First Financial Bank - 10-Q quarterly report FY

 

 

     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 þ No o 

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Exchange Act).

Yes o No þ 

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

See notes to consolidated financial statements.

See notes to consolidated financial statements.

The consolidated financial statements for interim periods are unaudited; however, in the opinion of the management of First Financial Bancorp. (First Financial), all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation have been included.

The consolidated financial statements of First Financial, a bank holding company, include the accounts of First Financial and its wholly-owned subsidiaries — First Financial Bank, N.A. and First Financial Capital Advisors LLC, a registered investment advisor. All significant intercompany transactions and accounts have been eliminated in consolidation.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual realized amounts could differ materially from those estimates. These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and serve to update the First Financial Bancorp. Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2006. These financial statements may not include all information and notes necessary to constitute a complete set of financial statements under U.S. generally accepted accounting principles applicable to annual periods and accordingly should be read in conjunction with the financial information contained in the Form 10-K. Management believes these unaudited consolidated financial statements reflect all adjustments of a normal recurring nature which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

Certain reclassifications of prior year’s amounts have been made to conform to current year presentation. Such reclassifications had no effect on net income.

First Financial adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” effective January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48 did not have a material financial impact on the consolidated financial statements of First Financial.

In July of 2006, the Emerging Issues Task Force (“EITF”) of FASB issued a draft abstract for EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The EITF reached a consensus that for an endorsement split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits. First Financial has purchased bank-owned life insurance on certain of its employees. The cash surrender value of these policies is carried as an asset on the Consolidated Balance Sheets in accrued interest and other assets. The carrying value was $83,521 at June 30, 2007. These life insurance policies are generally subject to endorsement split-dollar life insurance arrangements. These arrangements were designed to provide a pre-and postretirement benefit for certain senior officers of First Financial and its subsidiaries. First Financial is required to apply EITF Issue No. 06-4 beginning January 1, 2008, and is currently evaluating the effect the implementation of EITF Issue No. 06-4 will have on its Consolidated Financial Statements.

In September of 2006, the FASB issued Statement No. 157 (SFAS No. 157), “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. First Financial is required to apply SFAS No. 157 beginning January 1, 2008, and is currently evaluating the effect the implementation of SFAS No. 157 will have on its Consolidated Financial Statements.

In February of 2007, the FASB issued Statement No. 159 (SFAS No. 159), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” This statement permits the measurement of many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument, irrevocable basis. First Financial is required to apply SFAS No. 159 beginning January 1, 2008, and is currently evaluating the effect the implementation of SFAS No. 159 will have on its Consolidated Financial Statements.

In the normal course of business, First Financial offers a variety of financial instruments containing off-balance sheet risk. These financial instruments aid its clients in meeting their requirements for liquidity and credit enhancement, as well as to reduce its own exposure to fluctuations in interest rates. U.S. generally accepted accounting principles do not commonly require these financial instruments to be recorded in the Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Changes in Shareholders’ Equity, and Consolidated Statements of Cash Flows. Following is a discussion of these transactions.

First Financial uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Standby letters of credit are conditional commitments issued by First Financial to guarantee the performance of a client to a third party. First Financial’s portfolio of standby letters of credit consists primarily of performance assurances made on behalf of clients who have a contractual commitment to produce or deliver goods or services. The risk to First Financial arises from its obligation to make payment in the event of the clients’ contractual default and surfaces in the form of credit risk. First Financial had issued standby letters of credit aggregating $23,951 and $24,709 at June 30, 2007, and December 31, 2006, respectively.

Management conducts regular reviews of these instruments on an individual client basis and does not anticipate any material losses as a result of these letters of credit.

Loan commitments are agreements to lend to a client as long as there is no violation of any condition established in the agreement. 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. First Financial evaluates each client’s creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by First Financial 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. First Financial had commitments outstanding to extend credit totaling $737,455 and $633,104 at June 30, 2007, and December 31, 2006, respectively. Management does not anticipate any material losses as a result of these commitments.

The following is a summary of investment securities as of June 30, 2007:

The following is a summary of investment securities as of December 31, 2006:

All debt security unrealized losses are due to increased market yields relative to the yields of the amortized cost. None of the unrealized losses are due to credit risk of the underlying security. Management has the intention of holding these securities to maturity, and expects to realize the full amortized cost. All debt security issues are believed to be temporarily impaired with no future write-down expected. All securities with unrealized losses are reviewed quarterly to determine if any impairment is other than temporary, requiring a write-down to fair market value. At June 30, 2007, management does not consider these securities to be other-than-temporarily impaired.

The use of derivative instruments allows First Financial to meet the needs of its clients while managing the interest-rate risk associated with certain transactions. First Financial’s board of directors has authorized the use of certain derivative products, including interest rate caps, floors, and swaps. Currently, First Financial utilizes interest rate swaps as a means to offer long-term fixed-rate loans to commercial borrowers while maintaining the variable-rate income that better suits First Financial’s interest rate risk profile.

First Financial’s accounting policy for derivatives is based upon SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related amendments.

The net interest receivable or payable on the interest rate swaps is accrued and recognized as an adjustment to the interest income or interest expense of the hedged item. The fair value of the interest rate swaps is included within accrued interest and other assets on the Consolidated Balance Sheets. The corresponding fair-value adjustment is also included on the Consolidated Balance Sheets in the carrying value of the hedged item. Derivative gains and losses not effective in hedging the change in fair value of the hedged item would

be recognized immediately in current income. The following table summarizes the derivative financial instruments utilized by First Financial and their balances:

Other long-term debt, which appears on the balance sheet, consists of junior subordinated debentures owed to two unconsolidated subsidiary trusts. Capital securities were issued in the third quarter of 2003 by First Financial (OH) Statutory Trust II and in the third quarter of 2002 by First Financial (OH) Statutory Trust I, both statutory business trusts. First Financial owns 100% of the common equity of both of the trusts. The trusts were formed with the sole purpose of issuing the capital securities and investing the proceeds from the sale of such capital securities in the debentures. The debentures held by the trust are the sole assets of each trust. Distributions on the capital securities are payable quarterly at a variable rate of interest, which is equal to the interest rate being earned by the trust on the debentures and are recorded as interest expense of First Financial. The interest rate is subject to change every three months, indexed to the three-month LIBOR (London Inter-Bank Offered Rate). First Financial has the option to defer interest for up to five years on the debentures. However, the covenants prevent the payment of dividends on First Financial’s common stock if the interest is deferred. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. First Financial has entered into agreements which, taken collectively, fully or unconditionally guarantee the capital securities subject to the terms of the guarantees. The debentures qualify as Tier I capital under Federal Reserve Board guidelines, but are limited to 25% of qualifying Tier I capital.

Changes in the allowance for loan and lease losses for the previous five quarters are presented in the table that follows:

The allowance for loan and lease losses related to loans that are identified as impaired, as defined by SFAS No. 114, as amended by SFAS No. 118, are based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.

First Financial’s investment in impaired loans is as follows:

For all periods presented above, there were no impaired loans that did not require a valuation allowance. First Financial recognized interest income on those impaired loans for the sixth months and quarter ended June 30, 2007, of $237 and $135, compared to $94 and $48 for the same periods in 2006. Interest income is recorded on a cash basis during the period the loan is considered impaired after recovery of principal is reasonably assured.

First Financial’s effective tax rate in the second quarter of 2007 was 32.99%, compared to 35.26% in the second quarter of 2006. The 2007 year-to-date effective tax rate was 32.97% compared to 32.17% in 2006.

First Financial’s income tax returns are subject to review and examination by federal, state, and local government authorities. Federal income tax audits have been resolved through 2004. The years open to examination by state and local government authorities vary by jurisdiction, and First Financial is not aware of any material outstanding examination matters.

Effective January 1, 2007, First Financial adopted the provisions of FIN 48. The adoption of FIN 48 did not have a material financial impact on the consolidated financial statements of First Financial. As of January 1, 2007, there were no unrecognized tax benefits.

First Financial recognizes interest and penalties on income tax assessments or income tax refunds in the financial statements as a component of noninterest expense.

First Financial sponsors a non-contributory defined benefit pension plan covering substantially all employees. First Financial does not expect, nor is it required, to make any contributions to its pension plan in 2007 due to the improved funded status of the pension plan. The following table sets forth information concerning amounts recognized in First Financial’s Consolidated Balance Sheets and Consolidated Statements of Income.

Amount recognized in accumulated other comprehensive income (loss) for the period ending June 30, 2007:

Several of First Financial’s subsidiaries maintain health care and, in limited instances, life insurance plans for retired employees. The following table sets forth the components of net periodic postretirement benefit costs for those retired employees.

Amount recognized in accumulated other comprehensive income (loss) for the period ending June 30, 2007:

First Financial announced on July 30, 2007, that it is increasing the amount of planned shares to repurchase from up to one million shares during fiscal year 2007 to up to two million shares. As of July 28, 2007, 572,000 shares have been purchased under the existing plan. The remaining stock repurchases will be made pursuant to the amended 10b5-1 plan. Under the stock repurchase program, First Financial may repurchase common shares from time to time in compliance with SEC regulations, subject to market conditions and certain other contingencies established by the plan. The repurchases will continue to be funded from working capital and borrowings. First Financial repurchases shares under a plan adopted in 2000 and authorized by the board of directors of which 6,397,105 shares are available for repurchase.

First Financial’s future growth and capital investment plans are primarily directed towards larger metropolitan markets. Smaller markets have historically provided stable, low-cost funding sources to First Financial and remain an important part of its funding plan. First Financial’s historical strength in a number of these markets should enable it to retain market share.

First Financial’s market strategy is to serve a combination of metropolitan and non-metropolitan markets in Indiana, western Ohio, and northern Kentucky. In addition to geographic fit, each market should have growth potential and the ability to meet profit targets.

As key components to executing its market strategy, First Financial completed the sale of ten and closure of seven banking centers in August of 2006. The sale of ten was completed in three separate transactions with total net gains of $12,545 or $0.20 in diluted earnings per share. Total deposits of $108,629 were assumed and total loans of $101,414 were sold. The deposits and loans of the seven closed banking centers were transferred to other existing banking centers.

First Financial has 83 offices serving eight distinct markets with an average banking center deposit size of approximately $36,000. The operating model employed to execute its strategic plan includes a structure where market presidents manage these distinct markets, with the authority to make decisions at the point of client contact.

Net income for the second quarter of 2007 was $8,172 or $0.21 in diluted earnings per share versus $4,358 or $0.11 for the second quarter of 2006. The $3,814 increase in net income was due to decreased noninterest expense of $9,244 and increased noninterest income of $303, partially offset by decreased net interest income of $2,346, increased provision expense for loan and lease losses of $1,738, and increased income tax expense of $1,649. Compared to first quarter of 2007 net income of $8,435 or $0.22 in diluted earnings per share, second quarter of 2007 net income decreased $263 due to decreased net interest income of $802, increased provision expense for loan and lease losses of $742, and decreased noninterest income of $612, partially offset by decreased noninterest expense of $1,770 and decreased income tax expense of $123.

Net income for the first six months of 2007 was $16,607 or $0.43 in diluted earnings per share versus $8,325 or $0.21 for the first six months of 2006. The $8,282 increase in net income was due to decreased noninterest expense of $16,911 and increased noninterest income of $2,076, partially offset by decreased net interest income of $4,142, increased income tax expense of $4,221, and increased provision expense for loan and lease losses of $2,342.

Return on average assets for the second quarter of 2007 was 1.00% compared to 0.51% for the comparable period in 2006 and 1.04% for the linked-quarter (second quarter of 2007 compared to the first quarter of 2007). Return on average shareholders’ equity for the second quarter of 2007 was 11.61% compared to 5.90% for the comparable period in 2006 and 11.94% for the linked-quarter.

Return on average assets for the first six months of 2007 was 1.02% compared to 0.48% for the comparable period in 2006. Return on average shareholders’ equity was 11.78% for the first six months of 2007, versus 5.65% for the comparable period in 2006.

A detailed discussion of the first six months and second quarter of 2007 results of operations follows.

Net interest income, First Financial’s principal source of income, is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is also presented in the table that follows, adjusted to a tax equivalent basis assuming a 35% marginal tax rate for interest earned on tax-exempt assets such as municipal loans and investments. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully tax equivalent basis. Therefore, management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons.

Net interest income for the second quarter of 2007 was $29,601 compared to $31,947 in the second quarter of 2006, a decrease of $2,346 or 7.34%. This decrease is primarily due to a 4.13% net decline in the level of earnings assets, resulting primarily from the third quarter of 2006 sale of ten branches and their $101,414 of loans and $108,629 of deposits.

Net interest income on a linked-quarter basis decreased from $30,403 in the first quarter of 2007 to $29,601 in the second quarter of 2007, an $802 or 2.64% decrease. Linked-quarter net interest income remained flat, as included in the first quarter of 2007 was the impact from an accrual of income to convert certain consumer loans from a cycle-date basis of income recognition to a calendar-month basis, primarily due to consistent earning asset levels and stability in the net interest margin.

Year-to-date net interest income was $60,004 compared to $64,146 in 2006, a $4,142 or 6.46% decrease. This decrease is primarily due to a 5.85% net decline in the level of earning assets, resulting primarily from the balance sheet restructure completed in the first quarter of 2006, the third quarter of 2006 sale of ten branches and their associated loans and deposits, and continued effects of increased rates on deposits.

Second quarter of 2007 net interest margin of 3.97% decreased 14 basis points from 4.11% for the second quarter of 2006, reflecting the planned reduction in earning assets and an increase in deposit costs.

Linked-quarter net interest margin decreased 15 basis points from 4.12% to 3.97%. Approximately 10 basis points of the first quarter of 2007 net interest margin was due to the impact of an accrual of income to convert certain consumer loans from a cycle-date basis of income recognition to a calendar-month basis. The net interest margin remains relatively stable as the earning asset mix continues to shift from lower yielding indirect installment and conforming mortgage loans to higher yielding commercial and commercial real estate loans. These benefits were more than offset by the planned reduction in earning assets and a continued increase in deposit costs.

Year-to-date net interest margin was 4.05% in 2007 compared to 4.07% in 2006, reflecting the planned reduction in earning assets and an increase in deposit costs. Approximately 5 basis points of the year-to-date net interest margin was due to the first quarter of 2007 impact of an accrual of income to convert certain consumer loans from a cycle-date basis of income recognition to a calendar-month basis.

The Consolidated Average Balance Sheets and Net Interest Income Analysis that follows are presented on a GAAP basis.