<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 SEPTEMBER 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 OCTOBER 31, 2000
-------------------------- -------------------------------
COMMON STOCK, NO PAR VALUE 46,274,791
<PAGE> 2
FIRST FINANCIAL BANCORP.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I-FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS -
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 1
CONSOLIDATED STATEMENTS OF EARNINGS -
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 2
CONSOLIDATED STATEMENTS OF CASH FLOWS -
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS" EQUITY
NINE MONTHS ENDED SEPTEMBER 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 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>
September 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 168,196 $ 225,837
Interest-bearing deposits with other banks 15,490 8,867
Federal funds sold and securities purchased
under agreements to resell 2,647 5,621
Investment securities held-to-maturity, at cost
(market value - $28,966 at September 30, 2000 and
$32,498 at December 31, 1999) 28,394 31,765
Investment securities available-for-sale,
at market value 557,395 490,126
Loans
Commercial 789,082 769,454
Real estate-construction 108,318 111,458
Real estate-mortgage 1,465,642 1,467,591
Installment 636,660 623,091
Credit card 21,674 22,408
Lease financing 47,202 46,508
----------- -----------
Total loans 3,068,578 3,040,510
Less
Unearned income 4,177 4,134
Allowance for loan losses 40,487 39,340
----------- -----------
Net loans 3,023,914 2,997,036
Premises and equipment 58,805 59,004
Goodwill 29,242 30,077
Other intangibles 9,195 10,522
Deferred income taxes 6,553 8,008
Accrued interest and other assets 86,483 73,830
----------- -----------
TOTAL ASSETS $ 3,986,314 $ 3,940,693
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 412,792 $ 408,712
Interest-bearing 2,669,627 2,582,501
----------- -----------
Total deposits 3,082,419 2,991,213
Short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase 45,892 83,353
Federal Home Loan Bank borrowings 267,000 294,235
Other 2,892 4,530
----------- -----------
Total short-term borrowings 315,784 382,118
Long-term borrowings 166,778 161,799
Accrued interest and other liabilities 35,302 33,024
----------- -----------
TOTAL LIABILITIES 3,600,283 3,568,154
SHAREHOLDERS' EQUITY
Common stock - no par value
Authorized - 160,000,000 shares
Issued - 46,925,351 in 2000 and 46,869,107 in 1999 374,327 373,447
Retained earnings 28,306 5,904
Accumulated comprehensive income (3,821) (6,398)
Restricted stock awards (950) (414)
Treasury stock, at cost, 650,110 in 2000 and 0
Shares in 1999 (11,831) 0
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 386,031 372,539
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,986,314 $ 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>
Nine months ended Three months ended
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 207,432 $ 182,946 $ 70,989 $ 63,979
Investment securities
Taxable 20,752 17,614 7,426 5,854
Tax-exempt 6,395 6,958 2,090 2,304
------------ ------------ ------------ ------------
Total investment interest 27,147 24,572 9,516 8,158
Interest-bearing deposits with
other banks 548 204 194 59
Federal funds sold and securities
purchased under agreements to resell 170 294 57 78
------------ ------------ ------------ ------------
TOTAL INTEREST INCOME 235,297 208,016 80,756 72,274
INTEREST EXPENSE
Deposits 83,982 71,988 30,280 24,221
Short-term borrowings 16,805 8,413 5,786 4,395
Long-term borrowings 6,097 4,866 2,240 1,653
------------ ------------ ------------ ------------
TOTAL INTEREST EXPENSE 106,884 85,267 38,306 30,269
------------ ------------ ------------ ------------
NET INTEREST INCOME 128,413 122,749 42,450 42,005
Provision for loan losses 7,257 6,027 2,674 2,117
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 121,156 116,722 39,776 39,888
NONINTEREST INCOME
Service charges on deposit accounts 13,866 12,027 4,912 4,275
Trust income 10,782 9,950 3,611 3,255
Investment securities gains 37 56 12 9
Other 7,880 8,547 3,028 2,954
------------ ------------ ------------ ------------
Total noninterest income 32,565 30,580 11,563 10,493
NONINTEREST EXPENSES
Salaries and employee benefits 48,600 45,714 15,455 15,554
Net occupancy expenses 5,547 5,323 1,871 1,806
Furniture and equipment expenses 4,791 4,703 1,620 1,575
Data processing expenses 5,434 4,842 1,651 1,567
Deposit insurance expense 386 418 124 125
State taxes 1,833 1,567 602 577
Amortization of intangibles 2,531 2,784 837 917
Merger and restructuring (353) 6,930 0 0
Other 19,749 19,487 6,583 6,793
------------ ------------ ------------ ------------
Total noninterest expenses 88,518 91,768 28,743 28,914
------------ ------------ ------------ ------------
Income before income taxes 65,203 55,534 22,596 21,467
Income tax expense 21,815 19,203 7,427 6,932
------------ ------------ ------------ ------------
NET EARNINGS $ 43,388 $ 36,331 $ 15,169 $ 14,535
============ ============ ============ ============
Net earnings per share-basic $ 0.93 $ 0.78 $ 0.33 $ 0.31
============ ============ ============ ============
Net earnings per share-diluted $ 0.93 $ 0.77 $ 0.33 $ 0.31
============ ============ ============ ============
Cash dividends declared per share $ 0.45 $ 0.41 $ 0.15 $ 0.14
============ ============ ============ ============
Average basic shares outstanding 46,543,979 46,842,241 46,313,272 46,857,834
============ ============ ============ ============
Average diluted shares outstanding 46,630,579 46,981,464 46,396,280 46,972,639
============ ============ ============ ============
</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>
Nine months ended
September 30,
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 43,388 $ 36,331
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 7,257 6,027
Provision for depreciation and amortization 7,384 6,930
Net amortization of investment security
premiums and accretion of discounts (379) 166
Realized investment security gains (37) (56)
Originations of mortgage loans held for sale (147,652) (171,273)
Gains from sales of mortgage loans held for sale (754) (2,374)
Proceeds from sale of mortgage loans held for sale 148,406 173,647
Deferred income taxes (157) 1,914
Increase in interest receivable (3,135) (4,106)
Increase in cash surrender value of life insurance (5,927) (16,609)
Decrease (increase) in prepaid expenses (1,213) 1,233
(Decrease) increase in accrued expenses (806) 1,363
Increase (decrease) in interest payable 2,975 (576)
Other (3,383) (2,629)
--------- ---------
Net cash provided by operating activities 45,967 29,988
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available-for-sale 0 14,482
Proceeds from calls, paydowns and maturities of
investment securities available-for-sale 42,969 119,866
Purchases of investment securities available-for-sale (65,236) (114,679)
Proceeds from calls, paydowns and maturities of
investment securities held-to-maturity 6,707 6,110
Purchases of investment securities held-to-maturity (3,005) (906)
Net decrease in interest-bearing deposits
with other banks (6,623) (10,061)
Net decrease in federal funds sold and securities
purchased under agreements to resell 2,974 7,759
Net increase in loans and leases (78,036) (341,441)
Recoveries from loans and leases previously charged off 1,775 3,050
Proceeds from disposal of other real estate owned 2,035 369
Purchases of premises and equipment (4,309) (5,345)
--------- ---------
Net cash used in investing activities (100,749) (320,796)
FINANCING ACTIVITIES
Net increase in total deposits 91,206 49,079
Net (decrease) increase in short-term borrowings (66,334) 231,764
Increase in long-term borrowings 4,979 31,568
Cash dividends declared (20,987) (18,540)
Purchase of common stock (11,831) 0
Proceeds from exercise of stock options, net of shares
purchased 108 693
--------- ---------
Net cash provided by financing activities (2,859) 294,564
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (57,641) 3,756
Cash and cash equivalents at beginning of period 225,837 164,500
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 168,196 $ 168,256
========= =========
</TABLE>
3
<PAGE> 6
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
Supplemental disclosures
Interest paid $103,910 $ 85,842
======== ========
Income taxes paid $ 24,746 $ 16,955
======== ========
Recognition of deferred tax liabilities
attributable to FASB Statement No. 115 $ 1,612 $ 3,039
======== ========
Acquisition of other real estate owned through
foreclosure $ 1,389 $ 529
======== ========
Issuance of restricted stock award $ 773 $ 146
======== ========
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>
Nine months ended
September 30,
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Balances at January 1, as restated $ 372,539 $ 358,265
Net Earnings 43,388 36,331
Other comprehensive income, net of taxes:
Changes in unrealized gains on securities,
Available for sale 2,577 (8,936)
--------- ---------
Comprehensive income 45,965 27,395
Cash dividends declared (20,987) (18,540)
Purchase of common stock (11,831) 0
Exercise of stock options, net of shares purchased 108 693
Amortization of restricted stock awards 237 127
--------- ---------
Balance at September 30 $ 386,031 $ 367,940
========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 8
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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, Union
Bank & Trust Company, The Clyde Savings Bank Company, Peoples Bank and Trust
Company, Bright National Bank, First Finance Mortgage Company of Southwestern
Ohio (d.b.a. Community First Finance), Farmers State Bank, National Bank of
Hastings, Vevay Deposit Bank, Sand Ridge Bank, Hebron Deposit Bank, First
Financial Service Corporation, and Ohio City Insurance Agency. All significant
intercompany transactions and accounts have been eliminated in consolidation.
Intangible assets arising from the acquisition of subsidiaries are being
amortized over varying periods, none of which exceeds 25 years. Core deposit
balances are being amortized over varying periods, none of which exceeds 10
years.
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 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
6
<PAGE> 9
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 September 30,
2000, Bancorp had issued standby letters of credit aggregating $22,454,000
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 $496,297,000 at September 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
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, 2000 and 1999 are shown in the table
below.
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
2000 1999
------- --------
<S> <C> <C>
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising
during period $2,629 $(8,867)
Less: reclassification adjustment
for gains included in net income 52 69
------ -------
Other comprehensive income (loss) $2,577 $(8,936)
====== =======
</TABLE>
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
7
<PAGE> 10
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 September 30, 2000 are shown in the following table. During the first
nine months, based on current information, estimated liabilities associated with
the merger and restructuring charges were reduced by $353,000. As of September
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.
<TABLE>
<CAPTION>
Charges Remaining
Accrued Liability Liability
Description of Charges in 1999 12/31/99 9/30/00
---------------------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Merger costs $2,899 $ 219 $ 0
Disposals of property 1,574 115 95
Discontinued product line 1,100 167 104
Operations/affiliate restructuring 1,357 523 58
------ ------ ----
Total $6,930 $1,024 $257
====== ====== ====
</TABLE>
NOTE 5: SUBSEQUENT EVENTS
On October 24, 2000, Bancorp's Board of Directors authorized an additional stock
repurchase program to repurchase up to five percent, or approximately 2.3
million, of the outstanding shares of First Financial Bancorp common stock in
the open market or in privately negotiated transactions. The share purchase
program is for general corporate purposes including future stock dividends. At
valuation levels at the time of announcement, Bancorp believes stock repurchase
provides an attractive investment opportunity in addition to managing its strong
capital position. Stock repurchases at price levels at the time of announcement
will be accretive to earnings per share and return on equity, thereby enhancing
long-term shareholder value.
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
-------------------------------------------- ---------------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET EARNINGS $ 15,169 $ 14,349 $ 13,870 $ 13,992 $ 14,535
NET EARNINGS PER SHARE-BASIC 0.33 0.31 0.30 0.30 0.31
NET EARNINGS PER SHARE-DILUTED 0.33 0.31 0.30 0.30 0.31
NET EARNINGS PER SHARE-DILUTED-CASH BASIS (a) 0.34 0.32 0.31 0.31 0.32
AVERAGE CONSOLIDATED BALANCE SHEET ITEMS:
LOANS LESS UNEARNED INCOME 3,087,025 3,087,245 3,066,552 3,022,313 2,933,882
INVESTMENT SECURITIES 587,117 569,683 536,148 531,709 549,441
OTHER EARNING ASSETS 15,358 19,624 13,304 13,958 12,787
---------- ---------- ---------- ---------- ----------
TOTAL EARNING ASSETS 3,689,500 3,676,552 3,616,004 3,567,980 3,496,110
TOTAL ASSETS 3,980,154 3,965,393 3,904,639 3,865,437 3,757,969
DEPOSITS 3,032,342 3,037,649 2,990,226 2,985,289 2,892,952
SHAREHOLDERS' EQUITY 380,200 374,507 372,424 369,442 366,022
KEY RATIOS
AVERAGE EQUITY TO AVERAGE TOTAL ASSETS 9.55% 9.44% 9.54% 9.56% 9.74%
RETURN ON AVERAGE TOTAL ASSETS 1.52% 1.46% 1.43% 1.44% 1.53%
RETURN ON AVERAGE EQUITY 15.87% 15.41% 14.98% 15.03% 15.75%
NET INTEREST MARGIN (FULLY TAX EQUIVALENT) 4.71% 4.88% 4.88% 4.86% 4.92%
</TABLE>
(a) 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. Year-to-date net interest income on a fully tax equivalent basis
increased 4.25%, while the third quarter 2000 increased 0.76% over the same
quarter in 1999. The principal reason for these increases was an increase in
earning assets, the effects of which were somewhat offset by a decrease in the
net interest margin. From a linked quarter basis (third quarter 2000 compared to
second quarter 2000) net interest income on a fully tax equivalent basis
decreased $948,000 or 2.13%. Factors contributing to the decrease from the
preceding quarter included funding cost. The increased funding cost was a result
of pressure prevalent throughout the financial services industry due in part to
the interest rate environment and to one additional day of interest expense in
the third quarter compared to the second quarter. Additionally, higher loan fees
were received in the second quarter than in the third quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
2000 1999
----------------------------- ------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME $80,756 $78,774 $75,767 $74,382 $72,274
INTEREST EXPENSE 38,306 35,406 33,172 31,927 30,269
------- ------- ------- ------- -------
NET INTEREST INCOME 42,450 43,368 42,595 42,455 42,005
TAX EQUIVALENT ADJUSTMENT TO INTEREST INCOME 1,205 1,235 1,246 1,278 1,318
------- ------- ------- ------- -------
NET INTEREST INCOME (FULLY TAX EQUIVALENT) $43,655 $44,603 $43,841 $43,733 $43,323
======= ======= ======= ======= =======
</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 nine
months ended September 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>
NINE MONTHS THREE MONTHS
ENDED CHANGE DUE TO: ENDED CHANGE DUE TO:
SEP. 30, 2000 ------------------- SEP. 30, 2000 -----------------
OVER 1999 RATE VOLUME OVER 1999 RATE VOLUME
------------- -------- -------- ------------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME $ 27,281 $ 9,012 $ 18,269 $ 8,482 $ 4,370 $ 4,112
INTEREST EXPENSE 21,617 12,824 8,793 8,037 6,176 1,861
---------- --------- --------- --------- --------- --------
NET INTEREST INCOME $ 5,664 $ (3,812) $ 9,476 $ 445 $ (1,806) $ 2,251
========== ========= ========= ========= ========= ========
</TABLE>
OPERATING RESULTS
Net operating income represents net earnings before net securities transactions.
Net operating income for the first nine months of 2000 was $43,336,000 which was
an increase of $7,074,000 or 19.5% 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 $2,081,000 or 4.99% 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 $5,663,000 or 4.61% for the first nine months of 2000
compared to the same period in 1999. The increase in net interest income was
driven by loan growth. The provision for loan losses increased 20.4% over 1999
while the allowance for loan losses ratio increased to 1.32% from 1.30%.
Noninterest income excluding securities transactions for the first nine months
of 2000 increased $2,004,000 or 6.57% over the comparable period in 1999.
Continued strong growth in service charges on deposit accounts was offset by a
decrease in gain on loan sales. Gains on loan sales recorded in other
noninterest income were down $1,630,000 from the prior year due to the interest
rate environment. 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 $2,979,000 or approximately 4.00%
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 third quarter of 2000 increased $654,000 or 4.51%
over the same three month period in 1999. The increase for the quarter was due
to increased net interest income and increases in all major noninterest income
categories coupled with a slight decrease in noninterest expense. The favorable
variances were partially offset by an increase in the provision for loan losses.
10
<PAGE> 13
INCOME TAXES
For the first nine months of 2000, income tax expense was $21,815,000 compared
to $19,203,000 for the same period in 1999, or an increase of $2,612,000. In
2000, $21,830,000 of the tax expense was related to operating income with a tax
benefit of $15,000 related to securities transactions. In the first nine months
of 1999, income tax expense related to operating income was $19,216,000, with a
tax benefit related to securities transactions of $13,000. The higher effective
tax rate in 1999 was primarily attributable to merger expenses not being an
allowed taxable deduction.
Income tax expense for the third quarter of 2000 was $7,427,000 compared to
$6,932,000 for the same period in 1999, which was an increase of $495,000. Tax
expense relating to operating income totaled $7,423,000 and $6,951,000 for the
quarters ended September 30, 2000 and 1999, respectively, with a tax expense
related to securities transactions of $4,000 in 2000 and a tax benefit of
$19,000 in 1999.
NET EARNINGS
Net earnings for the first nine months of 2000 were $43,388,000 or 19.4% greater
than that recorded during the same period in 1999. Net earnings excluding the
2000 Home Federal accrual for its merger with First Southwestern and the 1999
merger and restructuring charges were $2,079,000 or 4.98% greater than the prior
year for reasons discussed in the Operating Results section. Net securities
gains through September 30, 2000 were $52,000 compared to $69,000 for the period
ending September 30, 1999.
Net earnings for the three months ended September 30, 2000 were $15,169,000 or
4.36% greater than the same period in 1999. Net securities gains for the third
quarter of 2000 and 1999 were $8,000 and $28,000, 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 September 30, 2000 and 1999, the recorded investment in loans that are
considered to be impaired under FASB Statement No. 114 was $6,547,000 and
$1,761,000, respectively, all of which were on a nonaccrual basis. The related
allowance for loan losses on these impaired loans was $3,222,000 at September
30, 2000 and $492,000 at September 30, 1999. At September 30, 2000 and 1999,
there were $35,000 and $31,000, respectively, that as a result of write-downs,
did not have an allowance for loan losses. The average recorded investment in
impaired loans for the respective nine months and quarters ended September 30,
2000 and 1999, was approximately $5,228,000 and $6,709,000 for 2000 and
$3,299,000 and $2,479,000 in 1999. For the nine months and quarter ended
September 30, 2000, Bancorp recognized interest income on those impaired loans
of $58,000 and $20,000 compared to $40,000 and $8,000 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.
11
<PAGE> 14
<TABLE>
<CAPTION>
QUARTER ENDED
1999 1999
--------------------------------------- -----------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 40,238 $ 40,192 $ 39,340 $ 38,729 $ 37,505
PROVISION FOR LOAN LOSSES 2,674 2,222 2,361 3,205 2,117
LOANS CHARGED OFF (2,993) (2,803) (2,089) (3,113) (1,869)
RECOVERIES 568 627 580 519 976
-------- -------- -------- -------- --------
NET CHARGE OFFS (2,425) (2,176) (1,509) (2,594) (893)
-------- -------- -------- -------- --------
BALANCE AT END OF PERIOD $ 40,487 $ 40,238 $ 40,192 $ 39,340 $ 38,729
======== ======== ======== ======== ========
RATIOS:
ALLOWANCE TO PERIOD END LOANS,
NET OF UNEARNED INCOME 1.32% 1.30% 1.31% 1.30% 1.30%
RECOVERIES TO CHARGE OFFS 18.98% 22.37% 27.76% 16.67% 52.22%
ALLOWANCE AS A MULTIPLE OF
NET CHARGE OFFS 16.70X 18.49X 26.63X 15.17X 43.37X
</TABLE>
NONPERFORMING/UNDERPERFORMING ASSETS
The table below shows the categories which are included in nonperforming and
underperforming assets.
Nonperforming assets have increased $5,982,000 in the third quarter of 2000 when
compared to the third quarter of 1999. The trend in nonperforming assets as a
percent of loans has remained relatively stable, while increasing slightly over
the last several quarters. In the third quarter of 2000 when compared to the
third quarter of 1999, restructured loans have decreased $633,000 primarily due
to one unsecured commercial loan that was moved to nonaccrual status the first
quarter of 2000. Nonaccrual loans have increased $6,050,000, which is composed
primarily of commercial, multi-family and 1-4 family residential investment
properties. Other real estate owned increased $565,000 in the third quarter of
2000 compared to the third quarter of 1999, primarily from foreclosures on
commercial, multi-family and 1-4 family residential mortgage loans. Accruing
loans past due 90 days or more increased $1,775,000. This increase was comprised
of some 12 loans of which approximately 65% were secured by residential
mortgages. 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
------------------------------- -------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NONACCRUAL LOANS $16,480 $15,586 $15,019 $11,283 $10,430
RESTRUCTURED LOANS 721 676 637 2,244 1,354
OREO/ISF* 919 1,345 1,551 1,707 354
------- ------- ------- ------- -------
TOTAL NONPERFORMING ASSETS 18,120 17,607 17,207 15,234 12,138
ACCRUING LOANS PAST DUE
90 DAYS OR MORE 5,093 2,875 2,252 2,777 3,318
------- ------- ------- ------- -------
TOTAL UNDERPERFORMING ASSETS $23,213 $20,482 $19,459 $18,011 $15,456
======= ======= ======= ======= =======
NONPERFORMING ASSETS AS A PERCENT
OF LOANS, NET OF UNEARNED INCOME
PLUS OREO/ISF 0.59% 0.57% 0.56% 0.50% 0.41%
======= ======= ======= ======= =======
UNDERPERFORMING ASSETS AS A PERCENT
OF LOANS, NET OF UNEARNED INCOME
PLUS OREO/ISF 0.76% 0.66% 0.64% 0.59% 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 third quarter of 2000 Bancorp's deposit
liabilities had increased by 3.04% from December 31, 1999. Another source of
funding is through short-term borrowings. Bancorp's short-term borrowings
decreased to $315,784,000 at September 30, 2000, compared to $382,118,000 at
December 31, 1999.
The principal source of asset-funded liquidity is marketable investment
securities, particularly those of shorter maturities. At September 30, 2000,
securities maturing in one year or less amounted to $32,856,000, representing
5.61% 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, 2000,
amounted to $710,894,000, representing 17.8% 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, 2000, Bancorp had classified $557,395,000 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 $4,309,000 for the first nine
months of 2000. In addition, remodeling is a planned and ongoing process given
the 112 offices of Bancorp and its subsidiaries. Material commitments for
capital expenditures as of September 30, 2000 were approximately $2,926,000.
Management believes that Bancorp has sufficient liquidity to fund its current
commitments.
CAPITAL ADEQUACY
The Federal Reserve established risk-based capital requirements for U.S. banking
organizations which have been adopted by the Office of Thrift Supervision for
savings and loan associations. Risk weights are assigned to on-and off-balance
sheet items in arriving at risk-adjusted total assets. Regulatory capital is
divided by risk-adjusted total assets, with the resulting ratios compared to
minimum standards to determine whether a bank has adequate capital.
Regulatory guidelines require a 4.00% Tier 1 capital ratio and an 8.00% Total
risk-based capital ratio. A minimum 3.00% Leverage ratio is required for bank
holding companies that either are rated composite "1" under the BOPEC rating
system or have implemented the Board's risk-based capital market risk measure.
The minimum leverage ratio for all other bank holding companies is 4.0%. Tier 1
capital consists primarily of common shareholders' equity, net of intangibles,
and
13
<PAGE> 16
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, 2000, was 12.1%, its Total risked-based
capital was 13.4% and its Leverage ratio was 8.98%. 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
2000 1999
------------------------------------ ----------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
---------- ---------- ---------- ---------- ---------
TIER I CAPITAL: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SHAREHOLDER'S EQUITY $ 386,031 $ 377,459 $ 373,186 $ 372,539 $ 367,940
LESS: INTANGIBLE ASSETS 35,675 36,256 36,854 37,610 38,364
LESS: UNREALIZED NET SECURITIES
LOSSES (3,821) (6,870) (7,165) (6,398) (3,987)
----------- ---------- ---------- ---------- ----------
TOTAL TIER I CAPITAL $ 354,177 $ 348,073 $ 343,497 $ 341,327 $ 333,563
========== ========== ========== ========== ==========
TOTAL RISK-BASED CAPITAL:
TIER I CAPITAL $ 354,177 $ 348,073 $ 343,497 $ 341,327 $ 333,563
QUALIFYING ALLOWANCE FOR LOAN LOSSES 36,578 36,826 36,295 35,636 35,280
---------- ---------- ---------- --------- ----------
TOTAL RISK-BASED CAPITAL $ 390,755 $ 384,899 $ 379,792 $ 376,963 $ 368,843
========== ========== ========== ========== ==========
RISK WEIGHTED ASSETS $2,922,338 $2,942,675 $2,899,705 $2,847,221 $2,818,936
========== ========== ========== ========== ==========
RISK-BASED RATIOS:
TIER I 12.12% 11.83% 11.85% 11.99% 11.83%
========== ========== ========== ========== ==========
TOTAL RISK-BASED CAPITAL 13.37% 13.08% 13.10% 13.24% 13.08%
========== ========== ========== ========== ==========
LEVERAGE 8.98% 8.86% 8.88% 8.92% 9.04%
========== ========== ========== ========== ==========
</TABLE>
FORWARD-LOOKING INFORMATION
The Form 10-Q should be read in conjunction with the consolidated financial
statements, notes and table included elsewhere in the report and in the First
Financial Bancorp. Annual Report on Form 10-K for the year ended December 31,
1999.
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 other 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement between Stanley N. Pontius and First
Financial Bancorp. dated August 4, 2000.
10.2 Agreement between Michael R. O'Dell and First
Financial Bancorp. dated August 4, 2000.
10.3 Agreement between Mark W. Immelt and First Financial
Bancorp. dated August 4, 2000.
10.4 Agreement between Michael T. Riley and First
Financial Bancorp. dated August 4, 2000.
10.5 Agreement between Brian D. Moriarty and First
Financial Bancorp. dated August 4, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended September 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 November 8, 2000 Date November 8, 2000
-------------------------- ---------------------
16
