Exhibit 13
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, 2001, Bancorp owned thirteen subsidiaries located in western
Ohio, Indiana, northern Kentucky, and southern Michigan. These subsidiaries
include ten commercial banks, one savings bank, a service corporation, and an
insurance agency.
On January 25, 2001, Bancorp announced that its board of directors had
approved a multi-year plan (Project Renaissance) to focus on regionalization and
market expansions designed to increase long-term shareholder value. This
multi-phased regionalization strategy will consolidate Bancorp's current banking
affiliates into four regional financial institutions.
The first of Bancorp's new regional affiliates was formed in November
of 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) were
merged under the new name, Heritage Community Bank. The new $350 million
southeastern Indiana entity encompasses 15 offices, serving 38,000 customers in
10 counties.
Bancorp plans to merge its 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) under the name, Community First Bank & Trust.
Management's initial intent in Project Renaissance was to form each
region by simultaneously converting the computer systems and merging the banks
involved. This strategy worked for the formation of our first regional bank,
Heritage Community Bank. However, for the Community First region, the regulatory
approval timelines for the merger did not align with the system conversion
timelines. Therefore, the Community First system conversion will be completed
separately in the second quarter of 2002, and the merger of the banks will occur
in either late-2002 or mid-2003.
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.
Designed to serve northwestern Indiana and southern Michigan, the
fourth phase of the project will be the merger of Sand Ridge Bank, Highland,
Indiana; Bright National Bank, Flora, Indiana; and National Bank of Hastings,
Hastings, Michigan.
Bancorp plans to disclose additional details concerning each of the
regionalization phases as appropriate.
On October 4, 2001, Bancorp's Ohio City Insurance Agency began
operating under a new name, Flagstone Insurance and Financial Services.
On May 23, 2001, Bancorp announced plans to discontinue its finance
company, Community First Finance. During its five-year existence, the finance
company grew to $14 million in net loans. Even so, the venture proved to be very
labor-intensive and did not meet net earnings expectations. As Community First
Finance's outstanding loan receivables are reduced through payoffs and routine
monthly consumer payments, Bancorp plans to redeploy the funds into alternatives
with higher total returns.
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.
Bancorp repurchased 276,000 shares of its common stock during 2001
under a previously approved program to satisfy restricted stock awards and stock
options. Under an additional previously approved and ongoing program for general
corporate purposes, Bancorp repurchased 1,571,500 shares during 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 December 31, 2001, Bancorp completed its purchase of certain assets
and assumption of certain liabilities of a division of Blue River Bancshares,
Inc. operating under the name First Community Bank of Fort Wayne, Indiana. This
division has assets of approximately $30 million with two branch locations in
Fort Wayne which are now operating as part of Bancorp's Community First Bank &
Trust affiliate.
OVERVIEW OF OPERATIONS
Bancorp's net earnings decreased 25.6% to $43,309,000 in 2001, compared
to net earnings of $58,222,000 in 2000. Bancorp's diluted earnings per share
decreased 23.5% to $0.91, from $1.19 in 2000. Core net earnings decreased 20.6%
to $46,481,000 versus core net earnings of $58,508,000 in 2000. Core net
earnings excludes one-time expenses associated with Project Renaissance,
Bancorp's regionalization and expansion plan, 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. Core diluted net earnings
per share decreased 18.3% to $0.98 in 2001, compared to $1.20 in 2000.
Bancorp's earnings for 2001 were impacted by a dramatic drop in
interest rates and a slowing economy, in addition to its anticipated
regionalization and expansion plan expenses. Net interest income for 2001
decreased 2.93%. Higher-than-normal nonperforming assets and loan charge-offs,
coupled with the building of the loan loss reserve to 1.63% of loans, required a
significant increase in the provision for loan loss expense. A 12.1% increase in
noninterest income and continued expense control contributed favorably to
Bancorp's 2001 results.
Bancorp's diluted earnings per share on a "cash basis," which excludes
the effect of amortization of goodwill and core deposits (tax effected when
applicable), were $0.95 for 2001, compared to $1.24 in 2000.
Bancorp's net earnings during 2000 were $58,222,000 or $1.19 per share
on a diluted basis, representing a 15.7% increase from 1999 net earnings and a
16.7% increase from 1999 earnings per share on a diluted basis. Core net
earnings in 2000 were $58,508,000 or $1.20 per share on a diluted basis,
representing a 6.19% increase over the comparable 1999 diluted earnings per
share of $1.13. Core net earnings excludes 2000 costs associated with the merger
of the First Southwestern and Home Federal affiliates, as well as 1999 merger
and restructuring costs associated with the acquisitions of Sand Ridge Bank and
Hebron Deposit Bank and the consolidation of some operational functions.
FIRST FINANCIAL BANCORP 1 2001 ANNUAL REPORT
TABLE 1 - FINANCIAL SUMMARY
2001 2000 1999 1998 1997
(Dollars in thousands, except per share data)
SUMMARY OF OPERATIONS
Interest income $ 289,745 $ 313,303 $ 281,018 $ 261,076 $ 230,823
Tax equivalent adjustment 4,405 4,899 5,246 4,862 4,927
---------- ---------- ---------- ---------- ----------
Interest income - tax equivalent 294,150 318,202 286,264 265,938 235,750
Interest expense 126,780 145,424 117,194 110,434 96,576
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME - TAX EQUIVALENT $ 167,370 $ 172,778 $ 169,070 $ 155,504 $ 139,174
========== ========== ========== ========== ==========
Interest income $ 289,745 $ 313,303 $ 281,018 $ 261,076 $ 230,823
Interest expense 126,780 145,424 117,194 110,434 96,576
---------- ---------- ---------- ---------- ----------
Net interest income 162,965 167,879 163,824 150,642 134,247
Provision for loan losses 26,813 11,300 9,232 8,247 6,656
Noninterest income 54,242 48,401 43,766 41,106 32,465
Noninterest expenses 124,954 118,018 121,735 107,845 91,229
---------- ---------- ---------- ---------- ----------
Income before income taxes 65,440 86,962 76,623 75,656 68,827
Income tax expense 22,131 28,740 26,300 24,684 21,995
---------- ---------- ---------- ---------- ----------
NET EARNINGS $ 43,309 $ 58,222 $ 50,323(2) $ 50,972 $ 46,832
========== ========== ========== ========== ==========
Tax equivalent basis was calculated using
a 35.0% tax rate in all years presented
PER SHARE DATA(1)
NET EARNINGS - BASIC $ 0.91 $ 1.19 $ 1.02 $ 1.03 $ 0.95
========== ========== ========== ========== ==========
NET EARNINGS - DILUTED $ 0.91 $ 1.19 $ 1.02 $ 1.03 $ 0.94
========== ========== ========== ========== ==========
Cash dividends declared
First Financial Bancorp $ 0.60 $ 0.57 $ 0.54 $ 0.50 $ 0.45
Sand Ridge Financial Corporation(3) N/A N/A $ 4.75 $ 18.00 $ 17.00
Hebron Bancorp, Inc.(4) N/A N/A $ 1.50 $ 5.50 $ 5.00
Average common shares outstanding - basic
(in thousands) 47,428 48,776 49,191 49,333 49,365
Average common shares outstanding - diluted
(in thousands) 47,479 48,862 49,335 49,531 49,515
SELECTED YEAR-END BALANCES
Total assets $3,854,794 $3,932,512 $3,940,693 $3,538,869 $3,189,663
Earning assets 3,505,791 3,604,916 3,572,755 3,253,574 2,911,760
Investment securities held-to-maturity 20,890 24,800 31,765 37,782 62,511
Investment securities available-for-sale 595,600 564,762 490,126 550,394 503,936
Loans, net of unearned income 2,872,249 3,008,066 3,036,376 2,654,146 2,322,953
Deposits 3,085,093 3,151,428 2,991,213 2,872,067 2,692,688
Noninterest-bearing demand deposits 448,330 419,878 408,712 392,999 370,960
Interest-bearing demand deposits 346,039 306,356 314,735 307,752 338,968
Savings deposits 782,640 739,376 778,405 758,808 655,719
Time deposits 1,508,084 1,685,818 1,489,361 1,412,508 1,327,041
Long-term borrowings 260,345 205,216 161,799 120,777 46,570
Shareholders' equity 384,543 395,132 372,539 358,265 336,256
RATIOS BASED ON AVERAGE BALANCES
Loans to deposits 93.71% 100.76% 98.28% 89.07% 89.04%
Net charge-offs to loans 0.71% 0.37% 0.20% 0.24% 0.18%
Shareholders' equity to
Total assets 10.26% 9.62% 9.93% 10.46% 11.04%
Deposits 12.72% 12.45% 12.61% 12.64% 13.29%
Return on assets 1.12% 1.48% 1.37% 1.53% 1.61%
Return on equity 10.94% 15.34% 13.75% 14.59% 14.63%
Net interest margin (tax equivalent basis) 4.67% 4.72% 4.94% 5.02% 5.13%
(1) First Financial Bancorp's per share data has been restated for all stock
dividends, stock splits, and material pooling-of-interests mergers through
2001.
(2) 1999 net earnings includes $6,930,000 ($5,454,000 after tax) in merger and
restructuring charges.
(3) Sand Ridge Financial Corporation was the parent company of Sand Ridge Bank
and was merged out of existence on June 1, 1999.
(4) 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 2001 ANNUAL REPORT
Bancorp's diluted earnings per share on a "cash basis," which excludes
the effect of amortization of goodwill and core deposits (tax effected when
applicable), were $1.24 for 2000 compared to $1.18 in 1999.
Bancorp's return on equity for 2001 was 10.9%, which compares to 15.3%
and 13.8% for 2000 and 1999, respectively. Bancorp's return on assets for 2001
was 1.12%. This compares with return on assets of 1.48% and 1.37% for 2000 and
1999, respectively. Excluding Project Renaissance expenses in 2001, Bancorp's
return on equity was 11.7% and its return on assets was 1.20%. 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 1997
through 2001 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 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 $294,150,000 in 2001, a decrease of
$24,052,000 or 7.56% from 2000. The decrease in interest income was largely the
result of eleven downward movements in interest rates initiated by the Federal
Reserve during 2001, as the prime lending rate dropped from 9.50% to 4.75% and
impacted on Bancorp's variable rate loans. Interest income was also adversely
impacted as average loan balances decreased $155,788,000 primarily due to a
$120,979,000 reduction in real estate loans. While residential real estate loan
demand remained high due to refinancing activity into lower fixed-rate loans,
Bancorp's strategy, given a lower point in the interest rate cycle, was to sell
a majority of these mortgage loans while retaining the servicing and customer
relationships.
Total interest expense was $126,780,000 in 2001, a decrease of
$18,644,000 from 2000. The interest expense was primarily impacted by a decrease
in the rate paid on interest-bearing liabilities. The average rate paid for
deposits and borrowings decreased from 4.65% during 2000 to 4.18% during 2001.
Tax equivalent net interest income, the difference between tax
equivalent total interest income and total interest expense, decreased
$5,408,000 or 3.13% during 2001 as a result of the factors discussed above.
However, most of the decline in net interest income occurred in the first six
months of 2001, as net interest income stabilized in the last two quarters.
The interest rate spread and the net interest margin are two ratios
frequently used to measure differences in net interest income. The interest rate
spread (the average rate on earning assets minus the average rate on
interest-bearing liabilities) was 4.03% for 2001 and 4.05% for 2000. The net
interest margin (net interest income on a tax equivalent basis divided by
average earning assets) decreased five basis points, from 4.72% in 2000 to 4.67%
in 2001. Throughout 2001, Bancorp's balance sheet was asset-sensitive. An
asset-sensitive position suggests that a declining rate environment will
negatively influence net interest income as earning assets will reprice downward
more quickly than interest-bearing liabilities. Given the dramatic drop in rates
in 2001, Bancorp did well to maintain the margin, which continues to rank high
relative to its peers.
TABLE 2 - VOLUME/RATE ANALYSIS - TAX EQUIVALENT BASIS (1)
2001 change from 2000 due to 2000 change from 1999 due to
VOLUME RATE TOTAL VOLUME RATE TOTAL
(Dollars in thousands)
INTEREST INCOME
Loans $(13,701) $(10,228) $(23,929) $ 19,369 $ 8,722 $ 28,091
Investment securities (2)
Taxable 2,229 (2,985) (756) 1,740 2,850 4,590
Tax-exempt (1,000) (191) (1,191) (917) (129) (1,046)
-------- -------- -------- -------- -------- --------
Total investment securities interest (2) 1,229 (3,176) (1,947) 823 2,721 3,544
Interest-bearing deposits with other banks 195 (301) (106) 275 96 371
Federal funds sold and securities
purchased under agreements to resell 2,075 (145) 1,930 (174) 106 (68)
-------- -------- -------- -------- -------- --------
TOTAL (10,202) (13,850) (24,052) 20,293 11,645 31,938
INTEREST EXPENSE
Interest-bearing demand deposits 552 (1,084) (532) (289) 1,066 777
Savings deposits (12) (3,597) (3,609) (736) 893 157
Time deposits 2,443 (4,704) (2,261) 8,860 9,406 18,266
Short-term borrowings (11,110) (4,814) (15,924) 3,590 2,984 6,574
Long-term borrowings 4,299 (617) 3,682 1,812 644 2,456
-------- -------- -------- -------- -------- --------
TOTAL (3,828) (14,816) (18,644) 13,237 14,993 28,230
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ (6,374) $ 966 $ (5,408) $ 7,056 $ (3,348) $ 3,708
======== ======== ======== ======== ======== ========
(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 2001 ANNUAL REPORT
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 2001, 2000, and 1999 was $7,541,000, $6,622,000, and
$6,889,000, respectively.
NONINTEREST INCOME AND NONINTEREST EXPENSES
A listing of noninterest income and noninterest expenses for 2001,
2000, and 1999 is reported in Table 3. 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 2001 or 2000.
NONINTEREST INCOME
2001 vs. 2000. Excluding securities gains, 2001 noninterest income
increased $5,578,000 or 11.5% over 2000. For the same period, service charges on
deposits increased 8.31%, fueled by growth in core deposits and re-pricing of
certain service fees. Trust revenues increased 3.79% due to a revised pricing
structure and new business development. Decreased market values of the
underlying securities held in trust limited the increase in trust revenues.
Other noninterest income was up 22.7% as a result of increased insurance agency
revenues, gains on the sales of mortgage loans, sales of third-party mutual
funds, and increased credit insurance sales.
2000 vs. 1999. Total noninterest income, exclusive of securities gains
or losses, increased $4,646,000 or 10.6% 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 15.1%. 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 and
improvements in this fee income area. One indication of Bancorp's emphasis on
deposits was the appointment of a chief deposit officer at each affiliate in
2000.
Bancorp's trust revenues increased 6.11% or $820,000 over 1999. Bancorp
had targeted an increase of over 10%; 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.
In 2000, the "other" category of noninterest income increased 12.2%.
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.
NONINTEREST EXPENSES
2001 vs. 2000. Bancorp's strong control over operating costs is
reflected by its 2001 core expenses that remained relatively flat over 2000 as
Bancorp continues to realize savings associated with the 2000 in-market
consolidation of two affiliates, First National Bank of Southwestern Ohio and
Home Federal Bank. Adjusting for merger and restructuring expenses in 2000 and
Project Renaissance in 2001, noninterest expenses increased approximately
$2,495,000 or 2.11%.
TABLE 3 - NONINTEREST INCOME AND NONINTEREST EXPENSES
2001 2000 1999
% CHANGE % CHANGE % CHANGE
INCREASE INCREASE INCREASE
TOTAL (DECREASE) TOTAL (DECREASE) TOTAL (DECREASE)
(Dollars in thousands)
NONINTEREST INCOME
Service charges on deposit accounts $ 20,348 8.3% $ 18,786 13.0% $ 16,629 14.3%
Trust revenues 14,769 3.8% 14,230 6.1% 13,410 10.4%
Other 18,823 22.7% 15,346 12.2% 13,677 (2.7%)
----------- ----------- -----------
Subtotal 53,940 11.5% 48,362 10.6% 43,716 7.3%
Investment securities gains 302 N/M 39 N/M 50 N/M
----------- ----------- -----------
TOTAL $ 54,242 12.1% $ 48,401 10.6% $ 43,766 4.7%
=========== ===== =========== ===== =========== ====
NONINTEREST EXPENSES
Salaries and employee benefits $ 65,061 2.3% $ 63,606 3.2% $ 61,614 7.3%
Net occupancy 7,475 1.0% 7,402 5.5% 7,019 7.8%
Furniture and equipment 6,332 (0.7%) 6,374 1.9% 6,256 5.5%
Data processing 7,254 (13.9%) 8,427 11.7% 7,545 1.3%
Deposit insurance 602 11.1% 542 (1.6%) 551 16.2%
State taxes 1,913 (21.3%) 2,432 20.1% 2,025 11.0%
Amortization of intangibles 2,650 (18.9%) 3,268 (11.1%) 3,674 (8.5%)
Restructuring charge 0 N/M (353) N/M 6,930 N/M
Other 33,667 27.9% 26,320 0.8% 26,121 3.7%
----------- ----- ----------- ----- ----------- ----
TOTAL $ 124,954 5.9% $ 118,018 (3.1%) $ 121,735 11.8%
=========== ===== =========== ===== =========== ====
N/M = Not meaningful
FIRST FINANCIAL BANCORP 4 2001 ANNUAL REPORT
Total Project Renaissance expenses in 2001 were $4,880,000 related to
salaries and employee benefits, equipment disposals, and early termination of
certain data processing agreements. The majority of the Project Renaissance
expenses were recorded in the "other" category resulting in the 27.9% increase
in the category over 2000. Of the $4,880,000 recognized in 2001, $3,867,000 was
recorded in the fourth quarter of 2001.
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
Project Renaissance expenses and merger and restructuring charges, was 54.3%,
53.0%, and 53.7% for 2001, 2000, and 1999, respectively
2000 vs. 1999. Noninterest expense decreased by $3,858,000 in 2000 as
compared to 1999. Excluding expenses related to the 2000 in-market merger of two
affiliates and expenses associated with the merger and restructuring charge in
1999, 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.
Salaries and employee benefits increased by only 3.23% over 1999.
Less-than-anticipated health care costs and 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 approximately 6%.
Bancorp's amortization of intangibles decreased 11.1% from 1999 as a
result of the expiration of the amortization of various intangible assets.
INCOME TAXES
Bancorp's tax expense in 2001 totaled $22,131,000 compared to
$28,740,000 in 2000 and $26,300,000 in 1999, resulting in effective tax rates of
33.8%, 33.0%, and 34.3% in 2001, 2000, and 1999, respectively. The 2001
effective tax rate increased slightly, primarily as a result of less tax- exempt
interest income. The decrease in 2000's effective tax rate was primarily due to
an increase in tax-exempt life insurance income associated with an ongoing
employee benefit plan.
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 $135,817,000 or 4.52%
during 2001, and average loan balances were down 5.07%. A slowing economy in the
last half of 2001 impacted loan demand. Lower loan balances were also a result
of Bancorp's plan to hold fewer real estate loans. While residential real estate
loan demand remained high due to refinancing activity into lower fixed-rate
loans, Bancorp's strategy, given a lower point in the interest rate cycle, was
to sell a majority of these mortgage loans while retaining the servicing and
customer relationships.
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, 2001, 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, 2001, real estate mortgage loans composed
46.8% of Bancorp's total loan portfolio and installment loans composed another
20.5% of the total loan portfolio. Commercial loans equaled 28.0% of the total
portfolio; and real estate construction, credit card lending, and lease
financing made up the remaining 4.70% of the portfolio. In 2001, Bancorp
continued 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 $17,247,000 or 2.19% from 2000 to 2001. Real estate mortgage loans
decreased $92,104,000 or 6.40% for the same period.
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.
Subject to Bancorp guidelines and policy, credit underwriting and
approval occur within the subsidiary originating the loan. Bancorp has
established individual affiliate house lending limits to handle the majority of
customer requests in a timely manner at each subsidiary. 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.
TABLE 4 - LOAN PORTFOLIO
DECEMBER 31,
2001 2000 1999 1998 1997
(Dollars in thousands)
Commercial $ 804,683 $ 787,436 $ 769,454 $ 689,524 $ 554,728
Real estate - construction 75,785 97,571 111,458 74,205 65,468
Real estate - mortgage 1,346,235 1,438,339 1,467,591 1,306,065 1,140,628
Installment 588,549 618,489 623,091 537,156 516,368
Credit card 22,846 24,182 22,408 21,306 20,055
Lease financing 36,139 46,068 46,508 29,212 27,260
---------- ---------- ---------- ---------- ----------
TOTAL $2,874,237 $3,012,085 $3,040,510 $2,657,468 $2,324,507
========== ========== ========== ========== ==========
FIRST FINANCIAL BANCORP 5 2001 ANNUAL REPORT
TABLE 5 - LOAN MATURITY/RATE SENSITIVITY
DECEMBER 31, 2001
Maturity
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
(Dollars in thousands)
Commercial $455,315 $178,145 $171,223 $804,683
Real estate - construction 67,819 6,624 1,342 75,785
-------- -------- -------- --------
TOTAL $523,134 $184,769 $172,565 $880,468
======== ======== ======== ========
Sensitivity to changes in interest rates
PREDETERMINED VARIABLE
RATE RATE
(Dollars in thousands)
Due after one year but within five years $ 74,273 $110,496
Due after five years 59,295 113,270
-------- --------
TOTAL $133,568 $223,766
======== ========
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, 2001. 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 (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 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 delinquent 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
by a group of senior officers from the financial and lending areas.
A slowing economy in the last half of 2001 negatively impacted asset
quality for much of the financial industry including Bancorp. Total
nonperforming assets, as shown in Table 6, increased 51.2% from $18,686,000 at
December 31,
TABLE 6 - NONPERFORMING ASSETS
December 31,
2001 2000 1999 1998 1997
(Dollars in thousands)
Nonaccrual loans $24,628 $17,346 $11,283 $ 7,481 $ 7,845
Restructured loans 1,291 265 2,244 691 2,447
Other real estate owned (OREO) 2,338 1,075 1,707 221 1,150
------- ------- ------- ------- -------
TOTAL NONPERFORMING ASSETS $28,257 $18,686 $15,234 $ 8,393 $11,442
======= ======= ======= ======= =======
Nonperforming assets as a percent of total
loans plus OREO 0.98% 0.62% 0.50% 0.32% 0.49%
Accruing loans past due 90 days or more $ 4,728 $ 2,414 $ 2,777 $ 2,923 $ 2,392
FIRST FINANCIAL BANCORP 6 2001 ANNUAL REPORT
TABLE 7 - SUMMARY OF ALLOWANCE FOR LOAN LOSSES AND SELECTED STATISTICS
2001 2000 1999 1998 1997
(Dollars in thousands)
Transactions in the allowances for loan losses:
Balance at January 1 $39,349 $39,340 $34,800 $31,660 $25,803
Loans charged off
Commercial 13,573 6,439 4,120 4,022 2,053
Real estate - construction 5 32 0 0 28
Real estate - mortgage 2,096 1,098 325 352 257
Installment and other consumer financing 7,450 5,881 4,484 3,720 3,044
Lease financing 508 194 432 293 57
------- ------- ------- ------- -------
Total loans charged-off 23,632 13,644 9,361 8,387 5,439
Recoveries of loans previously charged-off
Commercial 766 620 2,340 1,541 684
Real estate - construction 0 0 0 0 0
Real estate - mortgage 549 191 79 99 142
Installment and other consumer financing 1,440 1,474 1,114 800 786
Lease financing 37 68 36 34 15
------- ------- ------- ------- -------
Total recoveries 2,792 2,353 3,569 2,474 1,627
------- ------- ------- ------- -------
Net charge-offs 20,840 11,291 5,792 5,913 3,812
Allowance acquired through mergers 1,462 0 0 806 3,013
Provision for discontinued product line 0 0 1,100 0 0
Provision for loan losses 26,813 11,300 9,232 8,247 6,656
------- ------- ------- ------- -------
BALANCE AT DECEMBER 31 $46,784 $39,349 $39,340 $34,800 $31,660
======= ======= ======= ======= =======
Ratios
Net charge-offs as a percent of:
Average loans outstanding 0.71% 0.37% 0.20% 0.24% 0.18%
Provision 77.72% 99.92% 62.74% 71.70% 57.27%
Allowance 44.55% 28.69% 14.72% 16.99% 12.04%
Allowance as a percent of:
year-end loans, net of unearned income 1.63% 1.31% 1.30% 1.31% 1.36%
TABLE 8 - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
2001 2000 1999
(Dollars in thousands)
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
Balance at end of ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
period applicable to: --------- ----------- ---------- ----------- --------- -----------
Commercial $ 17,313 28% $ 11,061 26% $ 8,221 25%
Real estate - construction 445 3% 376 3% 470 4%
Real estate - mortgage 10,710 47% 8,853 48% 8,798 48%
Installment and credit card 11,311 21% 11,399 21% 10,978 21%
Lease financing 913 1% 756 2% 477 2%
Unallocated 6,092 N/A 6,904 N/A 10,396 N/A
-------- ---- --------- ---- --------- ----
TOTAL $ 46,784 100% $ 39,349 100% $ 39,340 100%
======== ==== ========= ==== ========= ====
1998 1997
(Dollars in thousands)
PERCENT OF PERCENT OF
LOANS TO LOANS TO
Balance at end of ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
period applicable to: --------- ----------- --------- -----------
Commercial $ 9,909 26% $ 8,202 24%
Real estate - construction 910 3% 246 3%
Real estate - mortgage 5,395 49% 5,645 49%
Installment and credit card 9,750 21% 8,323 23%
Lease financing 630 1% 483 1%
Unallocated 8,206 N/A 8,761 N/A
---------- ---- --------- ----
TOTAL $ 34,800 100% $ 31,660 100%
========== ==== ========= ====
FIRST FINANCIAL BANCORP 7 2001 ANNUAL REPORT
2000, to $28,257,000 at year-end 2001. Net charge-offs increased to 0.71% from
0.37% of total average loans as shown in Table 7. During 2001, Bancorp increased
its provision for loan losses 137% to $26,813,000 from $11,300,000 in 2000. Even
with the issues previously discussed, Bancorp finished 2001 with a nonperforming
assets to ending loans ratio of 0.98%, which is in line with Bancorp's peers.
The allowance at December 31, 2001, was $46,784,000 or 1.63% of loans, net of
unearned income, which compares to $39,349,000 or 1.31% of loans, net of
unearned income, at December 31, 2000.
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
primarily represents properties acquired by Bancorp's subsidiaries through loan
defaults by customers. See Table 6 for a summary of Bancorp's nonaccrual and
restructured loans and OREO properties.
In comparing December 31, 2001, with December 31, 2000, nonaccrual
loans increased $7,282,000, restructured loans increased $1,026,000, other real
estate owned increased $1,263,000, and accruing loans past due 90 days or more
increased $2,314,000.
The increase in nonperforming assets is associated with the effects of
a slowing economy and does not consist of a concentration in any particular
industry. In the fourth quarter of 2001, Bancorp classified one agricultural
credit of approximately $6,900,000 primarily secured by real estate as
nonperforming. Overall, it is management's belief that the allowance for loan
losses is adequate to absorb estimated probable credit losses.
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 $26,928,000 or 4.57% during
2001 to a balance of $616,490,000. Bancorp follows a conservative investment
policy, investing primarily for liquidity management purposes and interest rate
risk management.
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 represented 16.0% of
the investment portfolio at December 31, 2001. No structured notes were included
in the U.S. government agencies and corporations securities category at December
31, 2001. All U.S. government agencies and corporations securities were
classified as available-for-sale at December 31, 2001, 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 53.5% of the investment
portfolio at December 31, 2001. 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 99.0% of Bancorp's MBSs are classified as available-for-sale.
CMOs totaled $71,503,000 at December 31, 2001, all of which were
classified as available-for-sale. All of the CMOs held by Bancorp are rated AAA
TABLE 9 - INVESTMENT SECURITIES
DECEMBER 31, 2001
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) $ 9 7.93% $ 510 6.46% $ 1,690 9.05% $ 1,142 8.09%
Obligations of state and other
political subdivisions 2,075 9.45% 11,103 8.75% 3,358 9.01% 1,003 8.14%
--------- --------- ---------- ----------
Total $ 2,084 9.44% $ 11,613 8.65% $ 5,048 9.02% $ 2,145 8.11%
========= ===== ========= ===== ========== ===== ========= =====
AVAILABLE-FOR-SALE
U.S. Treasury securities $ 102 4.92%
Securities of other U.S.
government agencies
and corporations 30,522 5.41% $ 55,819 4.92% $ 11,750 6.64% $ 408 4.07%
Mortgage-backed securities(2) 3,950 6.55% 13,216 6.35% 36,501 4.81% 272,650 6.13%
Obligations of state and other
political subdivisions 5,187 7.68% 25,240 8.05% 30,796 8.01% 67,904 7.66%
Other securities 1,503 2.97% 273 7.29% 216 6.35% 39,563 6.24%
--------- --------- ---------- ----------
Total $ 41,264 5.71% $ 94,548 5.96% $ 79,263 6.33% $ 380,525 6.41%
========= ===== ========= ===== ========== ===== ========== =====
(1) Tax equivalent basis was calculated using a marginal federal income tax
rate of 35.0%.
(2) 30.4% of the mortgage-backed securities maturing after five years are
variable rate.
FIRST FINANCIAL BANCORP 8 2001 ANNUAL REPORT
by Standard & Poor's Corporation or similar rating agencies. Bancorp does not
own any interest-only securities, principal-only securities, accrual bonds, or
inverse floaters.
Securities of state and other political subdivisions composed 23.8% of
Bancorp's investment portfolio at December 31, 2001. The securities are
diversified as to states and issuing authorities within states, thereby
decreasing portfolio risk. About 88.0% of such investments at December 31, 2001,
were classified as available-for-sale.
The remaining 6.70% of Bancorp's investment portfolio at December 31,
2001, 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,
2001, 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 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, 2001, the market value of Bancorp's held-to-maturity
investment securities portfolio exceeded the carrying value by $657,000. The
available-for-sale investment securities are reported at their market value of
$595,600,000, 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 from $4,040,000 at December 31, 2000, to $3,381,000 at
December 31, 2001. 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,
2001.
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 decreased $66,335,000 or 2.10% in 2001. Comparing
Bancorp's totals at December 31, 2001, and 2000, interest-bearing deposits
decreased $94,787,000 and noninterest-bearing demand deposits increased
$28,452,000.
Table 10 shows the contractual maturity of time deposits of $100,000
and over that were outstanding at December 31, 2001. These deposits represented
only 8.25% of total deposits.
Short-term borrowings decreased from $146,568,000 at December 31, 2000,
to $93,452,000 at December 31, 2001.
Long-term borrowings increased $55,129,000 from $205,216,000 at the end
of 2000 to $260,345,000 at the end of 2001. 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. See Note 10 of the Notes to Consolidated Financial Statements for
additional information.
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 $8,111,000 for 2001 and $5,461,000 for 2000. Remodeling is a
planned and ongoing process for the 114 offices/facilities of Bancorp's
subsidiaries. Routine capital expenditures planned for the year 2002 currently
total $2,500,000.
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. In
addition, Bancorp utilizes advances from the Federal Home Loan Bank as a funding
source. At December 31, 2001, total borrowings from the FHLB were $260,345,000.
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, 2001, was $325,880,000. The principal source of
asset-funded liquidity is investment securities classified as
available-for-sale, the market values of which totaled $595,600,000 at December
31, 2001, an increase of $30,838,000 or 5.46% over 2000. 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 $2,084,000 at December 31, 2001. 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.
TABLE 10 - MATURITIES OF TIME DEPOSITS
GREATER THAN OR EQUAL TO $100,000(*)
DECEMBER 31, 2001
(Dollars in thousands)
Maturing in
3 months or less $ 126,614
3 months to 6 months 62,483
6 months to 12 months 43,317
over 12 months 22,246
----------
TOTAL $ 254,660
==========
(*) All time deposits greater than or equal to $100,000 were
in certificates of deposit.
FIRST FINANCIAL BANCORP 9 2001 ANNUAL REPORT
TABLE 11 - MARKET RISK DISCLOSURE
Principal Amount Maturing In:
2002 2003 2004 2005 2006 THEREAFTER
(Dollars in thousands)
RATE SENSITIVE ASSETS
Fixed interest rate loans $ 298,444 $ 134,213 $ 115,661 $ 89,738 $ 83,327 $ 416,700
Average interest rate 7.63% 8.78% 8.89% 8.88% 8.01% 7.78%
Variable interest rate loans 481,407 109,462 73,689 63,680 58,793 947,135
Average interest rate 6.82% 7.74% 7.76% 7.97% 8.05% 7.78%
Fixed interest rate securities 42,455 31,894 40,294 11,285 22,688 372,205
Average interest rate 5.38% 5.09% 4.88% 4.86% 5.70% 5.21%
Variable interest rate securities 893 -- -- -- -- 94,776
Average interest rate 1.75% -- -- -- -- 4.77%
Other earning assets 17,052 -- -- -- -- --
Average interest rate 1.76% -- -- -- -- --
RATE SENSITIVE LIABILITIES
Noninterest-bearing checking 448,330 -- -- -- -- --
Savings and interest-bearing checking 112,868 1,015,811 -- -- -- --
Average interest rate 1.08% 1.08% -- -- -- --
Time deposits 1,140,153 236,084 102,887 12,269 13,882 2,809
Average interest rate 4.26% 4.45% 4.28% 5.72% 4.63% 2.57%
Fixed interest rate borrowings 4,634 1,200 16,500 5,000 19,908 213,103
Average interest rate 4.44% 4.96% 5.73% 6.82% 5.89% 5.26%
Variable interest rate borrowings 93,452 -- -- -- -- --
Average interest rate 1.58% -- -- -- -- --
FAIR VALUE
TOTAL DECEMBER 31, 2001
RATE SENSITIVE ASSETS
Fixed interest rate loans $1,138,083 $1,165,515
Average interest rate 8.08%
Variable interest rate loans 1,734,166 1,741,066
Average interest rate 7.51%
Fixed interest rate securities 520,821 521,467
Average interest rate 5.20%
Variable interest rate securities 95,669 95,680
Average interest rate 4.74%
Other earning assets 17,052 17,052
Average interest rate 1.76%
RATE SENSITIVE LIABILITIES
Noninterest-bearing checking 448,330 448,330
Savings and interest-bearing checking 1,128,679 1,128,679
Average interest rate 1.08%
Time deposits 1,508,084 1,516,181
Average interest rate 4.31%
Fixed interest rate borrowings 260,345 263,210
Average interest rate 5.35%
Variable interest rate borrowings 93,452 93,452
Average interest rate 1.58%
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, 2001, the
outstanding balance was $23,500,000. The outstanding balance of this line varies
throughout the year depending on Bancorp's cash needs. The average outstanding
balance for 2001 was $14,210,000.
INTEREST RATE SENSITIVITY
Table 11 details the maturities and yields of interest-bearing
financial instruments at December 31, 2001, 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. In November of 2001, Bancorp's board of
directors approved a policy authorizing the use of certain derivative products
as a tool for the management of interest rate risk. Approved derivatives include
interest rate caps, floors, and swaps. These instruments will allow Bancorp to
meet the needs of its customers, yet reduce the interest rate risk associated
with certain transactions. Bancorp had not used interest rate swaps, interest
rate caps, or interest rate floors as of December 31, 2001. 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 banking 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.
FIRST FINANCIAL BANCORP 10 2001 ANNUAL REPORT
CAPITAL
Total shareholders' equity at December 31, 2001, and 2000, was
$384,543,000 and $395,132,000, respectively. The decrease in shareholders'
equity for 2001 was primarily the result of increased stock repurchase activity.
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
7,507,500 shares. Under this program, Bancorp repurchased 276,000 shares in
2001.
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 1,571,500 shares in 2001.
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 were distributed on April 2, 2001.
The dividend payout ratio was 65.6%, 47.9%, and 50.8%, for 2001, 2000,
and 1999, 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 2001 ANNUAL REPORT
STATISTICAL INFORMATION
(Unaudited)
2001 2000 1999
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE
Daily average balances and interest rates: (Tax equivalent basis; dollars in thousands)
EARNING ASSETS
Loans (1)
Commercial (2) $ 792,568 $ 73,399 9.26% $ 788,668 $ 81,048 10.28% $ 734,982
Real estate (2) 1,465,334 117,352 8.01% 1,586,313 126,170 7.95% 1,475,943
Installment
and other consumer 616,714 58,162 9.43% 649,606 65,199 10.04% 603,730
Lease financing (2) 41,107 3,269 7.95% 46,924 3,694 7.87% 39,144
----------- ----------- ----------- ----------- -----------
Total loans 2,915,723 252,182 8.65% 3,071,511 276,111 8.99% 2,853,799
Investment securities(3)
Taxable 441,513 27,285 6.18% 407,564 28,041 6.88% 380,520
Tax-exempt (2) 149,704 11,900 7.95% 162,257 13,091 8.07% 173,607
----------- ----------- ----------- ----------- -----------
Total investment securities (3) 591,217 39,185 6.63% 569,821 41,132 7.22% 554,127
Interest-bearing deposits
with other banks 14,972 596 3.98% 11,203 702 6.27% 6,575
Federal funds sold and securities
purchased under agreements
to resell 59,470 2,187 3.68% 4,157 257 6.18% 7,430
----------- ----------- ----------- ----------- -----------
TOTAL EARNING ASSETS 3,581,382 294,150 8.21% 3,656,692 318,202 8.70% 3,421,931
NONEARNING ASSETS
Allowance for loan losses (40,758) (40,360) (37,303)
Cash and due from banks 133,644 141,951 131,863
Accrued interest and other assets 183,103 186,295 169,675
----------- ----------- -----------
TOTAL ASSETS $ 3,857,371 $ 3,944,578 $ 3,686,166
=========== =========== ===========
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand $ 299,461 6,065 2.03% $ 275,048 6,597 2.40% $ 288,865
Savings 766,400 15,393 2.01% 766,886 19,002 2.48% 797,396
Time 1,646,954 88,892 5.40% 1,603,214 91,153 5.69% 1,438,145
----------- ----------- ----------- ----------- -----------
Total interest-bearing deposits 2,712,815 110,350 4.07% 2,645,148 116,752 4.41% 2,524,406
Borrowed funds
Short-term borrowings 75,240 3,015 4.01% 316,537 18,939 5.98% 251,273
Long-term borrowings 243,868 13,415 5.50% 166,290 9,733 5.85% 134,691
----------- ----------- ----------- ----------- -----------
Total borrowed funds 319,108 16,430 5.15% 482,827 28,672 5.94% 385,964
----------- ----------- ----------- ----------- -----------
TOTAL INTEREST-BEARING LIABILITIES 3,031,923 126,780 4.18% 3,127,975 145,424 4.65% 2,910,370
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 398,464 403,219 379,276
Other liabilities 31,194 33,852 30,503
SHAREHOLDERS' EQUITY 395,790 379,532 366,017
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 3,857,371 $ 3,944,578 $ 3,686,166
=========== =========== ===========
NET INTEREST INCOME AND
INTEREST RATE SPREAD $ 167,370 4.03% $ 172,778 4.05%
=========== ===== =========== ====
NET INTEREST MARGIN 4.67% 4.72%
===== =====
STATISTICAL INFORMATION
(Unaudited)
1999
INTEREST YIELD
Daily average balances and interest rates:
(Tax equivalent basis; dollars in thousands)
EARNING ASSETS
Loans (1)
Commercial (2) $ 69,774 9.49%
Real estate (2) 116,126 7.87%
Installment
and other consumer 59,324 9.83%
Lease financing (2) 2,796 7.14%
-----------
Total loans 248,020 8.69%
Investment securities(3)
Taxable 23,451 6.16%
Tax-exempt (2) 14,137 8.14%
-----------
Total investment securities (3) 37,588 6.78%
Interest-bearing deposits
with other banks 331 5.03%
Federal funds sold and securities
purchased under agreements
to resell 325 4.37%
-----------
TOTAL EARNING ASSETS 286,264 8.37%
NONEARNING ASSETS
Allowance for loan losses
Cash and due from banks
Accrued interest and other assets
TOTAL ASSETS
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand 5,820 2.01%
Savings 18,845 2.36%
Time 72,887 5.07%
-----------
Total interest-bearing deposits 97,552 3.86%
Borrowed funds
Short-term borrowings 12,365 4.92%
Long-term borrowings 7,277 5.40%
-----------
Total borrowed funds 19,642 5.09%
-----------
TOTAL INTEREST-BEARING LIABILITIES 117,194 4.03%
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits
Other liabilities
SHAREHOLDERS' EQUITY
-----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY
NET INTEREST INCOME AND
INTEREST RATE SPREAD $ 169,070 4.34%
=========== =====
NET INTEREST MARGIN 4.94%
=====
(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 2001 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2001 2000
(Dollars in thousands)
ASSETS
Cash and due from banks $ 211,130 $ 182,058
Interest-bearing deposits with other banks 13,671 3,248
Federal funds sold and securities purchased under agreements to resell 3,381 4,040
Investment securities held-to-maturity
(market value of $21,547 at December 31, 2001;
$25,433 at December 31, 2000) 20,890 24,800
Investment securities available-for-sale, at market value
(cost of $586,946 at December 31, 2001;
$561,502 at December 31, 2000) 595,600 564,762
Loans
Commercial 804,683 787,436
Real estate - construction 75,785 97,571
Real estate - mortgage 1,346,235 1,438,339
Installment 588,549 618,489
Credit card 22,846 24,182
Lease financing 36,139 46,068
----------- -----------
Total loans 2,874,237 3,012,085
Less
Unearned income 1,988 4,019
Allowance for loan losses 46,784 39,349
----------- -----------
Net loans 2,825,465 2,968,717
Premises and equipment 60,575 58,466
Goodwill 27,379 28,860
Other intangibles 8,842 8,878
Deferred income taxes 0 691
Accrued interest and other assets 87,861 87,992
----------- -----------
TOTAL ASSETS $ 3,854,794 $ 3,932,512
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 448,330 $ 419,878
Interest-bearing 2,636,763 2,731,550
----------- -----------
Total deposits 3,085,093 3,151,428
Short-term borrowings
Federal funds purchased and securities sold under agreements to repurchase 67,641 53,581
Federal Home Loan Bank borrowings 0 85,500
Other 25,811 7,487
----------- -----------
Total short-term borrowings 93,452 146,568
Federal Home Loan Bank long-term borrowings 260,345 205,216
Deferred income taxes payable 1,388 0
Accrued interest and other liabilities 29,973 34,168
----------- -----------
Total liabilities 3,470,251 3,537,380
SHAREHOLDERS' EQUITY
Common stock -- no par value
Authorized -- 160,000,000 shares
Issued -- 48,570,346 shares in 2001
46,927,736 shares in 200 396,631 374,336
Retained earnings 18,244 36,225
Accumulated comprehensive income 5,348 1,955
Restricted stock awards (2,563) (866)
Treasury stock, at cost, 1,970,411 and 940,610 shares (33,117) (16,518)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 384,543 395,132
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,854,794 $ 3,932,512
=========== ===========
See Notes to Consolidated Financial Statements.
FIRST FINANCIAL BANCORP 13 2001 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
2001 2000 1999
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees $ 251,951 $ 275,804 $ 247,733
Investment securities
Taxable 27,285 28,041 23,451
Tax-exempt 7,726 8,499 9,178
------------ ------------ ------------
Total investment securities interest 35,011 36,540 32,629
Interest-bearing deposits with other banks 596 702 331
Federal funds sold and securities purchased under agreements to resell 2,187 257 325
------------ ------------ ------------
TOTAL INTEREST INCOME 289,745 313,303 281,018
INTEREST EXPENSE
Deposits 110,350 116,752 97,552
Short-term borrowings 3,015 18,939 12,365
Long-term borrowings 13,415 9,733 7,277
------------ ------------ ------------
TOTAL INTEREST EXPENSE 126,780 145,424 117,194
------------ ------------ ------------
NET INTEREST INCOME 162,965 167,879 163,824
Provision for loan losses 26,813 11,300 9,232
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 136,152 156,579 154,592
NONINTEREST INCOME
Service charges on deposit accounts 20,348 18,786 16,629
Trust revenues 14,769 14,230 13,410
Gains from sales of mortgage loans 2,929 1,018 2,993
Investment securities gains 302 39 50
Other 15,894 14,328 10,684
------------ ------------ ------------
TOTAL NONINTEREST INCOME 54,242 48,401 43,766
NONINTEREST EXPENSES
Salaries and employee benefits 65,061 63,606 61,614
Net occupancy 7,475 7,402 7,019
Furniture and equipment 6,332 6,374 6,256
Data processing 7,254 8,427 7,545
Deposit insurance 602 542 551
State taxes 1,913 2,432 2,025
Amortization of intangibles 2,650 3,268 3,674
Restructuring charge 0 (353) 6,930
Other 33,667 26,320 26,121
------------ ------------ ------------
TOTAL NONINTEREST EXPENSES 124,954 118,018 121,735
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 65,440 86,962 76,623
Income tax expense 22,131 28,740 26,300
------------ ------------ ------------
NET EARNINGS $ 43,309 $ 58,222 $ 50,323
============ ============ ============
NET EARNINGS PER SHARE - BASIC $ 0.91 $ 1.19 $ 1.02
============ ============ ============
NET EARNINGS PER SHARE - DILUTED $ 0.91 $ 1.19 $ 1.02
============ ============ ============
AVERAGE SHARES OUTSTANDING - BASIC 47,427,921 48,775,547 49,191,294
============ ============ ============
AVERAGE SHARES OUTSTANDING - DILUTED 47,479,315 48,862,287 49,335,071
============ ============ ============
See Notes to Consolidated Financial Statements.
FIRST FINANCIAL BANCORP 14 2001 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2001 2000 1999
(Dollars in thousands)
OPERATING ACTIVITIES
Net earnings $ 43,309 $ 58,222 $ 50,323
Adjustments to reconcile net earnings to net cash provided by operating activities
Provision for loan losses 26,813 11,300 9,232
Provision for depreciation and amortization 8,797 9,707 9,196
Net amortization of premiums and accretion of discounts
on investment securities 12 (528) 83
Deferred income taxes 79 2,175 2,059
Realized gains on investment securities (302) (39) (50)
Originations of mortgage loans held for sale (186,571) (171,012) (226,475)
Gains from sales of mortgage loans held for sale (2,929) (1,018) (2,993)
Proceeds from sale of mortgage loans held for sale 187,448 171,161 227,534
Increase in cash surrender value of life insurance (1,775) (6,467) (17,168)
Decrease (increase) in interest receivable 6,527 (3,031) (4,082)
Decrease (increase) in prepaid expenses 530 (881) 1,276
Increase (decrease) in accrued expenses 660 (3,146) 351
(Decrease) increase in interest payable (5,536) 3,986 311
Other 318 (3,589) 2,646
--------- --------- ---------
Net cash provided by operating activities 77,380 66,840 52,243
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale 0 0 13,520
Proceeds from calls, paydowns, and maturities of investment securities available-for-sale 219,864 58,858 159,916
Purchases of investment securities available-for-sale (245,279) (79,144) (135,915)
Proceeds from calls, paydowns, and maturities of investment securities held-to-maturity 12,085 11,773 12,215
Purchases of investment securities held-to-maturity (7,910) (4,365) (1,901)
Net (increase) decrease in interest-bearing deposits with other banks (10,423) 5,619 (6,269)
Net decrease in federal funds sold and
securities purchased under agreements to resell 659 1,581 3,033
Net decrease (increase) in loans and leases 108,922 (28,494) (393,706)
Proceeds from disposal of other real estate owned 1,773 2,882 622
Recoveries from loans and leases previously charged-off 2,792 2,353 3,569
Purchases of premises and equipment (8,111) (5,461) (8,422)
--------- --------- ---------
Net cash provided by (used in) investing activities 74,372 (34,398) (353,338)
FINANCING ACTIVITIES
Net (decrease) increase in total deposits (66,335) 160,215 119,146
Net (decrease) increase in short-term borrowings (53,116) (235,550) 227,054
Proceeds from long-term borrowings 55,129 43,417 41,022
Cash dividends (28,400) (27,901) (25,570)
Purchase of common stock (30,057) (16,518) 0
Proceeds from exercise of stock options 99 116 780
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (122,680) (76,221) 362,432
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,072 (43,779) 61,337
Cash and cash equivalents at beginning of year 182,058 225,837 164,500
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 211,130 $ 182,058 $ 225,837
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 132,316 $ 141,438 $ 116,884
========= ========= =========
Income taxes paid $ 24,839 $ 31,233 $ 23,080
========= ========= =========
Recognition of deferred tax (liabilities) assets attributable to SFAS No. 115 $ (2,000) $ (5,142) $ 6,995
========= ========= =========
Acquisition of other real estate owned through foreclosure $ 3,263 $ 2,423 $ 2,252
========= ========= =========
Issuance of restricted stock awards $ 2,826 $ 773 $ 174
========= ========= =========
Securitization of loans $ 0 $ 40,737 $ 0
========= ========= =========
See Notes to Consolidated Financial Statements.
FIRST FINANCIAL BANCORP 15 2001 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON COMMON ACCUMULATED RESTRICTED TREASURY
STOCK STOCK RETAINED COMPREHENSIVE STOCK STOCK
SHARES AMOUNT EARNINGS INCOME AWARDS SHARES
(Dollars in thousands)
Balances at December 31, 1998 42,657,815 $ 306,709 $ 50,160 $ 4,949 $ (408) (118,638)
Net earnings 50,323
Unrealized holding losses on
securities available for sale
arising during the period (11,347)
Total comprehensive income
Cash dividends declared
(Bancorp - $0.54 per share;
SRFC - $4.75 per share;
HBI - $1.50 per share) (25,570)
Exercise of stock options,
net of shares purchased 1,331 (951) 65,725
10% stock dividend 4,213,712 67,700 (69,009) 45,313
Restricted stock awards (3,751) (11) (174) 7,600
Amortization of restricted
stock awards 168
---------- ---------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 46,869,107 373,447 5,904 $ (6,398) (414) 0
Net earnings 58,222
Unrealized holding losses on
securities available for sale
arising during the period 8,353
Total comprehensive income
Cash dividends declared
(Bancorp - $0.57 per share) (27,901)
Purchase of common stock (940,500)
Exercise of stock options,
net of shares purchased 16,729 116
Restricted stock awards 41,900 773 (773) (110)
Amortization of restricted
stock awards 321
---------- ---------- ----------- ----------- ----------- -----------
Balances at December 31,2000 46,927,736 374,336 36,225 1,955 (866) (940,610)
Net earnings 43,309
Unrealized holding losses on
securities available for sale
arising during the period 3,393
Total comprehensive income
Cash dividends declared
(Bancorp - $0.60 per share) (28,400)
Purchase of common stock (1,847,500)
Exercise of stock options,
net of shares purchased (105) 12,603
5% stock dividend 1,646,021 22,348 (32,890) 637,004
Restricted stock awards (3,411) 52 (2,826) 168,092
Amortization of restricted
stock awards 1,129
---------- ---------- ----------- ----------- ----------- -----------
Balances at December 31, 2001 48,570,346 $ 396,631 $ 18,244 $ 5,348 $ (2,563) (1,970,411)
========== =========== =========== =========== =========== ==========
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
TREASURY
STOCK
AMOUNT TOTAL
Balances at December 31, 1998 $ (3,145) $ 358,265
Net earnings 50,323
Unrealized holding losses on
securities available for sale
arising during the period (11,347)
-----------
Total comprehensive income 38,976
Cash dividends declared
(Bancorp - $0.54 per share;
SRFC - $4.75 per share;
HBI - $1.50 per share) (25,570)
Exercise of stock options,
net of shares purchased 1,731 780
10% stock dividend 1,265 (44)
Restricted stock awards 149 (36)
Amortization of restricted
stock awards 168
----------- -----------
Balances at December 31, 1999 $ 0 $ 372,539
Net earnings 58,222
Unrealized holding losses on
securities available for sale
arising during the period 8,353
-----------
Total comprehensive income 66,575
Cash dividends declared
(Bancorp - $0.57 per share) (27,901)
Purchase of common stock (16,515) (16,515)
Exercise of stock options,
net of shares purchased 116
Restricted stock awards (3) (3)
Amortization of restricted
stock awards 321
----------- -----------
Balances at December 31,2000 (16,518) 395,132
Net earnings 43,309
Unrealized holding losses on
securities available for sale
arising during the period 3,393
-----------
Total comprehensive income 46,702
Cash dividends declared
(Bancorp - $0.60 per share) (28,400)
Purchase of common stock (30,057) (30,057)
Exercise of stock options,
net of shares purchased 204 99
5% stock dividend 10,542 0
Restricted stock awards 2,712 (62)
Amortization of restricted
stock awards 1,129
----------- -----------
Balances at December 31, 2001 $ (33,117) $ 384,543
=========== ===========
See Notes to Consolidated Financial Statements.
FIRST FINANCIAL BANCORP 16 2001 ANNUAL REPORT
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 the 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.
Capital - During 2001, Bancorp issued a 5% stock dividend. All share
amounts presented in the financial statements have been adjusted to reflect
these transactions.
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.
Goodwill - SFAS No. 141, "Business Combination" and No. 142, "Goodwill
and Other Intangible Assets" were issued in June of 2001, and are effective for
fiscal years beginning after December 15, 2001. Under the new
FIRST FINANCIAL BANCORP 17 2001 ANNUAL REPORT
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 approximately $1,172,000
($0.02 per share) for 2002. 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. The effect of these tests on the earnings
and financial position of Bancorp has not yet been determined, but is not
anticipated to be material.
Reclassifications - Certain reclassifications of prior years' amounts
have been made to conform to current year presentation. Such reclassifications
had no effect on net earnings.
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 2001 and 2000 were approximately $26,221,000 and $25,181,000,
respectively.
NOTE 3 - BUSINESS COMBINATIONS
Bancorp consummated the following business combinations in 2001 and 1999:
ACQUISITION SHARES PURCHASE
BUSINESS COMBINATIONS DATE ASSETS DEPOSITS ISSUED PRICE
(Dollars in thousands)
Purchase transactions
FIRST COMMUNITY BRANCHES DECEMBER 31, 2001 $ 31,912 $ 11,110 PAR
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
On December 31, 2001, Bancorp purchased certain assets and assumed
certain liabilities of a division of Blue River Bancshares, Inc. operating under
the name First Community Bank of Fort Wayne, Indiana (First Community). This
division has two branch locations in Fort Wayne. Since consummation of the
merger, these branches are operating as part of Bancorp's Community First Bank &
Trust affiliate. The merger was accounted for using the purchase method of
accounting; and, accordingly, the consolidated financial statements included
First Community's results of operations from the date of acquisition.
NOTE 4 - LEASE FINANCING
Leases included in the loan portfolio at December 31 were composed as follows:
2001 2000
(Dollars in thousands)
Direct financing $ 21,269 $ 30,804
Leveraged 557 734
--------- ---------
Net rentals receivable 21,826 31,538
Estimated residual value of leased assets 18,494 21,317
Less unearned income 4,181 6,787
--------- ---------
Investment in leases, net $ 36,139 $ 46,068
========= =========
Direct financing lease payments receivable as of December 31, 2001, for the
next five years and thereafter are as follows:
DIRECT FINANCING LEASES
(Dollars in thousands)
2002 $ 9,091
2003 6,528
2004 3,832
2005 1,386
2006 404
Thereafter 28
FIRST FINANCIAL BANCORP 18 2001 ANNUAL
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 were summarized as follows:
2001 2000
(Dollars in thousands)
Land and land improvements $ 14,513 $ 12,360
Buildings 54,934 54,618
Furniture and fixtures 42,498 43,732
Leasehold improvements 5,624 4,242
Construction in progress 1,041 580
---------- ----------
118,610 115,532
Less accumulated depreciation
and amortization 58,035 57,066
---------- ----------
TOTAL $ 60,575 $ 58,466
========== ==========
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, 2001, Bancorp's subsidiaries had
retained earnings of $150,234,000 of which $12,352,000 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 balance sheets,
statements of earnings, shareholders' equity, or cash flows. However, a
discussion of these instruments follows.
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 customers' contractual
default. Bancorp has issued standby letters of credit aggregating $24,516,000
and $26,813,000 at December 31, 2001 and 2000, 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 counterparty. The
collateral held varies, but may include securities, real estate, inventory,
plant, or equipment. Bancorp had commitments outstanding to extend credit
totaling $477,689,000 and $484,894,000 at December 31, 2001, and 2000,
respectively. Management does not anticipate any material losses as a result of
these commitments.
Derivatives - In November of 2001, Bancorp's board of directors
approved a policy authorizing the use of certain derivative products as a tool
for the management of interest rate risk. Approved derivatives include interest
rate caps, floors, and swaps. These instruments will allow Bancorp to meet the
needs of its customers, yet reduce the interest rate risk associated with
certain transactions. Bancorp did not use off-balance-sheet derivative financial
instruments (such as interest rate swaps) as defined in SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities" in 2001.
FIRST FINANCIAL BANCORP 19 2001 ANNUAL REPORT
NOTE 8 - INVESTMENT SECURITIES
The following is a summary of investment securities as of December 31, 2001:
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 $ 101 $ 1 $ 0 $ 102
Securities of U.S. government
agencies and corporations 96,579 2,058 (138) 98,499
Mortgage-backed securities $ 3,351 $ 153 $ (4) $ 3,500 321,613 5,344 (640) 326,317
Obligations of state and
other political subdivisions 17,539 523 (15) 18,047 127,339 2,622 (834) 129,127
Other securities 41,314 241 0 41,555
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 20,890 $ 676 $ (19) $ 21,547 $586,946 $ 10,266 $ (1,612) $595,600
======== ======== ======== ======== ======== ======== ======== ========
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 carrying value of investment securities as of December 31,1999, by
category was as follows: U.S. Treasury $11,311,000, U.S. government agencies and
corporations $118,838,000, mortgage-backed $195,307,000, obligations of state
and other political subdivisions $164,584,000, and other $32,520,000.
During the years ended December 31, 2001 and 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.
There were net investment gains after taxes of $188,000, $73,000, and
$106,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
The applicable income tax effects were an expense of $114,000 for 2001 and
benefits of $34,000 and $56,000 for 2000 and 1999, respectively.
The carrying value of investment securities pledged to secure public
deposits and for other purposes as required by law amounted to $259,904,000 at
December 31, 2001.
The amortized cost and market value of investment securities, including
mortgage-backed securities at December 31, 2001, 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 $ 2,084 $ 2,108 $ 40,542 $ 41,264
Due after one year through five years 11,613 12,068 92,697 94,548
Due after five years through ten years 5,048 5,180 77,550 79,263
Due after ten years 2,145 2,191 376,157 380,525
-------- -------- -------- --------
TOTAL $ 20,890 $ 21,547 $586,946 $595,600
======== ======== ======== ========
FIRST FINANCIAL BANCORP 20 2001 ANNUAL REPORT
NOTE 9 - LOANS
Information as to nonaccrual and restructured loans at December 31 was as
follows:
2001 2000 1999
(Dollars in thousands)
Principal balance
Nonaccrual loans $24,628 $17,346 $11,283
Restructured loans 1,291 265 2,244
------- ------- -------
TOTAL $25,919 $17,611 $13,527
======= ======= =======
Interest income effect
Gross amount of interest that would
have been recorded at original rate $ 1,609 $ 2,560 $ 885
Interest included in income 416 1,613 286
------- ------- -------
NET IMPACT ON INTEREST INCOME $ 1,193 $ 947 $ 599
======= ======= =======
At December 31, 2001, 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 $2,338,000, $1,075,000, and $1,707,000 at December
31, 2001, 2000, and 1999, respectively.
Changes in the allowance for loan losses for the three years ended
December 31 were as follows:
2001 2000 1999
(Dollars in thousands)
Balance at beginning of year $ 39,349 $ 39,340 $ 34,800
Allowance acquired 1,462 0 0
Provision for discontinued product line 0 0 1,100
Provision for loan losses 26,813 11,300 9,232
Loans charged-off (23,632) (13,644) (9,361)
Recoveries 2,792 2,353 3,569
-------- -------- --------
BALANCE AT END OF YEAR $ 46,784 $ 39,349 $ 39,340
======== ======== ========
The allowances for loan losses related to loans that are identified for
evaluation in accordance with SFAS No. 114 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, 2001, 2000, and 1999, the total recorded investment in
loans that are considered to be impaired under SFAS No. 114 was $2,006,000,
$8,904,000, and $2,708,000, respectively. For those same periods, the recorded
investment in loans for which there was a related allowance for loan losses was
$801,000, $8,839,000, and $2,688,000.
The related allowance for loan losses on these impaired loans was
$529,000 at December 31, 2001, $2,008,000 at December 31, 2000, and $1,433,000
at December 31, 1999. At December 31, 2001 and 2000, there were $1,205,000 and
$65,000, 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, 2001, was approximately $4,343,000 versus
$5,517,000 for the year ended December 31, 2000, and $2,407,000 for the year
ended December 31, 1999. For the years ended December 31, 2001, 2000, and 1999,
Bancorp recognized interest income on those impaired loans of $143,000,
$218,000, and $88,000, respectively. Bancorp recognizes income on impaired loans
using the cash basis method.
Mortgage loans serviced for others are not included in the accompanying
Consolidated Balance Sheets. The unpaid principal balances of these loans
totaled $545,733,000, $560,530,000, and $394,978,000 at December 31, 2001, 2000,
and 1999, respectively.
Custodial escrow balances maintained in connection with these mortgage
loans serviced were approximately $3,336,000, $3,313,000, and $2,344,000 at
December 31, 2001, 2000, and 1999, respectively.
FIRST FINANCIAL BANCORP 21 2001 ANNUAL REPORT
NOTE 10 - BORROWINGS
The following is a summary of short-term borrowings for the last three years:
2001 2000 1999
AMOUNT RATE AMOUNT RATE AMOUNT RATE
(Dollars in thousands)
At year end:
Federal funds purchased and securities
sold under agreements to repurchase $ 67,641 1.31% $ 53,581 5.54% $ 83,353 5.06%
Federal Home Loan Bank borrowings 0 0.00% 85,500 6.30% 294,235 5.73%
Other short-term borrowings 25,811 2.29% 7,487 6.08% 4,530 3.72%
---------- ------------ ---------
Total $ 93,452 1.58% $ 146,568 6.01% $ 382,118 5.56%
========== ======= ============ ======= ========= ======
Average for the year:
Federal funds purchased and securities
sold under agreements to repurchase $ 46,974 3.29% $ 68,720 4.54% $ 70,421 4.50%
Federal Home Loan Bank borrowings 12,330 6.00% 245,880 6.38% 178,959 5.09%
Other short-term borrowings 15,936 4.56% 1,937 6.96% 1,893 4.78%
---------- ------------ ---------
Total $ 75,240 4.01% $ 316,537 5.98% $ 251,273 4.92%
========== ======= ============ ======= ========= ======
Maximum month-end balances:
Federal funds purchased and securities
sold under agreements to repurchase $ 67,641 $ 115,109 $ 86,429
Federal Home Loan Bank borrowings 83,000 344,350 302,750
Other short-term borrowings 28,912 4,243 5,859
At December 31, 2001, Bancorp had a short-term revolving line of credit
with a financial institution of $25,000,000. As of year end, the outstanding
balance was $23,500,000. 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. Also, Bancorp must 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, 2001.
Federal Home Loan Bank long-term borrowings - Long-term borrowings at
December 31, 2001, consisted exclusively of Federal Home Loan Bank (FHLB)
advances with rates ranging from 1.93% to 6.90%, with interest payable monthly.
The long-term advances mature as follows: $4,634,000 in 2002, $1,200,000 in
2003, $16,500,000 in 2004, $5,000,000 in 2005, $19,908,000 in 2006, and
$213,103,000 after 2006.
Federal Home Loan Bank 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 $843,660,000 at December 31, 2001.
FIRST FINANCIAL BANCORP 22 2001 ANNUAL REPORT
NOTE 11 - INCOME TAXES
Income tax expense consisted of the following components:
2001 2000 1999
(Dollars in thousands)
Current:
Federal $ 18,431 $ 24,548 $ 21,613
State 2,636 3,134 2,633
------------ ----------- ------------
Total 21,067 27,682 24,246
Deferred expense 1,064 1,058 2,054
------------ ----------- ------------
INCOME TAX EXPENSE $ 22,131 $ 28,740 $ 26,300
============ =========== ============
The difference between the federal income tax rates, applied to income before
income taxes, and the effective rates were due to the following:
2001 2000 1999
(Dollars in thousands)
Income taxes computed at federal statutory rate of 35% $ 22,904 $ 30,431 $ 26,818
State income taxes, net of federal tax benefit 1,713 2,037 1,711
Effect of tax-exempt interest (2,073) (3,014) (2,885)
Other (413) (714) 656
----------- ------------ ------------
INCOME TAX EXPENSE $ 22,131 $ 28,740 $ 26,300
=========== ============ ============
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, 2001, 2000, and 1999.
The major components of the temporary differences that give rise to deferred tax
assets and liabilities at December 31, 2001 and 2000 were as follows:
2001 2000
(Dollars in thousands)
Deferred tax assets
Allowance for loan losses $ 14,577 $ 13,034
Mark to market adjustment 795 (712)
Other real estate owned (18) (82)
Postretirement benefits other than pension liability 847 866
Pension liability 230 675
Other 255 210
-------- --------
TOTAL DEFERRED TAX ASSETS 16,686 13,991
Deferred tax liabilities
Tax greater than book depreciation 1,994 989
Leasing activities 7,166 5,815
Federal Home Loan Bank stock basis difference 2,287 1,095
Deferred loan fees 2,054 1,614
Purchase accounting adjustment (162) (276)
Other 1,374 1,717
-------- --------
TOTAL DEFERRED TAX LIABILITIES 14,713 10,954
-------- --------
Net deferred tax asset recognized through the statement of earnings 1,973 3,037
Net deferred tax liability from valuation adjustments of investment securities
available-for-sale, recognized in equity section of balance sheet (3,361) (2,346)
-------- --------
TOTAL NET DEFERRED TAX (LIABILITY) ASSET $ (1,388) $ 691
======== ========
FIRST FINANCIAL BANCORP 23 2001 ANNUAL
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 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 the 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,
2001 2000
(Dollars in thousands)
Tier 1 capital
Shareholders' equity $ 384,543 $ 395,132
Less certain intangibles 32,465 34,957
Less accumulated comprehensive income 5,348 1,955
------------ -------------
TOTAL TIER 1 CAPITAL $ 346,730 $ 358,220
============ =============
Total risk-based capital
Tier 1 capital $ 346,730 $ 358,220
Qualifying allowance for loan losses 35,111 35,945
------------ -------------
TOTAL RISK-BASED CAPITAL $ 381,841 $ 394,165
============ =============
RISK WEIGHTED ASSETS $ 2,797,210 $ 2,872,181
============ =============
RISK-BASED RATIOS
TIER 1 CAPITAL 12.4% 12.5%
============ =============
TOTAL RISK-BASED CAPITAL 13.7% 13.7%
============ =============
LEVERAGE 9.1% 9.2%
============ =============
NOTE 13 - EMPLOYEE BENEFIT PLANS
Bancorp sponsors a non-contributory defined benefit pension plan
covering substantially all employees. Plan assets are administered by the Trust
Department of First National Bank of Southwestern Ohio. Plan assets primarily
consist of equity and debt mutual funds, stocks, corporate bonds, and money
market funds. Approximately 98.1% and 97.9% of plan assets at December 31, 2001,
and 2000, respectively, were invested in collective trust funds with First
Southwestern. The pension plan does not own any shares of Bancorp common stock.
The following tables set forth information concerning amounts
recognized in Bancorp's Consolidated Balance Sheets and Consolidated Statements
of Earnings:
December 31,
2001 2000
(Dollars in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 27,773 $ 26,536
Service cost 2,306 2,115
Interest cost 2,236 2,007
Actuarial loss 4,449 1,247
Benefits paid (3,595) (4,132)
-------- --------
Benefit obligation at end of year 33,169 27,773
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 21,667 22,898
Actual return on plan assets 131 1,427
Employer contributions 4,773 1,474
Benefits paid (3,595) (4,132)
-------- --------
Fair value of plan assets at end of year 22,976 21,667
-------- --------
Funded status (10,193) (6,106)
Unrecognized transition amount (460) (731)
Unrecognized prior service cost 822 1,074
Unrecognized actuarial loss 8,561 2,313
-------- --------
NET AMOUNT RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS (ACCRUED BENEFIT LIABILITY) $ (1,270) $ (3,450)
======== ========
FIRST FINANCIAL BANCORP 24 2001 ANNUAL REPORT
WEIGHTED-AVERAGE ASSUMPTIONS DECEMBER 31,
2001 2000
Discount rate 7.25% 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,
2001 2000 1999
(Dollars in thousands)
Service cost $ 2,306 $ 2,115 $ 1,972
Interest cost 2,236 2,007 1,941
Expected return on assets (2,051) (2,000) (2,223)
Amortization of transition asset (270) (305) (305)
Amortization of unrecognized prior service cost 252 252 252
Amortization of actuarial loss 120 0 0
----------- ----------- ---------
NET PERIODIC PENSION COST $ 2,593 $ 2,069 $ 1,637
=========== =========== =========
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 2001, 2000, and 1999, Bancorp contributed $.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 $873,000 during 2001,
$937,000 during 2000, and $775,000 during 1999.
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:
2001 2000
(Dollars in thousands)
Benefit obligation at beginning of year $ 1,199 $ 1,178
Interest cost 85 84
Plan participants' contributions 23 23
Actuarial loss 220 106
Benefits paid (213) (192)
-------- --------
Benefit obligation at end of year 1,314 1,199
Fair value of plan assets at beginning and end of year 0 0
-------- --------
Funded status (1,314) (1,199)
Unrecognized actuarial gain (883) (1,152)
Unrecognized prior service cost (22) (25)
-------- --------
NET POSTRETIREMENT LIABILITY RECOGNIZED IN THE BALANCE SHEETS $(2,219) $(2,376)
======== ========
Net periodic postretirement benefit cost includes the following
components:
Interest cost $ 85 $ 84
Amortization of unrecognized prior service cost (3) (4)
Amortization of actuarial gain (94) (114)
-------- --------
NET PERIODIC BENEFIT COST $ (12) $ (34)
======== ========
The discount rate used to determine the accumulated postretirement
benefit obligation was 7.25% at December 31, 2001 and 7.50% at December 31,
2000. 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 post- retirement benefit obligation as of December 31, 2001,
would be increased by approximately $106,000.
If the health care cost trend rate assumptions were decreased by 1.00%,
the accumulated post- retirement benefit obligation as of December 31, 2001,
would be decreased by approximately $96,000.
2001 2000
2001 6.60%
2002 10.00% 6.00%
2003 9.00% 5.50%
2004 8.00% 5.00%
2005 7.00% 5.00%
2006 6.00% 5.00%
Thereafter 5.00% 5.00%
FIRST FINANCIAL BANCORP 25 2001 ANNUAL REPORT
NOTE 15 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
2001 2000 1999
(Dollars in thousands, except per share data)
Net income--numerator for basic and diluted earnings per share -
income available to common stockholders $ 43,309 $ 58,222 $ 50,323
=========== =========== ===========
Denominator for basic earnings per share - weighted average shares 47,427,921 48,775,547 49,191,294
Effect of dilutive securities - employee stock options 51,394 86,739 143,778
----------- ----------- -----------
Denominator for diluted earnings per share - adjusted weighted average shares 47,479,315 48,862,286 49,335,072
=========== =========== ===========
Basic earnings per share $ 0.91 $ 1.19 $ 1.02
=========== =========== ===========
Diluted earnings per share $ 0.91 $ 1.19 $ 1.02
=========== =========== ===========
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 1,691,035 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, specifies, 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 7,507,500 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 2001,
2000, and 1999, respectively: risk-free interest rates of 4.94%, 6.52%, and
4.74%; dividend yields of 3.61%, 3.25%, and 2.35%; volatility factors of the
expected market price of Bancorp's common stock of 0.220, 0.215, and 0.202; and
a weighted average expected life of the options of 4.50, 3.90, and 2.83 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:
2001 2000 1999
(Dollars in thousands, except per share data)
Pro forma net earnings $ 42,392 $ 55,778 $ 49,238
========= ========== =========
Pro forma earnings per share $ 0.89 $ 1.20 $ 1.05
========= ========== =========
Activity in the above plan for 2001, 2000, and 1999 is summarized as follows:
2001 2000 1999
NUMBER OF OPTION NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 1,403,595 779,524 554,169
Granted 284,172 $ 15.37-16.01 678,011 $ 17.75-18.75 337,824 $ 20.23-23.69
Exercised (19,719) $ 7.36-11.30 (24,877) $ 7.50-11.87 (83,282) $ 7.72-20.04
Cancelled (70,688) $ 7.36-22.57 (29,063) $ 18.44-20.05 (29,187) $ 23.69
----------- ----------- ----------
OUTSTANDING AT END OF YEAR 1,597,360 $ 7.14-22.57 1,403,595 $ 7.50-23.69 779,524 $ 7.50-23.69
=========== =========== ==========
EXERCISABLE AT END OF YEAR 1,319,594 735,637 470,863
=========== =========== ==========
AVAILABLE FOR FUTURE GRANT 7,013,931 7,227,408 7,370,203
=========== =========== ==========
WEIGHTED-AVERAGE FAIR VALUE OF
OPTIONS GRANTED DURING THE YEAR $ 2.79 $ 3.56 $ 3.56
=========== =========== ==========
FIRST FINANCIAL BANCORP 26 2001 ANNUAL
NOTE 17 - LOANS TO RELATED PARTIES
Loans to directors, executive officers, principal holders of Bancorp's
common stock and certain related persons totaled $37,177,000 and $37,331,000 at
December 31, 2001 and 2000, respectively.
Activity of these loans was as follows:
2001 2000
(Dollars in thousands)
Beginning balance $ 37,331 $ 33,281
Additions 17,212 14,988
Collected 17,366 10,938
Charged-off 0 0
-------- ---------
ENDING BALANCE $ 37,177 $ 37,331
======== =========
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 occurs: 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 the
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 $38.96, 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
$38.96, 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 27 2001 ANNUAL REPORT
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:
2001 2000
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(Dollars in thousands)
Financial assets
Cash and short-term investments $ 228,182 $ 228,182 $ 189,346 $ 189,346
Investment securities held-to-maturity 20,890 21,547 24,800 25,433
Investment securities available-for-sale 595,600 595,600 564,762 564,762
Loans
Commercial 804,683 833,614 787,436 787,326
Real estate - construction 75,785 72,721 97,571 98,182
Real estate - mortgage 1,346,235 1,355,934 1,438,339 1,431,782
Installment, net of unearned income 586,561 586,845 614,470 616,192
Credit card 22,846 22,601 24,182 24,197
Leasing 36,139 35,246 46,068 46,251
Less allowance for loan losses 46,784 39,349
---------- ---------- ---------- ----------
Net loans 2,825,465 2,906,961 2,968,717 3,003,930
Accrued interest receivable 27,054 27,054 33,580 33,580
Financial liabilities
Deposits
Noninterest-bearing 448,330 448,330 419,878 419,878
Interest-bearing demand 346,039 346,039 306,356 306,356
Savings 782,640 782,640 739,376 739,376
Time 1,508,084 1,516,181 1,685,818 1,689,563
---------- ---------- ---------- ----------
Total deposits 3,085,093 3,093,190 3,151,428 3,155,173
Short-term borrowings 93,452 93,452 146,568 146,568
Long-term borrowings 260,345 263,210 205,216 203,937
Accrued interest payable 9,275 9,275 14,811 14,811
FIRST FINANCIAL BANCORP 28 2001 ANNUAL REPORT
NOTE 20 - FIRST FINANCIAL BANCORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
<Table>
<Caption>
December 31,
2001 2000
(Dollars in thousands)
ASSETS
Cash $ 21,159 $ 22,721
Investment securities 3,313 89
Subordinated notes from subsidiaries 7,500 7,500
Investment in subsidiaries
Commercial banks 313,462 321,504
Savings banks 30,973 32,884
-------- --------
Total investment in subsidiaries 344,435 354,388
Loans
Commercial 16,352 0
Real estate - mortgage 605 0
-------- --------
Total loans 16,957 0
Allowance for loan losses 3,502 0
-------- --------
Net loans 13,455 0
Bank premises & equipment 1,325 1,347
Other assets 27,592 20,555
-------- --------
TOTAL ASSETS $418,779 $406,600
======== ========
LIABILITIES
Short-term borrowings $ 23,500 $ 3,500
Dividends payable 7,004 6,915
Other liabilities 3,732 1,053
-------- --------
TOTAL LIABILITIES 34,236 11,468
SHAREHOLDERS' EQUITY 384,543 395,132
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $418,779 $406,600
======== ========
</Table>
STATEMENTS OF EARNINGS
Year Ended December 31,
2001 2000 1999
(Dollars in thousands)
Income
Interest income $ 313 $ 670 $ 140
Other interest income 94
Dividends from subsidiaries 75,647 58,018 38,348
-------- -------- --------
TOTAL INCOME 76,054 58,688 38,488
EXPENSES
Interest expense 665 11 0
Provision for loan losses 3,752
Salaries and employee benefits 4,972 2,889 3,211
Other 4,909 1,522 5,683
-------- -------- --------
TOTAL EXPENSES 14,298 4,422 8,894
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 61,756 54,266 29,594
Income tax benefit (4,186) (1,119) (1,310)
-------- -------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 65,942 55,385 30,904
Equity in undistributed net earnings of subsidiaries (22,633) 2,837 19,419
-------- -------- --------
NET EARNINGS $ 43,309 $ 58,222 $ 50,323
======== ======== ========
FIRST FINANCIAL BANCORP 29 2001 ANNUAL
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
2001 2000 1999
(Dollars in thousands)
OPERATING ACTIVITIES
Net earnings $ 43,309 $ 58,222 $ 50,323
Adjustments to reconcile net earnings to net cash provided by operating activities
Equity in undistributed net earnings of subsidiaries 22,633 (2,837) (19,419)
Provision for loan losses 3,752 0 0
Provision for depreciation and amortization 1,228 471 60
Deferred income taxes 92 38 78
(Decrease) increase in dividends payable 89 (65) 465
Increase (decrease) in accrued expenses 2,200 (2,338) 2,251
(Increase) decrease in receivables (6,776) (2,820) (4,550)
-------- -------- --------
Net cash provided by operating activities 66,527 50,671 29,208
INVESTING ACTIVITIES
Subordinated notes from subsidiaries 0 0 (7,500)
Capital contributions to subsidiaries (9,434) (19,397) (4,200)
Purchase of investment securities (3,000) 0 0
Net increase in loans (17,207) 0 0
Purchases of premises and equipment (90) (27) (1,189)
Other 0 77 84
-------- -------- --------
Net cash used in investing activities (29,731) (19,347) (12,805)
FINANCING ACTIVITIES
Increase in short-term borrowings 20,000 3,500 0
Cash dividends (28,400) (27,901) (25,570)
Purchase of common stock (30,057) (16,518) 0
Proceeds from exercise of stock options, net of shares purchased 99 116 780
-------- -------- --------
Net cash used in financing activities (38,358) (40,803) (24,790)
-------- -------- --------
DECREASE IN CASH (1,562) (9,479) (8,387)
Cash at beginning of year 22,721 32,200 40,587
-------- -------- --------
CASH AT END OF YEAR $ 21,159 $ 22,721 $ 32,200
======== ======== ========
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, 2001, and 2000, 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,
2001. 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Cincinnati, Ohio
January 17, 2002
FIRST FINANCIAL BANCORP 30 2001 ANNUAL REPORT
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)
2001
Interest income $76,999 $74,853 $71,434 $66,459
Interest expense 36,554 34,766 30,085 25,375
------- ------- ------- -------
Net interest income 40,445 40,087 41,349 41,084
Provision for loan losses 2,528 8,527 5,206 10,552
Noninterest income
Investment securities gains 148 42 8 104
All other 12,713 13,591 12,794 14,842
Noninterest expenses 29,835 29,999 30,660 34,460
------- ------- ------- -------
Income before income taxes 20,943 15,194 18,285 11,018
Income tax expense 6,930 5,363 6,173 3,665
------- ------- ------- -------
NET EARNINGS $14,013 $ 9,831 $12,112 $ 7,353
======= ======= ======= =======
Per share
NET EARNINGS - BASIC $ 0.29 $ 0.21 $ 0.26 $ 0.16
======= ======= ======= =======
NET EARNINGS - DILUTED $ 0.29 $ 0.21 $ 0.26 $ 0.16
======= ======= ======= =======
CASH DIVIDENDS PAID $ 0.15 $ 0.15 $ 0.15 $ 0.15
======= ======= ======= =======
Market price
HIGH BID $ 16.61 $ 17.08 $ 17.23 $ 17.75
======= ======= ======= =======
LOW BID $ 14.41 $ 14.58 $ 14.97 $ 15.23
======= ======= ======= =======
2000
Interest income $75,272 $78,232 $80,243 $79,556
Interest expense 33,172 35,406 38,306 38,540
------- ------- ------- -------
Net interest income 42,100 42,826 41,937 41,016
Provision for loan losses 2,361 2,222 2,674 4,043
Noninterest income
Investment securities gains 14 11 12 2
All other 10,937 11,671 12,449 13,305
Noninterest expenses 29,725 30,644 29,128 28,521
------- ------- ------- -------
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 $ 0.28 $ 0.29 $ 0.31 $ 0.31
======= ======= ======= =======
NET EARNINGS - DILUTED $ 0.28 $ 0.29 $ 0.31 $ 0.31
======= ======= ======= =======
CASH DIVIDENDS PAID $ 0.14 $ 0.14 $ 0.14 $ 0.14
======= ======= ======= =======
Market price
HIGH BID $ 18.81 $ 18.75 $ 18.46 $ 16.19
======= ======= ======= =======
LOW BID $ 14.76 $ 15.95 $ 15.00 $ 13.39
======= ======= ======= =======
First Financial Bancorp common stock trades on The Nasdaq Stock Market (?)
under the symbol FFBC.
(1) First Financial Bancorp's per share data and market price information is
stated as if the 5% stock dividends declared in 2001 occurred January 1,
2000.
FIRST FINANCIAL BANCORP 31 2001 ANNUAL REPORT