1
Exhibit 13
MISSION STATEMENT
To provide a balanced offering of innovative, quality-differentiated financial
products, and extraordinary customer service to our clientele.
To safeguard the interests of our depositors.
To maximize the return on investment to our shareholders by consistently earning
the highest possible returns, while being ever mindful of the associated ethical
and moral considerations necessary to ensure the Bancorp's financial stability
and long-term independence.
To promote the economic growth and development of the communities we serve.
To provide a stimulating work environment and optimal career path potential for
all Bancorp associates in order to instill the highest level of commitment and
dedication to First Financial Bancorp and our varied constituencies.
[ARTWORK]
BANCORP BOARD OF DIRECTORS AND OFFICERS
DIRECTORS
Barry J. Levey, Chairman of the Board,
First Financial; Retired Ohio State
Senator, 4th District; Retired Partner,
Frost, Brown, Todd, LLC --
Middletown, Attorneys-at-Law.
Stanley N. Pontius, President and
Chief Executive Officer,
First Financial, and Chairman of the Board,
First Southwestern.
Richard L. Alderson, Partner,
Real Estate Investment and Development.
Martin J. Bidwell, President,
Magnode Corp.
Don M. Cisle, President,
Don S. Cisle Contractor, Inc.
Dan R. Dalton, Dean, Kelley School
of Business, Indiana University.
Corinne R. Finnerty, Partner, McConnell
& Finnerty, Attorneys-at-Law.
Carl R. Fiora, Retired President and Chief
Executive Officer, Armco Steel Co., L.P.
Dr. James C. Garland, President,
Miami University, Oxford, Ohio.
F. Elden Houts, Chairman of the Board,
Community First Bank & Trust.
Murph Knapke, Owner, Knapke Law
Office, Attorney-at-Law.
Bruce E. Leep, Chairman and Chief
Executive Officer, Sand Ridge Bank.
Stephen S. Marcum, Partner, Parrish,
Fryman & Marcum Co., L.P.A.
Barry S. Porter, Retired Chief Financial Officer,
Ohio Casualty Corp.
Steven C. Posey, President,
Posey Management Corp.
Perry D. Thatcher, President
and CEO, Ample Industries, Inc.
DIRECTORS EMERITI
Arthur W. Bidwell, Thomas C. Blake,
Merle F. Brady, Don S. Cisle, Jr.,
Edward N. Dolun, Richard J. Fritton,
Vaden Fitton, Robert M. Jones, Charles
T. Koehler, Robert W. Long, Joseph L.
Marcum, Robert Q. Millan, Frank C.
Neal, James L. Pease, Jr., C. Wesley
Rowles, Joel H. Schmidt, Hon. C. William
Verity, Jr.
OFFICERS
President and Chief Executive Officer
Stanley N. Pontius
Senior Vice President
Mark W. Immelt
Senior Vice President, Human Resources
Brian D. Moriarty
Senior Vice President, Chief Financial Officer, and Secretary
Michael R. O'Dell
Senior Vice President, Consumer Banking and Operations
Michael T. Riley
First Vice President, Investments
Gary A. Eppley
First Vice President, Comptroller
C. Douglas Lefferson
Vice President
Elizabeth E. Fontaine
Vice President, Business Development
Cheryl R. Lipp
Vice President
Lawrence P. Mulligan, Jr.
Acting Chief Lending Officer
Howard A. Stammen
Compliance Officer
Terence M. Fitz
Auditor
Daniel C. Mergy
2
LETTER TO SHAREHOLDERS - 2000
The year 2000 saw First Financial Bancorp remain true to our long-standing
vision of building a more efficient and customer-focused community banking
organization. This vision continues to be the basis by which strategic decisions
are made and measured, and we are pleased to report the Bancorp's continued
success.
Before detailing our accomplishments for the year, we would like to address
briefly the Bancorp's regionalization strategy - endorsed by the board and
announced on January 25, 2001 - to consolidate our 14 current banking affiliates
into four regional financial institutions over the next two years. A key element
of this regionalization effort is our continuing commitment to our community
banking philosophy.
It is our belief that this effort will enable our affiliates to be even more
competitive with larger regional, as well as national financial institutions -
by taking our community banking message and practices to a higher level.
Furthermore, we are confident that this initiative is in the best interest of
our shareholders, customers, and associates, allowing us to provide greater
growth opportunities and long-term benefits. We will keep you apprised of our
progress.
For 2000, net earnings increased 15.7% over 1999, finishing the year at
$58,222,000. The Bancorp's core earnings per share* rose to $1.26, an increase
of 5.9% when compared to 1999.
Additionally, our return on equity closed the year at an historic high of 15.3%,
while return on assets stood at a respectable 1.48%. With heightened competition
in the banking industry, we remain pleased overall with the company's
performance - while maintaining our commitment to achieving even greater
success.
SUCCESS - A SHARED VISION
Bancorp's management and associates share a common vision with shareholders -
the efficient delivery of customer-driven products, superior service, and an
above-average return on investment.
For shareholders, the board extended the Bancorp's record to 68 consecutive
quarterly cash dividend payments, dating back to the corporation's inception in
April of 1983. Although the market price declined in 2000, the value of an
investment in Bancorp stock continued to be strong. A $1,000 investment made in
1983 is now worth over $13,636, an appreciation of some 1264%. Furthermore, when
small- to mid-cap bank stocks return to favor, we are confident that the
Bancorp's management philosophy and strategies are on target so that our
shareholders will benefit.
Success with our products and services is impacted by the quality of product
offerings, appropriate pricing and delivery channels, sound strategies, and
overall market conditions. During 2000, the Bancorp affiliates actively pursued
deposit growth strategies. Time and attention were focused on broadening the
Bancorp's deposit base and client relationships through the creation of a chief
deposit officer position at each affiliate and the establishment of specific
deposit growth goals. In regard to loans, demand was strong for most of the
year, softening somewhat in the fourth quarter, while the Bancorp carried on a
year-long plan for controlled loan growth.
These loan issues, as well as changes in market interest rates, impacted both
net interest income and net interest margin. For the year, net interest income
increased by 3%, or $4.9 million. Net interest margin, on the other hand, fell
19 basis points to close at 4.79%. This decrease compares quite favorably with
our peer group, as the financial industry as a whole experienced considerable
margin pressure.
Fees and income from other sources also contributed to the Bancorp's increase in
earnings. Noninterest income rose nearly 9%, or some $3.6 million over 1999 -
with the largest share coming from a 13% jump in service charges on deposit
accounts, a result of our strong deposit focus.
The Trust Division also continued in a positive growth mode, realizing a revenue
increase of 6.1%, and bringing total assets held in trust to nearly $3 billion
by year-end. With the S&P 500 falling 10.1% for the year, and Nasdaq(R)
declining nearly 40%, trust revenues - which are largely tied to market
performance - felt the brunt of the declining market. We are pleased to report
that our Trust Division's Common Stock Fund once again outpaced the S&P, as
well as most other key indices.
A VISION FOR SUCCESS
To compete effectively in the markets we serve, and to provide shareholders with
a maximized return, we moved forward by implementing measures to generate
efficiencies and by taking steps to enhance our competitive position.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FIRST FINANCIAL BANCORP
The following discussion and analysis is presented to facilitate the
understanding of the financial position and results of operations of First
Financial Bancorp. (Bancorp). It identifies trends and material changes that
occurred during the reporting periods and should be read in conjunction with the
consolidated financial statements and accompanying notes.
Bancorp is a financial holding company headquartered in Hamilton, Ohio. As
of December 31, 2000, Bancorp owned seventeen subsidiaries located in western
Ohio, Indiana, northern Kentucky, and southern Michigan. These subsidiaries
include thirteen commercial banks, one savings bank, one finance company, a
service corporation, and an insurance agency.
On January 25, 2001, Bancorp announced that its board of directors had
approved a multi-year plan to focus on regionalization and market expansions
designed to increase long-term shareholder value.
Over the course of 2001 and 2002, Bancorp intends to carry out a
multi-phased regionalization strategy which will consolidate its 14 current
banking affiliates into four regional financial institutions.
Bancorp acknowledges that any plan of this magnitude has an initial cost.
It is management's expectation that the cost for this undertaking will dilute
2001 earnings per share by three to five cents. Return on this investment will
be recognized through increased operational efficiencies, significantly enhanced
technologies, revenue growth, and diversification strategies, as well as market
expansions. Beginning in 2002, annually recurring benefits are estimated to be
accretive to earnings per share by two to four cents.
The first of Bancorp's new regional affiliates will be formed in mid 2001
when four of the holding company's financial institutions in southeastern
Indiana (Peoples Bank and Trust, Sunman; Farmers State Bank, Liberty; Union Bank
& Trust, North Vernon; and Vevay Deposit Bank, Vevay) will merge under the new
name, Heritage Community Bank. The new $366 million southeastern Indiana entity
will encompass 14 offices, serving 38,000 customers in 9 counties.
Near the end of 2001, the second regional bank will evolve when three north
central Indiana and two northern Ohio affiliates (Indiana Lawrence Bank, North
Manchester, Indiana; Citizens First State Bank, Hartford City, Indiana; Fidelity
Federal Savings Bank, Marion, Indiana; Community First Bank & Trust, Celina,
Ohio; and Clyde Savings Bank, Clyde, Ohio) are merged under the name, Community
First Bank & Trust. The expanded $1.25 billion bank will encompass 43 offices,
serving 117,000 customers and 13 counties.
During 2002, Bancorp's emphasis on the Greater Cincinnati market will be
sharpened through the merger of First National Bank of Southwestern Ohio,
Hamilton, Ohio and Hebron Deposit Bank, Hebron, Kentucky. The resulting $1.5
billion entity will encompass 37 offices, serving 265,000 customers in 5
counties.
Designed to serve northwestern Indiana, the fourth and final phase of the
project will be completed toward the end of 2002, as Sand Ridge Bank, Highland,
Indiana; Bright National Bank, Flora, Indiana; and National Bank of Hastings,
Hastings, Michigan; are merged. The expanded $831 million bank will encompass 15
offices, serving 72,000 customers in 6 counties.
Upon completion of the project, First Financial Bancorp expects to have
four regional financial institutions with assets of approximately $4 billion,
112 banking centers, and almost 500,000 customers. There are currently no plans
to close any banking centers, and customers can expect to continue to perform
their transactions with the same employees they have developed relationships
with over the years.
Bancorp plans to disclose additional details concerning each of the
regionalization phases as appropriate in 2001.
The major components of Bancorp's operating results for the past five years
are summarized in Table 1 and discussed in greater detail on subsequent pages.
For a thorough understanding of Bancorp's financial results and conditions, this
discussion should be read in conjunction with the statistical data and
consolidated financial statements on Pages 12 through 31.
RECENT MERGERS AND ACQUISITIONS
On July 21, 2000, Bancorp merged its wholly owned subsidiary, Home Federal
Bank, a Federal Savings Bank, Hamilton, Ohio, into another of its wholly owned
subsidiaries, First National Bank of Southwestern Ohio, Hamilton, Ohio, as an
in-market consolidation. Savings are expected to be slightly accretive following
the transition of thrift customers to bank customers.
Bancorp received authorization from the Federal Reserve on March 13, 2000,
to convert from a bank and savings and loan holding company to a financial
holding company. Bancorp is now permitted to own and operate insurance agencies
and certain other financial services firms under the provisions of the
Gramm-Leach-Bliley Act enacted on November 12, 1999.
On March 29, 2000, Bancorp signed a letter of intent to purchase the Ohio
City Insurance Agency that was founded in 1997 with headquarters in Ohio City,
Ohio. Bancorp completed the purchase of the Ohio City Insurance Agency on May 1,
2000. The financial impact of Ohio City Insurance Agency and the purchase price
for the transaction are not material.
OVERVIEW OF OPERATIONS
Bancorp's net earnings increased 15.7% to $58,222,000 in 2000, compared to
net earnings of $50,323,000 in 1999. Bancorp's diluted earnings per share
increased 16.8%, to $1.25, from $1.07 in 1999. Core net earnings increased 4.90%
to $58,508,000 versus core net earnings of $55,777,000 in 1999. Core net
earnings excludes 1999 merger and restructuring costs associated with the
acquisitions of Sand Ridge Bank and Hebron Deposit Bank and the consolidation of
some operational functions, as well as 2000 costs associated with the merger of
two Bancorp affiliates, First National Bank of Southwestern Ohio and Home
Federal Bank, a Federal Savings Bank. (See Note 21 of the Notes to Consolidated
Financial Statements for more information about the merger and restructuring
charges.) Core diluted net earnings per share increased 5.88% to $1.26 in 2000,
compared to $1.19 in 1999.
Bancorp's core diluted earnings per share on a "cash basis," which
excludes the effect of amortization of goodwill and core deposits (tax effected
when applicable), and previously discussed merger and restructuring charges,
were $1.30 for 2000, which was a 4.84% increase from 1999.
Bancorp's net earnings during 1999 were $50,323,000 or $1.07 per share on
a diluted basis, representing a 1.27% decrease from 1998 net earnings and a
0.92% decrease from 1998 earnings per share on a diluted basis. Core net
earnings in 1999 were $55,777,000 or $1.19 per share on a diluted basis,
representing a 10.2% increase over the comparable 1998 diluted earnings per
share of $1.08.
FIRST FINANCIAL BANCORP 1 2000 ANNUAL REPORT
4
TABLE 1 - FINANCIAL SUMMARY
2000 1999 1998 1997 1996
(Dollars in thousands, except per share data)
SUMMARY OF OPERATIONS
Interest income $ 315,528 $ 282,398 $ 262,670 $ 231,993 $ 207,539
Tax equivalent adjustment 4,899 5,246 4,862 4,927 5,120
---------- ---------- ---------- ---------- ----------
Interest income - tax equivalent 320,427 287,644 267,532 236,920 212,659
Interest expense 145,424 117,194 110,434 96,576 87,827
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME - TAX EQUIVALENT $ 175,003 $ 170,450 $ 157,098 $ 140,344 $ 124,832
========== ========== ========== ========== ==========
Interest income $ 315,528 $ 282,398 $ 262,670 $ 231,993 $ 207,539
Interest expense 145,424 117,194 110,434 96,576 87,827
---------- ---------- ---------- ---------- ----------
Net interest income 170,104 165,204 152,236 135,417 119,712
Provision for loan losses 11,300 9,232 8,247 6,656 5,029
Noninterest income 44,961 41,312 39,512 31,295 25,747
Noninterest expenses 116,803 120,661 107,845 91,229 82,818
---------- ---------- ---------- ---------- ----------
Income before income taxes 86,962 76,623 75,656 68,827 57,612
Income tax expense 28,740 26,300 24,684 21,995 17,525
---------- ---------- ---------- ---------- ----------
NET EARNINGS $ 58,222 $ 50,323(2) $ 50,972 $ 46,832 $ 40,087(3)
========== ========== ========== ========== ==========
Tax equivalent basis was calculated using a 35.0%
tax rate in all years presented
PER SHARE DATA(1)
NET EARNINGS - BASIC $ 1.25 $ 1.07 $ 1.08 $ 1.00 $ 0.87
========== ========== ========== ========== ==========
NET EARNINGS - DILUTED $ 1.25 $ 1.07 $ 1.08 $ 0.99 $ 0.87
========== ========== ========== ========== ==========
Cash dividends declared
First Financial Bancorp $ 0.60 $ 0.57 $ 0.52 $ 0.47 $ 0.42
Sand Ridge Financial Corporation(4) $ N/A $ 4.75 $ 18.00 $ 17.00 $ 16.00
Hebron Bancorp, Inc.(5) $ N/A $ 1.50 $ 5.50 $ 5.00 $ 4.00
Average common shares outstanding - basic (in thousands) 46,453 46,849 46,984 47,014 45,868
Average common shares outstanding - diluted (in thousands) 46,536 46,986 47,172 47,157 45,917
SELECTED YEAR-END BALANCES
Total assets $3,932,512 $3,940,693 $3,538,869 $3,189,663 $2,775,819
Earning assets 3,604,916 3,572,755 3,253,574 2,911,760 2,562,674
Investment securities held-to-maturity 24,800 31,765 37,782 62,511 84,255
Investment securities available-for-sale 564,762 490,126 550,394 503,936 432,574
Loans, net of unearned income 3,008,066 3,036,376 2,654,146 2,322,953 2,025,867
Deposits 3,151,428 2,991,213 2,872,067 2,692,688 2,323,772
Noninterest-bearing demand deposits 419,878 408,712 392,999 370,960 289,260
Interest-bearing demand deposits 306,356 314,735 307,752 338,968 375,848
Savings deposits 739,376 778,405 758,808 655,719 518,888
Time deposits 1,685,818 1,489,361 1,412,508 1,327,041 1,139,776
Long-term borrowings 205,216 161,799 120,777 46,570 6,506
Shareholders' equity 395,132 372,539 358,265 336,256 301,975
RATIOS BASED ON AVERAGE BALANCES
Loans to deposits 100.76% 98.28% 89.07% 89.04% 85.76%
Net charge-offs to loans 0.37% 0.20% 0.24% 0.18% 0.27%
Shareholders' equity to
Total assets 9.62% 9.93% 10.46% 11.04% 10.89%
Deposits 12.45% 12.61% 12.64% 13.29% 12.86%
Return on Assets 1.48% 1.37% 1.53% 1.61% 1.51%
Return on Equity 15.34% 13.75% 14.59% 14.63% 13.90%
Net interest margin (tax equivalent basis) 4.79% 4.98% 5.07% 5.17% 5.04%
(1) First Financial Bancorp's per share data has been restated for all stock
dividends, stock splits, and material pooling-of-interests mergers through
2000.
(2) 1999 net earnings includes $6,930,000 ($5,454,000 after tax) in merger and
restructuring charges.
(3) 1996 net earnings includes the effect of a $2,144,000 ($1,389,000 after
tax) charge for a special assessment paid to the Savings Association
Insurance Fund which reduced earnings by 4.0%.
(4) Sand Ridge Financial Corporation was the parent company of Sand Ridge Bank
and was merged out of existence on June 1, 1999.
(5) Hebron Bancorp, Inc. was the parent company of Hebron Deposit Bank and was
merged out of existence on June 1, 1999.
FIRST FINANCIAL BANCORP 2 2000 ANNUAL REPORT
5
Bancorp's adjusted diluted earnings per share on a "cash basis," which
excludes the effect of amortization of goodwill and core deposits (tax effected
when applicable), and merger and restructuring charges, were $1.24 for 1999,
which is an 8.77% increase over 1998.
Bancorp's return on equity for 2000 was 15.3%, which compares to 13.8% and
14.6% for 1999 and 1998, respectively. Bancorp's return on assets for 2000, was
1.48%. This compares with return on asset ratios of 1.37% and 1.53% for 1999 and
1998, respectively. Excluding the merger and restructuring charges, Bancorp's
return on equity for 1999 was 15.2% and its return on assets was 1.51%.
NET INTEREST INCOME
Net interest income, Bancorp's principal source of earnings, is the excess
of interest received from earning assets over interest paid on interest-bearing
liabilities. Bancorp's net interest income for the years 1996 through 2000 is
shown in Table 1. For analytical purposes, a section showing interest income on
a tax equivalent basis is also presented in Table 1. The tax equivalent
adjustment recognizes the income tax savings when comparing taxable and
tax-exempt assets and assumes a 35.0% tax rate for all years presented.
The amount of net interest income is determined by the volume and mix of
earning assets, the rates earned on such earning assets and the volume, mix, and
rates paid for the deposits and borrowed money that support the earning assets.
Table 2 describes the extent to which changes in interest rates and changes in
volume of earning assets and interest-bearing liabilities have affected
Bancorp's net interest income during the years indicated. The combined effect of
changes in both volume and rate has been allocated proportionately to the change
due to volume and the change due to rate. Table 2 should be read in conjunction
with the Statistical Information shown on Page 12.
Tax equivalent interest income was $320,427,000 in 2000, an increase of
$32,783,000 or 11.4% over 1999. The majority of the increase was due to an
increase of $234,761,000 in the volume of earning assets, from an average of
$3,421,931,000 during 1999 to $3,656,692,000 during 2000. Average outstanding
loan balances increased $217,712,000. Investment securities and other
instruments increased $17,049,000. A 35 basis point (a basis point equals 0.01%)
increase in average yields earned on total earning assets, from 8.41% to 8.76%,
also contributed positively to the increase in tax equivalent interest income.
Total interest expense was $145,424,000 in 2000, an increase of
$28,230,000 over 1999. The interest expense was evenly impacted by an increase
in the volume of interest-bearing liabilities and the rate paid on those
liabilities. Total interest-bearing liabilities increased from an average of
$2,910,370,000 during 1999 to an average of $3,127,975,000 during 2000. The
average rate paid for deposits and borrowings increased from 4.03% during 1999
to 4.65% during 2000.
Tax equivalent net interest income, the difference between tax equivalent
total interest income and total interest expense, increased $4,553,000 or 2.67%
during 2000. Key factors limiting the growth in net interest income were changes
in market interest rates and a fourth-quarter softening of loan demand in the
midst of Bancorp's year-long plan for controlled loan growth. The changes in
market interest rates impacted short-term borrowing rates significantly. These
changes also created pressure on deposit pricing in an environment that was very
competitive in regard to retaining and attracting deposits.
The interest rate spread and the net interest margin are two ratios
frequently used to measure differences in net interest income. Although the
TABLE 2 - VOLUME/RATE ANALYSIS - TAX EQUIVALENT BASIS (1)
2000 change from 1999 due to 1999 change from 1998 due to
VOLUME RATE TOTAL VOLUME RATE TOTAL
(Dollars in thousands)
INTEREST INCOME
Loans $ 19,500 $ 9,436 $ 28,936 $ 34,513 $ (9,863) $ 24,650
Investment securities (2)
Taxable 1,740 2,850 4,590 (5,215) (15) (5,230)
Tax-exempt (917) (129) (1,046) 1,979 (895) 1,084
-------- -------- -------- -------- -------- --------
Total investment securities interest (2) 823 2,721 3,544 (3,236) (910) (4,146)
Interest-bearing deposits with other banks 275 96 371 113 (65) 48
Federal funds sold and securities
purchased under agreements to resell (174) 106 (68) (343) (97) (440)
-------- -------- -------- -------- -------- --------
TOTAL 20,424 12,359 32,783 31,047 (10,935) 20,112
INTEREST EXPENSE
Interest-bearing demand deposits (289) 1,066 777 (136) (623) (759)
Savings deposits (736) 893 157 1,902 (1,529) 373
Time deposits 8,860 9,406 18,266 1,806 (4,458) (2,652)
Short-term borrowings 3,654 4,129 7,783 7,037 115 7,152
Long-term borrowings 1,635 (388) 1,247 2,735 (89) 2,646
-------- -------- -------- -------- -------- --------
TOTAL 13,124 15,106 28,230 13,344 (6,584) 6,760
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ 7,300 $ (2,747) $ 4,553 $ 17,703 $ (4,351) $ 13,352
======== ======== ======== ======== ======== ========
(1) Tax equivalent basis was calculated using a 35.0% tax rate.
(2) Includes both investment securities held-to-maturity and investment
securities available-for-sale.
FIRST FINANCIAL BANCORP 3 2000 ANNUAL REPORT
6
average rate earned on loans and investments increased 35 basis points in 2000,
the average rate paid for deposits and borrowed money increased 62 basis points.
The result was a decrease in the interest rate spread and the net interest
margin. The interest rate spread (the average rate on earning assets minus the
average rate on interest-bearing liabilities) was 4.11% for 2000 and 4.38% for
1999, a difference of 27 basis points. The net interest margin (net interest
income on a tax equivalent basis divided by average earning assets) decreased 19
basis points, from 4.98% in 1999 to 4.79% in 2000. Narrowing net interest
margins were prevalent in the financial industry during 2000.
Nonaccruing loans were included in the daily average loan balances used in
determining the yields in Table 2. Interest foregone on nonaccruing loans is
disclosed in Note 9 of the Notes to Consolidated Financial Statements and is not
considered to have a material effect on the reasonableness of these
presentations. In addition, the amount of loan fees included in the interest
income computation for 2000, 1999, and 1998 was $8,847,000, $8,269,000, and
$6,799,000, respectively.
NONINTEREST INCOME AND NONINTEREST EXPENSES
A listing of noninterest income and noninterest expenses for 2000, 1999,
and 1998 is reported in Table 3. Affiliates that joined Bancorp during 1998 are
included in the Consolidated Statements of Earnings starting with their date of
acquisition. The mergers that occurred during 1999 were accounted for using the
pooling-of-interests method of accounting and the consolidated financial
statements for prior years were restated to include account balances and results
of operations for the companies acquired. There were no acquisitions that
required restatement in 2000.
NONINTEREST INCOME
2000 VS. 1999. Total noninterest income, exclusive of securities gains
or losses, increased by $3,660,000 or 8.87% during 2000.
When compared with the prior year, Bancorp's 2000 noninterest income was
impacted by a less favorable environment for gains on sale of loans, which were
down $1,975,000. Noninterest income excluding such gains was up 14.7%. One of
the largest contributing factors to the overall increase in noninterest income
was service charges on deposit accounts with an increase of 13.0%, resulting
from a continued focus on growth in Bancorp's deposit base improvements in this
fee income area. One indication of Bancorp's emphasis deposits was the
appointment of a chief deposit officer at each affiliate in 2000. For more
information on chief deposit officers, refer to the "Deposits and Borrowings"
section of this management discussion.
Bancorp's trust revenues increased 6.11% or by $820,000 over 1999. Bancorp
had targeted an increase of over 10 percent; however, trust revenues are largely
dependent on the market values of the underlying securities held in trust For
stocks in general, the year was difficult with the S&P 500 falling by 10.1% and
the Nasdaq(R)falling by 39.3%. These lower market values were the primary
reason for lower than anticipated trust revenues.
The "other" category of noninterest income increased 6.09% year over year.
Included in this category are a gain of approximately $400,000 associated with
the dissolution of a partnership originally established in 1974 to conduct
specialized leasing arrangements, a gain of approximately $100,000 due to
reduced investment in an ATM network, and increased key executive life insurance
income. It should be noted that the dissolution of the leasing partnership will
have no effect on future earnings per share.
1999 VS. 1998. Noninterest income, excluding securities transactions,
increased $2,810,000 or 7.31% in 1999.
Service charges on deposit accounts increased $2,079,000 or 14.3% over
1998 primarily due to an increase in the number of transaction accounts and to
pricing adjustments.
Trust revenues increased $1,264,000 or 10.4% over 1999 due to an increase
in the number of trust relationships.
TABLE 3 - NONINTEREST INCOME AND NONINTEREST EXPENSES
2000 1999 1998
% CHANGE % CHANGE % CHANGE
INCREASE INCREASE INCREASE
TOTAL (DECREASE) TOTAL (DECREASE) TOTAL (DECREASE)
(Dollars in thousands)
NONINTEREST INCOME
Service charges on deposit accounts $ 18,786 13.0% $ 16,629 14.3% $ 14,550 13.3%
Trust revenues 14,230 6.1% 13,410 10.4% 12,146 20.9%
Other 11,906 6.1% 11,223 (4.5%) 11,756 42.4%
--------- --------- ---------
Subtotal 44,922 8.9% 41,262 7.3% 38,452 23.4%
Investment securities gains 39 N/M 50 N/M 1,060 N/M
--------- --------- ---------
Total $ 44,961 8.8% $ 41,312 4.6% $ 39,512 26.3%
========= === ========= === ========= ====
NONINTEREST EXPENSES
Salaries and employee benefits $ 63,606 3.2% $ 61,614 7.3% $ 57,443 16.9%
Net occupancy 7,402 5.5% 7,019 7.8% 6,512 11.5%
Furniture and equipment 6,374 1.9% 6,256 5.5% 5,932 7.5%
Data processing 7,212 11.5% 6,471 0.4% 6,447 12.2%
Deposit insurance 542 (1.6%) 551 16.2% 474 9.7%
State taxes 2,432 20.1% 2,025 11.0% 1,824 0.9%
Amortization of intangibles 3,268 (11.1%) 3,674 (8.5%) 4,015 202.8%
Restructuring charge (353) N/M 6,930 N/M 0 N/M
Other 26,320 0.8% 26,121 3.7% 25,198 17.7%
--------- --------- ---------
TOTAL $ 116,803 (3.2%) $ 120,661 11.9% $ 107,845 18.2%
========= ==== ========= ==== ========= ====
N/M = Not meaningful
(R)Nasdaq and The Nasdaq Stock Market are registered service/trade marks of The
Nasdaq Stock Market, Inc.
FIRST FINANCIAL BANCORP 4 2000 ANNUAL REPORT
7
NONINTEREST EXPENSES
2000 VS. 1999. Noninterest expense decreased by $3,858,000 in 2000 as
compared to 1999. Excluding expenses associated with the merger and
restructuring charge in 1999 and expenses related to the 2000 in-market merger
of two affiliates, noninterest expense increased $2,633,000 or a modest 2.32%.
Excluding the merger and restructuring charge of $6,930,000 from 1999, the
$353,000 reduction of the merger and restructuring charge liability in 2000, and
the $792,000 of in-market affiliate merger expenses in 2000, provides a more
accurate indicator of changes in core expenses. (See Note 21 of the Notes to
Consolidated Financial Statements for more information about the merger and
restructuring charge.)
Salaries and employee benefits increased by only 3.23% over 1999. Items
such as less-than-anticipated health care costs, as well as reduced incentive
compensation contributed to holding this increase to less than 5%.
In 2000, approximately $360,000 was reclassified from Other to Data
Processing. Adjusting for this reclassification produces an increase in the data
processing expense of closer to 6%.
Bancorp's amortization of intangibles decreased 11.1% from 1999 as a
result of the expiration of the amortization of various intangible assets.
The efficiency ratio (noninterest expenses as a percentage of noninterest
income, excluding securities transactions, plus tax equivalent net interest
income) reflects how much, on average, an institution expends to generate each
dollar of revenue. Bancorp's efficiency ratio, exclusive of merger and
restructuring charges, was 53.0%, 53.7% and 55.1% for 2000, 1999, and 1998,
respectively.
1999 VS. 1998. Not including the merger and restructuring charge of
$6,930,000, noninterest expenses in 1999 increased $5,886,000 or 5.46% over
1998. The largest component of noninterest expenses is salaries and employee
benefits, which increased $4,171,000 or 7.26% during 1999.
Noninterest expenses were $12,816,000 or 11.9% greater during 1999 when
compared to the previous year if the restructuring charge is included.
INCOME TAXES
Net deferred tax assets at December 31, 2000, and 1999, were $691,000 and
$8,008,000, respectively. Due to Bancorp's strong historical earnings trend and
the expectation that this trend will continue, management has determined that it
is more likely than not that the net deferred tax asset will be realized.
Therefore, no valuation allowance has been established. As discussed earlier,
market interest rates experienced considerable change in 2000. The movement in
interest rates affected the unrealized gain/(loss) on investments
available-for-sale, which in turn, caused a reduction in deferred income taxes
of approximately $5 million.
Bancorp's tax expense in 2000 totaled $28,740,000 compared to $26,300,000
in 1999 and $24,684,000 in 1998, resulting in effective tax rates of 33.0%,
34.3%, and 32.6% in 2000, 1999, and 1998, respectively. The decrease in 2000's
effective tax rate was primarily due to tax-exempt life insurance income. The
increase in 1999's effective rate was primarily due to a decline in the amount
of tax-exempt investments held during those years.
Further analysis of income taxes is presented in Note 11 of the Notes to
Consolidated Financial Statements.
LOANS
Total loans, net of unearned income, declined slightly by $28,310,000 or
0.93% during 2000, while average loan balances were up 7.6% year over year.
Average loans outstanding increased while the end of period remained relatively
flat due to excellent loan growth experienced in 1999 followed by a planned
controlled loan growth campaign in 2000. Additionally, during 2000 Bancorp sold
$171 million of loans in the normal course of business and in conjunction with
asset/liability management strategies. In 2000, Bancorp also implemented a "swap
and hold" strategy where $40,737,000 in loans were securitized and moved to
Bancorp's investment portfolio, thus increasing the liquidity of the asset.
Bancorp's loans cover a broad range of borrowers characterizing the
western Ohio, southern Michigan, northern Kentucky, and Indiana markets. There
were no loan concentrations of multiple borrowers in similar activities at
December 31, 2000, which exceeded 10.0% of total loans.
Bancorp's subsidiaries consist of community banks dedicated to meeting the
financial needs of individuals and businesses living and operating in the
communities they serve. Bancorp's loan portfolio is therefore primarily composed
of residential and commercial real estate mortgage loans, commercial loans, and
installment loans. At December 31, 2000, real estate mortgage loans composed
47.8% of Bancorp's total loan portfolio and installment loans composed another
20.5% of the total loan portfolio. Commercial loans equaled 26.1% of the total
portfolio and real estate construction, credit card lending, and lease financing
made up the remaining 5.60% of the portfolio. In 2000, Bancorp had planned to
adjust its mix of loans slightly by targeting growth in commercial loans and
reducing the level of mortgage loans. End of period commercial loans increased
$17,982,000 or 2.34% from 1999 to 2000. Real estate mortgage loans decreased
$29,252,000 or 1.99% for the same period. A fourth quarter 2000 softening of
loan demand also impacted loan growth.
Real estate mortgage loans are generally considered to be the safest loan
investments because of the real estate securing the loans. Installment loans
include unsecured loans, second mortgage loans, secured lines of credit, secured
and unsecured home improvement loans, automobile loans, student loans and loans
secured by savings, stocks, or life insurance. Bancorp subsidiaries offer a wide
variety of commercial loans, including small business loans, agricultural loans,
equipment loans, and lines of credit.
In accordance with Bancorp's decentralized management structure and
subject to Bancorp guidelines, credit underwriting and approval occur within the
subsidiary originating the loan. Depending on the subsidiary, loan applications
are approved by either a loan committee or by one or more loan personnel with
designated approval authority. Loan committees are composed of senior management
and loan personnel and, at some subsidiaries, members of the subsidiary's board
of directors. Loan applications for principal amounts greater than a designated
amount, which varies by subsidiary, require Bancorp approval. Any plans to
purchase or sell a participation in a loan also require Bancorp approval.
Bancorp subsidiaries receive requests to renew maturing loans as a normal
part of business. Such requests are especially common with real estate loans
that are scheduled to mature before being fully amortized and with commercial
loans. The requests are reviewed by the subsidiary's loan committee or by
designated loan personnel, as appropriate, and may be approved, approved with
modifications, or denied. Required modifications may include, among other items,
a reduction in the loan balance, a change in the interest rate, an increase in
collateral, or the initiation of monthly principal payments.
Table 5 indicates the contractual maturity of commercial loans and real
estate-construction loans outstanding at December 31, 2000. Loans due after one
year are classified according to their sensitivity to changes in interest rates.
ASSET QUALITY
Bancorp's subsidiaries record a provision for loan losses (provision) in
the Consolidated Statements of Earnings to provide for expected credit losses.
Actual losses on loans and leases are charged against the allowance for loan
losses
FIRST FINANCIAL BANCORP 5 2000 ANNUAL REPORT
8
- -------------------------------------------------------------------------------
TABLE 4 - LOAN PORTFOLIO
DECEMBER 31,
2000 1999 1998 1997 1996
(Dollars in thousands)
Commercial $ 787,436 $ 769,454 $ 689,524 $ 554,728 $ 456,535
Real estate-construction 97,571 111,458 74,205 65,468 46,862
Real estate-mortgage 1,438,339 1,467,591 1,306,065 1,140,628 1,063,569
Installment 618,489 623,091 537,156 516,368 433,194
Credit card 24,182 22,408 21,306 20,055 18,510
Lease financing 46,068 46,508 29,212 27,260 14,821
---------- ----------- ----------- ----------- -----------
TOTAL $3,012,085 $ 3,040,510 $ 2,657,468 $ 2,324,507 $ 2,033,491
========== =========== =========== =========== ===========
(allowance), which is a reserve accumulated on the Consolidated Balance Sheets
through the provision. The recorded values of the loans and leases actually
removed from the Consolidated Balance Sheets are referred to as charge-offs and,
after netting out recoveries on previously charged off assets, become net
charge-offs. Bancorp's policy is to charge off loans when, in management's
opinion, collection of principal is in doubt. All loans charged off are subject
to continuous review and concerted efforts are made to maximize recovery.
Management records the provision, on an individual subsidiary basis, in
amounts sufficient to result in an allowance that will cover risks believed to
be inherent in the loan portfolio of each subsidiary. Management's evaluation in
establishing the provision includes such factors as historical loss and recovery
experience, estimated future loss for loans, known deterioration in loans,
periodic external loan evaluations, prevailing economic conditions that might
have an impact on the portfolio, and ratios of delinquencies and nonaccrual
loans. The 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
evaluation of these factors is completed at Bancorp's subsidiaries through a
group of senior officers from the financial and lending areas.
The year 2000 was difficult from a loan quality perspective for the
financial industry, and Bancorp was no exception. Total nonperforming assets, as
shown in Table 8, increased 22.7% from $15,234,000 at December 31, 1999, to
$18,686,000 at year-end 2000. Net charge-offs increased to 0.37% from 0.20% of
total average loans as shown in Table 6. During 2000, Bancorp increased its
provision for loan losses 22.4% to $11,300,000 from $9,232,000 in 1999. The 1999
provision for loan losses had increased $985,000 over 1998's provision of
$8,247,000 primarily due to the growth in the loan portfolio. Even with the
issues previously discussed, Bancorp finished 2000 with a nonperforming assets
to ending loans ratio of 0.62%, in line with Bancorp's peers. The allowance at
December 31, 2000, was $39,349,000 or 1.31% of loans, net of unearned income,
which compares to $39,340,000 or 1.30% of loans, net of unearned income, at
December 31, 1999.
The level of nonaccrual and restructured loans and leases is an
important element in assessing asset quality. Loans are classified as nonaccrual
when, in the opinion of management, collection of interest is doubtful. Loans
are classified as restructured when management, to protect its investment,
grants concessions to the debtor that it would not otherwise consider. Another
element associated with asset quality is Other Real Estate Owned (OREO). OREO
- -------------------------------------------------------------------------------
TABLE 5 - LOAN MATURITY/RATE SENSITIVITY
DECEMBER 31, 2000
MATURITY
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
(Dollars in thousands)
Commercial $393,393 $162,808 $231,235 $787,436
Real estate-construction 88,256 8,161 1,154 97,571
-------- -------- -------- --------
TOTAL $481,649 $170,969 $232,389 $885,007
======== ======== ======== ========
Sensitivity to changes in interest rates
PREDETERMINED VARIABLE
RATE RATE
(Dollars in thousands)
Due after one year but within five years $ 75,595 $ 95,374
Due after five years 29,040 203,349
-------- --------
TOTAL $104,635 $298,723
======== ========
FIRST FINANCIAL BANCORP 6 2000 ANNUAL REPORT
9
-------------------------------------------------------------------------------
TABLE 6 - SUMMARY OF ALLOWANCE FOR LOAN LOSSES AND SELECTED STATISTICS
2000 1999 1998 1997 1996
(Dollars in thousands)
Transactions in the allowances for loan losses:
Balance at beginning of year $39,340 $34,800 $31,660 $25,803 $24,453
Loans charged off
Commercial 6,439 4,120 4,022 2,053 3,520
Real estate-construction 32 0 0 28 0
Real estate-mortgage 1,098 325 352 257 249
Installment and other consumer financing 5,881 4,484 3,720 3,044 2,849
Lease financing 194 432 293 57 187
------- ------- ------- ------- -------
Total loans charged off 13,644 9,361 8,387 5,439 6,805
Recoveries of loans previously charged off
Commercial 620 2,340 1,541 684 532
Real estate-construction 0 0 0 0 0
Real estate-mortgage 191 79 99 142 70
Installment and other consumer financing 1,474 1,114 800 786 870
Lease financing 68 36 34 15 62
------- ------- ------- ------- -------
Total recoveries 2,353 3,569 2,474 1,627 1,534
------- ------- ------- ------- -------
Net charge-offs 11,291 5,792 5,913 3,812 5,271
Allowance acquired through mergers 0 0 806 3,013 1,592
Provision for discontinued product line 0 1,100 0 0 0
Provision for loan losses 11,300 9,232 8,247 6,656 5,029
------- ------- ------- ------- -------
BALANCE AT END OF YEAR $39,349 $39,340 $34,800 $31,660 $25,803
======= ======= ======= ======= =======
Ratios
Net charge-offs as a percent of
Average loans outstanding 0.37% 0.20% 0.24% 0.18% 0.27%
Provision 99.92% 62.74% 71.70% 57.27% 104.81%
Allowance 28.69% 14.72% 16.99% 12.04% 20.43%
Allowance as a percent of year-end loans,
net of unearned income 1.31% 1.30% 1.31% 1.36% 1.27%
- -------------------------------------------------------------------------------
TABLE 7 - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
2000 1999 1998 1997 1996
(Dollars in thousands)
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
TOTAL TOTAL TOTAL TOTAL TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Balance at End of
Period Applicable to:
Commercial $11,061 26% $ 8,221 25% $ 9,909 26% $ 8,202 24% $ 6,510 22%
Real estate-construction 376 3% 470 4% 910 3% 246 3% 172 2%
Real estate-mortgage 8,853 48% 8,798 48% 5,395 49% 5,645 49% 3,794 53%
Installment and credit card 11,399 21% 10,978 21% 9,750 21% 8,323 23% 6,582 22%
Lease financing 756 2% 477 2% 630 1% 483 1% 327 1%
Unallocated 6,904 N/A 10,396 N/A 8,206 N/A 8,761 N/A 8,418 N/A
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
TOTAL $39,349 100% $39,340 100% $34,800 100% $31,660 100% $25,803 100%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
FIRST FINANCIAL BANCORP 7 2000 ANNUAL REPORT
10
primarily represents properties acquired by Bancorp's subsidiaries through loan
defaults by customers. See Table 8 for a summary of Bancorp's nonaccrual and
restructured loans and OREO properties.
In comparing December 31, 2000, with December 31, 1999, nonaccrual loans
increased $6,063,000, while restructured loans decreased $1,979,000, other real
estate owned decreased $632,000, and accruing loans past due 90 days or more
decreased $363,000.
Nonaccrual loans at year-end do not consist of any one large credit or
groups of credit, or concentrations in any particular industry. Approximately
30% of the nonaccrual loans are mid-size commercial loans ($500,000 to
$1,000,000) secured by commercial real estate and/or other collateral. Another
25% of the nonaccrual loans are in and secured by residential real estate.
Nonaccrual and restructured loans and leases and OREO are discussed or
summarized in Notes 1 and 9 of the Notes to Consolidated Financial Statements.
INVESTMENT SECURITIES
Bancorp's investment securities increased $67,671,000 or 13.0% during 2000
to a balance of $589,562,000. Bancorp follows a conservative investment policy,
investing primarily for liquidity management purposes and interest rate risk
management. U.S. Treasury Securities, generally considered to have the least
credit risk and the highest liquidity, composed slightly less than 1% of
Bancorp's investment portfolio at December 31, 2000. All U.S. Treasury
Securities were classified as available-for-sale at that date and are available
for liquidity management purposes.
Another 24.4% of the investment portfolio is composed of securities issued
by U.S. government agencies and corporations, primarily the Federal Home Loan
Bank (FHLB), Federal Home Loan Mortgage Corporation (FHLMC), Federal National
Mortgage Association (FNMA), Student Loan Marketing Association (SLMA) and
Federal Farm Credit Bank. No structured notes were included in the U.S.
government agencies and corporations securities category at December 31, 2000.
All U.S. government agencies and corporations securities were classified as
available-for-sale at December 31, 2000, and are available for liquidity
management purposes. Due to the government guarantees, either expressed or
implied, U.S. government agency and corporation obligations are considered to
have low credit risk and high liquidity.
Investments in mortgage-backed securities (MBSs), including collateralized
mortgage obligations (CMOs), composed 42.5% of the investment portfolio at
December 31, 2000. MBSs represent participations in pools of mortgage loans, the
principal and interest payments of which are passed to the security investors.
MBSs are subject to prepayment risk, especially during periods of decreasing
interest rates. Prepayments of the underlying mortgage loans may shorten the
lives of the securities, thereby affecting yields to maturity and market values.
Bancorp invests primarily in MBSs issued by U.S. government agencies and
corporations, such as FHLMC, FNMA, and the Government National Mortgage
Association (GNMA). Such securities, because of government agency guarantees,
are considered to have low credit risk and high liquidity. Accordingly, about
98.0% of Bancorp's MBSs are classified as available-for-sale.
CMOs totaled $69,022,000 at December 31, 2000, all of which were
classified as available-for-sale. All of the CMOs held by Bancorp are rated AAA
by Standard & Poor's Corporation or similar rating agencies. Bancorp does not
own any interest only securities, principal only securities, accrual bonds,
inverse floaters, or high risk CMOs, as defined by regulatory guidelines.
Securities of state and other political subdivisions composed 26.5% of
Bancorp's investment portfolio at December 31, 2000. The securities are
diversified as to states and issuing authorities within states, thereby
decreasing portfolio risk. About 87.4% of such investments at December 31, 2000,
were classified as available-for-sale.
The remaining 6.04% of Bancorp's investment portfolio at December 31,
2000, termed "other securities," was primarily composed of stock ownership in
the Indianapolis and Cincinnati District Federal Home Loan Banks, the Federal
Reserve Bank, and in taxable obligations of state and other political
subdivisions.
Table 9 sets forth the maturities of investment securities
held-to-maturity and investment securities available-for-sale as of December 31,
2000, and the average yields of such securities calculated on the basis of the
cost and effective yields weighted for the scheduled maturity of each security.
Tax equivalent
- -------------------------------------------------------------------------------
TABLE 8 - NONPERFORMING ASSETS
DECEMBER 31,
2000 1999 1998 1997 1996
(Dollars in thousands)
Nonaccrual loans $17,346 $11,283 $ 7,481 $ 7,845 $13,502
Restructured loans 265 2,244 691 2,447 890
OREO 1,075 1,707 221 1,150 264
------- ------- ------- ------- -------
TOTAL NONPERFORMING ASSETS $18,686 $15,234 $ 8,393 $11,442 $14,656
======= ======= ======= ======= =======
Nonperforming assets as a percent of total
loans plus OREO 0.62% 0.50% 0.32% 0.49% 0.72%
Accruing loans past due 90 days or more $ 2,414 $ 2,777 $ 2,923 $ 2,392 $ 2,203
FIRST FINANCIAL BANCORP 8 2000 ANNUAL REPORT
11
adjustments, using a 35.0% rate, have been made in calculating yields on
tax-exempt obligations of state and other political subdivisions.
At December 31, 2000, the market value of Bancorp's held-to-maturity
investment securities portfolio exceeded the carrying value by $633,000. The
available-for-sale investment securities are reported at their market value of
$564,762,000, as required by SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." See Note 8 of the Notes to Consolidated
Financial Statements for additional information.
Bancorp's federal funds sold and securities purchased under agreements to
resell decreased $1,581,000, from $5,621,000 at December 31, 1999, to $4,040,000
at December 31, 2000. Bancorp monitors this position as part of its
asset/liability management.
Bancorp had not used off-balance-sheet derivative financial instruments
such as futures, forward contracts, option contracts, interest rate swaps, or
other financial instruments with similar characteristics as of December 31,
2000.
DEPOSITS AND BORROWINGS
Bancorp's subsidiaries solicit deposits by offering a wide variety of
savings and transaction accounts, including checking accounts, regular savings
accounts, money market deposit accounts, and time deposits of various maturities
and rates. In 2000, Bancorp designated a chief deposit officer at each
affiliate. While banks have traditionally had chief lending officers, the
concept of a chief deposit officer is unique. The chief deposit officer at each
affiliate focuses on developing strategies to attract an appropriate deposit
mix, developing new deposit products, establishing deposit pricing in
conjunction with the asset/liability committee, and tracking and providing
feedback to senior management.
Total deposits increased $160,215,000 or 5.36% in 2000. The growth in
deposits was used to reduce short-term borrowings and improve Bancorp's
liquidity position. Comparing Bancorp totals at December 31, 2000, and 1999,
interest-bearing deposits increased $149,049,000 and noninterest-bearing demand
deposits increased $11,166,000.
Table 10 shows the contractual maturity of time deposits of $100,000 and
over that were outstanding at December 31, 2000. These deposits represented only
9.28% of total deposits.
Short-term borrowings decreased from $382,118,000 at December 31, 1999, to
$146,568,000 at December 31, 2000. The combination of controlled loan growth,
loan sales, and deposit growth resulted in the paying down of short-term
borrowings. Cash and due from banks balances which were reduced by $43,779,000
from December 31, 1999, also had the effect of reducing borrowings. Excess cash
was held at December 31, 1999, in response to the public concerns for Y2K.
While total borrowings (long- and short-term) decreased $192,133,000,
long-term borrowings increased $43,417,000 from $161,799,000 at the end of 1999
to $205,216,000 at the end of 2000. The increase in long-term borrowings is
associated with ongoing asset/liability management strategies which take into
account the timing of maturities of all assets and liabilities among many other
factors.
TABLE 9 - INVESTMENT SECURITIES
DECEMBER 31, 2000
Maturing
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
(Dollars in thousands)
HELD-TO-MATURITY
Mortgage-backed securities(2) $ 23 8.63% $ 889 6.39% $ 2,153 8.62% $ 1,835 9.01%
Obligations of state and other
political subdivisions 5,367 11.53% 9,239 9.94% 3,984 8.80% 1,031 8.65%
Other securities 249 5.99% 0 0.00% 0 0.00% 30 7.25%
-------- -------- -------- --------
TOTAL $ 5,639 11.28% $ 10,128 9.63% $ 6,137 8.73% $ 2,896 8.86%
======== ===== ======== ==== ======== ==== ======== ====
AVAILABLE-FOR-SALE
U.S. Treasury securities $ 3,492 5.62%
Securities of other U.S.
government agencies
and corporations 9,054 6.06% $ 87,358 6.29% $ 46,943 6.87% $ 507 7.56%
Mortgage-backed securities(2) 1,485 6.29% 24,714 6.35% 20,444 6.89% 198,741 6.88%
Obligations of state and other
political subdivisions 5,044 7.16% 23,466 7.99% 33,249 7.93% 74,923 7.68%
Other securities 96 5.00% 860 5.47% 215 6.35% 34,171 7.44%
-------- -------- -------- --------
TOTAL $ 19,171 6.28% $136,398 6.58% $100,851 7.22% $308,342 7.13%
======== ==== ======== ==== ======== ==== ======== ====
(1) Tax equivalent basis was calculated using a marginal federal income tax
rate of 35.0%.
(2) 43.8% of the mortgage-backed securities maturing after five years are
variable rate.
TABLE 10 - MATURITIES OF TIME DEPOSITS
GREATER THAN OR EQUAL TO $100,000*
DECEMBER 31, 2000
(Dollars in thousands)
Maturing in
3 months or less $ 111,881
3 months to 6 months 64,638
6 months to 12 months 74,633
over 12 months 41,342
----------
TOTAL $ 292,494
==========
* All time deposits greater than or equal to $100,000 were in certificates of
deposit.
FIRST FINANCIAL BANCORP 9 2000 ANNUAL REPORT
12
TABLE 11 - MARKET RISK DISCLOSURE
Principal Amount Maturing In:
2001 2002 2003 2004 2005
(Dollars in thousands)
RATE SENSITIVE ASSETS
Fixed interest rate loans $ 375,776 $ 159,005 $ 124,660 $ 103,864 $ 70,398
Average interest rate 9.20% 9.25% 9.34% 9.20% 9.31%
Variable interest rate loans 399,940 98,520 69,617 68,671 65,958
Average interest rate 9.55% 9.29% 9.26% 9.14% 9.29%
Fixed interest rate securities 24,714 44,652 48,978 29,672 23,224
Average interest rate 6.04% 6.22% 6.05% 6.29% 5.82%
Variable interest rate securities 96 -- -- -- --
Average interest rate 5.00% -- -- -- --
Other earning assets 7,288 -- -- -- --
Average interest rate 6.06% -- -- -- --
RATE SENSITIVE LIABILITIES
Noninterest-bearing checking 419,878 -- -- -- --
Savings and interest-bearing checking 104,573 941,159 -- -- --
Average interest rate 2.48% 2.48% -- -- --
Time deposits 1,305,361 278,636 64,388 11,485 4,451
Average interest rate 6.12% 6.12% 5.76% 5.16% 5.84%
Fixed interest rate borrowings 5,240 4,942 1,200 16,500 5,000
Average interest rate 5.97% 6.44% 4.96% 5.73% 6.82%
Variable interest rate borrowings 145,068 4,500 -- 6,000 --
Average interest rate 6.37% 6.80% -- 6.58% --
FAIR VALUE
THEREAFTER TOTAL DECEMBER 31, 2000
RATE SENSITIVE ASSETS
Fixed interest rate loans $ 411,198 $1,244,901 $1,245,382
Average interest rate 8.40% 8.96%
Variable interest rate loans 1,060,459 1,763,165 1,758,548
Average interest rate 8.51% 8.87%
Fixed interest rate securities 320,584 491,824 492,465
Average interest rate 5.31% 5.59%
Variable interest rate securities 97,642 97,738 97,730
Average interest rate 7.29% 7.28%
Other earning assets -- 7,288 7,288
Average interest rate -- 6.06%
RATE SENSITIVE LIABILITIES
Noninterest-bearing checking -- 419,878 419,878
Savings and interest-bearing checking -- 1,045,732 1,045,732
Average interest rate -- 2.48%
Time deposits 21,497 1,685,818 1,689,563
Average interest rate 4.40% 6.08%
Fixed interest rate borrowings 163,334 196,216 194,937
Average interest rate 5.68% 5.74%
Variable interest rate borrowings -- 155,568 155,568
Average interest rate -- 6.39%
LIQUIDITY
Liquidity management is the process by which Bancorp ensures that adequate
liquid funds are available for the corporation and its subsidiaries. These funds
are necessary in order for Bancorp and its subsidiaries to meet financial
commitments on a timely basis. These commitments include withdrawals by
depositors, funding credit obligations to borrowers, paying dividends to
shareholders, paying operating expenses, funding capital expenditures, and
maintaining deposit reserve requirements. Liquidity is monitored and closely
managed by the asset/liability committees at Bancorp's subsidiaries and by
Bancorp's holding company asset/liability committee.
Liquidity may be used to fund capital expenditures. Capital expenditures
were $5,461,000 for 2000 and $8,422,000 for 1999. Remodeling is a planned and
ongoing process given the 113 offices of Bancorp's subsidiaries. Routine capital
expenditures planned for the year 2001 currently total $2,600,000. This amount
does not include expenditures associated with Bancorp's multi-year
regionalization and market expansion plan announced January 25, 2001.
Bancorp subsidiaries' source of funding is predominantly deposits within
each of their respective market areas. The deposit base is diversified among
individuals, partnerships, corporations, and public entities. This
diversification helps Bancorp avoid dependence on large concentrations of funds.
Liquidity is derived primarily from core deposit growth, principal
payments received on loans, the sale and maturation of investment securities,
net cash provided by operating activities, and access to other funding sources.
The most stable source of liability-funded liquidity for both the long-term and
short-term is deposit growth and retention in the core deposit base.
As mentioned previously, Bancorp's deposits grew by 5.36% in 2000. In addition,
Bancorp utilizes advances from the Federal Home Loan Bank as a funding source.
At December 31, 2000, total borrowings from the FHLB were $290,716,000.
Bancorp's bank subsidiaries have pledged certain mortgage loans and certain
investments to the FHLB. The total available remaining borrowing capacity from
the FHLB at December 31, 2000, was $483,119,000. The principal source of
asset-funded liquidity is investment securities classified as
available-for-sale, the market values of which totaled $564,762,000 at December
31, 2000, an increase of $74,636,000 or 15.2% over 1999. Securities classified
as held-to-maturity that are maturing within a short period of time can also be
a source of liquidity. Securities classified as held-to-maturity and that are
maturing in one year or less totaled $5,639,000 at December 31, 2000. In
addition, other types of assets--such as cash and due from banks, federal funds
sold and securities purchased under agreements to resell, and loans and
interest-bearing deposits with other banks maturing within one year--are sources
of liquidity.
Certain restrictions exist regarding the ability of Bancorp's subsidiaries
to transfer funds to Bancorp (see Note 6 of the Notes to Consolidated Financial
Statements). Management is not aware of any other events or regulatory
requirements which, if implemented, are likely to have a material effect on
Bancorp's liquidity. Bancorp has secured a $25,000,000 line of credit with
another financial institution. This line provides additional liquidity for
Bancorp for various corporate activities. As of December 31, 2000, the
outstanding balance was $3,500,000.
FIRST FINANCIAL BANCORP 10 2000 ANNUAL REPORT
13
INTEREST RATE SENSITIVITY
Table 11 details the maturities and yields of interest-bearing financial
instruments at December 31, 2000, for the next five years and thereafter. Also
included with each category is the fair value of those instruments. The values
represent the contractual maturity of each instrument. For loan instruments
without contractual maturities, such as credit card loans, management has
allocated principal payments based upon historical trends of payment activity.
Where there is no set maturity, as in the case of some interest-bearing
liabilities, management has allocated the amounts based upon its expectation of
cash flows, incorporating internal core deposit studies, and current
expectations of customer behavior. For loans, securities, and liabilities with
contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities.
The data in Table 11 was aggregated by type of financial instrument--
fixed and variable rate loans, fixed and variable rate investments, other
earning assets, fixed and variable rate deposits, and other fixed and variable
rate interest-bearing liabilities. Bancorp had not used interest rate swaps,
interest rate caps, or interest rate floors as of December 31, 2000. Therefore,
data concerning these instruments was not included in the table.
The primary source of market risk for the financial instruments presented
is interest rate risk. That is, the risk that an adverse change in market rates
will adversely affect the market value of the instruments. Generally, the longer
the maturity, the higher the interest rate risk exposure. While maturity
information does not necessarily present all aspects of exposure, it may provide
an indication of where risks are prevalent.
All financial institutions assume interest rate risk as an integral part
of normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from reducing the exposure of Bancorp's net
interest margin to swings in interest rates, to assuring that there is
sufficient capital and liquidity to support future balance sheet growth. Bancorp
manages interest rate risk through the asset/liability committees of Bancorp's
subsidiaries. The asset/liability committees are comprised of bank officers from
various disciplines. Each subsidiary committee establishes policies and rates
which lead to the prudent investment of resources, the effective management of
risks associated with changing interest rates, the existence of adequate
liquidity, and the earning of an adequate return on shareholders' equity.
Bancorp has a holding company asset/liability committee, made up of
representatives of various subsidiaries and disciplines, whose function is to
develop policies and guidelines for effective asset/liability management
throughout Bancorp's subsidiaries.
CAPITAL
Total shareholders' equity at December 31, 2000, and 1999, was
$395,132,000 and $372,539,000, respectively. The increase in shareholders'
equity for 2000 was primarily the result of net earnings exceeding dividends
declared for the year.
On January 25, 2000, the board of directors authorized Bancorp to
repurchase from time to time the number of common shares necessary to satisfy
any restricted stock awards or stock options that are granted from time to time
under the 1999 Stock Incentive Option Plan for Officers and Employees and the
1999 Stock Option Plan for Non-Employee Directors. The total number of shares
that can be repurchased over the life of the ten-year plans may not exceed 6.5
million shares. Under this program, Bancorp repurchased 650,110 shares in 2000.
On October 24, 2000, the board of directors authorized an additional
program to repurchase up to 5% (or approximately 2.3 million) of Bancorp's
common shares outstanding. This share repurchase program is for general
corporate purposes including future stock dividends. Under this program, Bancorp
repurchased 290,500 shares in 2000.
On February 27, 2001, Bancorp's board of directors declared a 5% stock
dividend and a quarterly cash dividend of 15 cents per share for each post-
stock-dividend share. Both the stock dividend and the quarterly cash dividend
are to be distributed on April 2, 2001.
The dividend payout ratio was 47.9%, 50.8%, and 42.1%, for 2000, 1999, and
1998, respectively. The dividend payout is continually reviewed by management
and the board of directors.
Bancorp has consistently maintained regulatory capital ratios at or above
the "well-capitalized" standards. For further detail on capital ratios, see Note
12 of the Notes to Consolidated Financial Statements.
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 (the Act). In addition, certain
statements in future filings by Bancorp with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of Bancorp which are not statements of historical fact
constitute forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to, projections of
revenues, income or loss, earnings or loss per share, the payment or non-payment
of dividends, capital structure and other financial items, statements of plans
and objectives of Bancorp or its management or board of directors, and
statements of future economic performances and statements of assumptions
underlying such statements. Words such as "believes," "anticipates," "intends,"
and other similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. 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, interest rates, market and
monetary fluctuations; technological changes; mergers and acquisitions; the
ability to increase market share and control expenses; the effect of changes in
accounting policies and practices, as may be adopted by the regulatory agencies
as well as the Financial Accounting Standards Board and the Securities and
Exchange Commission; the costs and effects of litigation and of unexpected or
adverse outcomes in such litigation; and the success of Bancorp at managing the
risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and Bancorp undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
FIRST FINANCIAL BANCORP 11 2000 ANNUAL REPORT
14
STATISTICAL INFORMATION
(Unaudited)
2000 1999
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
DAILY AVERAGE BALANCES AND INTEREST RATES: (Tax equivalent basis; dollars in thousands)
EARNING ASSETS
Loans(1)
Commercial(2) $ 788,668 $ 80,956 10.26% $ 734,982 $ 69,774 9.49%
Real estate(2) 1,586,313 126,262 7.96% 1,475,943 116,126 7.87%
Installment
and other consumer 649,606 67,425 10.38% 603,730 60,704 10.05%
Lease financing(2) 46,924 3,693 7.87% 39,144 2,796 7.14%
----------- --------- ---------- --------
Total loans 3,071,511 278,336 9.06% 2,853,799 249,400 8.74%
Investment securities(3)
Taxable 407,564 28,041 6.88% 380,520 23,451 6.16%
Tax-exempt(2) 162,257 13,091 8.07% 173,607 14,137 8.14%
----------- --------- ---------- --------
Total investment securities(3) 569,821 41,132 7.22% 554,127 37,588 6.78%
Interest-bearing deposits
with other banks 11,203 702 6.27% 6,575 331 5.03%
Federal funds sold and securities
purchased under agreements
to resell 4,157 257 6.18% 7,430 325 4.37%
----------- --------- ---------- --------
TOTAL EARNING ASSETS 3,656,692 320,427 8.76% 3,421,931 287,644 8.41%
NONEARNING ASSETS
Allowance for loan losses (40,360) (37,303)
Cash and due from banks 141,951 131,863
Accrued interest and other assets 186,295 169,675
----------- ----------
TOTAL ASSETS $ 3,944,578 $3,686,166
=========== ==========
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand $ 275,048 6,597 2.40% $ 288,865 5,820 2.01%
Savings 766,886 19,002 2.48% 797,396 18,845 2.36%
Time 1,603,214 91,153 5.69% 1,438,145 72,887 5.07%
----------- --------- ---------- --------
Total interest-bearing deposits 2,645,148 116,752 4.41% 2,524,406 97,552 3.86%
Borrowed funds
Short-term borrowings 316,537 20,148 6.37% 251,273 12,365 4.92%
Long-term borrowings 166,290 8,524 5.13% 134,691 7,277 5.40%
----------- --------- ---------- --------
Total borrowed funds 482,827 28,672 5.94% 385,964 19,642 5.09%
----------- --------- ---------- --------
TOTAL INTEREST-BEARING LIABILITIES 3,127,975 145,424 4.65% 2,910,370 117,194 4.03%
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 403,219 379,276
Other liabilities 33,852 30,503
SHAREHOLDERS' EQUITY 379,532 366,017
----------- --------- ---------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 3,944,578 $3,686,166
=========== ==========
NET INTEREST INCOME AND
INTEREST RATE SPREAD $ 175,003 4.11% $170,450 4.38%
========= ==== ======== ====
NET INTEREST MARGIN 4.79% 4.98%
==== ====
1998
BALANCE INTEREST YIELD
EARNING ASSETS
Loans(1)
Commercial(2) $ 610,200 $ 60,431 9.90%
Real estate(2) 1,288,838 106,846 8.29%
Installment
and other consumer 534,949 55,282 10.33%
Lease financing(2) 28,552 2,191 7.67%
---------- --------
Total loans 2,462,539 224,750 9.13%
Investment securities(3)
Taxable 465,132 28,681 6.17%
Tax-exempt(2) 149,788 13,053 8.71%
---------- --------
Total investment securities(3) 614,920 41,734 6.79%
Interest-bearing deposits
with other banks 4,487 283 6.31%
Federal funds sold and securities
purchased under agreements
to resell 14,994 765 5.10%
---------- --------
TOTAL EARNING ASSETS 3,096,940 267,532 8.64%
NONEARNING ASSETS
Allowance for loan losses (33,732)
Cash and due from banks 123,743
Accrued interest and other assets 151,788
----------
TOTAL ASSETS $3,338,739
==========
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand $ 295,073 6,579 2.23%
Savings 719,754 18,472 2.57%
Time 1,403,990 75,539 5.38%
---------- --------
Total interest-bearing deposits 2,418,817 100,590 4.16%
Borrowed funds
Short-term borrowings 108,217 5,213 4.82%
Long-term borrowings 84,106 4,631 5.51%
---------- --------
Total borrowed funds 192,323 9,844 5.12%
---------- --------
TOTAL INTEREST-BEARING LIABILITIES 2,611,140 110,434 4.23%
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 345,997
Other liabilities 32,267
SHAREHOLDERS' EQUITY 349,335
---------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,338,739
==========
NET INTEREST INCOME AND
INTEREST RATE SPREAD $157,098 4.41%
======== ====
NET INTEREST MARGIN 5.07%
====
(1) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income.
(2) Interest income on tax-exempt investments and on certain tax-exempt loans
and leases has been adjusted to a taxable equivalent basis using a marginal
federal income tax rate of 35.0%.
(3) Includes both investment securities held-to-maturity and investment
securities available-for-sale.
FIRST FINANCIAL BANCORP 12 2000 ANNUAL REPORT
15
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2000 1999
(Dollars in thousands)
ASSETS
Cash and due from banks $ 182,058 $ 225,837
Interest-bearing deposits with other banks 3,248 8,867
Federal funds sold and securities purchased under agreements to resell 4,040 5,621
Investment securities held-to-maturity
(market value of $25,433 at December 31, 2000;
$32,498 at December 31, 1999) 24,800 31,765
Investment securities available-for-sale, at market value
(cost of $561,502 at December 31, 2000;
$500,361 at December 31, 1999) 564,762 490,126
Loans
Commercial 787,436 769,454
Real estate-construction 97,571 111,458
Real estate-mortgage 1,438,339 1,467,591
Installment 618,489 623,091
Credit card 24,182 22,408
Lease financing 46,068 46,508
----------- -----------
Total loans 3,012,085 3,040,510
Less
Unearned income 4,019 4,134
Allowance for loan losses 39,349 39,340
----------- -----------
Net loans 2,968,717 2,997,036
Premises and equipment 58,466 59,004
Goodwill 28,860 30,077
Other intangibles 8,878 10,522
Deferred income taxes 691 8,008
Accrued interest and other assets 87,992 73,830
----------- -----------
TOTAL ASSETS $ 3,932,512 $ 3,940,693
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 419,878 $ 408,712
Interest-bearing 2,731,550 2,582,501
----------- -----------
Total deposits 3,151,428 2,991,213
Short-term borrowings
Federal funds purchased and securities sold under agreements to repurchase 53,581 83,353
Federal Home Loan Bank borrowings 85,500 294,235
Other 7,487 4,530
----------- -----------
Total short-term borrowings 146,568 382,118
Federal Home Loan Bank long-term borrowings 205,216 161,799
Accrued interest and other liabilities 34,168 33,024
----------- -----------
TOTAL LIABILITIES 3,537,380 3,568,154
SHAREHOLDERS' EQUITY
Common stock -- no par value
Authorized -- 160,000,000 shares
Issued -- 46,927,736 shares in 2000 and 46,869,107 shares in 1999 374,336 373,447
Retained earnings 36,225 5,904
Accumulated comprehensive income 1,955 (6,398)
Restricted stock awards (866) (414)
Treasury stock, at cost, 940,610 and 0 shares (16,518) 0
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 395,132 372,539
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,932,512 $ 3,940,693
=========== ===========
See Notes to Consolidated Financial Statements.
FIRST FINANCIAL BANCORP 13 2000 ANNUAL REPORT
16
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
2000 1999 1998
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees $ 278,029 $ 249,113 $ 224,467
Investment securities
Taxable 28,041 23,451 28,681
Tax-exempt 8,499 9,178 8,474
------------ ----------- -----------
Total investment securities interest 36,540 32,629 37,155
Interest-bearing deposits with other banks 702 331 283
Federal funds sold and securities purchased under agreements to resell 257 325 765
------------ ----------- -----------
TOTAL INTEREST INCOME 315,528 282,398 262,670
INTEREST EXPENSE
Deposits 116,752 97,552 100,590
Short-term borrowings 20,148 12,365 5,213
Long-term borrowings 8,524 7,277 4,631
------------ ----------- -----------
TOTAL INTEREST EXPENSE 145,424 117,194 110,434
------------ ----------- -----------
NET INTEREST INCOME 170,104 165,204 152,236
Provision for loan losses 11,300 9,232 8,247
------------ ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 158,804 155,972 143,989
NONINTEREST INCOME
Service charges on deposit accounts 18,786 16,629 14,550
Trust revenues 14,230 13,410 12,146
Investment securities gains 39 50 1,060
Other 11,906 11,223 11,756
------------ ----------- -----------
TOTAL NONINTEREST INCOME 44,961 41,312 39,512
NONINTEREST EXPENSES
Salaries and employee benefits 63,606 61,614 57,443
Net occupancy 7,402 7,019 6,512
Furniture and equipment 6,374 6,256 5,932
Data processing 7,212 6,471 6,447
Deposit insurance 542 551 474
State taxes 2,432 2,025 1,824
Amortization of intangibles 3,268 3,674 4,015
Restructuring charge (353) 6,930 0
Other 26,320 26,121 25,198
------------ ----------- -----------
TOTAL NONINTEREST EXPENSES 116,803 120,661 107,845
------------ ----------- -----------
INCOME BEFORE INCOME TAXES 86,962 76,623 75,656
Income tax expense 28,740 26,300 24,684
------------ ----------- -----------
NET EARNINGS $ 58,222 $ 50,323 $ 50,972
============ =========== ===========
NET EARNINGS PER SHARE - BASIC $ 1.25 $ 1.07 $ 1.08
============ =========== ===========
NET EARNINGS PER SHARE - DILUTED $ 1.25 $ 1.07 $ 1.08
============ =========== ===========
AVERAGE SHARES OUTSTANDING - BASIC 46,452,902 46,848,851 46,984,480
============ =========== ===========
AVERAGE SHARES OUTSTANDING - DILUTED 46,535,511 46,985,782 47,172,423
============ =========== ===========
See Notes to Consolidated Financial Statements.
FIRST FINANCIAL BANCORP 14 2000 ANNUAL REPORT
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2000 1999 1998
(Dollars in thousands)
OPERATING ACTIVITIES
Net earnings $ 58,222 $ 50,323 $ 50,972
Adjustments to reconcile net earnings to net cash provided by operating activities
Provision for loan losses 11,300 9,232 8,247
Provision for depreciation and amortization 9,707 9,196 9,012
Net amortization of premiums and accretion of discounts
on investment securities (528) 83 615
Deferred income taxes 2,175 2,059 2,706
Realized gains on investment securities (39) (50) (1,060)
Originations of mortgage loans held for sale (171,013) (226,475) (173,231)
Gains from sales of mortgage loans held for sale (1,018) (2,993) (1,984)
Proceeds from sale of mortgage loans held for sale 171,161 227,534 173,886
Increase in cash surrender value of life insurance (6,467) (17,168) (3,236)
Increase in interest receivable (3,031) (4,082) (2,203)
(Increase) decrease in prepaid expenses (881) 1,276 567
(Decrease) increase in accrued expenses (3,146) 351 (9)
Increase in interest payable 3,986 311 815
Other (3,588) 2,646 (3,895)
--------- --------- --------
Net cash provided by operating activities 66,840 52,243 61,202
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale 0 13,520 49,953
Proceeds from calls, paydowns, and maturities of investment securities available-for-sale 58,858 159,916 259,762
Purchases of investment securities available-for-sale (79,144) (135,915) (335,389)
Proceeds from calls, paydowns, and maturities of investment securities held-to-maturity 11,773 12,215 28,513
Purchases of investment securities held-to-maturity (4,365) (1,901) (2,805)
Net decrease (increase) in interest-bearing deposits with other banks 5,619 (6,269) 989
Net decrease in federal funds sold and
securities purchased under agreements to resell 1,581 3,033 10,155
Net increase in loans and leases (28,494) (393,706) (300,617)
Proceeds from disposal of other real estate owned 2,882 622 2,176
Recoveries from loans and leases previously charged off 2,353 3,569 1,050
Cash used in merger with other financial institutions 0 0 (12,231)
Purchases of premises and equipment (5,461) (8,422) (8,690)
--------- --------- --------
Net cash used in investing activities (34,398) (353,338) (307,134)
FINANCING ACTIVITIES
Net increase in total deposits 160,215 119,146 126,581
Net (decrease) increase in short-term borrowings (235,550) 227,054 70,703
Proceeds from long-term borrowings 43,417 41,022 74,207
Cash dividends (27,901) (25,570) (21,436)
Purchase of common stock (16,518) 0 (8,773)
Proceeds from exercise of stock options 116 780 788
--------- --------- --------
Net cash (used in) provided by financing activities (76,221) 362,432 242,070
--------- --------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (43,779) 61,337 (3,862)
Cash and cash equivalents at beginning of year 225,837 164,500 168,362
--------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 182,058 $ 225,837 $164,500
========= ========= ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 141,438 $ 116,884 $109,399
========= ========= ========
Income taxes paid $ 31,233 $ 23,080 $ 24,356
========= ========= ========
Recognition of deferred tax (liabilities) assets attributable to SFAS No. 115 $ (5,142) $ 6,995 $ 187
========= ========= ========
Acquisition of other real estate owned through foreclosure $ 2,423 $ 2,252 $ 1,324
========= ========= ========
Issuance of restricted stock awards $ 773 $ 174 $ 220
========= ========= ========
Securitization of loans $ 40,737 $ 0 $ 0
========= ========= ========
See Notes to Consolidated Financial Statements.
FIRST FINANCIAL BANCORP 15 2000 ANNUAL REPORT
18
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON COMMON ACCUMULATED RESTRICTED TREASURY TREASURY
STOCK STOCK RETAINED COMPREHENSIVE STOCK STOCK STOCK
SHARES AMOUNT SURPLUS EARNINGS INCOME AWARDS SHARES AMOUNT TOTAL
(Dollars in thousands)
Balances at December 31, 1997 22,895,585 $183,164 $ 57,853 $ 91,007 $ 4,633 $(338) (1,319) $ (63) $336,256
Net earnings 50,972 50,972
Unrealized holding losses on
securities available for sale
arising during the period 316 316
--------
Total comprehensive income 51,288
Cash dividends declared
(Bancorp - $0.57 per share;
SRFC - $18 per share;
HBI - $5.50 per share) (21,436) (21,436)
Purchase of common stock (284,894) (8,773) (8,773)
Exercise of stock options,
net of shares purchased 6,135 (1,266) (314) 76,494 2,368 788
Transfer of surplus to
common stock (no par value) 57,536 (57,536)
2 for 1 stock split 16,560,780 (8,563)
10% stock dividend 3,195,315 67,275 (70,383) 95,819 3,108 0
Restricted stock awards (3) (220) 3,825 215 (8)
Amortization of restricted
stock awards 150 150
---------- -------- -------- -------- -------- ----- -------- -------- --------
Balances at December 31, 1998 42,657,815 $306,709 $ 0 $ 50,160 $ 4,949 $(408) (118,638) $ (3,145) $358,265
Net earnings 50,323 50,323
Unrealized holding losses on
securities available for sale
arising during the period (11,347) (11,347)
--------
Total comprehensive income 38,976
Cash dividends declared
(Bancorp - $0.57 per share;
SRFC - $4.75 per share;
HBI - $1.50 per share) (25,570) (25,570)
Exercise of stock options,
net of shares purchased 1,331 (951) 65,725 1,731 780
10% stock dividend 4,213,712 67,700 (69,009) 45,313 1,265 (44)
Restricted stock awards (3,751) (11) (174) 7,600 149 (36)
Amortization of restricted
stock awards 168 168
---------- -------- -------- -------- -------- ----- -------- -------- --------
Balances at December 31, 1999 46,869,107 $373,447 $ 0 $ 5,904 $ (6,398) $(414) 0 $ 0 $372,539
NET EARNINGS 58,222 58,222
UNREALIZED HOLDING GAINS ON
SECURITIES AVAILABLE FOR SALE
ARISING DURING THE PERIOD 8,353 8,353
--------
TOTAL COMPREHENSIVE INCOME 66,575
CASH DIVIDENDS DECLARED
(BANCORP - $0.60 PER SHARE) (27,901) (27,901)
PURCHASE OF COMMON STOCK (940,500) (16,515) (16,515)
EXERCISE OF STOCK OPTIONS,
NET OF SHARES PURCHASED 16,729 116 116
RESTRICTED STOCK AWARDS 41,900 773 (773) (110) (3) (3)
AMORTIZATION OF RESTRICTED
STOCK AWARDS 321 321
---------- -------- -------- -------- -------- ----- -------- -------- --------
BALANCES AT DECEMBER 31, 2000 46,927,736 $374,336 $ 0 $ 36,225 $ 1,955 $(866) (940,610) $(16,518) $395,132
========== ======== ======== ======== ======== ===== ======== ======== ========
See Notes to Consolidated Financial Statements.
FIRST FINANCIAL BANCORP 16 2000 ANNUAL REPORT
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The consolidated financial statements of First
Financial Bancorp. (Bancorp), a financial holding company, principally serving
western Ohio, Indiana, northern Kentucky, and southern Michigan, include the
accounts and operations of Bancorp and its wholly owned subsidiaries. All
significant intercompany transactions and accounts have been eliminated in
consolidation. The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of management's
estimates. Interest on loans, securities, and other earning assets is recognized
primarily on the accrual basis. Intangible assets arising from the acquisition
of subsidiaries are being amortized over varying periods, none of which exceeds
25 years. Core deposit intangibles are being amortized over varying periods,
none of which exceeds 10 years.
Investment securities - Statement of Financial Accounting Standards
(SFAS) No. 115 classifies debt and equity securities in three categories:
trading, held-to-maturity, and available-for-sale.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when Bancorp has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. Debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are stated at aggregate fair value, with the unrealized gains and
losses, net of tax, reported as a separate component of shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be other
than temporary, are included in investment securities gains/(losses). The cost
of securities sold is based on the specific identification method.
Loans - Loan origination and commitment fees and certain direct loan
origination costs are deferred, and the net amount amortized as an adjustment to
the related loan's yield. The accrual of interest income is discontinued when
the collection of a loan or interest, in whole or in part, is doubtful. This
applies generally to all loans, including impaired loans. When interest accruals
are suspended, interest income accrued in the current period is reversed and
interest accrued in the prior year is charged to the allowance for loan losses.
Mortgages held for sale are reported at the lower of cost or aggregate
market value primarily as determined by outstanding commitments from investors.
Capitalized mortgage servicing rights (MSRs) are evaluated for impairment based
on the fair value of those rights, using a disaggregated approach. MSRs are
amortized on an accelerated basis over the estimated period of net servicing
revenue.
Allowance for loan losses - The level of the allowance for loan losses
(allowance) is based upon management's evaluation of the loan and lease
portfolios, 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 portfolio, economic conditions, and other
pertinent 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 level maintained is believed by management to be adequate to cover
losses inherent in the portfolio. The allowance is increased by provisions
charged to expense and decreased by charge-offs, net of recoveries of amounts
previously charged off.
Lease financing - Bancorp principally uses the finance method of accounting
for direct lease contracts. Under this method of accounting, a receivable is
recorded for the total amount of lease payments due and estimated residual
values. Lease income, represented by the excess of the total contract receivable
plus estimated equipment residual value over the cost of the related equipment,
is recorded over the terms of the leases at a level rate of return on the
unrecovered net investment.
Premises and equipment - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed principally on the straight-line method over the estimated useful lives
of the assets. Maintenance and repairs are charged to operations as incurred.
Other real estate owned - Other real estate owned represents properties
acquired by Bancorp's subsidiaries through loan defaults by customers. The
property is recorded at the lower of cost or fair value minus estimated costs to
sell at the date acquired. Subsequently, the property is valued at the lower of
the amount recorded when the property was placed into other real estate owned or
fair value minus estimated costs to sell based on periodic valuations performed
by management. An allowance for losses on other real estate owned may be
maintained for subsequent valuation adjustments on a specific property basis.
Any gains or losses realized at the time of disposal are reflected in income.
Income taxes - Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Bancorp and its subsidiaries file a consolidated federal income tax return.
Each subsidiary provides for income taxes on a separate return basis, and remits
to Bancorp amounts determined to be currently payable.
Earnings per share - Basic net income per common share is computed by
dividing net income applicable to common stock by the weighted average number of
shares of common stock outstanding during the period. Diluted net income per
common share is computed by dividing net income applicable to common stock by
the weighted average number of shares, nonvested stock, and dilutive common
stock equivalents outstanding during the period. Common stock equivalents
consist of common stock issuable under the assumed exercise of stock options
granted under Bancorp's stock plans, using the treasury stock method.
Cash flow information - For purposes of the statement of cash flows,
Bancorp considers cash and due from banks as cash and cash equivalents.
Reporting comprehensive income - Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources.
Disclosure about segments and related information - Bancorp operates as one
community banking segment in contiguous geographic markets.
Derivative instruments - SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," was released in June, 1998, and is
effective for all fiscal quarters of fiscal years beginning after January 1,
2001. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. Bancorp does not use off-balance-sheet
derivative financial instruments (such as interest rate swaps) and therefore
will not be impacted by SFAS No. 133.
Reclassifications - Certain reclassifications of prior years' amounts have
been made to conform to current year presentation. Such reclassifications had no
effect on net earnings.
FIRST FINANCIAL BANCORP 17 2000 ANNUAL REPORT
20
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
Bancorp's subsidiaries are required to maintain average reserve balances
either in the form of vault cash or reserves held on deposit with the Federal
Reserve Bank, Federal Home Loan Bank, or in pass-through reserve accounts
with correspondent banks. The average amounts of these required reserve balances
for 2000 and 1999 were approximately $25,181,000 and $23,748,000, respectively.
NOTE 3 - BUSINESS COMBINATIONS
Bancorp consummated the following business combinations in 1999 and 1998:
ACQUISITION SHARES PURCHASE
BUSINESS COMBINATIONS DATE ASSETS DEPOSITS ISSUED PRICE
(Dollars in thousands)
Pooling-of-interests
Sand Ridge Financial Corporation June 1, 1999 $ 591,325 $ 516,413 5,114,878
Hebron Bancorp, Inc. June 1, 1999 110,089 94,624 1,222,599
Purchase transactions
The Union State Bank April 1, 1998 68,020 52,798 $ 13,600
NOTE 4 - LEASE FINANCING
Leases included in the loan portfolio at December 31 were composed as follows:
2000 1999
(Dollars in thousands)
Direct financing $30,804 $32,148
Leveraged 734 28
------- -------
Net rentals receivable 31,538 32,176
Estimated residual value of leased assets 21,317 21,872
Less unearned income 6,787 7,540
------- -------
Investment in leases, net $46,068 $46,508
======= =======
Direct financing lease payments receivable as of December 31, 2000, for the next
five years and thereafter are as follows:
DIRECT FINANCING LEASES
(Dollars in thousands)
2001 $ 12,152
2002 9,494
2003 5,621
2004 2,651
2005 746
Thereafter 140
FIRST FINANCIAL BANCORP 18 2000 ANNUAL REPORT
21
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 were summarized as follows:
2000 1999
(Dollars in thousands)
Land and land improvements $ 12,360 $ 12,221
Buildings 54,618 52,683
Furniture and fixtures 43,732 46,256
Leasehold improvements 4,242 3,379
Construction in progress 580 2,070
-------- --------
115,532 116,609
Less accumulated depreciation
and amortization 57,066 57,605
-------- --------
TOTAL $ 58,466 $ 59,004
======== ========
NOTE 6 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES
Dividends paid by Bancorp are mainly provided by dividends from its
subsidiaries. However, certain restrictions exist regarding the ability of these
subsidiaries to transfer funds to Bancorp in the form of cash dividends, loans,
or advances. The approval of the subsidiaries' respective primary federal
regulators is required for Bancorp's subsidiaries to pay dividends in excess of
regulatory limitations. As of December 31, 2000, Bancorp's subsidiaries had
retained earnings of $174,176,000 of which $26,781,000 was available for
distribution to Bancorp as dividends without prior regulatory approval.
NOTE 7 - 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. These financial
instruments include standby letters of credit and commitments outstanding to
extend credit. Generally accepted accounting principles do not require these
financial instruments to be recorded in the consolidated financial statements
and, accordingly, they are not. Bancorp does not use off-balance-sheet
derivative financial instruments (such as interest rate swaps) as defined in
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments."
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 - These transactions 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 customer's contractual
default. Bancorp has issued standby letters of credit aggregating $26,813,000
and $18,028,000 at December 31, 2000, and 1999, respectively.
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 - Commitments to extend credit 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 counter-party. The collateral held
varies, but may include securities, real estate, inventory, plant, or equipment.
Bancorp had commitments outstanding to extend credit totaling $484,894,000 and
$508,366,000 at December 31, 2000, and 1999, respectively. Management does not
anticipate any material losses as a result of these commitments.
FIRST FINANCIAL BANCORP 19 2000 ANNUAL REPORT
22
NOTE 8 - INVESTMENT SECURITIES
The following is a summary of investment securities as of December 31, 2000:
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
(Dollars in thousands)
U.S. Treasury securities $ 3,497 $ 0 $ (5) $ 3,492
Securities of U.S. government
agencies and corporations 143,311 1,037 (487) 143,861
Mortgage-backed securities $ 4,900 $ 100 $ (18) $ 4,982 244,895 1,844 (1,355) 245,384
Obligations of state and
other political subdivisions 19,621 575 (25) 20,171 134,439 2,632 (389) 136,682
Other securities 279 1 0 280 35,360 3 (20) 35,343
-------- ----- ----- -------- -------- -------- -------- --------
TOTAL $ 24,800 $ 676 $ (43) $ 25,433 $561,502 $ 5,516 $ (2,256) $564,762
======== ===== ===== ======== ======== ======== ======== ========
The following is a summary of investment securities as of December 31, 1999:
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
(Dollars in thousands)
U.S. Treasury securities $ 11,364 $ 2 $ (55) $ 11,311
Securities of U.S. government
agencies and corporations 122,103 11 (3,276) 118,838
Mortgage-backed securities $ 6,345 $ 116 $ (47) $ 6,414 191,894 638 (3,570) 188,962
Obligations of state and
other political subdivisions 25,097 752 (83) 25,766 142,743 955 (4,880) 138,818
Other securities 323 0 (5) 318 32,257 4 (64) 32,197
-------- ----- -------- -------- -------- -------- -------- --------
TOTAL $ 31,765 $ 868 $ (135) $ 32,498 $500,361 $ 1,610 $(11,845) $490,126
======== ===== ======== ======== ======== ======== ======== ========
The carrying value of investment securities as of December 31, 1998,
by category was as follows: U.S. Treasury $30,715,000, U.S. government
agencies and corporations $115,808,000, mortgage-backed $237,478,000,
obligations of state and other political subdivisions $182,464,000, and other
$21,711,000.
During the year ended December 31, 2000, no available-for-sale securities
were sold.
During the year ended December 31, 1999, available-for-sale securities with
a fair value at the date of sale of $13,482,000 were sold. The gross realized
gains on such sales totaled $38,000.
During the year ended December 31, 1998, available-for-sale securities with
a fair value at the date of sale of $48,749,000 were sold. The gross realized
gains on such sales totaled $900,000.
There were net investment gains after taxes of $73,000, $106,000, and
$738,000 for the years ended December 31, 2000, 1999, and 1998, respectively.
The applicable income tax effects were benefits of $34,000 and $56,000 for 2000
and 1999, respectively, and an expense of $322,000 for 1998.
The carrying value of investment securities pledged to secure public
deposits and for other purposes as required by law amounted to $237,295,000 at
December 31, 2000.
The amortized cost and market value of investment securities, including
mortgage-backed securities at December 31, 2000, by contractual maturity, are
shown in the table below.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
(Dollars in thousands)
Due in one year or less $ 5,639 $ 5,672 $ 19,186 $ 19,171
Due after one year through five years 10,128 10,601 135,970 136,398
Due after five years through ten years 6,137 6,217 99,535 100,851
Due after ten years 2,896 2,943 306,811 308,342
-------- -------- -------- --------
TOTAL $ 24,800 $ 25,433 $561,502 $564,762
======== ======== ======== ========
FIRST FINANCIAL BANCORP 20 2000 ANNUAL REPORT
23
NOTE 9 - LOANS
Information as to nonaccrual and restructured loans at December 31 was as
follows:
2000 1999 1998
(Dollars in thousands)
Principal balance
Nonaccrual loans $17,346 $11,283 $ 7,481
Restructured loans 265 2,244 691
------- ------- -------
TOTAL $17,611 $13,527 $ 8,172
======= ======= =======
Interest income effect
Gross amount of interest that would
have been recorded at original rate $ 2,560 $ 885 $ 631
Interest included in income 1,613 286 197
------- ------- -------
NET IMPACT ON INTEREST INCOME $ 947 $ 599 $ 434
======= ======= =======
At December 31, 2000, there were no commitments outstanding to
lend additional funds to borrowers with nonaccrual or restructured loans.
The balances of other real estate acquired through loan foreclosures,
in-substance foreclosures, repossessions, or other workout situations, net of
the related allowance, totaled $1,075,000, $1,707,000, and $221,000 at
December 31, 2000, 1999, and 1998, respectively.
Changes in the allowance for loan losses for the three years ended
December 31 were as follows:
2000 1999 1998
(Dollars in thousands)
Balance at beginning of year $ 39,340 $ 34,800 $ 31,660
Allowance acquired through mergers 0 0 806
Provision for discontinued product line 0 1,100 0
Provision for loan losses 11,300 9,232 8,247
Loans charged off (13,644) (9,361) (8,387)
Recoveries 2,353 3,569 2,474
-------- -------- --------
BALANCE AT END OF YEAR $ 39,349 $ 39,340 $ 34,800
======== ======== ========
The allowances for loan losses related to loans that are identified for
evaluation in accordance with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," are based on discounted cash flows using the loan's
initial effective interest rate or the fair value of the collateral for certain
collateral dependent loans.
At December 31, 2000, 1999, and 1998, the recorded investment in loans that
are considered to be impaired under SFAS No. 114 was $8,839,000, $2,688,000, and
$3,218,000, respectively. The related allowance for loan losses on these
impaired loans was $2,008,000 at December 31, 2000, $1,433,000 at December 31,
1999, and $1,449,000 at December 31, 1998. At December 31, 2000, and 1999, there
were $65,000 and $20,000, respectively, that as a result of write-downs, did not
have an allowance for loan losses. The average recorded investment in impaired
loans during the year ended December 31, 2000, was approximately $5,517,000
versus $2,407,000 for the year ended December 31, 1999, and $4,640,000 for the
year ended December 31, 1998.
For the years ended December 31, 2000, 1999, and 1998, Bancorp recognized
interest income on those impaired loans of $218,000, $88,000, and $129,000,
respectively. Bancorp recognizes income on impaired loans using the cash basis
method.
Mortgage loans serviced for others are not included in the accompany- ing
Consolidated Balance Sheets. The unpaid principal balances of these loans
totaled $560,530,000, $394,978,000, and $301,695,000 at December 31, 2000, 1999,
and 1998, respectively.
Custodial escrow balances maintained in connection with these mortgage
loans serviced were approximately $3,313,000, $2,344,000, and $1,908,000 at
December 31, 2000, 1999, and 1998, respectively.
NOTE 10 - DEBT AND FEDERAL HOME LOAN BANK LONG-TERM BORROWINGS
Long-term borrowings at December 31, 2000, consisted exclusively of Federal
Home Loan Bank (FHLB) advances with rates ranging from 4.90% to 6.90%, with
interest payable monthly. The long-term advances mature as follows: $3,740,000
in 2001, $9,442,000 in 2002, $1,200,000 in 2003, $22,500,000 in 2004, $5,000,000
in 2005, and $163,334,000 after 2005.
FHLB advances, both short-term and long-term, were secured by certain
residential mortgage loans, as well as certain government and agency securities,
with a book value of $1,705,803,000 at December 31, 2000.
At December 31, 2000, Bancorp had a short-term line of credit with a
financial institution of $25,000,000. As of year-end, the outstanding balance
was $3,500,000. The interest rate on this line of credit is the current federal
funds rate plus a spread. The line of credit has a financial requirement whereby
Bancorp's affiliates must maintain a risk-based capital level of a
well-capitalized institution as well as maintain an allowance for loan losses
which matches or exceeds its level of nonperforming loans. Bancorp was in
compliance with these requirements as of December 31, 2000.
FIRST FINANCIAL BANCORP 21 2000 ANNUAL REPORT
24
NOTE 11 - INCOME TAXES
Income tax expense consisted of the following components:
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Current
Federal $ 24,548 $ 21,613 $ 21,462
State 3,134 2,633 2,024
-------- -------- --------
Total 27,682 24,246 23,486
Deferred expense 1,058 2,054 1,198
-------- -------- --------
INCOME TAX EXPENSE $ 28,740 $ 26,300 $ 24,684
======== ======== ========
The difference between the federal income tax rates, applied to income before
income taxes, and the effective rates were due to the following:
2000 1999 1998
(Dollars in thousands)
Income taxes computed at federal statutory rate of 35% $ 30,431 $ 26,818 $ 26,420
State income taxes, net of federal tax benefit 2,037 1,711 1,322
Effect of tax-exempt interest (3,014) (2,885) (2,933)
Other (714) 656 (125)
-------- -------- --------
INCOME TAX EXPENSE $ 28,740 $ 26,300 $ 24,684
======== ======== ========
SFAS No. 109, "Accounting for Income Taxes," requires that deferred
tax assets and liabilities be carried at the enacted tax rate. The enacted tax
rate was 35% for years ended December 31, 2000, 1999, and 1998. The major
components of the temporary differences that give rise to deferred tax assets
and liabilities at December 31, 2000, and 1999, are as follows:
2000 1999
(Dollars in thousands)
Deferred tax assets
Allowance for loan losses $ 13,034 $ 12,237
Mark to market adjustment (712) (985)
Other real estate owned (82) 2
Postretirement benefits other than pensions liability 866 936
Pension liability 675 832
Other 210 3,930
-------- --------
TOTAL DEFERRED TAX ASSETS 13,991 16,952
Deferred tax liabilities
Tax greater than book depreciation 989 1,125
Leasing activities 5,815 4,308
Federal Home Loan Bank stock basis difference 1,095 5,546
Deferred loan fees 1,614 1,421
Purchase accounting adjustment (276) (276)
Other 1,717 733
-------- --------
TOTAL DEFERRED TAX LIABILITIES 10,954 12,857
-------- --------
Net deferred tax asset recognized through the statement of earnings 3,037 4,095
Net deferred tax (liability) asset from valuation adjustments of investment securities
available-for-sale, recognized in equity section of balance sheet (2,346) 3,913
-------- --------
TOTAL NET DEFERRED TAX ASSET $ 691 $ 8,008
======== ========
FIRST FINANCIAL BANCORP 22 2000 ANNUAL REPORT
25
NOTE 12 - RISK-BASED CAPITAL
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, an 8.00% total
risk-based capital ratio, and a 4.00% leverage ratio. Tier 1 capital consists
primarily of common shareholders' equity, net of certain intangibles, and total
risk-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 dividing Tier 1 capital by average total assets less
certain intangibles.
While Bancorp's 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.
The table below illustrates the risk-based capital calculations and ratios
for the last two years.
DECEMBER 31,
2000 1999
(Dollars in thousands)
Tier 1 capital
Shareholders' equity $ 395,132 $ 372,539
Less certain intangibles 34,957 37,610
Less accumulated comprehensive income 1,955 (6,398)
----------- -----------
TOTAL TIER 1 CAPITAL $ 358,220 $ 341,327
=========== ===========
Total risk-based capital
Tier 1 capital $ 358,220 $ 341,327
Qualifying allowance for loan losses 35,945 35,636
----------- -----------
TOTAL RISK-BASED CAPITAL $ 394,165 $ 376,963
=========== ===========
RISK WEIGHTED ASSETS $ 2,872,181 $ 2,847,221
=========== ===========
RISK-BASED RATIOS
TIER 1 CAPITAL 12.5% 12.0%
=========== ===========
TOTAL RISK-BASED CAPITAL 13.7% 13.2%
=========== ===========
LEVERAGE 9.2% 9.4%
=========== ===========
NOTE 13 - EMPLOYEE BENEFIT PLANS
Bancorp sponsors a non-contributory defined benefit pension plan covering
substantially all employees. Plan assets were administered by the Trust
Department of First National Bank of Southwestern Ohio. Plan assets primarily
consisted of equity and debt mutual funds, stocks, corporate bonds, and money
market funds. Approximately 97.9% and 95.8% of plan assets at December 31, 2000,
and 1999, respectively, were invested in collective trust funds with First
Southwestern. Also included in plan assets at December 31, 1999, was a $100,000
certificate of deposit invested with Community First Bank & Trust. The pension
plan does not own any shares of Bancorp common stock.
The following tables set forth information concerning amounts recognized in
Bancorp's nsolidated Balance Sheets and Consolidated Statements of Earnings:
DECEMBER 31,
2000 1999
(Dollars in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 26,536 $ 27,408
Service cost 2,115 1,972
Interest cost 2,007 1,941
Actuarial loss (gain) 1,247 (1,043)
Benefits paid (4,132) (3,742)
-------- --------
Benefit obligation at end of year 27,773 26,536
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 22,898 25,676
Actual return on plan assets 1,427 828
Employer contributions 1,474 136
Benefits paid (4,132) (3,742)
-------- --------
Fair value of plan assets at end of year 21,667 22,898
-------- --------
Funded status (6,106) (3,638)
Unrecognized transition amount (731) (1,036)
Unrecognized prior service cost 1,074 1,327
Unrecognized actuarial loss 2,313 493
-------- --------
NET AMOUNT RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS (ACCRUED BENEFIT LIABILITY) $ (3,450) $ (2,854)
======== ========
FIRST FINANCIAL BANCORP 23 2000 ANNUAL REPORT
26
WEIGHTED-AVERAGE ASSUMPTIONS DECEMBER 31,
2000 1999
Discount rate 7.50% 7.50%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 3.50% 3.50%
COMPONENTS OF NET PERIODIC BENEFIT COST DECEMBER 31,
2000 1999 1998
(Dollars in thousands)
Service cost $ 2,115 $ 1,972 $ 1,769
Interest cost 2,007 1,941 1,811
Expected return on assets (2,000) (2,223) (1,900)
Amortization of transition asset (305) (305) (305)
Amortization of unrecognized prior service cost 252 252 252
------- ------- -------
NET PERIODIC PENSION COST $ 2,069 $ 1,637 $ 1,627
======= ======= =======
Bancorp also sponsors a defined contribution 401(k) thrift plan which
covers substantially all employees. Employees may contribute up to 12.0% of
their base salaries into the plan. Bancorp contributions are at the discretion
of the board of directors. During 2000 and 1999, Bancorp contributed $0.50 for
each $1.00 an employee contributed, up to a maximum Bancorp contribution of
3.00% of the employee's base salary. All Bancorp matching contributions vest
immediately. Total Bancorp contributions to the 401(k) plan were $937,000 during
2000, $775,000 during 1999, and $701,000 during 1998.
NOTE 14 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Some Bancorp subsidiaries maintain health care and, in limited instances,
life insurance plans for current retired employees. Under the current policy,
the health care plans are unfunded and pay medically necessary expenses incurred
by retirees, after subtracting payments by Medicare or other providers and after
stated deductibles have been met. Bancorp has reserved the right to change or
eliminate these benefit plans.
The following table sets forth the funded status and amounts recognized in
Bancorp's Consolidated Balance Sheets:
2000 1999
(Dollars in thousands)
Benefit obligation at beginning of year $ 1,178 $ 1,439
Interest cost 84 96
Plan participants' contributions 23 25
Actuarial loss/(gain) 106 (192)
Benefits paid (192) (190)
------- -------
Benefit obligation at end of year 1,199 1,178
Fair value of plan assets at beginning and end of year 0 0
------- -------
Funded status (1,199) (1,178)
Unrecognized actuarial gain (1,152) (1,370)
Unrecognized prior service cost (25) (29)
------- -------
NET POSTRETIREMENT LIABILITY RECOGNIZED IN THE BALANCE SHEETS $(2,376) $(2,577)
======= =======
Net periodic postretirement benefit cost includes the following components:
Interest cost $ 84 $ 96
Amortization of unrecognized prior service cost (4) (4)
Amortization of actuarial gain (114) (103)
------- -------
NET PERIODIC BENEFIT COST $ (34) $ (11)
======= =======
The discount rate used to determine the accumulated postretirement
benefit obligation was 7.50% at December 31, 2000, and December 31,
1999. The assumed health care cost trend rates used in determining the
accumulated postretirement benefit obligation are shown in the table to the
right.
If the health care cost trend rate assumptions were increased by
1.00%, the accumulated postretirement benefit obligation as of December 31,
2000, would be increased by approximately $99,000.
If the health care cost trend rate assumptions were decreased by
1.00%, the accumulated postretirement benefit obligation as of December 31,
2000, would be decreased by approximately $89,000.
2000 1999
2000 7.30%
2001 6.60% 6.60%
2002 6.00% 6.00%
2003 5.50% 5.50%
2004 5.00% 5.00%
Thereafter 5.00% 5.00%
FIRST FINANCIAL BANCORP 24 2000 ANNUAL REPORT
27
NOTE 15 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
2000 1999 1998
(Dollars in thousands, except per share data)
Net income--numerator for basic and diluted earnings per share -
income available to common stockholders $ 58,222 $ 50,323 $ 50,972
=========== =========== ===========
Denominator for basic earnings per share - weighted average shares 46,452,902 46,848,851 46,984,480
Effect of dilutive securities - employee stock options 82,609 136,931 187,943
----------- ----------- -----------
Denominator for diluted earnings per share - adjusted weighted average shares 46,535,511 46,985,782 47,172,423
=========== =========== ===========
Basic earnings per share $ 1.25 $ 1.07 $ 1.08
=========== =========== ===========
Diluted earnings per share $ 1.25 $ 1.07 $ 1.08
=========== =========== ===========
NOTE 16 - STOCK OPTIONS
The 1991 Stock Incentive Plan provides incentive stock options and stock
awards to certain key employees and non-qualified stock options to directors
of Bancorp who are not employees for up to 1,610,510 common shares of Bancorp.
The options are not exercisable for at least one year from the date of grant and
are thereafter exercisable for such periods (which may not exceed 10 years) as
the board of directors, or a committee thereof, specify, provided that the
optionee has remained in the employment of Bancorp or its subsidiaries. The
board or the committee may accelerate the exercise period for an option upon the
optionee's disability, retirement, or death. All options expire at the end of
the exercise period. Cancelled and expired options become available for issuance
and are reflected in the available for future grant figure. On April 27, 1999,
the shareholders approved the 1999 Stock Incentive Plan which provides for
6,500,000 similar options and awards.
Bancorp has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related interpretations
in accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing stock options. Under APB 25, because the exercise
price of Bancorp's employee stock options equaled the market price of the
underlying stock on the date of grant, no compensation expense was recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if Bancorp had accounted for
its stock options under the fair value method of that statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 2000,
1999, and 1998, respectively: risk-free interest rates of 6.52%, 4.74%, and
5.59%; dividend yields of 3.25%, 2.35%, and 2.45%; volatility factors of the
expected market price of Bancorp's common stock of 0.215, 0.202, and 0.193; and
a weighted average expected life of the options of 3.90, 2.83, and 4.20 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Bancorp's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Bancorp's pro
forma information follows:
2000 1999 1998
(Dollars in thousands, except per share data)
Pro forma net earnings $ 55,778 $ 49,238 $ 50,187
======== ======== ========
Pro forma earnings per share $ 1.20 $ 1.05 $ 1.07
======== ======== ========
Activity in the above plan for 2000, 1999, and 1998 is summarized as follows:
2000 1999 1998
NUMBER OF OPTION NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 742,404 527,780 452,470
Granted 645,725 $17.75-18.75 321,737 $20.23-23.69 209,727 $20.04-22.68
Exercised (23,692) $7.50-11.87 (79,316) $7.72-20.04 (134,417) $7.50-11.86
Cancelled (27,680) $18.44-20.05 (27,797) $23.69
========= ======== ========
OUTSTANDING AT END OF YEAR 1,336,757 $7.50-23.69 742,404 $7.50-23.69 527,780 $7.50-22.68
========= ======== ========
EXERCISABLE AT END OF YEAR 700,607 448,441 318,030
========= ======== ========
AVAILABLE FOR FUTURE GRANT 6,883,246 7,019,241 680,250
========= ======== ========
WEIGHTED-AVERAGE FAIR VALUE OF
OPTIONS GRANTED DURING THE YEAR $ 3.56 $ 3.56 $ 3.89
========= ======== ========
FIRST FINANCIAL BANCORP 25 2000 ANNUAL REPORT
28
NOTE 17 - LOANS TO RELATED PARTIES
Loans to directors, executive officers, principal holders of Bancorp's
common stock and certain related persons totaled $37,331,000 and $33,281,000 at
December 31, 2000, and 1999, respectively.
Activity of these loans was as follows:
2000 1999
(Dollars in thousands)
Beginning balance $33,281 $29,961
Additions 14,988 14,805
Collected 10,938 11,485
Charged off 0 0
------- -------
ENDING BALANCE $37,331 $33,281
======= =======
LOANS 90 DAYS PAST DUE $ 0 $ 0
======= =======
Related parties of Bancorp, as defined above, were customers of and had
transactions with subsidiaries of Bancorp in the ordinary course of business
during the periods noted above. Additional transactions may be expected in the
ordinary course of business in the future. All outstanding loans, commitments,
financing leases, transactions in money market instruments, and deposit
relationships included in such transactions were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others, and did not involve more than a normal
risk of collectibility or present other unfavorable features.
NOTE 18 - SHAREHOLDER RIGHTS PLAN
Bancorp has a "shareholder rights plan" under which the holders of
Bancorp's common stock are entitled to receive one "right" per share held.
Under the plan, each "right" would be distributed only on the 20th business
day after any one of the following events occur: 1) A public announcement that a
person or group has acquired 20 percent or more (an "acquiring person") of
Bancorp's outstanding common shares, 2) The beginning of a tender offer or
exchange offer that would result in a person or group owning 30 percent or more
of the corporation's outstanding common shares, or 3) A declaration by the board
of directors of a shareholder as an "adverse person." (An adverse person is a
person who owns at least 10 percent of the common shares and attempts
"greenmail," or is likely to cause a material adverse impact on Bancorp - such
as impairing customer relationships, harming the company's competitive position,
or hindering the Board's ability to effect a transaction it deems to be in the
shareholders' best interest.)
In the event of such a distribution, each "right" would entitle the holder
to purchase, at an exercise price of $40.91, one share of common stock of the
corporation. Subject to the "exchange option" described below, if a person or
group acquires 30 percent or more of Bancorp's outstanding common shares or is
declared an "adverse person" by the board of directors of the corporation, each
"right" would entitle the holder to purchase, at an exercise price of $40.91, a
number (to be determined under the plan) of shares of common stock of the
corporation at a price equal to 50 percent of its then current market price.
However, any "rights" held by an "acquiring person" or an "adverse person" could
not be exercised.
Additionally, each "right" holder would be entitled to receive common stock
of any acquiring company worth two times the exercise price of the "right,"
should either of the following happen after a person becomes an "acquiring
person": 1) Bancorp is acquired in a merger or other transaction - other than a
merger which the independent directors determine to be in the best interest of
Bancorp and its shareholders, or 2) 50 percent or more of Bancorp's assets or
earning power is sold or transferred.
At any time after any person becomes an "acquiring person" or an "adverse
person," the plan gives Bancorp's board of directors the option (the "exchange
option") to exchange all or part of the outstanding "rights" (except "rights"
held by an "acquiring person" or an "adverse person") for shares of Bancorp's
common stock at an exchange ratio of 0.8 shares of common stock per "right." In
the event that Bancorp's board of directors adopts the "exchange option," each
"right" would entitle the holder thereof to receive 0.8 shares of common stock
per "right." Any partial exchange would be effected pro rata based on the number
of "rights" held by each holder of "rights" included in the exchange.
Bancorp may redeem "rights" for $0.01 per "right" at any time prior to the
20th business day following the date when a person acquires 20 percent of the
outstanding shares. Bancorp may not redeem the "rights" when a holder has become
an "adverse person."
The Board's adoption of this "rights" plan has no financial effect on
Bancorp, is not dilutive to Bancorp shareholders, is not taxable to the
corporation or its shareholders, and will not change the way in which Bancorp
common shares are traded. "Rights" are not exercisable until distributed; and
all "rights" will expire at the close of business on December 6, 2003, unless
earlier redeemed by Bancorp.
FIRST FINANCIAL BANCORP 26 2000 ANNUAL REPORT
29
NOTE 19 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by Bancorp in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments - The carrying amounts reported in the
balance sheet for cash and short-term investments, such as interest-bearing
deposits with other banks and federal funds sold, approximated the fair value of
those instruments.
Investment securities (including mortgage-backed securities) - Fair values
for investment securities were based on quoted market prices, where available.
If quoted market prices were not available, fair values were based on quoted
market prices of comparable instruments. (Refer to Note 8 for further
disclosure.)
Loans - For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values were based on carrying values.
The fair values of other loans and leases, such as commercial real estate and
consumer loans, were estimated by discounting the future cash flows using the
current rates at which similar loans and leases would be made to borrowers with
similar credit ratings and for the same remaining maturities. The carrying
amount of accrued interest approximated its fair value.
Deposit liabilities - The fair value of demand deposits, savings accounts,
and certain money market deposits was the amount payable on demand at the
reporting date. The carrying amounts for variable-rate certificates of deposit
approximated their fair values at the reporting date. The fair value of
fixed-rate certificates of deposit was estimated using a discounted cash flow
calculation which applies the interest rates currently offered for deposits of
similar remaining maturities. The carrying amount of accrued interest
approximated its fair value.
Borrowings - The carrying amounts of federal funds purchased and securities
sold under agreements to repurchase and other short-term borrowings approximated
their fair values. The fair value of long-term borrowings was estimated using a
discounted cash flow calculation which utilizes the interest rates currently
offered for borrowings of similar remaining maturities.
Commitments to extend credit and standby letters of credit - Pricing of
these financial instruments is based on the credit quality and relationship,
fees, interest rates, probability of funding, and compensating balance and other
covenants or requirements. Loan commitments generally have fixed expiration
dates, are variable rate, and contain termination and other clauses which
provide for relief from funding in the event that there is a significant
deterioration in the credit quality of the customer. Many loan commitments are
expected to expire without being drawn upon. The rates and terms of the
commitments to extend credit and the standby letters of credit are competitive
with those in Bancorp's market area. The carrying amounts are reasonable
estimates of the fair value of these financial instruments. Carrying amounts
which are comprised of the unamortized fee income and, where necessary, reserves
for any expected credit losses from these financial instruments, are immaterial.
(Refer to Note 7 for additional information.)
Bancorp does not carry financial instruments which are held or issued for
trading purposes.
The estimated fair values of Bancorp's financial instruments at December 31
were as follows:
2000 1999
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(Dollars in thousands)
Financial assets
Cash and short-term investments $ 189,346 $ 189,346 $ 240,325 $ 240,325
Investment securities held-to-maturity 24,800 25,433 31,765 32,498
Investment securities available-for-sale 564,762 564,762 490,126 490,126
Loans
Commercial 787,436 787,326 769,454 766,457
Real estate-construction 97,571 98,182 111,458 105,154
Real estate-mortgage 1,438,339 1,431,782 1,467,591 1,413,537
Installment, net of unearned income 614,470 616,192 618,957 678,673
Credit card 24,182 24,197 22,408 22,481
Leasing 46,068 46,251 46,508 47,179
Less allowance for loan losses 39,349 39,340
---------- ---------- ---------- ----------
Net loans 2,968,717 3,003,930 2,997,036 3,033,481
Accrued interest receivable 33,580 33,580 30,550 30,550
Financial liabilities
Deposits
Noninterest-bearing 419,878 419,878 408,712 408,712
Interest-bearing demand 306,356 306,356 314,735 314,735
Savings 739,376 739,376 778,405 778,405
Time 1,685,818 1,689,563 1,489,361 1,452,826
---------- ---------- ---------- ----------
Total deposits 3,151,428 3,155,173 2,991,213 2,954,678
Short-term borrowings 146,568 146,568 382,118 382,118
Long-term borrowings 205,216 203,937 161,799 157,169
Accrued interest payable 14,811 14,811 10,825 10,825
FIRST FINANCIAL BANCORP 27 2000 ANNUAL REPORT
30
NOTE 20 - FIRST FINANCIAL BANCORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
DECEMBER 31,
2000 1999
(Dollars in thousands)
ASSETS
Cash $ 22,721 $ 32,200
Investment securities 89 46
Subordinated notes from subsidiaries 7,500 7,500
Investment in subsidiaries
Commercial banks 321,504 286,669
Savings banks 32,884 37,085
-------- --------
Total investment in subsidiaries 354,388 323,754
Bank premises and equipment 1,347 1,426
Other assets 20,555 17,842
-------- --------
TOTAL ASSETS $406,600 $382,768
======== ========
LIABILITIES
Short-term borrowings $ 3,500 $ 0
Dividends payable 6,915 6,980
Other liabilities 1,053 3,249
-------- --------
TOTAL LIABILITIES 11,468 10,229
SHAREHOLDERS' EQUITY 395,132 372,539
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $406,600 $382,768
======== ========
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
2000 1999 1998
(Dollars in thousands)
INCOME
Interest income (other) $ 670 $ 140 $ 57
Dividends from subsidiaries 58,018 38,348 52,974
-------- -------- --------
TOTAL INCOME 58,688 38,488 53,031
EXPENSES
Interest expense 11 0 0
Salaries and employee benefits 2,889 3,211 2,589
Other 1,522 5,683 2,188
-------- -------- --------
TOTAL EXPENSES 4,422 8,894 4,777
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 54,266 29,594 48,254
Income tax benefit (1,119) (1,310) (984)
-------- -------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 55,385 30,904 49,238
Equity in undistributed net earnings of subsidiaries 2,837 19,419 1,734
-------- -------- --------
NET EARNINGS $ 58,222 $ 50,323 $ 50,972
======== ======== ========
FIRST FINANCIAL BANCORP 28 2000 ANNUAL REPORT
31
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
2000 1999 1998
(Dollars in thousands)
OPERATING ACTIVITIES
Net earnings $ 58,222 $ 50,323 $ 50,972
Adjustments to reconcile net earnings to net cash provided by operating activities
Equity in undistributed net earnings of subsidiaries (2,837) (19,419) (1,734)
Provision for depreciation and amortization 471 60 32
Deferred income taxes 38 78 173
(Decrease) increase in dividends payable (65) 465 528
(Decrease) increase in accrued expenses (2,338) 2,251 662
Increase in receivables (2,820) (4,550) (3,261)
-------- -------- --------
Net cash provided by operating activities 50,671 29,208 47,372
INVESTING ACTIVITIES
Subordinated notes from subsidiaries 0 (7,500) 0
Capital contributions to subsidiaries (19,397) (4,200) (1,200)
Purchase of subsidiary 0 0 (13,600)
Purchases of premises and equipment (27) (1,189) (286)
Other 77 84 7
-------- -------- --------
Net cash used in investing activities (19,347) (12,805) (15,079)
FINANCING ACTIVITIES
Increase in short-term borrowings 3,500 0 0
Cash dividends (27,901) (25,570) (21,436)
Purchase of common stock (16,518) 0 (8,773)
Proceeds from exercise of stock options, net of shares purchased 116 780 788
-------- -------- --------
Net cash used in financing activities (40,803) (24,790) (29,421)
-------- -------- --------
(DECREASE) INCREASE IN CASH (9,479) (8,387) 2,872
Cash at beginning of year 32,200 40,587 37,715
-------- -------- --------
CASH AT END OF YEAR $ 22,721 $ 32,200 $ 40,587
======== ======== ========
NOTE 21 - MERGER AND RESTRUCTURING CHARGES
In December 1998, Bancorp announced plans for a merger and restructuring
charge to coincide with its mergers with Sand Ridge Financial Corporation (Sand
Ridge) and Hebron Bancorp, Inc. (Hebron). Bancorp completed these mergers on
June 1, 1999. In the second quarter of 1999, Bancorp recorded merger and
restructuring charges of approximately $6.9 million before taxes or $5.5 million
after taxes.
This merger and restructuring charge consists of two general components.
The first component was for merger related charges of approximately $2.9 million
before taxes, or $2.8 million after taxes, for investment banking and other
professional services specifically associated with the Sand Ridge and Hebron
mergers. Investment banking fees and other professional services such as legal,
accounting, and consulting represented $2.4 million of the $2.9 million pre-tax
merger charge. The remaining approximately $500,000 was incurred primarily for
system conversions and personnel charges. As of December 31, 2000, all the
merger related charges have been paid.
The second component included in the overall merger and restructuring
charges of $5.5 million after taxes relates to restructuring charges for the
planned consolidation of some operational functions including the sale of four
facilities and more effective use of existing properties. Under its
restructuring plan, Bancorp also discontinued its accounts receivable financing
line of business and merged Union Trust Bank, Union City, Indiana, into
Community First Bank & Trust, Celina, Ohio. The restructuring component totaled
approximately $4.0 million before taxes and $2.7 million after taxes.
Of the $4.0 million pre-tax restructuring component, approximately $1.6
million was related to the disposals of properties. The four facilities to be
disposed of were written down to fair value (estimated selling price). As of
December 31, 2000, one property had not yet been sold.
The $4.0 million pre-tax restructuring component also consisted of a $1.1
million provision for loan losses associated with the discontinuance of the
accounts receivable financing line of business. Losses of approximately $996,000
associated with the discontinuance of the accounts receivable financing have
been recognized through December 31, 2000.
Of the $4.0 million component, $1.3 million was related to the
consolidation of operational functions and affiliate restructuring. All but
$12,000 of this accrual had been paid as of December 31, 2000.
Revenues and operating income of activities discontinued are not
significant to Bancorp's operating results.
The table below summarizes the major components of the merger and
restructuring charge. Bancorp expects that the remaining balance will be
utilized during 2001.
MERGER DISPOSALS DISCONTINUED OPERATIONS/AFFILIATE
COSTS OF PROPERTY PRODUCT RESTRUCTURING TOTAL
(Dollars in thousands)
Merger and restructuring charge-June 1999 $2,899 $1,574 $1,100 $1,357 $6,930
Amount paid/written off in 1999 2,680 1,459 933 834 5,906
------ ------ ------ ------ ------
Balance as of December 31,1999 $ 219 $ 115 $ 167 $ 523 $1,024
Amount paid/written off in 2000 219 115 63 511 908
------ ------ ------ ------ ------
Balance as of December 31, 2000 $ 0 $ 0 $ 104 $ 12 $ 116
====== ====== ====== ====== ======
FIRST FINANCIAL BANCORP 29 2000 ANNUAL REPORT
32
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Board of Directors and Shareholders
First Financial Bancorp.
We have audited the accompanying consolidated balance sheets of First
Financial Bancorp. and subsidiaries as of December 31, 2000, and 1999, and the
related consolidated statements of earnings, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts, and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Financial
Bancorp. and subsidiaries at December 31, 2000, and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Cincinnati, Ohio
January 23, 2001
FIRST FINANCIAL BANCORP 30 2000 ANNUAL REPORT
33
QUARTERLY FINANCIAL AND COMMON STOCK DATA (1)
(Unaudited)
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
(Dollars in thousands, except per share data)
2000
Interest income $ 75,767 $ 78,774 $ 80,756 $ 80,231
Interest expense 33,172 35,406 38,306 38,540
-------- -------- -------- --------
Net interest income 42,595 43,368 42,450 41,691
Provision for loan losses 2,361 2,222 2,674 4,043
Noninterest income
Investment securities gains 14 11 12 2
All other 10,138 10,839 11,551 12,394
Noninterest expenses 29,421 30,354 28,743 28,285
-------- -------- -------- --------
Income before income taxes 20,965 21,642 22,596 21,759
Income tax expense 7,095 7,293 7,427 6,925
-------- -------- -------- --------
Net earnings $ 13,870 $ 14,349 $ 15,169 $ 14,834
======== ======== ======== ========
Per share
Net earnings - basic $ 0.30 $ 0.31 $ 0.33 $ 0.32
======== ======== ======== ========
Net earnings - diluted $ 0.30 $ 0.31 $ 0.33 $ 0.32
======== ======== ======== ========
Cash dividends paid $ 0.15 $ 0.15 $ 0.15 $ 0.15
======== ======== ======== ========
Market price
HIGH BID $ 19.75 $ 19.69 $ 19.38 $ 17.00
======== ======== ======== ========
LOW BID $ 15.50 $ 16.75 $ 15.75 $ 14.06
======== ======== ======== ========
1999
Interest income $ 66,938 $ 68,804 $ 72,274 $ 74,382
Interest expense 27,222 27,776 30,269 31,927
-------- -------- -------- --------
Net interest income 39,716 41,028 42,005 42,455
Provision for loan losses 2,532 1,378 2,117 3,205
Noninterest income
Investment securities gains (losses) 55 (8) 9 (6)
All other 10,041 9,999 10,484 10,738
Noninterest expenses 27,667 35,187 28,914 28,893
-------- -------- -------- --------
Income before income taxes 19,613 14,454 21,467 21,089
Income tax expense 6,532 5,739 6,932 7,097
-------- -------- -------- --------
NET EARNINGS $ 13,081 $ 8,715 $ 14,535 $ 13,992
======== ======== ======== ========
Per share
NET EARNINGS - BASIC $ 0.28 $ 0.19 $ 0.31 $ 0.30
======== ======== ======== ========
NET EARNINGS - DILUTED $ 0.28 $ 0.19 $ 0.31 $ 0.30
======== ======== ======== ========
CASH DIVIDENDS PAID $ 0.14 $ 0.14 $ 0.14 $ 0.14
======== ======== ======== ========
Market price
HIGH BID $ 27.55 $ 22.73 $ 21.36 $ 23.56
======== ======== ======== ========
LOW BID $ 19.77 $ 19.09 $ 18.46 $ 18.75
======== ======== ======== ========
First Financial Bancorp. Common stock trades on The Nasdaq Stock Market(R),
under the symbol FFBC.
(1) First Financial Bancorp's per share data and market price information is
stated as if the 10% stock dividends declared in 1999 occurred January 1,
1999.
FIRST FINANCIAL BANCORP 31 2000 ANNUAL REPORT
34
In March of 2000, First Financial Bancorp received approval from the Federal
Reserve to convert from a bank holding company to a financial holding company.
This change makes it possible for the Bancorp to own and operate insurance
agencies and other such financial service firms. As a financial holding company,
Bancorp's first notable action was the acquisition of the Ohio City Insurance
Agency, a firm headquartered in Ohio City, Ohio, which had been leasing space in
two of our retail banking centers since 1997 and offering a variety of insurance
products and services. We will expand the Ohio City operation into other markets
as we see the opportunity.
In a continuing effort to reduce market overlap and improve efficiency, we
consolidated our Home Federal affiliate into First Southwestern in July. This
change leveraged the strength of two affiliate banks and created an even
stronger community partner. As previously discussed, we plan to continue such
strategic moves over the next two years as we transform our company into four
regional financial institutions.
On the operations side of our business, efficiencies continued to increase as
our newest affiliate, First Financial Bancorp Service Corporation, completed its
first full year of operation. At this state-of-the-art processing center, the
Service Corporation has consolidated its operations to include those previously
handled at a satellite center in Celina, Ohio. In the future, the Service
Corporation will support new technologies and the planned migration of all
affiliates to a new common data processing system.
VISION FOR LEADERSHIP
Products and technology are critical success factors; but it's really our people
who make the difference. As an organization, First Financial Bancorp is
fortunate to employ a seasoned team of dedicated and knowledgeable associates -
from branch administration and customer service, to loan specialists and senior
managers.
Our focus on people is exemplified through our Client Connection sales and
service process. In 2000, Client Connection moved forward aggressively with
cross-sales training to prepare associates to consistently identify clients'
needs and provide product and service solutions. Specific sales programs were
implemented and their results tracked. Client Connection has strengthened our
affiliate sales culture by helping to create a confident sales attitude among
our associates, while bringing a heightened level of service to our clients.
Leadership changes also took place this past year, as several individuals who
had an impact on the Bancorp for many years retired. After his retirement from
Union Bank & Trust in January, Nick Filosa was succeeded by Benny McNeely, the
bank's president and chief executive officer. Bob Wyne retired in April as chief
executive officer of our Citizens First affiliate, and Jim Weiseman moved into
that position from his role as president and chief operating officer. In July,
Al Short retired as president and chief executive officer of our Peoples Bank
affiliate. Dave Mackey, who had been president and chief operating officer at
Farmers State Bank, took the helm at Peoples Bank in July and at Farmers State
Bank when Ed Dodson retired as chief executive officer at Farmers in October. We
thank those who served us well through their hard work and tireless efforts.
FOCUS - CLEAR AND PURPOSEFUL
First Financial Bancorp has a strong foundation on which to build. We are poised
to take advantage of the opportunities that lie ahead, and we have a strategic
vision that will strengthen the company and its commitment to its shareholders,
communities, customers, and staff. We have already achieved much, but we can do
more; and we have the talent and dedication of experienced associates to bring
the future into focus.
We appreciate your confidence, your support, and your business.
Sincerely, Sincerely,
/s/ Barry J. Levey /s/ Stanley N. Pontius
Barry J. Levey Stanley N. Pontius
Chairman President and CEO
* Core earnings per share excludes 1999 merger and restructuring costs
associated with the acquisitions of Sand Ridge Bank and Hebron Deposit Bank
and the consolidations of some operational functions, as well as 2000 costs
associated with the merger of two Bancorp affiliates, First National Bank of
Southwestern Ohio and Home Federal Bank, a Federal Savings Bank.