1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 ----------------------------- OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO _________________ __________________ COMMISSION FILE NUMBER 0-12379 ------- FIRST FINANCIAL BANCORP. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO 31-1042001 ------------------------------- ------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 300 HIGH STREET, HAMILTON, OHIO 45011 ------------------------------- ------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (513) 867-4700 ----------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. CLASS OUTSTANDING AT APRIL 30, 2001 -------------------------- ----------------------------- COMMON STOCK, NO PAR VALUE 47,709,239
2 FIRST FINANCIAL BANCORP. INDEX Page No. -------- PART I-FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS - MARCH 31, 2001 AND DECEMBER 31, 2000 1 CONSOLIDATED STATEMENTS OF EARNINGS - THREE MONTHS ENDED MARCH 31, 2001 AND 2000 2 CONSOLIDATED STATEMENTS OF CASH FLOWS - THREE MONTHS ENDED MARCH 31, 2001 AND 2000 3 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 2001 AND 2000 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 PART II-OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 15 SIGNATURES 16
3 PART I - FINANCIAL INFORMATION FIRST FINANCIAL BANCORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited, dollars in thousands) <TABLE> <CAPTION> March 31, December 31, 2001 2000 --------- ------------ <S> <C> <C> ASSETS Cash and due from banks $ 137,845 $ 182,058 Interest-bearing deposits with other banks 3,459 3,248 Federal funds sold and securities purchased under agreements to resell 63,240 4,040 Investment securities held-to-maturity, at cost (market value - $25,025 at March 31, 2001 and $25,433 at December 31, 2000) 24,256 24,800 Investment securities available-for-sale, at market value 565,503 564,762 Loans Commercial 801,508 787,436 Real estate-construction 82,569 97,571 Real estate-mortgage 1,422,678 1,438,339 Installment 603,891 618,489 Credit card 21,869 24,182 Lease financing 43,422 46,068 ---------- ---------- Total loans 2,975,937 3,012,085 Less Unearned income 4,081 4,019 Allowance for loan losses 39,541 39,349 ---------- ---------- Net loans 2,932,315 2,968,717 Premises and equipment 57,708 58,466 Goodwill 28,490 28,860 Other intangibles 8,953 8,878 Deferred income taxes receivable 0 691 Accrued interest and other assets 89,694 87,992 ---------- ---------- TOTAL ASSETS $3,911,463 $3,932,512 ========== ========== LIABILITIES Deposits Noninterest-bearing $ 392,510 $ 419,878 Interest-bearing 2,740,889 2,731,550 ---------- ---------- Total deposits 3,133,399 3,151,428 Short-term borrowings Federal funds purchased and securities sold under agreements to repurchase 42,975 53,581 Federal Home Loan Bank borrowings 29,500 85,500 Other 14,428 7,487 ---------- ---------- Total short-term borrowings 86,903 146,568 Long-term borrowings 254,691 205,216 Deferred income taxes payable 1,742 0 Accrued interest and other liabilities 38,162 34,168 ---------- ---------- TOTAL LIABILITIES 3,514,897 3,537,380 SHAREHOLDERS' EQUITY Common stock - no par value Authorized - 160,000,000 shares Issued - 48,573,757 in 2001 and 46,927,736 in 2000 396,767 374,336 Retained earnings 10,149 36,225 Accumulated comprehensive income 5,819 1,955 Restricted stock awards (3,391) (16,518) Treasury stock, at cost, 713,818 in 2001 and 940,610 Shares in 2000 (12,778) (866) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 396,566 395,132 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,911,463 $3,932,512 ========== ========== </TABLE> See notes to consolidated financial statements. 1
4 FIRST FINANCIAL BANCORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (Dollars in thousands, except per share data) <TABLE> <CAPTION> Three months ended March 31 ------------------ 2001 2000 -------- -------- <S> <C> <C> INTEREST INCOME Loans, including fees $ 67,587 $ 66,615 Investment securities Taxable 7,107 6,320 Tax-exempt 1,995 2,165 --------- ---------- Total investment interest 9,102 8,485 Interest-bearing deposits with other banks 68 131 Federal funds sold and securities purchased under agreements to resell 242 41 --------- ---------- Total interest income 76,999 75,272 INTEREST EXPENSE Deposits 32,135 26,011 Short-term borrowings 1,371 5,323 Long-term borrowings 3,048 1,838 --------- ---------- TOTAL INTEREST EXPENSE 36,554 33,172 --------- ---------- NET INTEREST INCOME 40,445 42,100 Provision for loan losses 2,528 2,361 --------- ---------- Net interest income after provision for loan losses 37,917 39,739 NONINTEREST INCOME Service charges on deposit accounts 4,890 4,322 Trust income 4,038 3,588 Investment securities gains 148 14 Other 3,785 3,027 --------- ---------- Total noninterest income 12,861 10,951 NONINTEREST EXPENSES Salaries and employee benefits 16,042 16,316 Net occupancy expenses 1,970 1,929 Furniture and equipment expenses 1,594 1,566 Data processing expenses 1,770 1,976 Deposit insurance expense 150 147 State taxes 497 625 Amortization of intangibles 691 853 Merger and restructuring 0 (353) Other 7,121 6,666 --------- ---------- Total noninterest expenses 29,835 29,725 --------- ---------- Income before income taxes 20,943 20,965 Income tax expense 6,930 7,095 --------- ---------- NET EARNINGS $ 14,013 $ 13,870 ========= ========= Net earnings per share-basic $ 0.29 $ 0.28 ========== ========== Net earnings per share-diluted $ 0.29 $ 0.28 ========== ========== Cash dividends declared per share $ 0.15 $ 0.14 ========== ========== Average basic shares outstanding 48,094,239 49,152,625 ========== ========== Average diluted shares outstanding 48,162,385 49,252,010 ========== ========== </TABLE> See notes to consolidated financial statements. 2
5 FIRST FINANCIAL BANCORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, dollars in thousands) <TABLE> <CAPTION> Three months ended March 31, ------------------ 2001 2000 ---- ---- <S> <C> <C> OPERATING ACTIVITIES Net earnings $ 14,013 $ 13,870 Adjustments to reconcile net earnings to net cash provided by operating activities Provision for loan losses 2,528 2,361 Provision for depreciation and amortization 2,214 2,298 Net amortization of investment security premiums and accretion of discounts (125) (85) Realized investment security gains (148) (14) Originations of mortgage loans held for sale (30,162) (17,957) Gains from sales of mortgage loans held for sale (415) (197) Proceeds from sale of mortgage loans held for sale 30,040 17,939 Deferred income taxes 141 87 Decrease (increase) in interest receivable 1,800 (759) Increase in cash surrender value of life insurance (1,079) (4,047) Increase in prepaid expenses (942) (1,571) Increase in accrued expenses 3,295 5,113 Increase in interest payable 212 798 Increase (decrease) in dividends payable 284 (6,980) Other (398) (604) --------- -------- Net cash provided by operating activities 21,258 10,252 INVESTING ACTIVITIES Proceeds from calls, paydowns and maturities of investment securities available-for-sale 62,263 12,307 Purchases of investment securities available-for-sale (56,670) (68,084) Proceeds from calls, paydowns and maturities of investment securities held-to-maturity 4,439 2,119 Purchases of investment securities held-to-maturity (3,800) (2,120) Net decrease (increase) in interest-bearing deposits with other banks (211) (4,423) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell (59,200) 5,170 Net (decrease) increase in loans and leases 32,948 (28,611) Recoveries from loans and leases previously charged off 550 580 Proceeds from disposal of other real estate owned 377 544 Purchases of premises and equipment (1,204) (1,353) --------- -------- Net cash used in investing activities (20,508) (83,871) FINANCING ACTIVITIES Net (decrease) increase in total deposits (18,029) 59,574 Net decrease in short-term borrowings (59,665) (8,572) Net increase (decrease) in long-term borrowings 49,475 (18,943) Cash dividends declared (7,199) (7,074) Purchase of common stock (9,554) (5,479) Proceeds from exercise of stock options, net of shares purchased 9 17 --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (44,963) 19,523 --------- --------- DECREASE IN CASH AND CASH EQUIVALENTS (44,213) (54,096) Cash and cash equivalents at beginning of period 182,058 225,837 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 137,845 $ 171,741 ========= ========= </TABLE> 3
6 FIRST FINANCIAL BANCORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) (Dollars in thousands) <TABLE> <CAPTION> Three months ended March 31, --------------------- 2001 2000 --------- -------- <S> <C> <C> Supplemental disclosures Interest paid $ 36,342 $ 32,374 ======== ======== Income taxes paid $ 2,325 $ 2,763 ======== ======== Recognition of deferred tax liabilities attributable to FASB Statement No. 115 $ (2,292) $ 369 ======== ======== Acquisition of other real estate owned through foreclosure $ 376 $ 450 ======== ======== Issuance of restricted stock award $ 2,826 $ 772 ======== ======== Securitization of loans $ 0 $ 27,206 ======== ======== </TABLE> See notes to consolidated financial statements. 4
7 FIRST FINANCIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (Dollars in Thousands) <TABLE> <CAPTION> Three months ended March 31, --------------------------- 2001 2000 ----------- ----------- <S> <C> <C> Balances at January 1 $ 395,132 $ 372,539 Net Earnings 14,013 13,870 Other comprehensive income, net of taxes: Changes in unrealized gains on securities, Available for sale 3,864 (767) ---------- ----------- Comprehensive income 17,877 13,103 Cash dividends declared (7,199) (7,074) Purchase of common stock (9,554) (5,479) Exercise of stock options, net of shares purchased 9 17 Amortization of restricted stock awards 301 80 ---------- ----------- Balance at March 31 $ 396,566 $ 373,186 ========== =========== </TABLE> See notes to consolidated financial statements. 5
8 FIRST FINANCIAL BANCORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) The consolidated financial statements for interim periods are unaudited; however, in the opinion of the management of First Financial Bancorp. ("Bancorp"), all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation have been included. NOTE 1: BASIS OF PRESENTATION The consolidated financial statements of Bancorp, a financial holding company, include the accounts of Bancorp and its wholly-owned subsidiaries - First National Bank of Southwestern Ohio, Community First Bank & Trust, Indiana Lawrence Bank, Fidelity Federal Savings Bank, Citizens First State Bank, Union Bank & Trust Company, The Clyde Savings Bank Company, Peoples Bank and Trust Company, Bright National Bank, First Finance Mortgage Company of Southwestern Ohio (d.b.a. Community First Finance), Farmers State Bank, National Bank of Hastings, Vevay Deposit Bank, Sand Ridge Bank, Hebron Deposit Bank, First Financial Service Corporation, and Ohio City Insurance Agency. All significant intercompany transactions and accounts have been eliminated in consolidation. Intangible assets arising from the acquisition of subsidiaries are being amortized over varying periods, none of which exceeds 25 years. Core deposit balances are being amortized over varying periods, none of which exceeds 10 years. During the first quarter of 2001, Bancorp proceeded with a multi-phased regionalization strategy which will consolidate its fourteen current banking affiliates into four regional financial institutions. This plan, announced January 25, 2001, will continue throughout 2001 and 2002. It is management's expectation that the cost for this undertaking will dilute 2001 earnings per share by approximately five cents. Beginning in 2002, annually recurring benefits are estimated to be accretive to earnings per share by two to four cents. The first of Bancorp's new regional affiliates will be formed in the last half of 2001 when four of the holding company's financial institutions in southeastern Indiana (Peoples Bank and Trust Company, Sunman; Farmers State Bank, Liberty; Union Bank & Trust Company, North Vernon; and Vevay Deposit Bank, Vevay) will merge under the new name, Heritage Community Bank. The accompanying financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary to be in conformity with generally accepted accounting principles. Certain credit card and merchant fees have been reclassified from net interest income into noninterest income and noninterest expense. While the amounts reclassified are not material, Bancorp initiated this reclassification based on a survey of peers and best industry practices available in order to provide the most comparable data. This change began in 2001, and all prior periods have been restated, including appropriate ratios, to reflect these reclassifications. On February 27, 2001, the Board of Directors approved a 5% stock dividend, issued to shareholders of record as of March 9, 2001 and distributed April 2, 2001. All per share amounts have been restated for all periods presented. 6
9 Under a previously approved program to repurchase common shares to satisfy restricted stock awards and stock options, Bancorp repurchased 231,800 shares and under an additional previously approved program for general corporate purposes, Bancorp repurchased 348,900 shares during the first quarter of 2001. NOTE 2: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, Bancorp offers a variety of financial instruments with off-balance sheet risk to its customers to aid them in meeting their requirements for liquidity and credit enhancement and to reduce its own exposure to fluctuations in interest rates. These financial instruments include standby letters of credit and commitments outstanding to extend credit. Generally accepted accounting principles do not require these financial instruments to be recorded in the consolidated financial statements, and accordingly, they are not. Bancorp had not used off-balance sheet derivative financial instruments, such as futures, forward contracts, option contracts, interest rate swaps, or other financial instruments with similar characteristics as of March 31, 2001. Bancorp's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit and commitments outstanding to extend credit is represented by the contractual amounts of those instruments. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Following is a discussion of these transactions. Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Bancorp's portfolio of standby letters of credit consists primarily of performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. The risk to Bancorp arises from its obligation to make payment in the event of the customers' contractual default. As of March 31, 2001, Bancorp had issued standby letters of credit aggregating $26,767,000 compared to $26,813,000 issued as of December 31, 2000. Management conducts regular reviews of these instruments on an individual customer basis, and the results are considered in assessing the adequacy of Bancorp's allowance for loan losses. Management does not anticipate any material losses as a result of these letters of credit. Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp evaluates each customer's creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by Bancorp upon extension of credit, is based on management's credit evaluation of the counterparty. The collateral held varies, but may include securities, real estate, inventory, plant, or equipment. Bancorp had commitments outstanding to extend credit totaling $470,080,000 at March 31, 2001 and $484,894,000 at December 31, 2000. Management does not anticipate any material losses as a result of these commitments. 7
10 NOTE 3: COMPREHENSIVE INCOME Bancorp discloses comprehensive income in the "Consolidated Statements of Changes in Shareholders' Equity". Disclosure of the reclassification adjustments for the three months ended March 31, 2001 and 2000 are shown in the table below. <TABLE> <CAPTION> Three months ended March 31, ------------------ 2001 2000 ---------- -------- (Dollars in thousands) <S> <C> <C> NET INCOME $ 14,013 $ 13,870 Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during period 3,954 (759) Less: reclassification adjustment for gains included in net income 90 8 -------- -------- Other comprehensive income (loss) 3,864 (767) -------- -------- COMPREHENSIVE INCOME $ 17,877 $ 13,103 ======== ======== </TABLE> 8
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST FINANCIAL BANCORP. AND SUBSIDIARIES SELECTED QUARTERLY FINANCIAL DATA <TABLE> <CAPTION> 2001 2000 ---------- ------------------------------------------------ MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31 ---------- ---------- ---------- ---------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> NET EARNINGS $ 14,013 $ 14,834 $ 15,169 $ 14,349 $ 13,870 NET EARNINGS PER SHARE-BASIC (a) 0.29 0.31 0.31 0.29 0.28 NET EARNINGS PER SHARE-DILUTED (a) 0.29 0.31 0.31 0.29 0.28 NET EARNINGS PER SHARE-DILUTED-CASH BASIS (a)(b) 0.30 0.32 0.32 0.31 0.29 AVERAGE CONSOLIDATED BALANCE SHEET ITEMS: LOANS LESS UNEARNED INCOME 2,988,791 3,045,340 3,087,025 3,087,245 3,066,552 INVESTMENT SECURITIES 582,627 585,968 587,117 569,683 536,148 OTHER EARNING ASSETS 22,169 13,177 15,358 19,624 13,304 ---------- ---------- --------- --------- ---------- TOTAL EARNING ASSETS 3,593,587 3,644,485 3,689,500 3,676,552 3,616,004 TOTAL ASSETS 3,865,828 3,927,920 3,980,154 3,965,393 3,904,639 DEPOSITS 3,117,272 3,132,501 3,032,342 3,037,649 2,990,226 SHAREHOLDERS' EQUITY 394,882 390,866 380,200 374,507 372,424 KEY RATIOS AVERAGE EQUITY TO AVERAGE TOTAL ASSETS 10.21% 9.95% 9.55% 9.44% 9.54% RETURN ON AVERAGE TOTAL ASSETS 1.47% 1.50% 1.52% 1.46% 1.43% RETURN ON AVERAGE EQUITY 14.39% 15.10% 15.87% 15.41% 14.98% NET INTEREST MARGIN (FULLY TAX EQUIVALENT) 4.69% 4.61% 4.65% 4.82% 4.82% </TABLE> (a) ALL PER SHARE DATA HAS BEEN RESTATED FOR A 5% STOCK DIVIDEND DECLARED FEBRUARY 27, 2001. (b) EXCLUDING THE EFFECT OF AMORTIZATION OF GOODWILL AND CORE DEPOSITS, TAX EFFECTED WHEN APPLICABLE. THE CASH BASIS CALCULATIONS WERE SPECIFICALLY FORMULATED BY BANCORP AND MAY NOT BE COMPARABLE TO SIMILARLY TITLED MEASURES REPORTED BY OTHER COMPANIES. NET INTEREST INCOME Net interest income, the principal source of earnings, is the amount by which interest and fees generated by earning assets exceed the interest costs of liabilities obtained to fund them. For analytical purposes, interest income presented in the table below has been adjusted to a tax equivalent basis assuming a 35% marginal tax rate for interest earned on tax-exempt assets such as municipal loans, tax-free leases, and investments. This is to recognize the income tax savings which facilitates a comparison between taxable and tax-exempt assets. Net interest income on a fully tax equivalent basis decreased 4.07% for the three months ended March 31, 2001 compared to the same period in 2000. Since the first quarter of 2000, net interest income was impacted by the effects of: changes in interest rates, loan sales designed to improve liquidity, the implementation of a plan for controlled loan growth, and the softening of loan demand which began in the fourth quarter of 2000. From a linked quarter basis (first quarter 2001 compared to fourth quarter 2000) net interest income on a fully tax equivalent basis decreased $647,000 or 1.53%. The decline in net interest income was largely driven by year-end loan sales that were initiated to enhance liquidity. Because of a slowing loan demand, Bancorp was unable to replace those average balances. Additionally, higher loan fees were received in the fourth quarter, 2000 than in the first quarter, 2001. 9
12 <TABLE> <CAPTION> QUARTER ENDED 2001 2000 ------- ---------------------------------------- MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> INTEREST INCOME $76,999 $79,556 $80,243 $78,232 $75,272 INTEREST EXPENSE 36,554 38,540 38,306 35,406 33,172 ------- ------- ------- ------- ------- NET INTEREST INCOME 40,445 41,016 41,937 42,826 42,100 TAX EQUIVALENT ADJUSTMENT TO INTEREST INCOME 1,137 1,213 1,205 1,235 1,246 ------- ------- ------- ------- ------- NET INTEREST INCOME (FULLY TAX EQUIVALENT) $41,582 $42,229 $43,142 $44,061 $43,346 ======= ======= ======= ======= ======= </TABLE> RATE/VOLUME ANALYSIS The impact of changes in volume and interest rates on net interest income is illustrated in the table below. As shown, an increase in rate had a significant impact on both interest income and interest expense for the three months ended March 31, 2001 in comparison to 2000. However, the increase in rates affected interest expense more than interest income, giving a negative effect to net interest income. The change in interest due to the combined effect of both rate and volume has been allocated to the volume and rate variance on a prorated basis. <TABLE> <CAPTION> THREE MONTHS ENDED CHANGE DUE TO: MAR. 31, 2001 ------------------- OVER 2000 RATE VOLUME ------------- ------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> INTEREST INCOME $ 1,727 $ 2,196 $ (469) INTEREST EXPENSE 3,382 3,932 (550) ---------- --------- --------- NET INTEREST INCOME $ (1,655) $ (1,736) $ 81 ========== ========= ======== </TABLE> OPERATING RESULTS Net operating income represents net earnings before net securities transactions. Net operating income for the first three months of 2001 was $13,923,000 which was an increase of $61,000 or 0.44% over that reported in the same period in 2000. Core net operating income, which excludes $209,000 of expenses after-tax in 2001 associated with Bancorp's regionalization strategy and adjustment of $229,000 after-tax related to unused merger charges in the first quarter of 2000, increased $499,000 or 3.67%. The increase in net operating income can be primarily attributed to an increase in noninterest income of $1,910,000 or 17.4% for the three months of 2001 compared to the same period in 2000. All noninterest income areas increased. Service charges on deposit accounts continued its strong growth with a 13.1% increase over 2000, as well as trust fees with a 12.5% increase. Investment securities gains increased from $14,000 to $148,000 as a result of called securities. The "other" category of noninterest income increased 25% over the first quarter 2000. The increase in other income is a result of increased gains on loan sales, credit insurance, third-party mutual fund income, and key executive life insurance income. This increase in noninterest income was offset by a decrease in net interest income of $1,655,000 or 3.93%. Also, the provision for loan losses increased 7.07% over 2000 while the allowance for loan losses ratio increased to 1.33% from 1.31%. Noninterest expense increase $110,000 or approximately 0.37%. Core expense numbers have improved as Bancorp realized savings associated with the in-market consolidation of two affiliates, First National Bank of Southwestern Ohio and Home Federal Bank, a Federal Savings Bank. 10
13 INCOME TAXES For the first three months of 2001, income tax expense was $6,930,000 compared to $7,095,000 for the same period in 2000, or a decrease of $165,000. In 2001, $6,872,000 of the tax expense was related to operating income with a tax expense of $58,000 related to securities transactions. In the first three months of 2000, income tax expense related to operating income was $7,089,000, with a tax expense related to securities transactions of $6,000. NET EARNINGS Net earnings for the first three months of 2001 were $14,013,000 or 1.03% greater than that recorded during the same period in 2000. Net securities gains through March 31, 2001 were $90,000 compared to $8,000 for the period ending March 31, 2001. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation of the adequacy of the allowance is based on Bancorp's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. At March 31, 2001 and 2000, the recorded investment in loans that are considered to be impaired under FASB Statement No. 114 was $4,525,000 and $6,141,000, respectively, all of which were on a nonaccrual basis. The related allowance for loan losses on these impaired loans was $1,680,000 at March 31, 2001 and $2,426,000 at March 31, 2000. At March 31, 2001 and 2000, there were $49,000 and $55,000, respectively, that as a result of write-downs, did not have an allowance for loan losses. The average recorded investment in impaired loans for the quarter ended March 31, 2001 and 2000, was approximately $6,830,000 and $3,706,000. For the three months ended March 31, 2001, Bancorp recognized interest income on those impaired loans of $58,000 compared to $5,000 for the same period in 2000. Bancorp recognizes income on impaired loans using the cash basis method. The table that follows indicates the activity in the allowance for loan losses for the quarters presented. <TABLE> <CAPTION> QUARTER ENDED 2001 2000 -------- ----------------------------------------------- MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31 -------- -------- ------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> BALANCE AT BEGINNING OF PERIOD $ 39,349 $ 40,487 $ 40,238 $ 40,192 $ 39,340 PROVISION FOR LOAN LOSSES 2,528 4,043 2,674 2,222 2,361 LOANS CHARGED OFF (2,886) (5,759) (2,993) (2,803) (2,089) RECOVERIES 550 578 568 627 580 --------- --------- --------- --------- -------- NET CHARGE OFFS (2,336) (5,181) (2,425) (2,176) (1,509) --------- --------- --------- --------- --------- BALANCE AT END OF PERIOD $ 39,541 $ 39,349 $ 40,487 $ 40,238 $ 40,192 ========= ========= ========= ========= ======== RATIOS: ALLOWANCE TO PERIOD END LOANS, NET OF UNEARNED INCOME 1.33% 1.31% 1.32% 1.30% 1.31% RECOVERIES TO CHARGE OFFS 19.06% 10.04% 18.98% 22.37% 27.76% ALLOWANCE AS A MULTIPLE OF NET CHARGE OFFS 16.93X 7.59X 16.70X 18.49X 26.63X </TABLE> 11
14 NONPERFORMING/UNDERPERFORMING ASSETS The table below shows the categories which are included in nonperforming and underperforming assets. Total nonperforming assets are slightly higher than first quarter of 2000, but have decreased $1,105,000 or 5.9% from the fourth quarter. The trend in nonperforming assets as a percent of loans has remained relatively stable. In the first quarter of 2001 when compared to the first quarter of 2000, restructured loans have decreased $558,000. Nonaccrual loans have increased $2,028,000, which is composed primarily of commercial, multi-family and 1-4 family residential investment properties. Other real estate owned decreased $538,000 in the first quarter of 2001 compared to the first quarter of 2000. Accruing loans past due 90 days or more increased $1,570,000. Accruing loans, including loans impaired under FASB Statement No. 114, which are past due 90 days or more where there is not a likelihood of becoming current are transferred to nonaccrual loans. However, those loans which management feels will become current and therefore accruing are classified as "Accruing loans 90 days or more past due" until they become current. With a general slowdown in the economy and considerable discussion about credit quality in the financial services industry, Bancorp will continue to closely monitor the quality of its loan portfolio. <TABLE> <CAPTION> QUARTER ENDED 2001 2000 ------- ------------------------------------------- MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> NONACCRUAL LOANS $16,489 $17,346 $16,480 $15,586 $15,019 RESTRUCTURED LOANS 79 265 721 676 637 OREO 1,013 1,075 919 1,345 1,551 ------- ------- ------- ------- ------- TOTAL NONPERFORMING ASSETS 17,581 18,686 18,120 17,607 17,207 ACCRUING LOANS PAST DUE 90 DAYS OR MORE 3,822 2,414 5,093 2,875 2,252 ------- ------- ------- ------- ------- TOTAL UNDERPERFORMING ASSETS $21,403 $21,100 $23,213 $20,482 $19,459 ======= ======= ======= ======= ======= NONPERFORMING ASSETS AS A PERCENT OF LOANS, NET OF UNEARNED INCOME PLUS OREO/ISF 0.59% 0.62% 0.59% 0.57% 0.56% ======= ======= ======= ======= ======= UNDERPERFORMING ASSETS AS A PERCENT OF LOANS, NET OF UNEARNED INCOME PLUS OREO/ISF 0.72% 0.70% 0.76% 0.66% 0.64% ======= ======= ======= ======= ======= </TABLE> LIQUIDITY AND CAPITAL RESOURCES Liquidity management is the process by which Bancorp provides for the continuing flow of funds necessary to meet its financial commitments on a timely basis. These commitments include withdrawals by depositors, funding credit commitments to borrowers, shareholder dividends, paying expenses of operations, and funding capital expenditures. Liquidity is derived primarily from deposit growth, maturing loans, the maturity of investment securities, access to other funding sources and markets, and a strong capital position. The most stable source of liability-funded liquidity for both the long-term and short-term is deposit growth and retention in the core deposit base. Total average deposits are up 4.25% from the prior year and down slightly over the linked quarter reflecting seasonal fluctuations. Short-term borrowings decreased $59,665,000 from the preceding quarter, while long-term borrowings increased $49,475,000 in conjunction with asset/liability management strategies. 12
15 The principal source of asset-funded liquidity is marketable investment securities, particularly those of shorter maturities. At March 31, 2001, securities maturing in one year or less amounted to $41,227,000, representing 6.99% of the total of the investment securities portfolio. In addition, other types of assets such as cash and due from banks, federal funds sold and securities purchased under agreements to resell, as well as loans and interest-bearing deposits with other banks maturing within one year, are sources of liquidity. Total asset-funded sources of liquidity at March 31, 2001, amounted to $722,720,000, representing 18.5% of total assets. Sources of long-term asset funded liquidity are derived from the maturity of investment securities and maturing loans in excess of one year. At March 31, 2001, Bancorp had classified $565,503,000 in investment securities available-for-sale. Management examines Bancorp's liquidity needs in establishing this classification in accordance with the Financial Accounting Standards Board Statement No. 115 on accounting for certain investments in debt and equity securities. Liquidity is very important and as such is both monitored and managed closely by the asset/liability committee at each affiliate. Liquidity may be used to fund capital expenditures. Capital expenditures were $1,204,000 for the first three months of 2001. In addition, remodeling is a planned and ongoing process given the 113 offices of Bancorp and its subsidiaries. Material commitments for capital expenditures as of March 31, 2001 were approximately $1,050,000. Management believes that Bancorp has sufficient liquidity to fund its current commitments. CAPITAL ADEQUACY The Federal Reserve established risk-based capital requirements for U.S. banking organizations which have been adopted by the Office of Thrift Supervision for savings and loan associations. Risk weights are assigned to on-and off-balance sheet items in arriving at risk-adjusted total assets. Regulatory capital is divided by risk-adjusted total assets, with the resulting ratios compared to minimum standards to determine whether a bank has adequate capital. Regulatory guidelines require a 4.00% Tier 1 capital ratio and an 8.00% total risk-based capital ratio. A minimum 3.00% Leverage ratio is required for bank holding companies that either are rated composite "1" under the BOPEC rating system or have implemented the Board's risk-based capital market risk measure. The minimum leverage ratio for all other bank holding companies is 4.0%. Tier 1 capital consists primarily of common shareholders' equity, net of certain intangibles, and total risked-based capital is Tier 1 capital plus Tier 2 supplementary capital, which is primarily the allowance for loan losses subject to certain limits. The leverage ratio is a result of Tier 1 capital divided by average total assets less certain intangibles. Bancorp's Tier I ratio at March 31, 2001, was 12.5%, its total risked-based capital was 13.7% and its leverage ratio was 9.20%. While Bancorp subsidiaries' ratios are well above regulatory requirements, management will continue to monitor the asset mix which affects these ratios due to the risk weights assigned various assets, and the allowance for loan losses, which influences the total risk-based capital ratio. 13
16 The table below illustrates the risk-based capital calculations and ratios for the last five quarters. <TABLE> <CAPTION> QUARTER ENDED 2001 2000 ---------- ------------------------------------------------- MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31 ---------- ---------- --------- ---------- --------- <S> <C> <C> <C> <C> <C> TIER I CAPITAL: (DOLLARS IN THOUSANDS) SHAREHOLDER'S EQUITY $ 396,566 $ 395,132 $ 386,031 $ 377,459 $ 373,186 LESS: INTANGIBLE ASSETS 34,326 34,957 35,675 36,256 36,854 LESS: UNREALIZED NET SECURITIES LOSSES 5,819 1,955 (3,821) (6,870) (7,165) ---------- ---------- ---------- ---------- ---------- TOTAL TIER I CAPITAL $ 356,421 $ 358,220 $ 354,177 $ 348,073 $ 343,497 ========== ========== ========== ========== ========== TOTAL RISK-BASED CAPITAL: TIER I CAPITAL $ 356,421 $ 358,220 $ 354,177 $ 348,073 $ 343,497 QUALIFYING ALLOWANCE FOR LOAN LOSSES 35,745 35,945 36,578 36,826 36,295 ---------- ---------- ---------- --------- ---------- TOTAL RISK-BASED CAPITAL $ 392,166 $ 394,165 $ 390,755 $ 384,899 $ 379,792 ========== ========== ========== ========== ========== RISK WEIGHTED ASSETS $2,859,625 $2,872,181 $2,922,338 $2,942,675 $2,899,705 ========== ========== ========== ========== ========== RISK-BASED RATIOS: TIER I 12.48% 12.47% 12.12% 11.83% 11.85% ========== ========== ========== ========== ========== TOTAL RISK-BASED CAPITAL 13.73% 13.72% 13.37% 13.08% 13.10% ========== ========== ========== ========== ========== LEVERAGE 9.30% 9.20% 8.98% 8.86% 8.88% ========== ========== ========== ========== ========== </TABLE> FORWARD-LOOKING INFORMATION The Form 10-Q should be read in conjunction with the consolidated financial statements, notes and table included elsewhere in the report and in the First Financial Bancorp. Annual Report on Form 10-K for the year ended December 31, 2000. Management's analysis may contain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties which may cause actual results to differ materially. For a discussion of certain factors that may cause such forward-looking statements to differ materially from actual results, refer to the 2000 Form 10-K. ACCOUNTING AND REGULATORY MATTERS Management is not aware of any other events or regulatory recommendations which, if implemented, are likely to have a material effect on Bancorp's liquidity, capital resources, or operations. 14
17 PART II-OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K During the quarter ended March 31, 2001, the registrant did not file any reports on Form 8-K. 15
18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. First Financial Bancorp. ------------------------ (Registrant) /s/ Michael R. O'Dell /s/ C. Douglas Lefferson - ----------------------------------------- ------------------------ Michael R. O'Dell, Senior Vice C. Douglas Lefferson President, Chief Financial Comptroller Officer and Secretary (Principal Accounting Officer) Date May 14, 2001 Date May 14, 2001 --------------------------------- --------------------- 16