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, 2008
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.)
|
4000
Smith Road, Cincinnati, Ohio
|
|
45209
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code (513)
979-5837
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
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 x
Accelerated
filer ¨ Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of Exchange Act).
Yes
¨
No x
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 30, 2008
|
Common
stock, No par value
|
|
37,481,398
|
FIRST
FINANCIAL BANCORP.
INDEX
|
|
Page No.
|
|
|
|
Part
I-FINANCIAL INFORMATION
|
|
|
|
|
|
Item
1-Financial Statements
|
|
|
|
|
|
Consolidated
Balance Sheets -
|
|
|
September
30, 2008 and December 31, 2007
|
|
1
|
|
|
|
Consolidated
Statements of Income -
|
|
|
Nine
and Three Months Ended September 30, 2008 and 2007
|
|
2
|
|
|
|
Consolidated
Statements of Cash Flows -
|
|
|
Nine
Months Ended September 30, 2008 and 2007
|
|
3
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity -
|
|
|
Nine
Months Ended September 30, 2008 and 2007
|
|
4
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
6
|
|
|
|
Item
2-Management's Discussion and Analysis of Financial Condition and
Results
of Operations
|
|
18
|
|
|
|
Item
3-Quantitative and Qualitative Disclosures about Market
Risk
|
|
36
|
|
|
|
Item
4-Controls and Procedures
|
|
37
|
|
|
|
Part
II-OTHER INFORMATION
|
|
|
|
|
|
Item
2-Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
38
|
|
|
|
Item
6-Exhibits
|
|
40
|
|
|
|
Signatures
|
|
43
|
PART
I – FINANCIAL INFORMATION
ITEM
I – FINANCIAL STATEMENTS
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Dollars
in thousands)
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
90,341
|
|
$
|
106,224
|
|
Federal
funds sold
|
|
|
0
|
|
|
106,990
|
|
Investment
securities trading
|
|
|
198
|
|
|
0
|
|
Investment
securities available-for-sale, at market value (cost $491,740 at
September
30, 2008 and $306,412 at December 31, 2007)
|
|
|
492,554
|
|
|
306,928
|
|
Investment
securities held-to-maturity (market value $5,230 at September 30,
2008 and
$5,814 at December 31, 2007)
|
|
|
5,037
|
|
|
5,639
|
|
Other
investments
|
|
|
34,976
|
|
|
33,969
|
|
Loans
held for sale
|
|
|
2,437
|
|
|
1,515
|
|
Loans:
|
|
|
|
|
|
|
|
Commercial
|
|
|
819,430
|
|
|
785,143
|
|
Real
estate - construction
|
|
|
203,809
|
|
|
151,432
|
|
Real
estate - commercial
|
|
|
814,578
|
|
|
706,409
|
|
Real
estate - residential
|
|
|
424,902
|
|
|
539,332
|
|
Installment
|
|
|
106,456
|
|
|
138,895
|
|
Home
equity
|
|
|
276,943
|
|
|
250,888
|
|
Credit
card
|
|
|
27,047
|
|
|
26,610
|
|
Lease
financing
|
|
|
92
|
|
|
378
|
|
Total
loans
|
|
|
2,673,257
|
|
|
2,599,087
|
|
Less:
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
|
30,353
|
|
|
29,057
|
|
Net
loans
|
|
|
2,642,904
|
|
|
2,570,030
|
|
Premises
and equipment, net
|
|
|
81,989
|
|
|
78,994
|
|
Goodwill
|
|
|
28,261
|
|
|
28,261
|
|
Other
intangibles
|
|
|
872
|
|
|
698
|
|
Accrued
interest and other assets
|
|
|
132,107
|
|
|
130,068
|
|
TOTAL
ASSETS
|
|
$
|
3,511,676
|
|
$
|
3,369,316
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Interest-bearing
|
|
$
|
580,417
|
|
$
|
603,870
|
|
Savings
|
|
|
608,438
|
|
|
596,636
|
|
Time
|
|
|
1,118,511
|
|
|
1,227,954
|
|
Total
interest-bearing deposits
|
|
|
2,307,366
|
|
|
2,428,460
|
|
Noninterest-bearing
|
|
|
404,315
|
|
|
465,731
|
|
Total
deposits
|
|
|
2,711,681
|
|
|
2,894,191
|
|
Short-term
borrowings:
|
|
|
|
|
|
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
|
45,495
|
|
|
26,289
|
|
Federal
Home Loan Bank
|
|
|
215,000
|
|
|
0
|
|
Other
|
|
|
53,000
|
|
|
72,000
|
|
Total
short-term borrowings
|
|
|
313,495
|
|
|
98,289
|
|
Long-term
debt
|
|
|
152,568
|
|
|
45,896
|
|
Other
long-term debt
|
|
|
20,620
|
|
|
20,620
|
|
Accrued
interest and other liabilities
|
|
|
36,092
|
|
|
33,737
|
|
TOTAL
LIABILITIES
|
|
|
3,234,456
|
|
|
3,092,733
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock - no par value Authorized - 160,000,000 shares Issued -
48,558,614
shares in 2008 and 2007
|
|
|
391,249
|
|
|
391,962
|
|
Retained
earnings
|
|
|
80,632
|
|
|
82,093
|
|
Accumulated
comprehensive loss
|
|
|
(6,285
|
)
|
|
(7,127
|
)
|
Treasury
Stock, at cost 11,082,007 shares in 2008 and 11,190,806 shares in
2007
|
|
|
(188,376
|
)
|
|
(190,345
|
)
|
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
277,220
|
|
|
276,583
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
3,511,676
|
|
$
|
3,369,316
|
|
See
notes
to consolidated financial statements.
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(Dollars
in thousands, except per share data)
(Unaudited)
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
39,754
|
|
$
|
46,606
|
|
$
|
122,121
|
|
$
|
136,961
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
5,349
|
|
|
3,667
|
|
|
13,257
|
|
|
11,320
|
|
Tax-exempt
|
|
|
631
|
|
|
863
|
|
|
2,214
|
|
|
2,683
|
|
Total
investment securities interest
|
|
|
5,980
|
|
|
4,530
|
|
|
15,471
|
|
|
14,003
|
|
Federal
funds sold
|
|
|
22
|
|
|
1,048
|
|
|
627
|
|
|
4,045
|
|
Total
interest income
|
|
|
45,756
|
|
|
52,184
|
|
|
138,219
|
|
|
155,009
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
13,608
|
|
|
20,528
|
|
|
45,982
|
|
|
58,946
|
|
Short-term
borrowings
|
|
|
1,720
|
|
|
1,041
|
|
|
3,642
|
|
|
3,021
|
|
Long-term
borrowings
|
|
|
707
|
|
|
532
|
|
|
1,497
|
|
|
1,633
|
|
Subordinated
debentures and capital securities
|
|
|
311
|
|
|
666
|
|
|
1,025
|
|
|
1,988
|
|
Total
interest expense
|
|
|
16,346
|
|
|
22,767
|
|
|
52,146
|
|
|
65,588
|
|
Net
interest income
|
|
|
29,410
|
|
|
29,417
|
|
|
86,073
|
|
|
89,421
|
|
Provision
for loan and lease losses
|
|
|
3,219
|
|
|
2,558
|
|
|
8,935
|
|
|
6,012
|
|
Net
interest income after provision for loan and lease losses
|
|
|
26,191
|
|
|
26,859
|
|
|
77,138
|
|
|
83,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
5,348
|
|
|
5,396
|
|
|
14,906
|
|
|
15,436
|
|
Trust
and wealth management fees
|
|
|
4,390
|
|
|
4,721
|
|
|
13,666
|
|
|
13,407
|
|
Bankcard
income
|
|
|
1,405
|
|
|
1,422
|
|
|
4,196
|
|
|
4,086
|
|
Net
gains from sales of loans
|
|
|
376
|
|
|
203
|
|
|
783
|
|
|
549
|
|
Gain
on sale of mortgage servicing rights
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
1,061
|
|
Gains
on sales of investment securities
|
|
|
0
|
|
|
367
|
|
|
1,585
|
|
|
367
|
|
Loss
on preferred securities
|
|
|
(3,400
|
)
|
|
0
|
|
|
(3,601
|
)
|
|
0
|
|
Other
|
|
|
2,359
|
|
|
2,341
|
|
|
7,566
|
|
|
8,420
|
|
Total
noninterest income
|
|
|
10,478
|
|
|
14,450
|
|
|
39,101
|
|
|
43,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
16,879
|
|
|
17,288
|
|
|
49,847
|
|
|
53,383
|
|
Net
occupancy
|
|
|
2,538
|
|
|
2,728
|
|
|
8,000
|
|
|
8,019
|
|
Furniture
and equipment
|
|
|
1,690
|
|
|
1,684
|
|
|
4,960
|
|
|
5,019
|
|
Data
processing
|
|
|
791
|
|
|
1,010
|
|
|
2,398
|
|
|
2,673
|
|
Marketing
|
|
|
622
|
|
|
407
|
|
|
1,613
|
|
|
1,918
|
|
Communication
|
|
|
601
|
|
|
664
|
|
|
2,155
|
|
|
2,327
|
|
Professional
services
|
|
|
729
|
|
|
964
|
|
|
2,551
|
|
|
3,033
|
|
Other
|
|
|
4,490
|
|
|
3,980
|
|
|
13,805
|
|
|
13,003
|
|
Total
noninterest expenses
|
|
|
28,340
|
|
|
28,725
|
|
|
85,329
|
|
|
89,375
|
|
Income
before income taxes
|
|
|
8,329
|
|
|
12,584
|
|
|
30,910
|
|
|
37,360
|
|
Income
tax expense
|
|
|
2,597
|
|
|
4,211
|
|
|
10,032
|
|
|
12,380
|
|
Net
income
|
|
$
|
5,732
|
|
$
|
8,373
|
|
$
|
20,878
|
|
$
|
24,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic
|
|
$
|
0.15
|
|
$
|
0.22
|
|
$
|
0.56
|
|
$
|
0.64
|
|
Earnings
per share - diluted
|
|
$
|
0.15
|
|
$
|
0.22
|
|
$
|
0.56
|
|
$
|
0.64
|
|
Cash
dividends declared per share
|
|
$
|
0.17
|
|
$
|
0.16
|
|
$
|
0.51
|
|
$
|
0.48
|
|
Average
basic shares outstanding
|
|
|
37,132,864
|
|
|
38,383,228
|
|
|
37,104,793
|
|
|
38,820,545
|
|
Average
diluted shares outstanding
|
|
|
37,504,231
|
|
|
38,383,228
|
|
|
37,487,037
|
|
|
38,825,940
|
|
See
notes
to consolidated financial statements.
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited,
dollars in thousands)
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Operating
activities
|
|
|
|
|
|
Net
income
|
|
$
|
20,878
|
|
$
|
24,980
|
|
Adjustments
to reconcile net cash provided by operating activities
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
8,935
|
|
|
6,012
|
|
Depreciation
and amortization
|
|
|
5,021
|
|
|
6,039
|
|
Stock-based
compensation expense
|
|
|
1,440
|
|
|
845
|
|
Pension
expense
|
|
|
998
|
|
|
2,053
|
|
Net
amortization of premiums and accretion of discounts on investment
securities
|
|
|
115
|
|
|
109
|
|
Gains
on sales of investment securities
|
|
|
(1,585
|
)
|
|
(367
|
)
|
Loss
on trading securities
|
|
|
3,602
|
|
|
0
|
|
Originations
of loans held for sale
|
|
|
(68,568
|
)
|
|
(68,027
|
)
|
Net
gains from sales of loans held for sale
|
|
|
(783
|
)
|
|
(549
|
)
|
Proceeds
from sales of loans held for sale
|
|
|
68,180
|
|
|
76,564
|
|
Deferred
income taxes
|
|
|
(1,205
|
)
|
|
(2,476
|
)
|
Decrease
(increase) in interest receivable
|
|
|
2,605
|
|
|
(3,170
|
)
|
Increase
in cash surrender value of life insurance
|
|
|
(3,043
|
)
|
|
(3,983
|
)
|
Increase in
prepaid expenses
|
|
|
(265
|
)
|
|
(1,886
|
)
|
(Decrease)
increase in accrued expenses
|
|
|
(2,601
|
)
|
|
593
|
|
(Decrease)
increase in interest payable
|
|
|
(2,117
|
)
|
|
1,911
|
|
Other
|
|
|
455
|
|
|
9,397
|
|
Net
cash provided by operating activities
|
|
|
32,062
|
|
|
48,045
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Proceeds
from sales of securities available-for-sale
|
|
|
1,124
|
|
|
392
|
|
Proceeds
from calls, paydowns and maturities of securities
available-for-sale
|
|
|
72,487
|
|
|
41,219
|
|
Purchases
of securities available-for-sale
|
|
|
(197,972
|
)
|
|
(26,346
|
)
|
Proceeds
from calls, paydowns and maturities of securities
held-to-maturity
|
|
|
602
|
|
|
3,162
|
|
Purchases
of securities held-to-maturity
|
|
|
0
|
|
|
(634
|
)
|
Purchases
of FHLB stock
|
|
|
(1,007
|
)
|
|
0
|
|
Net
decrease in federal funds sold
|
|
|
106,990
|
|
|
30,300
|
|
Net increase
in loans and leases
|
|
|
(143,909
|
)
|
|
(123,437
|
)
|
Proceeds
from surrender of life insurance policies
|
|
|
0
|
|
|
10,823
|
|
Proceeds
from disposal of other real estate owned
|
|
|
1,578
|
|
|
1,308
|
|
Purchases
of premises and equipment
|
|
|
(8,095
|
)
|
|
(4,378
|
)
|
Net
cash used in investing activities
|
|
|
(168,202
|
)
|
|
(67,591
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Net
(decrease) increase in total deposits
|
|
|
(182,510
|
)
|
|
51,923
|
|
Net increase
in short-term borrowings
|
|
|
215,206
|
|
|
4,548
|
|
Payments
on long-term borrowings
|
|
|
(8,328
|
)
|
|
(8,445
|
)
|
Proceeds
from long-term borrowings
|
|
|
115,000
|
|
|
0
|
|
Redemption
of junior subordinated debt
|
|
|
0
|
|
|
(10,000
|
)
|
Cash
dividends paid
|
|
|
(19,080
|
)
|
|
(18,774
|
)
|
Purchase
of common stock
|
|
|
0
|
|
|
(26,834
|
)
|
Proceeds
from exercise of stock options
|
|
|
0
|
|
|
81
|
|
Excess
tax (liability) benefit on share-based compensation
|
|
|
(31
|
)
|
|
54
|
|
Net
cash provided by (used in) financing activities
|
|
|
120,257
|
|
|
(7,447
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(15,883
|
)
|
|
(26,993
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
106,224
|
|
|
119,407
|
|
Cash
and cash equivalents at end of period
|
|
$
|
90,341
|
|
$
|
92,414
|
|
See
notes
to consolidated financial statements.
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited,
dollars in thousands except per share data)
|
|
|
|
|
|
|
|
Accumulated comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
Common
|
|
Common
|
|
|
|
Unrealized gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Stock
|
|
Retained
|
|
(loss) on AFS
|
|
Pension
|
|
Unrealized gain
|
|
Treasury stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
earnings
|
|
Securities
|
|
Obligation
|
|
on Derivatives
|
|
Shares
|
|
Amount
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
48,558,614
|
|
$
|
392,736
|
|
$
|
71,320
|
|
|
($420
|
)
|
|
($12,955
|
)
|
$
|
0
|
|
|
(9,313,207
|
)
|
|
($165,202
|
)
|
$
|
285,479
|
|
Net
income
|
|
|
|
|
|
|
|
|
24,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,980
|
|
Unrealized
holding losses on securities available-for-sale arising during the
period
|
|
|
|
|
|
|
|
|
|
|
|
(855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(855
|
)
|
Changes
in accumulated unrealized losses for pension and other postretirement
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,661
|
|
|
|
|
|
|
|
|
|
|
|
6,661
|
|
Unrealized
gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
0
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,786
|
|
Cash
dividends declared ($0.48 per share)
|
|
|
|
|
|
|
|
|
(18,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,555
|
)
|
Purchase
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,965,700
|
)
|
|
(26,834
|
)
|
|
(26,834
|
)
|
Tax
benefit on stock option exercise
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Exercise
of stock options, net of shares purchased
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,474
|
|
|
139
|
|
|
81
|
|
Restricted
stock awards, net of forfeitures
|
|
|
|
|
|
(2,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,252
|
|
|
2,069
|
|
|
(153
|
)
|
Share-based
compensation expense
|
|
|
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
845
|
|
Balances
at September 30, 2007
|
|
|
48,558,614
|
|
$
|
391,355
|
|
$
|
77,745
|
|
$
|
(1,275
|
)
|
$
|
(6,294
|
)
|
$
|
0
|
|
|
(11,153,181
|
)
|
$
|
(189,828
|
)
|
$
|
271,703
|
|
See
Notes
to Consolidated Financial Statements.
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited,
dollars in thousands except per share data)
|
|
|
|
|
|
|
|
Accumulated comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
Common
|
|
Common
|
|
|
|
Unrealized gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Stock
|
|
Retained
|
|
(loss) on AFS
|
|
Pension
|
|
Unrealized gain
|
|
Treasury stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
earnings
|
|
Securities
|
|
Obligation
|
|
on Derivatives
|
|
Shares
|
|
Amount
|
|
Total
|
|
Balances
at December 31, 2007
|
|
|
48,558,614
|
|
$
|
391,962
|
|
$
|
82,093
|
|
$
|
328
|
|
$
|
(7,455
|
)
|
$
|
0
|
|
|
(11,190,806
|
)
|
$
|
(190,345
|
)
|
$
|
276,583
|
|
Cumulative
adjustment for accounting changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value option
|
|
|
|
|
|
|
|
|
(750
|
)
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Issue
No. EITF 06-4
|
|
|
|
|
|
|
|
|
(2,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,499
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
20,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,878
|
|
Unrealized
holding losses on securities available-for-sale arising during the
period
|
|
|
|
|
|
|
|
|
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(560
|
)
|
Changes
in accumulated unrealized losses for pension and other postretirement
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
Unrealized
gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373
|
|
|
|
|
|
|
|
|
373
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,970
|
|
Cash
dividends declared ($0.51 per share)
|
|
|
|
|
|
|
|
|
(19,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,090
|
)
|
Purchase
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Tax
liability on stock option exercise
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
Exercise
of stock options, net of shares purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards, net of forfeitures
|
|
|
|
|
|
(2,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,799
|
|
|
1,969
|
|
|
(153
|
)
|
Share-based
compensation expense
|
|
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,440
|
|
Balances
at September 30, 2008
|
|
|
48,558,614
|
|
$
|
391,249
|
|
$
|
80,632
|
|
$
|
518
|
|
$
|
(7,176
|
)
|
$
|
373
|
|
|
(11,082,007
|
)
|
$
|
(188,376
|
)
|
$
|
277,220
|
|
See
Notes
to Consolidated Financial Statements.
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(Unaudited)
The
consolidated financial statements for interim periods are unaudited; however,
in
the opinion of the management of First Financial Bancorp. (First Financial),
all
material 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 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 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, 2007. 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.
The
Consolidated Balance Sheet as of December 31, 2007, has been derived from the
audited financial statements in the company’s 2007 Form 10-K.
NOTE
2: RECENTLY
ADOPTED AND ISSUED ACCOUNTING STANDARDS
Effective
January 1, 2008, First Financial adopted FASB Statement No. 157 (SFAS No.
157), “Fair Value Measurements.” This statement defines fair value, establishes
a framework for measuring fair value in U.S. generally accepted accounting
principles, and expands disclosures about fair value measurements. Fair value
is
defined under SFAS No. 157, from the point of view of the transferor, as the
price that would be received to sell an asset or paid to transfer a liability
in
an orderly transaction between market participants in the principal or most
advantageous market for the asset or liability at the measurement date. For
further detail on SFAS No. 157, see Note 11 – Fair Value
Disclosures.
Effective
January 1, 2008, First Financial adopted FASB 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 applied the fair value option to its equity securities of
government sponsored entities, specifically 200,000 Federal Home Loan Mortgage
Corporation perpetual preferred series V shares, and these securities are
classified as trading investment securities at September 30, 2008, in the
Consolidated Balance Sheets. In connection with First Financial’s adoption of
SFAS No. 159 effective January 1, 2008, a $0.8 million unrealized loss, net
of
related deferred taxes, was reclassified from accumulated other comprehensive
income (loss) to beginning retained earnings as part of a cumulative-effect
adjustment. There was no impact on total shareholders’ equity upon adoption. For
further detail on SFAS No. 159, see Note 11 – Fair Value
Disclosures.
Effective
January 1, 2008, First Financial adopted EITF Issue No 06-4, “Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Split-Dollar Life
Insurance Arrangements.” EITF Issue No. 06-4 applies
to split-dollar life insurance arrangements whose benefits continue into the
employees’ retirement. First Financial recorded the $2.5 million transition
impact of this EITF as a reduction of opening retained earnings as part of
a
cumulative-effect adjustment and an increase in accrued interest and other
liabilities in the Consolidated Balance Sheets, reflective of the ongoing cost
of insurance for the pool of retirees.
Effective
January 1, 2008, First Financial adopted EITF Issue No. 06-11,
“Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.”
EITF Issue No. 06-11 requires companies to recognize in shareholders’ equity the
tax benefit of dividends paid on unvested share-based payments, consistent
with
First Financial’s historical accounting. When the related award is forfeited or
is no longer expected to vest (i.e. due to a performance condition not
anticipated to be met), Issue No. 06-11 requires companies to record the
dividend payment as salary and benefits expense and the related tax impact
as a
tax benefit in the income statement. The adoption of EITF Issue No. 06-11 did
not have a material impact on First Financial.
Effective
January 1, 2008, First Financial adopted
FSP 39-1, “Amendment of FASB Interpretation No. 39, Offsetting of
Amounts Related to Certain Contracts.” FSP 39-1 permits entities to offset
fair value amounts recognized for multiple derivative instruments executed
with
the same counterparty under a master netting agreement. FSP 39-1 clarifies
that the fair value amounts recognized for the right to reclaim cash collateral,
or the obligation to return cash collateral, arising from the same master
netting arrangement, should also be offset against the fair value of the related
derivative instruments. First Financial adopted a net presentation for
derivative positions and related collateral entered into under master netting
agreements pursuant to the guidance in FSP 39-1. The adoption of FSP 39-1
resulted in balance sheet reclassifications of certain cash collateral-based
short-term investments against the related derivative liabilities. The effects
of these reclassifications will fluctuate in the future based on the fair values
of the derivative contracts, but overall are not expected to have a material
impact on either total assets or total liabilities.
In
December of 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” This
statement will significantly change how business acquisitions are accounted
for,
continuing the transition to fair value measurement, and will impact financial
statements both on the acquisition date and in subsequent periods. This
statement requires the acquirer to recognize assets acquired, liabilities
assumed, and any noncontrolling interest in the acquiree at their respective
fair values as of the acquisition date. SFAS No. 141(R) changes the treatment
of
acquisition-related costs, restructuring costs related to an acquisition that
the acquirer expects but is not obligated to incur, contingent consideration
associated with the purchase price, and preacquisition contingencies associated
with acquired assets and liabilities. In addition, SFAS No. 141(R) requires
enhanced disclosures to enable users of the financial statements to evaluate
the
nature and financial effects of the business combination. SFAS No. 141(R) is
effective for years beginning after December 15, 2008, and is required to be
applied prospectively to future business combinations. Early adoption is not
permitted.
In
December of 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Financial Statements.” This statement will change the accounting and reporting
for minority interests, which will be recharacterized as noncontrolling
interests and classified as a component of shareholders’ equity. SFAS No. 160 is
effective for years beginning after December 15, 2008, and requires retroactive
adoption of the presentation and disclosure requirements for existing
consolidated minority interests. All other requirements of SFAS No. 160 are
required to be applied prospectively, with early adoption not permitted. First
Financial has no existing consolidated minority interests and management does
not anticipate this will occur in the future; therefore, SFAS No. 160 is not
anticipated to have an impact on First Financial.
In
March
of 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities.” The new standard is intended to help investors better
understand how derivative instruments and hedging activities impact an entity’s
financial condition, financial performance, and cash flows through enhanced
disclosure requirements. SFAS No. 161 is effective for financial statements
issued for years and interim periods beginning after November 15, 2008, with
early application
encouraged.
First Financial is currently evaluating the enhanced disclosure requirements
and
their impact on the Consolidated Financial Statements.
NOTE
3: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In
the
normal course of business, First Financial offers a variety of financial
instruments with off-balance-sheet risk to its clients to aid them in meeting
their requirements for liquidity and credit enhancement. These financial
instruments include standby letters of credit and commitments outstanding to
extend credit. U.S. generally accepted accounting principles do not require
these financial instruments to be recorded in the Consolidated Balance Sheets,
Consolidated Statements of Earnings, Consolidated Statements of Changes in
Shareholders’ Equity, and Consolidated Statements of Cash Flows. Following is a
discussion of these transactions.
First
Financial’s exposure to credit loss from commitments outstanding to extend
credit, and in the event of nonperformance by the other party to the financial
instrument for standby letters of credit, is represented by the contractual
amounts of those instruments. First Financial uses the same credit policies
in
making commitments and conditional obligations as it does for on-balance-sheet
instruments.
Loan
commitments – Commitments to extend credit are agreements to lend to a
client 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. 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 $754.7
million and $728.5 million at September 30, 2008, and December 31, 2007,
respectively. Management does not anticipate any material losses as a result
of
these commitments.
Standby
letters of credit – These transactions 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 to produce the contracted good or service to a third party.
First Financial has issued standby letters of credit aggregating $24.0 million
and $25.2 million at September 30, 2008, and December 31, 2007,
respectively.
Management
conducts regular reviews of these instruments on an individual client basis.
Management does not anticipate any material losses as a result of these letters
of credit.
NOTE
4: INVESTMENTS
The
following is a summary of held-to-maturity and available-for-sale investment
securities as of September 30, 2008 (dollars in $000’s):
|
|
Held-to-Maturity
|
|
Available-for-Sale
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Market
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Market
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Securities
of U.S. government agencies and corporations
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
64,962
|
|
$
|
790
|
|
$
|
0
|
|
$
|
65,752
|
|
Mortgage-backed
securities
|
|
|
204
|
|
|
0
|
|
|
(1
|
)
|
|
203
|
|
|
382,699
|
|
|
1,613
|
|
|
(1,829
|
)
|
|
382,483
|
|
Obligations
of state and other political subdivisions
|
|
|
4,833
|
|
|
195
|
|
|
(1
|
)
|
|
5,027
|
|
|
39,486
|
|
|
453
|
|
|
(101
|
)
|
|
39,838
|
|
Other
securities
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
4,593
|
|
|
126
|
|
|
(238
|
)
|
|
4,481
|
|
Total
|
|
$
|
5,037
|
|
$
|
195
|
|
$
|
(2
|
)
|
$
|
5,230
|
|
$
|
491,740
|
|
$
|
2,982
|
|
$
|
(2,168
|
)
|
$
|
492,554
|
|
The
following is a summary of held-to-maturity and available-for-sale investment
securities as of December 31, 2007 (dollars in $000’s):
|
|
Held-to-Maturity
|
|
Available-for-Sale
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Market
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Market
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Securities
of U.S. government agencies and corporations
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
85,124
|
|
$
|
705
|
|
$
|
(39
|
)
|
$
|
85,790
|
|
Mortgage-backed
securities
|
|
|
274
|
|
|
2
|
|
|
(1
|
)
|
|
275
|
|
|
151,753
|
|
|
1,219
|
|
|
(1,198
|
)
|
|
151,774
|
|
Obligations
of state and other political subdivisions
|
|
|
5,365
|
|
|
183
|
|
|
(9
|
)
|
|
5,539
|
|
|
59,475
|
|
|
925
|
|
|
(39
|
)
|
|
60,361
|
|
Other
securities
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
10,060
|
|
|
222
|
|
|
(1,279
|
)
|
|
9,003
|
|
Total
|
|
$
|
5,639
|
|
$
|
185
|
|
$
|
(10
|
)
|
$
|
5,814
|
|
$
|
306,412
|
|
$
|
3,071
|
|
$
|
(2,555
|
)
|
$
|
306,928
|
|
Unrealized
losses on debt securities are generally due to higher current market yields
relative to the yields of the debt securities at their amortized cost.
Unrealized losses due to credit risk associated with the underlying collateral
of the debt security, if any, are not material. First Financial has the intent
and ability to hold all debt security issues temporarily impaired until maturity
or recovery of book value. 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.
First
Financial had trading securities with a fair value of $0.2 million at September
30, 2008, $0 at December 31, 2007, and September 30, 2007. For further detail
on
the fair value of investment securities, see Note 11 – Fair Value
Disclosures.
NOTE
5: DERIVATIVES
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.
First Financial does not use derivatives for speculative purposes and currently
does not have any derivatives that are not designated as hedges.
While
authorized to use a variety of derivative products, First Financial primarily
utilizes interest rate swaps as a means to offer borrowers products that meet
their needs and may from time to time utilize interest rate swaps to manage
the
macro interest rate risk profile of the company. These agreements
establish
the basis on which interest rate payments are exchanged with counterparties
and
are referred to as the notional amount. As only interest rate payments are
exchanged, cash requirements and credit risk are significantly less than the
notional amount and the company’s credit risk exposure is limited to the market
value of the instrument.
First
Financial manages this market value credit risk through counterparty credit
policies. These policies require the company to maintain a total derivative
notional position of less than 10 percent of assets, total credit exposure
of
less than 3 percent of capital, and no single counterparty credit risk exposure
greater than $20 million. The company is currently well below all single
counterparty and portfolio limits. At September 30, 2008, the company had a
total notional amount outstanding of approximately $181.4 million, spread among
seven counterparties, with a gross credit risk exposure from these contracts
of
$0.4 million.
The
accounting for changes in the fair value of derivatives depends on the intended
use of the derivative and the resulting designation. Derivatives used to hedge
the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, such as interest rate risk, are
considered fair
value hedges. Derivatives used to hedge the exposure to variability in expected
future cash flows, or other types of forecasted transactions, are considered
cash flow hedges.
Fair
Value Hedges
- First
Financial utilizes interest rate swaps as a means to offer commercial borrowers
products that meet their needs, but are also designed to achieve First
Financial’s desired interest rate risk profile at the time. 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 considered effective
in hedging the change in fair value of the hedged item are recognized
immediately in income.
Cash
Flow Hedges –
During the third quarter of 2008, First Financial executed a prime interest
rate
swap to hedge against interest rate volatility on $50.0 million of prime-based,
floating rate loans. The prime interest rate swap involves the receipt of
fixed-rate interest amounts in exchange for variable-rate interest payments over
the life of the agreement without exchange of the underlying notional amount.
First Financial’s objective in using this derivative is to add stability to
interest income and to manage its exposure to interest rate risk. The net
interest receivable or payable on the prime interest rate swap is accrued and
recognized as an adjustment to interest income or interest expense. The fair
value of the prime interest rate swap is included within accrued interest and
other assets on the Consolidated Balance Sheets. Changes in the fair value
of
the prime interest rate swap are included in accumulated comprehensive income
(loss) on the Consolidated Balance Sheets. Derivative gains and losses not
considered effective in hedging the cash flows related to these loans, if any,
would be recognized immediately in income.
The
following table summarizes the derivative financial instruments utilized by
First Financial and their balances (dollars in $000’s):
|
|
September 30, 2008
|
|
December 31, 2007
|
|
September 30, 2007
|
|
|
|
Notional
|
|
Estimated
Fair Value
|
|
Notional
|
|
Estimated
Fair Value
|
|
Notional
|
|
Estimated
Fair Value
|
|
|
|
Amount
|
|
Gain
|
|
(Loss)
|
|
Amount
|
|
Gain
|
|
(Loss)
|
|
Amount
|
|
Gain
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay
fixed interest rate swaps
|
|
$
|
24,923
|
|
$
|
19
|
|
$
|
(997
|
)
|
$
|
28,903
|
|
$
|
79
|
|
$
|
(866
|
)
|
$
|
29,126
|
|
$
|
384
|
|
$
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow Hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
swap
|
|
|
50,000
|
|
|
373
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matched
Client Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client
interest rate swaps with bank
|
|
|
106,466
|
|
|
4,110
|
|
|
(32
|
)
|
|
51,480
|
|
|
2,702
|
|
|
0
|
|
|
38,590
|
|
|
1,052
|
|
|
0
|
|
Bank
interest rate swaps with counterparty
|
|
|
106,466
|
|
|
32
|
|
|
(4,110
|
)
|
|
51,480
|
|
|
0
|
|
|
(2,702
|
)
|
|
38,590
|
|
|
0
|
|
|
(1,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
287,855
|
|
$
|
4,534
|
|
$
|
(5,139
|
)
|
$
|
131,863
|
|
$
|
2,781
|
|
$
|
(3,568
|
)
|
$
|
106,306
|
|
$
|
1,436
|
|
$
|
(1,308
|
)
|
In
connection with its use of derivative instruments, First Financial from time
to
time is required to post cash collateral with its counterparties to offset
its
market position. Derivative collateral balances were $1.9 million, $0.9 million,
and $0 at September 30, 2008, December 31, 2007, and September 30, 2007,
respectively. First Financial classifies the derivative cash collateral
outstanding with its counterparties as an adjustment to the fair value of the
derivative contracts within accrued interest and other liabilities in the
Consolidated Balance Sheets.
NOTE
6: LONG-TERM DEBT
Long-term
debt on the Consolidated Balance Sheets consists of Federal Home Loan Bank
(FHLB) long-term advances and repurchase agreements utilizing investment
securities as pledged collateral. During the third quarter of 2008, First
Financial executed $115 million of these term debt instruments utilizing a
combination of its funding sources from the pledging of $65.0 million of
investment securities and the $50.0 million borrowing from the FHLB The $115
million of borrowings have multiple maturities between two and three years
and a
weighted average rate of 3.63%. This strategy was primarily executed to reduce
overnight liquidity risk and to mitigate interest rate sensitivity on the
balance sheet. Securities pledged as collateral in conjunction with the
repurchase agreements are included within Investment securities
available-for-sale on the Consolidated Balance Sheets.
NOTE
7: OTHER LONG-TERM DEBT
Other
long-term debt on the Consolidated Balance Sheets consists of junior
subordinated debentures owed to unconsolidated subsidiary trusts. Capital
securities were issued in the third quarter of 2003 by a statutory business
trust, First Financial (OH) Statutory Trust II (Trust II), and in the third
quarter of 2002 by First Financial (OH) Statutory Trust I (Trust
I).
The
debentures issued in 2002 were eligible for early redemption by First Financial
in September of 2007, with a final maturity in 2032. In September of 2007,
First
Financial redeemed all the underlying capital securities relating to Trust
I.
The total outstanding capital securities redeemed were $10.0 million. The
debentures issued in 2003 were eligible for early redemption by First Financial
in September of 2008. First Financial did not elect to redeem early, but under
the terms of the agreement may redeem the securities on any interest payment
date after September of 2008, with a final maturity in 2033.
First
Financial owns 100% of the common equity of the remaining trust, Trust II.
The
trust was 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 the 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. 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. The company has the capacity to issue approximately
$72.1 million in additional qualifying debentures under these
guidelines.
(dollars
in $000’s)
|
|
Amount
|
|
Rate
|
|
Maturity
Date
|
|
First
Financial (OH) Statutory Trust II
|
|
$
|
20,000
|
|
|
5.90
|
%
|
|
9/30/33
|
|
NOTE
8: ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes
in the allowance for loan and lease losses for the previous five quarters are
presented in the table that follows (dollars in $000’s):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
2008
|
|
2007
|
|
Sep. 30,
|
|
|
|
Sep. 30
|
|
June 30
|
|
Mar. 30
|
|
Dec. 31
|
|
Sep. 30
|
|
2008
|
|
2007
|
|
Balance
at beginning of period
|
|
$
|
29,580
|
|
$
|
29,718
|
|
$
|
29,057
|
|
$
|
29,136
|
|
$
|
28,060
|
|
$
|
29,057
|
|
$
|
27,386
|
|
Provision
for loan losses
|
|
|
3,219
|
|
|
2,493
|
|
|
3,223
|
|
|
1,640
|
|
|
2,558
|
|
|
8,935
|
|
|
6,012
|
|
Loans
charged off
|
|
|
(2,936
|
)
|
|
(3,195
|
)
|
|
(3,103
|
)
|
|
(3,042
|
)
|
|
(2,097
|
)
|
|
(9,234
|
)
|
|
(6,380
|
)
|
Recoveries
|
|
|
490
|
|
|
564
|
|
|
541
|
|
|
1,323
|
|
|
615
|
|
|
1,595
|
|
|
2,118
|
|
Balance
at end of period
|
|
$
|
30,353
|
|
$
|
29,580
|
|
$
|
29,718
|
|
$
|
29,057
|
|
$
|
29,136
|
|
$
|
30,353
|
|
$
|
29,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses to total ending loans
|
|
|
1.14
|
%
|
|
1.11
|
%
|
|
1.14
|
%
|
|
1.12
|
%
|
|
1.12
|
%
|
|
1.14
|
%
|
|
1.12
|
%
|
First
Financial’s investment in impaired loans is as follows (dollars in
$000’s):
|
|
As of and for the Quarter Ended
|
|
|
|
2008
|
|
2007
|
|
|
|
Sep. 30
|
|
June 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sep. 30
|
|
Impaired
loans requiring a valuation
|
|
$
|
5,642
|
|
$
|
5,279
|
|
$
|
4,721
|
|
$
|
4,822
|
|
$
|
5,325
|
|
Valuation
allowance
|
|
$
|
2,322
|
|
$
|
2,106
|
|
$
|
2,125
|
|
$
|
2,705
|
|
$
|
2,756
|
|
Average
impaired loans for the period
|
|
$
|
6,072
|
|
$
|
5,502
|
|
$
|
4,939
|
|
$
|
9,755
|
|
$
|
8,921
|
|
For
all
periods presented above, there were no impaired loans that did not require
a
valuation allowance. First Financial recognized interest income on impaired
loans for the nine months and quarter ended September 30, 2008, of $0.3 million
and $0.1 million, compared to $0.3 million and $0.1 million for the
respective
periods in 2007. Interest income is recorded on a cash basis during the period
the loan is considered impaired after recovery of principal is reasonably
assured.
NOTE
9: INCOME TAXES
First
Financial’s effective tax rate for the third quarter of 2008 was 31.2%, compared
to 33.5% for
the
third quarter of 2007. The 2008 year-to-date effective tax rate was 32.5%
compared to 33.1% for 2007.
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. The adoption of FIN 48 had no impact on First Financial’s
financial statements. At September 30, 2008, and December 31, 2007, First
Financial had no FIN 48 unrecognized tax benefits recorded. First Financial
does
not expect the total amount of unrecognized tax benefits to significantly
increase within the next twelve months.
First
Financial recognizes interest and penalties on income tax assessments or income
tax refunds in the Consolidated Financial Statements as a component of
noninterest expense.
First
Financial and its subsidiaries are subject to U.S. federal income tax as well
as
income tax of the state of Indiana. First Financial’s income tax returns are
subject to review and examination by federal, state, and local government
authorities. The calendar years through 2004 have been reviewed and closed
by
the Internal Revenue Service. 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.
NOTE
10: EMPLOYEE BENEFIT PLANS
First
Financial sponsors a non-contributory defined benefit pension plan covering
substantially all employees. First Financial uses a December 31 measurement
date
for its defined benefit pension plan. Effective in the third quarter of 2007,
First Financial amended the defined benefit pension plan formula to change
the
determination of participant benefits from a final average earnings plan to
a
cash balance plan. Pension plan participants prior to July 1, 2007, transitioned
to the amended plan on January 1, 2008. After July 1, 2007, newly eligible
participants entered the amended plan upon their eligibility date. Due to the
funded status of the pension plan, First Financial does not expect to make
any
contributions to its pension plan in 2008.
The
following table sets forth information concerning amounts recognized in First
Financial’s Consolidated Balance Sheets and Consolidated Statements of Earnings
(dollars in $000’s).
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
562
|
|
$
|
881
|
|
$
|
1,679
|
|
$
|
2,582
|
|
Interest
cost
|
|
|
637
|
|
|
686
|
|
|
1,922
|
|
|
2,172
|
|
Expected
return on plan assets
|
|
|
(1,000
|
)
|
|
(1,084
|
)
|
|
(3,049
|
)
|
|
(3,327
|
)
|
Amortization
of transition asset
|
|
|
(9
|
)
|
|
(12
|
)
|
|
(26
|
)
|
|
(36
|
)
|
Amortization
of prior service cost
|
|
|
(105
|
)
|
|
(45
|
)
|
|
(317
|
)
|
|
(20
|
)
|
Amortization
of actuarial loss
|
|
|
308
|
|
|
229
|
|
|
789
|
|
|
682
|
|
Net
periodic benefit cost
|
|
$
|
393
|
|
$
|
655
|
|
$
|
998
|
|
$
|
2,053
|
|
Amounts
recognized in accumulated other comprehensive income (loss):
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss
|
|
$
|
308
|
|
$
|
229
|
|
$
|
789
|
|
$
|
682
|
|
Net
prior service credit
|
|
|
(105
|
)
|
|
(45
|
)
|
|
(317
|
)
|
|
(20
|
)
|
Net
transition asset
|
|
|
(9
|
)
|
|
(12
|
)
|
|
(26
|
)
|
|
(36
|
)
|
Deferred
tax assets
|
|
|
(80
|
)
|
|
(3,698
|
)
|
|
(172
|
)
|
|
(3,864
|
)
|
Prior
service credit
|
|
|
0
|
|
|
7,003
|
|
|
0
|
|
|
7,003
|
|
Settlements
|
|
|
0
|
|
|
2,898
|
|
|
0
|
|
|
2,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$
|
114
|
|
$
|
6,375
|
|
$
|
274
|
|
$
|
6,663
|
|
First
Financial maintained a health care plan for certain retired employees. The
plan
was unfunded and paid medically necessary expenses incurred by retirees, after
subtracting payments by Medicare or other providers and after deductibles had
been met. First Financial had reserved the right to change or eliminate this
benefit plan. In the second quarter of 2008, First Financial communicated to
the
pool of covered retirees that it was changing its postretirement health care
plan. Effective August 1, 2008, First Financial began offering retiree health
care coverage to the existing pool of covered retirees under a fully insured
plan. Covered retirees pay a monthly premium equal to 50% of the total premium
for their health care coverage, and First Financial pays a per participant
monthly gross premium equal to 50% of the total premium. A third party
administers the plan, directly paying all covered retiree medical expenses
after
co-payments and deductibles are met.
The
change in the postretirement health care plan is considered a plan settlement
per FASB Statement No. 106, “Employers' Accounting for Postretirement Benefits
Other Than Pensions” and as such the fully insured plan eliminates the need for
the FAS 106 postretirement benefit liability that was recorded on the balance
sheet. As there was no transition asset or prior service cost for the plan
recorded within accumulated other comprehensive income, in the second quarter
of
2008 First Financial reversed $1.3 million
of the postretirement benefit liability as a reduction of salaries and benefits
expense. First Financial’s portion of the future monthly payment of third party
premiums will be expensed as paid.
NOTE
11: FAIR VALUE DISCLOSURES
First
Financial adopted SFAS No. 157 effective January 1, 2008. This statement defines
fair value, establishes a framework for measuring fair value in U.S. generally
accepted accounting principles, and expands disclosures about fair value
measurements.
First
Financial also adopted SFAS No. 159 effective January 1, 2008. This statement
permits the initial and subsequent measurement of many financial instruments
and
certain other assets and liabilities at fair value on an
instrument-by-instrument, irrevocable basis.
Fair
Value Option
The
following table summarizes the impact on First Financial’s Consolidated Balance
Sheets of adopting the fair value option (FVO) for equity securities of
government sponsored entities, specifically 200,000 Federal Home Loan Mortgage
Corporation perpetual preferred series V shares with an original cost basis
of
$5.0 million. Amounts shown represent the carrying value of the affected
investment security categories before and after the change in accounting
resulting from the adoption of SFAS No. 159 (dollars in $000’s).
|
|
Jan. 1, 2008
Balance Sheet
Prior to
Adoption
|
|
Adoption Impact
|
|
Jan. 1, 2008
Balance Sheet
After Adoption
|
|
|
|
|
|
|
|
|
|
Trading
investment securities
|
|
$
|
0
|
|
$
|
3,799
|
|
$
|
3,799
|
|
Available-for-sale
investment securities
|
|
|
306,928
|
|
|
(3,799
|
)
|
|
303,129
|
|
Accumulated
comprehensive income (loss)
|
|
|
(7,127
|
)
|
|
750
|
|
|
(6,377
|
)
|
Cumulative
effect of adoption of the FVO – charge to retained earnings
(1)
|
|
|
|
|
$
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings
|
|
$
|
82,093
|
|
|
($750
|
)
|
$
|
81,343
|
|
(1)
The
adoption of SFAS No. 159 had no overall tax impact due to the transfer of the
unrealized loss from accumulated other comprehensive income (loss) to retained
earnings, within shareholders’ equity.
Prior
to
the election of the FVO effective January 1, 2008, First Financial’s equity
securities of government sponsored entities totaled $3.8 million and were
classified as investment securities available-for-sale. An unrealized loss
of
$0.8 million, net of taxes of $0.4 million, as of December 31, 2007, was
included as a component of accumulated other comprehensive income (loss). In
connection with First Financial’s adoption of SFAS No. 159 effective January 1,
2008, the $0.8 million unrealized loss was reclassified from accumulated other
comprehensive income (loss) to beginning retained earnings as part of a
cumulative-effect adjustment. There was no impact on total shareholders’ equity
upon adoption. The equity securities of government sponsored entities are
included as trading investment securities on First Financial’s Consolidated
Balance Sheets effective January 1, 2008.
At
September 30, 2008, the fair value of the equity securities of government
sponsored entities for which the FVO was elected was $0.2 million, a decrease
of
approximately $3.6 million from the fair value of the equity securities at
January 1, 2008. Since January 1, 2008, changes in market value for the equity
securities of government sponsored entities for which the FVO was elected have
been recorded in other noninterest income.
Future
changes will be recorded similarly. Dividends received on these securities
in
the first half of 2008 were included in tax-exempt investment security interest
income. Dividends are not expected in the future. There were no purchases or
sales of similar investment securities in during 2008.
Fair
Value Measurement
The
SFAS
No. 157 fair value framework includes a hierarchy which focuses on prioritizing
the inputs used in valuation techniques. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or
liabilities (Level 1), a lower priority to observable inputs other than quoted
prices in active markets for identical assets and liabilities (Level 2), and
the
lowest priority to unobservable inputs (Level 3). When determining the fair
value measurements for assets and liabilities, First Financial looks to active
markets to price identical assets or liabilities whenever possible and
classifies such items in Level 1. When identical assets and liabilities are
not
traded in active markets, First Financial looks to market observable data for
similar assets and liabilities and classifies such items as Level 2. Certain
assets and liabilities are not actively traded in observable markets and First
Financial must use alternative techniques, based on unobservable inputs, to
determine the fair value and classifies such items as Level 3. The level within
the fair value hierarchy is based on the lowest level of input that is
significant in the fair value measurement.
The
following describes the valuation techniques used by First Financial to measure
different financial assets and liabilities at fair value in the financial
statements.
Investment
securities –
Investment securities classified as trading and available-for-sale are recorded
at fair value on a recurring basis. Fair value measurement is based upon quoted
market prices, when available (Level 1). If quoted market prices are not
available, fair values are measured utilizing
independent
valuation techniques of identical or similar investment securities. Third party
vendors compile prices from various sources and may apply such techniques as
matrix pricing to determine the value of identical or similar investment
securities (Level 2). Matrix pricing is a mathematical technique widely used
in
the banking industry to value investment securities without relying exclusively
on quoted prices for the specific investment securities but rather relying
on
the investment securities’ relationship to other benchmark quoted investment
securities. Any investment securities not valued based upon the methods above
are considered Level 3.
Loans
held for sale –
Loans held for sale are carried at the lower of cost or market value. These
loans currently consist of one-to-four family residential real estate loans
originated for sale to a strategic partner. Fair value is based on the
contractual price to be received from our strategic partner, which is not
materially different than cost due to the short duration between origination
and
sale (Level 2). As such, First Financial records any fair value adjustments
on a
nonrecurring basis. Gains and losses on the sale of loans are recorded as net
gains from sales of loans within noninterest income in the Consolidated
Statements of Income.
Derivatives –
First Financial utilizes interest rate swaps as a means to offer commercial
borrowers products that meet their needs and also to achieve First Financial’s
desired interest rate risk profile at the time. The net interest receivable
or
payable is accrued and recognized as an adjustment to the interest income or
interest expense of the hedged item. First Financial utilizes third-party
vendors for derivative valuation purposes. These vendors determine the
appropriate fair value based on a net present value calculation of the cash
flows related to the interest rate swaps using primarily observable market
inputs such as interest rate yield curves. The discounted net present value
calculated represents the cost to terminate the swap if First Financial should
choose to do so on the applicable measurement date (Level 2).
Allowance
for loan and lease losses –
Loans are designated as impaired when, in the judgment of management based
on
current information and events, it is probable that all amounts due according
to
the contractual terms of the loan agreement will not be collected. Impaired
loans are valued at the lower of cost or market for purposes of determining
the
appropriate amount of impairment to be allocated to the allowance for loan
and
lease losses. Market value is measured based on the value of the collateral
securing the loans. Collateral may be in the form of real estate or business
assets including equipment, inventory, and accounts receivable. The vast
majority of the collateral is real estate. The value of real estate collateral
is determined utilizing an income or market valuation approach based on an
appraisal conducted by an independent, licensed appraiser outside of the company
(Level 2). The value of business equipment is based upon an outside appraisal
if
deemed significant, or the net book value on the
applicable borrower financial statements if not considered significant.
Likewise, values for inventory and accounts receivable collateral are based
on
borrower financial statement balances or aging reports (Level 3). Impaired
loans
allocated to the allowance for loan and lease losses are measured at fair value
on a nonrecurring basis. Any fair value adjustments are recorded in the period
incurred as provision for loan and lease losses on the Consolidated Statements
of Income.
The
following table summarizes the financial assets and liabilities measured at
fair
value on a recurring basis at September 30, 2008 (dollars in
$000’s):
|
|
Fair Value Measurements Using
|
|
Netting
|
|
Assets/Liabilities at
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adjustments (1)
|
|
Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
investment securities (2)
|
|
$
|
198
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
198
|
|
Derivatives
|
|
|
0
|
|
|
4,534
|
|
|
0
|
|
|
(4,142
|
)
|
|
392
|
|
Available-for-sale
investment securities
|
|
|
190
|
|
|
492,364
|
|
|
0
|
|
|
0
|
|
|
492,554
|
|
Total
|
|
$
|
388
|
|
$
|
496,898
|
|
$
|
0
|
|
$
|
(4,142
|
)
|
$
|
493,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
0
|
|
$
|
5,139
|
|
$
|
0
|
|
$
|
(4,142
|
)
|
$
|
997
|
|
(1)
Amounts
represent the impact of legally enforceable master netting arrangements that
allow First Financial to settle positive and negative positions and also cash
collateral held with the same counterparties.
(2)
Amount
represents an item for which First Financial elected the fair value option
under
SFAS No. 159.
Certain
financial assets and liabilities are measured at fair value on a nonrecurring
basis. Adjustments to the fair market value of these assets usually result
from
the application of lower-of-cost-or-market accounting or write-downs of
individual assets. The following table summarizes financial assets and
liabilities measured at fair value on a nonrecurring basis at September 30,
2008
(dollars in $000’s):
|
|
Fair
Value Measurements Using
|
|
Year-to-Date
Gains
(Losses)
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$
|
0
|
|
$
|
2,437
|
|
$
|
0
|
|
$
|
0
|
|
Impaired
loans
(1)
|
|
|
0
|
|
|
2,821
|
|
|
82
|
|
|
0
|
|
(1)
Amounts
represent the fair value of collateral for impaired loans allocated to the
allowance for loan and lease losses.
ITEM
2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
(Unaudited)
SUMMARY
MARKET
STRATEGY
First
Financial serves a combination of metropolitan and non-metropolitan markets
in
Ohio, Indiana, and Kentucky through its full-service banking centers. Market
selection is based upon a number of factors, but markets are primarily chosen
for their potential for growth and long-term profitability. First Financial’s
goal is to develop a competitive advantage through a local market focus;
building long-term relationships with clients and helping them reach greater
levels of success in their financial life. To help achieve its goals of superior
service to an increasing number of clients, First Financial opened two new
banking centers in its metropolitan markets in 2007. First Financial has future
expansion opportunities in Ohio, Indiana, and Kentucky, including expansion
opportunities with properties previously acquired. First Financial announced
in
December of 2007 its plans to open a new market headquarters in the third
quarter of 2008 for its Dayton-Middletown metropolitan market and began
construction on that location during the first quarter of 2008. This location
is
now complete and opened early in the fourth quarter of 2008. First Financial
intends to concentrate future growth plans and capital investments in its
metropolitan markets and during the second quarter of 2008 began construction
on
a new location in Crown Point, Indiana. In the third quarter of 2008,
construction began on a new location in Cincinnati, Ohio, and a commercial
lending office was opened in Indianapolis, Indiana. Smaller markets have
historically provided stable, low-cost funding sources to First Financial and
they remain an important part of First Financial’s funding base. First Financial
believes its historical strength in these markets should enable it to retain
or
improve its market share.
As
a key
component to executing its market strategy, in the first quarter of 2008, First
Financial’s corporate headquarters was relocated to its existing Cincinnati
market offices. The bank subsidiary remains headquartered in Hamilton,
Ohio.
First
Financial continues to focus on the execution of its strategic initiatives,
including the identification of core businesses. Some examples of these efforts
include the fourth quarter of 2007 formation of a long-term exclusive marketing
agreement and the sale of the merchant payment processing portfolio, as well
as
the first quarter of 2007 consolidation of seven banking centers and sale of
mortgage servicing rights and problem loans.
First
Financial has 80 offices serving nine distinct markets with an average
banking center deposit size
of
approximately $35 million. 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.
OVERVIEW
OF OPERATIONS
Net
income for the third quarter of 2008 was $5.7 million or $0.15 in diluted
earnings per share versus $8.4 million or $0.22 in diluted earnings per share
for the third quarter of 2007. The $2.6 million decrease in net income was
primarily due to the $3.4 million loss or approximately $0.06 per share related
to the company’s investment in 200,000 Federal Home Loan Mortgage Corporation
(FHLMC) perpetual preferred series V shares. This loss is a result of the
decline in market value of the shares following the September 7, 2008
announcement by the U.S. Treasury, the Federal Reserve, and the Federal Housing
Finance Agency (FHFA), that the FHFA was placing FHLMC under conservatorship
and
would eliminate dividends on its common and preferred stock.
Increased
provision expense for loan and lease losses of $0.7 million and decreased
noninterest income of $0.6 million, excluding the effect of the FHLMC loss,
partially offset by decreased noninterest expense of $0.4 million, makes up
the
remaining $0.4 million decrease in net earnings. Income tax expense decreased
$1.6 million, of which $1.2 million is associated with the FHLMC loss. Compared
to the second
quarter
of 2008 net income of $7.8 million or $0.21 in diluted earnings per share,
third
quarter of 2008 net income decreased $2.1 million primarily due to the $3.4
million loss associated with the FHLMC shares, as well as increased provision
for loan and lease losses of $0.7 million and increased noninterest expense
of
$0.4 million, partially offset by increased net interest income of $1.0 million
and decreased income tax expense of $1.3 million.
Net
income for the first nine months of 2008 was $20.9 million or $0.56 in diluted
earnings per share versus $25.0 million or $0.64 for the first nine months
of
2007. The $4.1 million decrease in net income was primarily due to the FHLMC
loss referred to above of $3.6 million or approximately $0.06 per share,
decreased net interest income of $3.3 million, increased provision expense
for
loan and lease losses of $2.9 million, and decreased noninterest income of
$0.6
million, partially offset by decreased noninterest expense of $4.0 million
and
decreased income tax expense of $2.3 million.
Return
on
average assets for the third quarter of 2008 was 0.66% compared to 1.00% for
the
comparable period in 2007 and 0.93% for the linked-quarter (third quarter of
2008 compared to the second quarter of 2008). Return on average shareholders’
equity for the third quarter of 2008 was 8.24% compared to 12.03% for the
comparable period in 2007 and 11.26% for the linked-quarter.
Return
on
average assets for the first nine months of 2008 was 0.83% compared to 1.01%
for
the comparable period in 2007. Return on average shareholders’ equity was 10.05%
for the first nine months of 2008, versus 11.86% for the comparable period
in
2007.
A
detailed discussion of the first nine months and third quarter of 2008 results
of operations follows.
NET
INTEREST INCOME
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.
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(dollars in $000’s)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net interest income
|
|
$
|
29,410
|
|
$
|
29,417
|
|
$
|
86,073
|
|
$
|
89,421
|
|
Tax equivalent adjustment
|
|
|
424
|
|
|
564
|
|
|
1,448
|
|
|
1,720
|
|
Net
interest income - tax equivalent
|
|
$
|
29,834
|
|
$
|
29,981
|
|
$
|
87,521
|
|
$
|
91,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
earning assets
|
|
$
|
3,180,290
|
|
$
|
3,007,663
|
|
$
|
3,087,925
|
|
$
|
2,996,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin *
|
|
|
3.68
|
%
|
|
3.88
|
%
|
|
3.72
|
%
|
|
3.99
|
%
|
Net
interest margin (fully tax equivalent) *
|
|
|
3.73
|
%
|
|
3.95
|
%
|
|
3.79
|
%
|
|
4.07
|
%
|
*
Margins are calculated using net interest income annualized divided
by
average earning assets.
|
Net
interest income in the third quarter of 2008 was $29.4 million compared to
$29.4
million in the third quarter of 2007. Third quarter of 2008 net interest margin
of 3.68% decreased 20 basis points from 3.88% for the third quarter of 2007.
The
decline in net interest margin is primarily a result of actions by the Federal
Reserve to address deteriorating economic conditions. Specifically, the federal
funds rate has
declined
375 basis points from September 2007 through September 2008, which has led
to a
decline in most market interest rates and negatively impacted the company’s
asset sensitive balance sheet. Earning asset growth in the commercial,
commercial real estate, and construction loan portfolios, as well as in the
investment securities portfolio, has partially offset the effects of the decline
in market interest rates on net interest income.
On
a tax
equivalent basis, the third quarter of 2008 net interest margin of 3.73%
decreased 22 basis points from 3.95% for the third quarter of 2007.
Net
interest income on a linked-quarter basis increased from $28.4 million in the
second quarter of 2008 to $29.4 million in the third quarter of 2008, a $1.0
million or 14.0% annualized increase. The increase in net interest income is
primarily due to 14.5% growth in the investment portfolio over the same time
period, combined with disciplined pricing on deposits, substantially offsetting
the impact on loan yields from the decline in market interest rates. The decline
in the net interest margin reflects a 7 basis point negative impact from the
increase in earning assets related to the growth in the investment portfolio.
On
a tax-equivalent basis, the third quarter of 2008 net interest margin was 3.73%
as compared to 3.78% for the second quarter of 2008.
Year-to-date
net interest income was $86.1 million compared to $89.4 million in 2007, a
$3.3
million or 3.7% decrease. The decline in net interest income and margin is
primarily a result of decreasing market interest rates, offset by loan growth
and growth in the investment portfolio, combined with a shift in deposit
balances from more expensive certificate of deposits to transaction-based
accounts.
On
a
tax-equivalent year-to-date basis, net interest margin was 3.79% in 2008
compared to an 4.07% in 2007.
During
the third quarter of 2008, First Financial entered into a $50 million two-year
interest rate swap that hedges the risk of overall changes in cash flows on
a
designated prime-based loan portfolio. The execution of this receive fixed/pay
floating instrument is consistent with the company’s risk management objective
and strategy to reduce exposure to variability in cash flows relating to its
variable-rate loans. This interest rate swap will effectively fix the company’s
interest rate on $50 million of loan assets at 5.88%.
The
Consolidated Average Balance Sheets and Net Interest Income Analysis that
follows are presented on a GAAP basis (dollars in $000’s).
QUARTERLY
CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
ANALYSIS
|
|
September
30, 2008
|
|
June
30, 2008
|
|
September
30, 2007
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$
|
3,137
|
|
$
|
22
|
|
|
2.79
|
%
|
$
|
4,095
|
|
$
|
40
|
|
|
3.93
|
%
|
$
|
81,669
|
|
$
|
1,048
|
|
|
5.09
|
%
|
Investment
securities
|
|
|
467,524
|
|
|
5,980
|
|
|
5.09
|
%
|
|
422,463
|
|
|
5,179
|
|
|
4.93
|
%
|
|
349,686
|
|
|
4,530
|
|
|
5.14
|
%
|
Loans
(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
|
|
819,199
|
|
|
11,364
|
|
|
5.52
|
%
|
|
805,122
|
|
|
11,302
|
|
|
5.65
|
%
|
|
766,479
|
|
|
15,421
|
|
|
7.98
|
%
|
Real
estate – construction
|
|
|
192,731
|
|
|
2,364
|
|
|
4.88
|
%
|
|
179,078
|
|
|
2,287
|
|
|
5.14
|
%
|
|
139,291
|
|
|
2,693
|
|
|
7.67
|
%
|
Real
estate – commercial
|
|
|
797,143
|
|
|
12,566
|
|
|
6.27
|
%
|
|
747,077
|
|
|
12,059
|
|
|
6.49
|
%
|
|
682,287
|
|
|
11,951
|
|
|
6.95
|
%
|
Real
estate – residential
|
|
|
492,169
|
|
|
6,888
|
|
|
5.57
|
%
|
|
511,871
|
|
|
7,221
|
|
|
5.67
|
%
|
|
567,910
|
|
|
8,022
|
|
|
5.60
|
%
|
Installment
|
|
|
110,933
|
|
|
1,845
|
|
|
6.62
|
%
|
|
121,000
|
|
|
2,012
|
|
|
6.69
|
%
|
|
155,505
|
|
|
2,438
|
|
|
6.22
|
%
|
Home
equity
|
|
|
270,659
|
|
|
3,665
|
|
|
5.39
|
%
|
|
257,954
|
|
|
3,725
|
|
|
5.81
|
%
|
|
239,693
|
|
|
4,864
|
|
|
8.05
|
%
|
Credit
card
|
|
|
26,692
|
|
|
658
|
|
|
9.81
|
%
|
|
26,043
|
|
|
657
|
|
|
10.15
|
%
|
|
24,586
|
|
|
727
|
|
|
11.73
|
%
|
Lease
financing
|
|
|
103
|
|
|
1
|
|
|
3.86
|
%
|
|
182
|
|
|
3
|
|
|
6.63
|
%
|
|
557
|
|
|
9
|
|
|
6.41
|
%
|
Loan
fees
|
|
|
|
|
|
403
|
|
|
|
|
|
|
|
|
380
|
|
|
|
|
|
|
|
|
481
|
|
|
|
|
Total
loans
|
|
|
2,709,629
|
|
|
39,754
|
|
|
5.84
|
%
|
|
2,648,327
|
|
|
39,646
|
|
|
6.02
|
%
|
|
2,576,308
|
|
|
46,606
|
|
|
7.18
|
%
|
Total
earning assets
|
|
|
3,180,290
|
|
|
45,756
|
|
|
5.72
|
%
|
|
3,074,885
|
|
|
44,865
|
|
|
5.87
|
%
|
|
3,007,663
|
|
|
52,184
|
|
|
6.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
89,498
|
|
|
|
|
|
|
|
|
81,329
|
|
|
|
|
|
|
|
|
85,576
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
|
(29,739
|
)
|
|
|
|
|
|
|
|
(29,248
|
)
|
|
|
|
|
|
|
|
(28,278
|
)
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
81,000
|
|
|
|
|
|
|
|
|
78,933
|
|
|
|
|
|
|
|
|
79,102
|
|
|
|
|
|
|
|
Other
assets
|
|
|
155,599
|
|
|
|
|
|
|
|
|
155,750
|
|
|
|
|
|
|
|
|
165,737
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
3,476,648
|
|
|
|
|
|
|
|
$
|
3,361,649
|
|
|
|
|
|
|
|
$
|
3,309,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
|
|
$
|
609,992
|
|
|
1,175
|
|
|
0.77
|
%
|
$
|
590,464
|
|
|
1,089
|
|
|
0.74
|
%
|
$
|
632,890
|
|
|
3,462
|
|
|
2.17
|
%
|
Savings
|
|
|
611,713
|
|
|
1,227
|
|
|
0.80
|
%
|
|
617,029
|
|
|
1,321
|
|
|
0.86
|
%
|
|
586,065
|
|
|
2,932
|
|
|
1.98
|
%
|
Time
|
|
|
1,158,332
|
|
|
11,206
|
|
|
3.85
|
%
|
|
1,193,447
|
|
|
12,225
|
|
|
4.12
|
%
|
|
1,231,875
|
|
|
14,134
|
|
|
4.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
297,053
|
|
|
1,720
|
|
|
2.30
|
%
|
|
194,183
|
|
|
1,130
|
|
|
2.34
|
%
|
|
88,299
|
|
|
1,041
|
|
|
4.68
|
%
|
Long-term
borrowings
|
|
|
97,655
|
|
|
1,018
|
|
|
4.15
|
%
|
|
62,226
|
|
|
686
|
|
|
4.43
|
%
|
|
88,229
|
|
|
1,198
|
|
|
5.39
|
%
|
Total
interest-bearing liabilities
|
|
|
2,774,745
|
|
|
16,346
|
|
|
2.34
|
%
|
|
2,657,349
|
|
|
16,451
|
|
|
2.49
|
%
|
|
2,627,358
|
|
|
22,767
|
|
|
3.44
|
%
|
Noninterest-bearing
liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
|
402,604
|
|
|
|
|
|
|
|
|
394,352
|
|
|
|
|
|
|
|
|
385,653
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
22,705
|
|
|
|
|
|
|
|
|
31,145
|
|
|
|
|
|
|
|
|
20,606
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
276,594
|
|
|
|
|
|
|
|
|
278,803
|
|
|
|
|
|
|
|
|
276,183
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
3,476,648
|
|
|
|
|
|
|
|
$
|
3,361,649
|
|
|
|
|
|
|
|
$
|
3,309,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
29,410
|
|
|
|
|
|
|
|
$
|
28,414
|
|
|
|
|
|
|
|
$
|
29,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
3.38
|
%
|
|
|
|
|
|
|
|
3.38
|
%
|
|
|
|
|
|
|
|
3.44
|
%
|
Contribution
of noninterest-bearing sources of funds
|
|
|
|
|
|
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
0.34
|
%
|
|
|
|
|
|
|
|
0.44
|
%
|
Net
interest margin (2)
|
|
|
|
|
|
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
3.72
|
%
|
|
|
|
|
|
|
|
3.88
|
%
|
|
(1)
Nonaccrual loans and loans held for sale are included in average
balances
for each applicable loan category.
|
|
(2)
Because noninterest-bearing funding sources, demand deposits, other
liabilities, and shareholders’ equity also support earning assets, the net
interest margin exceeds the interest
spread.
|
RATE/VOLUME
ANALYSIS
The
impact of changes in the volume of interest-earning assets and interest-bearing
liabilities and interest rates on net interest income is illustrated in the
following tables (dollars
in $000’s).
|
|
Changes for the Three Months Ended September 30
|
|
|
|
Linked Qtr. Income Variance
|
|
Comparable Qtr. Income Variance
|
|
|
|
Rate
|
|
Volume
|
|
Total
|
|
Rate
|
|
Volume
|
|
Total
|
|
Earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$
|
166
|
|
$
|
635
|
|
$
|
801
|
|
$
|
(57
|
)
|
$
|
1,507
|
|
$
|
1,450
|
|
Federal
funds sold
|
|
|
(12
|
)
|
|
(6
|
)
|
|
(18
|
)
|
|
(475
|
)
|
|
(551
|
)
|
|
(1,026
|
)
|
Gross
loans
(1)
|
|
|
(1,214
|
)
|
|
1,322
|
|
|
108
|
|
|
(8,808
|
)
|
|
1,956
|
|
|
(6,852
|
)
|
Total
earning assets
|
|
|
(1,060
|
)
|
|
1,951
|
|
|
891
|
|
|
(9,340
|
)
|
|
2,912
|
|
|
(6,428
|
)
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing deposits
|
|
$
|
(1,057
|
)
|
$
|
30
|
|
$
|
(1,027
|
)
|
$
|
(6,515
|
)
|
$
|
(405
|
)
|
$
|
(6,920
|
)
|
Borrowed
funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
(18
|
)
|
|
608
|
|
|
590
|
|
|
(530
|
)
|
|
1,209
|
|
|
679
|
|
Federal
Home Loan Bank long-term debt
|
|
|
(6
|
)
|
|
329
|
|
|
323
|
|
|
(1
|
)
|
|
176
|
|
|
175
|
|
Other
long-term debt
|
|
|
6
|
|
|
3
|
|
|
9
|
|
|
(208
|
)
|
|
(147
|
)
|
|
(355
|
)
|
Total
borrowed funds
|
|
|
(18
|
)
|
|
940
|
|
|
922
|
|
|
(739
|
)
|
|
1,238
|
|
|
499
|
|
Total
interest-bearing liabilities
|
|
|
(1,075
|
)
|
|
970
|
|
|
(105
|
)
|
|
(7,254
|
)
|
|
833
|
|
|
(6,421
|
)
|
Net
interest income
(2)
|
|
$
|
15
|
|
$
|
981
|
|
$
|
996
|
|
$
|
(2,086
|
)
|
$
|
2,079
|
|
$
|
(7
|
)
|
(1)
Loans
held for sale and nonaccrual loans are both included in gross
loans.
(2)
Not
tax
equivalent.
|
|
Changes for the Nine Months Ended September 30
|
|
|
|
Year-to-Date Income Variance
|
|
|
|
Rate
|
|
Volume
|
|
Total
|
|
Earning assets
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$
|
(472
|
)
|
$
|
1,940
|
|
$
|
1,468
|
|
Federal
funds sold
|
|
|
(1,378
|
)
|
|
(2,040
|
)
|
|
(3,418
|
)
|
Gross
loans
(1)
|
|
|
(20,319
|
)
|
|
5,479
|
|
|
(14,840
|
)
|
Total
earning assets
|
|
|
(22,169
|
)
|
|
5,379
|
|
|
(16,790
|
)
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing deposits
|
|
$
|
(12,783
|
)
|
$
|
(181
|
)
|
$
|
(12,964
|
)
|
Borrowed
funds
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
(1,379
|
)
|
|
2,000
|
|
|
621
|
|
Federal
Home Loan Bank long-term debt
|
|
|
13
|
|
|
(149
|
)
|
|
(136
|
)
|
Other
long-term debt
|
|
|
(460
|
)
|
|
(503
|
)
|
|
(963
|
)
|
Total
borrowed funds
|
|
|
(1,826
|
)
|
|
1,348
|
|
|
(478
|
)
|
Total
interest-bearing liabilities
|
|
|
(14,609
|
)
|
|
1,167
|
|
|
(13,442
|
)
|
Net
interest income
(2)
|
|
$
|
(7,560
|
)
|
$
|
4,212
|
|
$
|
(3,348
|
)
|
(1)
Loans
held for sale and nonaccrual loans are both included in gross
loans.
(2)
Not tax
equivalent.
NONINTEREST
INCOME
Third
quarter of 2008 noninterest income of $10.5 million declined $4.0 million or
27.5% compared to the third quarter of 2007. This decline is primarily the
result of the previously mentioned FHLMC loss of $3.4 million. The remaining
$0.6 million was due to a $0.4 million gain on sales of investments securities
in the third quarter of 2007, a decrease in third quarter 2008 investment
advisory and trust fees of $0.3 million, offset by $0.2 million increase in
third quarter 2008 gain on loan sales.
On
a
linked-quarter basis, total noninterest income decreased $3.3 million or 23.8%.
Excluding the effect of the FHLMC loss referred to previously, noninterest
income decreased only $0.1 million. Third quarter
2008
service charges on deposits increased $0.4 million from the second quarter
of
2008, offsetting a $0.3 million decline in investment advisory fees and lower
brokerage fees.
Assets
under management by the company’s wealth management division have declined
approximately $100.0 million or 5.0% since June 30, 2007.
Year-to-date
noninterest income was $39.1 million in 2008 compared to $43.3 million in 2007,
a $4.2 million or 9.8% decrease. Noninterest income in the first quarter 2008
included a $1.6 million gain associated with the partial redemption of Visa
Inc.
common shares. Noninterest income in the first quarter 2007 included a $1.1
million gain on the sale of residential mortgage services rights, and a $0.4
million gain on the sale of investment securities. Excluding these items and
the
FHLMC loss of $3.6 million, year-to-date 2008 noninterest income decreased
$0.8
million or 1.9% from the prior year comparable period primarily due to lower
earnings from bank-owned life insurance and service charges on deposits.
NONINTEREST
EXPENSE
Noninterest
expense was $28.3 million in the third quarter 2008 compared to $28.7 million
in
the third quarter 2007, a decrease of $0.4 million or 1.3% primarily due to
a
$0.3 million reduction in pension and retirement related expenses.
On
a
linked-quarter basis, noninterest expense increased $0.4 million or 1.3% to
$28.3 million in the third quarter 2008 from $28.0 million in the second quarter
2008 primarily as a result of a $1.3 million reduction in the liability for
retiree medical benefits recorded in the second quarter of 2008. Excluding
the
effects of the retiree medical benefit liability, noninterest expense decreased
approximately $0.9 million or 3.2%. This decrease is primarily a result of
decreased professional services expenses of $0.3 million and decreased employee
benefits expenses of $0.4 million.
Year-to-date
noninterest expense was $85.3 million in 2008 compared to $89.4 million in
2007,
a $4.1 million or 4.5% decrease. This reduction is primarily the result of
a
$3.5 million decrease in salary and benefits, with an approximate $2.0 million
reduction in base salary expense and $2.3 million reduction in associated
pension and retiree costs, offset by an increase in various incentive agreements
of $0.9 million. The remainder of the decrease is a result of decreased data
processing, professional fees, and marketing costs.
INCOME
TAXES
Income
tax expense was $2.6 million and $4.2 million for the third quarters of 2008
and
2007, respectively. The effective taxes rates for the third quarters of 2008
and
2007 were 31.18% and 33.46%, respectively.
Income
tax expense was $10.0 million and $12.4 million for the nine months ended
September 30, 2008, and 2007, respectively, with a tax benefit
related to securities transactions of $0.6 million and $0.1 million for the
nine
months ended September 30, 2008 and 2007, respectively.
The
effective tax rate for the nine months ended September 30, 2008, and 2007,
was
32.46% and 33.14%, respectively.
ASSETS
The
outlook for growth in commercial lending remains positive as the company expands
its presence in new and existing markets. The recent opening of the Indianapolis
office expands the company’s presence into a new metropolitan market not
previously served. The newly opened business office and retail banking center
in
the Dayton, Ohio suburb of Kettering serves a market where the company has
successfully continued to expand its retail banking and commercial lending
presence over the past several years.
During
late 2005 and early 2006, management made a number of strategic decisions to
realign its balance sheet and change its lending focus. These decisions included
exiting indirect installment lending and no longer holding its residential
real
estate loan originations on the balance sheet. This has resulted in the
cumulative
reduction in indirect installment and residential real estate loan balances
of
$220 million and $234 million, respectively, since that time.
Late
in
the third quarter of 2008, First Financial took steps to further manage the
risk
profile of its balance sheet by securitizing $58.5 million in residential
mortgage loans into agency guaranteed, mortgage-backed securities,
collateralized by those loans. This resulted in a reduction in credit risk
on
the balance sheet and a lower regulatory risk weighting for those assets. The
assets remain on the balance sheet, but are now accounted for as investment
securities available-for-sale rather than residential real estate loans. This
transaction had an immaterial impact on the average loan balances for the third
quarter and year-to-date 2008. This securitization resulted in First Financial
recognizing a servicing asset of approximately $0.3 million related to the
company’s contractual right to service the securitized loans. This
mortgage servicing right will be amortized over the estimated period of net
servicing income, estimated to be sixty months.
Average
total loans during the third quarter of 2008 increased $133.5 million or 5.2%
from the comparable period a year ago. Average commercial, commercial real
estate, and construction loans increased $221.8 million or 14.0% from the third
quarter of 2007.
Average
total loans for the third quarter of 2008 increased $62.3 million or 9.4% on
an
annualized basis, from the second quarter of 2008. Average commercial,
commercial real estate, and construction loans increased $77.8 million or 17.9%
on an annualized basis, from the second quarter of 2008.
Year-to-date
2008 average total loans increased $119.3 million or 4.7% with average
commercial, commercial real estate, and construction loans increasing $223.5
million or 14.8% from the comparable period in 2007.
At
September 30, 2008, First Financial’s shared national credit exposure was
approximately $37.0 million or 1.38% of total loans, and was dispersed among
38
credits. These loans were acquired over the past 24 months and have no single
credit exposure greater than $2.2 million. These loans are held in the loan
portfolio and each has been subjected to the customary commercial loan
underwriting process and is routinely monitored for credit deterioration.
During
the second quarter of 2008, First Financial began to increase the size of its
investment portfolio through the purchase of highly rated agency guaranteed
mortgage-backed securities. This activity continued into the third quarter
of
2008. Approximately $68 million of securities were added during the third
quarter of 2008, bringing the total additions for the year to approximately
$189.5 million. The investment portfolio, as a percentage of total assets,
remains low relative to peers. The company continues to review various portfolio
strategies that may increase the size of its investment portfolio and its
absolute level of earnings while balancing capital and liquidity targets. Among
other factors, the portfolio selection criteria avoids securities backed by
sub-prime assets and also those containing assets that would give rise to
material geographic concentrations. At September 30, 2008, First Financial
held
approximately 72.9% of its available-for-sale securities in mortgage related
instruments, substantially all of which are held in highly rated agency
pass-through residential mortgage instruments.
Securities
available-for-sale were $492.6 million at September 30, 2008, compared with
$307.9 million at September 30, 2007, and $421.7 million at June 30, 2008.
The
combined investment portfolio was 15.17% and 10.43% of total assets at September
30, 2008, and 2007, respectively, and 13.45% of total assets at June 30, 2008.
In
the
first quarter of 2008, First Financial adopted FASB Statement No. 159 (SFAS
No.
159), “The Fair Value Option for Financial Assets and Financial
Liabilities – Including an Amendment of FASB Statement No. 115.” The
company applied the fair value option to its equity securities of government
sponsored entities (“GSE”), specifically 200,000 Federal Home Loan Mortgage
Corporation perpetual preferred series V shares; and these shares are classified
as trading investment securities. Third quarter 2008 financial results included
a $3.4 million loss related to the company’s investment in these
securities. This loss is a result of the decline in market value of the
shares following the September 7, 2008 announcement by the U.S. Treasury, the
Federal Reserve, and the Federal Housing Finance Agency (FHFA), that the FHFA
was placing FHLMC under conservatorship and would eliminate the dividends on
its
common and
preferred
stock. The fair value accounting treatment discussed above will require First
Financial to recognize in its income statement both the market value increases
and decreases in future periods.
DEPOSITS
AND FUNDING
Average
total deposits decreased $53.8 million, or 1.9% from the third quarter of 2007
to the third quarter of 2008. Average total interest-bearing deposits, decreased
$70.8 million or 2.9% for the same period. Average noninterest-bearing deposits
increased $17.0 million or 4.4%. Average transaction account balances increased
$2.8 million, or 0.2%.
On
a
linked quarter basis, average total deposits decreased $12.7 million, or 1.8%
on
an annualized basis. Average total interest-bearing deposits, decreased $20.9
million or 3.5%, on an annualized basis. Average noninterest-bearing deposits
increased $8.3 million or 8.3% on an annualized basis. Average transaction
account balances increased $14.2 million, or 4.7% on an annualized basis.
On
a
year-to-date basis, average total deposits decreased $14.8 million, or 0.5%
from
2007. Average total interest-bearing deposits decreased $9.5 million or 0.4%
and
average noninterest-bearing deposits decreased $5.3 million or 1.3% for the
same
period.
Total
deposit balances, both average and period-end, declined on a linked-quarter
and
year-over-year basis. The declines in average total interest-bearing deposits
were primarily due to the planned runoff of public funds and wholesale deposits,
which in the third quarter of 2008, declined by approximately $31.0 million
from
the third quarter of 2007.
For
most
of this year, First Financial has maintained a strategy of rational deposit
pricing aimed at stabilizing the net interest margin in a very competitive
landscape. The strategy has been successful as outflows of deposits have been
replaced with less expensive wholesale instruments that were used to help fund
asset generation. While the company has experienced balance outflow in the
public funds and wholesale categories due to this decision, it has not seen
net
inflows in period-end and average noninterest-bearing deposits on a
year-over-year basis. Growth in transaction accounts has been offset by the
runoff of public funds and wholesale deposits as a result of the decision to
maintain rational deposit pricing.
At
the
end of the third quarter of 2008, First Financial instituted pricing initiatives
designed to retain and grow retail deposits, as well as to mitigate interest
rate sensitivity. Some of the new initiatives included extending CD offerings
with maturities of one year and beyond, and offering rate-competitive core
deposit products in an effort to more appropriately manage the company’s overall
asset/liability position.
As
a
result of increasing the size of the investment portfolio over the past several
quarters, continued strong loan demand, and the net deposit outflows recently
experienced, during the third quarter First Financial executed $115 million
of
term debt instruments during the third quarter of 2008. Utilizing a combination
of its funding sources from the pledging of investment securities and the
Federal Home Loan Bank (FHLB), this funding has multiple maturities between
two
and three years, and a weighted average cost of 3.63%. This strategy was
primarily executed to reduce overnight liquidity risk and to mitigate interest
rate sensitivity on the balance sheet.
ALLOWANCE
FOR LOAN AND LEASE LOSSES
Management
maintains the allowance at a level that is considered sufficient to absorb
inherent risks in the loan portfolio. Management’s evaluation in establishing
the adequacy of the allowance includes evaluation of the loan and lease
portfolios, historical loan and lease 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, economic conditions,
and other pertinent factors, such as periodic internal and external evaluations
of delinquent, nonaccrual, and classified loans. The evaluation is inherently
subjective as it requires utilizing material estimates, including the amounts
and timing of future cash flows expected to be received on impaired loans.
The
evaluation of these factors is the responsibility of the Allowance for Loan
and
Lease
Losses
Committee, which is comprised of senior officers from the risk management,
credit administration, finance, and lending areas.
First
Financial’s credit quality continues to be favorably impacted by the 2005
decision to shift away from certain consumer-based lending, including the
decision to discontinue the origination of residential real estate loans for
retention on the balance sheet. In early 2007, the company sold the servicing
of
the remaining residential real estate portfolio and established an agreement
to
sell substantially all of future originations to a strategic partner. As a
result of these decisions, the residential real estate and indirect installment
loan portfolios have declined $234.2 million and $220.0 million, respectively,
excluding the impact of loan sales, since that time. It is also important to
note that First Financial has never participated in high risk mortgage lending,
including originating sub-prime residential real estate loans.
First
Financial’s credit trends have remained relatively consistent over the past five
quarters. Total nonperforming assets as a percent of total assets have ranged
from a low of 0.51% to a high of 0.55%, and annualized net charge-offs as a
percent of average loans and leases have been within the expected range, with
a
low of 0.23% to a high of 0.40%. At the end of the third quarter of 2008, total
nonperforming assets were $18.6 million, a decrease of $0.5 million from the
end
of the second quarter of 2008. Compared to the end of the second quarter of
2008, the ratio of nonperforming loans to total loans decreased 4 basis points
to 53 basis points at the end of the third quarter of 2008, and the ratio of
nonperforming assets to period-end loans, plus other real estate owned,
decreased 1 basis point to 70 basis points at the end of the third quarter
of
2008.
Delinquency
trends have also remained relatively stable over the past five quarters with
total loans 30 to 89 days past due, at September 30, 2008, of $22.3 million
or
0.84% of period end loans, consistent with $22.1 million or 0.83% at June 30,
2008. Management closely monitors these trends and ratios and considers the
current level of delinquent loans consistent with expectations of the total
loan
portfolio’s behavior.
First
Financial’s allowance for loan and lease losses was $30.4 million at September
30, 2008 compared to $29.6 million at June 30, 2008, and $29.1 million at
September 30, 2007. The allowance for loan and lease losses at September 30,
2008, was 3.1 times the third quarter annualized net charge-offs. The allowance
for loan and lease losses to period-end loans ratio was 1.14% as of September
30, 2008, compared to the September 30, 2007, and June 30, 2008, ratios of
1.11%
and 1.12%, respectively. Overall credit coverage ratios remain strong at
September 30, 2008, with the allowance for loan and lease losses as a percent
of
nonaccrual loans and as a percent of nonperforming loans at 219.47% and 216.22%,
respectively. The allowance for loan and lease losses to period-end loans ratio
is based on our estimate of potential losses inherent in the loan portfolio
in
today’s economic environment. A large percentage of nonperforming loans are
secured by real estate, and this collateral has been appropriately considered
in
establishing the allowance for loan and lease losses.
At
September 30, 2008, the commercial real estate and real estate construction
loan
portfolio totaled $1.0 billion, or 38.3% of total loans, including $152.5
million or 5.7% of total loans for commercial real estate construction, and
$51.3 million or 1.9% of total loans for residential construction, land
acquisition, and development. First Financial closely monitors the status of
all
residential construction and land development projects and works proactively
with borrowers throughout all stages of the lending relationship. At September
30, 2008, there were no residential construction or land development loans
in
the nonperforming loan category. The company believes its internal lending
policies, comprehensive underwriting standards, aggressive monitoring and
frequent communication with borrowers are keys to limiting credit exposure
from
both the residential construction and land acquisition and development segments
in any particular project.
First
Financial continually evaluates the commercial real estate and real estate
construction portfolio for geographic and borrower concentrations, as well
as
loan-to-value coverage.
At
September 20, 2008, First Financial’s shared national credit exposure was
approximately $37 million or 1.38% of total loans, and was dispersed among
38
credits. These loans were acquired over the past 24 months and have no single
credit exposure greater than $2.2 million. These loans are held in the loan
portfolio and each has been subjected to the customary commercial loan
underwriting process and is
routinely
monitored for credit deterioration. As of September 30, 2008, the values and
reserves for these loans were deemed appropriate.
Since
the
third quarter of 2007, First Financial has experienced 12.6% growth in its
total
home equity loan portfolio average balances. While this category of loans has
proven problematic for some in our industry, First Financial believes its
current underwriting criteria coupled with the monitoring of a number of metrics
including credit scores, loan-to-value ratios, line size, and usage, provides
adequate oversight for the growth. The origination methods for our home equity
lending also keep both the credit decision and the documentation under the
control of First Financial associates. The spike in credit losses earlier in
the
year for home equity was attributable to a few large credits that were
originated several years ago, prior to the standardization of our underwriting
guidelines. The remaining portfolio of loans that have a similar profile have
been reviewed and have been appropriately reflected in the third quarter. At
September 30, 2008, approximately 98.8% of the outstanding home equity loans
had
a credit line size of less than $250 thousand and had an average outstanding
balance of $21 thousand. First Financial maintains a strong pricing discipline
for its home equity loan product and does not sacrifice loan quality for
growth.
From
an
industry perspective, home equity lending may continue to experience stress,
as
borrowers remain under pressure in the current economic environment. Over the
past five quarters both the home equity net charge-off ratio and ratio of
nonaccrual home equity loans to total home equity loans have consistently been
below 50 basis points, excluding a few large home equity loan charge-offs in
the
first and second quarters of 2008 that the company believes were unusual in
terms of individual charge-off size. The net charge-off level for home equity
loans returned to its lower historical level in the third quarter of 2008,
and
although the company continues to actively monitor its home equity portfolio,
it
may experience some volatility in future quarters.
In
the
second quarter of 2005, First Financial made the strategic decisions to
discontinue the origination of residential real estate loans for retention
on
its balance sheet and to exit its indirect installment lending. As a result,
the
residential real estate and indirect installment portfolio have declined $234
million and $220 million excluding the impact of the loan sales, since that
time. In the first quarter of 2007, First Financial sold the servicing of its
remaining residential real estate portfolio and established an agreement to
sell
substantially all its future originations to a strategic partner. Prior to
this
decision, First Financial was not a sub-prime lender, and the company does
not
originate sub-prime residential real estate loans in the current
originate-and-sell model.
The
provision for loan and lease losses for the third quarter of 2008 was $3.2
million compared to $2.6 million for the same period in 2007 and $2.5 million
for the linked-quarter. Year-to-date provision for loan and lease losses was
$8.9 million for 2008 and $6.0 million for 2007. The
increase in provision expense over these periods is primarily due to our current
estimate of potential losses inherent in the loan portfolio, primarily driven
by
changes in consumer-based credit.
Third
quarter of 2008 net charge-offs were $2.4 million, an annualized 36 basis points
of average loans, compared to third quarter of 2007 net charge-offs of $1.5
million, an annualized 23 basis points of average loans, and second quarter
of
2008 net charge-offs of $2.6 million, an annualized 40 basis points of average
loans. Year-to-date 2008 net charge-offs were $7.6 million, an annualized 39
basis points of average loans, compared to year-to-date 2007 net charge-offs
of
$4.3 million, an annualized 23 basis points of average loans. Both the first
and
second quarters of 2008 were adversely impacted by a few large home equity
loan
charge-offs totaling approximately 5 basis points for the nine months ended
September 30, 2008.
Overall
credit coverage ratios remained strong at September 30, 2008. The allowance
for
loan and lease losses at September 30, 2008, was 3.1 times third quarter
annualized net charge-offs. The allowance for loan and lease losses as a percent
of period-end loans is based on the estimated potential losses inherent in
the
loan portfolio in today’s economic environment. It is management’s belief that
the $30.4 million allowance for loan and lease losses at September 30, 2008
is
adequate to absorb probable credit losses inherent in its lending portfolio.
A
large percent of nonperforming loans are secured by real estate, and this
collateral has been appropriately considered in establishing the allowance
for
loan and lease losses.
The
table
that follows indicates the activity in the allowance for loan losses for the
quarterly and year-to-date periods presented (dollars
in $000’s).
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
2008
|
|
2007
|
|
Sep. 30,
|
|
|
|
Sep. 30
|
|
June 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sep. 30
|
|
2008
|
|
2007
|
|
ALLOWANCE FOR
LOAN AND LEASE LOSS ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
29,580
|
|
$
|
29,718
|
|
$
|
29,057
|
|
$
|
29,136
|
|
$
|
28,060
|
|
$
|
29,057
|
|
$
|
27,386
|
|
Provision
for loan losses
|
|
|
3,219
|
|
|
2,493
|
|
|
3,223
|
|
|
1,640
|
|
|
2,558
|
|
|
8,935
|
|
|
6,012
|
|
Gross
charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,568
|
|
|
946
|
|
|
545
|
|
|
1,433
|
|
|
1,008
|
|
|
3,059
|
|
|
2,674
|
|
Real
estate - commercial
|
|
|
48
|
|
|
589
|
|
|
806
|
|
|
465
|
|
|
76
|
|
|
1,443
|
|
|
398
|
|
Real
estate - residential
|
|
|
335
|
|
|
227
|
|
|
39
|
|
|
33
|
|
|
49
|
|
|
601
|
|
|
222
|
|
Installment
|
|
|
424
|
|
|
482
|
|
|
564
|
|
|
522
|
|
|
471
|
|
|
1,470
|
|
|
1,816
|
|
Home
equity
|
|
|
135
|
|
|
525
|
|
|
651
|
|
|
285
|
|
|
189
|
|
|
1,311
|
|
|
477
|
|
All
other
|
|
|
426
|
|
|
426
|
|
|
498
|
|
|
304
|
|
|
304
|
|
|
1,350
|
|
|
793
|
|
Total
gross charge-offs
|
|
|
2,936
|
|
|
3,195
|
|
|
3,103
|
|
|
3,042
|
|
|
2,097
|
|
|
9,234
|
|
|
6,380
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
179
|
|
|
166
|
|
|
144
|
|
|
342
|
|
|
145
|
|
|
489
|
|
|
660
|
|
Real
estate - commercial
|
|
|
37
|
|
|
19
|
|
|
3
|
|
|
632
|
|
|
124
|
|
|
59
|
|
|
230
|
|
Real
estate - residential
|
|
|
4
|
|
|
5
|
|
|
11
|
|
|
3
|
|
|
25
|
|
|
20
|
|
|
53
|
|
Installment
|
|
|
225
|
|
|
246
|
|
|
315
|
|
|
242
|
|
|
263
|
|
|
786
|
|
|
897
|
|
Home
equity
|
|
|
0
|
|
|
30
|
|
|
0
|
|
|
19
|
|
|
12
|
|
|
30
|
|
|
113
|
|
All
other
|
|
|
45
|
|
|
98
|
|
|
68
|
|
|
85
|
|
|
46
|
|
|
211
|
|
|
165
|
|
Total
recoveries
|
|
|
490
|
|
|
564
|
|
|
541
|
|
|
1,323
|
|
|
615
|
|
|
1,595
|
|
|
2,118
|
|
Total
net charge-offs
|
|
|
2,446
|
|
|
2,631
|
|
|
2,562
|
|
|
1,719
|
|
|
1,482
|
|
|
7,639
|
|
|
4,262
|
|
Ending
allowance for loan losses
|
|
$
|
30,353
|
|
$
|
29,580
|
|
$
|
29,718
|
|
$
|
29,057
|
|
$
|
29,136
|
|
$
|
30,353
|
|
$
|
29,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
CHARGE-OFFS TO AVERAGE LOANS AND LEASES (ANNUALIZED) |
|
|
|
|
|
|
|
Commercial
|
|
|
0.67
|
%
|
|
0.39
|
%
|
|
0.21
|
%
|
|
0.56
|
%
|
|
0.45
|
%
|
|
0.43
|
%
|
|
0.37
|
%
|
Real
estate - commercial
|
|
|
0.01
|
%
|
|
0.31
|
%
|
|
0.46
|
%
|
|
(0.10
|
)%
|
|
(0.03
|
)%
|
|
0.25
|
%
|
|
0.03
|
%
|
Real
estate - residential
|
|
|
0.27
|
%
|
|
0.18
|
%
|
|
0.02
|
%
|
|
0.02
|
%
|
|
0.02
|
%
|
|
0.15
|
%
|
|
0.04
|
%
|
Installment
|
|
|
0.71
|
%
|
|
0.78
|
%
|
|
0.75
|
%
|
|
0.76
|
%
|
|
0.53
|
%
|
|
0.75
|
%
|
|
0.72
|
%
|
Home
equity
|
|
|
0.20
|
%
|
|
0.77
|
%
|
|
1.04
|
%
|
|
0.43
|
%
|
|
0.29
|
%
|
|
0.66
|
%
|
|
0.21
|
%
|
All
other
|
|
|
0.69
|
%
|
|
0.64
|
%
|
|
0.92
|
%
|
|
0.48
|
%
|
|
0.62
|
%
|
|
0.74
|
%
|
|
0.58
|
%
|
Total
net charge-offs
|
|
|
0.36
|
%
|
|
0.40
|
%
|
|
0.40
|
%
|
|
0.26
|
%
|
|
0.23
|
%
|
|
0.39
|
%
|
|
0.23
|
%
|
While
First Financial’s credit trends have remained relatively consistent over the
past several quarters and the company is well-positioned to handle the
challenging economic environment and avoid many of the troublesome areas facing
the financial services industry, the possibility exists that the company could
experience higher credit costs over the next several quarters.
The
ratio
of nonperforming loans to total loans remained constant at 53 basis points
at
the end of the third quarters of 2007 and 2008. Total nonperforming assets
at
the end of the third quarter of 2008 were $18.6 million, an increase of $1.8
million from the end of the third quarter of 2007 primarily due to a higher
level of nonaccrual residential real estate loans, commercial loans, and other
real estate owned, partially offset by a decline in commercial real estate
loans.
The
ratio
of nonperforming loans to total loans decreased from 57 basis points at the
end
of the second quarter of 2008 to 53 basis points at the end of the third quarter
of 2008, and the ratio of nonperforming assets to period-end loans, plus other
real estate owned, decreased from 71 basis points at the end of the second
quarter of 2008 to 70 basis points at the end of the third quarter of 2008.
Total nonperforming assets on a linked-quarter basis increased $0.5 million
from
the end of the second quarter of 2008.
Accruing
loans, including impaired loans, are transferred to nonaccrual status when,
in
the opinion of management, the collection of principal or interest is doubtful.
This generally occurs when a loan
becomes
90 days past due as to principal or interest unless the loan is both well
secured and in the process of collection.
Other
real estate owned had a net increase of $0.8 million during the third quarter
of
2008 from the second quarter of 2008, primarily as a result of net additions
in
residential real estate.
The
table
that follows shows the categories that are included in nonperforming and
underperforming assets as of September 30, 2008, and the four previous quarters,
as well as related credit quality ratios (dollars
in $000’s).
|
|
Quarter Ended
|
|
|
|
2008
|
|
2007
|
|
|
|
Sep. 30
|
|
June 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sep. 30
|
|
Nonaccrual loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
5,194
|
|
$
|
5,447
|
|
$
|
3,952
|
|
$
|
2,677
|
|
$
|
3,782
|
|
Real
estate - commercial
|
|
|
3,361
|
|
|
3,592
|
|
|
4,415
|
|
|
5,965
|
|
|
5,343
|
|
Real
estate - residential
|
|
|
3,742
|
|
|
4,461
|
|
|
4,529
|
|
|
3,063
|
|
|
2,147
|
|
Installment
|
|
|
417
|
|
|
438
|
|
|
544
|
|
|
734
|
|
|
745
|
|
Home
equity
|
|
|
1,084
|
|
|
866
|
|
|
1,221
|
|
|
1,662
|
|
|
1,117
|
|
All
other
|
|
|
32
|
|
|
8
|
|
|
30
|
|
|
12
|
|
|
8
|
|
Total
nonaccrual loans
|
|
|
13,830
|
|
|
14,812
|
|
|
14,691
|
|
|
14,113
|
|
|
13,142
|
|
Restructured
loans
|
|
|
208
|
|
|
554
|
|
|
562
|
|
|
567
|
|
|
574
|
|
Total
nonperforming loans
|
|
|
14,038
|
|
|
15,366
|
|
|
15,253
|
|
|
14,680
|
|
|
13,716
|
|
Other
real estate owned (OREO)
|
|
|
4,610
|
|
|
3,763
|
|
|
2,368
|
|
|
2,636
|
|
|
3,124
|
|
Total
nonperforming assets
|
|
|
18,648
|
|
|
19,129
|
|
|
17,621
|
|
|
17,316
|
|
|
16,840
|
|
Accruing
loans past due 90 days or more
|
|
|
241
|
|
|
245
|
|
|
372
|
|
|
313
|
|
|
222
|
|
Total
underperforming assets
|
|
$
|
18,889
|
|
$
|
19,374
|
|
$
|
17,993
|
|
$
|
17,629
|
|
$
|
17,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses to
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
|
219.47
|
%
|
|
199.70
|
%
|
|
202.29
|
%
|
|
205.89
|
%
|
|
221.70
|
%
|
Nonperforming
loans
|
|
|
216.22
|
%
|
|
192.50
|
%
|
|
194.83
|
%
|
|
197.94
|
%
|
|
212.42
|
%
|
Total
ending loans
|
|
|
1.14
|
%
|
|
1.11
|
%
|
|
1.14
|
%
|
|
1.12
|
%
|
|
1.12
|
%
|
Nonperforming
loans to total loans
|
|
|
0.53
|
%
|
|
0.57
|
%
|
|
0.58
|
%
|
|
0.56
|
%
|
|
0.53
|
%
|
Nonperforming
assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
loans, plus OREO
|
|
|
0.70
|
%
|
|
0.71
|
%
|
|
0.67
|
%
|
|
0.67
|
%
|
|
0.65
|
%
|
Total
assets
|
|
|
0.53
|
%
|
|
0.55
|
%
|
|
0.53
|
%
|
|
0.51
|
%
|
|
0.51
|
%
|
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
management is the process by which First Financial manages the continuing flow
of funds necessary to meet its financial commitments on a timely basis and
at a
reasonable cost. These funding commitments include withdrawals by depositors,
credit commitments to borrowers, shareholder dividends, expenses of its
operations, and capital expenditures. Liquidity is closely monitored and managed
by First Financial’s Asset and Liability Committee (ALCO), a group of senior
officers from the lending, deposit gathering, finance, risk management, and
treasury areas. It is ALCO’s responsibility to ensure First Financial has the
necessary level of funds available for normal operations as well as maintain
a
contingency funding policy to ensure that liquidity stress events are quickly
identified, and management plans are in place to respond. This is accomplished
through the use of policies which establish limits and require measurements
to
monitor liquidity trends, including management reporting that identifies the
amounts and costs of all available funding sources.
Liquidity
is derived primarily from deposit growth, principal and interest payments on
loans and investment securities, maturing loans and investment securities,
access to wholesale funding sources, and collateralized borrowings. First
Financial’s most stable source of liability-funded liquidity for both the long
and short-term needs is deposit growth and retention of the core deposit base.
The deposit base is diversified among individuals, partnerships, corporations,
public entities, and geographic markets. This diversification helps First
Financial minimize dependence on large concentrations of funding
sources.
Capital
expenditures, such as banking center expansions and technology investments,
were
$8.1 million and $4.4 million for the first nine months of 2008 and 2007,
respectively. Management believes that First Financial has sufficient liquidity
to fund its future capital expenditure commitments.
From
time
to time, First Financial utilizes its short-term line of credit and longer-term
advances from the Federal Home Loan Bank (FHLB) as funding sources. At September
30, 2008 and December 31, 2007, total short-term borrowings from the FHLB were
$215.0 million and $0, respectively. At September 30, 2008, and December
31, 2007, total long-term borrowings from the FHLB were $87.6 million and
$45.9 million, respectively. The total available remaining borrowing
capacity from the FHLB at September 30, 2008, was
$87.9 million.
As
of
September 30, 2008, First Financial has pledged certain residential real estate
loans totaling $459.1 million as collateral for borrowings to the FHLB. For
ease of borrowing execution, First Financial utilizes a blanket collateral
agreement with the FHLB.
The
principal source of asset-funded liquidity is marketable investment securities,
particularly those of shorter maturities. The market value of investment
securities classified as available-for-sale totaled $492.6 million at September
30, 2008. Securities classified as held-to-maturity that are maturing within
a
short period of time are also a source of liquidity. Securities classified
as
held-to-maturity that are maturing in one year or less totaled $0.4 million
at
September 30, 2008. The market value of securities classified as trading totaled
$0.2 million at September 30, 2008. 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.
Certain
restrictions exist regarding the ability of First Financial’s subsidiaries to
transfer funds to First Financial in the form of cash dividends, loans, or
advances. The approval of the subsidiaries’ respective primary federal
regulators is required for First Financial’s subsidiaries to pay dividends in
excess of regulatory limitations. Dividends paid to First Financial from its
subsidiaries totaled $22.2 million for the first nine months of 2008. As of
September 30, 2008, First Financial’s subsidiaries had retained earnings of
$134.9 million of which $1.4 million was available for distribution to
First Financial without prior regulatory approval. Management is not aware
of
any other events or regulatory requirements that, if implemented, are likely
to
have a material effect on First Financial’s liquidity.
First
Financial Bancorp maintains a short-term revolving credit facility with an
unaffiliated bank. This facility provides First Financial additional liquidity
for various corporate activities, including the repurchase of First Financial
shares and the payment of dividends to shareholders. As of September 30, 2008,
the outstanding balance was $53.0 million compared to an outstanding balance
of
$72.0 million at December 31, 2007. The outstanding balance of this line varies
throughout the year depending on First Financial’s cash needs. First Financial
renewed the $75.0 million credit facility during the first quarter of 2008
for a
period of one year. The credit agreement requires First Financial to maintain
certain covenants including those related to asset quality and capital levels.
First Financial was in full compliance with all covenants as of September 30,
2008.
First
Financial Bancorp makes quarterly interest payments on its junior subordinated
debentures owed to unconsolidated subsidiary trusts. Interest expense related
to
this other long-term debt totaled $0.3 million and $0.7 million for the three
months ending September 30, 2008, and 2007, respectively. Year-to-date interest
expense totaled $1.0 million and $2.0 million for the nine months ending
September 30, 2008, and 2007, respectively. In September of 2007, First
Financial redeemed all the underlying capital securities relating to First
Financial (OH) Statutory Trust I. The total outstanding capital securities
redeemed were $10 million. Therefore, there will be no future interest payments
on that debenture. The $20 million of debentures issued in 2003 remains
outstanding.
First
Financial had no share repurchase activity under publicly announced plans in
the
nine months of 2008, and at this time, First Financial does not plan to
repurchase any of its shares the remainder of 2008. In the nine months of 2007,
First Financial repurchased 1,965,700 common shares at a cost of $26.8 million
and a weighted average share repurchase price of $13.65.
In
connection with First Financial’s adoption of SFAS No. 159 effective January 1,
2008, a $0.8 million unrealized loss was reclassified from accumulated other
comprehensive income (loss) to beginning retained earnings as part of a
cumulative-effect adjustment. There was no impact on total shareholders’ equity
upon adoption.
First
Financial also adopted EITF Issue No. 06-4 effective January 1, 2008.
Issue
No.
06-4 applies
to split-dollar life insurance arrangements whose benefits continue into the
employees’ retirement. First Financial recorded a transition adjustment in the
amount of $2.5 million for the impact of this EITF effective January 1, 2008,
as
a reduction of opening retained earnings and an increase in accrued interest
and
other liabilities in the Consolidated Balance Sheets.
CAPITAL
ADEQUACY
First
Financial and its subsidiary, First Financial Bank, are subject to regulatory
capital requirements administered by federal banking agencies. Capital adequacy
guidelines and, additionally for banks, prompt corrective action regulations
involve quantitative measures of assets, liabilities, and certain off-balance
sheet items calculated under regulatory accounting practices. Capital amounts
and classifications are also subject to qualitative judgments by regulators.
Failure to meet minimum capital requirements can initiate regulatory action.
Consolidated regulatory capital ratios at September 30, 2008, included the
leverage ratio of 7.95%, Tier 1 ratio of 9.80%, and total capital ratio of
10.89%. All regulatory capital ratios exceeded the amounts necessary to be
classified as “well capitalized,” and total regulatory capital exceeded the
“minimum” requirement by approximately $80.8 million, on a consolidated basis.
The tangible capital ratio decreased from 7.18% at June 30, 2008, to 7.13%
at
September 30, 2008, primarily due to the growth in total average assets since
the third quarter of 2007.
Quantitative
measures established by regulation to ensure capital adequacy require First
Financial to maintain minimum amounts and ratios (set forth in the following
table) of Total and Tier 1 capital (as defined by the regulations) to
risk-weighted assets and of Tier 1 capital to average assets. Management
believes, as of September 30, 2008, that First Financial met all capital
adequacy requirements to which it was subject. At September 30, 2008, and
December 31, 2007, the most recent regulatory notifications categorized First
Financial as well-capitalized under the regulatory framework for prompt
corrective action.
To
be
categorized as well-capitalized, First Financial must maintain minimum Total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table. There have been no conditions or events since those notifications that
management believes has changed the institution’s category.
First
Financial’s Tier I capital is comprised of total shareholders’ equity plus
junior subordinated debentures, less unrealized gains and losses and any amounts
resulting from the application of SFAS No. 158 “Employers’ Accounting for
Defined Benefit Pension and other Postretirement Plans,” that is recorded within
accumulated other comprehensive income (loss), intangible assets, and any
valuation related to mortgage servicing rights. Total risk-based capital
consists of Tier I capital plus qualifying allowance for loan and lease losses
and gross unrealized gains on equity securities.
For
purposes of calculating the leverage ratio, average assets represents quarterly
average assets less assets not qualifying for Total risk-based capital including
intangibles and non-qualifying mortgage servicing rights and allowance for
loan
and lease losses.
As
previously mentioned, First Financial took steps to further manage the risk
profile of its balance sheet by securitizing $58.5 million in residential
mortgage loans into agency guaranteed, mortgage-backed securities,
collateralized by those loans. This resulted in a reduction in credit risk
on
the balance sheet and a lower regulatory risk weighting for those assets. The
assets remain on the balance sheet, but are now accounted for as investment
securities available-for-sale rather than residential real estate loans. This
securitization resulted in First Financial recognizing a servicing asset of
approximately $0.3 million related to the company’s contractual right to service
the securitized loans. This mortgage servicing right will be amortized
over the estimated period of net servicing income, estimated to be sixty
months.
First
Financial is currently evaluating the merits of a sale-leaseback transaction
involving certain of its properties. Sale-leaseback transactions have been
utilized in the financial services industry as a means to generate higher levels
of earning assets by redeploying the current value of real estate. Additionally,
a
sale-leaseback
transaction may also provide regulatory capital relief, depending on the risk
weighting of the replacement assets. The portfolio under review includes a
maximum of 47 of the company’s retail banking locations. A typically structured
transaction would result in First Financial selling the properties and
simultaneously entering into long-term operating leases. Should the company
decide to pursue this strategy, there would be no disruption of services to
customers or impact on staff.
On
October 1, 2008, First Financial filed a shelf registration on Form S-3 with
the
Securities and Exchange Commission. This shelf registration statement will
allow
the company to raise capital from time to time, up to an aggregate of $100
million, through the sale of various types of securities. Specific terms
and
prices will be determined at the time of each offering under a separate
prospectus supplement to be filed with the SEC at the time of the offering.
The
U.S.
Department of the Treasury (“Treasury”), working with the Federal Reserve Board,
recently announced the Troubled Asset Relief Program (TARP) Capital Purchase
Program (CPP), which is intended to stabilize the financial services industry.
Some of the components of the CPP include a $250 billion voluntary capital
purchase program for certain qualified and healthy banking institutions.
Pursuant to the CPP, Treasury will purchase from qualifying financial
institutions, a limited amount of senior perpetual preferred securities equal
to
generally 1-3% of a company’s risk-weighted assets. Treasury will also receive a
warrant for the purchase of common stock with an aggregate market value equal
to
15% of the value of the preferred securities purchased. Such preferred shares
will pay a dividend of 5% for the first five years and will increase to 9%
thereafter. In addition, subject to certain limited exceptions, financial
institutions participating in the CPP will be prohibited from (a) increasing
their dividend to common shareholders and (b) conducting share repurchases
without the prior approval of the Treasury. Participating financial institutions
will also be subject to certain limitations on executive compensation as
well as
other conditions.
On
October 30, 2008, First Financial was notified by the Treasury that it was
preliminarily approved to participate in the CPP. On October 31, 2008, the
company filed a proxy statement seeking shareholder approval for the issuance
of
preferred stock in order to maintain flexibility in considering its
participation in the CPP. The company is not currently authorized to issue
preferred securities.
First
Financial also plans to participate in the FDIC’s temporary liquidity guarantee
program. The components of this program include the guarantee, until June
30,
2012, of certain newly issued senior unsecured debt issued by banks and bank
holding companies on or before June 30, 2009 and full deposit insurance coverage
for noninterest-bearing transaction accounts, regardless of size, until the
end
of 2009. It is expected that such participation will result in an increase
in
deposit insurance premiums and any debt will be subject to an insurance premium.
At this time it is not possible to determine the amount of such
increase.
The
following table illustrates the actual and required capital amounts and ratios
as of September 30, 2008, and the year ended December 31, 2007 (dollars in
$000’s).
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
|
|
|
|
|
|
For Capital
|
|
Prompt Corrective
|
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Action Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
304,866
|
|
|
10.89
|
%
|
$
|
224,060
|
|
|
8.00
|
%
|
|
N/A
|
|
|
10.00
|
%
|
First
Financial Bank
|
|
|
342,755
|
|
|
12.30
|
%
|
|
222,929
|
|
|
8.00
|
%
|
$
|
278,662
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
274,513
|
|
|
9.80
|
%
|
|
112,030
|
|
|
4.00
|
%
|
|
N/A
|
|
|
6.00
|
%
|
First
Financial Bank
|
|
|
304,976
|
|
|
10.94
|
%
|
|
111,465
|
|
|
4.00
|
%
|
|
167,197
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to average assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
274,513
|
|
|
7.95
|
%
|
|
137,910
|
|
|
4.00
|
%
|
|
N/A
|
|
|
5.00
|
%
|
First
Financial Bank
|
|
|
304,976
|
|
|
8.86
|
%
|
|
137,416
|
|
|
4.00
|
%
|
|
171,771
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
303,103
|
|
|
11.38
|
%
|
$
|
213,041
|
|
|
8.00
|
%
|
|
N/A
|
|
|
10.00
|
%
|
First
Financial Bank
|
|
|
341,702
|
|
|
12.92
|
%
|
|
211,604
|
|
|
8.00
|
%
|
$
|
264,505
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
274,046
|
|
|
10.29
|
%
|
|
106,520
|
|
|
4.00
|
%
|
|
N/A
|
|
|
6.00
|
%
|
First
Financial Bank
|
|
|
305,394
|
|
|
11.55
|
%
|
|
105,802
|
|
|
4.00
|
%
|
|
158,703
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to average assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
274,046
|
|
|
8.26
|
%
|
|
132,395
|
|
|
4.00
|
%
|
|
N/A
|
|
|
5.00
|
%
|
First
Financial Bank
|
|
|
305,394
|
|
|
9.30
|
%
|
|
131,121
|
|
|
4.00
|
%
|
|
163,901
|
|
|
5.00
|
%
|
CRITICAL
ACCOUNTING POLICIES
The
accounting and financial reporting policies of First Financial comply with
U.S.
generally accepted accounting principles and conform to general practices
within
the banking industry. These policies require estimates and assumptions. Changes
in underlying factors, assumptions, or estimates in any of these areas could
have a material impact on First Financial’s future financial condition and
results of operations.
In
management’s opinion, some of these areas have a more significant impact than
others on First Financial’s financial reporting. For First Financial, these
areas currently include accounting for the allowance for loan and lease losses,
pension costs, goodwill, and income taxes.
Allowance
for loan and lease losses – The
level
of the allowance for loan and lease losses (allowance) is based upon
management’s evaluation of the loan and lease portfolios, historical 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, economic conditions, and other pertinent 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. Loans are charged off
when
management believes that ultimate collectiblity of the loan is unlikely.
Allocation of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management’s judgment, is deemed to
be uncollectible.
Management’s
determination of the adequacy of the allowance is based on an assessment
of the
inherent loss given the conditions at the time. The allowance is increased
by
provisions charged to expense and decreased by charge-offs, net of recoveries
of
amounts previously charged-off. The allowance for
commercial
loans, including time and demand notes, tax-exempt loans, commercial real
estate, and commercial capital leases begins with a process of estimating
the
probable losses inherent in the portfolio. The estimates for these commercial
loans are established by category and based on First Financial’s internal system
of credit risk ratings and historical loss data.
The
estimate of losses inherent in the commercial portfolio may then be adjusted
for
management’s estimate of probable losses on specific exposures as well as trends
in delinquent and nonaccrual loans and other factors such as prevailing economic
conditions, lending strategies, and other influencing factors. In the commercial
portfolio, certain loans, typically larger-balance non-homogeneous exposures,
may have a specific allowance established based on the borrower’s overall
financial condition, resources and payment record, support from guarantors,
and
the realizable value of any collateral.
The
allowance for consumer loans which includes residential real estate,
installment, home equity, credit card, consumer leasing, and overdrafts is
established for each of the categories by estimating losses inherent in that
particular category of consumer loans. The estimate of losses is primarily
based
on historical loss rates. Consumer loans are evaluated as an asset type within
a
category (i.e., residential real estate, installment, etc.), as these loans
are
smaller and more homogeneous.
Larger
balance commercial and commercial real estate loans are impaired when, based
on
current information and events, it is probable that First Financial will
be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement.
Loans
that are impaired are recorded at the present value of expected future cash
flows discounted at the loan’s effective interest rate or if the loan is
collateral dependent, impairment measurement is based on the fair value of
the
collateral. Income on impaired loans is recorded on the cash basis.
Pension –First
Financial sponsors a non-contributory defined benefit pension plan covering
substantially all employees. The measurement of the accrued benefit liability
and the annual pension expense involves actuarial and economic assumptions.
The
assumptions used in pension accounting relate to the discount rates, the
expected return on plan assets, and the rate of compensation
increase.
Goodwill
and other intangible assets –
Goodwill
and intangible assets deemed to have indefinite lives, if any, are not
amortized, but are subject to annual impairment tests. Core deposit intangibles
were amortized on a straight-line basis over their useful lives, none of
which
exceeded 10 years. Core
deposit intangibles were fully amortized by the end of the first quarter
of
2008.
Income
taxes –
The
calculation of First Financial’s income tax provision is complex and requires
the use of estimates and judgments in its determination. First Financial
estimates income tax expense based on amounts expected to be owed to various
tax
jurisdictions. Accrued taxes represent the net estimated amount due or to
be
received from taxing jurisdictions either currently or in the future and
are
reported as a component of other assets or other liabilities in the Consolidated
Balance Sheets. In estimating accrued taxes, First Financial assesses the
appropriate tax treatment considering statutory, judicial, and regulatory
guidance, including consideration of any reserve required for potential
examination issues. Changes in the estimate of accrued taxes occur periodically
due to changes in tax rates, interpretations of tax laws, the status of
examinations being conducted by taxing authorities, and newly enacted statutory,
judicial, and regulatory guidance. These changes, when they occur, affect
accrued taxes and can be significant to the operating results of First
Financial. The potential impact to First Financial’s operating results for any
of the changes cannot be reasonably estimated. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to
be
recovered or settled. The effect on deferred tax assets and liabilities of
a
change in tax rates is recognized in income in the period that includes the
enactment date.
First
Financial and its subsidiaries file a consolidated federal income tax return.
Each subsidiary provides for income taxes on a separate return basis, and
remits
to First Financial amounts determined to be currently payable.
ACCOUNTING
AND REGULATORY MATTERS
Note
2 to
the Consolidated Financial Statements discusses new accounting standards
adopted
by First Financial during 2008 and the expected impact of accounting standards
recently issued but not yet required to be adopted. To the extent the adoption
of new accounting standards materially affects financial condition, results
of
operations, or liquidity, the impacts are discussed in the applicable section(s)
the Management’s Discussion and Analysis and Notes to the Consolidated Financial
Statements.
FORWARD
LOOKING INFORMATION
Certain
statements contained in this report that are not statements of historical
fact
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act (the Act). In addition, certain statements
in
future filings by First Financial with the Securities and Exchange Commission,
in press releases, and in oral and written statements made by or with the
approval of First Financial which are not statements of historical fact
constitute forward-looking statements within the meaning of the
Act.
Examples
of forward-looking statements include, but are not limited to, projections
of
revenues, income or loss, earnings or loss per share, the payment or non-payment
of dividends, capital structure and other financial items, statements of
plans
and objectives of First Financial or its management or board of directors,
and
statements of future economic performances and statements of assumptions
underlying such statements. Words such as “believes,” “anticipates,” “intends,”
and other similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such
statements.
Forward-looking
statements involve risks and uncertainties that may cause actual results
to
differ materially from those in such statements. Factors that could cause
actual
results to differ from those discussed in the forward-looking statements
include, but are not limited to, management’s ability to effectively execute its
business plan; the risk that the strength of the United States economy in
general and the strength of the local economies in which First Financial
conducts operations may be different from expected, resulting in, among other
things, a deterioration in credit quality or a reduced demand for credit,
including the resultant effect on First Financial’s loan portfolio and allowance
for loan and lease losses; the ability of financial institutions to access
sources of liquidity at a reasonable cost; the effects of and changes in
policies and laws of regulatory agencies, inflation, and interest rates,
technology changes; mergers and acquisitions; the effect of changes in
accounting policies and practices; adverse changes in the securities markets;
the cost and effects of litigation and of unexpected or adverse outcomes
in such
litigation; and First Financial’s success at managing the risks involved in the
foregoing.
In
addition, please refer to our Annual Report on Form 10-K for the year ended
December 31, 2007, as well as our other filings with the Commission, for
a more
detailed discussion of these risks and uncertainties and other factors. Such
forward-looking statements speak only as of the date on which such statements
are made, and First Financial undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on
which such statement is made to reflect the occurrence of unanticipated
events.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
risk is the risk of loss arising from adverse changes in the fair value of
financial instruments due to changes in interest rates, foreign exchange
rates,
and equity prices. The primary source of market risk for First Financial
is
interest rate risk. Interest rate risk arises in the normal course of business
to the extent that there is a divergence between the amount of First Financial’s
interest earning assets and the amount of interest earning liabilities that
are
prepaid/withdrawn, re-price, or mature in specified periods. First Financial
seeks to achieve consistent growth in net interest income and capital while
managing volatility arising from shifts in market interest rates. The Asset
and
Liability Committee (ALCO) oversees market risk management, establishing
risk
measures, limits, and policy guidelines for managing the amount of interest-rate
risk and its effect on net interest income and capital.
Interest-rate
risk for First Financial’s Consolidated Balance Sheets consists of repricing,
option, and basis risks. Repricing risk results from differences in the
maturity, or repricing, of interest-bearing assets and liabilities. Option
risk
in financial instruments arises from embedded options such as loan prepayments,
early withdrawal of Certificates of Deposits, and calls on investments and
debt
instruments that are primarily driven by third party or client behavior.
Basis
risk refers to the potential for changes in the underlying relationship between
market rates or indices, which subsequently result in a narrowing of the
net
interest margin. Basis risk is also present in managed rate liabilities,
such as
interest-bearing checking accounts and savings accounts, where historical
pricing relationships to market rates may change due to the level or directional
change in market interest rates, or competitive pressures.
The
interest rate risk position is measured and monitored using income simulation
models and economic value of equity sensitivity analysis that capture both
short-term and long-term interest rate risk exposure. Income simulation involves
forecasting net interest income under a variety of interest rate scenarios
including instantaneous shocks.
Presented
below is the estimated impact on First Financial’s net interest income as of
September 30, 2008, assuming immediate, parallel shifts in interest
rates:
|
|
-200 basis points
|
|
-100 basis points
|
|
+100 basis points
|
|
+200 basis points
|
|
September 30, 2008
|
|
|
(7.64)
|
%
|
|
(2.18)
|
%
|
|
1.30
|
%
|
|
2.16
|
%
|
Modeling
the sensitivity of net interest income to changes in market interest rates
is
highly dependent on numerous assumptions incorporated into the modeling process.
Market based prepayment speeds are factored into the analysis for loan and
securities portfolios. Rate sensitivity for transactional deposit accounts
is
modeled based on both historical experience and external industry
studies.
Additional
interest rate scenarios are modeled utilizing most-likely interest rates
over
the next twelve months. Based on this scenario, First Financial has a relatively
neutral rate risk position of a positive 0.32 when compared to a base-case
scenario with interest rates held constant.
First
Financial uses economic value of equity sensitivity analysis to understand
the
impact of changes in interest rates on long-term cash flows, income, and
capital. Economic value of equity is based on discounting the cash flows
for all
balance sheet instruments under different interest-rate scenarios. Deposit
premiums are based on external industry studies and utilizing historical
experience. Presented below is the change in First Financial’s economic value of
equity position as of September 30, 2008, assuming immediate, parallel shifts
in
interest rates:
|
|
-200 basis points
|
|
-100 basis points
|
|
+100 basis points
|
|
+200 basis points
|
|
September
30, 2008
|
|
|
(24.53)
|
%
|
|
(8.08)
|
%
|
|
3.18
|
%
|
|
(0.94)
|
%
|
See
also
“Item 2-Management’s Discussion and Analysis of Financial Condition and Results
of Operations—Net Interest Income.”
ITEM
4. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Management
is responsible for establishing and maintaining effective disclosure controls
and procedures, as defined under Rule 13a-15 of the Securities Exchange Act
of 1934, that are designed to cause the material information required to
be
disclosed by First Financial in the reports it files or submits under the
Securities Exchange Act of 1934 to be recorded, processed, summarized, and
reported to the extent applicable within the time periods required by the
Securities and Exchange Commission’s rules and forms. In designing and
evaluating the disclosure controls and procedures, management recognized
that a
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
As
of the
end of the period covered by this report, First Financial performed an
evaluation under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective
at
the reasonable assurance level.
Changes
in Internal Control over Financial Reporting
No
changes were made to the Corporation’s internal control over financial reporting
(as defined in Rule 13a-15 under the Securities Exchange Act of 1934)
during the last fiscal quarter that materially affected, or are reasonably
likely to materially affect, the Corporation’s internal control over financial
reporting.
PART
II-OTHER INFORMATION
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
|
(c)
|
The
following table shows the total number of shares repurchased in
the third
quarter of 2008.
|
Issuer
Purchases of Equity Securities
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
Maximum Number
|
|
|
|
Total Number
|
|
Average
|
|
Purchased as
|
|
of Shares that may
|
|
|
|
of Shares
|
|
Price Paid
|
|
Part of Publicly
|
|
yet be purchased
|
|
Period
|
|
Purchased (1)
|
|
Per Share
|
|
Announced Plans (2)
|
|
Under the Plans
|
|
July
1 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
31, 2008
|
|
|
3,163
|
|
$
|
9.14
|
|
|
0
|
|
|
4,969,105
|
|
August
1 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
31, 2008
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
4,969,105
|
|
September
1 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
4,969,105
|
|
Total
|
|
|
3,163
|
|
$
|
9.14
|
|
|
0
|
|
|
4,969,105
|
|
(1)
|
The
number of shares purchased in column (a) and the average price
paid per
share in column (b) include the purchase of shares other than through
publicly announced plans. The shares purchased other than through
publicly
announced plans were purchased pursuant to First Financial’s Thrift Plan,
Director Fee Stock Plan, 1999 Stock Option Plan for Non-Employee
Directors
and 1999 Stock Incentive Plan for Officers and Employees. (The
last two
plans are referred to hereafter as the Stock Option Plans.) The
following
tables show the number of shares purchased pursuant to those plans
and the
average price paid per share. The purchases for the Thrift Plan
and the
Director Fee Stock Plan were made in open-market transactions.
Under the
Stock Option Plans, shares were purchased from plan participants
at the
then current market value in satisfaction of stock option exercise
prices.
|
|
|
(a)
|
|
(b)
|
|
|
|
Total Number
|
|
Average
|
|
|
|
of Shares
|
|
Price Paid
|
|
Period
|
|
Purchased
|
|
Per Share
|
|
First Financial
Bancorp Thrift Plan
|
|
|
|
|
|
|
|
July
1 through
|
|
|
|
|
|
|
|
July
31, 2008
|
|
|
0
|
|
$
|
0.00
|
|
August
1 through
|
|
|
|
|
|
|
|
August
31, 2008
|
|
|
0
|
|
|
0.00
|
|
September
1 through
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
0
|
|
|
0.00
|
|
Total
|
|
|
0
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Director
Fee Stock Plan
|
|
|
|
|
|
|
|
July
1 through
|
|
|
|
|
|
|
|
July
31, 2008
|
|
|
3,163
|
|
$
|
9.14
|
|
August
1 through
|
|
|
|
|
|
|
|
August
31, 2008
|
|
|
0
|
|
|
0.00
|
|
September
1 through
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
0
|
|
|
0.00
|
|
Total
|
|
|
3,163
|
|
$
|
9.14
|
|
|
|
|
|
|
|
|
|
Stock
Option Plans
|
|
|
|
|
|
|
|
July
1 through
|
|
|
|
|
|
|
|
July
31, 2008
|
|
|
0
|
|
$
|
0.00
|
|
August
1 through
|
|
|
|
|
|
|
|
August
31, 2008
|
|
|
0
|
|
|
0.00
|
|
September
1 through
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
0
|
|
|
0.00
|
|
Total
|
|
|
0
|
|
$
|
0.00
|
|
|
(2)
|
First
Financial has two publicly announced stock repurchase plans under
which it
is currently authorized to purchase shares of its common stock.
Neither of
the plans expired during this quarter. However, as of September
30, 2008,
all shares under the 2003 plan have been repurchased. The table
that
follows provides additional information regarding those
plans.
|
|
|
|
|
Total Shares
|
|
|
|
Announcement
|
|
Total Shares Approved for
|
|
Repurchased Under
|
|
Expiration
|
|
Date
|
|
Repurchase
|
|
the Plan
|
|
Date
|
|
1/25/2000
|
|
|
7,507,500
|
|
|
2,538,395
|
|
|
None
|
|
2/25/2003
|
|
|
2,243,715
|
|
|
2,243,715
|
|
|
Complete
|
|
Item
6. Exhibits
(a)
|
Exhibits:
|
|
|
3.1
|
Articles
of Incorporation, as amended as of February 26, 2008, and incorporated
herein by reference to Exhibit 3.1 to the Form 10-K for the year
ended
December 31, 2007. File No. 000-12379.
|
|
|
3.2
|
Amended
and Restated Regulations, as amended as of May 1, 2007, and incorporated
herein by reference to Exhibit 3.2 to the Form 10-Q for the quarter
ended
June 30, 2007. File No. 000-12379.
|
|
|
4.1
|
Rights
Agreement between First Financial Bancorp. and First National Bank
of
Southwestern Ohio dated as of November 23, 1993, and incorporated
herein
by reference to Exhibit 4 to the Form 10-K for year ended December
31,
1998. File No. 000-12379.
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4.2
|
First
Amendment to Rights Agreement dated as of May 1, 1998, and incorporated
herein by reference to Exhibit 4.1 to the Form 10-Q for the quarter
ended
March 31, 1998. File No. 000-12379.
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4.3
|
Second
Amendment to Rights Agreement dated as of December 5, 2003, and
incorporated herein by reference to Exhibit 4.1 to First Financial’s Form
8-K filed on December 5, 2003. File No. 000-12379.
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4.4
|
No
instruments defining the rights of holders of long-term debt of
First
Financial are filed herewith. Pursuant to (b)(4)(iii) of Item 601
of
Regulation S-K, First Financial agrees to furnish a copy of any
such
agreements to the Securities and Exchange Commission upon
request.
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10.1
|
Agreement
between Charles D. Lefferson and First Financial Bancorp. dated
August 4,
2000, and incorporated herein by reference to Exhibit 10.5 to the
Form
10-K for the year ended December 31, 2002. File No.
000-12379.
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10.2
|
Amendment
to Employment Agreement between Charles D. Lefferson and First
Financial
Bancorp. dated May 23, 2003, and incorporated herein by reference
to
Exhibit 10.5 to the Form 10-Q for the quarter ended June 30, 2003.
File
No. 000-12379.
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10.3
|
First
Financial Bancorp. 1991 Stock Incentive Plan, dated September 24,
1991,
and incorporated herein by reference to a Registration Statement
on Form
S-8, Registration No. 33.46819.
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10.4
|
First
Financial Bancorp. Dividend Reinvestment and Share Purchase Plan,
dated
April 24, 1997, and incorporated by reference to a Registration
Statement
on Form S-3, Registration No. 333-25745.
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10.5
|
First
Financial Bancorp. 1999 Stock Incentive Plan for Officers and Employees,
dated April 27, 1999, and incorporated herein by reference to a
Registration Statement on Form S-3, Registration No.
333-86781.
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10.6
|
First
Financial Bancorp. 1999 Non-Employee Director Stock Plan, as dated
April
27, 1999 and amended and restated as of April 25, 2006, and incorporated
herein by reference to Exhibit 10.11 to the Form 10-Q for the quarter
ended March 31, 2006. File No.
001-12379.
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10.7
|
First
Financial Bancorp. Director Fee Stock Plan amended and restated
effective
April 20, 2004, and incorporated herein by reference to Exhibit
10.12 to
the Form 10-Q for the quarter ended June 30, 2004. File No.
000-12379.
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10.8
|
Form
of Executive Supplemental Retirement Agreement, incorporated herein
by
reference to Exhibit 10.11 to the Form 10-K for the year ended
December
31, 2002. File No. 000-12379.
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|
|
10.9
|
Form
of Endorsement Method Split Dollar Agreement, incorporated herein
by
reference to Exhibit 10.12 to the Form 10-K for the year ended
December
31, 2002. File No. 000-12379.
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|
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10.10
|
First
Financial Bancorp. Deferred Compensation Plan, effective June 1,
2003,
incorporated herein by reference to Exhibit 10.1 to the Form 10-Q
for the
quarter ended June 30, 2003. File No. 000-12379.
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|
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10.11
|
Form
of Stock Option Agreement for Incentive Stock Options, incorporated
herein
by reference to Exhibit 10.1 to the Form 8-K filed on January 27,
2005.
File No. 000-12379.
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|
|
10.12
|
Form
of Stock Option Agreement for Nonqualified Stock Options, incorporated
herein by reference to Exhibit 10.2 of the Form 8-K filed on January
27,
2005. File No. 000-12379.
|
|
|
10.13
|
Form
of First Financial Bancorp. 1999 Stock Incentive Plan for Officers
and
Employees Agreement for Restricted Stock Award, incorporated herein
by
reference to Exhibit 10.3 to the Form 8-K filed on January 27,
2005. File
No. 000-12379.
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|
|
10.14
|
Form
of Stock Option Agreement for Incentive Stock Options, incorporated
herein
by reference to Exhibit 10.1 to the Form 8-K filed on April 22,
2005. File
No. 000-12379.
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|
|
10.15
|
Form
of Stock Option Agreement for Non-Qualified Stock Options, incorporated
herein by reference to Exhibit 10.2 of the Form 8-K filed on April
22,
2005. File No. 000-12379.
|
|
|
10.16
|
Form
of Stock Option Agreement for Restricted Stock Awards, incorporated
herein
by reference to Exhibit 10.3 to the Form 8-K filed on April 22,
2005. File
No. 000-12379.
|
|
|
10.17
|
Form
of Agreement for Restricted Stock Award for Non-Employee Directors
dated
April 25, 2006, incorporated herein by reference to the Form 10-Q
for the
quarter ended June 30, 2006. File No. 000-12379.
|
|
|
10.18
|
Amended
and Restated Employment and Non-Competition Agreement between Claude
E.
Davis and First Financial Bancorp. dated August 22, 2006, and incorporated
herein by reference to Exhibit 10.1 to First Financial Bancorp’s Form 8-K
filed on August 28, 2006. File No. 000-12379.
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|
|
10.19
|
First
Financial Bancorp. Amended and Restated Severance Pay Plan as approved
April 28, 2008, incorporated by reference to the Form 10-Q filed
on May 9,
2008. File No. 000-12379.
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|
|
10.20
|
Terms
of First Financial Bancorp. Short-Term Incentive Plan, incorporated
herein
by reference to the Form 8-K filed on May 5, 2007. File No.
000-12379.
|
|
|
10.21
|
First
Financial Bancorp. Amended and Restated Key Management Severance
Plan as
approved February 26, 2008, incorporated herein by reference to
the Form
10-Q filed on May 9, 2008. File No.
000-12379.
|
10.22
|
Form
of Agreement for Restricted Stock Award dated February 14, 2008,
incorporated herein by reference to the Form 10-Q filed on May
9, 2008.
File No. 000-12379.
|
|
|
10.23
|
Long-Term
Incentive Plan Grant Design (2008), incorporated herein by reference
to
the Form 10-Q filed on May 9, 2008. File No. 000-12379.
|
|
|
10.24
|
Short-Term
Incentive Plan Design (2008), incorporated herein by reference
to the Form
10-Q filed on May 9, 2008. File No. 000-12379.
|
|
|
14
|
First
Financial Bancorp. Code of Business Conduct and Ethics as approved
January
23, 2007, incorporated herein by reference to Exhibit 14 to the
Form 10-K
for the year ended December 31, 2006. File No.
000-12379.
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|
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31.1
|
Certification
by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
31.2
|
Certification
by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
32.1
|
Certification
of Periodic Financial Report by Chief Executive Officer Pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification
of Periodic Financial Report by Chief Financial Officer Pursuant
to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
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.
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|
FIRST
FINANCIAL BANCORP.
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(Registrant)
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/s/
J. Franklin Hall
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/s/
Anthony M. Stollings
|
J.
Franklin Hall
|
|
Anthony
M. Stollings
|
Executive
Vice President and Chief Financial Officer
|
|
Senior
Vice President, Chief Accounting Officer, and
Controller
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Date
11/3/08
|
|
Date
11/3/08
|