FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.c. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended SEPTEMBER 30, 2001
--------------------------------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-12379
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FIRST FINANCIAL BANCORP.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1042001
---------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 High Street, Hamilton, Ohio 45011
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 867-4700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 2, 2001
---------------------------- -----------------------------------
Common stock, No par value 46,844,427
FIRST FINANCIAL BANCORP.
INDEX
Page No.
--------
Part I-Financial Information
Consolidated Balance Sheets -
September 30, 2001 and December 31, 2000 1
Consolidated Statements of Earnings -
Nine and Three Months Ended September 30, 2001 and 2000 2
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2001 and 2000 3
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II-Other Information
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
PART I - FINANCIAL INFORMATION
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in thousands)
September 30, December 31,
ASSETS 2001 2000
------------ ------------
Cash and due from banks $ 155,532 $ 182,058
Interest-bearing deposits with other banks 17,117 3,248
Federal funds sold and securities purchased
under agreements to resell 31,312 4,040
Investment securities held-to-maturity, at cost
(market value - $22,401 at September 30, 2001 and
$25,433 at December 31, 2000) 21,618 24,800
Investment securities available-for-sale,
at market value 575,513 564,762
Loans
Commercial 789,000 787,436
Real estate-construction 78,280 97,571
Real estate-mortgage 1,350,703 1,438,339
Installment 598,923 618,489
Credit card 21,431 24,182
Lease financing 38,524 46,068
----------- ------------
Total loans 2,876,861 3,012,085
Less
Unearned income 2,659 4,019
Allowance for loan losses 41,168 39,349
----------- ------------
Net loans 2,833,034 2,968,717
Premises and equipment 58,286 58,466
Goodwill 27,748 28,860
Other intangibles 8,849 8,878
Deferred income taxes receivable 0 691
Accrued interest and other assets 90,468 87,992
----------- ------------
TOTAL ASSETS $3,819,477 $3,932,512
=========== ============
LIABILITIES
Deposits
Noninterest-bearing $ 402,878 $ 419,878
Interest-bearing 2,661,759 2,731,550
----------- ------------
Total deposits 3,064,637 3,151,428
Short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase 44,815 53,581
Federal Home Loan Bank borrowings 0 85,500
Other 28,711 7,487
----------- ------------
Total short-term borrowings 73,526 146,568
Long-term borrowings 252,227 205,216
Deferred income taxes payable 3,634 0
Accrued interest and other liabilities 31,484 34,168
----------- ------------
TOTAL LIABILITIES 3,425,508 3,537,380
SHAREHOLDERS' EQUITY
Common stock - no par value
Authorized - 160,000,000 shares
Issued - 48,570,608 in 2001 and 46,927,736 in 2000 396,681 374,336
Retained earnings 17,896 36,225
Accumulated comprehensive income 8,833 1,955
Restricted stock awards (2,818) (866)
Treasury stock, at cost, 1,575,049 in 2001 and 940,610
shares in 2000 (26,623) (16,518)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 393,969 395,132
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,819,477 $3,932,512
=========== ===========
See notes to consolidated financial statements.
1
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share data)
Nine months ended Three months ended
September 30, September 30,
-------------------- -------------------
2001 2000 2001 2000
--------- ---------- --------- ---------
INTEREST INCOME
Loans, including fees $ 194,372 $ 205,882 $ 62,140 $ 70,476
Investment securities
Taxable 20,790 20,752 6,755 7,426
Tax-exempt 5,835 6,395 1,903 2,090
--------- --------- --------- ---------
Total investment interest 26,625 27,147 8,658 9,516
Interest-bearing deposits with
other banks 475 548 190 194
Federal funds sold and securities
purchased under agreements to resell 1,814 170 446 57
--------- --------- --------- --------
TOTAL INTEREST INCOME 223,286 233,747 71,434 80,243
INTEREST EXPENSE
Deposits 88,831 83,982 26,290 30,280
Short-term borrowings 2,634 16,805 633 5,786
Long-term borrowings 9,940 6,097 3,162 2,240
--------- --------- --------- --------
TOTAL INTEREST EXPENSE 101,405 106,884 30,085 38,306
--------- --------- --------- --------
NET INTEREST INCOME 121,881 126,863 41,349 41,937
Provision for loan losses 16,261 7,257 5,206 2,674
--------- --------- --------- --------
Net interest income after
provision for loan losses 105,620 119,606 36,143 39,263
NONINTEREST INCOME
Service charges on deposit accounts 15,075 13,866 5,066 4,912
Trust income 11,579 10,782 3,701 3,611
Investment securities gains 198 37 8 12
Other 12,444 10,409 4,027 3,926
--------- ---------- -------- ---------
Total noninterest income 39,296 35,094 12,802 12,461
NONINTEREST EXPENSES
Salaries and employee benefits 48,772 48,600 16,892 15,455
Net occupancy expenses 5,679 5,547 1,776 1,871
Furniture and equipment expenses 4,741 4,791 1,488 1,620
Data processing expenses 5,294 5,434 1,655 1,651
Deposit insurance expense 457 386 156 124
State taxes 1,485 1,833 479 602
Amortization of intangibles 2,012 2,531 662 837
Merger and restructuring 0 (353) 0 0
Other 22,054 20,728 7,552 6,968
--------- --------- -------- ---------
Total noninterest expenses 90,494 89,497 30,660 29,128
--------- --------- -------- --------
Income before income taxes 54,422 65,203 18,285 22,596
Income tax expense 18,466 21,815 6,173 7,427
--------- --------- -------- --------
NET EARNINGS $ 35,956 $ 43,388 $ 12,112 $ 15,169
========= ========= ======== ========
Net earnings per share-basic $ 0.75 $ 0.89 $ 0.26 $ 0.31
========= ========= ======== ========
Net earnings per share-diluted $ 0.75 $ 0.89 $ 0.26 $ 0.31
========= ========= ======== ========
Cash dividends declared per share $ 0.45 $ 0.42 $ 0.15 $ 0.14
========= ========= ======== ========
Average basic shares outstanding 47,643,081 48,871,178 47,206,438 48,628,936
========== ========== ========== ==========
Average diluted shares outstanding 47,832,478 48,962,105 47,260,724 48,716,094
========== ========== ========== ==========
See notes to consolidated financial statements.
2
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)
Nine months ended
September 30,
-----------------------
2001 2000
---------- ----------
OPERATING ACTIVITIES
Net earnings $ 35,956 $ 43,388
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 16,261 7,257
Provision for depreciation and amortization 6,623 7,384
Net amortization of investment security
premiums and accretion of discounts (74) (379)
Realized investment security gains (198) (37)
Originations of mortgage loans held for sale (137,152) (148,324)
Gains from sales of mortgage loans held for sale (2,021) (754)
Proceeds from sale of mortgage loans held for sale 137,629 148,406
Deferred income taxes 254 (157)
Decrease (increase) in interest receivable 2,928 (3,135)
Increase in cash surrender value of life insurance (1,233) (5,927)
Increase in prepaid expenses 78 (1,213)
(Increase) decrease in accrued expenses 785 (806)
(Decrease) increase in interest payable (4,091) 2,975
Other (1,156) (2,711)
---------- ----------
Net cash provided by operating activities 54,589 45,967
INVESTING ACTIVITIES
Proceeds from calls, paydowns and maturities of
investment securities available-for-sale 159,983 42,969
Purchases of investment securities available-for-sale (159,715) (65,236)
Proceeds from calls, paydowns and maturities of
investment securities held-to-maturity 7,909 6,707
Purchases of investment securities held-to-maturity (4,520) (3,005)
Net (increase) decrease in interest-bearing deposits
with other banks (13,869) (6,623)
Net increase in federal funds sold and securities
purchased under agreements to resell (27,272) 2,974
Net decrease (increase) in loans and leases 114,989 (78,036)
Recoveries from loans and leases previously charged off 2,104 1,775
Proceeds from disposal of other real estate owned 1,204 2,035
Purchases of premises and equipment (4,235) (4,309)
---------- ----------
Net cash provided by (used in) investing activities 76,578 (100,749)
FINANCING ACTIVITIES
Net (decrease) increase in total deposits (86,791) 91,206
Net (decrease) increase in short-term borrowings (73,042) (66,334)
Net increase in long-term borrowings 47,011 4,979
Cash dividends declared (21,395) (20,987)
Purchase of common stock (23,493) (11,831)
Proceeds from exercise of stock options, net of shares
purchased 17 108
---------- ----------
Net cash (used in) provided by financing activities (157,693) (2,859)
---------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (26,526) (57,641)
Cash and cash equivalents at beginning of period 182,058 225,837
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 155,532 $ 168,196
========== ===========
3
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited, dollars in thousands)
<Table>
<Caption>
Nine months ended
September 30,
------------------------
2001 2000
----------- -----------
Supplemental disclosures
Interest paid $105,496 $103,910
========== ===========
Income taxes paid $ 17,781 $ 24,746
========== ===========
Recognition of deferred tax liabilities
attributable to FASB Statement No. 115 $ (4,071) $ 1,612
========== ===========
Acquisition of other real estate owned through
foreclosure $ 2,329 $ 1,389
========== ===========
Issuance of restricted stock award $ 2,826 $ 773
========== ===========
Securitization of loans $ 0 $ 40,737
========== ===========
</Table>
See notes to consolidated financial statements.
4
FIRST FINANCIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited, dollars in thousands)
<Table>
<Caption>
Nine months ended
September 30,
-----------------------------
2001 2000
----------- ------------
Balances at January 1, as restated $ 395,132 $ 372,539
Net earnings 35,956 43,388
Other comprehensive income, net of taxes:
Changes in unrealized gains on securities,
Available for sale 6,878 2,577
----------- ------------
Comprehensive income 42,834 45,965
Cash dividends declared (21,395) (20,987)
Purchase of common stock (23,493) (11,831)
Exercise of stock options, net of shares purchased 75 108
Restricted stock award (58) 0
Amortization of restricted stock awards 874 237
----------- ------------
Balance at December 31 $ 393,969 $ 386,031
=========== ============
</Table>
See notes to consolidated financial statements.
5
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
The consolidated financial statements for interim periods are unaudited;
however, in the opinion of the management of First Financial Bancorp.
("Bancorp"), all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation have been included.
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements of Bancorp, a financial holding company,
include the accounts of Bancorp and its wholly-owned subsidiaries - First
National Bank of Southwestern Ohio, Community First Bank & Trust, Indiana
Lawrence Bank, Fidelity Federal Savings Bank, Citizens First State Bank, Union
Bank & Trust Company, The Clyde Savings Bank Company, Peoples Bank and Trust
Company, Bright National Bank, Farmers State Bank, National Bank of Hastings,
Vevay Deposit Bank, Sand Ridge Bank, Hebron Deposit Bank, First Financial
Bancorp Service Corporation, and Flagstone Insurance Agency. All significant
intercompany transactions and accounts have been eliminated in consolidation.
Intangible assets arising from the acquisition of subsidiaries are being
amortized over varying periods, none of which exceeds 25 years. Core deposit
balances are being amortized over varying periods, none of which exceeds 10
years.
During the first nine months of 2001, Bancorp proceeded with a multi-phased
regionalization strategy which will consolidate its fourteen current banking
affiliates into four regional financial institutions. This plan, announced
January 25, 2001, will continue throughout 2001 and 2002. It is management's
expectation that the cost for this undertaking will dilute 2001 earnings per
share by approximately five cents. 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 November of
2001 when four of the holding company's financial institutions in southeastern
Indiana (Peoples Bank and Trust Company, Sunman; Farmers State Bank, Liberty;
Union Bank & Trust Company, North Vernon; and Vevay Deposit Bank, Vevay) will
merge under the new name, Heritage Community Bank.
The accompanying financial statements have been prepared in accordance with the
instructions for Form 10-Q and, therefore, do not include all information and
footnotes necessary to be in conformity with generally accepted accounting
principles.
Certain credit card and merchant fees have been reclassified from net interest
income into noninterest income and noninterest expense. While the amounts
reclassified are not material, Bancorp initiated this reclassification based on
a survey of peers and best industry practices available in order to provide the
most comparable data. This change began in 2001, and all prior periods have been
restated, including appropriate ratios, to reflect these reclassifications.
On February 27, 2001, the Board of Directors approved a 5% stock dividend,
issued to shareholders of record as of March 9, 2001 and distributed April 2,
2001. All per share amounts have been restated for all periods presented.
6
Under a previously approved program to repurchase common shares to satisfy
restricted stock awards and stock options, Bancorp repurchased 276,000 shares
and under an additional previously approved program for general corporate
purposes, Bancorp repurchased 1,171,800 shares during the first nine months of
2001.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combination, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives, if any, will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
Bancorp will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of $1,172,000 ($0.02 per share) per year. During 2002, Bancorp
will perform the first of the required impairment tests of goodwill and
intangible assets with indefinite lives, if any, as of January 1, 2002 and has
not yet determined what the effect of these tests will be on the earnings and
financial position of Bancorp.
NOTE 2: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, Bancorp offers a variety of financial
instruments with off-balance sheet risk to its customers to aid them in meeting
their requirements for liquidity and credit enhancement and to reduce its own
exposure to fluctuations in interest rates. These financial instruments include
standby letters of credit and commitments outstanding to extend credit.
Generally accepted accounting principles do not require these financial
instruments to be recorded in the consolidated financial statements, and
accordingly, they are not. As of September 30, 2001, 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.
Bancorp's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for standby letters of credit and commitments
outstanding to extend credit is represented by the contractual amounts of those
instruments. Bancorp uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. Following
is a discussion of these transactions.
Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a customer to a third party. Bancorp's portfolio of
standby letters of credit consists primarily of performance assurances made on
behalf of customers who have a contractual commitment to produce or deliver
goods or services. The risk to Bancorp arises from its obligation to make
payment in the event of the customers' contractual default. As of September 30,
2001, Bancorp had issued standby letters of credit aggregating $27,274,000
compared to $26,813,000 issued as of December 31, 2000. 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.
7
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Bancorp evaluates each customer's creditworthiness on an
individual basis. The amount of collateral obtained, if deemed necessary by
Bancorp upon extension of credit, is based on management's credit evaluation of
the counterparty. The collateral held varies, but may include securities, real
estate, inventory, plant, or equipment. Bancorp had commitments outstanding to
extend credit totaling $479,439,000 at September 30, 2001 and $484,894,000 at
December 31, 2000. Management does not anticipate any material losses as a
result of these commitments.
NOTE 3: COMPREHENSIVE INCOME
Bancorp discloses comprehensive income in the "Consolidated Statements of
Changes in Shareholders' Equity". Disclosure of the reclassification adjustments
for the nine months ended September 30, 2001 and 2000 are shown in the table
below.
<Table>
<Caption>
Nine months ended
September 30,
----------------------------
2001 2000
------------ ------------
(Dollars in thousands)
NET INCOME $35,956 $43,388
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising
during period 7,002 2,629
Less: reclassification adjustment
for gains included in net income 124 52
---------- ----------
Other comprehensive income (loss) 6,878 2,577
---------- ----------
COMPREHENSIVE INCOME $42,834 $45,965
========== ==========
</Table>
NOTE 4: SUBSEQUENT EVENT
On October 17, 2001, First Financial Bancorp entered into an agreement with Blue
River Bancshares, Inc., to purchase certain assets and assume certain
liabilities of a division of Blue River operating under the name First Community
Bank of Fort Wayne, Indiana. This division has assets of approximately $25
million with two branch locations in Fort Wayne. Subject to regulatory approval
and upon consummation, these branches will operate as part of Bancorp's
Community First Bank & Trust affiliate.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
2001 2000
------------------------------------ -----------------------
Sep. 30 Jun. 31 Mar. 31 Dec. 31 Sep. 30
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Net earnings $ 12,112 $ 9,831 $ 14,013 $ 14,834 $ 15,169
Net earnings per share-basic (a) 0.26 0.21 0.29 0.31 0.31
Net earnings per share-diluted (a) 0.26 0.21 0.29 0.31 0.31
Net earnings per share-diluted-cash basis (a)(b) 0.27 0.21 0.30 0.32 0.32
Average consolidated balance sheet items:
Loans less unearned income 2,890,307 2,934,168 2,988,791 3,045,340 3,087,025
Investment securities 591,386 586,151 582,627 585,968 587,117
Other earning assets 66,161 126,961 22,169 13,177 15,358
---------- ---------- --------- --------- ----------
Total earning assets 3,547,854 3,647,280 3,593,587 3,644,485 3,689,500
Total assets 3,825,105 3,917,884 3,866,043 3,927,920 3,980,154
Deposits 3,072,824 3,175,336 3,117,272 3,132,501 3,032,342
Shareholders' equity 396,384 395,114 394,882 390,866 380,200
Key Ratios
Average equity to average total assets 10.36% 10.08% 10.21% 9.95% 9.55%
Return on average total assets 1.26% 1.01% 1.47% 1.50% 1.52%
Return on average equity 12.12% 9.98% 14.39% 15.10% 15.87%
Net interest margin (fully tax equivalent) 4.74% 4.53% 4.69% 4.61% 4.65%
(a) All per share data has been restated for a 5% stock dividend declared
February 27, 2001.
(b) Excluding the effect of amortization of goodwill and core deposits, tax
effected when applicable. the cash basis calculations were specifically
formulated by bancorp and may not be comparable to similarly titled
measures reported by other companies.
NET INTEREST INCOME
Net interest income, the principal source of earnings, is the amount by which
interest and fees generated by earning assets exceed the interest costs of
liabilities obtained to fund them. For analytical purposes, interest income
presented in the table below has been adjusted to a tax equivalent basis
assuming a 35% marginal tax rate for interest earned on tax-exempt assets such
as municipal loans, tax-free leases, and investments. This is to recognize the
income tax savings which facilitates a comparison between taxable and tax-exempt
assets. Net interest income on a fully tax equivalent basis decreased 1.65% for
the quarter ended September 30, 2001 compared to the same period in 2000. Since
the third quarter of 2000, net interest income was effected by a dramatic drop
in interest rates, as well as the softening of commercial and installment loan
demand. In contrast, residential real estate loan demand remained high due to
refinancing activity into lower fixed-rate loans. At this point in the
interest-rate cycle, Bancorp's current strategy is to sell the majority of these
mortgage loans while retaining the servicing and customer relationships.
Interest expense decreased as a result of the decline in interest rates and the
strategy to allow for runoff of some higher-priced deposits, given a decline in
loan demand. From a linked quarter basis (third quarter 2001 compared to second
quarter 2001) net interest income on a fully tax equivalent basis increased
$1,245,000 or 3.02%. The increase in linked quarter net interest income was due
to the lagged impact of the repricing of time deposits and a shift out of
lower-margin assets.
9
Quarter Ended
2001 2000
----------------------------- ------------------
Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30
------- ------- ------- ------- -------
(Dollars in thousands)
Interest income $71,434 $74,853 $76,999 $79,556 $80,243
Interest expense 30,085 34,766 36,554 38,540 38,306
------- ------- ------- ------- -------
Net interest income 41,349 40,087 40,445 41,016 41,937
Tax equivalent adjustment to interest income 1,083 1,100 1,137 1,213 1,205
------- ------- ------- ------- -------
Net interest income (fully tax equivalent) $42,432 $41,187 $41,582 $42,229 $43,142
======= ======= ======= ======= =======
RATE/VOLUME ANALYSIS
The impact of changes in volume and interest rates on net interest income is
illustrated in the table below. As shown, the dramatic decrease in market
interest rates had a significant effect on Bancorp's rates impacting both
interest income and interest expense for the nine months ended September 30,
2001 in comparison to 2000. The decrease in volume of earning assets had a
negative impact on net interest income for the same period partially offset by
lower interest-bearing liabilities. For the three month period, the decrease in
volume of earning assets had a more significant impact than the decrease in
interest-bearing liabilities. The decline in rates effected interest income less
than interest expense thus somewhat offsetting the decline due to volume. The
change in interest due to the combined effect of both rate and volume has been
allocated to the volume and rate variance on a prorated basis.
Nine Months Three Months
Ended Ended
September 30, 2001 Change Due To: September 30, 2001 Change Due To:
------------------- --------------------
Over 2000 Rate Volume Over 2000 Rate Volume
------------- -------- -------- -------------- --------- ---------
(Dollars in thousands) (Dollars in thousands)
Interest income $ (10,461) $ (6,373) $ (4,088) $ (8,809) $ (5,806) $ (3,003)
Interest expense (5,479) (2,449) (3,030) (8,221) (6,327) (1,894)
---------- --------- --------- ------------ -------- ---------
Net interest income $ (4,982) $ (3,924) $ (1,058) $ (588) $ 521 $ (1,109)
========== ========= ========= ============= ========= =========
OPERATING RESULTS
Net operating income represents net earnings before net securities transactions.
Net operating income for the first nine months of 2001 was $35,832,000 which was
a decrease of $7,504,000 or 17.3% from that reported in the same period in 2000.
The decrease in net operating income can be primarily attributed to the increase
in the provision for loan losses of $9,004,000 as well as the decline in the net
interest income of $4,983,000. The provision expense exceeded net charge-offs by
$1,819,000 for the first nine months of 2001, which contributed to Bancorp's
reserve to loan ratio increasing to 1.43% from the year-end 2000 ratio of 1.31%.
The decrease in net operating income was offset by an increase in noninterest
income of $4,202,000 or 12.0% for the nine months of 2001 compared to the same
period in 2000. All noninterest income areas increased. Service charges on
deposit accounts continued its strong growth with a 8.72% increase over 2000, as
well as trust fees with a 7.39% increase. Investment securities gains increased
from $37,000 to $198,000 as a result of called securities. The "other" category
of noninterest income increased 19.6% over the same period in 2000. The increase
in other income is a result of increased gains on loan sales, credit insurance
sales, and third-party mutual fund income. Noninterest expense increased
$996,000 or approximately 1.11%. Core expense numbers have remained relatively
flat as Bancorp realized savings associated with the in-market consolidation of
two affiliates, First National Bank of Southwestern Ohio and Home Federal Bank,
a Federal Savings Bank. Adjusting for merger and restructuring expenses in 2000
and Project Renaissance in 2001, noninterest expenses increased approximately
$194,000 or 0.20%.
10
Third quarter total noninterest expense was slightly higher than the linked
quarter due to the recognition of some Project Renaissance expenses. Project
Renaissance expenses in the category of salaries and employees benefits for the
quarter were approximately $700,000 and related to severance and salary expenses
related to the project. Lower net occupancy and furniture and equipment expenses
on a linked-quarter basis were primarily the result of the discontinuation of
Bancorp's finance company.
INCOME TAXES
For the first nine months of 2001, income tax expense was $18,466,000 compared
to $21,815,000 for the same period in 2000, or a decrease of $3,349,000. In
2001, $18,392,000 of the tax expense was related to operating income with a tax
expense of $74,000 related to securities transactions. In the first nine months
of 2000, income tax expense related to operating income was $21,830,000, with a
tax benefit related to securities transactions of $15,000.
Income tax expense for the third quarter of 2001 was $6,173,000, a decrease of
$1,254,000 when compared to $7,427,000 reported for the same period in 2000. Tax
expense relating to operating income totaled $5,349,000 and $7,423,000 for the
quarters ended September 30, 2001 and 2000, respectively, with a tax expense
related to securities transactions of $12,000 for 2001 and $14,000 for 2000.
NET EARNINGS
Net earnings for the first nine months of 2001 were $35,956,000 or $0.75 in
diluted earnings per share compared to $43,388,000 or $0.89 in diluted earnings
per share for the same period in 2000. Net securities gains through September
30, 2001 were $124,000 compared to $52,000 for the period ending September 30,
2001.
Net earnings for the third quarter of 2001 were $12,112,000 or $0.26 in diluted
earnings per share versus $15,169,000 or $0.31 for the third quarter of 2000.
Net securities gains for the third quarter of 2001 and 2000 were $6,000 and
$8,000, respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on Bancorp's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.
The loan loss provision totaled $5,206,000 for the third quarter and $16,261,000
for the first nine months of 2001. This compares to $2,674,000 and $7,257,000
for the corresponding periods in 2000. Provision expense exceeded net chargeoffs
by $1,819,000 in the first nine months of 2001, contributing to Bancorp's
increasing the reserve to loan ratio to 1.43% in the third quarter of 2001 from
1.32% in September of 2000. Bancorp will continue to closely monitor the quality
of its loan portfolio and respond accordingly.
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At September 30, 2001 and 2000, the recorded investment in loans that are
considered to be impaired under FASB Statement No. 114 was $2,117,000 and
$6,547,000, respectively, all of which were on a nonaccrual basis. The related
allowance for loan losses on these impaired loans was $1,600,000 at September
30, 2001 and $3,222,000 at September 30, 2000. At September 30, 2001 and 2000,
there were $335,000 and $35,000, respectively, of impaired loans that did not
have an allowance for loan losses. The average recorded investment in impaired
loans for the nine months ended September 30, 2001 and 2000, was approximately
$4,894,000 and $5,228,000. The average recorded investment in impaired loans for
the quarter ended September 30, 2001 and 2000, was approximately $3,606,000 and
$3,299,000. For the nine months and quarter ended September 30, 2001, Bancorp
recognized interest income on those impaired loans of $132,000 and $14,000
compared to $58,000 and $20,000 for the same periods in 2000. Bancorp recognizes
income on impaired loans using the cash basis method. The table that follows
indicates the activity in the allowance for loan losses for the quarters
presented.
Quarter Ended
2001 2000
---------------------------------- --------------------
Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30
-------- -------- ------- -------- --------
(Dollars in thousands)
Balance at beginning of period $ 40,642 $ 39,541 $ 39,349 $ 40,487 $ 40,238
Provision for loan losses 5,206 8,527 2,528 4,043 2,674
Loans charged off (5,675) (7,985) (2,886) (5,759) (2,993)
Recoveries 995 559 550 578 568
--------- --------- --------- --------- ---------
Net charge offs (4,680) (7,426) (2,336) (5,181) (2,425)
--------- --------- --------- --------- ---------
Balance at end of period $ 41,168 $ 40,642 $ 39,541 $ 39,349 $ 40,487
========= ========= ========= ========= =========
Ratios:
Allowance to period end loans,
Net of unearned income 1.43% 1.40% 1.33% 1.31% 1.32%
Recoveries to charge offs 17.53% 7.00% 19.06% 10.04% 18.98%
Allowance as a multiple of
Net charge offs 8.80x 5.47x 16.93x 7.59x 16.70x
NONPERFORMING/UNDERPERFORMING ASSETS
The table on the following page shows the categories which are included in
nonperforming and underperforming assets.
Nonaccrual loans as of September 30, 2001 have increased over prior periods
indicative of the effects of a softening economy. While Bancorp's level of
nonperforming assets is in-line with its peers, management remains cautious
about the continued effects of the economic slowdown. Nonperforming assets do
not consist of any one large credit or groups of credits or concentrations in
any particular industry. Nonaccrual loans are composed primarily of commercial,
multi-family and 1-4 family residential properties. Accruing loans past due 90
days or more increased $921,000. Accruing loans, including loans impaired under
FASB Statement No. 114, which are past due 90 days or more where there is not a
likelihood of becoming current are transferred to nonaccrual loans. However,
those loans which management feels will become current and therefore accruing
are classified as "Accruing loans 90 days or more past due" until they become
current. With a general slowdown in the economy and considerable discussion
about credit quality in the financial services industry, Bancorp will continue
to closely monitor the quality of its loan portfolio.
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Quarter Ended
2001 2000
------------------------------- -------------------
Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30
------- ------- ------- ------- -------
(Dollars in thousands)
Nonaccrual loans $22,534 $17,341 $16,489 $17,346 $16,480
Restructured loans 666 953 79 265 721
Other real estate owned 2,053 1,684 1,013 1,075 919
------- ------- ------- ------- -------
Total nonperforming assets 25,253 19,978 17,581 18,686 18,120
Accruing loans past due
90 days or more 3,246 2,325 3,822 2,414 5,093
------- ------- ------- ------- -------
Total underperforming assets $28,499 $22,303 $21,403 $21,100 $23,213
======= ======= ======= ======= =======
Nonperforming assets as a percent
of loans, net of unearned income
plus other real estate owned 0.88% 0.69% 0.59% 0.62% 0.59%
======= ======= ======= ======= =======
Underperforming assets as a percent
of loans, net of unearned income
Plus other real estate owned 0.99% 0.77% 0.72% 0.70% 0.76%
======= ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management is the process by which Bancorp provides for the continuing
flow of funds necessary to meet its financial commitments on a timely basis.
These commitments include withdrawals by depositors, funding credit commitments
to borrowers, shareholder dividends, paying expenses of operations, and funding
capital expenditures.
Liquidity is derived primarily from deposit growth, maturing loans, the maturity
of investment securities, access to other funding sources and markets, and a
strong capital position. 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. Total year-to-date average deposits are up 3.36% from the
prior year. Quarterly average deposits are up slightly from the linked quarter
and the same quarter last year. Short-term borrowings decreased $73,042,000 from
year end, while long-term borrowings increased $47,011,000 in conjunction with
asset/liability management strategies.
The principal source of asset-funded liquidity is marketable investment
securities, particularly those of shorter maturities. At September 30, 2001,
securities maturing in one year or less amounted to $69,517,000, representing
11.64% of the total of the investment securities portfolio. In addition, other
types of assets such as cash and due from banks, federal funds sold and
securities purchased under agreements to resell, as well as loans and
interest-bearing deposits with other banks maturing within one year, are sources
of liquidity. Total asset-funded sources of liquidity at September 30, 2001,
amounted to $748,815,000, representing 19.61% of total assets. Sources of
long-term asset funded liquidity are derived from the maturity of investment
securities and maturing loans in excess of one year.
At September 30, 2001, Bancorp had classified $575,513,000 in investment
securities available-for-sale. Management examines Bancorp's liquidity needs in
establishing this classification in accordance with the Financial Accounting
Standards Board Statement No. 115 on accounting for certain investments in debt
and equity securities.
Liquidity is very important and as such is both monitored and managed closely by
the asset/liability committee at each affiliate. Liquidity may be used to fund
capital expenditures. Capital expenditures were $4,235,000 for the first nine
months of 2001. In addition, remodeling is a planned and ongoing process given
the 110 offices of Bancorp and its subsidiaries. Material commitments for
capital expenditures as of September 30, 2001 were approximately $365,000.
Management believes that Bancorp has sufficient liquidity to fund its current
commitments.
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CAPITAL ADEQUACY
The Federal Reserve established risk-based capital requirements for U.S. banking
organizations which have been adopted by the Office of Thrift Supervision for
savings and loan associations. Risk weights are assigned to on-and off-balance
sheet items in arriving at risk-adjusted total assets. Regulatory capital is
divided by risk-adjusted total assets, with the resulting ratios compared to
minimum standards to determine whether a bank has adequate capital.
Regulatory guidelines require a 4.00% Tier 1 capital ratio and an 8.00% total
risk-based capital ratio. A minimum 3.00% Leverage ratio is required for bank
holding companies that either are rated composite "1" under the BOPEC rating
system or have implemented the Board's risk-based capital market risk measure.
The minimum leverage ratio for all other bank holding companies is 4.0%. Tier 1
capital consists primarily of common shareholders' equity, net of certain
intangibles, and total risked-based capital is Tier 1 capital plus Tier 2
supplementary capital, which is primarily the allowance for loan losses subject
to certain limits. The leverage ratio is a result of Tier 1 capital divided by
average total assets less certain intangibles.
Bancorp's Tier I ratio at September 30, 2001, was 12.6%, its total risked-based
capital was 13.8% and its leverage ratio was 9.28%. While Bancorp subsidiaries'
ratios are well above regulatory requirements, management will continue to
monitor the asset mix which affects these ratios due to the risk weights
assigned various assets, and the allowance for loan losses, which influences the
total risk-based capital ratio.
The table below illustrates the risk-based capital calculations and ratios for
the last five quarters.
Quarter Ended
2001 2000
------------------------------------ -----------------------
Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30
---------- ---------- --------- ---------- ----------
Tier I Capital: (Dollars in thousands)
Shareholder's equity $ 393,969 $ 392,717 $ 396,566 $ 395,132 $ 386,031
Less: Intangible assets 33,066 33,690 34,326 34,957 35,675
Less: Unrealized net securities
gains (losses) 8,832 5,506 5,819 1,955 (3,821)
---------- ---------- ---------- ---------- ----------
Total Tier I Capital $ 352,071 $ 353,521 $ 356,421 $ 358,220 $ 354,177
========== ========== ========== ========== ==========
Total Risk-based Capital:
Tier I Capital $ 352,071 $ 353,521 $ 356,421 $ 358,220 $ 354,177
Qualifying allowance for loan losses 35,082 35,294 35,745 35,945 36,578
---------- ---------- ---------- --------- ----------
Total Risk-based Capital $ 387,153 $ 388,815 $ 392,166 $ 394,165 $ 390,755
========== ========== ========== ========== ==========
Risk Weighted Assets $2,800,521 $2,818,162 $2,855,829 $2,872,181 $2,922,338
========== ========== ========== ========== ==========
Risk-based Ratios:
Tier I 12.57% 12.54% 12.48% 12.47% 12.12%
========== ========== ========== ========== ==========
Total Risk-based Capital 13.82% 13.80% 13.73% 13.72% 13.37%
========== ========== ========== ========== ==========
Leverage 9.28% 9.10% 9.30% 9.20% 8.98%
========== ========== ========== ========== ==========
FORWARD-LOOKING INFORMATION
The Form 10-Q should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in the report and in the First
Financial Bancorp. Annual Report on Form 10-K for the year ended December 31,
2000.
Management's analysis may contain forward-looking statements that are provided
to assist in the understanding of anticipated future financial performance.
However, such performance involves
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risks and uncertainties which may cause actual results to differ materially.
Factors that could cause actual results to differ from those discussed in the
forward looking statements include, but are not limited to, the strength of the
local economies in which operations are conducted, the effects of and changes in
policies and laws of regulatory agencies, inflation, and interest rates. For
further discussion of certain factors that may cause such forward-looking
statements to differ materially from actual results, refer to the 2000 Form
10-K.
ACCOUNTING AND REGULATORY MATTERS
Management is not aware of any other events or regulatory recommendations which,
if implemented, are likely to have a material effect on Bancorp's liquidity,
capital resources, or operations.
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PART II-OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
During the quarter ended September 30, 2001, the registrant did not
file any reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST FINANCIAL BANCORP.
-------------------------
(Registrant)
/s/ Michael R. O'Dell /s/ C. Douglas Lefferson
- ---------------------------------- ----------------------------------
Michael R. O'Dell, Senior Vice C. Douglas Lefferson
President, Chief Financial Comptroller
Officer and Secretary (Principal Accounting Officer)
Date November 8, 2001 Date November 8, 2001
----------------------------- -----------------------------
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