<PAGE> 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, 2000
------------------------------------------------
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, 2000
-------------------------------- ---------------------------------
Common stock, No par value 46,319,380
<PAGE> 2
FIRST FINANCIAL BANCORP.
INDEX
<TABLE>
<CAPTION>
Page No.
---------
<S> <C>
Part I-Financial Information
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 1
Consolidated Statements of Earnings -
Six and Three Months Ended June 30, 2000 and 1999 2
Consolidated Statements of Cash Flows -
Six and Three Months Ended June 30, 2000 and 1999 3
Consolidated Statements of Changes in Shareholders Equity
Six Months Ended June 30, 2000 and 1999 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>
<PAGE> 3
PART I - FINANCIAL INFORMATION
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 205,417 $ 225,837
Interest-bearing deposits with other banks 4,771 8,867
Federal funds sold and securities purchased
under agreements to resell 10,005 5,621
Investment securities held-to-maturity, at cost
(market value - $30,993 at June 30, 2000 and
$32,498 at December 31, 1999) 30,441 31,765
Investment securities available-for-sale,
at market value 558,086 490,126
Loans
Commercial 793,046 769,454
Real estate-construction 113,695 111,458
Real estate-mortgage 1,478,369 1,467,591
Installment 642,709 623,091
Credit card 21,165 22,408
Lease financing 48,514 46,508
----------- ----------
Total loans 3,097,498 3,040,510
Less
Unearned income 4,289 4,134
Allowance for loan losses 40,238 39,340
----------- ----------
Net loans 3,052,971 2,997,036
Premises and equipment 58,859 59,004
Deferred income taxes 8,402 8,008
Goodwill 29,465 30,077
Other intangibles 9,516 10,522
Accrued interest and other assets 83,187 73,830
----------- ----------
TOTAL ASSETS $4,051,120 $3,940,693
=========== ==========
LIABILITIES
Deposits
Noninterest-bearing $ 420,631 $ 408,712
Interest-bearing 2,599,031 2,582,501
----------- ----------
Total deposits 3,019,662 2,991,213
Short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase 106,148 83,353
Federal Home Loan Bank borrowings 344,350 294,235
Other 4,011 4,530
----------- ----------
Total short-term borrowings 454,509 382,118
Long-term borrowings 163,902 161,799
Accrued interest and other liabilities 35,588 33,024
----------- ----------
TOTAL LIABILITIES 3,673,661 3,568,154
SHAREHOLDERS' EQUITY
Common stock - no par value
Authorized - 160,000,000 shares
Issued - 46,921,638 in 2000 and 46,869,107 in 1999 374,310 373,447
Retained earnings 20,079 5,904
Accumulated comprehensive income (6,870) (6,398)
Restricted stock awards (1,030) (414)
Treasury stock, at cost, 496,900 and 0 shares (9,030) 0
----------- ---------
TOTAL SHAREHOLDERS' EQUITY 377,459 372,539
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,051,120 $3,940,693
=========== ==========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 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,
-------------------- --------------------
2000 1999 2000 1999
---------- -------- --------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 136,443 $ 118,967 $ 69,333 $ 60,479
Investment securities
Taxable 13,326 11,760 7,006 5,790
Tax-exempt 4,305 4,654 2,140 2,301
--------- --------- --------- ---------
Total investment interest 17,631 16,414 9,146 8,091
Interest-bearing deposits with
other banks 354 145 223 89
Federal funds sold and securities
purchased under agreements to resell 113 216 72 145
--------- --------- ---------- ---------
TOTAL INTEREST INCOME 154,541 135,742 78,774 68,804
INTEREST EXPENSE
Deposits 53,702 47,767 27,691 23,998
Short-term borrowings 11,019 4,018 5,696 2,467
Long-term borrowings 3,857 3,213 2,019 1,311
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 68,578 54,998 35,406 27,776
--------- --------- --------- ---------
NET INTEREST INCOME 85,963 80,744 43,368 41,028
Provision for loan losses 4,583 3,910 2,222 1,378
--------- --------- --------- ---------
Net interest income after
provision for loan losses 81,380 76,834 41,146 39,650
NONINTEREST INCOME
Service charges on deposit accounts 8,954 7,752 4,632 4,037
Trust income 7,171 6,695 3,583 3,258
Investment securities gains (losses) 25 47 11 (8)
Other 4,852 5,593 2,624 2,704
--------- --------- --------- ---------
Total noninterest income 21,002 20,087 10,850 9,991
NONINTEREST EXPENSES
Salaries and employee benefits 33,145 30,160 16,829 15,153
Net occupancy expenses 3,676 3,517 1,747 1,688
Furniture and equipment expenses 3,171 3,128 1,605 1,572
Data processing expenses 3,783 3,275 1,807 1,602
Deposit insurance expense 262 293 115 151
State taxes 1,231 990 606 485
Amortization of intangibles 1,660 1,867 818 924
Merger and restructuring (353) 6,930 0 6,930
Other 13,200 12,694 6,827 6,682
--------- --------- --------- ---------
Total noninterest expenses 59,775 62,854 30,354 35,187
--------- --------- --------- ---------
Income before income taxes 42,607 34,067 21,642 14,454
Income tax expense 14,388 12,271 7,293 5,739
--------- --------- --------- ---------
NET EARNINGS $ 28,219 $ 21,796 $ 14,349 $ 8,715
========= ========= ========= =========
Net earnings per share - basic $ 0.60 $ 0.47 $ 0.31 $ 0.19
========= ========= ========= =========
Net earnings per share - diluted $ 0.60 $ 0.47 $ 0.31 $ 0.19
========= ========= ========= =========
Cash dividends declared per share $ 0.30 $ 0.28 $ 0.15 $ 0.14
========= ========= ========= =========
Average basic shares outstanding 46,660,600 46,834,316 46,509,890 46,849,041
========== ========== ========== ==========
Average diluted shares outstanding 46,748,991 46,983,023 46,592,020 46,974,060
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
2000 1999
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 28,219 $ 21,796
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 4,583 3,910
Provision for depreciation and amortization 4,572 4,645
Net amortization of investment security
premiums and accretion of discounts (233) 330
Realized investment security gains (25) (47)
Originations of mortgage loans held for sale (68,168) (60,093)
Gains from sales of mortgage loans held for sale (487) (1,662)
Proceeds from sale of mortgage loans held for sale 68,655 61,755
Deferred income taxes (136) 181
Increase in interest receivable (1,892) (2,426)
Increase in cash surrender value of life insurance (4,630) (12,234)
(Increase) decrease in prepaid expenses (1,262) 862
Increase (decrease) in accrued expenses 739 (375)
Increase (decrease) in interest payable 819 (152)
Other (720) (6,217)
---------- ----------
Net cash provided by operating activities 30,034 10,273
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available-for-sale 0 9,989
Proceeds from calls, paydowns and maturities of
investment securities available-for-sale 25,849 98,171
Purchases of investment securities available-for-sale (53,752) (89,801)
Proceeds from calls, paydowns and maturities of
investment securities held-to-maturity 4,544 4,180
Purchases of investment securities held-to-maturity (3,005) (845)
Net decrease (increase) in interest-bearing deposits
with other banks 4,096 (1,335)
Net increase in federal funds sold and
securities purchased under agreements to resell (4,384) (10,319)
Net increase in loans and leases (103,250) (208,610)
Recoveries from loans and leases previously charged off 1,207 2,074
Proceeds from disposal of other real estate owned 1,037 243
Purchases of premises and equipment (2,755) (4,601)
---------- ----------
Net cash used in investing activities (130,413) (200,854)
FINANCING ACTIVITIES
Net increase in total deposits 28,449 41,297
Net increase in short-term borrowings 72,391 130,565
Net increase in long-term borrowings 2,103 10,644
Cash dividends declared (14,044) (12,150)
Purchase of common stock (9,030) 0
Proceeds from exercise of stock options, net of shares
purchased 90 581
---------- ---------
Net cash provided by financing activities 79,959 170,937
---------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (20,420) (19,644)
Cash and cash equivalents at beginning of period 225,837 164,500
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 205,417 $ 144,856
========== =========
</TABLE>
3
<PAGE> 6
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
2000 1999
---------- ---------
<S> <C> <C>
Supplemental disclosures
Interest paid $ 67,759 $ 54,634
========== =========
Income taxes paid $ 17,058 $ 13,335
========== =========
Recognition of deferred tax assets
attributable to FASB Statement No. 115 $ 243 $ 4,556
========== =========
Acquisition of other real estate owned through
foreclosure $ 788 $ 381
========== =========
Issuance of restricted stock awards $ 773 $ 143
========== =========
Securitization of loans $ 40,737 $ 0
========== =========
Non-cash transfer from securities available-for-
sale to securities held-to-maturity $ 0 $ 4,020
========== =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
2000 1999
--------- ----------
<S> <C> <C>
Balances at January 1, as restated $ 372,539 $ 358,265
Net earnings 28,219 21,796
Other comprehensive income, net of taxes:
Change in unrealized gains on securities,
available for sale (472) (7,419)
---------- -----------
Comprehensive income 27,747 14,377
Cash dividends declared (14,044) (12,150)
Purchase of common stock (9,030) 0
Exercise of stock options, net shares purchased 90 582
Amortization of restricted stock awards 157 84
---------- ----------
Balance at June 30 $ 377,459 $ 361,158
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 8
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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, Home
Federal Bank, A Federal Savings 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 (dba 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.
On July 21, 2000, Bancorp merged its wholly-owned subsidiary, Home Federal Bank,
a Federal Savings Bank, Hamilton, Ohio, into another of its wholly-owned
subsidiaries, First National Bank of Southwestern Ohio, Hamilton, Ohio, as an
in-market consolidation. Savings are expected to be slightly accretive following
the transition of thrift customers to bank customers.
Bancorp received authorization from the Federal Reserve on March 13, 2000 to
convert from a bank and savings and loan holding company to a financial holding
company. Bancorp is now permitted to own and operate insurance agencies and
certain other financial services firms under the provisions of the
Gramm-Leach-Bliley Act enacted on November 12, 1999.
On March 29, 2000, Bancorp signed a letter of intent to purchase the Ohio City
Insurance Agency which was founded in 1997 with headquarters in Ohio City, Ohio.
Bancorp completed the purchase of the Ohio City Insurance Agency on May 1, 2000.
The financial impact of Ohio City Insurance Agency and the purchase price for
the transaction are not material.
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.
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
6
<PAGE> 9
recorded in the consolidated financial statements, and accordingly, they are
not. Bancorp does not use off-balance sheet derivative financial instruments
(such as interest rate swaps) as defined in the Financial Accounting Standards
Board's (FASB) Statement No. 119 "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments".
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, 2000,
Bancorp had issued standby letters of credit aggregating $18,596,000 compared to
$18,028,000 issued as of December 31, 1999. Management conducts regular reviews
of these instruments on an individual customer basis, and the results are
considered in assessing the adequacy of Bancorp's allowance for loan losses.
Management does not anticipate any material losses as a result of these letters
of credit.
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Bancorp evaluates each customer's creditworthiness on an
individual basis. The amount of collateral obtained, if deemed necessary by
Bancorp upon extension of credit, is based on management's credit evaluation of
the counterparty. The collateral held varies, but may include securities, real
estate, inventory, plant, or equipment. Bancorp had commitments outstanding to
extend credit totaling $499,952,000 at June 30, 2000 and $508,366,000 at
December 31, 1999. Management does not anticipate any material losses as a
result of these commitments.
NOTE 3: COMPREHENSIVE INCOME
In 1998, Bancorp adopted FASB No. 130, "Reporting Comprehensive Income". The
statement establishes standards for the reporting and display of comprehensive
income. Bancorp elected to present the required disclosures in the "Consolidated
Statements of Changes in Shareholders' Equity". Disclosure of the
reclassification adjustments for the six months ended June 30, 2000 and 1999 are
shown below.
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Other comprehensive income, net of tax:
Unrealized holding losses arising during period $ (428) $ (7,378)
Less: reclassification adjustment
for gains included in net income 44 41
-------- ---------
Other comprehensive income (loss) $ (472) $ (7,419)
======== =========
</TABLE>
7
<PAGE> 10
NOTE 4: MERGER AND RESTRUCTURING CHARGES
In the second quarter of 1999, Bancorp recorded merger and restructuring charges
of approximately $6.9 million before taxes or $5.5 million after taxes to
coincide with its mergers with Sand Ridge Financial Corporation (Sand Ridge) and
Hebron Bancorp, Inc. (Hebron) and its plan for some operational consolidation,
affiliate restructuring and the discontinuation of a product line.
The components of these charges and the remaining unpaid amounts at December 31,
1999 and June 30, 2000 are shown in the following table. During the first six
months, based on current information, estimated liabilities associated with the
merger and restructuring charges were reduced by $353,000. As of June 30, 2000,
of the four facilities to be disposed of, two properties have been sold, Bancorp
has decided to retain one property for use in another capacity, and one facility
remains to be sold. Bancorp expects that the remaining balance in the liability
account will be substantially utilized during 2000.
(Dollars in thousands)
<TABLE>
<CAPTION>
Charges Remaining
Accrued Liability Liability
Description of Charges in 1999 12/31/99 6/30/00
---------------------- ------- --------- ---------
<S> <C> <C> <C>
Merger costs $2,899 $ 219 $ 25
Disposals of property 1,574 115 115
Discontinued product line 1,100 167 104
Operations/affiliate restructuring 1,357 523 151
------ ------- -----
Total $6,930 $1,024 $ 396
====== ====== =====
</TABLE>
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
2000 1999
------------------------- --------------------
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net earnings $ 14,349 $ 13,870 $ 13,992 $ 14,535 $ 8,715
Net earnings--adjusted (a) 14,169
Net earnings per share-basic 0.31 0.30 0.30 0.31 0.19
Net earnings per share-diluted 0.31 0.30 0.30 0.31 0.19
Net earnings per share-diluted-adjusted (a) 0.30
Net earnings per share-diluted-adjusted
cash basis (b) 0.32 0.31 0.31 0.32 0.32
Average consolidated balance sheet items:
Loans less unearned income 3,087,245 3,066,552 3,022,313 2,933,882 2,796,591
Investment securities 569,683 536,148 531,709 549,441 558,475
Other earning assets 19,624 13,304 13,958 12,787 18,576
---------- ---------- ---------- ---------- ----------
Total earning assets 3,676,552 3,616,004 3,567,980 3,496,110 3,373,642
Total assets 3,965,393 3,904,639 3,865,437 3,757,969 3,610,779
Deposits 3,037,649 2,990,226 2,985,289 2,892,952 2,907,268
Shareholders' equity 374,507 372,424 369,442 366,022 368,271
Key Ratios:
Average equity to average total assets 9.44% 9.54% 9.56% 9.74% 10.20%
Return on average total assets 1.46% 1.43% 1.44% 1.53% 0.97%
Return on average total assets--adjusted (a) 1.57%
Return on average equity 15.41% 14.98% 15.03% 15.75% 9.49%
Return on average equity--adjusted (a) 15.36%
Net interest margin (fully tax equivalent) 4.88% 4.88% 4.86% 4.92% 5.03%
</TABLE>
(a) Excluding after-tax merger and restructuring charges of $5.5 million in the
second quarter of 1999.
(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. As shown below, net interest income on a fully tax equivalent basis has
increased $ 762,000 or 1.74%, over the first quarter of 2000 and $2,263,000 or
5.34% over the second quarter of 1999. Continued loan growth, in all major
categories of loans, contributed to higher net interest income in the second
quarter of 2000.
<TABLE>
<CAPTION>
QUARTER ENDED
2000 1999
------------------- ------------------------------
Jun. 30 Mar. 31 Dec. 31 Sep. 31 Jun. 30
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income $78,774 $75,767 $74,382 $72,274 $68,804
Interest expense 35,406 33,172 31,927 30,269 27,776
------- ------- ------- ------- -------
Net interest income 43,368 42,595 42,455 42,005 41,028
Tax equivalent adjustment to interest income 1,235 1,246 1,278 1,318 1,312
------- ------- ------- ------- -------
Net interest income (fully tax equivalent) $44,603 $43,841 $43,733 $43,323 $42,340
======= ======= ======= ======= =======
</TABLE>
9
<PAGE> 12
RATE/VOLUME ANALYSIS
The impact of changes in volume and interest rates on net interest income is
illustrated in the table below. As shown, an increase in volume had a
significant impact on both interest income and interest expense for the six
month and three month periods ended June 30, 2000 in comparison to 1999. The
increase in volume had more impact on interest income than interest expense.
However, the recent increase in rates affected interest expense more than
interest income, giving a negative effect to net interest income. The change in
interest due to the combined effect of both rate and volume has been allocated
to the volume and rate variance on a prorated basis.
<TABLE>
<CAPTION>
Three Months
Six Months Ended
Ended Change Due To: Jun. 30, 2000 Change Due To:
Jun. 30, 2000 ------------------- -----------------
Over 1999 Rate Volume Over 1999 Rate Volume
------------- --------- -------- ------------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 18,799 $ 4,661 $14,138 $ 9,970 $ 3,592 $ 6,378
Interest expense 13,580 6,682 6,898 7,630 4,378 3,252
-------- --------- ------- -------- --------- --------
Net interest income $ 5,219 $ (2,021) $ 7,240 $ 2,340 $ (786) $ 3,126
======== ========= ======= ======== ========= ========
</TABLE>
OPERATING RESULTS
Net operating income represents net earnings before net securities transactions.
Net operating income for the first six months of 2000 was $28,175,000 which was
an increase of $6,420,000 or 29.5 % over that reported in the same period in
1999. The 2000 net operating income included a non-recurring expense of $700,000
related to the in-market consolidation of two of Bancorp's affiliates (Home
Federal Bank, a Federal Savings Bank into First National Bank of Southwestern
Ohio). The 1999 net operating income included merger and restructuring charges
of $6,930,000 as discussed in Note 4. Net operating income, excluding the
non-recurring expense in 2000 and the merger and restructuring charges in 1999,
increased $1,401,000 or 5.14% over 1999. The increase in net operating income,
excluding the non-recurring items, can be primarily attributed to an increase in
net interest income of $5,219,000 or 6.46% for the first six months of 2000
compared to the same period in 1999. The increase in net interest income was
driven by loan growth. Noninterest income excluding securities transactions for
the first six months of 2000 increased $937,000 or 4.68% over the comparable
period in 1999. Continued strong growth in service charges on deposit accounts
was offset by the decrease in gain on loan sales. The increase in trust fees was
less than has been the trend due to lower market values on several large
holdings. Noninterest expense, excluding the Home Federal related accrual in
2000 and the merger and restructuring charge in 1999, increased $3,151,000 or
5.63% primarily as a result of increased salary and benefit expenses. The
$700,000 accrual in 2000 for the Home Federal consolidation relates primarily to
severance and therefore, was recorded in salary and benefits expenses.
Net operating income for the second quarter of 2000 increased $5,603,000 or
64.3% over the same three month period in 1999. Net operating income, excluding
the non-recurring Home Federal related accrual in June 2000 and the merger and
restructuring charge in June 1999, increased $625,000 or 4.41%. The increase for
the quarter was due to increased net interest income and higher noninterest
income, partially offset by increased noninterest expense. These categories were
affected by the same items discussed in the preceding paragraph.
INCOME TAXES
For the first six months of 2000, income tax expense was $14,388,000 compared to
$12,271,000 for the same period in 1999, or an increase of $2,117,000. In 2000,
$14,407,000 of the tax expense was related to operating income with a tax
benefit of $19,000 related to securities
10
<PAGE> 13
transactions. In the first six months of 1999, income tax expense related to
operating income and securities transactions was $12,264,000 and $6,000,
respectively. The higher effective tax rate in 1999 was primarily attributable
to merger expenses not being an allowed taxable deduction.
Income tax expense for the second quarter of 2000 was $7,293,000 compared to
$5,739,000 for the same period in 1999, which was an increase of $1,554,000. Tax
expense relating to operating income totaled $7,318,000 and $5,752,000 for the
quarters ended June 30, 2000 and 1999, respectively, with a tax benefit related
to securities transactions of $25,000 for 2000 and $13,000 for 1999. A tax
benefit related to restructuring charges included in taxes on operating income
for 1999 was $1,476,000.
NET EARNINGS
Net earnings for the first six months of 2000 were $ 6,423,000 or 29.5% above
that recorded during the same period in 1999. Net earnings excluding the 2000
Home Federal accrual and the 1999 merger and restructuring charges were
$1,445,000 or 5.30% greater than the prior year for reasons discussed in the
Operating Results section. Net securities gains through June 30, 2000 were
$44,000 compared to $41,000 for the period ending June 30, 1999. Merger and
restructuring charges, net of taxes, were $5,454,000 for 1999.
Net earnings for the three months ended June 30, 2000 were $5,634,000 or 64.6%
more than the same period in 1999. Excluding 2000's Home Federal accrual and
1999's merger and restructuring charges, net earnings were $656,000 or 4.63%
greater in 2000. Net securities gains for the second quarter of 2000 and 1999
were $36,000 and $5,000, 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, 2000 and 1999, the recorded investment in loans that are considered
to be impaired under FASB Statement No. 114 was $6,496,000 and $2,170,000,
respectively, all of which were on a nonaccrual basis. The related allowance for
loan losses on these impaired loans was $3,585,000 at June 30, 2000 and $437,000
at June 30, 1999. There were $46,000 and $31,000 in 2000 and 1999, respectively,
in impaired loans that as a result of write-downs did not have an allowance for
loan losses. The average recorded investment in impaired loans for the
respective six months and quarters ended June 30, 2000 and 1999, was
approximately $5,096,000 and $6,475,000 for 2000 and $3,715,000 and $3,624,000
for 1999. For the six months and quarter ended June 30, 2000, Bancorp recognized
interest income on those impaired loans of $48,000 and $44,000 compared to
$32,000 and $14,000 for the same periods in 1999. Bancorp recognizes income on
impaired loans using the cash basis method. The table on the following page
indicates the activity in the allowance for loan losses for the quarters
presented.
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<PAGE> 14
<TABLE>
<CAPTION>
Quarter Ended
2000 1999
--------------------- -------------------
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 40,192 $ 39,340 $ 38,729 $ 37,505 $ 36,319
Provision for discontinued product line 0 0 0 0 1,100
Provision for loan losses 2,222 2,361 3,205 2,117 1,378
Loans charged off (2,803) (2,089) (3,113) (1,869) (2,762)
Recoveries 627 580 519 976 1,470
--------- --------- --------- --------- --------
Net charge offs (2,176) (1,509) (2,594) (893) (1,292)
-------- --------- --------- --------- ---------
Balance at end of period $ 40,238 $ 40,192 $ 39,340 $ 38,729 $ 37,505
========= ========= ========= ========= ========
Ratios:
Allowance to period end loans,
net of unearned income 1.30% 1.31% 1.30% 1.30% 1.31%
Recoveries to charge offs 22.37% 27.76% 16.67% 52.22% 53.22%
Allowance as a multiple of
Net charge offs 18.49X 26.63X 15.17X 43.37X 29.03X
</TABLE>
NONPERFORMING/UNDERPERFORMING ASSETS
The table below shows the categories which are included in nonperforming and
underperforming assets.
Nonperforming assets have increased $6,645,000 in the second quarter of 2000
when compared to the second quarter of 1999. While the nonperforming assets have
increased significantly, loan volume has also increased significantly. In the
second quarter of 2000 when compared to the second quarter of 1999, accruing
loans past due 90 days or more decreased $921,000. Restructured loans have
decreased $735,000 primarily due to one unsecured commercial loan that was moved
to nonaccrual status the first quarter of 2000. Nonaccrual loans have increased
$6,367,000, which is composed primarily of commercial, multi-family and 1-4
family residential investment properties. Other real estate owned increased
$1,013,000 in the second quarter of 2000 compared to the second quarter of 1999,
primarily from foreclosures on commercial, multi-family and 1-4 family
residential mortgage loans. 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.
<TABLE>
<CAPTION>
Quarter Ended
2000 1999
------------------- -------------------------------
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $15,586 $15,019 $11,283 $10,430 $ 9,219
Restructured loans 676 637 2,244 1,354 1,411
OREO/ISF* 1,345 1,551 1,707 354 332
------- ------- ------- ------- -------
Total nonperforming assets 17,607 17,207 15,234 12,138 10,962
Accruing loans past due
90 days or more 2,875 2,252 2,777 3,318 3,796
------- ------- ------- ------- -------
Total underperforming assets $20,482 $19,459 $18,011 $15,456 $14,758
======= ======= ======= ======= =======
Nonperforming assets as a percent
of loans, net of unearned income
plus OREO/ISF 0.57% 0.56% 0.50% 0.41% 0.38%
======= ======= ======= ======= =======
Underperforming assets as a percent
of loans, net of unearned income
plus OREO/ISF 0.66% 0.64% 0.59% 0.52% 0.52%
======= ======= ======= ======= =======
</TABLE>
*Other real estate owned/In-substance foreclosure
12
<PAGE> 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. At the end of the second quarter of 2000, Bancorp's deposit
liabilities had increased by 0.95% from December 31, 1999. There continues to be
increased emphasis by Bancorp on deposits as evidenced by the recent appointment
of chief deposit officers at each affiliate. Another source of funding is
through short-term borrowings. As part of Bancorp's asset/liability management
strategy, Bancorp's short-term borrowings increased to $454,509,000 at June 30,
2000, compared to $382,118,000 at December 31, 1999, an increase of $72,391,000
or 18.9%.
The principal source of asset-funded liquidity is marketable investment
securities, particularly those of shorter maturities. At June 30, 2000,
securities maturing in one year or less amounted to $37,614,000, representing
6.39% 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, 2000, amounted
to $712,091,000, representing 17.6% 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, 2000, Bancorp had classified $558,086,000 in investment securities
available-for-sale, of which approximately $236,094,000 were pledged to secure
public deposits. Management examines Bancorp's liquidity needs in establishing
this classification in accordance with the FASB 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 $2,755,000 for the first six
months of 2000. In addition, remodeling is a planned and ongoing process given
the 115 offices of Bancorp and its subsidiaries. Material commitments for
capital expenditures as of June 30, 2000 were approximately $1,110,000.
Management believes that Bancorp has sufficient liquidity to fund its current
commitments.
One balance sheet item of note, Bancorp's cash and due from banks decreased
significantly as Y2K has passed and cash reserves were reduced to normal levels.
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.
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<PAGE> 16
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 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 June 30, 2000, was 11.8%, its Total risk-based capital
was 13.1% and its Leverage ratio was 8.86%. 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 two years.
<TABLE>
<CAPTION>
Quarter Ended
2000 1999
----------------------- ---------------------
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30
---------- ---------- ---------- ---------- ---------
(Dollars in thousands)
Tier I Capital:
<S> <C> <C> <C> <C> <C>
Shareholder's equity $ 377,459 $ 373,186 $ 372,539 $ 367,940 $ 361,158
Less: Non-qualifying intangible assets 36,256 36,854 37,610 38,364 38,992
Less: Unrealized net securities
losses (6,870) (7,165) (6,398) (3,987) (2,470)
---------- ---------- ---------- ---------- ----------
Total Tier I Capital $ 348,073 $ 343,497 $ 341,327 $ 333,563 $ 324,636
========== ========== ========== ========== ==========
Total Risk-Based Capital:
Tier I Capital $ 348,073 $ 343,497 $ 341,327 $ 333,563 $ 324,636
Qualifying Allowance for Loan Losses 36,826 36,295 35,636 35,280 33,462
---------- ---------- ---------- ---------- ----------
Total Risk-Based Capital $ 384,899 $ 379,792 $ 376,963 $ 368,843 $ 358,098
========== ========== ========== ========== ==========
Risk Weighted Assets $2,942,675 $2,899,705 $2,847,221 $2,818,936 $2,672,881
========== ========== ========== ========== ==========
Risk-Based Ratios:
Tier I 11.83% 11.85% 11.99% 11.83% 12.15%
========== ========== ========== ========== ==========
Total Risk-Based Capital 13.08% 13.10% 13.24% 13.08% 13.40%
========== ========== ========== ========== ==========
Leverage 8.86% 8.88% 8.92% 9.04% 9.01%
========== ========== ========== ========== ==========
</TABLE>
FORWARD-LOOKING INFORMATION
The Form 10-Q should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this report and in the First
Financial Bancorp. Annual Report on Form 10-K for the year ended December 31,
1999 (1999 Form 10-K).
Management's analysis may contain forward-looking statements that are provided
to assist in the understanding of anticipated future financial performance.
However, such performance involves risks and uncertainties which may cause
actual results to differ materially. For a discussion of certain factors that
may cause such forward-looking statements to differ materially from actual
results, refer to the 1999 Form 10-K.
ACCOUNTING AND REGULATORY MATTERS
Management is not aware of any events or regulatory recommendations which, if
implemented, are likely to have a material effect on Bancorp's liquidity,
capital resources, or operations.
14
<PAGE> 17
PART II-OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On April 25, 2000 Bancorp held its annual meeting of shareholders, the
results of which follow:
1) Election of six directors:
<TABLE>
<CAPTION>
% of
Total Votes
Name Term Votes for Shares Voted Withheld
---- ---- --------- ------------ --------
<S> <C> <C> <C> <C>
Richard L. Alderson 3 years 38,717,414 98.89% 433,906
James C. Garland 3 years 38,794,734 99.09% 356,586
Murph Knapke 3 years 38,799,291 99.10% 352,029
Stanley N. Pontius 3 years 38,212,363 97.60% 938,957
Barry S. Porter 3 years 38,785,566 99.07% 365,754
Perry D. Thatcher 3 years 38,712,155 98.88% 439,165
</TABLE>
Directors whose terms continue beyond the Annual Meeting in
2000:
Class III Term expiring in 2001:
Donald M. Cisle
Dan R. Dalton
Corinne R. Finnerty
F. Elden Houts
Bruce E. Leep
Class I expiring in 2002:
Martin J. Bidwell
Carl R. Fiora
Barry J. Levey
Stephen S. Marcum
Steven C. Posey
No other matters were brought before the meeting for a vote.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 2000, the registrant did
not file any reports on Form 8-K.
15
<PAGE> 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 10, 2000 Date August 10, 2000
------------------------- --------------------
16
