Two years ago, First Financial Bancorp embarked on Project Renaissance, a plan
for Bringing the Future Into Focus by regionalizing its affiliate banks and
expanding into growth markets. Since then, much has been accomplished by all
Bancorp associates - through extra hours and extraordinary efforts - in Meeting
the Challenge of Change. With the regionalization project nearly complete,
Bancorp now continues its strategic direction with more aggressive plans for
growth and expansion through new markets, new branches, revitalized customer
service, and more extensive relationships. In short, Bancorp is Moving Forward &
Growing.
[FIRST FINANCIAL LOGO]
FIRST FINANCIAL BANCORP - 2002 ANNUAL REPORT
2002
FIRST FINANCIAL BANCORP PROFILE
Founded in April of 1983 as a two-bank holding company with a focus on community
banking, First Financial Bancorp is now a $3.7 billion publicly owned bank
holding company with diversified interests in banking, asset management, and an
insurance agency. Bancorp serves 500,000 customers across four states, has over
4,000 shareholders, and remains focused on providing financial-services
solutions for the ever-changing needs of customers.
FINANCIAL HIGHLIGHTS 2002 2001 % CHANGE
---- ---- --------
(Dollars in thousands, except per share data)
EARNINGS
Net interest income $ 162,757 $ 162,965 -0.13%
Net Earnings 48,235 43,309 11.37%
PER SHARE
Net earnings - basic $ 1.05 $ 0.91 15.38%
Net earnings - diluted 1.05 0.91 15.38%
Cash dividends declared 0.60 0.60 0.00%
Book value (end of year) 8.39 8.25 1.70%
Market price (end of year) 16.39 17.65 -7.14%
AVERAGE
Total assets $ 3,720,050 $3,857,371 -3.56%
Deposits 2,951,088 3,111,279 -5.15%
Loans, net of unearned income 2,785,717 2,915,723 -4.46%
Investment securities 627,824 591,217 6.19%
Shareholders' equity 384,618 395,790 -2.82%
RATIOS
Return on average assets 1.30% 1.12% 16.07%
Return on average shareholders' equity 12.54% 10.94% 14.63%
Average shareholders' equity to average 10.34% 10.26% 0.78%
assets
Net interest margin (fully tax equivalent) 4.83% 4.67% 3.43%
TABLE OF CONTENTS
Management's Letter to Shareholders 1
Corporate Overview 4
Mission Statement 12
Bancorp Board of Directors and Officers 12
Management's Discussion and Analysis 15
Consolidated Financial Statements 28
Notes to Consolidated Financial Statements 32
Quarterly Financial and Common Stock Data 48
Corporate Structure 49
Shareholder Information 52
MANAGEMENT'S LETTER TO SHAREHOLDERS
As business conditions change, commercial enterprises must use all of their
creative resources to maintain a core level of business activity as they undergo
major efforts to strengthen their foundations and develop new ways of
approaching the future.
So it was for First Financial Bancorp in 2002 as we continued to reshape our
company through Project Renaissance. We are eager to provide you more detail
about our accomplishments of this year, including improved earnings, the
formation of two regional banks, and conversion to a common data processing
system. Then again, there are areas where we fell short of our expectations, and
we want to share those also.
To our disappointment, the merger of affiliate banks into the planned
northwestern Ohio region is not yet complete. In spite of heroic efforts and
much positive improvement, credit-quality issues at Community First have slowed
our consolidation plan for this region. Given this situation, Bancorp s
management is currently considering alternative merger options.
In addition to their normal banking duties, our staff has accommodated the
additional demands of recent conversions and mergers participation in training,
learning new processes, adjusting to new products, and more. We believe these
distractions caused us to miss some opportunities for loan and deposit growth in
2002.
Increased efficiency was certainly one of our primary goals with Project
Renaissance. We did not achieve our initial projections in 2002, but our focus
remains on this potential. You may rest assured that we have new initiatives in
place to improve efficiencies.
On the positive side, the operational changes of 2002 will help us do a better
job of serving tomorrow's customers and shareholders.
At year-end and for the first time in our 20-year history all of our banks are
operating on a common data-processing system. We now have a standardized product
platform, making it possible for us to take a consolidated approach to marketing
those products.
Throughout 2002, we continued our strategic approach to protect the company and
your investment in it by developing new corporate initiatives to address the
Sarbanes-Oxley Act. Your board of directors has formed a Governance Committee.
In addition, the corporation's management has convened a Governance/Disclosure
Committee and strengthened our focus on managing risk with the hiring of a
senior vice president with responsibility for risk management. These are all
initiatives that demonstrate our proactive stance in preserving the reputation
that Bancorp has in the industry, as well as with shareholders and analysts.
1
MANAGEMENT'S LETTER TO SHAREHOLDERS
GROWTH BY NUMBERS
If you have had your eye on the market, you would not be surprised that a
sluggish national economy and lagging consumer confidence limited growth for
many businesses in 2002. Despite the additional rate cut by the Federal Reserve
in 2002, uncertainty remains in the market and the minds of consumers.
Nonetheless, First Financial Bancorp still achieved a net earnings increase of
11.4 percent in 2002 or a diluted earnings per share increase of 15.4 percent.
Net earnings were $48,235,000 or $1.05 per share for 2002.
We are very proud to have been able to continue providing the safety and
stability of regular dividend payments, extending our record of 79 consecutive
quarters of dividend payments since the company was formed in 1983. At year-end
2002, a $1,000 investment made in 1983 was worth some $14,529, a return of 1,353
percent.
We also saw improvements in both our return on equity and return on assets for
the year. Our return on equity of 12.5 percent compares to 10.9 percent reported
in 2001. Meanwhile our return on assets increased to 1.30 percent compared to
1.12 percent for 2001.
Across the country, many financial institutions saw flat or declining trust
revenues in 2002. In this difficult economy, First Financial Bancorp achieved an
increase of approximately 4.2 percent in trust revenues over 2001. Total assets
held in trust remained at $3 billion. In the trust business, where market swings
greatly impact performance, we continue to be pleased with our results and feel
that there are great opportunities for continued growth throughout all of our
affiliates.
The Federal Reserve's rate cut, in an already low-interest-rate environment,
made it tough to grow or even maintain net interest income and net interest
margin. In total we saw net interest income decline modestly to $163 million, a
0.13 percent decrease compared to 2001. Bancorp did an excellent job of managing
net interest margin, as it grew to 4.83 percent versus 4.67 percent in 2001.
Over the last couple of years, credit quality has been area of great focus among
all affiliates. In 2002, we continued to monitor risk and respond accordingly we
increased our reserve ratio to 1.75 percent from 63 percent in 2001. This is an
area that continues to
[PHOTO OF PONTIUS AND LEEP]
(L to R) Stanley N. Pontius, President
and CEO, and Bruce E. Leep, who was
elected Chairman of First Financial
Bancorp on April 23, 2002.
MANAGEMENT'S LETTER TO SHAREHOLDERS
require considerable attention and involvement from Bancorp management, as well
as a team of key individuals from several affiliates.
POSITIONED TO GROW
With our new standardized delivery system, First Financial Bancorp now has a
more robust infrastructure that benefits all affiliates in a variety of ways. We
are focusing on growing market share in all of our regions with a rejuvenated
emphasis on expanding our community banking franchise into new markets.
During 2002, we laid the groundwork for expansion in several key markets. We
anticipate that our affiliates will open as many as eight new locations in 2003.
This will expand our reach in Indiana (Columbus, Warsaw, and Crown Point), Ohio
(southeastern Butler County and Warren County) and northern Kentucky. We
continue to look for additional locations with strong potential for growth where
we feel that our banking philosophy provides a strategic advantage to us and a
positive alternative for the customer.
To make sure that our regions grow in appropriate ways, First Financial Bancorp
has established a Corporate Branch Expansion Committee to oversee branching and
growth.
Throughout 2002, even as we expended time and energy on conversions related to
Project Renaissance, we continued to offer exciting new products that are in
demand in our market areas: proprietary mutual funds, insurance services,
internet banking, online bill payment, and check cards, all of which will
position us to improve earnings per share and return on equity in 2003. We
continue to look for ways to improve our product offerings, especially those
that provide additional sources of fee income.
LEADERSHIP FOR TOMORROW
With firm conviction, we assert that our leadership is the strongest in this
company's history. As always, we continue to train and groom our associates who
show potential for responding to challenging career opportunities. In addition,
we have strengthened our company by hiring new executives with valuable
experience and fresh perspectives.
Throughout our affiliates and at the holding company, there were several changes
in key leadership positions in 2002. Doug Lefferson assumed the position of
Chief Financial Officer of First Financial Bancorp upon Mike O'Dell's
retirement. We continue to benefit from Mike's service as chairman of the board
at Community First Bank & Trust.
In September, Pat Hart was promoted to executive vice president of First
Financial Bank. Pat's entire banking career has involved a series of
increasingly important roles within our holding company.
We are fortunate to have an experienced and ambitious leadership team in place
throughout our organization.
LOOKING AHEAD
In many ways, we saw our associates at their best in 2002 as they rose to the
challenges inherent in Project Renaissance while also helping their customers.
They exhibited the dedication and spirit that have been the hallmark of our
staff for many years.
To our loyal customers, we express gratitude for choosing us. Beyond that, we
renew our commitment to doing our best in 2003 to warrant their continued
confidence.
To our shareholders, we pledge a new level of initiative that will help us grow
our business.
Sincerely,
/s/ Bruce E. Leep
Bruce E. Leep
Chairman
/s/ Stanley N. Pontius
Stanley N. Pontius
President and CEO
3
2002 ANNUAL REPORT
Whether you are a shareholder, an associate, or a customer, it's an exciting
time to be part of First Financial Bancorp.
Looking back at the past two years, we are truly proud of the dedication and
hard work expended by so many as we brought the future into focus through
Project Renaissance. Even in difficult economic times and in spite of some of
the most disturbing events in our nation's history we met the challenge of
change and maintained our steadfast commitment to the rebirth of our company
through 2001 and 2002.
Now, as we move forward, growth is not just our theme, but our mission. In 2002,
we continued to lay the groundwork for growth, and firm evidence will be
forthcoming in 2003.
BUILDING NAME RECOGNITION
A key element of Project Renaissance was to combine our banks into regional
entities.
[PHOTO OF EMPLOYEES]
(L to R) LeEtta Hunter and Karen Burks are part of the team of First Financial
Bancorp Service Corporation associates who process an average of five million
items a month using new technology and equipment.
As a result of the consolidations we accomplished in 2002, many of our customers
and communities are getting to know us by new names. When Hebron Deposit Bank
and First National Bank of Southwestern Ohio merged in July, the new regional
bank was introduced as First Financial Bank. Likewise, Sand Ridge Bank is the
new identity for the regional bank that combined National Bank of Hastings,
Bright National Bank, and Sand Ridge Bank. These affiliates began quickly
implementing a disciplined marketing strategy as well as their dedication and
commitment to service to establish and build name recognition with existing and
prospective customers in their respective markets.
TAKING GIANT STEPS IN TECHNOLOGY
Bancorp's companywide conversion to a common data-processing system was
completed in November and is now beginning to deliver on its promise to increase
efficiency and provide the foundation for a competitive advantage for the
future.
All 104 banking centers in the First Financial Bancorp network are now connected
to the Horizon Banking System, a major advance that allows our front-line staff
to focus on customers more than paperwork. Simplified and streamlined procedures
now give
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2002 ANNUAL REPORT
[PHOTO OF BANK DRIVETHRU]
Busy Sand Ridge Bank customers in Highland, Indiana, appreciate the access to
ten drive-thru lanes with two ATMs at the 45th Street banking center. Designed
to meet the needs of a more densely populated market, this facility also adds
convenience for their customers with extended hours.
banking center associates more time to listen to their customers and cross-sell
additional products and services. Over time, centralized back-office services
will add even greater value and more efficiencies to the company's bottom line.
Of course, an investment was required both in time and capital for these
enhanced technologies. Yet our plan and the investments required are now
providing a more cost-effective delivery of products and services to the 500,000
customers who depend on our affiliates to satisfy their banking needs.
Our operations affiliate, First Financial Bancorp Service Corporation, steered
us steadfastly through our two-year operational conversion improving our
communications network, installing new processing equipment, and upgrading our
computer hardware and software.
Each of these enhancements was accomplished while maintaining everyday services
to customers, and processing an average of five million items every month in
2002.
Project Renaissance has also brought new and enhanced products to our affiliates
and the customers they serve. Nationally, the percentage of bank customers who
use online bill payment grew significantly in 2002. At our banks, we're seeing
steady growth in the number of customers who rely on our online banking service
to do their personal banking. At the same time, businesses are also responding
well to our new online cash management product that provides them greater
control and flexibility over their accounts as well as access from any location
where they have a computer.
Existing and emerging technologies are also enabling us to offer greater
convenience to customers as they go about day-to-day tasks like paying bills and
making purchases. Every day, our affiliates are seeing greater use of telephone
banking and check cards, two products that keep us viable in a keenly
competitive market. In addition, all of our customers now enjoy no-fee access to
our expanding corporate network of 110 automated teller machines located across
our four-state market.
These technology enhancements attractive to current and prospective customers
alike constitute a core component of Project Renaissance. We are pleased to
report that we are already beginning to see their benefit.
5
2002 ANNUAL REPORT
[PHOTO OF STUDENTS]
At Mason High School, Betsy Koval (far right), Marketing Officer, is First
Financial Bank's primary mentor for the student officers of Comet Savings: (L to
R) Stephanie Sheppard, Amy Sailor, Amanda White, instructor Cindy Donnelly,
Allison Salmons, and Adam Ritz.
GROWING MARKETS REQUIRE NEW FACILITIES
Having positioned ourselves for strategic expansion and growth, we are eagerly
targeting new opportunities. In 2003, we expect to add as many as eight new
banking centers in strategic locations across our four-state market. With each
new location, we intend to capitalize on market opportunities by choosing sites
and designing facilities to meet varying consumer needs.
One such target is southeastern Butler County, the third-fastest-growing area in
Ohio. There, our First Financial Bank region already has a market presence that
will be further increased as we open at least two new banking centers in 2003.
This area, between I-75 and I-71 in the suburbs north of Cincinnati, offers us a
wealth of commercial and retail opportunities. In addition to planning new
facilities, we have increased our banking hours at several current banking
centers in this area so we offer greater convenience for our customers.
In tandem with our search for growth opportunities near Cincinnati, our First
Financial Bank affiliate has embarked on a unique financial literacy program
sponsoring the first in-school simulated bank in southwestern Ohio and mentoring
the bank's student staff. Comet Savings & Loan, located inside the new Mason
High School, now serves over 2,000 teachers and students with First Financial
Bank providing all the training and furnishings for a fully functional
[PHOTO OF PATRICK HART] Patrick J. Hart,First Financial Bank's new
Executive Vice President is charged with overseeing growth initiatives for
the bank, including new banking centers and strategic business development.
6
2002 ANNUAL REPORT
and educational endeavor. This project brings the officers and staff of First
Financial Bank into a promising partnership with a growing community where the
bank hopes to increase its customer relationships.
South of the Ohio River in northern Kentucky, our First Financial Bank region is
also making plans to open an additional office. Northern Kentucky is an area of
exceptionally strong growth potential with an abundance of mid- to large-size
commercial businesses, where construction abounds in affordable yet upscale
residences for young professionals.
In the northwestern Indiana community of Crown Point the county seat of Lake
County our Sand Ridge Bank broke ground for a new facility at the end of 2002.
This office will provide Sand Ridge Bank with yet another excellent location to
build new relationships in a rapidly growing, mostly suburban area. Always
looking toward the future, Sand Ridge Bank also purchased a site in
Merrillville, Indiana, for possible development of another banking center.
In north central Indiana, Indiana Lawrence Bank is planning to open an office
that will focus on commercial business development in the city of Warsaw, a
center for orthopedic manufacturing.
And in the city of Columbus, Indiana, our Heritage Community Bank also has
exciting plans for revamping its presence. On one of the busiest routes in the
city, Heritage expects to open a new full-service suburban banking center by
mid-2003. In addition, the bank's main office will be relocated to the south end
of downtown Columbus, gaining drive-up lanes and a drive-up ATM while retaining
close proximity to retail shops, county and city administration offices, and a
riverfront development that has been proposed for the near future.
[PHOTO OF A REPORTER INTERVIEWING DAVID HARVEY, CEO]
[PHOTO OF GROUNDBREAKING] At the groundbreaking for the new Crown Point Banking
Center, a reporter interviews David Harvey, President and Chief Executive
Officer of Sand Ridge Bank. In the background is an architect's rendering
showing how the new building will reflect the design of the Lake County Court
House. Lifting the first shovels of dirt for the new building are (L to R) Sam
Van Til, Director of the bank; Harvey; Bruce E. Leep, Chairman of the Board;
James D. Metros, Mayor of Crown Point; Gayle Van Sessen, Executive Director of
the Crown Point Chamber of Commerce; and Keith Nielsen, CCIM, Broker Assoc.,
Industrial Specialist.
7
2002 ANNUAL REPORT
[THREE PHOTO'S OF OFFICER'S PROVIDING FULL SERVICE SOLUTIONS FOR CUSTOMERS]
Providing full-service solutions for customers: (L to R) John R. Kuczynski,
Senior Vice President at First Financial Bank, meets with a trust client; Dennis
C. Dietz, First Vice President and Investment Officer for First Financial
Capital Advisors, analyzes investment alternatives in the Legacy Funds Group;
and Mark A. Willis, President and Chief Executive Officer of Flagstone
Insurance, conducts training to help associates learn to make insurance
referrals.
PROVIDING DIVERSE FINANCIAL SOLUTIONS
Our investment and trust professionals have been serving a broad range of
clients for several generations, helping them to implement their estate planning
goals and investment objectives. To capitalize on opportunities to provide
full-service solutions for customers, we continue to fine-tune the array of
services offered by our Trust Division. While trust is the mainstay of this
segment of our business, we have also developed several diversified financial
products for our customers.
In May of 2002, the Trust Investment Department reorganized as First Financial
Capital Advisors, LLC, a wholly owned subsidiary registered as an investment
advisor with the Securities and Exchange Commission. First Financial Capital
Advisors serves as investment advisor to a new group of mutual funds the Legacy
Funds Group which are widely used in our trust accounts and broadly available to
all customers. This new offering allows us to appropriately serve a growing
segment of investment-savvy families with needs beyond savings accounts and
certificates of deposit.
The year 2002 also saw Flagstone Insurance and Financial Services continue to
perform beyond expectations. With offices in two of our affiliates, Flagstone
gives us the opportunity to offer consumers a full complement of insurance
services from people they know and trust. At the end of 2002, Flagstone signed a
letter of intent and subsequently purchased an insurance agency in Connersville,
Indiana, that will expand our insurance offerings in this region.
The Legacy Funds and Flagstone Insurance are prime examples of how we have
squarely focused on our customers expanding our offerings to meet their changing
needs and an increasing desire for convenient, one-stop sources of financial
products and services.
PROGRESS THOUGH OUR PEOPLE
Over the course of Project Renaissance, we moved a few of our most experienced
bankers into areas where they could make an even greater contribution to the
success of our growing organization. In addition, we recruited several talented
bankers who have brought experience, ability and creativity to our organization.
Through this strategy, our management team has infused new ideas and new
attitudes into the way we operate, making us ready to usher in a new era of
growth and success.
8
2002 ANNUAL REPORT
In 2002, we witnessed an exciting synergy as we formed teams of associates to
accomplish an aggressive array of company goals. As they continue to work
together, these teams develop a camaraderie that breaks down barriers between
regions and helps them become more keenly aware of how they can positively
impact First Financial Bancorp's future.
Given our strong focus on growth, each of our associates must be proactive and
their sales skills must be sharp. To achieve optimum results, we provided
additional sales training to all business development officers in 2002, and
implemented a standardized incentive compensation program for these officers.
In addition to training individuals, we are developing sales teams that match
commercial loan officers with trust officers and private bankers to work
together on business development initiatives. These sales teams operate with a
broad long-term goal: to cultivate a comprehensive business relationship with
each client.
[PHOTO OF LEBUDA]
[PHOTO OF STOFFER AND NIEKAMP]
Ruth LaBuda, Vice President at Sand Ridge Bank; Michele Stoffer, Assistant Vice
President at First Financial Bank, and Kevin Niekamp, Vice President at
Community First, are among our most successful associates in developing new
business. In 2002, LaBuda was recognized for outstanding sales of investment
products, both nationally and within First Financial Bancorp.
FOCUSING ON THE COMMUNITY
A strong presence and involvement in our communities has long been the hallmark
of First Financial Bancorp affiliates. Beyond our affiliates longtime commitment
to a broad variety of groups, events and programs in their respective markets,
each year provides compelling examples of our associates vital roles in the
communities they call home.
9
2002 ANNUAL REPORT
When a devastating tornado struck Van Wert, Ohio, in November of 2002 destroying
over 40 homes, severely damaging another 50, and putting many residents out of
work our Community First affiliate responded immediately. Community First
associates mobilized to provide meals to aid workers and residents, and the bank
stepped forward with low-interest loans and an expedited loan application and
approval process for consumers and commercial businesses needing help.
Building on the future, our affiliates also offer scholarships to deserving
students in their markets on an ongoing basis. Just one example: First Financial
Bank funds a business technology scholarship, a minority scholarship, and four
others that are dedicated to children of bank associates.
[PHOTO OF MURREL, HOCKEMEYER, PONTIUS, IMMELT, HALL]
10
2002 ANNUAL REPORT
Through events and opportunities such as these, we reinforce what it means to be
community bankers.
MOVING FORWARD AND GROWING
As we go forward, growth is our focus. We are genuinely excited about entering
new markets, building new facilities, and developing new business. Our vision is
clear growth for shareholders, superior service for customers, and an energized
sales climate that promises success for associates.
We are indeed prepared to move forward and grow.
First Financial Bancorp Senior Staff: (L to R) C. Thomas Murrell, III, Senior
Vice President and Chief Lending Officer; Rex A. Hockemeyer, Senior Vice
President, Information Technology; Stanley N. Pontius, President and Chief
Executive Officer; Mark W. Immelt, Senior Vice President; James C. Hall,
Executive Vice President; Brian D. Moriarty, Senior Vice President, Human
Resources; C. Douglas Lefferson, Senior Vice President and Chief Financial
Officer; Cheryl R. Lipp, Vice President, Business Development and Marketing and
John R. Kuczynski, Senior Vice President at First Financial Bank.
[PHOTO OF MORIARTY, LEFFERSON, LIPP, KUCZYNSKI]
11
MISSION STATEMENT
To provide a balanced offering of innovative, quality differentiated financial
products, and extraordinary customer service to our clientele.
To safeguard the interests of our depositors.
To maximize the return on investment to our shareholders by consistently earning
the highest possible returns, while being ever mindful of the associated ethical
and moral considerations necessary to ensure Bancorp's financial stability and
long-term independence.
To promote the economic growth and development of the communities we serve.
To provide a stimulating work environment and optimal career path potential for
all Bancorp associates in order to instill the highest level of commitment and
dedication to First Financial Bancorp and our varied constituencies.
BOARD OF DIRECTORS & OFFICERS
DIRECTORS
Bruce E. Leep, Chairman of the Board, First Financial
Bancorp, and Chairman of the Board, Sand Ridge Bank
Stanley N. Pontius, President and Chief Executive Officer,
First Financial Bancorp, and Chairman of the Board,
First Financial Bank
Richard L. Alderson, Partner,
Real Estate Investment and Development
Martin J. Bidwell, President, Magnode Corp.
Don M. Cisle, President, Don S. Cisle Contractor, Inc.
Corinne R. Finnerty, Partner,
McConnell & Finnerty, Attorneys-at-Law
Carl R. Fiora, Retired President and
Chief Executive Officer, Armco Steel Co., L.P.
Dr. James C. Garland, President,
Miami University, Oxford, Ohio
Murph Knapke, Owner, Knapke Law Office, Attorney-at-Law
Stephen S. Marcum, Partner, Parrish,
Fryman & Marcum Co., L.P.A.
Barry S. Porter, Retired Chief Financial Officer,
The Ohio Casualty Corp.
Steven C. Posey, President, Posey Management Corp.
Perry D. Thatcher, President and CEO,
Ample Industries, Inc.
DIRECTORS EMERITI
Arthur W. Bidwell, Thomas C. Blake, Merle F. Brady, Don S.
Cisle, Jr., Edward N. Dohn, Richard J. Fitton, Vaden Fitton,
F. Elden Houts, Robert M. Jones, Charles T. Koehler, Barry J.
Levey, Robert W. Long, Joseph L. Marcum, Robert Q. Millan,
Frank C. Neal, James L. Pease, Jr., C. Wesley Rowles, Joel H.
Schmidt, Hon. C. William Verity, Jr.
OFFICERS
President and Chief Executive Officer
Stanley N. Pontius
Executive Vice President
James C. Hall
Senior Vice President and Chief Financial Officer
C. Douglas Lefferson
Senior Vice President, Information Technology
Rex A. Hockemeyer
Senior Vice President
Mark W. Immelt
Senior Vice President, Human Resources
Brian D. Moriarty
Senior Vice President and Chief Lending Officer
C. Thomas Murrell, III
Senior Vice President, Risk Management
Robert C. Oberg
First Vice President, Investments
Gary A. Eppley
Vice President, Controller
J. Franklin Hall
Vice President, Assistant Controller
Elizabeth E. Fontaine
Vice President, Business Development and Marketing
Cheryl R. Lipp
Vice President and Director of Asset/Liability Management
Lawrence P. Mulligan, Jr.
Legal Officer and Secretary
Janie McCauley
12
FINANCIALS
Asset/liability management is a key factor in the financial performance of First
Financial Bancorp. During 2002, our company focused on opportunities for
interest rate adjustments that would positively impact the margin without
jeopardizing customer relationships. This disciplined approach made a
significant contribution to Bancorp's success in managing the margin and in
improving its financial performance. In fact, during the past decade we have
consistently ranked among the top five Ohio and Indiana publicly traded bank
holding companies with regard to net interest margin.
[PHOTO OF MULLIGAN, LEFFERSON, HALL]
(L to R) Lawrence P. Mulligan, Vice President and Director of Asset/Liability
Management, C. Douglas Lefferson, Senior Vice President and Chief Financial
Officer and J. Franklin Hall, Vice President and Controller.
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. All dollar amounts,
except per share data, are expressed in thousands of dollars.
Bancorp is a bank and savings and loan holding company headquartered in
Hamilton, Ohio, having rescinded its financial holding company election
effective July 31, 2002. Management initially believed that becoming a financial
holding company under the Gramm-Leach-Bliley Act of 1999 would be beneficial.
Bancorp later withdrew its election of financial holding company status because
its strategic plans did not include utilizing the expanded activities for which
it qualified under the structure. The only activity Bancorp pursued as a
financial holding company was its direct ownership of an insurance agency. In
conjunction with the change Bancorp transferred its insurance agency, Flagstone
Insurance and Financial Services, to one of Bancorp's subsidiaries, Heritage
Community Bank. Additionally, because financial holding companies can engage in
expanded activities, they are subject to more stringent regulatory requirements
than those that apply to bank holding companies. Previously disclosed
operational issues (credit quality, Bank Secrecy Act) at Community First Bank &
Trust might have caused Bancorp to be unable to continue as a financial holding
company. Since the financial holding company activities were not necessary for
Bancorp to achieve its strategic plans, Bancorp decided to withdraw its
election. Bancorp's change in status from a financial holding company to a bank
and savings and loan holding company has not had any impact on the earnings or
financial position of the company or disrupted any of Bancorp's strategic plans.
As of December 31, 2002, Bancorp owned eleven subsidiaries operating in western
Ohio, Indiana, northern Kentucky, and southern Michigan. These subsidiaries
include seven commercial banks, one savings bank, a service corporation for
Bancorp's subsidiaries, a statutory trust company (established to facilitate the
issuance of trust preferred securities), and a registered investment advisory
company.
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. The end
result of this multi-phased regionalization strategy was to have Bancorp's
banking affiliates operate as four regional financial institutions on a common
data processing system. Bancorp initiated this plan to gain efficiencies through
consolidation, to provide a structure with a smaller number of subsidiaries that
could more easily be managed, and to better position the company for growth, for
instance by reducing operational burdens on certain employees and enabling them
to focus more on customer sales and service. All the data processing conversions
were completed and three of the four regional financial institutions have been
formed.
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, and converted to a common data processing system.
During the second and third quarters of 2002, several Project Renaissance
benchmarks were achieved. First, in May 2002, the data processing conversions at
Community First Bank & Trust, Citizens First State Bank, The Clyde Savings Bank
Company, Fidelity Federal Savings Bank, and Indiana Lawrence Bank were
completed. Also in May 2002, Bancorp's new family of proprietary mutual funds,
The Legacy Funds Group, was introduced to the public. Additionally, on July 19,
2002, First National Bank of Southwestern Ohio and Hebron Deposit Bank were
merged and converted to the new system to form Bancorp's second new regional
bank, known as First Financial Bank, National Association.
Designed to serve northwestern Indiana and southern Michigan, Bancorp's
third regional financial institution was formed in November 2002, when Sand
Ridge Bank, Highland, Indiana; Bright National Bank, Flora, Indiana; and
National Bank of Hastings, Hastings, Michigan, merged and converted to the new
system.
Subject to regulatory approval, Bancorp has been planning to combine its
remaining banking affiliates (Community First Bank & Trust, Citizens First State
Bank, The Clyde Savings Bank Company, Fidelity Federal Savings Bank, and Indiana
Lawrence Bank) during 2003. Given the credit-quality issues at Community First,
Bancorp's management is currently considering alternative consolidation options.
Bancorp approved a stock repurchase plan on October 24, 2000. Bancorp
purchased 567,495 shares during 2002 to complete the authorized repurchase of
2.4 million shares under this plan. Under another stock repurchase program
approved on February 26, 2002, Bancorp was authorized to repurchase up to 5% of
its outstanding shares as of the approval date. Bancorp repurchased 1,272,205
shares under the 2002 plan during the year. On February 25, 2003, Bancorp's
Board of Directors authorized an additional stock repurchase program to
repurchase up to 5% of its shares outstanding upon the completion of the
February 26, 2002, program.
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 27 through 48.
RECENT MERGERS AND ACQUISITIONS
In February of 2003, Flagstone Insurance and Financial Services, an
affiliate of Bancorp's Heritage Community Bank, completed the cash purchase of
the Wilson Lawson Meyers Insurance Agency of Connersville, Indiana. While the
transaction is not material from a financial perspective, Bancorp looks forward
to the opportunity for increased market share in southeastern Indiana.
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 operates as part of Bancorp's Community First Bank & Trust affiliate.
OVERVIEW OF OPERATIONS
Bancorp's net earnings increased 11.4% to $48,235 in 2002, compared to net
earnings of $43,309 in 2001. Bancorp's diluted earnings per share increased
15.4% to $1.05, from $0.91 in 2001.
The 2002 earnings increased over 2001 as a result of significantly lower
provision for loan loss expense, due primarily to reduced net charge-offs.
Bancorp's reserve for loan losses as a percentage of loans increased to 1.75% at
the end of 2002 from 1.63% in 2001. The uncertain economy and continued decline
in interest rates were two factors that influenced Bancorp's 2002 results. The
effect of an uncertain economy created reduced loan demand in some of Bancorp's
markets. Declining interest rates resulted in lower loan and investment yields
in an environment where it was increasingly difficult to lower rates on deposits
correspondingly. These factors were reflected in Bancorp's net interest income
which showed a modest decline in 2002 from 2001. Noninterest income, excluding
security gains, increased 4.95%. This positive variance, however, was more than
offset by a 6.05% increase in noninterest expense.
Total assets at December 31, 2002, were $3,729,952, a decrease of $124,842
or 3.24% from year-end 2001. Total assets decreased as a result of loans, net of
unearned income, decreasing $124,161. Reference the Loans section of the
Management's Discussion and Analysis for further discussion.
Bancorp's net earnings decreased 25.6% to $43,309 in 2001, compared to net
earnings of $58,222 in 2000. Bancorp's diluted earnings per share decreased
23.5% to $0.91, from $1.19 in 2000.
Bancorp's earnings for 2001 were impacted by a dramatic drop in interest
rates and a slowing economy, in addition to its planned regionalization and
expansion expenses. Net interest income for 2001 decreased 2.93%. Higher-than-
normal nonperforming assets and loan charge-offs, along with a slowing economy
FIRST FINANCIAL BANCORP 15
TABLE 1 - FINANCIAL SUMMARY
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
SUMMARY OF OPERATIONS
Interest income $ 241,008 $ 289,745 $ 313,303 $ 281,018 $ 261,076
Tax equivalent adjustment 4,108 4,405 4,899 5,246 4,862
---------- ---------- ---------- ---------- ----------
Interest income - tax equivalent 245,116 294,150 318,202 286,264 265,938
Interest expense 78,251 126,780 145,424 117,194 110,434
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME - TAX EQUIVALENT $ 166,865 $ 167,370 $ 172,778 $ 169,070 $ 155,504
========== ========== ========== ========== ==========
Interest income $ 241,008 $ 289,745 $ 313,303 $ 281,018 $ 261,076
Interest expense 78,251 126,780 145,424 117,194 110,434
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME 162,757 162,965 167,879 163,824 150,642
Provision for loan losses 16,174 26,813 11,300 9,232 8,247
Noninterest income 56,699 54,242 48,401 43,766 41,106
Noninterest expenses 132,512 124,954 118,018 121,735 107,845
---------- ---------- ---------- ---------- ----------
Income before income taxes 70,770 65,440 86,962 76,623 75,656
Income tax expense 22,535 22,131 28,740 26,300 24,684
---------- ---------- ---------- ---------- ----------
NET EARNINGS $ 48,235 $ 43,309 $ 58,222 $ 50,323(2) $ 50,972
========== ========== ========== ========== ==========
Tax equivalent basis was calculated using a
35.0% tax rate in all years presented
PER SHARE DATA (1)
NET EARNINGS - BASIC $ 1.05 $ 0.91 $ 1.19 $ 1.02 $ 1.03
========== ========== ========== ========== ==========
NET EARNINGS - DILUTED $ 1.05 $ 0.91 $ 1.19 $ 1.02 $ 1.03
========== ========== ========== ========== ==========
Cash dividends declared
First Financial Bancorp $ 0.60 $ 0.60 $ 0.57 $ 0.54 $ 0.50
Sand Ridge Financial Corporation(3) N/A N/A $N/A $ 4.75 $ 18.00
Hebron Bancorp, Inc.(4) N/A N/A $N/A $ 1.50 $ 5.50
Average common shares outstanding - basic (in thousands) 45,881 47,428 48,776 49,191 49,333
Average common shares outstanding - diluted (in thousands) 46,001 47,479 48,862 49,335 49,531
SELECTED YEAR-END BALANCES
Total assets $3,729,952 $3,854,794 $3,932,512 $3,940,693 $3,538,869
Earning assets 3,407,769 3,505,791 3,604,916 3,572,755 3,253,574
Investment securities held-to-maturity 21,571 20,890 24,800 31,765 37,782
Investment securities available-for-sale 605,345 595,600 564,762 490,126 550,394
Loans, net of unearned income 2,748,088 2,872,249 3,008,066 3,036,376 2,654,146
Deposits 2,922,434 3,085,093 3,151,428 2,991,213 2,872,067
Noninterest-bearing demand deposits 422,453 448,330 419,878 408,712 392,999
Interest-bearing demand deposits 328,204 346,039 306,356 314,735 307,752
Savings deposits 841,336 782,640 739,376 778,405 758,808
Time deposits 1,330,441 1,508,084 1,685,818 1,489,361 1,412,508
Long-term borrowings 290,051 260,345 205,216 161,799 120,777
Shareholders' equity 377,603 384,543 395,132 372,539 358,265
RATIOS BASED ON AVERAGE BALANCES
Loans to deposits 94.40% 93.71% 100.76% 98.28% 89.07%
Net charge-offs to loans 0.53% 0.71% 0.37% 0.20% 0.24%
Shareholders' equity to
Total assets 10.34% 10.26% 9.62% 9.93% 10.46%
Deposits 13.03% 12.72% 12.45% 12.61% 12.64%
Return on assets 1.30% 1.12% 1.48% 1.37% 1.53%
Return on equity 12.54% 10.94% 15.34% 13.75% 14.59%
Net interest margin 4.71% 4.55% 4.59% 4.79% 4.86%
Net interest margin (tax equivalent basis) 4.83% 4.67% 4.72% 4.94% 5.02%
(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.
16 FIRST FINANCIAL BANCORP
and other individual customer-specific factors considered in determining the
adequacy of the allowance for loan and lease losses, resulted in 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 return on equity for 2002 was 12.5%, which compares to 10.9% and
15.3% for 2001 and 2000, respectively. Bancorp's return on assets for 2002 was
1.30%. This compares with return on assets of 1.12% and 1.48% for 2001 and 2000,
respectively.
Core net earnings exclude one-time expenses associated with Project
Renaissance, Bancorp's regionalization and expansion plan. Management believes a
discussion of core net earnings is valuable due to the non-recurring nature of
the expenses. Project Renaissance expenses, net of tax, were $2,641 and $3,172
for 2002 and 2001 respectively. Core net earnings increased 9.46% to $50,876
versus core net earnings of $46,481 in 2001. Core diluted net earnings per share
increased 13.3% to $1.11 in 2002, compared to $0.98 in 2001.
Core net earnings in 2001 decreased 20.6% to $46,481 versus core net
earnings of $58,508 in 2000. Core net earnings exclude one-time expenses
associated with Project Renaissance, as well as 2000 costs associated with the
merger of two Bancorp affiliates, First Financial Bank 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.
Excluding Project Renaissance expenses in 2002, Bancorp's return on equity
was 13.2% and its return on assets was 1.37%. Comparable ratios for 2001,
excluding Project Renaissance expenses, were return on equity of 11.7% and
return on assets of 1.20%.
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 1998 through 2002 is
shown in Table 1.
Interest income was $241,008 in 2002, a decrease of $48,737 or 16.8% from
2001. The decrease in interest income was primarily the result of a declining
interest rate environment beginning in 2001 and continuing through 2002 which
impacted Bancorp's variable rate loans. Interest income was also adversely
impacted as average loan balances decreased $130,007 or 4.46%. The greatest
contributing factor to the decline in average loan balances was a planned
reduction in residential real estate loans. Residential real estate loan demand
remained high due to refinancing activity into lower fixed-rate mortgages.
However, at a low point in the interest rate cycle, Bancorp's strategy was to
sell a majority of these mortgage loans while retaining the servicing and
customer relationships. A decline in other loan categories was partially the
result of decreased demand due to the effect of an uncertain economy.
Total interest expense was $78,251 in 2002, a decrease of $48,529 from
2001. 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 to 2.70% during 2002 from 4.18% during 2001.
Net interest income, the difference between total interest income and
total interest expense, decreased $208 or 0.13% during 2002 as a result of the
factors discussed previously. The 50 basis point reduction in rates initiated by
the Federal Reserve on November 6, 2002, caused net interest margin compression
and lower net interest income in the fourth quarter, which resulted from
non-parallel rate shifts in the earning asset and deposit rate curves. Bancorp
expects continued margin compression in 2003 as a result of the most recent rate
cut, continued downward repricing of adjustable rate earning assets, and
replacement of assets in a lower rate environment. One of the ways Bancorp
intends to offset the effects of the margin compression is by increasing
production of earning assets through its sales network.
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 4.27% for 2002 and 3.91% for 2001. The net
interest margin (net interest income divided by average earning assets)
increased 16 basis points, to 4.71% in 2002 from 4.55% in 2001. Throughout 2002,
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 and 2002,
Bancorp did well to increase the margin. The
TABLE 2 - VOLUME/RATE ANALYSIS - TAX EQUIVALENT BASIS (1)
2002 change from 2001 due to 2001 change from 2000 due to
-------------------------------- --------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
INTEREST INCOME
Loans $(10,867) $(32,951) $(43,818) $(13,701) $(10,228) $(23,929)
Investment securities (2)
Taxable 2,585 (4,999) (2,414) 2,229 (2,985) (756)
Tax-exempt (632) (221) (853) (1,000) (191) (1,191)
-------- -------- -------- -------- -------- --------
Total investment securities interest (2) 1,953 (5,220) (3,267) 1,229 (3,176) (1,947)
Interest-bearing deposits with other banks (29) (227) (256) 195 (301) (106)
Federal funds sold and securities
purchased under agreements to resell (836) (857) (1,693) 2,075 (145) 1,930
-------- -------- -------- -------- -------- --------
TOTAL (9,779) (39,255) (49,034) (10,202) (13,850) (24,052)
INTEREST EXPENSE
Interest-bearing demand deposits 38 (3,212) (3,174) 552 (1,084) (532)
Savings deposits 1,377 (8,354) (6,977) (12) (3,597) (3,609)
Time deposits (11,865) (26,238) (38,103) 2,443 (4,704) (2,261)
Short-term borrowings 513 (1,801) (1,288) (11,110) (4,814) (15,924)
Long-term borrowings 1,145 (271) 874 4,299 (617) 3,682
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust 139 0 139 N/A N/A N/A
-------- -------- -------- -------- -------- --------
TOTAL (8,653) (39,876) (48,529) (3,828) (14,816) (18,644)
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ (1,126) $ 621 $ (505) $ (6,374) $ 966 $ (5,408)
======== ======== ======== ======== ======== ========
(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.
2002 ANNUAL REPORT 17
margin is also influenced by the composition of the earning assets and funding
sources. Reallocation of balances in federal funds sold to higher yielding
investment securities, and the increase in noninterest-bearing deposits
positively impacted the net interest margin in 2002.
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 on a tax equivalent basis 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 27.
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 10 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 2002, 2001, and 2000 was $7,767, $7,541, and $6,622,
respectively.
NONINTEREST INCOME AND NONINTEREST EXPENSES
A listing of noninterest income and noninterest expenses for 2002, 2001,
and 2000 is reported in Table 3.
NONINTEREST INCOME
2002 VS. 2001. Excluding securities gains, 2002 noninterest income
increased $2,670 or 4.95% over 2001. This increase was driven by an increase in
gains on sales of mortgage loans, other noninterest income and trust revenue
offset by a decrease in service charges. Service charges on deposit accounts
were lower by $783 or 3.85% partially due to lower nonsufficient fund fees.
Gains from sales of mortgage loans increased $1,503 or 51.3%. Gains on sale of
loans was positively impacted by a low interest rate environment throughout
2002, which increased mortgage lending activity, particularly refinancings.
While mortgage originations were high, Bancorp sold the majority of these loans
while maintaining the servicing and customer relationships. Other noninterest
income increased $1,334 or 8.39% as the result of ongoing insurance revenue and
the sale of third-party mutual funds. Trust fee revenues increased 4.17% over
the same period in 2001 due to improved pricing. The 2002 increase is an
impressive result in a year when equity asset market values have decreased.
Included in other income for the full year of 2002 were impairment charges of
$496 against the mortgage-servicing asset in a valuation reserve. These mortgage
servicing right charges reduced noninterest income and were a result of
increased prepayment speeds on mortgages.
2001 VS. 2000. Excluding securities gains, 2001 noninterest income
increased $5,578 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.
Gains on the sales of mortgage loans increased to $2,929 from $1,018 in 2000.
Gains on sale of loans increased due to increased mortgage lending activity
driven by a falling interest rate environment and Bancorp's strategy of selling
the majority of the originated mortgage loans. Other noninterest income was up
10.9% as a result of increased insurance agency revenues, sales of third-party
mutual funds, and increased credit insurance sales.
NONINTEREST EXPENSES
2002 VS. 2001. Noninterest expenses increased $7,558 or 6.05% over 2001.
The category with the most significant increase was salary and employee
benefits. This increase is partially related to increased staff which includes
new income-generating personnel and strengthened administrative staff in the
areas of risk management, loan administration including problem credits, and
financial control. An increase of $946 in health care costs for 2002 versus 2001
also
TABLE 3 - NONINTEREST INCOME AND NONINTEREST EXPENSES
2002 2001 2000
-------------------- ------------------ -------------------
% CHANGE % CHANGE % CHANGE
INCREASE INCREASE INCREASE
TOTAL (DECREASE) TOTAL (DECREASE) TOTAL (DECREASE)
--------- ----- --------- ----- --------- -----
(Dollars in thousands)
NONINTEREST INCOME
Service charges on deposit accounts $ 19,565 (3.8%) $ 20,348 8.3% $ 18,786 13.0%
Trust revenues 15,385 4.2% 14,769 3.8% 14,230 6.1%
Gains from sales of mortgage loans 4,432 51.3% 2,929 187.7% 1,018 (66.0%)
Other 17,228 8.4% 15,894 10.9% 14,328 34.1%
--------- --------- ---------
Subtotal 56,610 4.9% 53,940 11.5% 48,362 10.6%
Investment securities gains 89 N/M 302 N/M 39 N/M
--------- --------- ---------
TOTAL $ 56,699 4.5% $ 54,242 12.1% $ 48,401 10.6%
========= ===== ========= ===== ========= =====
NONINTEREST EXPENSES
Salaries and employee benefits $ 71,619 10.1% $ 65,061 2.3% $ 63,606 3.2%
Net occupancy 7,973 6.7% 7,475 1.0% 7,402 5.5%
Furniture and equipment 7,729 22.1% 6,332 (0.7%) 6,374 1.9%
Data processing 7,817 7.8% 7,254 (13.9%) 8,427 11.7%
Deposit insurance 609 1.2% 602 11.1% 542 (1.6%)
State taxes 1,747 (8.7%) 1,913 (21.3%) 2,432 20.1%
Amortization of intangibles 847 (68.0%) 2,650 (18.9%) 3,268 (11.1%)
Restructuring charge 0 N/M 0 N/M (353) N/M
Other 34,171 1.5% 33,667 27.9% 26,320 0.8%
--------- --------- ---------
TOTAL $ 132,512 6.0% $ 124,954 5.9% $ 118,018 (3.1%)
========= ===== ========= ===== ========= =====
N/M = Not meaningful
18 FIRST FINANCIAL BANCORP
contributed to a rise in salary and employee benefit expense. Higher overtime
expenses related to the data processing conversions also contributed to an
increase in this category. Additionally, personnel efficiencies were not fully
recognized in 2002 as it was the primary year of transition in regard to Project
Renaissance. Bancorp expects to recognize these efficiencies in 2003. Net
occupancy expenses increased due to routine maintenance and increased property
tax. Furniture and equipment expenses were higher as a result of increased lease
expense associated with new personal computer equipment. A portion of the
increase in other expenses was related to increased credit and collection and
legal expenses associated with credit-quality issues. The significant decrease
in amortization expense is due to goodwill no longer being amortized per new
statements of financial accounting standards effective January 1, 2002.
Project Renaissance expenses for 2002 impacted the noninterest expense
categories of furniture and equipment, data processing, and other noninterest
expense. The total of these expenses was approximately $4,063 on a pre-tax
basis, the majority of which were recorded in the "other" category.
2001 VS. 2000. Bancorp's 2001 salaries and employee benefits, net
occupancy and furniture and equipment increased moderately as shown in Table 3,
as Bancorp realized savings associated with the 2000 in-market consolidation of
two affiliates, First Financial Bank and Home Federal Bank. Data processing
decreased as a result of the in-market consolidation and the initial positive
effects of Project Renaissance.
Total Project Renaissance expenses in 2001 were $4,880 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 recognized in 2001, $3,867 was recorded in the
fourth quarter of 2001.
The efficiency ratio (noninterest expenses as a percentage of noninterest
income, excluding securities transactions, plus net interest income) reflects
how much, on average, an institution expends to generate each dollar of revenue.
Bancorp's efficiency ratio was 60.4%, 57.6%, and 54.6%, for 2002, 2001, and
2000, respectively.
INCOME TAXES
Bancorp's tax expense in 2002 totaled $22,535 compared to $22,131 in 2001
and $28,740 in 2000, resulting in effective tax rates of 31.8%, 33.8%, and 33.0%
in 2002, 2001, and 2000, respectively. The decrease in 2002's effective tax rate
is primarily due to an increase in tax-exempt income through investments and
bank owned life insurance. The 2001 effective tax rate increased slightly,
primarily as a result of less tax-exempt interest income.
Further analysis of income taxes is presented in Note 14 of the Notes to
Consolidated Financial Statements.
LOANS
Loans, net of unearned income, decreased $124,161 or 4.32% during 2002
with average balances declining 4.46%. The greatest contributing factor to the
decline in average loan balances was a planned reduction in residential real
estate loans. Residential real estate loan demand remained high due to
refinancing activity into lower fixed-rate mortgages. However, during what was
thought to be a low point in the interest rate cycle, Bancorp's strategy was to
sell a majority of these mortgage loans while retaining the servicing and
customer relationships. Subsequent to the Federal Reserve's last interest rate
cut in November 2002, Bancorp modified this approach. In 2003, Bancorp expects
to retain more residential real estate loans while appropriately managing
interest rate risk and the overall loan portfolio mix. An uncertain economy
throughout 2002 created less loan demand in all loan categories exclusive of
residential real estate. Bancorp experienced the effects of an uncertain economy
not only through loan demand, but also through elevated credit risk in the
current portfolio. This uncertainty also flows through to the underwriting
process in Bancorp's overall risk assessment of new credits. Installment loan
balances were impacted by competitive pricing from automobile manufacturers and
the increased use of mortgage refinancings to consolidate consumer debt.
Leasing, while one of Bancorp's smaller lines of business, declined as Bancorp
placed less emphasis on the low profit margin automobile leasing business.
Total loans, net of unearned income, declined $135,817 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 in 2001 due to refinancing activity into lower
fixed-rate loans, Bancorp's strategy in 2001, 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, 2002, 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, 2002, real estate mortgage loans composed 49.8% of
Bancorp's total loan portfolio and installment loans composed another 20.3% of
the total loan portfolio. Commercial loans equaled 25.1% of the total portfolio;
and real estate construction, credit card lending, and lease financing made up
the remaining 4.80% of the portfolio. In 2002 end-of-period commercial loans
decreased $114,027 or 14.2% from 2001 to 2002 partially due to a
reclassification of approximately $70,000 from commercial loans to real estate
loans. Prior periods were not restated due to its immateriality to the total
balance sheet and total loans. Real estate mortgage loans increased $21,972 or
1.63% for the same period.
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
TABLE 4 - LOAN PORTFOLIO
DECEMBER 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Commercial $ 690,656 $ 804,683 $ 787,436 $ 769,454 $ 689,524
Real estate - construction 89,674 75,785 97,571 111,458 74,205
Real estate - mortgage 1,368,207 1,346,235 1,438,339 1,467,591 1,306,065
Installment 556,975 588,549 618,489 623,091 537,156
Credit card 22,068 22,846 24,182 22,408 21,306
Lease financing 21,031 36,139 46,068 46,508 29,212
---------- ---------- ---------- ---------- ----------
TOTAL $2,748,611 $2,874,237 $3,012,085 $3,040,510 $2,657,468
========== ========== ========== ========== ==========
2002 ANNUAL REPORT 19
TABLE 5 - LOAN MATURITY/RATE SENSITIVITY
DECEMBER 31, 2002
Maturity
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
(Dollars in thousands)
Commercial $375,768 $178,142 $136,746 $690,656
Real estate - construction 78,177 11,187 310 89,674
-------- -------- -------- --------
TOTAL $453,945 $189,329 $137,056 $780,330
======== ======== ======== ========
Sensitivity to changes in interest rates
PREDETERMINED VARIABLE
RATE RATE
---- ----
(Dollars in thousands)
Due after one year but within five years $ 69,769 $119,560
Due after five years 82,639 54,417
-------- --------
TOTAL $152,408 $173,977
======== ========
of mortgage loans. End-of-period commercial loans increased $17,247 or 2.19%
from 2000 to 2001. Real estate mortgage loans decreased $92,104 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.
Bancorp subsidiaries receive requests to renew maturing loans as a normal
part of business. Such requests are especially common with commercial loans and
with real estate loans that are scheduled to mature before being fully
amortized. 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, 2002. 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,
lending personnel experience and changes, lending strategies, and ratios of
delinquent and nonaccrual loans. The evaluation is inherently subjective as it
requires material
TABLE 6 - NONPERFORMING ASSETS
DECEMBER 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans $21,456 $24,628 $17,346 $11,283 $7,481
Restructured loans 5,375 1,291 265 2,244 691
Other real estate owned (OREO) 2,792 2,338 1,075 1,707 221
------- ------- ------- ------- ------
TOTAL NONPERFORMING ASSETS $29,623 $28,257 $18,686 $15,234 $8,393
======= ======= ======= ======= ======
Nonperforming assets as a percent of total
loans plus OREO 1.08% 0.98% 0.62% 0.50% 0.32%
Accruing loans past due 90 days or more $ 6,818 $ 4,728 $ 2,414 $ 2,777 $2,923
20 FIRST FINANCIAL BANCORP
TABLE 7 - SUMMARY OF ALLOWANCE FOR LOAN LOSSES AND SELECTED STATISTICS
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Transactions in the allowances for loan losses:
Balance at January 1 $46,784 $39,349 $39,340 $34,800 $31,660
Loans charged-off
Commercial 7,865 13,573 6,439 4,120 4,022
Real estate - construction 0 5 32 0 0
Real estate - mortgage 1,821 2,096 1,098 325 352
Installment and other consumer financing 8,340 7,450 5,881 4,484 3,720
Lease financing 1,847 508 194 432 293
------- ------- ------- ------- -------
Total loans charged-off 19,873 23,632 13,644 9,361 8,387
Recoveries of loans previously charged-off
Commercial 2,849 766 620 2,340 1,541
Real estate - construction 0 0 0 0 0
Real estate - mortgage 440 549 191 79 99
Installment and other consumer financing 1,742 1,440 1,474 1,114 800
Lease financing 61 37 68 36 34
------- ------- ------- ------- -------
Total recoveries 5,092 2,792 2,353 3,569 2,474
------- ------- ------- ------- -------
Net charge-offs 14,781 20,840 11,291 5,792 5,913
Allowance acquired through mergers 0 1,462 0 0 806
Provision for discontinued product line 0 0 0 1,100 0
Provision for loan losses 16,174 26,813 11,300 9,232 8,247
------- ------- ------- ------- -------
BALANCE AT DECEMBER 31 $48,177 $46,784 $39,349 $39,340 $34,800
======= ======= ======= ======= =======
Ratios
Net charge-offs as a percent of:
Average loans outstanding 0.53% 0.71% 0.37% 0.20% 0.24%
Provision 91.39% 77.72% 99.92% 62.74% 71.70%
Allowance 30.68% 44.55% 28.69% 14.72% 16.99%
Allowance as a percent of:
Year-end loans, net of unearned income 1.75% 1.63% 1.31% 1.30% 1.31%
TABLE 8 - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
-----------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
(Dollars in thousands)
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ----------- --------- ----------- --------- -----------
Balance at end of
period applicable to:
Commercial $15,729 25% $12,210 28% $11,061 26%
Real estate - construction 43 3% 445 3% 376 3%
Real estate - mortgage 13,702 50% 15,431 47% 8,853 48%
Installment and credit card 11,276 21% 11,804 21% 11,399 21%
Lease financing 441 1% 921 1% 756 2%
Unallocated 6,986 N/A% 5,973 N/A 6,904 N/A
------- --- ------- --- ------- ---
TOTAL $48,177 100% $46,784 100% $39,349 100%
======= === ======= === ======= ===
DECEMBER 31,
-----------------------------------------------
1999 1998
---------------------- ----------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ----------- --------- -----------
Balance at end of
period applicable to:
Commercial $ 8,221 25% $ 9,909 26%
Real estate - construction 470 4% 910 3%
Real estate - mortgage 8,798 48% 5,395 49%
Installment and credit card 10,978 21% 9,750 21%
Lease financing 477 2% 630 1%
Unallocated 10,396 N/A 8,206 N/A
------- --- ------- ---
TOTAL $39,340 100% $34,800 100%
======= === ======= ===
2002 ANNUAL REPORT 21
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.
The allowance for commercial loans, including time and demand notes, tax
exempt loans, commercial real estate, and commercial capital and operating
leases begins with a process of estimating the probable losses inherent in the
portfolio. The estimates for these commercial loans are established by category
and based on Bancorp's internal system of credit risk ratings, historical loss
data, and the estimated average expected life of the portfolio.
The estimate of losses inherent in the commercial portfolio may then be
adjusted for management's estimate of probable losses on specific exposures as
well as trends in delinquent and nonaccrual loans and other factors such as
prevailing economic conditions, lending personnel experience and changes,
lending strategies and other influencing factors as discussed earlier in the
Asset Quality section. In the commercial portfolio, certain loans where more
specific information is available, typically larger-balance non-homogeneous
exposures, a specific allowance may be established based on the borrower's
overall financial condition, resources and payment record, support from
guarantors, and the realizable value of any collateral.
The allowance for consumer loans which includes retail real estate,
installment, home equity, credit card, consumer leasing, overdrafts, and student
loans is established for each of the categories listed by estimating losses
inherent in that particular category of consumer loans. The estimate of losses
is based on historical loss rates and the estimated average life or contractual
maturity of each portfolio. Consumer loans are evaluated as a group within
category (i.e., retail real estate, installment, etc.) because these loans are
smaller and homogeneous.
The unallocated portion of the allowance consists partially of dollar
amounts specifically set aside for each of the overall factors influencing the
allowance. These factors include national and economic factors, concentrations
in market segments, lending personnel experiences and changes, lending
strategies, personnel underwriting, ratio trends, and other factors not already
accounted for in the allowance estimates. Establishing percentages for these
factors is largely subjective, but is supported by economic data, supporting
dated material for changes made in lending functions and other support where
appropriate.
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.
A slowing economy in the last half of 2001, which continued throughout
2002, negatively impacted asset quality for much of the financial industry
including Bancorp. Total nonperforming assets, as shown in Table 6, increased
from $28,257 at December 31, 2001, to $29,623 at December 31, 2002.
Nonperforming assets consist of nonaccrual loans, restructured loans and other
real estate owned. In comparing December 31, 2002, with December 31, 2001,
nonaccrual loans decreased $3,172, restructured loans increased $4,084, and
other real estate owned increased $454. The nonperforming assets do not consist
of a concentration in any particular industry. The decrease in nonaccrual loans
in 2002 was a result of Bancorp's efforts to work through problem credits. As
nonaccrual loans were addressed, certain loans were rewritten and are now
classified as restructured loans which accounts for the significant increase in
restructured loans from 2001 to 2002. Additionally OREO remained at elevated
levels in 2002 as Bancorp worked through problem credits and acquired more
property through customer loan defaults.
As Bancorp has worked problem credits out of its portfolio, additional
credits have been moved into nonperforming. In the fourth quarter of 2001,
Bancorp classified one agricultural credit of approximately $6,900 as
nonperforming. This credit was paid off in 2002 and resulted in a charge-off of
$2,500.
Net charge-offs of $14,781 in 2002 decreased $6,059 from 2001,
decreasing their percentage to average loans to 0.53% in 2002 from 0.71% in 2001
as shown in Table 7. Commercial loans charged off increased significantly from
2000 to 2001 as a result of worsening economic factors in the Midwest and credit
issues at Community First Bank & Trust. In 2002 commercial charge-offs decreased
substantially as credit issues stabilized compared with 2001. Installment and
other consumer financing charge-offs continued to increase in 2002 as
TABLE 9 - INVESTMENT SECURITIES
DECEMBER 31, 2002
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) $ 3 9.98% $ 402 7.13% $ 1,118 9.90% $ 702 5.70%
Obligations of state and other
political subdivisions 1,360 7.45% 13,207 8.67% 2,475 9.00% 2,214 7.80%
Other securities 90 8.30% 0 0.00% 0 0.00% 0 0.00%
-------- -------- -------- --------
TOTAL $ 1,453 7.51% $ 13,609 8.62% $ 3,593 9.28% $ 2,916 7.29%
======== ======== ======== ======== ======== ======== ======== ========
AVAILABLE-FOR-SALE
Securities of other U.S.
government agencies
and corporations $ 18,299 3.50% $114,545 3.70% $ 2,252 6.85% $ 287 2.82%
Mortgage-backed securities(2) 1,909 6.34% 6,559 4.09% 43,055 4.81% 254,273 5.82%
Obligations of state and other
political subdivisions 4,703 8.07% 23,530 7.89% 28,185 7.90% 63,770 7.59%
Other securities 0 0.00% 317 5.75% 235 6.35% 43,426 5.37%
-------- -------- -------- --------
TOTAL $ 24,911 4.58% $144,951 4.40% $ 73,727 6.06% $361,756 6.08%
======== ======== ======== ======== ======== ======== ======== ========
- ----------
(1) Tax equivalent basis was calculated using a marginal federal income tax
rate of 35.0%.
(2) 18.1% of the mortgage-backed securities maturing after five years are
variable rate.
22 FIRST FINANCIAL BANCORP
economic conditions, including record levels of bankruptcies, affected Bancorp's
markets. Bancorp anticipates that this consumer trend will stabilize in 2003 in
regard to its portfolio. However the future effect of the uncertain economy and
geopolitical climate is difficult to predict. As charge-offs have increased over
the periods presented, there are more opportunities for recoveries of loans
previously charged off. Bancorp has focused on these opportunities, resulting in
increased recoveries in 2002. The $2,849 in commercial recoveries in 2002
include a single recovery of $1,432. The allowance at December 31, 2002, was
$48,177 or 1.75% of loans, net of unearned income, an increase from the 1.63%
reported for 2001. Provision for loan loss expense of $16,174 was $10,639 less
in 2002 than in 2001. The provision for loan loss expense was significantly less
based on Bancorp's efforts to work through problem credits and a significant
reduction in net charge-offs. Overall, it is management's belief that the
allowance for loan losses is adequate to absorb estimated probable credit
losses.
In 2001, total nonperforming assets increased 51.2% from $18,686 at
year-end 2000 to $28,257 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 from $11,300 in 2000.
The increase in provision expense in 2001 from 2000 was necessary as a result of
an uncertain economy, particularly in the Midwest markets Bancorp serves and
credit quality issues at Bancorp's Community First Bank & Trust subsidiary.
Agriculture- and manufacturing-related loans at certain Bancorp affiliates also
contributed to the increase. The allowance at December 31, 2001, was $46,784 or
1.63% of loans, net of unearned income, which compares to $39,349 or 1.31% of
loans, net of unearned income, at December 31, 2000. In comparing December 31,
2001, with December 31, 2000, nonaccrual loans increased $7,282, restructured
loans increased $1,026, other real estate owned increased $1,263, and accruing
loans past due 90 days or more increased $2,314.
Nonaccrual and restructured loans and leases and OREO are discussed or
summarized in Notes 1 and 10 of the Notes to Consolidated Financial Statements.
INVESTMENT SECURITIES
Bancorp's investment securities increased $10,422 or 1.69% during 2002 to
a balance of $626,912. Similarly in 2001, investment securities increased
$26,928 or 4.57%. 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 21.6% of the
investment portfolio at December 31, 2002, and 16.0% at year-end 2001. One
structured note was included in the U.S. government agencies and corporations
securities category at December 31, 2002, with a book value of $3,567. There
were no structured notes 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, 2002 and 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 49.1% and 53.5% of the
investment portfolio at December 31, 2002 and 2001, respectively. 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 total $42,461 at December 31, 2002, and $71,503 at December 31,
2001, all of which were classified as available-for-sale. All of the CMOs held
by Bancorp are rated AAA by Standard & Poor's Corporation or similar rating
agencies. Bancorp did not own any interest-only securities, principal-only
securities, or inverse floaters. At December 31, 2002, Bancorp owned accrual
bonds with a book value of $2,295.
Securities of state and other political subdivisions composed 22.2% of
Bancorp's investment portfolio at December 31, 2002, and 23.8% at year-end 2001.
The securities are diversified as to states and issuing authorities within
states, thereby decreasing portfolio risk. About 86.2% of such investments at
December 31, 2002, and 88.0% at December 31, 2001, were classified as
available-for-sale.
The remaining 7.10% and 6.70% of Bancorp's investment portfolio at
December 31, 2002 and 2001, respectively, 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,
2002, 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, 2002, the market value of Bancorp's held-to-maturity
investment securities portfolio exceeded the carrying value by $526. The
available-for-sale investment securities are reported at their market value of
$605,345, as required by SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." At December 31, 2001, the market value of Bancorp's
held-to-maturity investment securities portfolio exceeded the carrying value by
$657. The available-for-sale investment securities are reported at their market
value of $595,600. See Note 9 of the Notes to Consolidated Financial Statements
for additional information.
Bancorp's federal funds sold and securities purchased under agreements to
resell increased from $3,381 at December 31, 2001, to $28,291 at December 31,
2002. Bancorp monitors this position as part of its asset/liability management.
DERIVATIVES
In 2002, Bancorp began utilizing interest rate swap agreements to assist
in effectively modifying its exposure to interest rate risk by converting
certain fixed rate assets to a floating rate. The use of these interest rate
swaps allows Bancorp's subsidiary banks to offer long-term fixed rate loans to
commercial borrowers. The interest rate swaps allow Bancorp to convert the fixed
interest rate to a variable rate that better suits its funding position. The
swap agreements involve the receipt of floating rate amounts in exchange for
fixed interest payments over the life of the agreements without an exchange of
the underlying principal amount. As of December 31, 2002, Bancorp had interest
rate swaps with a notional value of $5,012.
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.
Total ending deposits for 2002 decreased $162,659 or 5.27%. This decrease
is due largely to time deposits decreasing $177,643 or 11.8%. Bancorp believes a
portion of the decrease is due to the historically low rate environment.
Additionally, Bancorp's funding and pricing strategies resulted in planned
runoff in this category. Savings deposits increased $58,696 or 7.50% in 2002.
Bancorp believes that a portion of the increase in savings is attributable to
customers seeking FDIC-insured liquid investment alternatives in this low rate
environment.
Total average deposits for 2002 decreased $160,191 or 5.15% over 2001 due
solely to the decrease in time deposits. Other average deposit categories
increased over 2001 as follows: savings increased by $74,654 or 9.74%,
noninterest-bearing increased $8,175 or 2.05%, and interest-bearing demand
deposits increased $1,897 or 0.63%.
Total deposits decreased $66,335 or 2.10% in 2001. Comparing Bancorp's
totals at December 31, 2001, and 2000, interest-bearing deposits decreased
$94,787 and noninterest-bearing demand deposits increased $28,452.
2002 ANNUAL REPORT 23
TABLE 10 - MATURITIES OF TIME DEPOSITS
GREATER THAN OR EQUAL TO $100,000
DECEMBER 31, 2002
(Dollars in thousands)
CERTIFICATES OF DEPOSIT
Maturing in
3 months or less $ 88,634
3 months to 6 months 42,581
6 months to 12 months 52,014
over 12 months 59,576
--------
TOTAL $242,805
========
IRAS
Maturing in
3 months or less $ 7,555
3 months to 6 months 7,186
6 months to 12 months 9,339
over 12 months 34,784
--------
TOTAL $ 58,864
========
Total average deposits for 2001 increased $62,912 or 2.06% over 2000. The
increase is due to an 8.88% increase in interest-bearing demand deposits and a
2.73% increase in time deposits. All other deposit categories remained
relatively flat.
Table 10 shows the contractual maturity of time deposits of $100 and over
that were outstanding at December 31, 2002. These deposits represented 10.3% of
total deposits.
Short-term borrowings increased to $95,180 at December 31, 2002, from
$93,452 at December 31, 2001. Short-term borrowings decreased from $146,568 at
December 31, 2000, to $93,452 at December 31, 2001.
Long-term borrowings increased $29,706 to $290,051 at the end of 2002.
Likewise, the 2001 year-end balance was $55,129 greater than the 2000 year-end
balance of $205,216. The increase in long-term borrowings is associated with
ongoing asset/liability management strategies that take into account the timing
of maturities of assets and liabilities among many other factors.
The corporation-obligated mandatorily redeemable capital securities (the
"capital securities") of subsidiary trust, which appears on the balance sheet,
are commonly known as Trust Preferred Securities. The subsidiary trust holds
solely the junior subordinated debt securities of Bancorp (the "debentures").
The capital securities were issued in third quarter 2002 by a statutory business
trust -- First Financial (OH) Statutory Trust I, of which 100% of the common
equity of the trust is owned by Bancorp. The trust was formed with the sole
purpose of issuing the capital securities and investing the proceeds from the
sale of such capital securities in the debentures. The debentures held by the
trust are the sole assets of the trust. Distributions on the capital securities
are payable quarterly at a variable rate of interest, which is equal to the
interest rate being earned by the trust on the debentures, and are recorded as
interest expense of Bancorp. The capital securities are subject to mandatory
redemption, in whole or in part, upon repayment of the debentures. Bancorp has
entered into agreements which, taken collectively, fully or unconditionally
guarantee the capital securities subject to the terms of the guarantees.
The debentures qualify as Tier I capital under Federal Reserve Board
guidelines and are first redeemable, in whole or in part, by Bancorp on
September 25, 2007, and mature on September 25, 2032. The amount outstanding,
net of offering costs, as of December 31, 2002, is $10,000. These funds were
used to repurchase Bancorp stock and for other corporate purposes and as a means
to diversify funding sources at the parent company level. See Note 13 of the
Notes to Consolidated Financial Statements for additional information on
borrowings.
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 $3,276 for 2002 and $8,111 for 2001. Capital expenditures planned for the
year 2003, consisting primarily of banking centers, are estimated to be $10,300.
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 and investment securities, 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 (FHLB) as a funding source. At December 31, 2002 and 2001, total borrowings
from the FHLB were $290,051 and $260,345, respectively.
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, 2002, was $269,678. The principal source
of asset-funded liquidity is investment securities classified as
available-for-sale, the market values of which totaled $605,345 at December 31,
2002, an increase of $9,745 or 1.64% over 2001. 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 $1,453 at December 31, 2002. In addition,
other types of assets - such as cash and due from banks, federal funds sold and
securities purchased under agreements to resell, and loans and interest-bearing
deposits with other banks maturing within one year - are sources of liquidity.
Certain restrictions exist regarding the ability of Bancorp's
subsidiaries to transfer funds to Bancorp (see Note 6 of the Notes to
Consolidated Financial Statements). Management is not aware of any other events
or regulatory requirements which, if implemented, are likely to have a material
effect on Bancorp's liquidity. Bancorp has secured a $50,000 line of credit with
another financial institution. This line provides additional liquidity for
Bancorp for various corporate activities. The outstanding balance was $30,500 as
of December 31, 2002, and $23,500 as of December 31, 2001. The outstanding
balance of this line varies throughout the year depending on Bancorp's cash
needs. The average outstanding balance was $27,163 for 2002 and $14,210 for
2001.
INTEREST RATE SENSITIVITY
Table 11 details the maturities and yields of interest-bearing financial
instruments at December 31, 2002, 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, and interest rate swaps. Bancorp has no
assets held for trading, and as such, the table presents instruments entered
into for purposes other than trading purposes. For interest rate swaps, the
table includes notional amounts and weighted average interest rates by
contractual maturity dates. The variable receive rates are tied to the one-month
London Inter-Bank Offered Rate (LIBOR) plus a spread.
24 FIRST FINANCIAL BANCORP
TABLE 11 - MARKET RISK DISCLOSURE
FAIR VALUE
Principal Amount Maturing In: DECEMBER 31,
2003 2004 2005 2006 2007 THEREAFTER TOTAL 2002
---- ---- ---- ---- ---- ---------- ----- ----
(Dollars in thousands)
RATE SENSITIVE ASSETS
Fixed interest rate loans $226,703 $ 123,594 $116,386 $107,617 $75,858 $510,985 $1,161,143 $1,176,408
Average interest rate 7.22% 8.87% 8.70% 7.99% 7.84% 7.04% 7.58%
Variable interest rate loans 473,189 68,134 45,994 57,741 57,627 884,751 1,587,436 1,591,479
Average interest rate 5.38% 5.56% 6.46% 6.26% 6.20% 6.87% 6.31%
Fixed interest rate securities 26,196 61,086 53,728 21,738 22,008 388,034 572,790 573,307
Average interest rate 4.06% 3.94% 3.07% 4.60% 4.70% 4.71% 4.44%
Variable interest rate securities -- -- -- -- -- 54,126 54,126 54,135
Average interest rate -- -- -- -- -- -- 4.12% 4.12%
Other earning assets 32,765 -- -- -- -- -- 32,765 32,765
Average interest rate 0.98% -- -- -- -- -- 0.98%
RATE SENSITIVE LIABILITIES
Noninterest-bearing checking 422,453 -- -- -- -- -- 422,453 422,453
Savings and interest-bearing checking 116,954 1,052,586 -- -- -- -- 1,169,540 1,169,540
Average interest rate 0.62% 0.62% -- -- -- -- 0.62%
Time deposits 866,489 280,952 80,445 17,458 69,631 15,466 1,330,441 1,344,459
Average interest rate 2.85% 3.63% 3.88% 4.53% 4.66% 2.19% 3.19%
Fixed interest rate borrowings 1,200 16,500 7,000 26,172 27,000 212,179 290,051 321,355
Average interest rate 4.96% 5.73% 5.77% 5.27% 5.67% 5.08% 5.20%
Variable interest rate borrowings 95,180 -- -- -- -- 10,000 105,180 105,180
Average interest rate 1.37% -- -- -- -- 4.80% 1.69%
INTEREST RATE DERIVATIVES
Interest Rate Swaps
Fixed to variable 5,012 5,012
Average pay rate (fixed) 7.42% 7.42%
Average receive rate (variable) 4.07% 4.07%
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. Bancorp had no stand-alone derivative products prior to
the adoption of this policy. 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. At December 31, 2002, Bancorp had interest rate swaps, with a
notional value of $5,012.
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. Bancorp's risk exposure can be
characterized as asset sensitive. That is, as market rates fall, there are more
assets repricing down to the new rates than the amount of liabilities that
reprice. This exposure has impacted the net interest income over the last two
years. Looking forward, Bancorp has some exposure to rising rates. While many
market sensitive loans and investments are immediately repriceable with changes
in market rates, which would positively impact interest income, the non-maturity
interest-bearing deposit account (savings, money market, and NOW accounts) rates
may move differently than is currently assumed in the modeling.
Within the interest rate risk exposure, a majority of Bancorp's commercial
loans reprice with the Prime Rate. Across the time horizon of the yield curve,
other rate risk exposures occur with the U.S. Treasury CMT (constant maturity
treasury) rates, as those rates are the primary index rates for adjustable rate
mortgages, in the one, three, and five year periods. The deposit rates typically
depend on local market conditions, somewhat influenced by national market rates.
Borrowing rates are impacted by changes in LIBOR and the Federal Home Loan Bank
advance rates for various term structures.
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. The
management of the risk includes objectives to minimize the adverse changes to
net interest income, typically exercised through adjusting rates paid on deposit
accounts, managing the volume of assets generated, and monitoring loan rates.
Long-term funding is used to fund longer-term assets that are generated within
the loan and investment portfolios.
Bancorp has a holding company asset/liability committee, comprised of
holding company officers and representatives of various subsidiaries with a
variety of disciplines. The committee's function is to develop policies and
guidelines, monitor results and initiate strategies for effective
asset/liability management throughout Bancorp's subsidiaries.
CAPITAL
Total shareholders' equity at December 31, 2002 and 2001, was $377,603
and $384,543, respectively. The decrease in shareholders' equity for 2002 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
2002 ANNUAL REPORT 25
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 plan may not exceed
7,507,500 shares. Under this program, Bancorp repurchased no shares in 2002 and
276,000 shares in 2001.
On October 24, 2000, the board of directors authorized an additional
program to repurchase up to 5% of Bancorp's common shares outstanding. This
share repurchase program is for general corporate purposes including future
stock dividends. Under this program, Bancorp repurchased 567,495 shares in 2002
and 1,571,500 shares in 2001. The 2002 purchases completed the authorized
repurchase activity for this plan.
On February 26, 2002, the board of directors authorized a new stock
repurchase program for up to 5% of Bancorp's common shares outstanding. This
program provides shares for general corporate purposes including future stock
dividends. Repurchase activity under this plan was 1,272,205 shares in 2002.
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 57.0%, 65.6%, and 47.9%, for 2002, 2001,
and 2000, 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
15 of the Notes to Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
Bancorp's consolidated financial statements are prepared based on the
application of accounting policies, the most significant of which are described
in Note 1 of the Notes to Consolidated Financial Statements. These policies
require estimates and assumptions. Changes in underlying factors, assumptions or
estimates in any of these areas could have a material impact on Bancorp's future
financial condition and results of operations. In management's opinion, some of
these areas have a more significant impact than others on Bancorp's financial
reporting. For Bancorp, these areas currently include accounting for the
allowance for loan losses, pension costs, and goodwill.
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.
26 FIRST FINANCIAL BANCORP
STATISTICAL INFORMATION
(Unaudited)
2002 2001 2000
--------------------------- ---------------------------- ---------------------------
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------- -------- ----- ------- -------- ----- ------- -------- -----
DAILY AVERAGE BALANCES AND INTEREST RATES: (Tax equivalent basis; dollars in thousands)
EARNING ASSETS
Loans (1)
Commercial (2) $ 749,072 $ 58,010 7.74% $ 792,568 $ 73,399 9.26% $ 788,668 $ 81,048 10.28%
Real estate (2) 1,417,770 95,236 6.72% 1,465,334 117,352 8.01% 1,586,313 126,170 7.95%
Installment
and other consumer 590,580 52,921 8.96% 616,714 58,162 9.43% 649,606 65,199 10.04%
Lease financing (2) 28,295 2,197 7.76% 41,107 3,269 7.95% 46,924 3,694 7.87%
---------- -------- ----------- --------- ---------- -------
Total loans 2,785,717 208,364 7.48% 2,915,723 252,182 8.65% 3,071,511 276,111 8.99%
Investment securities (3)
Taxable 486,188 24,871 5.12% 441,513 27,285 6.18% 407,564 28,041 6.88%
Tax-exempt (2) 141,636 11,047 7.80% 149,704 11,900 7.95% 162,257 13,091 8.07%
---------- -------- ----------- --------- ---------- -------
Total investment
securities (3) 627,824 35,918 5.72% 591,217 39,185 6.63% 569,821 41,132 7.22%
Interest-bearing deposits
with other banks 14,202 340 2.39% 14,972 596 3.98% 11,203 702 6.27%
Federal funds sold and securities
purchased under agreements
to resell 28,654 494 1.72% 59,470 2,187 3.68% 4,157 257 6.18%
---------- -------- ----------- --------- ---------- -------
TOTAL EARNING ASSETS 3,456,397 245,116 7.09% 3,581,382 294,150 8.21% 3,656,692 318,202 8.70%
NONEARNING ASSETS
Allowance for loan losses (48,341) (40,758) (40,360)
Cash and due from banks 131,730 133,644 141,951
Accrued interest and other assets 180,264 183,103 186,295
---------- ----------- ----------
TOTAL ASSETS $3,720,050 $ 3,857,371 $3,944,578
========== =========== ==========
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand $ 301,358 2,891 0.96% $ 299,461 6,065 2.03% $ 275,048 6,597 2.40%
Savings 841,054 8,416 1.00% 766,400 15,393 2.01% 766,886 19,002 2.48%
Time 1,402,037 50,789 3.62% 1,646,954 88,892 5.40% 1,603,214 91,153 5.69%
---------- -------- ----------- --------- ---------- -------
Total interest-bearing
deposits 2,544,449 62,096 2.44% 2,712,815 110,350 4.07% 2,645,148 116,752 4.41%
Borrowed funds
Short-term borrowings 90,188 1,727 1.91% 75,240 3,015 4.01% 316,537 18,939 5.98%
Long-term borrowings 265,034 14,289 5.39% 243,868 13,415 5.50% 166,290 9,733 5.85%
Corporation-obligated mandatorily
redeemable capital securities of
subsidiary trust 2,658 139 5.23% 0 0 N/A 0 0 N/A
---------- -------- ----------- --------- ---------- -------
Total borrowed funds 357,880 16,155 4.51% 319,108 16,430 5.15% 482,827 28,672 5.94%
---------- -------- ----------- --------- ---------- -------
TOTAL INTEREST-BEARING LIABILITIES 2,902,329 78,251 2.70% 3,031,923 126,780 4.18% 3,127,975 145,424 4.65%
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 406,639 398,464 403,219
Other liabilities 26,464 31,194 33,852
SHAREHOLDERS' EQUITY 384,618 395,790 379,532
---------- -------- ----------- --------- ---------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,720,050 $ 3,857,371 $3,944,578
========== =========== ==========
NET INTEREST INCOME AND
INTEREST RATE SPREAD $166,865 4.39% $ 167,370 4.03% $172,778 4.05%
======== ==== ========= ==== ======== ====
NET INTEREST MARGIN 4.83% 4.67% 4.72%
==== ==== ====
(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.
2002 ANNUAL REPORT 27
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2002 2001
---- ----
(Dollars in thousands)
ASSETS
Cash and due from banks $ 181,839 $ 211,130
Interest-bearing deposits with other banks 4,474 13,671
Federal funds sold and securities purchased under agreements to resell 28,291 3,381
Investment securities held-to-maturity
(market value of $22,097 at December 31, 2002;
$21,547 at December 31, 2001) 21,571 20,890
Investment securities available-for-sale, at market value
(cost of $587,131 at December 31, 2002;
$586,946 at December 31, 2001) 605,345 595,600
Loans
Commercial 690,656 804,683
Real estate - construction 89,674 75,785
Real estate - mortgage 1,368,207 1,346,235
Installment 556,975 588,549
Credit card 22,068 22,846
Lease financing 21,031 36,139
----------- -----------
Total loans 2,748,611 2,874,237
Less
Unearned income 523 1,988
Allowance for loan losses 48,177 46,784
----------- -----------
Net loans 2,699,911 2,825,465
Premises and equipment 56,348 60,575
Goodwill 27,379 27,379
Other intangibles 9,147 8,842
Deferred income taxes receivable 4,107 0
Accrued interest and other assets 91,540 87,861
----------- -----------
TOTAL ASSETS $ 3,729,952 $ 3,854,794
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 422,453 $ 448,330
Interest-bearing 2,499,981 2,636,763
----------- -----------
Total deposits 2,922,434 3,085,093
Short-term borrowings
Federal funds purchased and securities sold under
agreements to repurchase 55,766 67,641
Other 39,414 25,811
----------- -----------
Total short-term borrowings 95,180 93,452
Federal Home Loan Bank long-term borrowings 290,051 260,345
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust 10,000 0
Deferred income taxes payable 0 1,388
Accrued interest and other liabilities 34,684 29,973
----------- -----------
TOTAL LIABILITIES 3,352,349 3,470,251
SHAREHOLDERS' EQUITY
Common stock -- no par value
Authorized -- 160,000,000 shares
Issued -- 48,558,614 shares in 2002
48,570,346 shares in 2001 396,252 396,631
Retained earnings 39,005 18,244
Accumulated comprehensive income 8,189 5,348
Restricted stock awards (4,022) (2,563)
Treasury stock, at cost, 3,554,691 and 1,970,411 shares (61,821) (33,117)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 377,603 384,543
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,729,952 $ 3,854,794
=========== ===========
See Notes to Consolidated Financial Statements.
28 FIRST FINANCIAL BANCORP
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees $ 208,131 $ 251,951 $ 275,804
Investment securities
Taxable 24,871 27,285 28,041
Tax-exempt 7,172 7,726 8,499
----------- ----------- ------------
Total investment securities interest 32,043 35,011 36,540
Interest-bearing deposits with other banks 340 596 702
Federal funds sold and securities purchased under agreements to resell 494 2,187 257
----------- ----------- ------------
TOTAL INTEREST INCOME 241,008 289,745 313,303
INTEREST EXPENSE
Deposits 62,096 110,350 116,752
Short-term borrowings 1,727 3,015 18,939
Long-term borrowings 14,289 13,415 9,733
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust 139 0 0
----------- ----------- ------------
TOTAL INTEREST EXPENSE 78,251 126,780 145,424
----------- ----------- ------------
NET INTEREST INCOME 162,757 162,965 167,879
Provision for loan losses 16,174 26,813 11,300
----------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 146,583 136,152 156,579
NONINTEREST INCOME
Service charges on deposit accounts 19,565 20,348 18,786
Trust revenues 15,385 14,769 14,230
Gains from sales of mortgage loans 4,432 2,929 1,018
Investment securities gains 89 302 39
Other 17,228 15,894 14,328
----------- ----------- ------------
TOTAL NONINTEREST INCOME 56,699 54,242 48,401
NONINTEREST EXPENSES
Salaries and employee benefits 71,619 65,061 63,606
Net occupancy 7,973 7,475 7,402
Furniture and equipment 7,729 6,332 6,374
Data processing 7,817 7,254 8,427
Deposit insurance 609 602 542
State taxes 1,747 1,913 2,432
Amortization of intangibles 847 2,650 3,268
Restructuring charge 0 0 (353)
Other 34,171 33,667 26,320
----------- ----------- ------------
TOTAL NONINTEREST EXPENSES 132,512 124,954 118,018
----------- ----------- ------------
INCOME BEFORE INCOME TAXES 70,770 65,440 86,962
Income tax expense 22,535 22,131 28,740
----------- ----------- ------------
NET EARNINGS $ 48,235 $ 43,309 $ 58,222
=========== =========== ============
NET EARNINGS PER SHARE - BASIC $ 1.05 $ 0.91 $ 1.19
=========== =========== ============
NET EARNINGS PER SHARE - DILUTED $ 1.05 $ 0.91 $ 1.19
=========== =========== ============
AVERAGE SHARES OUTSTANDING - BASIC 45,880,649 47,427,921 48,775,547
=========== =========== ============
AVERAGE SHARES OUTSTANDING - DILUTED 46,000,801 47,479,315 48,862,287
=========== =========== ============
See Notes to Consolidated Financial Statements.
2002 ANNUAL REPORT 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(Dollars in thousands)
OPERATING ACTIVITIES
Net earnings $ 48,235 $ 43,309 $ 58,222
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 16,174 26,813 11,300
Provision for depreciation and amortization 9,172 8,797 9,707
Net amortization of premiums and accretion of discounts
on investment securities 1,151 12 (528)
Deferred income taxes (7,524) 79 2,175
Realized gains on investment securities (89) (302) (39)
Originations of mortgage loans held for sale (221,703) (186,571) (171,012)
Gains from sales of mortgage loans held for sale (4,432) (2,929) (1,018)
Proceeds from sale of mortgage loans held for sale 223,893 187,448 171,161
Increase in cash surrender value of life insurance (8,527) (1,775) (6,467)
Decrease (increase) in interest receivable 4,111 6,527 (3,031)
(Increase) decrease in prepaid expenses (956) 530 (881)
Increase (decrease) in accrued expenses 8,807 660 (3,146)
(Decrease) increase in interest payable (3,074) (5,536) 3,986
Other (1,101) 318 (3,589)
--------- --------- ---------
Net cash provided by operating activities 64,137 77,380 66,840
INVESTING ACTIVITIES
Proceeds from calls, paydowns, and maturities of investment
securities available-for-sale 242,076 219,864 58,858
Purchases of investment securities available-for-sale (243,583) (245,279) (79,144)
Proceeds from calls, paydowns, and maturities of investment securities
held-to-maturity 3,994 12,085 11,773
Purchases of investment securities held-to-maturity (4,414) (7,910) (4,365)
Net decrease (increase) in interest-bearing deposits with other banks 9,197 (10,423) 5,619
Net (increase) decrease in federal funds sold and
securities purchased under agreements to resell (24,910) 659 1,581
Net decrease (increase) in loans and leases 98,621 108,922 (28,494)
Proceeds from disposal of other real estate owned 4,608 1,773 2,882
Recoveries from loans and leases previously charged-off 5,092 2,792 2,353
Purchases of premises and equipment (3,276) (8,111) (5,461)
--------- --------- ---------
Net cash provided by (used in) investing activities 87,405 74,372 (34,398)
FINANCING ACTIVITIES
Net (decrease) increase in total deposits (162,659) (66,335) 160,215
Net increase (decrease) in short-term borrowings 1,728 (53,116) (235,550)
Proceeds from long-term borrowings 29,706 55,129 43,417
Proceeds from corporate-obligated mandatorily redeemable capital securities of
subsidiary trust 10,000 0 0
Cash dividends (27,474) (28,400) (27,901)
Purchase of common stock (32,910) (30,057) (16,518)
Proceeds from exercise of stock options 776 99 116
--------- --------- ---------
Net cash used in financing activities (180,833) (122,680) (76,221)
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (29,291) 29,072 (43,779)
Cash and cash equivalents at beginning of year 211,130 182,058 225,837
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 181,839 $ 211,130 $ 182,058
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 81,325 $ 132,316 $ 141,438
========= ========= =========
Income taxes paid $ 25,110 $ 24,839 $ 31,233
========= ========= =========
Recognition of deferred tax liabilities attributable to SFAS No. 115 $ (3,685) $ (2,000) $ (5,142)
========= ========= =========
Acquisition of other real estate owned through foreclosure $ 5,667 $ 3,263 $ 2,423
========= ========= =========
Issuance of restricted stock awards $ 3,273 $ 2,826 $ 773
========= ========= =========
Securitization of loans $ 0 $ 0 $ 40,737
========= ========= =========
See Notes to Consolidated Financial Statements.
30 FIRST FINANCIAL BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
COMMON COMMON ACCUMULATED RESTRICTED TREASURY TREASURY
STOCK STOCK RETAINED COMPREHENSIVE STOCK STOCK STOCK
SHARES AMOUNT EARNINGS INCOME AWARDS SHARES AMOUNT TOTAL
---------- -------- -------- ------------- ---------- ---------- -------- --------
(Dollars in thousands)
Balances at December 31, 1999 46,869,107 $373,447 $ 5,904 $ (6,398) $ (414) $ 0 $ 0 $372,539
Net earnings 58,222 58,222
Unrealized holding gains on
securities available for sale
arising during the period 8,353 8,353
--------
Total comprehensive income 66,575
Cash dividends declared
(Bancorp - $0.57 per share) (27,901) (27,901)
Purchase of common stock (940,500) (16,515) (16,515)
Exercise of stock options,
net of shares purchased 16,729 116 116
Restricted stock awards 41,900 773 (773) (110) (3) (3)
Amortization of restricted
stock awards 321 321
---------- -------- -------- ------------- ---------- ---------- -------- --------
Balances at December 31, 2000 46,927,736 374,336 36,225 1,955 (866) (940,610) (16,518) 395,132
Net earnings 43,309 43,309
Unrealized holding gains on
securities available for sale
arising during the period 3,393 3,393
--------
Total comprehensive income 46,702
Cash dividends declared
(Bancorp - $0.60 per share) (28,400) (28,400)
Purchase of common stock (1,847,500) (30,057) (30,057)
Exercise of stock options,
net of shares purchased (105) 12,603 204 99
5% stock dividend 1,646,021 22,348 (32,890) 637,004 10,542 0
Restricted stock awards (3,411) 52 (2,826) 168,092 2,712 (62)
Amortization of restricted
stock awards 1,129 1,129
---------- -------- -------- ------------- ---------- ---------- -------- --------
Balances at December 31,2001 48,570,346 396,631 18,244 5,348 (2,563) (1,970,411) (33,117) 384,543
NET EARNINGS 48,235 48,235
UNREALIZED HOLDING GAINS ON
SECURITIES AVAILABLE FOR SALE
ARISING DURING THE PERIOD 5,875 5,875
UNFUNDED PENSION LOSSES,
NET OF TAX (3,034) (3,034)
TOTAL COMPREHENSIVE INCOME 51,076
--------
CASH DIVIDENDS DECLARED
(BANCORP - $0.60 PER SHARE) (27,474) (27,474)
PURCHASE OF COMMON STOCK (1,839,700) (32,910) (32,910)
EXERCISE OF STOCK OPTIONS,
NET OF SHARES PURCHASED (376) 66,835 1,152 776
RESTRICTED STOCK AWARDS (11,732) (3) (3,273) 188,585 3,054 (222)
AMORTIZATION OF RESTRICTED
STOCK AWARDS 1,814 1,814
---------- -------- -------- ------------- ---------- ---------- -------- --------
BALANCES AT DECEMBER 31, 2002 48,558,614 $396,252 $ 39,005 $ 8,189 $ (4,022) (3,554,691) $(61,821) $377,603
========== ======== ======== ============= ========== ========== ======== ========
See Notes to Consolidated Financial Statements.
2002 ANNUAL REPORT 31
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 bank 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.
Certain reclassifications of prior years' amounts have been made to conform to
current year presentation. Such reclassifications had no effect on net earnings.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompany notes. Actual results could differ from those
estimates.
Interest on loans, securities, and other earning assets is recognized
primarily on the accrual basis.
All dollar amounts, except per share data, are expressed in thousands of
dollars.
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
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.
Bancorp's subsidiaries sell certain mortgage loans immediately after
origination on a flow basis. Due to Bancorp's policy of selling loans on a flow
basis, loans held for sale are not material and therefore not disclosed
separately on the Consolidated Balance Sheets. Loans held for sale are carried
at the lower of cost or market value. 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.
A commercial loan is impaired when, based on current information and
events, it is probable that Bancorp will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
Collection of all amounts due according to the contractual terms means
that both the contractual interest payments and the contractual principal
payments of a loan will be collected as scheduled in the loan agreement.
Bancorp applies normal loan review procedures in determining whether or
not it is probable that it will be able to collect all amounts due according to
the contractual terms of a loan.
An impairment loss is recognized if the present value of expected future
cash flows from the loan are less than the recorded investment in the loan
(recorded investment in the loan is the principal balance plus any accrued
interest, net deferred loan fees or costs, and unamortized premium or discount,
and does not reflect any direct write-down of the investment). The impairment
loss is recognized through the use of a valuation allowance. Loans that are
impaired are recorded at the present value of expected future cash flows
discounted at the loan's effective interest rate or if the loan is collateral
dependent, impairment measurement is based on the fair value of the collateral
as a practicable expedient. Income recognition on impaired loans is based on the
cash basis method.
The level of allowance 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. The allowance for commercial loans, including
time and demand notes, tax exempt loans, commercial real estate, and commercial
capital and operating leases begins with a process of estimating the probable
losses inherent in the portfolio. The estimates for these commercial loans are
established by category and based on Bancorp's internal system of credit risk
ratings, historical loss data, and the estimated average expected life of the
portfolio.
The estimate of losses inherent in the commercial portfolio may then be
adjusted for management's estimate of probable losses on specific exposures as
well as trends in delinquent and nonaccrual loans and other factors such as
prevailing economic conditions, lending personnel experience and changes,
lending strategies and other influencing factors as discussed in the Asset
Quality section of Management's Discussion and Analysis. In the commercial
portfolio, certain loans where more specific information is available, typically
larger-balance non-homogeneous exposures, a specific allowance may be
established based on the borrower's overall financial condition, resources and
payment record, support from guarantors, and the realizable value of any
collateral.
The allowance for consumer loans which includes retail real estate,
installment, home equity, credit card, consumer leasing, overdrafts, and student
loans is established for each of the categories listed by estimating losses
inherent in that particular category of consumer loans. The estimate of losses
is based on historical loss rates and the estimated average life or contractual
maturity of each portfolio. Consumer loans are evaluated as a group within
category (i.e., retail real estate, installment, etc.) because these loans are
smaller and homogeneous.
The unallocated portion of the allowance consists partially of dollar
amounts specifically set aside for each of the overall factors influencing the
allowance. These factors include national and economic factors, concentrations
in market segments, lending personnel experiences and changes, lending
strategies, personnel underwriting, ratio trends, and other factors not already
accounted for in the allowance estimates. Establishing percentages for these
factors is largely subjective, but is supported by economic data, supporting
dated material for changes made in lending functions and other support where
appropriate.
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
32 FIRST FINANCIAL BANCORP
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.
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. Accumulated comprehensive
income includes the unrealized holding gains from available-for-sale securities
arising during the period which were $11,223 at December 31, 2002, and unfunded
pension losses, net of taxes which were $3,034 at December 31, 2002.
Disclosure about segments and related information - Bancorp operates as
one community banking segment in contiguous geographic markets.
Derivative instruments - SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," was released in June, 1998, and is
effective for all fiscal quarters of fiscal years beginning after January 1,
2001. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. Bancorp did not use derivative financial
instruments until June 2002, at which time it adopted and follows the provisions
of SFAS No. 133.
Intangible assets - SFAS No. 141, "Business Combinations" 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
rules, goodwill and intangible assets deemed to have indefinite lives, if any,
will no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Core deposit intangibles and mortgage servicing
rights will continue to be amortized over their useful lives. Core deposit
intangibles are being amortized over varying periods, none of which exceeds 10
years.
Bancorp applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement resulted in an increase in net
income of $1,172 ($0.02 per share) per year. Bancorp performed the first
required impairment tests of goodwill and intangible assets with indefinite
lives as of January 1, 2002, and found no adjustment was necessary.
Since Bancorp was required to recognize an additional minimum liability
for its pension accounting, it was required to recognize an intangible asset to
the extent of its unrecognized prior service cost. Pursuant to SFAS No. 87
"Employers Accounting for Pensions," this intangible is never amortized
directly, but instead the amounts are recalculated at each measurement date
which is normally on an annual basis.
Employee Stock Options - Bancorp has elected to follow the intrinsic value
method of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), and related interpretations in accounting for its
stock options. Bancorp's employee stock options have fixed terms and the
exercise price of those stock options equals the market price of the underlying
stock on the date of grant. Therefore, no compensation expense was recognized.
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
2002 and 2001 were approximately $27,103 and $26,221, respectively.
NOTE 3 - BUSINESS COMBINATIONS
------------------------------
Bancorp consummated the following business combinations in 2001:
ACQUISITION PURCHASE
BUSINESS COMBINATIONS DATE ASSETS DEPOSITS PRICE
- -------------------------- ----------------- ------------- --------- --------
(Dollars in thousands)
Purchase transactions
First Community branches December 31, 2001 $ 31,912 $ 11,110 Par
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). Upon
consummation of the merger, these branches began 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. There were no acquisitions in 2002.
2002 ANNUAL REPORT 33
NOTE 4 - GOODWILL
-----------------
SFAS No. 141, "Business Combinations" 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 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.
Bancorp applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement resulted in an increase in net
income of $1,172 ($0.02 per share) per year. SFAS No. 142 prescribes testing of
goodwill for impairment using a two-step process. The first step is a screen for
potential impairment, while the second step measures the amount of the
impairment, if any. Bancorp performed the first of the required impairment tests
of goodwill and indefinite-lived intangible assets as of January 1, 2002, and no
impairment was indicated. Therefore, the second step was not necessary. Goodwill
and indefinite-lived intangible assets of each reporting unit must be tested for
impairment at least annually. Bancorp has selected October 1 as its date for
annual impairment testing. As of October 1, 2002, Bancorp performed step one and
concluded that no impairment of goodwill was indicated.
Net earnings and earnings per share for the years ended December 31, 2000
and 2001, adjusted to exclude amortization expense recognized during that period
is shown below:
2001 2000
---------- ----------
(Dollars in thousands)
Reported net earnings $ 43,309 $ 58,222
Goodwill amortization 1,172 1,199
---------- ----------
Net earnings, excluding goodwill
amortization 44,481 59,421
========== ==========
Reported net earnings per share $ 0.91 $ 1.19
Goodwill amortization per share 0.02 0.02
---------- ----------
Net earnings per share, excluding
goodwill amortization $ 0.93 $ 1.21
========== ==========
Average shares outstanding 47,427,921 48,775,547
========== ==========
NOTE 5 - MORTGAGE SERVICING RIGHTS
----------------------------------
Changes in capitalized mortgage servicing rights are summarized as follows:
2002 2001
--------- --------
(Dollars in thousands)
Balance at beginning of year $ 4,138 $ 3,005
Rights capitalized 2,242 2,052
Amortization (1,176) (919)
Impairment (497) 0
--------- --------
BALANCE AT END OF YEAR $ 4,707 $ 4,138
========= ========
The fair value of capitalized mortgage servicing rights was $4,707 at
December 31, 2002, and $4,138 at December 31, 2001. Bancorp recognized
impairment charges in "other" in the noninterest income section of the
Consolidated Statement of Earnings of $497 in 2002 due to a decline in the
estimated future value of the servicing cash flows. Valuations are conducted
regularly to determine the fair value and any possible impairment of the
mortgage servicing right asset. Key assumptions include prepayment speeds,
discount rates, inflation, and future operating costs. Bancorp uses market-based
data for assumptions related to the valuation of mortgage servicing rights.
Mortgage loans serviced for others are not included in the accompanying
Consolidated Balance Sheets. The unpaid principal balances of these loans
totaled $542,288, $545,733, and $560,530 at December 31, 2002, 2001, and 2000,
respectively.
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, 2002, Bancorp's subsidiaries had
retained earnings of $144,618 of which $8,444 was available for distribution to
Bancorp as dividends without prior regulatory approval.
34 FIRST FINANCIAL BANCORP
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. Accounting principles generally accepted in the United States do
not require these financial instruments to be recorded in the consolidated
balance sheets, statements of earnings, changes in shareholders' equity, or cash
flows. However, a discussion of these instruments follows.
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 $33,167 and
$24,516 at December 31, 2002, and 2001, 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 $464,777 and $477,689 at
December 31, 2002, and 2001, respectively. Management does not anticipate any
material losses as a result of these commitments.
NOTE 8 - ACCOUNTING FOR 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 follows the provisions of SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" in accounting for its derivative
activities. Bancorp has interest rate swaps that are accounted for as fair value
hedges under SFAS No. 133. Bancorp utilizes interest rate swap agreements to
effectively modify its exposure to interest rate risk by converting certain
fixed rate assets to floating rate. The use of these interest rate swaps allows
Bancorp's subsidiary banks to offer a long-term fixed-rate loan to commercial
borrowers. The interest rate swaps allow Bancorp to convert the fixed interest
rate to a variable rate that better suits its funding position. The swap
agreements involve the receipt of floating rate amounts in exchange for fixed
interest payments over the life of the agreements without an exchange of the
underlying principal amount. The swaps are accounted for under the short-cut
method. These contracts are designated as hedges of specific assets. The net
interest receivable or payable on swaps is accrued and recognized as an
adjustment to the interest income or expense of the hedged asset. At December
31, 2002, Bancorp had interest rate swaps with a notional value of $5,012. The
fair value of the swaps was an unrealized loss of $301 at December 31, 2002.
This amount is included with other assets on the balance sheet. A corresponding
fair value adjustment was also included on the balance sheet with the hedged
item.
Bancorp is exposed to losses if a counterparty fails to make its payment
under a contract in which Bancorp is in the receiving position. Although
collateral or other security may not be obtained, Bancorp minimizes its credit
risk by monitoring the credit standing of each counterparty and believes that
each will be able to fully satisfy its obligation under the agreement.
2002 ANNUAL REPORT 35
NOTE 9 - INVESTMENT SECURITIES
------------------------------
The following is a summary of investment securities as of December 31, 2002:
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------------------------------- -------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED ------------------- MARKET AMORTIZED ------------------- MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- -------- -------- -------- --------- -------- -------- --------
(Dollars in thousands)
Securities of U.S. government
agencies and corporations $ 132,971 $ 2,412 $ 0 $135,383
Mortgage-backed securities $ 2,225 $ 123 $ (2) $ 2,346 295,859 9,972 (35) 305,796
Obligations of state and
other political subdivisions 19,256 419 (14) 19,661 114,445 5,756 (13) 120,188
Other securities 90 0 0 90 43,856 160 (38) 43,978
--------- -------- -------- -------- --------- -------- -------- --------
TOTAL $ 21,571 $ 542 $ (16) $ 22,097 $ 587,131 $ 18,300 $ (86) $605,345
========= ======== ======== ======== ========= ======== ======== ========
The following is a summary of investment securities as of December 31, 2001:
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------------------------------- -------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED ------------------- MARKET AMORTIZED ------------------- 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 carrying value of investment securities as of December 31, 2000, by
category was as follows: U.S. Treasury $3,492, U.S. government agencies and
corporations $143,861, mortgage-backed $250,284, obligations of state and other
political subdivisions $156,303, and other $35,622.
During the years ended December 31, 2002, 2001, and 2000, no
available-for-sale securities were sold.
There were net investment gains after taxes of $58, $188, and $73 for the
years ended December 31, 2002, 2001, and 2000, respectively. The applicable
income tax effects were an expense of $31 for 2002 and benefits of $114 and $34
for 2001 and 2000, respectively.
The carrying value of investment securities pledged to secure public
deposits and for other purposes as required by law amounted to $282,416 at
December 31, 2002.
The amortized cost and market value of investment securities, including
mortgage-backed securities at December 31, 2002, 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 $ 1,453 $ 1,464 $ 24,693 $ 24,911
Due after one year through five years 13,609 13,994 141,437 144,951
Due after five years through ten years 3,593 3,689 70,795 73,727
Due after ten years 2,916 2,950 350,206 361,756
--------- -------- --------- --------
TOTAL $ 21,571 $ 22,097 $587,131 $605,345
========= ======== ========= ========
36 FIRST FINANCIAL BANCORP
NOTE 10 - LOANS
---------------
Information as to nonaccrual and restructured loans at December 31 was as
follows:
2002 2001 2000
------- ------- -------
(Dollars in thousands)
Principal balance
Nonaccrual loans $21,456 $24,628 $17,346
Restructured loans 5,375 1,291 265
------- ------- -------
TOTAL $26,831 $25,919 $17,611
======= ======= =======
Interest income effect
Gross amount of interest that would
have been recorded at original rate $ 2,549 $ 1,609 $ 2,560
Interest included in income 744 416 1,613
------- ------- -------
NET IMPACT ON INTEREST INCOME $ 1,805 $ 1,193 $ 947
======= ======= =======
At December 31, 2002, 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 $2,792, $2,338, and $1,075 at December 31, 2002,
2001, and 2000, respectively.
Changes in the allowance for loan losses for the three years ended
December 31 were as follows:
2002 2001 2000
------- ------- -------
(Dollars in thousands)
Balance at beginning of year $46,784 $39,349 $39,340
Allowance acquired through mergers 0 1,462 0
Provision for loan losses 16,174 26,813 11,300
Loans charged-off (19,873) (23,632) (13,644)
Recoveries 5,092 2,792 2,353
------- ------- -------
BALANCE AT END OF YEAR $48,177 $46,784 $39,349
======= ======= =======
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, 2002, 2001, and 2000, the total recorded investment in
loans that are considered to be impaired under SFAS No. 114 was $6,745, $2,006,
and $8,904, respectively. For those same periods, the recorded investment in
loans for which there is a related allowance for loan losses was $6,093, $801,
and $8,839, respectively. The related allowance for loan losses on these
impaired loans was $1,131 at December 31, 2002, $529 at December 31, 2001, and
$2,008 at December 31, 2000. At December 31, 2002, 2001, and 2000, there were
$652, $1,205, and $65, 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, 2002, was approximately $4,280 versus
$4,343 for the year ended December 31, 2001, and $5,517 for the year ended
December 31, 2000. For the years ended December 31, 2002, 2001, and 2000,
Bancorp recognized interest income on those impaired loans of $84, $143, and
$218, respectively. Bancorp recognizes income on impaired loans using the cash
basis method.
Custodial escrow balances maintained in connection with these mortgage
loans serviced were approximately $3,380, $3,336, and $3,313 at December 31,
2002, 2001, and 2000, respectively.
NOTE 11 - LEASE FINANCING
-------------------------
Leases included in the loan portfolio at December 31 were composed as follows:
2002 2001
--------- ----------
(Dollars in thousands)
Direct financing $ 13,055 $ 21,269
Leveraged 0 557
--------- ----------
Net rentals receivable 13,055 21,826
Estimated residual value of leased assets 10,065 18,494
Less unearned income 2,089 4,181
--------- ----------
Investment in leases, net $ 21,031 $ 36,139
========= ==========
Direct financing lease payments receivable as of December 31, 2002, for the next
five years and thereafter are as follows:
DIRECT FINANCING LEASES
(Dollars in thousands)
----------------------
2003 $5,785
2004 4,062
2005 2,158
2006 737
2007 279
Thereafter 34
2002 ANNUAL REPORT 37
NOTE 12 - PREMISES AND EQUIPMENT
--------------------------------
Premises and equipment at December 31 were summarized as follows:
2002 2001
--------- --------
(Dollars in thousands)
Land and land improvements $ 14,809 $ 14,513
Buildings 53,841 54,934
Furniture and fixtures 38,277 42,498
Leasehold improvements 5,920 5,624
Construction in progress 1,028 1,041
--------- --------
113,875 118,610
Less accumulated depreciation
and amortization 57,527 58,035
--------- --------
TOTAL $ 56,348 $ 60,575
========= ========
Rental expense recorded under operating leases in 2002, 2001, and 2000 was
$1,576, $358, and $139, respectively.
As of December 31, 2002, future minimum lease payments were $2,834 for
2003, $2,828 for 2004 and $2,112 for 2005.
Capital lease agreements for land and buildings at December 31, 2002, were
immaterial.
NOTE 13 - BORROWINGS
--------------------
The following is a summary of short-term borrowings for the last three years:
2002 2001 2000
------------------------- ------------------------- -------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
At year end:
Federal funds purchased and securities
sold under agreements to repurchase $ 55,766 1.01% $ 67,641 1.31% $ 53,581 5.54%
Federal Home Loan Bank borrowings 0 0.00% 0 0.00% 85,500 6.30%
Other short-term borrowings 39,414 2.02% 25,811 2.29% 7,487 6.08%
----------- ----------- -----------
Total $ 95,180 1.37% $ 93,452 1.58% $ 146,568 6.01%
=========== =========== =========== =========== =========== ===========
Average for the year:
Federal funds purchased and securities
sold under agreements to repurchase $ 54,306 1.49% $ 46,974 3.29% $ 68,720 4.54%
Federal Home Loan Bank borrowings 6,944 1.88% 12,330 6.00% 245,880 6.38%
Other short-term borrowings 28,938 2.71% 15,936 4.56% 1,937 6.96%
----------- ----------- -----------
Total $ 90,188 1.91% $ 75,240 4.01% $ 316,537 5.98%
=========== =========== =========== =========== =========== ===========
Maximum month-end balances:
Federal funds purchased and securities
sold under agreements to repurchase $ 65,214 $ 67,641 $ 115,109
Federal Home Loan Bank borrowings 42,200 83,000 344,350
Other short-term borrowings 35,347 28,912 4,243
Bancorp's policy regarding collateralization of repurchase agreements is
to comply with all federal regulations.
At December 31, 2002, Bancorp had a short-term revolving line of credit
with a financial institution of $50,000. As of year end, the outstanding balance
was $30,500. 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, 2002.
Federal Home Loan Bank long-term borrowings - Long-term borrowings at
December 21, 2002, totalled $290,051 and consisted exclusively of Federal Home
Loan Bank (FHLB) advances with rates ranging from 3.16% to 6.90%, with interest
payable monthly. The long-term advances mature as follows: $1,200 in 2003,
$16,500 in 2004, $7,000 in 2005, $26,172 in 2006, $27,000 in 2007, and $212,179
after 2007.
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 $748,655 at December 31, 2002.
Corporation-obligated mandatorily redeemable capital securities of
subsidiary trust - The corporation-obligated mandatorily redeemable capital
securities (the "capital securities") of subsidiary trust, which appears on the
balance sheet, are commonly known as Trust Preferred Securities. The subsidiary
trust holds solely the junior subordinated debt securities of Bancorp (the
"debentures"). The capital securities were issued in the third quarter of 2002
by a statutory business trust - First Financial (OH) Statutory Trust I, of which
100% of the common equity of the trust is owned by Bancorp. The trust was formed
with the sole purpose of issuing the capital
38 FIRST FINANCIAL BANCORP
securities and investing the proceeds from the sale of such capital securities
in the debentures. The debentures held by the trust are the sole assets of the
trust. Distributions on the capital securities are payable quarterly at a
variable rate of interest, which is equal to the interest rate being earned by
the trust on the debentures and are recorded as interest expense of Bancorp. The
capital securities are subject to mandatory redemption, in whole or in part,
upon repayment of the debentures. Bancorp has entered into agreements which,
taken collectively, fully or unconditionally guarantee the capital securities
subject to the terms of the guarantees. The debentures qualify as Tier I capital
under Federal Reserve Board guidelines and are first redeemable, in whole or in
part, by Bancorp on September 25, 2007, and mature on September 25, 2032. The
amount outstanding, net of offering costs, as of December 31, 2002, was $10,000.
NOTE 14 - INCOME TAXES
----------------------
Income tax expense consisted of the following components:
2002 2001 2000
--------- --------- ---------
(Dollars in thousands)
Current:
Federal $ 29,861 $ 18,431 $ 24,548
State 1,799 2,636 3,134
--------- --------- ---------
Total 31,660 21,067 27,682
Deferred expense (9,125) 1,064 1,058
--------- --------- ---------
INCOME TAX EXPENSE $ 22,535 $ 22,131 $ 28,740
========= ========= =========
The difference between the federal income tax rates, applied to income before
income taxes, and the effective rates were due to the following:
2002 2001 2000
--------- --------- ---------
(Dollars in thousands)
Income taxes computed at federal statutory rate of 35% $ 24,770 $ 22,904 $ 30,431
State income taxes, net of federal tax benefit 1,169 1,713 2,037
Effect of tax-exempt interest (3,143) (2,073) (3,014)
Other (261) (413) (714)
--------- --------- ---------
INCOME TAX EXPENSE $ 22,535 $ 22,131 $ 28,740
========= ========= =========
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, 2002, 2001, and 2000.
The major components of the temporary differences that give rise to deferred tax
assets and liabilities at December 31, 2002 and 2001, were as follows:
2002 2001
--------- ---------
(Dollars in thousands)
Deferred tax assets
Allowance for loan losses $ 16,759 $ 14,577
Mark to market adjustment 3,095 795
Other real estate owned 383 (18)
Postretirement benefits other than pension liability 804 847
Pension liability 603 230
Unfunded pension liability 1,665 0
Other 1,253 255
--------- ---------
TOTAL DEFERRED TAX ASSETS 24,562 16,686
Deferred tax liabilities
Tax greater than book depreciation 1,869 1,994
Leasing activities 5,164 7,166
Federal Home Loan Bank stock basis difference 2,539 2,287
Deferred loan fees 1,560 2,054
Purchase accounting adjustment 9 (162)
Other 2,323 1,374
--------- ---------
TOTAL DEFERRED TAX LIABILITIES 13,464 14,713
Net deferred tax asset recognized through the statement of earnings 11,098 1,973
Net deferred tax liability from valuation adjustments of investment
securities available-for-sale, recognized in equity section of
balance sheet (6,991) (3,361)
--------- ---------
TOTAL NET DEFERRED TAX ASSET (LIABILITY) $ 4,107 $ (1,388)
========= =========
2002 ANNUAL REPORT 39
NOTE 15 - 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,
2002 2001
----------- -----------
(Dollars in thousands)
Tier 1 capital
Shareholders' equity $ 377,603 $ 384,543
Less certain intangibles 32,290 32,465
Less unrealized gains from available for sale securities 11,223 5,348
Add corporation-obligated mandatorily redeemable
capital securities of subsidiary trust 10,000 0
---------- ----------
TOTAL TIER 1 CAPITAL $ 344,090 $ 346,730
========== ==========
Total risk-based capital
Tier 1 capital $ 344,090 $ 346,730
Qualifying allowance for loan losses 34,249 35,111
---------- ----------
TOTAL RISK-BASED CAPITAL $ 378,339 $ 381,841
========== ==========
RISK WEIGHTED ASSETS $2,726,025 $2,797,210
========== ==========
RISK-BASED RATIOS
TIER 1 CAPITAL 12.6% 12.4%
========== ==========
TOTAL RISK-BASED CAPITAL 13.9% 13.7%
========== ==========
LEVERAGE 9.3% 9.1%
========== ==========
40 FIRST FINANCIAL BANCORP
NOTE 16 - 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 Financial Bank. Plan assets primarily consist of equity and
debt mutual funds, stocks, corporate bonds, and money market funds.
Approximately 99.4% and 98.1% of plan assets at December 31, 2002 and 2001,
respectively, were invested in collective trust funds with First Financial Bank.
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,
2002 2001
-------- --------
(Dollars in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 33,169 $ 27,773
Service cost 2,486 2,306
Interest cost 2,340 2,236
Amendments 14 0
Actuarial loss 1,966 4,449
Benefits paid (3,452) (3,595)
-------- --------
Benefit obligation at end of year 36,523 33,169
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 22,976 21,667
Actual return on plan assets (1,912) 131
Employer contributions 1,285 4,773
Benefits paid (3,452) (3,595)
-------- --------
Fair value of plan assets at end of year 18,897 22,976
-------- --------
Funded status (17,626) (10,193)
Unrecognized transition amount (380) (460)
Unrecognized prior service cost 583 822
Unrecognized actuarial loss 14,412 8,561
-------- --------
NET AMOUNT RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS (ACCRUED BENEFIT LIABILITY) $ (3,011) $ (1,270)
======== ========
AMOUNTS RECOGNIZED IN SETTLEMENT OF FINANCIAL POSITION
Accrued benefit liability $ (8,308) $ (1,270)
Intangible pension asset 583 0
Other comprehensive income, net of taxes 3,034 0
Deferred tax assets 1,680 0
-------- --------
NET AMOUNT RECOGNIZED $ (3,011) $ (1,270)
======== ========
WEIGHTED-AVERAGE ASSUMPTIONS DECEMBER 31,
2002 2001
---- ----
Discount rate 6.95% 7.25%
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,
2002 2001 2000
------- ------- -------
(Dollars in thousands)
Service cost $ 2,486 $ 2,306 $ 2,115
Interest cost 2,340 2,236 2,007
Expected return on assets (2,203) (2,051) (2,000)
Amortization of transition asset (80) (270) (305)
Amortization of unrecognized prior service cost 253 252 252
Amortization of actuarial loss 230 120 0
------- ------- -------
NET PERIODIC PENSION COST $ 3,026 $ 2,593 $ 2,069
======= ======= =======
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 2002 and 2001, 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 $909 during
2002, $873 during 2001, and $937 during 2000.
Bancorp provides life insurance to all full-time employees. Bank-owned
life insurance balances were $51,511 and $44,456 at December 31, 2002, and 2001,
respectively.
2002 ANNUAL REPORT 41
NOTE 17 - 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:
2002 2001
------- -------
(Dollars in thousands)
Benefit obligation at beginning of year $ 1,314 $ 1,199
Interest cost 91 85
Plan participants' contributions 38 23
Actuarial loss 122 220
Benefits paid (247) (213)
------- -------
Benefit obligation at end of year 1,318 1,314
Fair value of plan assets at beginning and end of year 0 0
------- -------
Funded status (1,318) (1,314)
Unrecognized actuarial gain (744) (883)
Unrecognized prior service cost (18) (22)
NET POSTRETIREMENT LIABILITY RECOGNIZED IN THE BALANCE SHEETS $(2,080) $(2,219)
======= =======
Net periodic postretirement benefit cost includes the following components:
Interest cost $ 91 $ 85
Amortization of unrecognized prior service cost (4) (3)
Amortization of actuarial gain (75) (94)
------- -------
NET PERIODIC BENEFIT COST $ 12 $ (12)
======= =======
The discount rate used to determine the accumulated postretirement 2002 2001
benefit obligation was 6.95% and 7.25% at December 31, 2002, and ----- -----
December 31, 2001, respectively. The assumed health care cost trend rates used 2002 10.00%
in determining the accumulated postretirement benefit obligation are shown in 2003 9.00% 9.00%
the table to the right. 2004 8.00% 8.00%
2005 7.00% 7.00%
If the health care cost trend rate assumptions were increased by 1.00%, 2006 6.00% 6.00%
the accumulated postretirement benefit obligation as of December 31, 2002, 2007 5.00% 5.00%
would be increased by approximately $104. Thereafter 5.00% 5.00%
If the health care cost trend rate assumptions were decreased by 1.00%,
the accumulated postretirement benefit obligation as of December 31, 2002, would
be decreased by approximately $94.
NOTE 18 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
2002 2001 2000
----------- ----------- -----------
(Dollars in thousands, except per share data)
Net income- numerator for basic and diluted earnings per share -
income available to common stockholders $ 48,235 $ 43,309 $ 58,222
=========== =========== ===========
Denominator for basic earnings per share - weighted average shares 45,880,649 47,427,921 48,775,547
Effect of dilutive securities - employee stock options 120,152 1,394 86,740
----------- ----------- -----------
Denominator for diluted earnings per share - adjusted weighted average shares 46,000,801 47,479,315 48,862,287
=========== =========== ===========
Basic earnings per share $ 1.05 $ 0.91 $ 1.19
=========== =========== ===========
Diluted earnings per share $ 1.05 $ 0.91 $ 1.19
=========== =========== ===========
42 FIRST FINANCIAL BANCORP
NOTE 19 - 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 1,691,036 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 2002,
2001, and 2000, respectively: risk-free interest rates of 4.37%, 4.94%, and
6.52%; dividend yields of 3.43%, 3.61%, and 3.25%; volatility factors of the
expected market price of Bancorp's common stock of 0.222, 0.220, and 0.215; and
a weighted average expected life of the options of 5.09, 4.50, and 3.90 years.
At December 31, 2002, the weighted average exercise price of the exercisable
options was $17.66, and the weighted average remaining contractual life of those
options was 6.5 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:
2002 2001 2000
---------- ---------- ----------
(Dollars in thousands, except per share data)
Pro forma net earnings $ 46,782 $ 42,392 $ 55,778
========== ========== ==========
Pro forma earnings per share $ 1.02 $ 0.89 $ 1.14
========== ========== ==========
Activity in the above plan for 2002, 2001, and 2000 is summarized as follows:
2002 2001 2000
NUMBER OF OPTION NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 1,597,360 1,403,595 779,524
Granted 250,402 $ 17.20-18.84 284,172 $ 15.37-16.01 678,011 $ 16.90-17.86
Exercised (78,386) $ 7.14-17.86 (19,719) $ 7.36-11.30 (24,877) $ 7.14-11.30
Cancelled (181,621) $ 11.13-22.57 (70,688) $ 7.36-22.57 (29,063) $ 17.57-19.09
----------- ----------- -----------
OUTSTANDING AT END OF YEAR 1,587,755 $ 8.20-22.57 1,597,360 $ 7.14-22.57 1,403,595 $ 7.14-22.57
=========== =========== ===========
EXERCISABLE AT END OF YEAR 1,339,603 1,319,594 735,637
=========== =========== ===========
AVAILABLE FOR FUTURE GRANT 5,962,775 7,013,931 7,227,408
=========== =========== ===========
WEIGHTED-AVERAGE FAIR VALUE OF
OPTIONS GRANTED DURING THE YEAR $ 3.15 $ 2.79 $ 3.56
=========== =========== ===========
2002 ANNUAL REPORT 43
NOTE 20 - LOANS TO RELATED PARTIES
Loans to directors, executive officers, principal holders of Bancorp's
common stock, and certain related persons totaled $48,555, $37,177, and $37,133
at December 31, 2002, 2001, and 2000, respectively.
Activity of these loans was as follows:
2002 2001 2000
(Dollars in thousands)
Beginning balance $37,177 $37,331 $33,281
Additions 29,946 17,212 14,988
Collected 18,568 17,366 10,938
Charged-off 0 0 0
------- ------- -------
ENDING BALANCE $48,555 $37,177 $37,331
======= ======= =======
LOANS 90 DAYS PAST DUE $ 0 $ 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 21 - 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.
44 FIRST FINANCIAL BANCORP
NOTE 22 - 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 9 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. The
carrying amount of the corporation-obligated mandatorily redeemable capital
securities of subsidiary trust approximated its fair value.
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.)
Derivative financial instruments - Fair values for derivative
financial instruments, specifically interest rate swaps, were determined using
market quotes for those instruments.
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:
2002 2001
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(Dollars in thousands)
Financial assets
Cash and short-term investments $ 214,604 $ 214,604 $ 228,182 $ 228,182
Investment securities held-to-maturity 21,571 22,097 20,890 21,547
Investment securities available-for-sale 605,345 605,345 595,600 595,600
Loans
Commercial 690,656 691,787 804,683 833,614
Real estate - construction 89,674 89,734 75,785 72,721
Real estate - mortgage 1,368,207 1,376,340 1,346,235 1,355,934
Installment, net of unearned income 556,452 566,916 586,561 586,845
Credit card 22,068 22,140 22,846 22,601
Leasing 21,031 20,970 36,139 35,246
Less allowance for loan losses 48,177 46,784
---------- ---------- ---------- ----------
Net loans 2,699,911 2,767,887 2,825,465 2,906,961
Accrued interest receivable 22,942 22,942 27,054 27,054
Financial liabilities
Deposits
Noninterest-bearing 422,453 422,453 448,330 448,330
Interest-bearing demand 841,336 841,336 346,039 346,039
Savings 328,204 328,204 782,640 782,640
Time 1,330,441 1,344,459 1,508,084 1,516,181
---------- ---------- ---------- ----------
Total deposits 2,922,434 2,936,452 3,085,093 3,093,190
Short-term borrowings 95,180 95,180 93,452 93,452
Long-term borrowings 290,051 321,355 260,345 263,210
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trust 10,000 10,000 0 0
Accrued interest payable 6,201 6,201 9,275 9,275
Derivative financial instruments 301 301 0 0
2002 ANNUAL REPORT 45
NOTE 23 - FIRST FINANCIAL BANCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
DECEMBER 31,
2002 2001
-------- --------
(Dollars in thousands)
ASSETS
Cash $ 27,141 $ 21,159
Investment securities 5,207 3,313
Subordinated notes from subsidiaries 7,500 7,500
Investment in subsidiaries
Commercial banks 315,867 313,462
Savings banks 29,281 30,973
-------- --------
Total investment in subsidiaries 345,148 344,435
Loans
Commercial 14,822 16,352
Real estate - mortgage 945 605
-------- --------
Total loans 15,767 16,957
Allowance for loan losses 3,337 3,502
-------- --------
Net loans 12,430 13,455
Bank premises & equipment 1,234 1,325
Other assets 29,455 27,592
-------- --------
TOTAL ASSETS $428,115 $418,779
======== ========
LIABILITIES
Short-term borrowings $ 30,500 $ 23,500
Subordinated debentures 10,310 0
Dividends payable 6,765 7,004
Other liabilities 2,937 3,732
-------- --------
TOTAL LIABILITIES 50,512 34,236
SHAREHOLDERS' EQUITY 377,603 384,543
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $428,115 $418,779
======== ========
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
2002 2001 2000
-------- -------- --------
(Dollars in Thousands)
INCOME
Interest income $ 1,278 $ 313 $ 670
Other interest income 725 94 0
Dividends from subsidiaries 54,364 75,647 58,018
-------- -------- --------
TOTAL INCOME 56,367 76,054 58,688
EXPENSES
Interest expense 903 665 11
Provision for loan losses 0 3,752 0
Salaries and employee benefits 4,768 4,972 2,889
Other 1,050 4,909 1,522
-------- -------- --------
TOTAL EXPENSES 6,721 14,298 4,422
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET
EARNINGS OF SUBSIDIARIES 49,646 61,756 54,266
Income tax benefit (1,393) (4,186) (1,119)
-------- -------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 51,039 65,942 55,385
Equity in undistributed net earnings of subsidiaries (2,804) (22,633) 2,837
-------- -------- --------
NET EARNINGS $ 48,235 $ 43,309 $ 58,222
======== ======== ========
46 FIRST FINANCIAL BANCORP
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
2002 2001 2000
-------- -------- --------
(Dollars in thousands)
OPERATING ACTIVITIES
Net earnings $ 48,235 $ 43,309 $ 58,222
Adjustments to reconcile net earnings to net cash provided by operating activities
Equity in undistributed net earnings of subsidiaries 2,804 22,633 (2,837)
Provision for allowance for loan losses 0 3,752 0
Provision for depreciation and amortization 1,980 1,228 471
Deferred income taxes (2,176) 92 38
(Decrease) increase in dividends payable (239) 89 (65)
Increase (decrease) in accrued expenses (422) 2,200 (2,338)
(Increase) decrease in receivables (158) (6,776) (2,820)
-------- -------- --------
Net cash provided by operating activities 50,024 66,527 50,671
INVESTING ACTIVITIES
Capital contributions to subsidiaries (510) (9,434) (19,397)
Purchase of investment securities (2,016) (3,000) 0
Net decrease (increase) in loans 1,025 (17,207) 0
Purchases of premises and equipment (41) (90) (27)
Other (202) 0 77
-------- -------- --------
Net cash used in investing activities (1,744) (29,731) (19,347)
FINANCING ACTIVITIES
Increase in short-term borrowings 7,000 20,000 3,500
Issuance of subordinated debentures to non-bank subsidiary 10,310 0 0
Cash dividends (27,474) (28,400) (27,901)
Purchase of common stock (32,910) (30,057) (16,518)
Proceeds from exercise of stock options, net of shares purchased 776 99 116
-------- -------- --------
Net cash used in financing activities (42,298) (38,358) (40,803)
-------- -------- --------
INCREASE (DECREASE) IN CASH 5,982 (1,562) (9,479)
Cash at beginning of year 21,159 22,721 32,200
-------- -------- --------
CASH AT END OF YEAR $ 27,141 $ 21,159 $ 22,721
======== ======== ========
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, 2002, and 2001, 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, 2002. 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 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, 2002, and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
January 17, 2003
2002 ANNUAL REPORT 47
QUARTERLY FINANCIAL AND COMMON STOCK DATA
(Unaudited)
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------- ------- ------- -------
(Dollars in thousands, except per share data)
2002
Interest income $62,710 $61,485 $59,536 $57,277
Interest expense 21,664 19,804 18,953 17,830
------- ------- ------- -------
Net interest income 41,046 41,681 40,583 39,447
Provision for loan losses 5,640 3,404 5,189 1,941
Noninterest income
Investment securities gains 4 5 0 80
All other 14,764 13,953 14,386 13,507
Noninterest expenses 31,459 32,420 34,268 34,365
------- ------- ------- -------
Income before income taxes 18,715 19,815 15,512 16,728
Income tax expense 6,314 6,384 4,710 5,127
------- ------- ------- -------
NET EARNINGS $12,401 $13,431 $10,802 $11,601
======= ======= ======= =======
Per share
NET EARNINGS - BASIC $ 0.27 $ 0.29 $ 0.24 $ 0.26
======= ======= ======= =======
NET EARNINGS - DILUTED $ 0.27 $ 0.29 $ 0.24 $ 0.26
======= ======= ======= =======
CASH DIVIDENDS PAID $ 0.15 $ 0.15 $ 0.15 $ 0.15
======= ======= ======= =======
Market price
HIGH BID $ 17.82 $ 20.31 $ 20.00 $ 18.87
======= ======= ======= =======
LOW BID $ 15.65 $ 15.80 $ 15.90 $ 15.99
======= ======= ======= =======
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
======= ======= ======= =======
First Financial Bancorp common stock trades on The Nasdaq Stock Market(R) under
the symbol FFBC.
48 FIRST FINANCIAL BANCORP
CORPORATE STRUCTURE
FIRST FINANCIAL BANCORP
300 High Street, Hamilton, Ohio 45011
(513) 867-5240
Subsidiaries of the Corporation
FIRST FINANCIAL BANK, NATIONAL ASSOCIATION
Assets: $1.4 billion
DIRECTORS
Stanley N. Pontius, Chairman of the Board, First Financial Bank;
President and Chief Executive Officer, First Financial Bancorp
Mark W. Immelt, President and Chief Executive Officer, First Financial
Bank; Senior Vice President, First Financial Bancorp
Richard L. Alderson, Partner, Real Estate Investment and Development
Don M. Cisle, President, Don S. Cisle Contractor, Inc.
Michael A. Conner, Chief Operating Officer, First Financial Bank
Carl R. Fiora, Retired President and Chief Executive Officer,
Armco Steel Co., L.P.
Dr. James C. Garland, President, Miami University, Oxford, Ohio
Stephen S. Marcum, Partner, Parrish, Fryman & Marcum Co., L.P.A.
Barry S. Porter, Retired Chief Financial Officer, The Ohio Casualty Corp.
Steven C. Posey, President, Posey Management Corp.
Susan L. Purkrabek-Knust, President, Precision Packaging Services
Herman R. Sanders, President and Manager, Butler County Lumber Co.
Ronald E. Watson, President, Watson Gravel
OFFICERS
Chairman of the Board: Stanley N. Pontius
President and Chief Executive Officer: Mark W. Immelt
Chief Operating Officer: Michael A. Conner
Executive Vice President: Patrick J. Hart
Senior Vice President: Brendan J. Burns, Joseph M. Gallina,
John R. Kuczynski, Brian D. Moriarty
First Vice President: Margaret S. Baker, Charles H. Barton, Ronald S.
Biggs, Vaden W. Fitton, Alan R. Flegal, Greg W. Meyers, August J.
Miserocchi, Howard L. Regenbogen, David D. Schul, Patty K. Scott,
Dennis G. Walsh
Vice President: Glenn E. Boone, Kathy D. Carmack, Pamela R. Cottle,
James R. Deller, Kelland L. Farler, Brenda L. Frazier, Jean E. Gaw,
A. Scott Gullett, David L. Haft, Joseph Hojnacki, Timothy A. Kemper,
Harry L. Korros, Rebecca A. Lancaster, Keith A. Maurmeier, Brenda K.
Morris, Tricia M. Neeley, Lawrence W. Neiman, Sara A. Pinkerton,
Suzanne Puthoff, Todd Slagle
LOCATIONS
4 South Main Street, Camden, Ohio 45311
10174 Colerain Avenue, Cincinnati, Ohio 45251
7521 Hamilton Avenue, Cincinnati, Ohio 45231
6880 Wooster Pike, Cincinnati, Ohio 45227
4601 Dixie Highway, Fairfield, Ohio 45014
6060 South Gilmore Road, Fairfield, Ohio 45014
5300 Pleasant Avenue, Fairfield, Ohio 45014
300 High Street, Hamilton, Ohio 45011*
5971 Golf Club Lane, Hamilton, Ohio 45011
970 Main Street, Hamilton, Ohio 45013
2344 South Erie Highway, Hamilton, Ohio 45011
8211 Princeton-Glendale Road, Hamilton, Ohio 45011
855 Stahlheber Road, Hamilton, Ohio 45013
160 Berkeley Square, Hamilton, Ohio 45013
1510 Plaza Drive, Hamilton, Ohio 45013
720 NW Washington Boulevard, Hamilton, Ohio 45013
100 North Commerce Street, Lewisburg, Ohio 45338
8601 Landen Drive, Maineville, Ohio 45039
1063 Reading Road, Mason, Ohio 45040
300 North Main Street, Middletown, Ohio 45042
815 South Breiel Boulevard, Middletown, Ohio 45044
1300 Sunset Street, Middletown, Ohio 45042
108 South Main Street, Monroe, Ohio 45050
225 Britton Lane, Monroe, Ohio 45050
25 West High Street, Oxford, Ohio 45056
475 McGuffey Avenue, Oxford, Ohio 45056
4079 Hamilton-Cleves Road, Ross, Ohio 45014
300 North Main Street, Seven Mile, Ohio 45062
885 West Central Avenue, Springboro, Ohio 45066
125 East State Street, Trenton, Ohio 45067
7795 Tylersville Road, West Chester, Ohio 45069
7237 Cincinnati-Dayton Road, West Chester, Ohio 45069
6081 Limaburg Road, Burlington, Kentucky 41005
2652 Northbend Road, Hebron, Kentucky 41048
3010 First Street, Petersburg, Kentucky 41080
SAND RIDGE BANK
Assets: $820 million
DIRECTORS
Bruce E. Leep, Chairman of the Board, Sand Ridge Bank;
Chairman of the Board, First Financial Bancorp
Ronnie J. Alting, Indiana State Senator
James C. Hall, Executive Vice President, First Financial Bancorp
J. Franklin Hall, Vice President and Controller, First Financial Bancorp
David S. Harvey, President and Chief Executive Officer, Sand Ridge Bank
E. Kenneth Leep, Retired President and Owner, Pleasant View Dairy
Richard E. Olszewski, President and Owner, Highland K & L Inc.
Rhett L. Tauber, Partner, Tauber & Westland PC
Tom A. Van Prooyen, General Manager, Schepel Buick GMC
Samuel N. Van Til, Vice President, Strack & Van Til Supermarket, Inc.
Dale V. Zinn, Secretary, Zinn Kitchens
OFFICERS
President and Chief Executive Officer: David S. Harvey
Executive Vice President: George J. Vande Werken
Senior Vice President and Chief Operating Officer: Bruce A. Hunt,
Thomas J. Young
Senior Vice President: Scott S. Gyure, Bryan D. Jackson, Terry L. Saxsma,
Mark W. Sprenger, William M. Winterhaler
Vice President: Walter J. Banke, Cortney H. Collison, Marjorie Dian,
Paul L. Doherty, Donald L. Harris, B. Wayne Hays, Timothy P. Kelly,
Andrew S. Kyres, Ruth A. LaBuda, Patrick T. Leahy, Michelle M.
Markley, Gregory S. McGandy, Alisa J. Morehouse, Patrick C. Morrissey,
Eric G. Ross, Michael S. Schneider, Mary E. Shelton, Terri L. Sink,
Guy M. Staska, Michael A. Troxell, Sandra G. Velasco
LOCATIONS
4 North Gate Plaza, Michigan Road, Burlington, Indiana 46915
215 East Main Street, Delphi, Indiana 46923
4 East Main Street, Flora, Indiana 46929
817 East Columbia Street, Flora, Indiana 46929
2635 169th Street, Hammond, Indiana 46323
2611 Highway Avenue, Highland, Indiana 46322*
* Main Office
2002 ANNUAL REPORT 49
CORPORATE STRUCTURE
2750 45th Street, Highland, Indiana 46322
9632 Cline Avenue, Highland, Indiana 46322
1600 Sagamore Parkway South, Lafayette, Indiana 47903
302 Ferry Street, Lafayette, Indiana 47901
State Road 26 West, Rossville, Indiana 46065
450 West Lincoln Highway, Schererville, Indiana 46375
1650 US 41, Schererville, Indiana 46375
241 West State Street, Hastings, Michigan 49058
12850 West M-179 Highway, Wayland, Michigan 49348
COMMUNITY FIRST BANK & TRUST
Assets: $668 million
DIRECTORS
Michael R. O'Dell, Chairman of the Board, Community First
Samuel J. Munafo, President and Chief Executive Officer,
Community First
Thomas Casaboro, President and Chief Executive Officer, CASA
Restaurant Group
Murph Knapke, Attorney-at-Law, Owner, Knapke Law Office
William J. Kramer, President, Pax Steel Products, Inc.
Rodney L. Stoller, CPA, Arend, Laukhuf & Stoller
OFFICERS
Chairman of the Board: Michael R. O'Dell
President and Chief Executive Officer: Samuel J. Munafo
Executive Vice President: Bryce L. Beckman, John C. Hoying,
Howard A. Stammen
Senior Vice President: Collin J. Bryan, Y. Jeannine Long,
David E. Morrison, Thomas R. Bolduc, Craig A. Kuhlman
First Vice President: Thomas C. Saddler, Rod L. Stover
Vice President: Diana J. Cearns, James A. Cecil, Dan R. Clark,
Linda G. Cooper, Thomas M. Gauvey, Ken Goettemoeller, Rick L.
Greve, Marie C. Gross, Kathleen Hemmelgarn, Geoffrey L. Hyman,
Edward Kaiser, Virgil V. Lochtefeld, Milton L. Miller, Michael J. Moore,
Laura L. Nanna, Kevin Niekamp, Byron L. Peasley, Kent A. Phares,
Dana L. Schultz, Betty K. Strawn, Randy Swary, J. Chadwick Tranter
LOCATIONS
327 South Main Street, Bryan, Ohio 43506
225 North Main Street, Celina, Ohio 45822*
124 East Fayette Street, Celina, Ohio 45822
115 West Summit Street, Celina, Ohio 45822
State Route 274, Chickasaw, Ohio 45826
730 East Main Street, Coldwater, Ohio 45828
202 North Main Street, Delphos, Ohio 45833
220 North Wayne Street, Fort Recovery, Ohio 45846
6154 St. Joe Center Road, Fort Wayne, Indiana 46835
201 North Main Street, Paulding, Ohio 45879
101 East Merrin Street, Payne, Ohio 45880
166 South Main Street, Rockford, Ohio 45882
153 East Spring Street, St. Marys, Ohio 45885
228 East South Street, St. Marys, Ohio 45885
1210 Celina Road, St. Marys, Ohio 45885
11230 State Route 364, St. Marys, Ohio 45885
211 West Pearl Street, Union City, Indiana 47390
204 Staudt Drive, Union City, Indiana 47390
102 East Main Street, Van Wert, Ohio 45891
113 East Central Street, Van Wert, Ohio 45891
1163 South Shannon Street, Van Wert, Ohio 45891
315 State Street, Willshire, Ohio 45898
870 East Washington Street, Winchester, Indiana 47394
HERITAGE COMMUNITY BANK
Assets: $325 million
DIRECTORS
C. Douglas Lefferson, Chairman of the Board, Heritage Community
Bank; Senior Vice President and Chief Financial Officer,
First Financial Bancorp
Harry R. Campbell, Owner, Campbell Auction Service
Dan R. Dalton, Dean, Kelley School of Business, Indiana University
E. Michael Danner, Owner/Operator, Danner's Hardware
Corrine R. Finnerty, Partner, McConnell & Finnerty, Attorneys-at-Law
Dean J. Miller, President and Chief Executive Officer,
Heritage Community Bank
John G. Roeder, Superintendent, Sunman-Dearborn School Corporation
OFFICERS
President and Chief Executive Officer: Dean J. Miller
Senior Vice President and Chief Operating Officer: David L. Mackey,
Karen I. Miller
Senior Vice President and Chief Lending Officer: Richard L. Belser
First Vice President and Chief Financial Officer: Matthew Marro
Vice President: Vickie Couch, Mary Jane Demaree, Colleen G. Ervin,
Deborah R. Harmon, Rita Hyden, George Keely, Steve Logue, James
Mitchell, Jeff Rayburn, Gayle Rayles, Gary Everroad, Ronald Sandidge,
John W. Stone, Bill Wilson
LOCATIONS
616 Main Street, Brookville, Indiana 47012
10 South Main Street, Carthage, Indiana 46115
426 Washington Street, Columbus, Indiana 47201*
630 Central Avenue, Connersville, Indiana 47331
State Road 250 & State Road 56, East Enterprise, Indiana 47019
310 North Main Street, Liberty, Indiana 47353
301 Demaree Drive, Madison, Indiana 47250
7 North 5th Street, North Vernon, Indiana 47265
2070 N. State Hwy. 7, North Vernon, Indiana 47265
327 North Main Street, Rushville, Indiana 46173
604 North Meridian Street, Sunman, Indiana 47041
102 West Main Street, Vevay, Indiana 47043
804 West Main Street, Vevay, Indiana 47043
48 Brookville Street, West College Corner, Indiana 47003
FLAGSTONE INSURANCE AND FINANCIAL SERVICES
(Heritage Community Bank Subsidiary)
DIRECTORS
Mark A. Willis, Chairman, President, and Chief Executive Officer,
Flagstone Insurance
Timothy R. Foley, President, ME Companies
James C. Hall, Executive Vice President, First Financial Bancorp
J. Franklin Hall, Vice President and Controller, First Financial Bancorp
Mark W. Immelt, Senior Vice President, First Financial Bancorp;
President and Chief Executive Officer, First Financial Bank
*Main Office
50 FIRST FINANCIAL BANCORP
CORPORATE STRUCTURE
C. Douglas Lefferson, Senior Vice President and
Chief Financial Officer, First Financial Bancorp;
Chairman of the Board, Heritage Community Bank
Janie McCauley, Legal Officer and Secretary, First Financial Bancorp
Dean J. Miller, President and Chief Executive Officer, Heritage
Community Bank
OFFICERS
President and Chief Executive Officer: Mark A. Willis, CPCU, CIC
Vice President: C. Douglas Lefferson
Secretary: Janie McCauley
Treasurer: J. Franklin Hall
LOCATIONS
128 West Market Street, Celina, Ohio 45822
300 High Street, Hamilton, Ohio 45011*
INDIANA LAWRENCE BANK
Assets: $142 million
DIRECTORS
David D. Grandstaff, Chairman of the Board, Indiana Lawrence Bank;
President, Grandstaff Rendering Service, Inc.
Michael R. Terrone, President and Chief Executive Officer,
Indiana Lawrence Bank
Samuel J. Munafo, President and Chief Executive Officer,
Community First
Stephen H. Downs, Partner, Tiede, Metz, Downs, Lynn, Schlitt P.C.
William F. Earle, Halderman Farm Services
Janis Fahs, Associate Professor, Manchester College
Stephen P. Heckman, President, Heckman Bindery
Alan B. Terrell, President, Rochester Telephone Company
OFFICERS
President and Chief Executive Officer: Michael R. Terrone
Executive Vice President: Paul R. House
Senior Vice President: Steven G. Hammer
Vice President and Senior Loan Officer: Douglas J. Rice
Vice President: Annette Y. Ayres, T.F. "Bob" Fuller, Keven L. Jennings,
Todd L. Lybarger, Christopher D. Sailors, J. Susie Snep,
Randal U. Vutech
LOCATIONS
106 North Market Street, North Manchester, Indiana 46962*
State Road 114 West, North Manchester, Indiana 46962
Peabody Retirement Community, North Manchester, Indiana 46962
Timbercrest Retirement Community, North Manchester, Indiana 46962
221 East Main Street, Kewanna, Indiana 46939
729 Main Street, Rochester, Indiana 46975
East Ninth Street, Rochester, Indiana 46975
1307 North Cass Street, Wabash, Indiana 46992
FIDELITY FEDERAL SAVINGS BANK
Assets: $125 million
DIRECTORS
Michael D. Pretorius, Chairman of the Board, President and
Chief Executive Officer, Fidelity Federal
Harry J. Finch, President, Grant County Abstract Co., Inc.
Dr. J. Courtney Gorman, President, Gorman Center for Orthodontics
John C. Hoying, Executive Vice President, Community First
Terry T. Munday, Vice President, Indiana Wesleyan University
John R. Noblitt, Retired President, SCM Office Supplies Group
OFFICERS
President and Chief Executive Officer: Michael D. Pretorius
Vice President: Michael A. Belcher, Dianne C. Harris, Sandra S. Holman,
James L. Widner
LOCATIONS
200 East Main Street, Gas City, Indiana 46933
116 West 4th Street, Marion, Indiana 46952*
1020 North Baldwin Avenue, Marion, Indiana 46952
CITIZENS FIRST STATE BANK
Assets: $95 million
DIRECTORS
John D. Littler, Chairman of the Board, Citizens First;
President, Littler Diecast
James M. Weiseman, President and Chief Executive Officer, Citizens First
Robert J. Barry, Attorney-at-Law, Barry, Basey & Barry
Robert C. Brown, Owner, Barnum-Brown Insurance Agency
John A. Miller, President, J.A. Miller & Sons Oil Co.
Arthur D. Needler, President, Needler Properties
Robert L. Wyne, Retired President and Chief Executive Officer,
Citizens First
OFFICERS
President and Chief Executive Officer: James M. Weiseman
Vice President and Chief Lending Officer: Scott A. Green
Vice President, Chief Deposit Officer, and Chief Operations Officer:
Debra L. Whitesell
Vice President: Shirley K. Miller, William D. Siewert
LOCATIONS
101 West Washington Street, Hartford City, Indiana 47348*
117 North Jefferson Street, Hartford City, Indiana 47348
218 South Main Street, Dunkirk, Indiana 47336
127 West Huntington Street, Montpelier, Indiana 47359
3360 North Morrison Road, Muncie, Indiana 47304
THE CLYDE SAVINGS BANK COMPANY
Assets: $88 million
DIRECTORS
Joseph F. Wilson, Chairman of the Board, Clyde Savings;
Owner, S & J Travel
Phyllis S. Fiser, President and Chief Executive Officer, Clyde Savings
E. Willson Baker, Orthodontist
Kevin M. Cooney, Retired
Thomas F. Dewey, Jr., Attorney-at-Law
Ronald C. House, Farmer
William B. Warnecke, Building Contractor
* Main Office
2002 ANNUAL REPORT 51
CORPORATE STRUCTURE
Officers
President and Chief Executive Officer: Phyllis S. Fiser
Senior Vice President: Marie J. Archer
Vice President: Frederick C. Bouyack, Scott A. Hicks
LOCATIONS
137 West Buckeye Street, Clyde, Ohio 43410*
1005 West McPherson Highway, Clyde, Ohio 43410
2140 Enterprise Drive, Fremont, Ohio 43420
FIRST FINANCIAL BANCORP SERVICE CORPORATION
DIRECTORS
Stanley N. Pontius, Chairman of the Board, Service Corporation;
President and Chief Executive Officer, First Financial Bancorp;
Chairman of the Board, First Financial Bank
David S. Harvey, President and Chief Executive Officer,
Sand Ridge Bank
Rex A. Hockemeyer, President and Chief Executive Officer,
Service Corporation; Senior Vice President, First Financial Bancorp
Mark W. Immelt, Senior Vice President, First Financial Bancorp;
President and Chief Executive Officer, First Financial Bank
Dean J. Miller, President and Chief Executive Officer,
Heritage Community Bank
Brian D. Moriarty, Senior Vice President, First Financial Bancorp
and First Financial Bank
Samuel J. Munafo, President and Chief Executive Officer,
Community First
OFFICERS
President and Chief Executive Officer: Rex A. Hockemeyer
Executive Vice President and Chief Operating Officer: Jerry L. Begley
Senior Vice President: Linda L. Novitski
Vice President: Maureen R. Loos, Rae J. LoBuono, Donna J. Jordan
LOCATION
4400 Lewis Street, Middletown, Ohio 45044
FIRST FINANCIAL CAPITAL ADVISORS
DIRECTORS
Mark W. Immelt, Senior Vice President, First Financial Bancorp;
President and Chief Executive Officer, First Financial Bank
James C. Hall, Executive Vice President, First Financial Bancorp
Janie McCauley, Legal Officer and Secretary, First Financial Bancorp
Patty K. Scott, First Vice President, First Financial Bank
OFFICERS
President and Chief Executive Officer: Mark W. Immelt
First Vice President and Investment Officer: Dennis C. Dietz
Compliance Officer and Secretary: Patty K. Scott
Treasurer: Glenn E. Boone
LOCATION
300 High Street, Hamilton, Ohio 45011
*Main Office
SHAREHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Shareholders
will be held at the
Manor House Banquet and Conference Center
7440 Mason-Montgomery Road, Mason, OH 45040
Tuesday, April 22, 2003, 2:00 p.m.
Form 10-K
For copies of First Financial Bancorp's
Form 10-K, write to:
C. Douglas Lefferson
Chief Financial Officer
First Financial Bancorp
300 High Street, P.O. Box 476
Hamilton, OH 45012-0476
1-513-867-4993
1-513-867-3112 (FAX)
doug.lefferson@ffbc-oh.com
Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
1-800-368-5948
1-908-497-2312 (FAX)
Listed on
The Nasdaq Stock Market(R)
Common Stock Symbol: FFBC
www.ffbc-oh.com
52 FIRST FINANCIAL BANCORP
[FIRST FINANCIAL LOGO]
FIRST FINANCIAL BANCORP - 300 HIGH STREET - HAMILTON, OH 45011
www.ffbc-oh.com