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 JUNE 30, 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 July 31, 2001 - ---------------------------- -------------------------------- Common stock, No par value 47,281,539
2 FIRST FINANCIAL BANCORP. INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> Part I-Financial Information Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 1 Consolidated Statements of Earnings - Six and Three Months Ended June 30, 2001 and 2000 2 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 3 Consolidated Statements of Changes in Shareholders' Equity Six Months Ended June 30, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II-Other Information Item 4 Submission of Matters to a Vote of Security Holders 15 Item 6 Exhibits and Reports on Form 8-K 15 Signatures 16 </TABLE>
3 PART I - FINANCIAL INFORMATION FIRST FINANCIAL BANCORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited, dollars in thousands) <TABLE> <CAPTION> June 30, December 31, ASSETS 2001 2000 ----------- ----------- <S> <C> <C> Cash and due from banks $ 175,264 $ 182,058 Interest-bearing deposits with other banks 19,911 3,248 Federal funds sold and securities purchased under agreements to resell 53,205 4,040 Investment securities held-to-maturity, at cost (market value - $23,371 at June 30, 2001 and $25,433 at December 31, 2000) 22,620 24,800 Investment securities available-for-sale, at market value 571,075 564,762 Loans Commercial 795,415 787,436 Real estate-construction 82,294 97,571 Real estate-mortgage 1,379,133 1,438,339 Installment 595,497 618,489 Credit card 21,769 24,182 Lease financing 40,830 46,068 ----------- ----------- Total loans 2,914,938 3,012,085 Less Unearned income 3,365 4,019 Allowance for loan losses 40,642 39,349 ----------- ----------- Net loans 2,870,931 2,968,717 Premises and equipment 57,216 58,466 Goodwill 28,119 28,860 Other intangibles 8,885 8,878 Deferred income taxes receivable 0 691 Accrued interest and other assets 89,883 87,992 ----------- ----------- TOTAL ASSETS $ 3,897,109 $ 3,932,512 =========== =========== LIABILITIES Deposits Noninterest-bearing $ 417,409 $ 419,878 Interest-bearing 2,720,619 2,731,550 ----------- ----------- Total deposits 3,138,028 3,151,428 Short-term borrowings Federal funds purchased and securities sold under agreements to repurchase 41,987 53,581 Federal Home Loan Bank borrowings 21,500 85,500 Other 21,449 7,487 ----------- ----------- Total short-term borrowings 84,936 146,568 Long-term borrowings 252,301 205,216 Deferred income taxes payable 1,592 0 Accrued interest and other liabilities 27,535 34,168 ----------- ----------- TOTAL LIABILITIES 3,504,392 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 12,847 36,225 Accumulated comprehensive income 5,506 1,955 Restricted stock awards (3,135) (866) Treasury stock, at cost, 1,132,318 in 2001 and 940,610 Shares in 2000 (19,268) (16,518) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 392,717 395,132 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,897,109 $ 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> Six months ended Three months ended June 30, June 30, --------------------------- --------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> INTEREST INCOME Loans, including fees $ 132,232 $ 135,406 $ 64,645 $ 68,791 Investment securities Taxable 14,035 13,326 6,928 7,006 Tax-exempt 3,932 4,305 1,937 2,140 ------------ ------------ ------------ ------------ Total investment interest 17,967 17,631 8,865 9,146 Interest-bearing deposits with other banks 285 354 217 223 Federal funds sold and securities purchased under agreements to resell 1,368 113 1,126 72 ------------ ------------ ------------ ------------ TOTAL INTEREST INCOME 151,852 153,504 74,853 78,232 INTEREST EXPENSE Deposits 62,541 53,702 30,406 27,691 Short-term borrowings 2,001 11,019 630 5,696 Long-term borrowings 6,778 3,857 3,730 2,019 ------------ ------------ ------------ ------------ TOTAL INTEREST EXPENSE 71,320 68,578 34,766 35,406 ------------ ------------ ------------ ------------ NET INTEREST INCOME 80,532 84,926 40,087 42,826 Provision for loan losses 11,055 4,583 8,527 2,222 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 69,477 80,343 31,560 40,604 NONINTEREST INCOME Service charges on deposit accounts 10,009 8,954 5,119 4,632 Trust income 7,878 7,171 3,840 3,583 Investment securities gains 190 25 42 11 Other 8,417 6,484 4,632 3,456 ------------ ------------ ------------ ------------ Total noninterest income 26,494 22,634 13,633 11,682 NONINTEREST EXPENSES Salaries and employee benefits 31,880 33,145 15,838 16,829 Net occupancy expenses 3,903 3,676 1,933 1,747 Furniture and equipment expenses 3,253 3,171 1,659 1,605 Data processing expenses 3,639 3,783 1,869 1,807 Deposit insurance expense 301 262 151 115 State taxes 1,006 1,231 509 606 Amortization of intangibles 1,360 1,694 669 841 Merger and restructuring 0 (353) 0 0 Other 14,492 13,761 7,371 7,094 ------------ ------------ ------------ ------------ Total noninterest expenses 59,834 60,370 29,999 30,644 ------------ ------------ ------------ ------------ Income before income taxes 36,137 42,607 15,194 21,642 Income tax expense 12,293 14,388 5,363 7,293 ------------ ------------ ------------ ------------ NET EARNINGS $ 23,844 $ 28,219 $ 9,831 $ 14,349 ============ ============ ============ ============ Net earnings per share-basic $ 0.50 $ 0.58 $ 0.21 $ 0.29 ============ ============ ============ ============ Net earnings per share-diluted $ 0.50 $ 0.57 $ 0.21 $ 0.29 ============ ============ ============ ============ Cash dividends declared per share $ 0.30 $ 0.28 $ 0.15 $ 0.14 ============ ============ ============ ============ Average basic shares outstanding 47,865,021 48,993,630 47,638.323 48,835,385 ============ ============ ============ ============ Average diluted shares outstanding 48,000,132 49,086,441 47,705,288 48,921,621 ============ ============ ============ ============ </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> Six months ended June 30, ---------------------- 2001 2000 --------- --------- <S> <C> <C> OPERATING ACTIVITIES Net earnings $ 23,844 $ 28,219 Adjustments to reconcile net earnings to net cash provided by operating activities Provision for loan losses 11,055 4,583 Provision for depreciation and amortization 4,522 4,572 Net amortization of investment security premiums and accretion of discounts (112) (233) Realized investment security gains (190) (25) Originations of mortgage loans held for sale (89,365) (68,532) Gains from sales of mortgage loans held for sale (1,241) (487) Proceeds from sale of mortgage loans held for sale 89,579 68,655 Deferred income taxes 216 (136) Decrease (increase) in interest receivable 3,042 (1,892) Increase in cash surrender value of life insurance (1,227) (4,630) Increase in prepaid expenses (1,163) (1,262) (Increase) decrease in accrued expenses (4,362) 739 (Decrease) increase in interest payable (1,488) 819 Other (1,906) (356) --------- --------- Net cash provided by operating activities 31,204 30,034 INVESTING ACTIVITIES Proceeds from calls, paydowns and maturities of investment securities available-for-sale 107,986 25,849 Purchases of investment securities available-for-sale (108,524) (53,752) Proceeds from calls, paydowns and maturities of investment securities held-to-maturity 6,628 4,544 Purchases of investment securities held-to-maturity (4,300) (3,005) Net (increase) decrease in interest-bearing deposits with other banks (16,663) 4,096 Net increase in federal funds sold and securities purchased under agreements to resell (49,165) (4,384) Net decrease (increase) in loans and leases 84,063 (103,250) Recoveries from loans and leases previously charged off 1,109 1,207 Proceeds from disposal of other real estate owned 848 1,037 Purchases of premises and equipment (1,666) (2,755) --------- --------- Net cash provided by (used in) investing activities 20,316 (130,413) FINANCING ACTIVITIES Net (decrease) increase in total deposits (13,400) 28,449 Net (decrease) increase in short-term borrowings (61,632) 72,391 Net increase in long-term borrowings 47,085 2,103 Cash dividends declared (14,332) (14,044) Purchase of common stock (16,044) (9,030) Proceeds from exercise of stock options, net of shares purchased 9 90 --------- --------- Net cash (used in) provided by financing activities (58,314) 79,959 --------- --------- DECREASE IN CASH AND CASH EQUIVALENTS (6,794) (20,420) Cash and cash equivalents at beginning of period 182,058 225,837 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 175,264 $ 205,417 ========= ========= </TABLE> 3
6 FIRST FINANCIAL BANCORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) (Dollars in thousands) Six months ended June 30, -------------------- 2001 2000 -------- -------- Supplemental disclosures Interest paid $ 72,808 $ 67,759 ======== ======== Income taxes paid $ 15,451 $ 17,058 ======== ======== Recognition of deferred tax liabilities attributable to FASB Statement No. 115 $ (2,067) $ 243 ======== ======== Acquisition of other real estate owned through foreclosure $ 1,559 $ 788 ======== ======== Issuance of restricted stock award $ 2,826 $ 773 ======== ======== Securitization of loans $ 0 $ 40,737 ======== ======== See notes to consolidated financial statements. 4
7 FIRST FINANCIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (Dollars in Thousands) Six months ended June 30, ---------------------- 2001 2000 --------- --------- Balances at January 1 $ 395,132 $ 372,539 Net Earnings 23,844 28,219 Other comprehensive income, net of taxes: Changes in unrealized gains on securities, Available for sale 3,551 (472) --------- --------- Comprehensive income 27,395 27,747 Cash dividends declared (14,332) (14,044) Purchase of common stock (16,044) (9,030) Exercise of stock options, net of shares purchased 9 90 Amortization of restricted stock awards 557 157 --------- --------- Balance at June 30 $ 392,717 $ 377,459 ========= ========= See notes to consolidated financial statements. 5
8 FIRST FINANCIAL BANCORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) The consolidated financial statements for interim periods are unaudited; however, in the opinion of the management of First Financial Bancorp. ("Bancorp"), all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation have been included. NOTE 1: BASIS OF PRESENTATION The consolidated financial statements of Bancorp, a financial holding company, include the accounts of Bancorp and its wholly-owned subsidiaries - First National Bank of Southwestern Ohio, Community First Bank & Trust, Indiana Lawrence Bank, Fidelity Federal Savings Bank, Citizens First State Bank, Union Bank & Trust Company, The Clyde Savings Bank Company, Peoples Bank and Trust Company, Bright National Bank, 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 six months of 2001, Bancorp proceeded with a multi-phased regionalization strategy which will consolidate its fourteen current banking affiliates into four regional financial institutions. This plan, announced January 25, 2001, will continue throughout 2001 and 2002. It is management's expectation that the cost for this undertaking will dilute 2001 earnings per share by approximately five cents. Beginning in 2002, annually recurring benefits are estimated to be accretive to earnings per share by two to four cents. The first of Bancorp's new regional affiliates will be formed in 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 276,000 shares and under an additional previously approved program for general corporate purposes, Bancorp repurchased 723,200 shares during the first half of 2001. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combination, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives, if any, will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. Bancorp will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $1,172,000 ($0.02 per share) per year. During 2002, Bancorp will perform the first of the required impairment tests of goodwill and intangible assets with indefinite lives, if any, as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of Bancorp. NOTE 2: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, Bancorp offers a variety of financial instruments with off-balance sheet risk to its customers to aid them in meeting their requirements for liquidity and credit enhancement and to reduce its own exposure to fluctuations in interest rates. These financial instruments include standby letters of credit and commitments outstanding to extend credit. Generally accepted accounting principles do not require these financial instruments to be recorded in the consolidated financial statements, and accordingly, they are not. As of June 30, 2001, Bancorp had not used off-balance sheet derivative financial instruments, such as futures, forward contracts, option contracts, interest rate swaps, or other financial instruments with similar characteristics. Bancorp's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit and commitments outstanding to extend credit is represented by the contractual amounts of those instruments. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Following is a discussion of these transactions. Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Bancorp's portfolio of standby letters of credit consists primarily of performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. The risk to Bancorp arises from its obligation to make payment in the event of the customers' contractual default. As of June 30, 2001, Bancorp had issued standby letters of credit aggregating $27,381,000 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 7
10 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 $463,367,000 at June 30, 2001 and $484,894,000 at December 31, 2000. Management does not anticipate any material losses as a result of these commitments. NOTE 3: COMPREHENSIVE INCOME Bancorp discloses comprehensive income in the "Consolidated Statements of Changes in Shareholders' Equity". Disclosure of the reclassification adjustments for the six months ended June 30, 2001 and 2000 are shown in the table below. Six months ended June 30, ------------------- 2001 2000 -------- -------- (Dollars in thousands) NET INCOME $ 23,844 $ 28,219 Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during period 3,669 (428) Less: reclassification adjustment for gains included in net income 118 44 -------- -------- Other comprehensive income (loss) 3,551 (472) -------- -------- COMPREHENSIVE INCOME $ 27,395 $ 27,747 ======== ======== 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 ------------------------ --------------------------------------- Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Net Earnings $ 9,831 $ 14,013 $ 14,834 $ 15,169 $ 14,349 Net earnings per share-basic (a) 0.21 0.29 0.31 0.31 0.29 Net earnings per share-diluted (a) 0.21 0.29 0.31 0.31 0.29 Net earnings per share-diluted-cash basis (a)(b) 0.21 0.30 0.32 0.32 0.31 Average Consolidated Balance Sheet Items: Loans less unearned income 2,934,168 2,988,791 3,045,340 3,087,025 3,087,245 Investment securities 586,151 582,627 585,968 587,117 569,683 Other earning assets 126,961 22,169 13,177 15,358 19,624 ---------- ---------- ---------- ---------- ---------- Total Earning Assets 3,647,280 3,593,587 3,644,485 3,689,500 3,676,552 Total assets 3,917,884 3,866,043 3,927,920 3,980,154 3,965,393 Deposits 3,175,336 3,117,272 3,132,501 3,032,342 3,037,649 Shareholders' equity 395,114 394,882 390,866 380,200 374,507 Key Ratios Average equity to average total assets 10.08% 10.21% 9.95% 9.55% 9.44% Return on average total assets 1.01% 1.47% 1.50% 1.52% 1.46% Return on average equity 9.98% 14.39% 15.10% 15.87% 15.41% Net interest margin (fully tax equivalent) 4.53% 4.69% 4.61% 4.65% 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 6.52% for the quarter ended June 30, 2001 compared to the same period in 2000. Since the second quarter of 2000, net interest income was effected by a dramatic drop in interest rates and its impact on variable rate loans and the softening of loan demand which began in the fourth quarter of 2000. An increase in interest expense due to planned growth in core deposit balances also contributed to the decline in net interest income. This is part of a larger asset/liability strategy to create a stable funding base and to impact future income opportunities from increased client relationships and deposit fee income. From a linked quarter basis (second quarter 2001 compared to first quarter 2001) net interest income on a fully tax equivalent basis decreased $395,000 or 0.95%. The decline in linked quarter net interest income was due to lower interest income impacted by a shift into lower-margin fed funds sold as loan demand softened and deposits grew, partially offset by improved interest expense. The shift into fed funds sold improved Bancorp's liquidity position. 9
12 <TABLE> <CAPTION> Quarter Ended 2001 2000 ------------------ ----------------------------- Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 ------- ------- ------- ------- ------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Interest income $74,853 $76,999 $79,556 $80,243 $78,232 Interest expense 34,766 36,554 38,540 38,306 35,406 ------- ------- ------- ------- ------- Net interest income 40,087 40,445 41,016 41,937 42,826 Tax equivalent adjustment to interest income 1,100 1,137 1,213 1,205 1,235 ------- ------- ------- ------- ------- Net interest income (fully tax equivalent) $41,187 $41,582 $42,229 $43,142 $44,061 ======= ======= ======= ======= ======= </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, for the six month period, decreased earning asset balances had the most significant impact on interest income while decreased interest bearing liability balances did not offset increased liability costs. For the three month period, the primary influence on net interest income was the decrease in interest income resulting from dramatic downward rate movement. 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> Six Months Three Months Ended Change Due To: Ended Change Due To: June 30, 2001 ------------------- June 30, 2001 --------------------- Over 2000 Rate Volume Over 2000 Rate Volume ------------- -------- -------- -------------- --------- ---------- (Dollars in thousands) (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Interest income $ (1,652) $ (573) $ (1,079) $ (3,379) $ (2,760) $ (619) Interest expense 2,742 3,925 (1,183) (640) (12) (628) ---------- --------- --------- ------------ -------- --------- Net interest income $ (4,394) $ (4,498) $ 104 $ (2,739) $ (2,748) $ 9 ========== ========= ========= ============= ========= ========== </TABLE> OPERATING RESULTS Net operating income represents net earnings before net securities transactions. Net operating income for the first six months of 2001 was $23,725,000 which was a decrease of $4,449,000 or 15.8% over that reported in the same period in 2000. The decrease in net operating income can be primarily attributed to the increase in the provision for loan losses of $6,472,000 as well as the decline in the net interest income of $4,394,000. The provision expense exceeded net charge-offs by $1,293,000 for the first six months of 2001, which contributed to Bancorp's reserve to loan ratio increasing to 1.40% from the year-end 2000 ratio of 1.31%. The decrease in net operating income was offset by an increase in noninterest income of $3,860,000 or 17.1% for the six 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 11.8% increase over 2000, as well as trust fees with a 9.86% increase. Investment securities gains increased from $25,000 to $190,000 as a result of called securities. The "other" category of noninterest income increased 29.8% over the same period in 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. Noninterest expense decreased $536,000 or approximately 0.89%. 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 six months of 2001, income tax expense was $12,293,000 compared to $14,388,000 for the same period in 2000, or a decrease of $2,095,000. In 2001, $12,221,000 of the tax expense was related to operating income with a tax expense of $72,000 related to securities transactions. In the first six months of 2000, income tax expense related to operating income was $14,407,000, with a tax expense related to securities transactions of $19,000. Income tax expense for the second quarter of 2001 was $5,363,000, a decrease of $1,930,000 when compared to $7,293,000 reported for the same period in 2000. Tax expense relating to operating income totaled $5,349,000 and $7,318,000 for the quarters ended June 30, 2001 and 2000, respectively, with a tax expense related to securities transactions of $14,000 for 2001 and a tax benefit also related to securities transactions of $13,000 for 2000. NET EARNINGS Net earnings for the first six months of 2001 were $23,844,000 or $0.50 in diluted earnings per share compared to $28,219,000 or $0.57 in diluted earnings per share for the same period in 2000. Net securities gains through June 30, 2001 were $118,000 compared to $44,000 for the period ending June 30, 2001. Net earnings for the second quarter of 2001 were $9,831,000 or $0.21 in diluted earnings per share versus $14,349,000 or $0.29 for the second quarter of 2000. Net securities gains for the second quarter of 2001 and 2000 were $28,000 and $36,000, respectively. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation of the adequacy of the allowance is based on Bancorp's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. At June 30, 2001 and 2000, the recorded investment in loans that are considered to be impaired under FASB Statement No. 114 was $1,819,000 and $6,496,000, respectively, all of which were on a nonaccrual basis. The related allowance for loan losses on these impaired loans was $980,000 at June 30, 2001 and $3,585,000 at June 30, 2000. At June 30, 2001 and 2000, there were $1,501,000 and $46,000, respectively, of impaired loans that did not have an allowance for loan losses. The average recorded investment in impaired loans for the quarter ended June 30, 2001 and 2000, was approximately $4,282,000 and $5,096,000. For the six months and quarter ended June 30, 2001, Bancorp recognized interest income on those impaired loans of $117,000 and $60,000 compared to $48,000 and $44,000 for the same periods in 2000. Bancorp recognizes income on impaired loans using the cash basis method. The table that follows indicates the activity in the allowance for loan losses for the quarters presented. 11
14 <TABLE> <CAPTION> Quarter Ended 2001 2000 ---------------------- ------------------------------------ Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 --------- --------- --------- --------- ---------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Balance at beginning of period $ 39,541 $ 39,349 $ 40,487 $ 40,238 $ 40,192 Provision for loan losses 8,527 2,528 4,043 2,674 2,222 Loans charged off (7,985) (2,886) (5,759) (2,993) (2,803) Recoveries 559 550 578 568 627 --------- --------- --------- --------- ---------- Net charge offs (7,426) (2,336) (5,181) (2,425) (2,176) --------- --------- --------- --------- --------- Balance at end of period $ 40,642 $ 39,541 $ 39,349 $ 40,487 $ 40,238 ========= ========= ========= ========= ========== Ratios: Allowance to period end loans, net of unearned income 1.40% 1.33% 1.31% 1.32% 1.30% Recoveries to charge offs 7.00% 19.06% 10.04% 18.98% 22.37% Allowance as a multiple of net charge offs 5.47X 16.93X 7.59X 16.70X 18.49X </TABLE> NONPERFORMING/UNDERPERFORMING ASSETS The table below shows the categories which are included in nonperforming and underperforming assets. The trend in nonperforming assets as a percent of loans has remained relatively stable. All categories of nonperforming assets as of June 30, 2001 have increased over prior periods indicative of the effects of a softening economy. While Bancorp's level of nonperforming assets is in-line with its peers, management remains cautious about the continued effects of the economic slowdown. Nonperforming assets do not consist of any one large credit or groups of credits or concentrations in any particular industry. Nonaccrual loans are composed primarily of commercial, multi-family and 1-4 family residential investment properties. Accruing loans past due 90 days or more decreased $1,497,000. 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 ------------------- ------------------------------- Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 ------- ------- ------- ------- ------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Nonaccrual loans $17,341 $16,489 $17,346 $16,480 $15,586 Restructured loans 953 79 265 721 676 Other real estate owned 1,684 1,013 1,075 919 1,345 ------- ------- ------- ------- ------- Total nonperforming assets 19,978 17,581 18,666 18,120 17,607 Accruing loans past due 90 days or more 2,325 3,822 2,414 5,093 2,875 ------- ------- ------- ------- ------- Total underperforming assets $22,303 $21,403 $21,100 $23,213 $20,482 ======= ======= ======= ======= ======= Nonperforming assets as a percent of loans, net of unearned income plus other real estate owned 0.69% 0.59% 0.62% 0.59% 0.57% ======= ======= ======= ======= ======= Underperforming assets as a percent of loans, net of unearned income plus other real estate owned 0.77% 0.72% 0.70% 0.76% 0.66% ======= ======= ======= ======= ======= </TABLE> 12
15 LIQUIDITY AND CAPITAL RESOURCES Liquidity management is the process by which Bancorp provides for the continuing flow of funds necessary to meet its financial commitments on a timely basis. These commitments include withdrawals by depositors, funding credit commitments to borrowers, shareholder dividends, paying expenses of operations, and funding capital expenditures. Liquidity is derived primarily from deposit growth, maturing loans, the maturity of investment securities, access to other funding sources and markets, and a strong capital position. The most stable source of liability-funded liquidity for both the long-term and short-term is deposit growth and retention in the core deposit base. Total year-to-date average deposits are up 4.40% from the prior year. Quarterly average deposits are up slightly from the linked quarter and the same quarter last year. Short-term borrowings decreased $61,632,000 from year end, while long-term borrowings increased $47,085,000 in conjunction with asset/liability management strategies. The principal source of asset-funded liquidity is marketable investment securities, particularly those of shorter maturities. At June 30, 2001, securities maturing in one year or less amounted to $52,837,000, representing 8.90% 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 June 30, 2001, amounted to $796,616,000, representing 20.4% 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 June 30, 2001, Bancorp had classified $571,075,000 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 $1,666,000 for the first six months of 2001. In addition, remodeling is a planned and ongoing process given the 110 offices of Bancorp and its subsidiaries. Material commitments for capital expenditures as of June 30, 2001 were approximately $415,000. 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, 13
16 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 June 30, 2001, was 12.5%, its total risked-based capital was 13.8% and its leverage ratio was 9.10%. While Bancorp subsidiaries' ratios are well above regulatory requirements, management will continue to monitor the asset mix which affects these ratios due to the risk weights assigned various assets, and the allowance for loan losses, which influences the total risk-based capital ratio. The table below illustrates the risk-based capital calculations and ratios for the last five quarters. <TABLE> <CAPTION> Quarter Ended 2001 2000 ---------------------- ------------------------------------ Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 ---------- ---------- --------- ---------- ----------- Tier I Capital: (Dollars in thousands) <S> <C> <C> <C> <C> <C> Shareholder's equity $ 392,717 $ 396,566 $ 395,132 $ 386,031 $ 377,459 Less: Intangible assets 33,690 34,326 34,957 35,675 36,256 Less: Unrealized net securities Losses 5,506 5,819 1,955 (3,821) (6,870) ----------- ---------- ---------- ---------- ---------- Total Tier I Capital $ 353,521 $ 356,421 $ 358,220 $ 354,177 $ 348,073 ========== ========== ========== ========== ========== Total Risk-Based Capital: Tier I Capital $ 353,521 $ 356,421 $ 358,220 $ 354,177 $ 348,073 Qualifying Allowance for Loan Losses 35,294 35,745 35,945 36,578 36,826 ---------- ---------- ---------- --------- ---------- Total Risk-Based Capital $ 388,815 $ 392,166 $ 394,165 $ 390,755 $ 384,899 ========== ========== ========== ========== ========== Risk Weighted Assets $2,818,162 $2,855,829 $2,872,181 $2,922,338 $2,942,675 ========== ========== ========== ========== ========== Risk-Based Ratios: Tier I 12.54% 12.48% 12.47% 12.12% 11.83% ========== ========== ========== ========== ========== Total Risk-Based Capital 13.80% 13.73% 13.72% 13.37% 13.08% ========== ========== ========== ========== ========== Leverage 9.10% 9.30% 9.20% 8.98% 8.86% ========== ========== ========== ========== ========== </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. Factors that could cause actual results to differ from those discussed in the forward looking statements include, but are not limited to, the strength of the local economies in which operations are conducted, the effects of and changes in policies and laws of regulatory agencies, inflation, and interest rates. For further discussion of certain factors that may cause such forward-looking statements to differ materially from actual results, refer to the 2000 Form 10-K. ACCOUNTING AND REGULATORY MATTERS Management is not aware of any other events or regulatory recommendations which, if implemented, are likely to have a material effect on Bancorp's liquidity, capital resources, or operations. 14
17 PART II-OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On April 24,2001, Bancorp held its annual meeting of shareholders, the results of which follow: 1) Election of four directors: <TABLE> <CAPTION> % of Total Votes Name Term Votes For Shares Voted Withheld ---- ---- --------- ------------ -------- <S> <C> <C> <C> <C> Donald M. Cisle 3 years 38,958,254 97.49% 1,001,996 Dan R. Dalton 3 years 38,369,886 96.02% 1,590,364 Corinne R. Finnerty 3 years 39,780,436 99.55% 179,814 Bruce E. Leep 3 years 39,737,728 99.44% 222,522 </TABLE> Directors whose terms continue beyond the Annual Meeting in 2001: Class 1 expiring in 2002: Martin J. Bidwell Carl R. Fiora Barry J. Levey Stephen S. Marcum Steve C. Posey Directors whose terms continue beyond the Annual Meeting in 2001: Class 1 expiring in 2003: Richard L. Alderson James C. Garland Murph Knapke Stanley N. Pontius Barry S. Porter Perry D. Thatcher Item 6. Exhibits and Reports on Form 8-K -------------------------------- (b) Reports on Form 8-K During the quarter ended June 30, 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 August 8, 2001 Date August 8, 2001 --------------------------- ------------------------------------- 16