,977,935			3,036,585			3,080,510			3,072,824			3,175,336
	Shareholders’ equity			386,892			388,976			396,754			396,384			395,114
Key Ratios
	Average equity to average total assets			10.35	%		10.25	%		10.38	%		10.36	%		10.08	%
	Return on average total assets			1.44	%		1.32	%		0.76	%		1.26	%		1.01	%
	Return on average equity			13.92	%		12.93	%		7.35	%		12.12	%		9.98	%
	Net interest margin (fully tax equivalent)			4.93	%		4.85	%		4.73	%		4.74	%		4.53	%

(a) Excluding the effect of amortization of goodwill and core deposits, tax effected when applicable. The cash basis calculations were specifically formulated by Bancorp and may not be comparable to similarly titled measures reported by other companies.

NET INTEREST INCOME

Net interest income, the principal source of earnings, is the amount by which interest and fees generated by earning assets exceed the interest costs of liabilities obtained to fund them. For analytical purposes, interest income presented in the table below has been adjusted to a tax equivalent basis assuming a 35% marginal tax rate for interest earned on tax-exempt assets such as municipal loans, tax-free leases, and investments. This is to recognize the income tax savings which facilitates a comparison between taxable and tax-exempt assets.

Net interest income on a fully tax equivalent basis increased $1,538,000 or 3.73% for the quarter ended June 30, 2002 compared to the same period in 2001. On a linked quarter basis (second quarter 2002 compared to first quarter 2002) net interest income on a fully tax equivalent basis increased $616,000 or 1.46%. Year-to-date net interest income on a fully tax equivalent basis increased $2,065,000 or 2.49% over the prior year. A dramatic drop in market interest rates since the first quarter of 2001 led to significant reductions in both interest income and interest expense affecting both the quarter and year-to-date results. A decrease in loan balances also contributed to reduced interest income. Year-to-date average outstanding loan balances were 5.21% lower than the comparable period one year ago. The greatest contributing factor to the decline in loan balances was a reduction in residential real estate loans. Residential real estate loan demand remained relatively high due to refinancing activity into lower fixed-rate loans. However, at this point in the interest-rate cycle, Bancorp’s current strategy is to sell the majority of these mortgage loans while retaining the servicing and customer relationships. A decline in consumer installment loan demand over the periods discussed also contributed somewhat to lower loan balances. A 41.9% reduction in interest expense, however, more than offset reduced loan interest.

9

Bancorp’s net interest margin on a fully tax-equivalent basis increased by 40 basis points to 4.93% for the second quarter of 2002 versus the second quarter of 2001. Year-to-date net interest margin was 4.89% compared to 4.61% for the same period in 2001, an increase of 28 basis points. The margin increased for both the quarter and year to date due to continued efficient repricing of deposits and a strategy to allow for runoff of some higher-priced deposits given a decline in loan balances.

				Quarter Ended
		2002				2001
		Jun. 30		Mar. 31		Dec. 31		Sep. 30		Jun. 30
				(Dollars in thousands)
Interest income		$	61,485	$	62,710	$	66,459	$	71,434	$	74,853
Interest expense			19,804		21,664		25,375		30,085		34,766
	Net interest income		41,681		41,046		41,084		41,349		40,087
Tax equivalent adjustment to interest income			1,044		1,063		1,085		1,083		1,100
Net interest income (fully tax equivalent)		$	42,725	$	42,109	$	42,169	$	42,432	$	41,187

RATE/VOLUME ANALYSIS

The impact of changes in volume and interest rates on net interest income is illustrated in the table below. As shown, the dramatic decrease in market interest rates had a significant effect on Bancorp’s rates impacting both interest income and interest expense year-to-date and quarter ended June 30, 2002 in comparison to 2001. The decrease in volume on earning assets had a negative impact on net interest income for both the year-to-date and the quarter partially offset by lower interest-bearing liabilities. The decline in rates affected interest expense more than interest income, thus more than offsetting the decline due to volume. The change in interest due to the combined effect of both rate and volume has been allocated to the volume and rate variance on a prorated basis.

		Six Months									Three Months
		Ended									Ended
		June 30, 2002			Change Due To:						June 30, 2002			Change Due To:
		Over 2001			Rate			Volume			Over 2001			Rate			Volume
		(Dollars in thousands)									(Dollars in thousands)
Interest income		$	(27,657	)	$	(22,692	)	$	(4,965	)	$	(13,368	)	$	(9,938	)	$	(3,430	)
Interest expense			(29,852	)		(27,016	)		(2,836	)		(14,962	)		(13,120	)		(1,842	)
	Net interest income	$	2,195		$	4,324		$	(2,129	)	$	1,594		$	3,182		$	(1,588	)

OPERATING RESULTS

Net operating income represents net earnings before net securities transactions. Net operating income for the first six months of 2002 was $25,825,000 which was an increase of $2,099,000 or 8.85% over the same period in 2001. As discussed previously, net interest income increased approximately $2,200,000. Noninterest income increased $2,200,000, while the provision for loan losses decreased $2,000,000. These increases to income were offset by a $4,400,000 increase in noninterest expenses. However, for the second quarter of 2002, compared to the same quarter in 2001, the primary reason for the $3,623,000 increase was due to a decrease in the provision for loan losses of $5,123,000. See the “Allowance for Loan Losses” section for further detail.

Excluding securities gains, second quarter noninterest income was $13,953,000, an increase of 2.66% over the second quarter of 2001. Service charges on deposit accounts were slightly lower, $192,000 or 3.75%, from the second quarter of last year primarily due to reduced nonsufficient fund (NSF) service charge income. Trust fee revenues were relatively flat when

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compared to the comparable period in 2001. While new trust sales remained strong, lower market values, as indicated by a 20% drop in the S&P since first quarter 2001, had a neutralizing impact on trust fee revenue. Other income for the second quarter increased 11.4% over the comparable period in 2001 as a result of higher gains on the sale of loans, ongoing insurance revenue and sales of third-party mutual funds. Year-to-date noninterest income excluding security gains increased 9.17%. This increase was driven by the net effect of an increase in other noninterest income, a decrease in service charges and stable trust fees as discussed above. Items of note on a linked quarter basis (second quarter 2002 compared to first quarter 2002) were an increase in service charge income of 3.79%. Also, a decrease in other income due to lower gains on sale of loans and the nonrecurring life insurance gain of $233,000 in the first quarter of 2002.

Noninterest expense for the second quarter of 2002 increased 8.07% over the second quarter of 2001. Year-to-date noninterest expense increased 6.76%. For both comparison periods, the category with the most significant increase was salary and employee benefits. The increase in salary and employee benefits is partially related to increased staff which includes new income-generating personnel and strengthened administrative staff in the areas of risk management, loan administration, including problem credits, and financial control. An increase of $357,000 in health care costs for the first six months of 2002 versus 2001 also contributed to a rise in expenses.

INCOME TAXES

For the first six months of 2002, income tax expense was $12,698,000 compared to $12,293,000 for the same period in 2001, or a decrease of $405,000. In 2002, $12,696,000 of the tax expense was related to operating income with a tax expense of $2,000 related to securities transactions. In the first six months of 2001, income tax expense related to operating income was $12,221,000, with a tax expense related to securities transactions of $72,000.

Income tax expense for the second quarter of 2002 was $6,384,000, an increase of $1,021,000 when compared to $5,363,000 reported for the same period in 2001. Tax expense relating to operating income totaled $6,384,000 and $5,349,000 for the quarters ended June 30, 2002 and 2001, respectively, with no tax expense related to securities transactions for the second quarter of 2002 and $14,000 for 2001.

NET EARNINGS

Net earnings for the first six months of 2002 were $25,832,000 or $0.56 in diluted earnings per share compared to $23,844,000 or $0.50 in diluted earnings per share for the same period in 2001. Net securities gains through June 30, 2002 were $7,000 compared to $118,000 for the period ending June 30, 2001.

Net earnings for the second quarter of 2002 were $13,431,000 or $0.29 in diluted earnings per share versus $9,831,000 or $0.21 for the second quarter of 2001. Net securities gains for the second quarter of 2002 and 2001 were $5,000 and $28,000, respectively.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management’s periodic evaluation of the adequacy of the allowance is based on Bancorp’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan

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portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

The provision for loan losses totaled $9,044,000 for the six months ended June 30, 2002 compared to $11,055,000 for the same period in 2001. For the quarters ended June 30, 2002 and 2001, the provision for loan losses totaled $3,404,000 and $8,527,000, respectively. The percentage of net charge-offs to average loans for the quarter was 0.37% which was substantially lower than the previous four quarters and 0.58% year-to-date which was lower than the 0.66% for the same period in 2001. Bancorp continued to maintain appropriate reserves as the reserve to loan ratio increased to 1.71% up from 1.40% a year ago and 1.68% last quarter. Bancorp will continue to closely monitor the quality of its loan portfolio and respond accordingly.

At June 30, 2002 and 2001, the recorded investment in loans that are considered to be impaired under FASB Statement No. 114 was $1,718,000 and $1,819,000, respectively, all of which were on a nonaccrual basis. The related allowance for loan losses on these impaired loans was $195,000 at June 30, 2002 and $980,000 at June 30, 2001. At June 30, 2002 and 2001, there were $1,287,000 and $1,501,000, respectively, of impaired loans that did not have an allowance for loan losses. The average recorded investment in impaired loans for the quarter ended June 30, 2002 and 2001, was approximately $1,786,000 and $4,282,000. For the six months and quarter ended June 30, 2002, Bancorp recognized interest income on those impaired loans of $14,000 and $8,000 compared to $117,000 and $60,000 for the same periods in 2001. Bancorp recognizes income on impaired loans using the cash basis method. The table that follows indicates the activity in the allowance for loan losses for the quarters presented.

					Quarter Ended
		2002						2001
		Jun. 30			Mar. 31			Dec. 31			Sep. 30			Jun. 30
					(Dollars in thousands)
Balance at beginning of period		$	46,876		$	46,784		$	41,168		$	40,642		$	39,541
Allowance acquired through mergers			0			0			1,462			0			0
Provision for loan losses			3,404			5,640			10,552			5,206			8,527
Loans charged off			(3,381	)		(6,386	)		(7,086	)		(5,675	)		(7,985	)
Recoveries			810			838			688			995			559
	Net charge offs		(2,571	)		(5,548	)		(6,398	)		(4,680	)		(7,426	)
Balance at end of period		$	47,709		$	46,876		$	46,784		$	41,168		$	40,642
Ratios:
	Allowance to period end loans, net of unearned income		1.71	%		1.68	%		1.63	%		1.43	%		1.40	%
	Recoveries to charge offs		23.96	%		13.12	%		9.71	%		17.53	%		7.00	%
	Allowance as a multiple of net charge offs		18.56X			8.45X			7.31X			8.80X			5.47X

NONPERFORMING/UNDERPERFORMING ASSETS

The table below shows the categories which are included in nonperforming and underperforming assets.

Total underperforming assets, which includes nonaccrual loans, restructured loans, other real estate owned, and loans 90 days or more past due and still accruing, increased $8,324,000 to $30,627,000 at the end of the second quarter 2002 from $22,303,000 at the end of the second quarter 2001. On a linked quarter basis, total underperforming assets decreased $1,562,000. Bancorp’s level of nonperforming assets, stabilized in the first quarter and remained as such in

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the second quarter as shown by the decrease in total underperforming assets. Nonaccrual loans are composed primarily of commercial, multi-family, and 1-4 family residential properties and had increased $6,314,000 from the second quarter of 2001 but had decreased $2,271,000 from last quarter.

Accruing loans past due 90 days or more for the second quarter 2002 compared to the first quarter 2002 increased $1,054,000 and compared to the second quarter of 2001 increased $2,427,000. The accruing loans past due 90 days or more for June 2002 includes a single commercial credit of approximately $2,100,000 which, subsequent to quarter end, was moved into nonaccrual status. Accruing loans, including loans impaired under FASB Statement No. 114, which are past due 90 days or more where there is not a likelihood of becoming current are transferred to nonaccrual loans. However, those loans which management believes will become current and therefore accruing are classified as “Accruing loans 90 days or more past due” until they become current. Bancorp does not have a concentration of credit in any particular industry.

		Quarter Ended
		2002						2001
		Jun. 30			Mar. 31			Dec. 31			Sep. 30			Jun. 30
		(Dollars in thousands)
Nonaccrual loans		$	23,655		$	25,926		$	24,628		$	22,534		$	17,341
Restructured loans			39			453			1,291			666			953
Other real estate owned			2,181			2,112			2,338			2,053			1,684
	Total nonperforming assets		25,875			28,491			28,257			25,253			19,978
Accruing loans past due 90 days or more			4,752			3,698			4,728			3,246			2,325
	Total underperforming assets	$	30,627		$	32,189		$	32,985		$	28,499		$	22,303
Nonperforming assets as a percent of loans, net of unearned income plus other real estate owned			0.93	%		1.02	%		0.98	%		0.88	%		0.69	%
Underperforming assets as a percent of loans, net of unearned income plus other real estate owned			1.10	%		1.15	%		1.15	%		0.99	%		0.77	%

LIQUIDITY AND CAPITAL RESOURCES

Liquidity management is the process by which Bancorp provides for the continuing flow of funds necessary to meet its financial commitments on a timely basis. These commitments include withdrawals by depositors, funding credit commitments to borrowers, shareholder dividends, paying expenses of operations, and funding capital expenditures.

Liquidity is derived primarily from deposit growth, maturing loans, the maturity of investment securities, access to other funding sources and markets, and a strong capital position. Total year-to-date average deposits are down 4.43% from the prior year. Short-term borrowings increased $17,223,000 from year end and long-term borrowings increased $949,000 in conjunction with asset/liability management strategies.

The principal source of asset-funded liquidity is marketable investment securities, particularly those of shorter maturities. At June 30, 2002, securities maturing in one year or less amounted to $84,507,000, representing 13.3% of the total of the investment securities portfolio. In addition, other types of assets such as cash and due from banks, federal funds sold and securities purchased under agreements to resell, as well as loans and interest-bearing deposits with other banks maturing within one year, are sources of liquidity. Total asset-funded sources of liquidity at June 30, 2002, amounted to $757,205,000, representing 20.3% of total assets. Sources of

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long-term asset funded liquidity are derived from the maturity of investment securities and maturing loans in excess of one year.

At June 30, 2002, Bancorp had classified $614,358,000 in investment securities available-for-sale. Management examines Bancorp’s liquidity needs in establishing this classification in accordance with the Financial Accounting Standards Board Statement No. 115 on accounting for certain investments in debt and equity securities.

Liquidity is very important and as such is both monitored and managed closely by the asset/liability committee at each affiliate. Liquidity may be used to fund capital expenditures. Capital expenditures were $1,738,000 for the first six months of 2002. In addition, remodeling is a planned and ongoing process given the 110 offices of Bancorp and its subsidiaries. Material commitments for capital expenditures as of June 30, 2002 were approximately $400,000. Management believes that Bancorp has sufficient liquidity to fund its current commitments.

CAPITAL ADEQUACY

The Federal Reserve established risk-based capital requirements for U.S. banking organizations which have been adopted by the Office of Thrift Supervision for savings and loan associations. Risk weights are assigned to on-and off-balance sheet items in arriving at risk-adjusted total assets. Regulatory capital is divided by risk-adjusted total assets, with the resulting ratios compared to minimum standards to determine whether a bank has adequate capital.

Regulatory guidelines require a 4.00% Tier 1 capital ratio and an 8.00% total risk-based capital ratio. A minimum 3.00% Leverage ratio is required for bank holding companies that either are rated composite “1” under the BOPEC rating system or have implemented the Board’s risk-based capital market risk measure. The minimum leverage ratio for all other bank holding companies is 4.0%. Tier 1 capital consists primarily of common shareholders’ equity, net of certain intangibles, and total risked-based capital is Tier 1 capital plus Tier 2 supplementary capital, which is primarily the allowance for loan losses subject to certain limits. The leverage ratio is a result of Tier 1 capital divided by average total assets less certain intangibles.

Bancorp’s Tier I ratio at June 30, 2002, was 12.7%, its total risked-based capital was 13.9% and its leverage ratio was 9.31%. While Bancorp subsidiaries’ ratios are well above regulatory requirements, management will continue to monitor the asset mix which affects these ratios due to the risk weights assigned various assets, and the allowance for loan losses, which influences the total risk-based capital ratio.

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The table below illustrates the risk-based capital calculations and ratios for the last five quarters.

		Quarter Ended
		2002									2001
		Jun. 30			Mar. 31			Dec. 31			Sep. 30			Jun. 30
		(Dollars in thousands)
Tier I Capital:
Shareholder’s equity		$	385,983		$	380,775		$	384,543		$	393,969		$	392,717
	Less: Nonqualifying intangible assets		31,639			31,839			32,465			33,066			33,690
	Less: Unrealized net securities
	gains (losses)		9,307			2,896			5,348			8,832			5,506
Total tier I capital		$	345,037		$	346,040		$	346,730		$	352,071		$	353,521
Total risk-based capital:
Tier I capital		$	345,037		$	346,040		$	346,730		$	352,071		$	353,521
Qualifying allowance for loan losses			34,228			34,407			35,111			35,083			35,294
Total risk-based capital		$	379,265		$	380,447		$	381,841		$	387,154		$	388,815
Risk weighted assets		$	2,724,721		$	2,740,088		$	2,797,210		$	2,800,521		$	2,818,162
Risk-based ratios:
	Tier I		12.66	%		12.63	%		12.40	%		12.57	%		12.54	%
	Total risk-based capital		13.92	%		13.88	%		13.65	%		13.82	%		13.80	%
	Leverage		9.31	%		9.09	%		9.07	%		9.28	%		9.10	%

ORGANIZATIONAL MATTERS

During the second quarter and subsequent thereto, Project Renaissance, Bancorp’s multi-phased regionalization and expansion project to consolidate the company’s 14 banks into 4 regional affiliates, achieved several benchmarks. First, in May 2002, the data processing conversion at Community First, Citizens First State Bank, The Clyde Savings Bank, Fidelity Federal Savings Bank, and Indiana Lawrence Bank was completed. Also in May 2002, our new family of proprietary mutual funds, The Legacy Funds Group, was introduced to the public. Finally, on July 19, 2002, First National Bank of Southwestern Ohio and Hebron Deposit Bank were merged to form a new regional bank known as First Financial Bank, National Association.

FORWARD-LOOKING INFORMATION

The Form 10-Q should be read in conjunction with the consolidated financial statements, notes and table included elsewhere in the report and in the First Financial Bancorp. Annual Report on Form 10-K for the year ended December 31, 2001.

Management’s analysis may contain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties which may cause actual results to differ materially. Factors that could cause actual results to differ from those discussed in the forward looking statements include, but are not limited to, the strength of the local economies in which operations are conducted, the effects of and changes in policies and laws of regulatory agencies, inflation, and interest rates. For further discussion of certain factors that may cause such forward-looking statements to differ materially from actual results, refer to the 2001 Form 10-K.

ACCOUNTING AND REGULATORY MATTERS

Bancorp has informed the Federal Reserve Bank of Cleveland of its decision to withdraw its election of financial holding company status and to cease to engage in all activities requiring

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financial holding company status effective July 31, 2002. Therefore, after such date, Bancorp may not engage in activities which require it to maintain financial holding company status. Bancorp continues to be a bank and savings and loan holding company.

As a result of the withdrawal of its financial holding company status, Bancorp could not continue its direct ownership of Flagstone Insurance HC, which holds all of the outstanding shares of two insurance agencies, Flagstone Insurance and Financial Services, Inc. and Flagstone Life Insurance and Financial Services, Inc. On July 31, 2002, Bancorp contributed all of the outstanding shares of Flagstone Insurance HC to its Indiana bank subsidiary, Heritage Community Bank (Heritage). Heritage is permitted to own Flagstone Insurance HC under powers granted to Indiana state-chartered banks by Indiana law. Holding Flagstone Insurance HC indirectly through Heritage is a permitted activity for Bancorp as a bank holding company. Bancorp’s change in status from a financial holding company to a bank and savings and loan holding company is not expected to have any impact on the earnings or financial position of the company or disrupt any of Bancorp’s strategic plans.

Management is not aware of any other events or regulatory recommendations which, if implemented, are likely to have a material effect on Bancorp’s liquidity, capital resources, or operations.

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PART II-OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

On April 23, 2002, Bancorp held its annual meeting of shareholders, the results of which follow:

1) Election of four directors:

				% of Total		Votes
Name	Term	Votes For		Shares Voted		Withheld
Martin J. Bidwell	3 years		38,956,128		98.99%		397,613
Carl R. Fiora	3 years		39,079,527		99.30%		274,214
Stephen S. Marcum	3 years		39,052,903		99.24%		300,838
Steven C. Posey	3 years		39,035,692		99.19%		318,049

Directors whose terms continue beyond the Annual Meeting in 2002:

Class 1 expiring in 2003:

Richard L. Alderson

James C. Garland

Murph Knapke

Stanley N. Pontius

Barry S. Porter

Perry D. Thatcher

Class 1 expiring in 2004:

Donald M. Cisle

Dan R. Dalton (Resigned from FFBC Board effective April 30, 2002)

Corinne R. Finnerty

Bruce E. Leep

Item 5. Other Information

Director Resignation

Dan R. Dalton, a director of First Financial Bancorp. since 1999 and a director of Heritage Community Bank, resigned as a director of First Financial Bancorp., effective April 30, 2002, due to the demands of other responsibilities. Mr. Dalton, who is Dean of the Kelley School of Business at Indiana University, will continue as a director of Heritage Community Bank.

New Chairman of the Board

On April 23, 2002, the board of directors of First Financial Bancorp elected a new chairman. The new chairman, Bruce E. Leep, 65, has been a member of First Financial Bancorp’s board since 1999. A retired banker, he still serves as chairman of the board of Sand Ridge Bank, Highland, Indiana, a $598 million affiliate of First Financial Bancorp. Mr. Leep replaces Barry J. Levey who retired upon reaching the corporation’s mandatory retirement age. Mr. Levey’s retirement from the board was announced in March.

Compliance Matter

On July 2, 2002, Community First Bank & Trust (Community First), which represents 18.5% of Bancorp’s June 30, 2002, total assets, entered into an agreement with the Federal Reserve Board regarding the steps necessary to bring the bank into compliance with the Bank Secrecy Act. Among other things, the Agreement requires

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Community First to develop and implement new policies and procedures designed to insure better compliance with regard to tracking and reporting large cash transactions. On March 31, 2002, when the Federal Reserve Board made its determination, Community First was already in the process of converting to a new data processing system that more efficiently captures and reports data. Bancorp believes that the May 10, 2002, conversion to this new system is already assisting Community First’s compliance efforts, and Community First’s Board of Directors and management are totally committed to cooperating with the Federal Reserve Board to bring the Bank into full compliance with the Bank Secrecy Act requirements. Community First’s agreement with the Federal Reserve Board has no financial impact on Bancorp or the bank itself.

Financial Holding Company Status

Bancorp has informed the Federal Reserve Bank of Cleveland of its decision to withdraw its election of financial holding company status and to cease to engage in all activities requiring financial holding company status effective July 31, 2002. Therefore, after such date, Bancorp may not engage in activities which require it to maintain financial holding company status. Bancorp continues to be a bank and savings and loan holding company.

As a result of the withdrawal of its financial holding company status, Bancorp could not continue its direct ownership of Flagstone Insurance HC, which holds all of the outstanding shares of two insurance agencies, Flagstone Insurance and Financial Services, Inc. and Flagstone Life Insurance and Financial Services, Inc. On July 31, 2002, Bancorp contributed all of the outstanding shares of Flagstone Insurance HC to its Indiana bank subsidiary, Heritage Community Bank (Heritage). Heritage is permitted to own Flagstone Insurance HC under powers granted to Indiana state-chartered banks by Indiana law. Bancorp’s change in status from a financial holding company to a bank and savings and loan holding company is not expected to have any impact on the earnings or financial position of the company or disrupt any of Bancorp’s strategic plans.

Item 6. Exhibits and Reports on Form 8-K

     (a) Reports on Form 8-K

     During the quarter ended June 30, 2002, the registrant did not file any reports on Form 8-K.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	FIRST FINANCIAL BANCORP. (Registrant)
/s/ C. Douglas Lefferson C. Douglas Lefferson Senior Vice President and Chief Financial Officer	/s/ J. Franklin Hall J. Franklin Hall Vice President and Controller (Principal Accounting Officer)
Date         8/12/02	Date        8/12/02

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