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