Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended
|
June 30, 2009
|
|
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨
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 ¨ Accelerated
filer x 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 August 6,
2009
|
Common
stock, No par value
|
|
51,434,060
|
FIRST
FINANCIAL BANCORP.
INDEX
|
Page No.
|
|
|
Part
I-FINANCIAL INFORMATION
|
|
|
|
Item
1-Financial Statements
|
|
|
|
Consolidated
Balance Sheets -
|
|
June
30, 2009 (unaudited) and December 31, 2008
|
1
|
|
|
Consolidated
Statements of Income -
|
|
Six
and Three Months Ended June 30, 2009 and 2008 (unaudited)
|
2
|
|
|
Consolidated
Statements of Cash Flows -
|
|
Six
Months Ended June 30, 2009 and 2008 (unaudited)
|
3
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity -
|
|
Six
Months Ended June 30, 2009 and 2008 (unaudited)
|
4
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
5
|
|
|
Item
2-Management's Discussion and Analysis of Financial Condition and
Results of Operations
|
22
|
|
|
Item
3-Quantitative and Qualitative Disclosures about Market
Risk
|
38
|
|
|
Item
4-Controls and Procedures
|
39
|
|
|
Part
II-OTHER INFORMATION
|
|
|
|
Item
1A-Risk Factors
|
40
|
|
|
Item
2-Unregistered Sales of Equity Securities and Use of
Proceeds
|
43
|
|
|
Item
4-Submission of Matters to a Vote of Security Holders
|
45
|
|
|
Item
6-Exhibits
|
46
|
|
|
Signatures
|
49
|
PART
I – FINANCIAL INFORMATION
ITEM
I – FINANCIAL STATEMENTS
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Dollars
in thousands, except per share data)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
80,938 |
|
|
$ |
100,935 |
|
Investment
securities trading
|
|
|
184 |
|
|
|
61 |
|
Investment
securities available-for-sale, at market value (cost
$516,311 at June 30, 2009 and $648,845 at December 31,
2008)
|
|
|
528,179 |
|
|
|
659,756 |
|
Investment
securities held-to-maturity (market
value $4,776 at June 30, 2009 and $5,135 at December 31,
2008)
|
|
|
4,536 |
|
|
|
4,966 |
|
Other
investments
|
|
|
27,976 |
|
|
|
27,976 |
|
Loans
held for sale
|
|
|
6,193 |
|
|
|
3,854 |
|
Loans:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
876,730 |
|
|
|
807,720 |
|
Real
estate - construction
|
|
|
266,452 |
|
|
|
232,989 |
|
Real
estate - commercial
|
|
|
988,901 |
|
|
|
846,673 |
|
Real
estate - residential
|
|
|
337,704 |
|
|
|
383,599 |
|
Installment
|
|
|
88,370 |
|
|
|
98,581 |
|
Home
equity
|
|
|
307,749 |
|
|
|
286,110 |
|
Credit
card
|
|
|
27,023 |
|
|
|
27,538 |
|
Lease
financing
|
|
|
25 |
|
|
|
50 |
|
Total
loans
|
|
|
2,892,954 |
|
|
|
2,683,260 |
|
Less:
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
38,649 |
|
|
|
35,873 |
|
Net
loans
|
|
|
2,854,305 |
|
|
|
2,647,387 |
|
Premises
and equipment, net
|
|
|
86,216 |
|
|
|
84,105 |
|
Goodwill
|
|
|
28,261 |
|
|
|
28,261 |
|
Other
intangibles
|
|
|
465 |
|
|
|
1,002 |
|
Accrued
interest and other assets
|
|
|
166,100 |
|
|
|
140,839 |
|
TOTAL
ASSETS
|
|
$ |
3,783,353 |
|
|
$ |
3,699,142 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Interest-bearing
|
|
$ |
599,365 |
|
|
$ |
636,945 |
|
Savings
|
|
|
657,300 |
|
|
|
583,081 |
|
Time
|
|
|
1,111,399 |
|
|
|
1,150,208 |
|
Total interest-bearing deposits
|
|
|
2,368,064 |
|
|
|
2,370,234 |
|
Noninterest-bearing
|
|
|
423,781 |
|
|
|
413,283 |
|
Total
deposits
|
|
|
2,791,845 |
|
|
|
2,783,517 |
|
Short-term
borrowings:
|
|
|
|
|
|
|
|
|
Federal
funds purchased and securities sold
|
|
|
|
|
|
|
|
|
under
agreements to repurchase
|
|
|
206,777 |
|
|
|
147,533 |
|
Federal
Home Loan Bank
|
|
|
125,000 |
|
|
|
150,000 |
|
Other
|
|
|
25,000 |
|
|
|
57,000 |
|
Total
short-term borrowings
|
|
|
356,777 |
|
|
|
354,533 |
|
Long-term
debt
|
|
|
135,908 |
|
|
|
148,164 |
|
Other
long-term debt
|
|
|
20,620 |
|
|
|
20,620 |
|
Accrued
interest and other liabilities
|
|
|
31,567 |
|
|
|
43,981 |
|
TOTAL
LIABILITIES
|
|
|
3,336,717 |
|
|
|
3,350,815 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock - $1,000 par value
|
|
|
|
|
|
|
|
|
Authorized
– 80,000 shares
|
|
|
|
|
|
|
|
|
Outstanding
– 80,000 shares in 2009 and 2008
|
|
|
78,173 |
|
|
|
78,019 |
|
Common
stock - no par value
|
|
|
|
|
|
|
|
|
Authorized
- 160,000,000 shares
|
|
|
|
|
|
|
|
|
Issued
– 62,358,614 shares in 2009 and 48,558,614 shares in 2008
|
|
|
490,292 |
|
|
|
394,169 |
|
Retained
earnings
|
|
|
74,285 |
|
|
|
76,339 |
|
Accumulated
other comprehensive loss
|
|
|
(10,700 |
) |
|
|
(11,905 |
) |
Treasury
Stock, at cost 10,924,268 shares in 2009 and 11,077,413
shares in 2008
|
|
|
(185,414 |
) |
|
|
(188,295 |
) |
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
446,636 |
|
|
|
348,327 |
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$ |
3,783,353 |
|
|
$ |
3,699,142 |
|
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
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$ |
33,978 |
|
|
$ |
39,646 |
|
|
$ |
67,635 |
|
|
$ |
82,367 |
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
8,023 |
|
|
|
4,387 |
|
|
|
16,713 |
|
|
|
7,908 |
|
Tax-exempt
|
|
|
386 |
|
|
|
792 |
|
|
|
820 |
|
|
|
1,583 |
|
Total
investment securities interest
|
|
|
8,409 |
|
|
|
5,179 |
|
|
|
17,533 |
|
|
|
9,491 |
|
Federal
funds sold
|
|
|
0 |
|
|
|
40 |
|
|
|
0 |
|
|
|
605 |
|
Total
interest income
|
|
|
42,387 |
|
|
|
44,865 |
|
|
|
85,168 |
|
|
|
92,463 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
9,080 |
|
|
|
14,635 |
|
|
|
18,883 |
|
|
|
32,374 |
|
Short-term
borrowings
|
|
|
527 |
|
|
|
1,130 |
|
|
|
1,034 |
|
|
|
1,922 |
|
Long-term
borrowings
|
|
|
1,251 |
|
|
|
384 |
|
|
|
2,557 |
|
|
|
790 |
|
Subordinated
debentures and capital securities
|
|
|
320 |
|
|
|
302 |
|
|
|
557 |
|
|
|
714 |
|
Total
interest expense
|
|
|
11,178 |
|
|
|
16,451 |
|
|
|
23,031 |
|
|
|
35,800 |
|
Net
interest income
|
|
|
31,209 |
|
|
|
28,414 |
|
|
|
62,137 |
|
|
|
56,663 |
|
Provision
for loan and lease losses
|
|
|
10,358 |
|
|
|
2,493 |
|
|
|
14,617 |
|
|
|
5,716 |
|
Net
interest income after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision
for loan and lease losses
|
|
|
20,851 |
|
|
|
25,921 |
|
|
|
47,520 |
|
|
|
50,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
4,289 |
|
|
|
4,951 |
|
|
|
8,368 |
|
|
|
9,558 |
|
Trust
and wealth management fees
|
|
|
3,253 |
|
|
|
4,654 |
|
|
|
6,542 |
|
|
|
9,276 |
|
Bankcard
income
|
|
|
1,422 |
|
|
|
1,493 |
|
|
|
2,713 |
|
|
|
2,791 |
|
Net
gains from sales of loans
|
|
|
408 |
|
|
|
188 |
|
|
|
792 |
|
|
|
407 |
|
Gains
on sales of investment securities
|
|
|
3,349 |
|
|
|
0 |
|
|
|
3,349 |
|
|
|
1,585 |
|
Income
(loss) on preferred securities
|
|
|
112 |
|
|
|
(221 |
) |
|
|
123 |
|
|
|
(201 |
) |
Other
|
|
|
1,264 |
|
|
|
2,683 |
|
|
|
4,243 |
|
|
|
5,207 |
|
Total
noninterest income
|
|
|
14,097 |
|
|
|
13,748 |
|
|
|
26,130 |
|
|
|
28,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
16,223 |
|
|
|
15,895 |
|
|
|
33,876 |
|
|
|
32,968 |
|
Net
occupancy
|
|
|
2,653 |
|
|
|
2,510 |
|
|
|
5,470 |
|
|
|
5,462 |
|
Furniture
and equipment
|
|
|
1,851 |
|
|
|
1,617 |
|
|
|
3,653 |
|
|
|
3,270 |
|
Data
processing
|
|
|
794 |
|
|
|
814 |
|
|
|
1,612 |
|
|
|
1,607 |
|
Marketing
|
|
|
700 |
|
|
|
474 |
|
|
|
1,340 |
|
|
|
991 |
|
Communication
|
|
|
669 |
|
|
|
749 |
|
|
|
1,340 |
|
|
|
1,554 |
|
Professional
services
|
|
|
1,254 |
|
|
|
1,061 |
|
|
|
2,207 |
|
|
|
1,822 |
|
State
intangible tax
|
|
|
648 |
|
|
|
688 |
|
|
|
1,316 |
|
|
|
1,374 |
|
FDIC
expense
|
|
|
3,424 |
|
|
|
121 |
|
|
|
3,706 |
|
|
|
248 |
|
Other
|
|
|
4,580 |
|
|
|
4,040 |
|
|
|
8,210 |
|
|
|
7,693 |
|
Total
noninterest expenses
|
|
|
32,796 |
|
|
|
27,969 |
|
|
|
62,730 |
|
|
|
56,989 |
|
Income
before income taxes
|
|
|
2,152 |
|
|
|
11,700 |
|
|
|
10,920 |
|
|
|
22,581 |
|
Income
tax expense
|
|
|
702 |
|
|
|
3,892 |
|
|
|
3,735 |
|
|
|
7,435 |
|
Net
income
|
|
|
1,450 |
|
|
|
7,808 |
|
|
|
7,185 |
|
|
|
15,146 |
|
Dividends
on preferred stock
|
|
|
1,000 |
|
|
|
0 |
|
|
|
1,578 |
|
|
|
0 |
|
Net
income available to common shareholders
|
|
$ |
450 |
|
|
$ |
7,808 |
|
|
$ |
5,607 |
|
|
$ |
15,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic
|
|
$ |
0.01 |
|
|
$ |
0.21 |
|
|
$ |
0.14 |
|
|
$ |
0.41 |
|
Earnings
per share - diluted
|
|
$ |
0.01 |
|
|
$ |
0.21 |
|
|
$ |
0.14 |
|
|
$ |
0.40 |
|
Cash
dividends declared per share
|
|
$ |
0.10 |
|
|
$ |
0.17 |
|
|
$ |
0.20 |
|
|
$ |
0.34 |
|
Average
basic shares outstanding
|
|
|
40,734,254 |
|
|
|
37,114,451 |
|
|
|
38,928,557 |
|
|
|
37,090,603 |
|
Average
diluted shares outstanding
|
|
|
41,095,949 |
|
|
|
37,524,789 |
|
|
|
39,458,443 |
|
|
|
37,478,353 |
|
See notes
to consolidated financial statements.
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited,
dollars in thousands)
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,185 |
|
|
$ |
15,146 |
|
Adjustments
to reconcile net cash provided by (used in) operating
activities
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
14,617 |
|
|
|
5,716 |
|
Depreciation
and amortization
|
|
|
3,805 |
|
|
|
3,398 |
|
Stock-based
compensation expense
|
|
|
1,394 |
|
|
|
837 |
|
Pension
expense
|
|
|
555 |
|
|
|
605 |
|
Net
amortization of premiums and
|
|
|
|
|
|
|
|
|
accretion
of discounts on investment securities
|
|
|
764 |
|
|
|
92 |
|
Gains
on sales of investment securities
|
|
|
(3,349 |
) |
|
|
(1,585 |
) |
Gains
on trading securities
|
|
|
(123 |
) |
|
|
0 |
|
Originations
of loans held for sale
|
|
|
(94,266 |
) |
|
|
(50,469 |
) |
Net
gains from sales of loans held for sale
|
|
|
(792 |
) |
|
|
(407 |
) |
Proceeds
from sales of loans held for sale
|
|
|
92,675 |
|
|
|
50,187 |
|
Deferred
income taxes
|
|
|
11,046 |
|
|
|
(288 |
) |
Decrease
in interest receivable
|
|
|
937 |
|
|
|
3,614 |
|
(Increase)
decrease in cash surrender value of life insurance
|
|
|
(69 |
) |
|
|
390 |
|
Increase in
prepaid expenses
|
|
|
(597 |
) |
|
|
(876 |
) |
Decrease
in accrued expenses
|
|
|
(81 |
) |
|
|
(4,010 |
) |
Decrease
in interest payable
|
|
|
(1,298 |
) |
|
|
(1,502 |
) |
Contribution
to pension plan
|
|
|
(30,800 |
) |
|
|
0 |
|
Other
|
|
|
(13,483 |
) |
|
|
(2,588 |
) |
Net
cash (used in) provided by operating activities
|
|
|
(11,880 |
) |
|
|
18,260 |
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from sales of securities available for sale
|
|
|
152,720 |
|
|
|
1,124 |
|
Proceeds
from calls, paydowns and maturities of securities
|
|
|
|
|
|
|
|
|
available-for-sale
|
|
|
95,413 |
|
|
|
51,205 |
|
Purchases
of securities available-for-sale
|
|
|
(113,014 |
) |
|
|
(173,052 |
) |
Proceeds
from calls, paydowns and maturities of securities
|
|
|
|
|
|
|
|
|
held-to-maturity
|
|
|
430 |
|
|
|
323 |
|
Net
decrease in federal funds sold
|
|
|
0 |
|
|
|
102,985 |
|
Net increase
in loans and leases
|
|
|
(225,238 |
) |
|
|
(82,596 |
) |
Proceeds
from disposal of other real estate owned
|
|
|
2,565 |
|
|
|
701 |
|
Purchases
of premises and equipment
|
|
|
(5,546 |
) |
|
|
(3,801 |
) |
Net
cash used in investing activities
|
|
|
(92,670 |
) |
|
|
(103,111 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in total deposits
|
|
|
8,328 |
|
|
|
(117,273 |
) |
Net increase
in short-term borrowings
|
|
|
2,244 |
|
|
|
219,543 |
|
Payments
on long-term borrowings
|
|
|
(12,256 |
) |
|
|
(4,633 |
) |
Cash
dividends paid
|
|
|
(11,697 |
) |
|
|
(12,717 |
) |
Issuance
of common stock, net of issuance costs
|
|
|
98,125 |
|
|
|
0 |
|
Excess
tax liability on share-based compensation
|
|
|
(191 |
) |
|
|
(45 |
) |
Net
cash provided by financing activities
|
|
|
84,553 |
|
|
|
84,875 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(19,997 |
) |
|
|
24 |
|
Cash
and cash equivalents at beginning of period
|
|
|
100,935 |
|
|
|
106,224 |
|
Cash
and cash equivalents at end of period
|
|
$ |
80,938 |
|
|
$ |
106,248 |
|
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)
|
|
Preferred
|
|
|
Preferred
|
|
|
Common
|
|
|
Common
|
|
|
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury stock
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
earnings
|
|
|
income (loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands, except share amounts)
|
|
Balance
at December 31, 2007
|
|
|
0 |
|
|
$ |
0 |
|
|
|
48,558,614 |
|
|
$ |
391,962 |
|
|
$ |
82,093 |
|
|
$ |
(7,127 |
) |
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,146 |
|
Net
unrealized holding losses on securities available for sale arising during
the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,024 |
) |
|
|
|
|
|
|
|
|
|
|
(2,024 |
) |
SFAS
No. 158 adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
165 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,287 |
|
Cash
dividends declared Common stock at $0.34 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,727 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,727 |
)
|
Excess
tax liability on share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
Restricted
stock awards, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,209 |
) |
|
|
|
|
|
|
|
|
|
|
115,576 |
|
|
|
2,063 |
|
|
|
(146 |
) |
Share-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
837 |
|
Balances
at June 30, 2008
|
|
|
0 |
|
|
|
0 |
|
|
|
48,558,614 |
|
|
|
390,545 |
|
|
|
81,263 |
|
|
|
(8,236 |
) |
|
|
(11,075,230 |
) |
|
|
(188,282 |
) |
|
|
275,290 |
|
Balances
at December 31, 2008
|
|
|
80,000 |
|
|
|
78,019 |
|
|
|
48,558,614 |
|
|
|
394,169 |
|
|
|
76,339 |
|
|
|
(11,905 |
) |
|
|
(11,077,413 |
) |
|
|
(188,295 |
) |
|
|
348,327 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,185 |
|
Net
unrealized holding gains on securities available for sale arising during
the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
609 |
|
|
|
|
|
|
|
|
|
|
|
609 |
|
SFAS
No. 158 adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
360 |
|
Unrealized
gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
236 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,390 |
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
13,800,000 |
|
|
|
98,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,125 |
|
Cash
dividends declared Common stock at $0.20 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,507 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,507 |
) |
Preferred
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,578 |
) |
Discount
on preferred stock
|
|
|
|
|
|
|
154 |
|
|
|
|
|
|
|
|
|
|
|
(154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Excess
tax liability on share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(191 |
) |
Restricted
stock awards, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,205 |
) |
|
|
|
|
|
|
|
|
|
|
153,145 |
|
|
|
2,881 |
|
|
|
(324 |
) |
Share-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,394 |
|
Balances
at June 30, 2009
|
|
|
80,000 |
|
|
$ |
78,173 |
|
|
|
62,358,614 |
|
|
$ |
490,292 |
|
|
$ |
74,285 |
|
|
$ |
(10,700 |
) |
|
|
(10,924,268 |
) |
|
$ |
(185,414 |
) |
|
$ |
446,636 |
|
See notes
to consolidated financial statements
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009
(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,
2008. 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, 2008, has been derived from the audited financial
statements in the company’s 2008 Form 10-K.
NOTE
2: RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS
Effective
January 1, 2009, First Financial adopted SFAS No. 141(R), “Business
Combinations.” This statement significantly changes 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)
has had no impact on First Financial to date.
Effective
January 1, 2009, First Financial adopted SFAS No. 160, “Noncontrolling Interests
in Financial Statements.” This statement changes the accounting and reporting
for minority interests, which are recharacterized as noncontrolling interests
and classified as a component of shareholders’ equity. SFAS No. 160
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. First Financial has no
existing consolidated minority interests and management does not anticipate this
will occur in the future; therefore, SFAS No. 160 has had no impact on First
Financial to date.
Effective
January 1, 2009, First Financial adopted SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities.” This 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. For further detail on First Financial’s derivative
instruments and hedging activities, see Note 5 – Derivatives.
Effective
June 30, 2009, First Financial adopted SFAS No. 165, “Subsequent
Events.” This statement represents the inclusion of guidance on
subsequent events in accounting literature and provides guidance on management’s
assessment of subsequent events. Historically, management had relied
on U.S. auditing literature for guidance on assessing and disclosing subsequent
events. SFAS No. 165 clarifies that management must evaluate, as of
each reporting period, events or transactions that occur after the balance sheet
date “through the date that the financial
statements are issued or are available to be
issued.” Management must perform its assessment for both interim and
annual financial reporting periods. For further detail on First
Financial’s assessment of subsequent events, see Note 14 – Subsequent
Events.
In June
of 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets,” which amends the derecognition guidance in SFAS No.
140. This statement removes the concept of a qualifying
special-purpose entity from SFAS No. 140 and removes the exception from applying
FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” to
qualifying special-purpose entities. SFAS No. 166 is effective for
fiscal years beginning after November 15, 2009, with early adoption
prohibited. First Financial is evaluating the revised guidance
included in SFAS No. 166 and does not anticipate a material impact on the
Consolidated Financial Statements.
In June
of 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R).” This statement amends the consolidation guidance that
applies to variable interest entities and affects all entities and enterprises
currently within the scope of Interpretation No. 46(R), as well as qualifying
special purpose entities that are currently outside the scope of Interpretation
46(R). SFAS No. 167 is effective for fiscal years beginning after
November 15, 2009, with early adoption prohibited. First Financial is
evaluating the revised guidance included in SFAS No. 167 and does not anticipate
a material impact on the Consolidated Financial Statements.
In June
of 2009, FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the
Hierarchy of Genrally Accepted Accounting Principles – A Replacement of FASB
Statement No. 162.” This statement notes that “the FASB Accounting
Standards Codification™” will become the source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. When the Codification is in effect, its
contents will carry the same level of authority, effectively superseding SFAS
162. The GAAP hierarchy will be modified to include only two levels of GAAP:
authoritative and nonauthoritative. SFAS No. 168 is effective for
financial statements issued for interim and annual reporting periods ending
after September 15, 2009.
Effective
January 1, 2009, First Financial adopted FASB Staff Position No. FAS 140-3,
“Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions.” This position applies to a repurchase financing, which
is a repurchase agreement that relates to a previously transferred financial
asset between the same counterparties, that is entered into contemporaneously
with the initial transfer. This position presumes that an initial transfer of a
financial asset and a repurchase financing are considered part of the same
arrangement, known as a linked transaction. However, if certain criteria are
met, the initial transfer and repurchase financing may not be evaluated as a
linked transaction and must be evaluated separately under FASB SFAS No.
140. Staff Position No. FAS 140-3 has had no impact on First
Financial to date.
Effective
January 1, 2009, First Financial adopted FASB Staff Position No. FAS 142-3,
“Determination of the Useful
Life of
Intangible Assets.” This position provides guidance as to factors
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets.” Staff Position No. FAS 142-3 has had no
impact on First Financial to date.
Effective
January 1, 2009, First Financial adopted FASB Staff Position No. APB 14-1,
“Accounting for Convertible
Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement).” This position clarifies that certain convertible debt
instruments should be separately accounted for as liability and equity
components. Staff Position No. FAS 142-3 has had no impact on First
Financial to date.
Effective
June 30, 2009, First Financial adopted FASB Staff Position FAS 141(R)-1,
“Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies.” This position amends and
clarifies FASB SFAS No. 141 (revised 2007), “Business Combinations,” to address
application issues related to initial recognition and measurement, subsequent
measurements and accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. Staff Position No. FAS
141(R)-1 is effective for all acquisitions of assets and liabilities arising
from contingencies in a business combination with closing dates after January 1,
2009. Staff Position No. 141(R)-1 has had no impact on First
Financial to date.
Effective
June 30, 2009, First Financial adopted FASB Staff Position No. FAS 107-1 and APB
28-1, “Interim Disclosures About Fair Value of Financial
Instruments.” This position extends the disclosure requirements of
SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” to
interim financial statements of publicly traded companies. For
further detail on First Financial’s fair value disclosures, see Note 11 – Fair
Value Disclosures.
Effective
June 30, 2009, First Financial adopted FASB Staff Position No. FAS 115-2 and FAS
124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments.” This position revised the guidance for determining
whether an impairment is other than temporary for debt securities, requires
bifurcation of any other than temporary impairment
between the amount representing credit loss and the amount related to
all other factors and requires additional disclosures on other than temporary
impairment of debt and equity securities. Staff Position No. FAS
115-2 has had no impact on First Financial to date.
Effective
June 30, 2009, First Financial adopted FASB Staff Position No. FAS 157-4,
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly.” This position provides additional guidance on estimating
fair value when the volume and level of activity for an asset or liability have
significantly decreased in relation to normal market activity for the asset or
liability, provides guidance on circumstances that may indicate that a
transaction is not orderly and requires additional disclosures about fair value
measurements in annual and interim reporting periods. Staff Position
No. FAS 157-4 has had no impact on First Financial to date.
In
December 2008, the FASB issued Staff Position No. FAS 132(R)-1, “Employers’
Disclosures about Postretirement Benefit Plan Assets.” This position
requires additional disclosures about plan assets in an employer’s defined
benefit pension and other postretirement plans including disclosure of the fair
value of each major asset category, consideration of whether additional
categories or further disaggregation should be disclosed, disclosure of the
level within the fair value hierarchy in which each major category of plan
assets falls, and reconciliation of beginning and ending balances of plan assets
with fair values measured using significant unobservable inputs. Staff
Position No. FAS 132(R)-1 is effective for fiscal years ending after
December 15, 2009 with early adoption permitted. First Financial is
evaluating the revised disclosure requirements included in Staff Position No.
FAS 132(R)-1 and does not anticipate a material 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 Income, 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, in the event of nonperformance by the other
party to the financial instrument for standby letters of credit, and commitments
outstanding to extend credit, is represented by the contractual amounts of those
instruments. First Financial uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Standby
letters of credit – 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 $20.0 million and $22.5 million at June 30, 2009, and December
31, 2008, 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.
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
commitment. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. First Financial evaluates each client’s
creditworthiness on an individual basis. The amount of collateral
obtained, if deemed necessary by First Financial upon extension of credit, is
based on management’s credit evaluation of the counterparty. The
collateral held varies, but may include securities, real estate, inventory,
plant, or equipment. First Financial had commitments outstanding to
extend credit totaling $737.9 million and $767.3 million at June 30, 2009,
and December 31, 2008, respectively. Management does not anticipate
any material losses as a result of these commitments.
NOTE
4: INVESTMENTS
The
following is a summary of held-to-maturity and available-for-sale investment
securities as of June 30, 2009 (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 |
|
|
$ |
39,982 |
|
|
$ |
1,162 |
|
|
$ |
0 |
|
|
$ |
41,144 |
|
Mortgage-backed
securities
|
|
|
168 |
|
|
|
1 |
|
|
|
0 |
|
|
|
169 |
|
|
|
446,799 |
|
|
|
11,245 |
|
|
|
(589 |
) |
|
|
457,455 |
|
Obligations
of state and other political subdivisions
|
|
|
4,368 |
|
|
|
239 |
|
|
|
0 |
|
|
|
4,607 |
|
|
|
25,240 |
|
|
|
374 |
|
|
|
(241 |
) |
|
|
25,373 |
|
Other
securities
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
4,290 |
|
|
|
51 |
|
|
|
(134 |
) |
|
|
4,207 |
|
Total
|
|
$ |
4,536 |
|
|
$ |
240 |
|
|
$ |
0 |
|
|
$ |
4,776 |
|
|
$ |
516,311 |
|
|
$ |
12,832 |
|
|
$ |
(964 |
) |
|
$ |
528,179 |
|
The
following is a summary of held-to-maturity and available-for-sale investment
securities as of December 31, 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 |
|
|
$ |
44,951 |
|
|
$ |
1,731 |
|
|
$ |
0 |
|
|
$ |
46,682 |
|
Mortgage-backed
securities
|
|
|
190 |
|
|
|
0 |
|
|
|
(1 |
) |
|
|
189 |
|
|
|
563,341 |
|
|
|
9,640 |
|
|
|
(465 |
) |
|
|
572,516 |
|
Obligations
of state and other political subdivisions
|
|
|
4,776 |
|
|
|
170 |
|
|
|
0 |
|
|
|
4,946 |
|
|
|
35,992 |
|
|
|
461 |
|
|
|
(301 |
) |
|
|
36,152 |
|
Other
securities
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
4,561 |
|
|
|
73 |
|
|
|
(228 |
) |
|
|
4,406 |
|
Total
|
|
$ |
4,966 |
|
|
$ |
170 |
|
|
$ |
(1 |
) |
|
$ |
5,135 |
|
|
$ |
648,845 |
|
|
$ |
11,905 |
|
|
$ |
(994 |
) |
|
$ |
659,756 |
|
During
the six months ended June 30, 2009, investment securities available-for-sale
were sold with a cost basis of $149.4 and gross proceeds of $152.7, resulting in
net proceeds of $3.3 million.
The
following is a summary of debt investment securities by estimated maturity as of
June 30, 2009 (dollars in $000’s).
|
|
Held-to-Maturity
|
|
|
Available-for-Sale
|
|
|
|
Amortized
|
|
|
Market
|
|
|
Amortized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Due
in one year or less
|
|
$ |
350 |
|
|
$ |
354 |
|
|
$ |
14,414 |
|
|
$ |
14,535 |
|
Due
after one year through five years
|
|
|
2,612 |
|
|
|
2,757 |
|
|
|
382,872 |
|
|
|
392,947 |
|
Due
after five years through ten years
|
|
|
576 |
|
|
|
610 |
|
|
|
80,593 |
|
|
|
81,818 |
|
Due
after ten years
|
|
|
998 |
|
|
|
1,055 |
|
|
|
38,432 |
|
|
|
38,879 |
|
Total
|
|
$ |
4,536 |
|
|
$ |
4,776 |
|
|
$ |
516,311 |
|
|
$ |
528,179 |
|
The
following tables present the age of gross unrealized losses and associated fair
value by investment category (dollars in $000’s).
|
|
June 30, 2009
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Securities
of U.S. government agencies and corporations
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
10 |
|
|
$ |
0 |
|
|
$ |
10 |
|
|
$ |
0 |
|
Mortgage-backed
securities
|
|
|
37,150 |
|
|
|
442 |
|
|
|
2,661 |
|
|
|
144 |
|
|
|
39,811 |
|
|
|
586 |
|
Obligations
of state and other political subdivisions
|
|
|
211 |
|
|
|
1 |
|
|
|
1,736 |
|
|
|
241 |
|
|
|
1,947 |
|
|
|
242 |
|
Other
securities
|
|
|
20 |
|
|
|
0 |
|
|
|
1,928 |
|
|
|
136 |
|
|
|
1,948 |
|
|
|
136 |
|
Total
|
|
$ |
37,381 |
|
|
$ |
443 |
|
|
$ |
6,335 |
|
|
$ |
521 |
|
|
$ |
43,716 |
|
|
$ |
964 |
|
|
|
December 31, 2008
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Securities
of U.S. government agencies and corporations
|
|
$ |
11 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
11 |
|
|
$ |
0 |
|
Mortgage-backed
securities
|
|
|
32,362 |
|
|
|
311 |
|
|
|
15,925 |
|
|
|
154 |
|
|
|
48,287 |
|
|
|
465 |
|
Obligations
of state and other political subdivisions
|
|
|
1,904 |
|
|
|
284 |
|
|
|
659 |
|
|
|
17 |
|
|
|
2,563 |
|
|
|
301 |
|
Other
securities
|
|
|
44 |
|
|
|
0 |
|
|
|
1,787 |
|
|
|
228 |
|
|
|
1,831 |
|
|
|
228 |
|
Total
|
|
$ |
34,321 |
|
|
$ |
595 |
|
|
$ |
18,371 |
|
|
$ |
399 |
|
|
$ |
52,692 |
|
|
$ |
994 |
|
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. 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
considers the percentage loss on a security, duration of the loss, average life
or duration of the security, credit rating of the security, as well as payment
performance and the company’s intent and ability to hold the security to
maturity when determining whether any impairment is other than temporary. First
Financial has the intent and ability to hold all debt security issues
temporarily impaired until maturity or recovery of book value. First Financial
had no other than temporary impairment charges for the three and six months
ended June 30, 2009.
First
Financial had trading securities with a fair value of $0.2 million at June 30,
2009, $0.1 million at December 31, 2008, and $3.6 million at June 30,
2008. 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.
The
following table summarizes the derivative financial instruments utilized by
First Financial by the nature of the underlying asset or liability (dollars in
$000’s):
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
June 30, 2008
|
|
|
|
Fair Value
|
|
|
Cash Flow
|
|
|
|
|
|
Fair Value
|
|
|
Cash Flow
|
|
|
|
|
|
Fair Value
|
|
|
Cash Flow
|
|
|
|
|
|
|
Hedges
|
|
|
Hedges
|
|
|
Total
|
|
|
Hedges
|
|
|
Hedges
|
|
|
Total
|
|
|
Hedges
|
|
|
Hedges
|
|
|
Total
|
|
Instruments
associated with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
404,217 |
|
|
$ |
- |
|
|
$ |
404,217 |
|
|
$ |
283,419 |
|
|
$ |
- |
|
|
$ |
283,419 |
|
|
$ |
200,577 |
|
|
$ |
- |
|
|
$ |
200,577 |
|
Other
long-term debt
|
|
|
- |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
notional value
|
|
$ |
404,217 |
|
|
$ |
20,000 |
|
|
$ |
424,217 |
|
|
$ |
283,419 |
|
|
$ |
- |
|
|
$ |
283,419 |
|
|
$ |
200,577 |
|
|
$ |
- |
|
|
$ |
200,577 |
|
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 June 30, 2009, the company had a total
counterparty notional amount outstanding of approximately $233.7 million, spread
among six counterparties, with an outstanding liability from these contracts of
$11.1 million.
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 $5.8 million,
$12.1 million, and $0.9 million at June 30, 2009, December 31, 2008, and June
30, 2008, 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.
The
following table summarizes the derivative financial instruments utilized by
First Financial and their balances (dollars in $000’s):
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
June 30, 2008
|
|
|
|
Balance
|
|
Notional
|
|
|
Estimated Fair Value
|
|
|
Notional
|
|
|
Estimated Fair Value
|
|
|
Notional
|
|
|
Estimated Fair Value
|
|
|
|
Sheet Location
|
|
Amount
|
|
|
Gain
|
|
|
Loss
|
|
|
Amount
|
|
|
Gain
|
|
|
Loss
|
|
|
Amount
|
|
|
Gain
|
|
|
Loss
|
|
Fair
Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay
fixed interest rate swaps
with counterparty
|
|
Accrued
interest and
other liabilities
|
|
$ |
23,085 |
|
|
|
- |
|
|
$ |
(2,071 |
) |
|
$ |
24,703 |
|
|
$ |
2 |
|
|
$ |
(3,339 |
) |
|
$ |
26,515 |
|
|
$ |
36 |
|
|
$ |
(876 |
) |
Matched
interest rate swaps
with borrower
|
|
Accrued
interest and
other assets
|
|
|
190,566 |
|
|
$ |
10,085 |
|
|
|
(91 |
) |
|
|
129,358 |
|
|
|
15,074 |
|
|
|
- |
|
|
|
87,031 |
|
|
|
3,233 |
|
|
|
(70 |
) |
Matched
interest rate swaps
with counterparty
|
|
Accrued
interest and
other liabilities
|
|
|
190,566 |
|
|
|
91 |
|
|
|
(9,738 |
) |
|
|
129,358 |
|
|
|
- |
|
|
|
(15,020 |
) |
|
|
87,031 |
|
|
|
70 |
|
|
$ |
(3,233 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow Hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
Preferred Swap
|
|
Accumulated
other comprehensive
loss
|
|
|
20,000 |
|
|
|
745 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
|
$ |
424,217 |
|
|
|
10,921 |
|
|
$ |
(11,900 |
) |
|
$ |
283,419 |
|
|
$ |
15,076 |
|
|
$ |
(18,359 |
) |
|
$ |
200,577 |
|
|
$ |
3,339 |
|
|
$ |
(4,179 |
) |
The
following table details the derivative financial instruments, the average
remaining maturities and the weighted-average interest rates being paid and
received by First Financial at June 30, 2009 (dollars in $000’s):
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Maturity
|
|
|
Fair
|
|
|
Weighted-Average Rate
|
|
|
|
Value
|
|
|
(years)
|
|
|
Value
|
|
|
Receive
|
|
|
Pay
|
|
Asset conversion swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay
fixed interest rate swaps with counterparty
|
|
$ |
23,085 |
|
|
|
6.2 |
|
|
$ |
(2,071 |
) |
|
|
2.39 |
% |
|
|
6.82 |
% |
Receive
fixed, matched interest rate swaps with borrower
|
|
|
190,566 |
|
|
|
5.4 |
|
|
|
9,994 |
|
|
|
6.43 |
% |
|
|
2.94 |
% |
Pay
fixed, matched interest rate swaps with counterparty
|
|
|
190,566 |
|
|
|
5.4 |
|
|
|
(9,647 |
) |
|
|
2.94 |
% |
|
|
6.43 |
% |
Total
asset conversion swaps
|
|
$ |
404,217 |
|
|
|
5.5 |
|
|
$ |
(1,724 |
) |
|
|
4.58 |
% |
|
|
4.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
conversion swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
Preferred Swap
|
|
$ |
20,000 |
|
|
|
9.8 |
|
|
$ |
745 |
|
|
|
3.70 |
% |
|
|
6.20 |
% |
Total
liability conversion swaps
|
|
$ |
20,000 |
|
|
|
9.8 |
|
|
$ |
745 |
|
|
|
3.70 |
% |
|
|
6.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
swap portfolio
|
|
$ |
424,217 |
|
|
|
5.7 |
|
|
$ |
(979 |
) |
|
|
4.46 |
% |
|
|
4.86 |
% |
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 fair
value hedge swap agreements generally involve the net receipt by First Financial
of floating-rate amounts in exchange for net payments by First Financial,
through its loan clients, of fixed-rate amounts over the life of the agreements
without an exchange of the underlying principal or notional
amount. This results in First Financial’s loan customers receiving
fixed rate funding, while providing First Financial with a floating rate
asset. 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. All of First Financial’s fair value hedges are considered
effective.
|
|
|
|
Increase (decrease) to Interest Income
|
|
|
|
|
|
Three Months Ended
|
|
Derivatives in fair value
|
|
Location of change in fair value
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
hedging relationships
|
|
recognized in earnings on derivative
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Interest
Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
Interest
Income - Loans
|
|
$ |
(251 |
) |
|
$ |
(123 |
) |
|
$ |
(136 |
) |
Total
|
|
|
|
$ |
(251 |
) |
|
$ |
(123 |
) |
|
$ |
(136 |
) |
|
|
|
|
Increase (decrease) to Interest Income
|
|
|
|
|
|
Six Months Ended
|
|
Derivatives in fair value
|
|
Location of change in fair value
|
|
June 30,
|
|
|
June 30,
|
|
hedging relationships
|
|
recognized in earnings on derivative
|
|
2009
|
|
|
2008
|
|
Interest
Rate Contracts
|
|
|
|
|
|
|
|
|
Loans
|
|
Interest
Income - Loans
|
|
$ |
(503 |
) |
|
$ |
(203 |
) |
Total
|
|
|
|
$ |
(503 |
) |
|
$ |
(203 |
) |
Cash Flow Hedges –
First Financial utilizes interest rate swaps designated as cash flow hedges to
manage the variability of cash flows, primarily net interest income,
attributable to changes in interest rates. The net interest
receivable or payable on an interest rate swap designated as a cash flow hedge
is accrued and recognized as an adjustment to interest income or interest
expense. The fair value of the interest rate swaps is included within
accrued interest and other assets on the Consolidated Balance
Sheets. Changes in the fair value of the interest rate swap are
included in accumulated comprehensive income (loss). Derivative gains
and losses not considered effective in hedging the cash flows related to the
underlying loans, if any, would be recognized immediately in
income. All of First Financial’s cash flow hedges are considered
effective.
Effective
March 30, 2009, First Financial executed a cash flow hedge utilizing an interest
rate swap to hedge against interest rate volatility on $20.0 million of floating
rate trust preferred securities based on the London Inter-Bank Offered Rate
(LIBOR). The interest rate swap involves the receipt by First
Financial of variable-rate interest amounts in exchange for fixed-rate interest
payments by First Financial for a period of 10 years. The net
interest receivable or payable on the trust preferred interest rate swap is
accrued and recognized as an adjustment to interest expense. The fair
value of the trust preferred interest rate swap is included in accrued interest
and other assets or liabilities on the Consolidated Balance
Sheets. Changes in the fair value of the trust preferred interest
rate swap are included in accumulated other comprehensive income (loss) on the
Consolidated Balance Sheets. Derivative gains and losses not
considered effective in hedging the cash flows related to these securities, if
any, will be recognized immediately in income.
|
|
Amount of gain or (loss)
recognized in OCI on derivatives
(effective portion)
|
|
Location of gain or
(loss) reclassified from
|
|
Amount of gain or (loss)
reclassified from accumulated
OCI into earnings (effective portion)
|
|
|
|
Three Months Ended
|
|
accumulated OCI into
|
|
Three Months Ended
|
|
Derivatives in cash flow
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
earnings (effective
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
hedging relationships
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
portion)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Interest
Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term debt
|
|
$ |
551 |
|
|
$ |
- |
|
|
$ |
- |
|
Interest
Expense - Other long-term debt
|
|
$ |
(95 |
) |
|
$ |
- |
|
|
$ |
- |
|
Total
|
|
$ |
551 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
$ |
(95 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
|
Amount of gain or (loss)
recognized in OCI on derivatives
(effective portion)
|
|
Location of gain or
(loss) reclassified from
|
|
Amount of gain or (loss)
reclassified from accumulated
OCI into earnings (effective portion)
|
|
|
|
Six Months Ended
|
|
accumulated OCI into
|
|
Six Months Ended
|
|
Derivatives
in cash flow
|
|
June 30,
|
|
|
June 30,
|
|
earnings (effective
|
|
June 30,
|
|
|
June 30,
|
|
hedging
relationships
|
|
2009
|
|
|
2008
|
|
portion)
|
|
2009
|
|
|
2008
|
|
Interest
Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term debt
|
|
$ |
551 |
|
|
$ |
- |
|
Interest
Expense - Other long-term debt
|
|
$ |
(97 |
) |
|
$ |
- |
|
Total
|
|
$ |
551 |
|
|
$ |
- |
|
|
|
$ |
(97 |
) |
|
$ |
- |
|
First
Financial expects approximately $318 of the unrecognized losses on cash flow
hedges, net of taxes, at June 30, 2009 to be reclassified into earnings within
the next 12 months.
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. These instruments are primarily
utilized to reduce overnight liquidity risk and to mitigate interest rate
sensitivity on the balance sheet. 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 remaining maturities
between one and three years and a weighted average rate of
3.63%. 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).
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 London Inter-Bank Offered
Rate (LIBOR). During the first quarter of 2009, First Financial
executed a cash flow hedge utilizing an interest rate swap to hedge against
interest rate volatility on the $20.0 million of floating rate trust preferred
securities. The interest rate swap involves the receipt by First
Financial of variable-rate interest amounts in exchange for fixed-rate interest
payments by First Financial for a period of 10 years. The net
interest receivable or payable on the trust preferred interest rate swap will be
accrued and recognized as an adjustment to interest expense. For
further information on this cash flow hedge, see Note 5.
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
debenture qualifies as Tier I capital under Federal Reserve Board guidelines,
but is limited to 25% of qualifying Tier I capital. The company has
the capacity to issue approximately $15.4 million in additional qualifying
debentures under these guidelines.
(dollars in $000’s)
|
|
Amount
|
|
|
Debt
Rate
|
|
|
Derivative
Rate
|
|
Maturity
Date
|
First
Financial (OH) Statutory Trust II
|
|
$ |
20,000 |
|
|
|
3.70 |
% |
|
|
6.20 |
% |
09/30/2033
|
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
|
|
|
Six Months Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
June 30,
|
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
June 30
|
|
|
2009
|
|
|
2008
|
|
Balance
at beginning of period
|
|
$ |
36,437 |
|
|
$ |
35,873 |
|
|
$ |
30,353 |
|
|
$ |
29,580 |
|
|
$ |
29,718 |
|
|
$ |
35,873 |
|
|
$ |
29,057 |
|
Provision
for loan losses
|
|
|
10,358 |
|
|
|
4,259 |
|
|
|
10,475 |
|
|
|
3,219 |
|
|
|
2,493 |
|
|
|
14,617 |
|
|
|
5,716 |
|
Loans
charged off
|
|
|
(8,771 |
) |
|
|
(4,060 |
) |
|
|
(5,403 |
) |
|
|
(2,936 |
) |
|
|
(3,195 |
) |
|
|
(12,831 |
) |
|
|
(6,298 |
) |
Recoveries
|
|
|
625 |
|
|
|
365 |
|
|
|
448 |
|
|
|
490 |
|
|
|
564 |
|
|
|
990 |
|
|
|
1,105 |
|
Balance
at end of period
|
|
$ |
38,649 |
|
|
$ |
36,437 |
|
|
$ |
35,873 |
|
|
$ |
30,353 |
|
|
$ |
29,580 |
|
|
$ |
38,649 |
|
|
$ |
29,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses to total ending loans
|
|
|
1.34 |
% |
|
|
1.33 |
% |
|
|
1.34 |
% |
|
|
1.14 |
% |
|
|
1.11 |
% |
|
|
1.34 |
% |
|
|
1.11 |
% |
The
allowance for loan and lease losses related to loans that are identified as
impaired, as defined by SFAS No. 114 and amended by SFAS No. 118, are based on
discounted cash flows using the loan’s initial effective interest rate or the
fair value of the collateral for certain collateral dependent
loans. Interest income for impaired loans is recorded on a cash basis
during the period the loan is considered impaired after recovery of principal is
reasonably assured.
First
Financial’s investment in impaired loans is as follows (dollars in
$000’s):
|
|
As of and for the Quarter Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
Impaired
loans requiring a valuation
|
|
$ |
16,229 |
|
|
$ |
7,137 |
|
|
$ |
1,472 |
|
|
$ |
5,642 |
|
|
$ |
5,209 |
|
Impaired
loans not requiring a valuation
|
|
|
21,364 |
|
|
|
17,554 |
|
|
|
16,509 |
|
|
|
8,188 |
|
|
|
9,603 |
|
Total
impaired loans
|
|
$ |
37,593 |
|
|
$ |
24,691 |
|
|
$ |
17,981 |
|
|
$ |
13,830 |
|
|
$ |
14,812 |
|
Valuation
allowance
|
|
$ |
5,890 |
|
|
$ |
3,024 |
|
|
$ |
864 |
|
|
$ |
2,322 |
|
|
$ |
2,106 |
|
Average
impaired loans for the period
|
|
$ |
31,142 |
|
|
$ |
21,336 |
|
|
$ |
15,906 |
|
|
$ |
14,321 |
|
|
$ |
14,752 |
|
Interest
income included in revenue
|
|
$ |
25 |
|
|
$ |
12 |
|
|
$ |
216 |
|
|
$ |
182 |
|
|
$ |
140 |
|
NOTE
9: INCOME TAXES
First
Financial’s effective tax rate for the second quarter of 2009 was 32.6%,
compared to 33.3% for the second quarter
of 2008. The 2009 year-to-date effective tax rate was 34.2% compared
to 33.0% for 2008. The increase in the 2009 effective tax rate is
primarily due to reduced tax-exempt investment interest and reduced bank-owned
life insurance income.
At June
30, 2009, and December 31, 2008, 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. First Financial was
notified during the first quarter of 2009 that the Internal Revenue Service will
commence a routine examination of the income tax return for the calendar year
2007. First Financial was notified in the second quarter of 2009 that the
Indiana Department of Revenue would commence a routine examination of the
Indiana franchise tax returns, as well as payroll withholdings, for the calendar
years of 2005, 2006, and 2007. The company cannot at this time make
an assessment of the outcome of these examinations. 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.
In April
of 2009, due to the unfunded pension obligation resulting from the significant
decline in equity market values, First Financial contributed $30.8 million to
its defined benefit pension plan. The impact from this cash
contribution is not reflected in the tables below, but will be reflected in
future periods. First Financial does not expect to make additional
contributions to the plan the remainder of 2009.
The
following table sets forth information concerning amounts recognized in First
Financial’s Consolidated Balance Sheets and Consolidated Statements of Income
(dollars in $000’s).
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
590 |
|
|
$ |
527 |
|
|
$ |
1,180 |
|
|
$ |
1,117 |
|
Interest
cost
|
|
|
675 |
|
|
|
642 |
|
|
|
1,350 |
|
|
|
1,285 |
|
Expected
return on assets
|
|
|
(917 |
) |
|
|
(1,025 |
) |
|
|
(1,835 |
) |
|
|
(2,049 |
) |
Amortization
of transition asset
|
|
|
0 |
|
|
|
(8 |
) |
|
|
0 |
|
|
|
(17 |
) |
Amortization
of prior service cost
|
|
|
(105 |
) |
|
|
(106 |
) |
|
|
(210 |
) |
|
|
(212 |
) |
Recognized
net actuarial loss
|
|
|
387 |
|
|
|
239 |
|
|
|
775 |
|
|
|
481 |
|
Net
periodic benefit cost
|
|
$ |
630 |
|
|
$ |
269 |
|
|
$ |
1,260 |
|
|
$ |
605 |
|
Amounts
recognized in accumulated other comprehensive income (loss):
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
actuarial loss
|
|
$ |
387 |
|
|
$ |
239 |
|
|
$ |
775 |
|
|
$ |
481 |
|
Net
prior service (credit) cost
|
|
|
(105 |
) |
|
|
(106 |
) |
|
|
(210 |
) |
|
|
(212 |
) |
Net
transition asset
|
|
|
0 |
|
|
|
(8 |
) |
|
|
0 |
|
|
|
(17 |
) |
Deferred
tax assets
|
|
|
(102 |
) |
|
|
(46 |
) |
|
|
(205 |
) |
|
|
(92 |
) |
Net
amount recognized
|
|
$ |
180 |
|
|
$ |
79 |
|
|
$ |
360 |
|
|
$ |
160 |
|
NOTE
11: FAIR VALUE DISCLOSURES
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, due to market volatility. 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 June
30, 2009, 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. There were no purchases or sales of these or similar
investment securities during 2009.
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 methods, assumptions, and valuation techniques were used by First
Financial to measure different financial assets and liabilities at fair
value and in estimating its fair value disclosures for financial
instruments.
Cash and short-term
investments –
The carrying amounts reported in the Consolidated Balance Sheets for cash
and short-term investments, such as federal funds sold, approximated the fair
value of those instruments.
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.
First
Financial utilizes information provided by a third party investment securities
portfolio manager in analyzing the investment securities portfolio in accordance
with the fair value hierarchy of SFAS No. 157. The
portfolio
manager’s
evaluation of investment security portfolio pricing is performed using a
combination of prices and data from third party vendors, along with internally
developed matrix pricing models and assistance from the provider’s internal
fixed income analysts and trading desk. The portfolio manager’s
month-end pricing process includes a series of quality assurance activities
where prices are compared to recent market conditions, previous evaluation
prices, and between the various pricing services. These processes
produce a series of quality assurance reports on which price exceptions are
identified, reviewed, and where appropriate, securities are
repriced. In the event of a materially different price, the portfolio
manager will report the variance to the third party vendor as a “price
challenge”, and review the pricing methodology in detail. The results
of the quality assurance process are incorporated into the selection of pricing
providers by the portfolio manager.
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.
Loans – The fair
value of commercial, commercial real estate, residential real estate, and
consumer loans were estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities or repricing
frequency. The carrying amount of accrued interest approximates its
fair value.
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.
Mortgage-servicing
rights – The fair value of mortgage-servicing rights was determined
through modeling the expected future cash flows. The modeling
included stratification by maturity and coupon rates on the underlying mortgage
loans. Certain assumptions were used in the valuation regarding
prepayment speeds, discount rates, servicing costs, delinquency, cash balances,
and foreclosure costs which were arrived at from third-party sources and
internal records.
Deposit liabilities –
The fair value of demand deposits, savings accounts, and certain money-market
deposits was the amount payable on demand at the reporting date. The
carrying amounts for variable-rate certificates of deposit approximated their
fair values at the reporting date. The fair value of fixed-rate
certificates of deposit was estimated using a discounted cash flow calculation
which applies the interest rates currently offered for deposits of similar
remaining maturities. The carrying amount of accrued interest
approximated its fair value.
Borrowings – The
carry amounts of federal funds purchased and securities sold under agreements to
repurchase and other short-term borrowings approximated their fair
values. The fair value of long-term debt was estimated using a
discounted cash flow calculation which utilizes the interest rates currently
offered for borrowings of similar remaining maturities. Third-party
valuations were used for long-term debt with embedded options, such as call
features.
Commitments to extend credit
and standby letters of credit – Pricing of these financial instruments is
based on the credit quality and relationship, fees, interest rates, probability
of funding and compensating balance and other covenants or
requirements. Loan commitments generally have fixed expiration dates,
are variable rate and contain termination and other clauses which provide for
relief from funding in the event that there is a significant deterioration in
the credit quality of the client. Many loan commitments are expected
to expire without being drawn upon. The rates and terms of the
commitments to extend credit and the standby letters of credit are competitive
with those in First Financial’s market area. The carrying amounts are
reasonable estimates of the fair value of these financial
instruments. Carrying amounts, which are comprised of the unamortized
fee income and, where necessary, reserves for any expected credit losses from
these financial instruments, are immaterial.
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). Additionally, First Financial utilizes a vendor developed,
proprietary model to value the credit risk component of both the derivative
assets and liabilities. The credit valuation adjustment is recorded
as an adjustment to the fair value of the derivative asset or liability on the
applicable measurement date (Level 3).
The
estimated fair values of First Financial’s financial instruments were as
follows:
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
value
|
|
|
value
|
|
|
value
|
|
|
value
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments
|
|
$ |
80,938 |
|
|
$ |
80,938 |
|
|
$ |
100,935 |
|
|
$ |
100,935 |
|
Investment
securities trading
|
|
|
184 |
|
|
|
184 |
|
|
|
61 |
|
|
|
61 |
|
Investment
securities held-to-maturity
|
|
|
4,536 |
|
|
|
4,776 |
|
|
|
4,966 |
|
|
|
5,135 |
|
Investment
securities available-for-sale
|
|
|
528,179 |
|
|
|
528,179 |
|
|
|
659,756 |
|
|
|
659,756 |
|
Other
investments
|
|
|
27,976 |
|
|
|
27,976 |
|
|
|
27,976 |
|
|
|
27,976 |
|
Loans
held for sale
|
|
|
6,193 |
|
|
|
6,193 |
|
|
|
3,854 |
|
|
|
3,854 |
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
876,730 |
|
|
|
868,213 |
|
|
|
807,720 |
|
|
|
795,013 |
|
Real
estate — construction
|
|
|
266,452 |
|
|
|
261,403 |
|
|
|
232,989 |
|
|
|
228,448 |
|
Real
estate — commercial
|
|
|
988,901 |
|
|
|
994,061 |
|
|
|
846,673 |
|
|
|
851,764 |
|
Real
estate — residential
|
|
|
337,704 |
|
|
|
328,761 |
|
|
|
383,599 |
|
|
|
375,482 |
|
Installment
|
|
|
88,370 |
|
|
|
88,745 |
|
|
|
98,581 |
|
|
|
98,562 |
|
Home
equity
|
|
|
307,749 |
|
|
|
302,442 |
|
|
|
286,110 |
|
|
|
288,537 |
|
Credit
card
|
|
|
27,023 |
|
|
|
27,005 |
|
|
|
27,538 |
|
|
|
27,169 |
|
Leasing
|
|
|
25 |
|
|
|
25 |
|
|
|
50 |
|
|
|
49 |
|
Less
allowance for loan and lease losses
|
|
|
38,649 |
|
|
|
|
|
|
|
35,873 |
|
|
|
|
|
Net
loans
|
|
|
2,854,305 |
|
|
|
2,870,655 |
|
|
|
2,647,387 |
|
|
|
2,665,024 |
|
Mortgage-servicing
rights
|
|
|
335 |
|
|
|
335 |
|
|
|
398 |
|
|
|
398 |
|
Accrued
interest receivable
|
|
|
14,286 |
|
|
|
14,286 |
|
|
|
15,223 |
|
|
|
15,223 |
|
Derivative
financial instruments
|
|
|
1,091 |
|
|
|
1,091 |
|
|
|
56 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
|
423,781 |
|
|
|
423,781 |
|
|
|
413,283 |
|
|
|
413,283 |
|
Interest-bearing
demand
|
|
|
599,365 |
|
|
|
599,365 |
|
|
|
636,945 |
|
|
|
636,945 |
|
Savings
|
|
|
657,300 |
|
|
|
657,300 |
|
|
|
583,081 |
|
|
|
583,081 |
|
Time
|
|
|
1,111,399 |
|
|
|
1,118,178 |
|
|
|
1,150,208 |
|
|
|
1,168,228 |
|
Total
deposits
|
|
|
2,791,845 |
|
|
|
2,798,624 |
|
|
|
2,783,517 |
|
|
|
2,801,537 |
|
Short-term
borrowings
|
|
|
356,777 |
|
|
|
356,777 |
|
|
|
354,533 |
|
|
|
354,533 |
|
Long-term
debt
|
|
|
135,908 |
|
|
|
140,134 |
|
|
|
148,164 |
|
|
|
155,702 |
|
Other
long-term debt
|
|
|
20,620 |
|
|
|
20,620 |
|
|
|
20,620 |
|
|
|
20,620 |
|
Accrued
interest payable
|
|
|
4,735 |
|
|
|
4,735 |
|
|
|
6,033 |
|
|
|
6,033 |
|
Derivative
financial instruments
|
|
|
2,071 |
|
|
|
2,071 |
|
|
|
3,339 |
|
|
|
3,339 |
|
The
following table summarizes the financial assets and liabilities measured at fair
value on a recurring basis at June 30, 2009 (dollars in $000’s):
|
|
Fair Value Measurements Using
|
|
|
Netting
|
|
|
Assets/Liabilities
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Adjustments
|
|
|
at Fair Value
|
|
Trading
investment securities
|
|
$ |
184 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
184 |
|
Derivatives
|
|
|
0 |
|
|
|
11,136 |
|
|
|
(216 |
) |
|
|
(9,829 |
) |
|
|
1,091 |
|
Available-for-sale
investment securities
|
|
|
114 |
|
|
|
528,065 |
|
|
|
0 |
|
|
|
0 |
|
|
|
528,179 |
|
Total
|
|
$ |
298 |
|
|
$ |
539,201 |
|
|
$ |
(216 |
) |
|
$ |
(9,829 |
) |
|
$ |
529,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
- Derivatives
|
|
$ |
0 |
|
|
$ |
12,247 |
|
|
$ |
(347 |
) |
|
$ |
(9,829 |
) |
|
$ |
2,071 |
|
(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 June 30, 2009
(dollars in $000’s):
|
|
Fair Value Measurements Using
|
|
|
Year-to-date
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Gains/(Losses)
|
|
Loans
held for sale *
|
|
$ |
0 |
|
|
$ |
6,193 |
|
|
$ |
0 |
|
|
|
0 |
|
Impaired
loans
|
|
|
0 |
|
|
|
10,339 |
|
|
|
0 |
|
|
|
0 |
|
(1)
Amounts represent the fair value of collateral for impaired loans allocated to
the allowance for loan and lease losses.
NOTE
12: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Shareholders’
equity is affected by transactions and valuations of asset and liability
positions that require adjustments to accumulated other comprehensive income
(loss). Disclosure of the related tax effects allocated to other
comprehensive income and accumulated other comprehensive income (loss) for the
six months ended June 30 were as follows (dollars in $000’s):
|
|
Transactions
|
|
|
Balances
|
|
|
|
Pre-tax
|
|
|
Tax-effect
|
|
|
Net of tax
|
|
|
Net of tax
|
|
June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on securities available-for-sale
|
|
$ |
957 |
|
|
$ |
(348 |
) |
|
$ |
609 |
|
|
$ |
7,548 |
|
Unrealized
loss on derivatives
|
|
|
371 |
|
|
|
(135 |
) |
|
|
236 |
|
|
|
1,005 |
|
Unfunded
pension obligation
|
|
|
565 |
|
|
|
(205 |
) |
|
|
360 |
|
|
|
(19,253 |
) |
Total
|
|
$ |
1,893 |
|
|
$ |
(688 |
) |
|
$ |
1,205 |
|
|
$ |
(10,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
adjustment for accounting change-fair value option
|
|
$ |
1,181 |
|
|
$ |
(431 |
) |
|
$ |
750 |
|
|
$ |
0 |
|
Unrealized
gain on securities available-for-sale
|
|
|
(3,186 |
) |
|
|
1,162 |
|
|
|
(2,024 |
) |
|
|
(946 |
) |
Unfunded
pension obligation
|
|
|
260 |
|
|
|
(95 |
) |
|
|
165 |
|
|
|
(7,290 |
) |
Total
|
|
$ |
(1,745 |
) |
|
$ |
636 |
|
|
$ |
(1,109 |
) |
|
$ |
(8,236 |
) |
NOTE
13: EARNINGS PER COMMON SHARE
The
following table sets forth the computation of basic and diluted earnings per
share (dollars in $000’s, except per share data):
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator
for basic and diluted earnings per share - income
available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,450 |
|
|
$ |
7,808 |
|
|
$ |
7,185 |
|
|
$ |
15,146 |
|
Dividends
on preferred stock
|
|
|
1,000 |
|
|
|
0 |
|
|
|
1,578 |
|
|
|
0 |
|
Income
available to common shareholders:
|
|
$ |
450 |
|
|
$ |
7,808 |
|
|
$ |
5,607 |
|
|
$ |
15,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share - weighted average shares
|
|
|
40,734,254 |
|
|
|
37,114,451 |
|
|
|
38,928,557 |
|
|
|
37,090,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock awards
|
|
|
361,695 |
|
|
|
410,338 |
|
|
|
529,886 |
|
|
|
387,750 |
|
Warrants
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Denominator
for diluted earnings per share - adjusted weighted average shares
|
|
|
41,095,949 |
|
|
|
37,524,789 |
|
|
|
39,458,443 |
|
|
|
37,478,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share available to common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.01 |
|
|
$ |
0.21 |
|
|
$ |
0.14 |
|
|
$ |
0.41 |
|
Diluted
|
|
$ |
0.01 |
|
|
$ |
0.21 |
|
|
$ |
0.14 |
|
|
$ |
0.40 |
|
Stock
options and warrants, where the exercise price was greater than the average
market price of the common shares, were not included in the computation of net
income per diluted share as they would have been antidilutive. These
out-of-the-money options were 3,314,462 and 1,963,489 at June 30, 2009 and 2008,
respectively. The out-of-the-money warrant to purchase common stock
of 930,233 was also outstanding at June 30, 2009.
NOTE
14: SUBSEQUENT EVENTS
First
Financial evaluated events and transactions that occurred after the balance
sheet date of June 30, 2009 through August 7, 2009, the date the
financial statements were issued, for adjustment to or disclosure in the
consolidated financial statements.
On July
1, 2009, First Financial’s wholly-owned subsidiary bank, First Financial Bank,
N.A. (First Financial Bank), entered into a Branch Purchase Agreement whereby
the company agreed to purchase 3 branches from Irwin Union Bank and Trust
Company (Irwin) in the Indiana cities of Carmel, Greensburg and Shelbyville.
Approximately $143 million of deposits will be assumed at that time at par. The
company also expects to purchase an additional $50 million in select performing
commercial and consumer loans from Irwin in the third quarter when the
acquisition of the 3 branches is expected to close. The branch purchase remains
scheduled to close late in the third quarter of 2009, subject to regulatory
approval and/or non-objection.
On July
31, 2009, First Financial announced that the company had terminated a previously
announced proposed branch acquisition from Peoples Community Bank and instead
acquired substantially all the assets and assumed substantially all the
liabilities of Peoples Community Bank through the receivership and resolution
process of the Federal Deposit Insurance Corporation (FDIC).
First
Financial paid a 1.5% premium for all deposits and acquired substantially all
the assets at a $42 million discount. Total deposits are approximately $538
million and total loans are estimated at $436 million based on gross loans from
the seller’s records. Losses incurred from the loan portfolio will be partially
absorbed by the FDIC under a loss sharing agreement whereby 80% of losses up to
$190 million, and 95% of losses beyond $190 million, are covered by the FDIC.
This loss sharing agreement provides First Financial with total loss protection
on 88.5% of the $436 million loan portfolio and gives the company assurance that
this transaction, despite the purchase of nonperforming loans, is conservative
and will create added value to shareholders.
First
Financial has a 90-day option to determine which branches it will purchase, or
leases it will assume, at fair market value from the FDIC as
receiver.
This transaction
will be accounted for using the acquisition method of accounting under SFAS No.
141(R), “Business Combinations.” The purchase price will be allocated to the
assets acquired and liabilities assumed using estimated fair values as of the
acquisition date. The final fair value determinations will be made throughout
the third quarter.
The
Peoples Community Bank and Irwin transactions are expected to add a combined
$0.16 to $0.19 per share on a cash basis in their first full year of
operation.
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 2008, including a new market headquarters for its
Dayton-Middletown metropolitan market and a new banking center in Crown Point,
Indiana. Additionally First Financial added a commercial lending team
in the Indianapolis metropolitan market. During the first quarter of
2009, First Financial opened a new banking center in Cincinnati,
Ohio. First Financial intends to concentrate future growth plans and
capital investments in its metropolitan markets. 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.
At June
30, 2009, First Financial had 82 offices serving nine distinct
markets. 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 second quarter of 2009 was $1.5 million while net income
available to common shareholders was $0.5 million or $0.01 in diluted earnings
per share. Net income for the second quarter of 2008 was $7.8 million
or $0.21 in diluted earnings per share. Net income available to
common shareholders declined $7.3 million in the second quarter of 2009 when
compared to the same quarter in 2008, primarily due to increased provision for
loan and lease losses of $7.9 million, and increased noninterest expense of $4.8
million offset by increases in net interest income of $2.8 million and decreases
in taxes of $3.2 million.
Net
income available to common shareholders for the second quarter of 2009 compared
to the first quarter of 2009 decreased $4.7 million due to the pre-tax increases
in the provision for loan and lease losses of $6.1 million and noninterest
expense of $2.9 million, offset by an increase in noninterest income of $2.1
million and a decrease in taxes of $2.3 million.
Year-to-date
2009 net income was $7.2 million, while net income available to common
shareholders was $5.6 million, or $0.14 in diluted earnings per share. This
compares with year-to-date 2008 net income of $15.1 million or $0.40 in diluted
earnings per share. Net income available to common shareholders
declined $9.5 million in 2009 when compared to the same six month period in
2008, primarily due to increased provision for loan and lease losses of $8.9
million and increased noninterest expense of $5.7 million offset by increases in
net interest income of $5.5 million and decreases in taxes of $3.7
million.
Return on
average assets for the second quarter of 2009 was 0.15% compared to 0.93% for
the comparable period in 2008 and 0.62% for the linked-quarter (second quarter
of 2009 compared to the first quarter of 2009). Return on average
shareholders’ equity for the second quarter of 2009 was 1.53% compared to 11.26%
for the comparable period in 2008 and 6.63% for the linked-quarter.
Return on
average assets for the first six months of 2009 was 0.38% compared to 0.91% for
the comparable period in 2008. Return on average shareholders’ equity
was 3.96% for the first six months of 2009, versus 10.96% for the comparable
period in 2008.
A
detailed discussion of the first six months and second quarter of 2009 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
|
|
|
Six Months Ended
|
|
(dollars in $000’s)
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
interest income
|
|
$ |
31,209 |
|
|
$ |
28,414 |
|
|
$ |
62,137 |
|
|
$ |
56,663 |
|
Tax
equivalent adjustment
|
|
|
307 |
|
|
|
510 |
|
|
|
670 |
|
|
|
1,024 |
|
Net
interest income - tax equivalent
|
|
$ |
31,516 |
|
|
$ |
28,924 |
|
|
$ |
62,807 |
|
|
$ |
57,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
earning assets
|
|
$ |
3,475,182 |
|
|
$ |
3,074,885 |
|
|
$ |
3,475,267 |
|
|
$ |
3,041,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin *
|
|
|
3.60 |
% |
|
|
3.72 |
% |
|
|
3.62 |
% |
|
|
3.75 |
% |
Net
interest margin (fully tax equivalent) *
|
|
|
3.64 |
% |
|
|
3.78 |
% |
|
|
3.65 |
% |
|
|
3.81 |
% |
* Margins are calculated using net
interest income annualized divided by average earning
assets.
Second
quarter 2009 net interest income increased $2.8 million from the second quarter
of 2008 and $0.3 million from the first quarter of 2009. The second quarter 2009
net interest margin declined 12 basis points from the second quarter of 2008 and
1 basis point from the first quarter 2009. Year-to-date 2009 net interest income
increased $5.5 million from 2008’s comparable period, and the net interest
margin declined 13 basis points.
The
year-over-year quarter, linked quarter and year-to-date increases in net
interest income were due to higher balances in average total loans primarily
driven by higher commercial lending volume, as well as an increase in lower-cost
transaction deposit accounts. Second quarter and year-to-date 2009 net interest
income were also positively impacted by growth in the investments securities
portfolio.
The
year-over-year quarter and year-to-date net interest margin declines were
primarily related to the lower overall market interest rate environment.
However, this was partially offset by growth in average total loans and the
continued mix shift in the loan portfolio from consumer to commercial, growth in
the investment portfolio, as well as increased average total deposits, including
the continued transition in the deposit mix from time to transaction
deposits.
The
linked quarter net interest margin benefited from stabilization of overall
market interest rates over the past six months and increased average total loans
and deposits combined with the continued transitions in the mix of these
portfolios. However, this was offset by monthly cash flows from the investment
portfolio that were not reinvested into securities.
On a tax
equivalent basis, the second quarter of 2009 net interest margin of 3.64%
decreased 14 basis points from 3.78% for the second quarter of 2008 and 1 basis
point from the first quarter of 2009. The 2009 year-to-date tax
equivalent net interest margin of 3.65% decreased 16 basis points from the 3.81%
for year-to-date 2008.
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
|
|
June 30, 2009
|
|
|
March 31, 2009
|
|
|
June 30, 2008
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
0.00 |
% |
|
$ |
0 |
|
|
$ |
0 |
|
|
|
0.00 |
% |
|
$ |
4,095 |
|
|
$ |
40 |
|
|
|
3.93 |
% |
Investment
securities
|
|
|
731,119 |
|
|
|
8,409 |
|
|
|
4.61 |
% |
|
|
758,257 |
|
|
|
9,124 |
|
|
|
4.88 |
% |
|
|
422,463 |
|
|
|
5,179 |
|
|
|
4.93 |
% |
Loans
(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
|
|
843,183 |
|
|
|
9,422 |
|
|
|
4.48 |
% |
|
|
825,399 |
|
|
|
8,914 |
|
|
|
4.38 |
% |
|
|
805,122 |
|
|
|
11,302 |
|
|
|
5,65 |
% |
Real
estate – construction
|
|
|
257,487 |
|
|
|
2,391 |
|
|
|
3.72 |
% |
|
|
242,750 |
|
|
|
2,225 |
|
|
|
3.72 |
% |
|
|
179,078 |
|
|
|
2,287 |
|
|
|
5.14 |
% |
Real
estate – commercial
|
|
|
869,985 |
|
|
|
12,066 |
|
|
|
5.56 |
% |
|
|
858,403 |
|
|
|
11,938 |
|
|
|
5.64 |
% |
|
|
747,077 |
|
|
|
12,059 |
|
|
|
6.49 |
% |
Real
estate – residential
|
|
|
354,776 |
|
|
|
4,814 |
|
|
|
5.44 |
% |
|
|
377,938 |
|
|
|
5,163 |
|
|
|
5.54 |
% |
|
|
511,871 |
|
|
|
7,221 |
|
|
|
5.67 |
% |
Installment
|
|
|
89,857 |
|
|
|
1,502 |
|
|
|
6.70 |
% |
|
|
94,881 |
|
|
|
1,573 |
|
|
|
6.72 |
% |
|
|
121,000 |
|
|
|
2,012 |
|
|
|
6.69 |
% |
Home
equity
|
|
|
302,159 |
|
|
|
2,835 |
|
|
|
3.76 |
% |
|
|
291,038 |
|
|
|
2,855 |
|
|
|
3.98 |
% |
|
|
257,954 |
|
|
|
3,725 |
|
|
|
5.81 |
% |
Credit
card
|
|
|
26,577 |
|
|
|
595 |
|
|
|
8.98 |
% |
|
|
26,641 |
|
|
|
615 |
|
|
|
9.36 |
% |
|
|
26,043 |
|
|
|
657 |
|
|
|
10.15 |
% |
Lease
financing
|
|
|
39 |
|
|
|
1 |
|
|
|
10.28 |
% |
|
|
47 |
|
|
|
1 |
|
|
|
8.63 |
% |
|
|
182 |
|
|
|
3 |
|
|
|
6.63 |
% |
Loan
fees
|
|
|
|
|
|
|
352 |
|
|
|
|
|
|
|
|
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
380 |
|
|
|
|
|
Total
loans
|
|
|
2,744,063 |
|
|
|
33,978 |
|
|
|
4.97 |
% |
|
|
2,717,097 |
|
|
|
33,657 |
|
|
|
5.02 |
% |
|
|
2,648,327 |
|
|
|
39,646 |
|
|
|
6.02 |
% |
Total
earning assets
|
|
|
3,475,182 |
|
|
|
42,387 |
|
|
|
4.89 |
% |
|
|
3,475,354 |
|
|
|
42,781 |
|
|
|
4.99 |
% |
|
|
3,074,885 |
|
|
|
44,865 |
|
|
|
5.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
81,016 |
|
|
|
|
|
|
|
|
|
|
|
85,650 |
|
|
|
|
|
|
|
|
|
|
|
81,329 |
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
|
(36,644 |
) |
|
|
|
|
|
|
|
|
|
|
(37,189 |
) |
|
|
|
|
|
|
|
|
|
|
(29,248 |
) |
|
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
85,433 |
|
|
|
|
|
|
|
|
|
|
|
84,932 |
|
|
|
|
|
|
|
|
|
|
|
78,933 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
179,471 |
|
|
|
|
|
|
|
|
|
|
|
168,763 |
|
|
|
|
|
|
|
|
|
|
|
155,750 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,784,458 |
|
|
|
|
|
|
|
|
|
|
$ |
3,777,510 |
|
|
|
|
|
|
|
|
|
|
$ |
3,361,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
|
|
$ |
630,885 |
|
|
|
389 |
|
|
|
0.25 |
% |
|
$ |
642,934 |
|
|
|
350 |
|
|
|
0.22 |
% |
|
$ |
590,464 |
|
|
|
1,089 |
|
|
|
0.74 |
% |
Savings
|
|
|
645,197 |
|
|
|
487 |
|
|
|
0.30 |
% |
|
|
620,509 |
|
|
|
347 |
|
|
|
0.23 |
% |
|
|
617,029 |
|
|
|
1,321 |
|
|
|
0.86 |
% |
Time
|
|
|
1,131,972 |
|
|
|
8,204 |
|
|
|
2.91 |
% |
|
|
1,142,257 |
|
|
|
9,106 |
|
|
|
3.23 |
% |
|
|
1,193,447 |
|
|
|
12,225 |
|
|
|
4.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
385,769 |
|
|
|
527 |
|
|
|
0.55 |
% |
|
|
401,830 |
|
|
|
507 |
|
|
|
0.51 |
% |
|
|
194,183 |
|
|
|
1,130 |
|
|
|
2.34 |
% |
Long-term
borrowings
|
|
|
156,809 |
|
|
|
1,571 |
|
|
|
4.02 |
% |
|
|
164,978 |
|
|
|
1,543 |
|
|
|
3.79 |
% |
|
|
62,226 |
|
|
|
686 |
|
|
|
4.43 |
% |
Total
interest-bearing liabilities
|
|
|
2,950,632 |
|
|
|
11,178 |
|
|
|
1.52 |
% |
|
|
2,972,508 |
|
|
|
11,853 |
|
|
|
1.62 |
% |
|
|
2,657,349 |
|
|
|
16,451 |
|
|
|
2.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities and shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
|
425,330 |
|
|
|
|
|
|
|
|
|
|
|
416,206 |
|
|
|
|
|
|
|
|
|
|
|
394,352 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
28,552 |
|
|
|
|
|
|
|
|
|
|
|
37,939 |
|
|
|
|
|
|
|
|
|
|
|
31,145 |
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
379,944 |
|
|
|
|
|
|
|
|
|
|
|
350,857 |
|
|
|
|
|
|
|
|
|
|
|
278,803 |
|
|
|
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders’
equity
|
|
$ |
3,784,458 |
|
|
|
|
|
|
|
|
|
|
$ |
3,777,510 |
|
|
|
|
|
|
|
|
|
|
$ |
3,361,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
31,209 |
|
|
|
|
|
|
|
|
|
|
$ |
30,928 |
|
|
|
|
|
|
|
|
|
|
$ |
28,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
3.38 |
% |
Contribution
of noninterest-bearing sources of funds
|
|
|
|
|
|
|
|
|
|
|
0.23 |
% |
|
|
|
|
|
|
|
|
|
|
0.24 |
% |
|
|
|
|
|
|
|
|
|
|
0.34 |
% |
Net interest margin
(2)
|
|
|
|
|
|
|
|
|
|
|
3.60 |
% |
|
|
|
|
|
|
|
|
|
|
3.61 |
% |
|
|
|
|
|
|
|
|
|
|
3.72 |
% |
(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 June 30
|
|
|
|
Linked Qtr. Income Variance
|
|
|
Comparable Qtr. Income Variance
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
Earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$ |
(499 |
) |
|
$ |
(216 |
) |
|
$ |
(715 |
) |
|
$ |
(320 |
) |
|
$ |
3,550 |
|
|
$ |
3,230 |
|
Federal
funds sold
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(40 |
) |
|
|
(40 |
) |
Gross
loans
(1)
|
|
|
(383 |
) |
|
|
704 |
|
|
|
321 |
|
|
|
(6,853 |
) |
|
|
1,185 |
|
|
|
(5,668 |
) |
Total
earning assets
|
|
|
(882 |
) |
|
|
488 |
|
|
|
(394 |
) |
|
|
(7,173 |
) |
|
|
4,695 |
|
|
|
(2,478 |
) |
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing deposits
|
|
$ |
(832 |
) |
|
$ |
109 |
|
|
$ |
(723 |
) |
|
$ |
(5,582 |
) |
|
$ |
27 |
|
|
$ |
(5,555 |
) |
Borrowed
funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
36 |
|
|
|
(16 |
) |
|
|
20 |
|
|
|
(865 |
) |
|
|
262 |
|
|
|
(603 |
) |
Federal
Home Loan Bank long-term debt
|
|
|
5 |
|
|
|
(60 |
) |
|
|
(55 |
) |
|
|
(2 |
) |
|
|
869 |
|
|
|
867 |
|
Other
long-term debt
|
|
|
79 |
|
|
|
4 |
|
|
|
83 |
|
|
|
18 |
|
|
|
0 |
|
|
|
18 |
|
Total
borrowed funds
|
|
|
120 |
|
|
|
(72 |
) |
|
|
48 |
|
|
|
(849 |
) |
|
|
1,131 |
|
|
|
282 |
|
Total
interest-bearing liabilities
|
|
|
(712 |
) |
|
|
37 |
|
|
|
(675 |
) |
|
|
(6,431 |
) |
|
|
1,158 |
|
|
|
(5,273 |
) |
Net
interest income
(2)
|
|
$ |
(170 |
) |
|
$ |
451 |
|
|
$ |
281 |
|
|
$ |
(742 |
) |
|
$ |
3,537 |
|
|
$ |
2,795 |
|
(1) Loans
held for sale and nonaccrual loans are both included in gross
loans.
(2) Not
tax equivalent.
|
|
Changes for the
Six Months Ended June 30
|
|
|
|
Year-to-Date Income Variance
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
Earning
assets
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$ |
(452 |
) |
|
$ |
8,494 |
|
|
$ |
8,042 |
|
Federal
funds sold
|
|
|
0 |
|
|
|
(605 |
) |
|
|
(605 |
) |
Gross
loans
(1)
|
|
|
(17,413 |
) |
|
|
2,681 |
|
|
|
(14,732 |
) |
Total
earning assets
|
|
|
(17,865 |
) |
|
|
10,570 |
|
|
|
(7,295 |
) |
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing deposits
|
|
$ |
(13,333 |
) |
|
$ |
(158 |
) |
|
$ |
(13,491 |
) |
Borrowed
funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
(1,545 |
) |
|
|
657 |
|
|
|
(888 |
) |
Federal
Home Loan Bank long-term debt
|
|
|
(7 |
) |
|
|
1,774 |
|
|
|
1,767 |
|
Other
long-term debt
|
|
|
(157 |
) |
|
|
0 |
|
|
|
(157 |
) |
Total
borrowed funds
|
|
|
(1,709 |
) |
|
|
2,431 |
|
|
|
722 |
|
Total
interest-bearing liabilities
|
|
|
(15,042 |
) |
|
|
2,273 |
|
|
|
(12,769 |
) |
Net
interest income
(2)
|
|
$ |
(2,823 |
) |
|
$ |
8,297 |
|
|
$ |
5,474 |
|
(1) Loans
held for sale and nonaccrual loans are both included in gross
loans.
(2) Not
tax equivalent.
NONINTEREST
INCOME
Second
quarter 2009 noninterest income was $14.1 million, compared with $13.8 million
in the second quarter of 2008, and $12.0 million in the first quarter of
2009. Second quarter 2009 results included a $3.3 million gain on the
sale of investment securities and a $0.1 million gain on FHLMC
shares. The second quarter of 2008 included a $0.2 million loss on
FHLMC shares. First quarter 2009 results included a $0.6 million gain
from the sale of the property and casualty liability portion of the company’s
insurance business, prior to employee-related costs.
Second
quarter 2009 noninterest income increased $0.3 million from the second quarter
of 2008 and $2.1 million from the first quarter of 2009. Excluding the items
previously disclosed, second quarter 2009 noninterest income declined $3.3
million from the second quarter of 2008 and $0.8 million from the first quarter
of 2009. The year-over-year
decline
was primarily due to lower service charges on deposit accounts, decreases in
bankcard income, lower trust and
wealth management fees, and a decline in other noninterest
income. The decline in other noninterest income was related to lower
revenue from bank-owned life insurance, brokerage, and the property and casualty
liability portion of the company’s insurance business that was sold during the
first quarter of 2009. Market-based revenues such as bank-owned life
insurance and trust fees are reflective of the overall market conditions from
which these revenues are derived. The linked quarter benefited from
increases in service charges on deposit accounts and bankcard income, but was
also negatively impacted by lower fee income from the client derivative program
and a decrease in trust and wealth management fees.
Year-to-date
2009 noninterest income was $26.1 million, a decline of $2.5 million from $28.6
million in 2008’s comparable period. The year-to-date 2009
noninterest income included the items mentioned previously. The
year-to-date 2008 noninterest income included the FHLMC loss mentioned
previously as well as a $1.6 million gain associated with the partial redemption
of Visa Inc. common shares. Excluding these items, year-to-date 2009
noninterest income declined $5.2 million from 2008’s comparable
period. This decline was primarily due to lower service charges on
deposit accounts, decreases in bankcard income and lower trust and wealth
management fees as well as a decline in income from bank-owned life
insurance.
For the
past several quarters, most fee income components of noninterest income have
been negatively impacted by the declining economic conditions and their impact
on consumer spending, while trust and wealth management fees were negatively
impacted by volatility in the investment and equity markets. In the second
quarter of 2009, a number of deposit and consumer-based fee income categories
realized some improvement over the first quarter of 2009. Total service charges
on deposit accounts increased $0.2 million, and bankcard income increased $0.1
million. Trust and wealth management fees were down slightly from the first
quarter of 2009; however, the decline was not as severe as it had been over the
past several quarters.
Since
June 30, 2008, assets under management by the company’s wealth management
division have declined by $366.4 million or 18% to $1.7 billion at June 30,
2009, primarily as a result of equity market declines.
NONINTEREST
EXPENSE
Second
quarter 2009 noninterest expense was $32.8 million, compared with $28.0 million
in the second quarter of 2008, and $29.9 million in the first quarter of
2009. Second quarter 2009 results included an FDIC special assessment
of $1.7 million, FDIC expense of $1.7 million, and $0.4 million in
acquisition-related expenses. Second quarter 2008 results included a
$1.3 million reduction in the liability for retiree medical benefits and $0.1
million in FDIC expense. First quarter 2009 noninterest expense
included FDIC expense of $0.3 million and severance payments of $0.2 million
related to the sale of the property and casualty portion of the company’s
insurance business which closed in the first quarter.
Second
quarter 2009 noninterest expense was $32.8 million, an increase of $4.8 million
from the second quarter of 2008, and an increase of $2.9 million from the first
quarter of 2009. Excluding the items mentioned previously, second
quarter 2009 noninterest expense decreased $0.2 million from the second quarter
of 2008 and $0.5 million from the first quarter of 2009. The
year-over-year quarter and linked quarter declines in noninterest expense were
primarily related to lower salaries and benefits due to lower incentive based
pay, partially offset by increased marketing costs as well as higher
professional services and other noninterest expenses related to loan collection
and resolution efforts.
Year-to-date
2009 noninterest expense increased $5.7 million to $62.7 million from $57.0
million in 2008’s comparable period. Excluding the items mentioned previously,
year-to-date 2009 noninterest expense increased $0.3 million from 2008’s
comparable period. This increase was primarily related to higher professional
services and other noninterest expenses related to loan collection and
resolution efforts, as well as increased marketing and furniture and equipment
costs, partially offset by a lower salaries and benefits due to lower incentive
pay. The higher marketing and furniture and equipment costs were
related to First Financial’s market expansion efforts, as the company opened two
new banking centers in late 2008 and one new banking center in the Cincinnati
market earlier this year.
The
second quarter 2009 FDIC special assessment was applicable to all insured
financial institutions. The FDIC is currently evaluating further increases in
deposit insurance premiums for all insured institutions later in 2009, including
a second possible special assessment later in the year. In addition,
regularly assessed FDIC insurance premiums increased.
INCOME
TAXES
Income
tax expense was $0.7 million and $3.9 million for the second quarters of 2009
and 2008, respectively. The effective taxes rates for the second quarters of
2009 and 2008 were 32.6% and 33.3%, respectively. The decrease in the
2009 effective tax rate for the second quarter is primarily due to a
contribution made to the company’s pension plan which was partially offset by
reduced tax-exempt investment interest and executive life insurance
income.
Income
tax expense was $3.7 million and $7.4 million for the six months ended June 30,
2009, and 2008, respectively with a tax expense related to securities
transactions of $1.2 million and $0.6 million for the six months ended June 20,
2009, and 2008, respectively. The effective tax rates for the six
months ended June 20, 2009, and 2008, were 34.2% and 32.9%,
respectively. The increase in the 2009 effective tax rate is
primarily due to reduced tax-exempt investment interest and reduced executive
life insurance income.
ASSETS
The
outlook for growth in commercial lending remains positive as the company expands
its presence in new and existing markets. The 2008 opening of the
Indianapolis office expanded the company’s presence into a 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.
Average
total loans increased $92.8 million or 3.5% from the second quarter of 2008,
excluding loans held for sale of $5.9 million for the second quarter of 2009 and
$3.0 million for the second quarter of 2008. Average commercial,
commercial real estate, and construction loans increased $239.4 million or 13.8%
from the second quarter of 2008.
Average
total loans increased $26.1 million or 3.9% on an annualized basis, from the
first quarter of 2009, excluding loans held for sale of $5.9 million for the
second quarter of 2009 and $5.1 million for the first quarter of
2009. Average commercial, commercial real estate, and construction
loans increased $44.1 million or 9.2% on an annualized, from the first quarter
of 2009.
On a
year-to-date basis, excluding loans held for sale of $5.5 million for the six
months ended June 30, 2009 and $3.1 million for the comparable period in 2008,
average total loans increased $105.8 million or 4.0%. Average
commercial, commercial real estate, and construction loans increased $257.0
million or 15.2% from June of 2008.
First
Financial continues to experience strong loan growth, primarily within its
commercial lending portfolios. Overall declines in certain period-end
and average loans are a result of the company’s strategy to de-emphasize certain
consumer-based lending activities.
First
Financial purchased $145.1 million in select performing commercial and consumer
loans from Irwin Union Bank and Trust Company (Irwin) on June 30,
2009. None of the loans purchased are residential development, land
acquisition or development loans and at the time of purchase, none were 30 days
or more delinquent, watch list, substandard, classified or
criticized. The loans were purchased at par.
During
the fourth quarter of 2008, First Financial completed the sale of $80 million in
perpetual preferred securities to the U.S. Treasury under the Capital Purchase
Program (“CPP”), a component of the Troubled Asset Relief Program
(“TARP”). At the time of issuance the company had both short and
long-term plans for the use of CPP proceeds. In anticipation of the
receipt of the $80 million in capital, the company began purchasing
agency-guaranteed, mortgage backed securities during the fourth quarter
2008. It was expected that as additional organic lending
opportunities became available, the cash flows from the CPP Investment Portfolio
would provide sufficient liquidity and capital support for redeployment into
loans. This investment portfolio was specifically designated as the
CPP Investment Portfolio.
As a
result of the June 30, 2009 purchase of the $145.1 million loan portfolio from
Irwin, the company executed a strategy to restructure the CPP Investment
Portfolio to fund this purchase. During the second quarter of 2009,
$149.4 million of CPP Investment Portfolio securities, with an effective yield
of 4.67%, were sold resulting in an aggregate pre-tax gain of $3.3
million. The CPP Investment Portfolio totaled $59.8 million at June
30, 2009, compared with $225.4 million at March 31, 2009.
Securities
available-for-sale at June 30, 2009, totaled $528.2 million, compared with
$421.7 million at June 30, 2008, and $732.9 million at March 31,
2009. The total investment portfolio represented 14.8% and 13.4% of
total assets at June 30, 2009 and 2008, respectively, and 20.1% of total assets
at March 31, 2009.
At June
30, 2009, the company held 82.3% of its available-for-sale securities in
residential mortgage-related investments, substantially all of which are held in
highly-rated, agency-backed pass-through instruments, including collateralized
mortgage obligations (CMOs). All CMOs held by the company are AAA
rated by Standard & Poor’s Corporation or similar rating agencies. First
Financial does not own any interest-only, principal-only, or other high-risk
securities.
The
company has recorded, as a component of equity in accumulated other
comprehensive income, an unrealized after-tax gain on the investment portfolio
of approximately $7.5 million at June 30, 2009, compared with an unrealized
after-tax loss of $0.9 million at June 30, 2008. After-tax gains of
$10.6 million were recorded at March 31, 2009 and $6.9 million at December 31,
2008.
DEPOSITS
AND FUNDING
Average
total deposits increased $38.1 million, or 1.4% from the second quarter of 2008
to the second quarter of 2009. Average transaction and savings deposits
increased $99.6 million, or 6.2%, while average time deposits declined $61.5
million, or 5.2%.
On a
linked quarter basis, average total deposits increased $11.5 million, or 1.6% on
an annualized basis. Average transaction and savings deposits
increased $21.8 million, or 5.2% on an annualized basis. Average time
deposits declined $10.3 million, or 3.6% on an annualized basis.
Year-to-date
average total deposits increased $13.9 million, or 0.5% from the comparable
period of 2008. Average transaction and savings deposits increased
$83.2 million, or 5.2%, while average time deposits declined $69.3 million, or
5.7%.
First
Financial experienced growth in average total deposit balances during the second
quarter of 2009, particularly in savings and lower-cost average transaction
deposits. This growth is a result of deposit-pricing strategies and other
initiatives that the company implemented over the past several quarters in an
effort to grow and retain more low-cost transaction-based retail and commercial
deposits. One new initiative recently launched is a retail sales
program that comprehensively tracks client contacts as well as calling efforts,
actual product sales and client service metrics. The declines in
average time deposits are attributable to a decrease in average total
interest-bearing deposits primarily due to the runoff of time deposits resulting
from disciplined pricing and the company’s strategy to generate lower-cost
transaction-based accounts.
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.
Second
quarter 2009 nonperforming loans increased to $37.8 million from $24.9 million
in the first quarter of 2009 and $15.4 million in the second quarter of
2008. Both the linked-quarter and year-over-year increases were
primarily attributable to continued deterioration within the commercial lending
portfolios. During the quarter, an $8.2 million commercial real
estate construction loan participation was placed in nonaccrual. The
overall credit quality of the commercial lending portfolios has remained
relatively strong throughout the economic downturn. Late in the
fourth quarter of 2008 and continuing into the first half of 2009, First
Financial has seen a higher level of borrower stress related to the prolonged
weak economic conditions.
While the
economies in most of the markets the company serves are well diversified and the
economic deterioration has been less severe in these areas compared with other
parts of the United States, the prolonged downturn and near record
unemployment levels have begun to negatively affect clients who just a short
time ago were not impacted by these adverse conditions.
The
provision for loan and lease losses for the second quarter of 2009 was $10.4
million compared to $2.5 million for the same period in 2008 and $4.3 million
for the linked-quarter. Year-to-date provision for loan and lease
losses was $14.6 for 2009 and $5.7 million for 2008. The year-to-date
2009 provision expense, represented approximately 123% of year-to-date 2009
total net charge-offs. The allowance for loan and lease losses at
June 30, 2009, was 1.6 times the first six months annualized net
charge-offs. The allowance for loan and lease losses to period-end
loans ratio was 1.34% as of June 30, 2009, compared to the June 30, 2008, and
March 31, 2009, ratios of 1.11% and 1.33%, respectively. First
Financial’s allowance for loan and lease losses was $38.6 million at June 30,
2009, compared to $36.4 million at March 31, 2009, and $29.6 million at June 30,
2008.
Similar
to the first quarter of 2009, the higher level of nonperforming loans in the
second quarter of 2009 continued to adversely impact the company’s nonperforming
loan coverage ratios. The second quarter 2009 allowance for loan and lease
losses as a percent of nonaccrual and nonperforming loans was 102.8% and 102.3%,
respectively, compared with 147.6% and 146.4%, respectively, in the first
quarter of 2009, and 199.7% and 192.5%, respectively, in the second quarter of
2008. Although the allowance for loan and lease losses as a percent of
nonaccrual and nonperforming loans has declined over the past several quarters,
based on historical information available, the company believes that it
continues to compare favorably with the industry and its peers on these and most
other key credit ratios and metrics. First Financial expects that the
challenging economic conditions will continue to persist over the coming
quarters, and as a result, anticipates that credit costs may remain volatile
during this uncertain period.
Prior to
and throughout the economic downturn, the company has maintained strong
underwriting policies, originated loans within its footprint and proactively
managed its credit portfolio and worked with clients on loan resolution issues.
However, in a continued effort to strengthen its loan underwriting standards and
improve its management of potential problem credits, First Financial conducted
an extensive review of its lending strategies, policies and procedures during
the recent quarter. Lending officers met face-to-face with
substantially all clients whose lending relationship exceeded $0.5 million to
obtain an update on each borrower’s current situation, including updating
financial information. As a result of this review, the company
enhanced a number of its existing procedures and implemented some new lending
strategies, including revising underwriting standards for larger commercial real
estate construction loans, placing further restrictions on automotive industry
borrowing and discontinuing commercial and residential real estate development
lending.
Total
loans 30 to 89 days past due at June 30, 2009 were $20.5 million, or 0.71% of
period end loans, compared with $20.4 million, or 0.75% at March 31, 2009, and
$22.1 million, or 0.83% at June 30, 2008. Management closely monitors these
trends and ratios and considers the level of delinquent loans consistent with
its expectation of the total loan portfolio’s behavior.
At June
30, 2009, the commercial real estate and real estate construction loan portfolio
totaled $1.3 billion, or 43.4% of total loans, including $200.6 million or 6.9%
of total loans for commercial real estate construction, and $65.8 million or
2.3% of total loans for residential construction, land acquisition, and
development. First Financial closely monitors the status of the $65.8
million in residential construction, land acquisition and development projects
and works proactively with borrowers throughout all stages of the lending
relationship. At June 30, 2009, there were $3.7 million in residential
construction and 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, but cannot be
assured that its efforts will be successful in this unique economic
environment. Additionally, the Office of the Comptroller of the
Currency issued new regulatory guidance that changed the manner in which these
loans are evaluated for future performance. The implementation of
this new regulatory guidance required the company to classify a higher level of
loans in this portfolio as substandard or nonperforming.
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.
In 2005,
First Financial made the strategic decisions to discontinue the origination of
residential real estate loans primarily for retention on its balance sheet and
to exit its indirect installment lending. As a result, the
residential real estate and indirect installment portfolios have declined $321.4
million and $233.7 million, excluding the impact of 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.
Second
quarter of 2009 net charge-offs were $8.1 million, an annualized 119 basis
points of average loans, compared to second quarter of 2008 net charge-offs of
$2.6 million, an annualized 40 basis points of average loans, and first quarter
of 2009 net charge-offs of $3.7 million, an annualized 55 basis points of
average loans. Year-to-date 2009 net
charge-offs
were $11.8 million, an annualized 88 basis points of average loans, compared to
year-to-date 2008 net
charge-offs
of $5.2 million, an annualized 40 basis points of average loans. The
higher level of net charge-offs was primarily the result of two separate and
unrelated vehicle floor plan relationships totaling approximately $3.8 million.
Recently, the company discovered unusual activity related to these relationships
resulting in violations of the terms of the loan agreements. These activities
adversely impacted the borrowers’ abilities to repay their loans and given
current market conditions, the market value of related collateral was not
sufficient to remedy the situations. The involvement of federal law enforcement
agencies and the resultant investigations of the borrowers are ongoing. First
Financial has undertaken a thorough review of its floor plan lending and
audit procedures and has made appropriate changes that it believes will help
prevent similar situations in the future. The financial impact of the
charge-offs related to these floor plan relationships was a decrease to second
quarter 2009 net income and earnings per diluted common share on an after-tax
basis of $2.4 million, or $0.06 per diluted common share, respectively. The
company’s vehicle floor plan lending portfolio totaled $25.0 million at June 30,
2009. Also during the quarter, First Financial charged off a $1.3 million
commercial real estate construction relationship, which represented the first
charge-off in this particular loan category in six quarters.
The
allowance for loan and lease losses increased to $38.6 million at June 30, 2009,
from $36.4 million at March 31, 2009, and $29.6 million at June 30, 2008. The
higher reserve reflects the impact from the addition of $145.1 million in
performing commercial and consumer loans that were purchased from Irwin on June
30, 2009, as well as the continued weak economic environment, near record levels
of unemployment and the uncertainty surrounding the timing of a recovery. The
growth in period end loans as a result of the loan purchase reduced the
allowance for loan and lease losses as a percent of period-end loans at June 30,
2009 by 5 basis points. The company believes that the $38.6 million allowance
for loan and lease losses at June 30, 2009, or 1.34% of period end loans, is
adequate to absorb probable credit losses inherent in its lending
portfolio.
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
|
|
|
Six Months Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
June 30,
|
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
June 30
|
|
|
2009
|
|
|
2008
|
|
ALLOWANCE
FOR LOAN AND LEASE LOSS ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
36,437 |
|
|
$ |
35,873 |
|
|
$ |
30,353 |
|
|
$ |
29,580 |
|
|
$ |
29,718 |
|
|
$ |
35,873 |
|
|
$ |
29,057 |
|
Provision
for loan losses
|
|
|
10,358 |
|
|
|
4,259 |
|
|
|
10,475 |
|
|
|
3,219 |
|
|
|
2,493 |
|
|
|
14,617 |
|
|
|
5,716 |
|
Gross
charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
4,707 |
|
|
|
2,521 |
|
|
|
2,168 |
|
|
|
1,568 |
|
|
|
946 |
|
|
|
7,228 |
|
|
|
1,491 |
|
Real
estate-construction
|
|
|
1,340 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,340 |
|
|
|
0 |
|
Real
estate-commercial
|
|
|
1,351 |
|
|
|
382 |
|
|
|
2,083 |
|
|
|
48 |
|
|
|
589 |
|
|
|
1,733 |
|
|
|
1,395 |
|
Real
estate-residential
|
|
|
351 |
|
|
|
231 |
|
|
|
47 |
|
|
|
335 |
|
|
|
227 |
|
|
|
582 |
|
|
|
266 |
|
Installment
|
|
|
304 |
|
|
|
400 |
|
|
|
493 |
|
|
|
424 |
|
|
|
482 |
|
|
|
704 |
|
|
|
1,046 |
|
Home
equity
|
|
|
332 |
|
|
|
218 |
|
|
|
238 |
|
|
|
135 |
|
|
|
525 |
|
|
|
550 |
|
|
|
1,176 |
|
All
other
|
|
|
386 |
|
|
|
308 |
|
|
|
374 |
|
|
|
426 |
|
|
|
426 |
|
|
|
694 |
|
|
|
924 |
|
Total
gross charge-offs
(1)
|
|
|
8,771 |
|
|
|
4,060 |
|
|
|
5,403 |
|
|
|
2,936 |
|
|
|
3,195 |
|
|
|
12,831 |
|
|
|
6,298 |
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
333 |
|
|
|
60 |
|
|
|
165 |
|
|
|
179 |
|
|
|
166 |
|
|
|
393 |
|
|
|
310 |
|
Real
estate-construction
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Real
estate-commercial
|
|
|
14 |
|
|
|
16 |
|
|
|
40 |
|
|
|
37 |
|
|
|
19 |
|
|
|
30 |
|
|
|
22 |
|
Real
estate-residential
|
|
|
20 |
|
|
|
2 |
|
|
|
5 |
|
|
|
4 |
|
|
|
5 |
|
|
|
22 |
|
|
|
16 |
|
Installment
|
|
|
203 |
|
|
|
254 |
|
|
|
189 |
|
|
|
225 |
|
|
|
246 |
|
|
|
457 |
|
|
|
561 |
|
Home
equity
|
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
30 |
|
|
|
1 |
|
|
|
30 |
|
All
other
|
|
|
54 |
|
|
|
33 |
|
|
|
49 |
|
|
|
45 |
|
|
|
98 |
|
|
|
87 |
|
|
|
166 |
|
Total
recoveries
|
|
|
625 |
|
|
|
365 |
|
|
|
448 |
|
|
|
490 |
|
|
|
564 |
|
|
|
990 |
|
|
|
1,105 |
|
Total
net charge-offs
|
|
|
8,146 |
|
|
|
3,695 |
|
|
|
4,955 |
|
|
|
2,446 |
|
|
|
2,631 |
|
|
|
11,841 |
|
|
|
5,193 |
|
Ending
allowance for loan losses
|
|
$ |
38,649 |
|
|
$ |
36,437 |
|
|
$ |
35,873 |
|
|
$ |
30,353 |
|
|
$ |
29,580 |
|
|
$ |
38,649 |
|
|
$ |
29,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
CHARGE-OFFS TO AVERAGE LOANS AND LEASES (ANNUALIZED)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2.08 |
% |
|
|
1.21 |
% |
|
|
0.98 |
% |
|
|
0.67 |
% |
|
|
0.39 |
% |
|
|
1.65 |
% |
|
|
0.30 |
% |
Real
estate-construction
|
|
|
2.09 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
1.08 |
% |
|
|
0.00 |
% |
Real
estate-commercial
|
|
|
0.62 |
% |
|
|
0.17 |
% |
|
|
0.98 |
% |
|
|
0.01 |
% |
|
|
0.31 |
% |
|
|
0.40 |
% |
|
|
0.38 |
% |
Real
estate-residential
|
|
|
0.38 |
% |
|
|
0.25 |
% |
|
|
0.04 |
% |
|
|
0.27 |
% |
|
|
0.18 |
% |
|
|
0.31 |
% |
|
|
0.10 |
% |
Installment
|
|
|
0.45 |
% |
|
|
0.62 |
% |
|
|
1.18 |
% |
|
|
0.71 |
% |
|
|
0.78 |
% |
|
|
0.54 |
% |
|
|
0.77 |
% |
Home
equity
|
|
|
0.44 |
% |
|
|
0.30 |
% |
|
|
0.34 |
% |
|
|
0.20 |
% |
|
|
0.77 |
% |
|
|
0.37 |
% |
|
|
0.90 |
% |
All
other
|
|
|
5.00 |
% |
|
|
4.18 |
% |
|
|
4.79 |
% |
|
|
5.66 |
% |
|
|
5.03 |
% |
|
|
4.59 |
% |
|
|
0.77 |
% |
Total
net charge-offs
(1)
|
|
|
1.19 |
% |
|
|
0.55 |
% |
|
|
0.73 |
% |
|
|
0.36 |
% |
|
|
0.40 |
% |
|
|
0.88 |
% |
|
|
0.40 |
% |
While
First Financial’s credit quality trends have experienced some deterioration over
the past several quarters, the company believes it is still well-positioned to
handle the challenging economic environment and avoid many of the troublesome
areas facing the financial services industry. However, the
possibility exists that the company could experience higher credit costs over
the next several quarters.
NONPERFORMING/UNDERPERFORMING
ASSETS
The ratio
of nonperforming loans to total loans increased to 131 basis points at the end
of the second quarter of 2009 from 57 basis points at the end of the comparable
period in 2008. Total nonperforming assets at the end of the second
quarter of 2009 were $43.0 million, an increase of $23.8 million from the end of
the second quarter of 2008 primarily due to a higher level of nonaccrual
commercial, construction, commercial real estate, and home equity loans, and
other real estate owned.
The ratio
of nonperforming loans to total loans increased from 91 basis points at the end
of the first quarter of 2009 to 131 basis points at the end of the second
quarter of 2009, and the ratio of nonperforming assets to period-end loans, plus
other real estate owned, increased from 104 basis points at the end of the first
quarter of 2009 to 148 basis
points at
the end of the second quarter of 2009. Total nonperforming assets on a
linked-quarter basis increased $14.6 million from the end of the first quarter
of 2009, primarily due to increased nonaccrual construction loans.
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 increased to $5.2 million at June 30, 2009, from $3.5 million
at March 31, 2009, and $3.8 million at June 30, 2008. The linked quarter and
year-over-year increases were primarily the result of commercial real estate
additions, specifically, collateral related to the previously mentioned vehicle
floor plan relationships that were charged-off during the
quarter. Balances related to residential real estate experienced a
net decline during the second quarter of 2009.
The table
that follows shows the categories that are included in nonperforming and
underperforming assets as of June 30, 2009, and the four previous quarters, as
well as related credit quality ratios (dollars in
$000’s).
|
|
Quarter Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
June 30
|
|
Nonaccrual
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
8,100 |
|
|
$ |
8,412 |
|
|
$ |
5,930 |
|
|
$ |
5,194 |
|
|
$ |
4,957 |
|
Real
estate - construction
|
|
|
11,936 |
|
|
|
240 |
|
|
|
240 |
|
|
|
0 |
|
|
|
490 |
|
Real
estate - commercial
|
|
|
10,130 |
|
|
|
9,170 |
|
|
|
4,779 |
|
|
|
3,361 |
|
|
|
3,592 |
|
Real
estate - residential
|
|
|
4,897 |
|
|
|
4,724 |
|
|
|
5,363 |
|
|
|
3,742 |
|
|
|
4,461 |
|
Installment
|
|
|
394 |
|
|
|
464 |
|
|
|
459 |
|
|
|
417 |
|
|
|
438 |
|
Home
equity
|
|
|
2,136 |
|
|
|
1,681 |
|
|
|
1,204 |
|
|
|
1,084 |
|
|
|
866 |
|
All
other
|
|
|
0 |
|
|
|
0 |
|
|
|
6 |
|
|
|
32 |
|
|
|
8 |
|
Total
nonaccrual loans
|
|
|
37,593 |
|
|
|
24,691 |
|
|
|
17,981 |
|
|
|
13,830 |
|
|
|
14,812 |
|
Restructured
loans
|
|
|
197 |
|
|
|
201 |
|
|
|
204 |
|
|
|
208 |
|
|
|
554 |
|
Total
nonperforming loans
|
|
|
37,790 |
|
|
|
24,892 |
|
|
|
18,185 |
|
|
|
14,038 |
|
|
|
15,366 |
|
Other
real estate owned (OREO)
|
|
|
5,166 |
|
|
|
3,513 |
|
|
|
4,028 |
|
|
|
4,610 |
|
|
|
3,763 |
|
Total
nonperforming assets
|
|
|
42,956 |
|
|
|
28,405 |
|
|
|
22,213 |
|
|
|
18,648 |
|
|
|
19,129 |
|
Accruing
loans past due 90 days or more
|
|
|
318 |
|
|
|
255 |
|
|
|
138 |
|
|
|
241 |
|
|
|
245 |
|
Total
underperforming assets
|
|
$ |
43,274 |
|
|
$ |
28,660 |
|
|
$ |
22,351 |
|
|
$ |
18,889 |
|
|
$ |
19,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
|
102.81 |
% |
|
|
147.57 |
% |
|
|
199.51 |
% |
|
|
219.47 |
% |
|
|
199.70 |
% |
Nonperforming
assets
|
|
|
102.27 |
% |
|
|
146.38 |
% |
|
|
197.27 |
% |
|
|
216.22 |
% |
|
|
192.50 |
% |
Total
ending loans
|
|
|
1.34 |
% |
|
|
1.33 |
% |
|
|
1.34 |
% |
|
|
1.14 |
% |
|
|
1.11 |
% |
Nonaccrual
loans to total loans
|
|
|
1.31 |
% |
|
|
0.91 |
% |
|
|
0.68 |
% |
|
|
0.53 |
% |
|
|
0.57 |
% |
Nonperforming
assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
loans, plus OREO
|
|
|
1.48 |
% |
|
|
1.04 |
% |
|
|
0.83 |
% |
|
|
0.70 |
% |
|
|
0.71 |
% |
Total
assets
|
|
|
1.14 |
% |
|
|
0.75 |
% |
|
|
0.60 |
% |
|
|
0.53 |
% |
|
|
0.55 |
% |
LIQUIDITY
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 monitored and
closely 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
$5.5 million and $3.8 million for the first six months of 2009 and 2008,
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 June 30, 2009 and December 31, 2008, total short-term
borrowings from the FHLB were $125.0 million and $150.0,
respectively. At June 30, 2009, and December 31, 2008, total
long-term borrowings from the FHLB were $70.9 million and
$83.2 million, respectively. The total remaining borrowing
capacity from the FHLB at June 30, 2009, was $201.3 million.
As of
June 30, 2009, First Financial had pledged certain eligible residential and farm
real estate loans, home equity lines of credit, as well as certain government
and agency securities, totaling $574.4 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 $528.2 million at
June 30, 2009. Securities classified as held-to-maturity that are
maturing in one year or less are also a source of liquidity and totaled $0.4
million at June 30, 2009. The market value of securities classified
as trading totaled $0.2 million at June 30, 2009. 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 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 $16.0 million for the first
six months of 2009. As of June 30, 2009, First Financial’s
subsidiaries had retained earnings of $129.4 million of which
$6.4 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
June 30, 2009, the outstanding balance was $25.0 million compared to an
outstanding balance of $57.0 million at December 31, 2008. The
outstanding balance of this line varies throughout the year depending on First
Financial’s cash needs. First Financial renewed the credit facility
during the first quarter of 2009 for a period of one year with an amended,
maximum outstanding balance of $40.0 million. The credit agreement
requires First Financial to maintain certain covenants including return on
average assets and those related to asset quality and capital
levels. For the quarter ending June 30, 2009, First Financial was in
compliance with all covenants with the exception of the return on average assets
covenant. First Financial’s second quarter 2009 rolling twelve month
return on average assets of 0.54% was below the minimum of 0.60% required by the
credit agreement. The return on average assets covenant was waived at June
30, 2009 as part of an amended agreement. The credit facility was subsequently
amended to reduce the maximum outstanding balance to $25.0 million and reduce
the return on average assets covenant for future periods.
First
Financial Bancorp makes quarterly interest payments on its junior subordinated
debenture owed to its unconsolidated subsidiary trust. Interest
expense related to this other long-term debt totaled $0.3 million for each of
the three months ended June 30, 2009, and 2008. Interest expense for
the six months ended June 30, 2009 and 2008 was $0.6 million and $0.7 million,
respectively. Through the execution of an interest-rate swap the
company has fixed its interest rate on the debentures for the next 10 years at
6.20%.
First
Financial will make quarterly dividend payments to the U.S. Treasury on the
80,000 perpetual preferred securities, which carry a 5.0% annual dividend rate
for the first five years and a 9.0% annual rate thereafter.
First
Financial had no share repurchase activity under publicly announced plans in
2008 or 2009. First Financial does not plan to repurchase any of its
shares during 2009.
CAPITAL
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.
On June
8, 2009, First Financial completed a public offering of 13.8 million shares of
its common stock adding approximately $98.0 million of additional common equity,
after offering related costs. As a result of the capital raised during the
quarter, the company's already strong capital ratios further improved and
continued to significantly exceed the amounts necessary to be classified as well
capitalized.
Consolidated
regulatory capital ratios at June 30, 2009, included the leverage ratio of
12.02%, Tier 1 ratio of 14.77%, and total capital ratio of
16.02%. All regulatory capital ratios exceeded the amounts necessary
to be classified as “well capitalized,” and total regulatory capital exceeded
the “minimum” requirement by approximately $246.6 million, on a consolidated
basis. The tangible capital ratio was 11.14% and the tangible common
equity ratio was 9.06% at June 30, 2009. The $145.1 million loan
portfolio purchased from Irwin reduced the Tier 1 Capital and Total Risk-Based
Capital ratios by 57 and 62 basis points, respectively, at June 30,
2009.
Quantitative
measures established by regulation to ensure capital adequacy require First
Financial to maintain minimum amounts and ratios (as defined by the regulations
and set forth in the following table) of Total and Tier 1 capital to
risk-weighted assets and to average assets, respectively. Management
believes, as of June 30, 2009, that First Financial met all capital adequacy
requirements to which it was subject. At June 30, 2009, and December
31, 2008, 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.
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 (SEC). Subsequently on May 1,
2009, the company amended the shelf registration on Form S-3. This
amended shelf registration statement allowed the company to raise capital from
time to time, up to an aggregate of $200 million, through the sale of various
types of securities. On June 8, 2009, the company completed a public
offering of 13,800,000 shares of its common stock at a price of $7.50 per share
resulting in net proceeds of $98.1 million of additional common equity after
offering related costs. Subsequent to this offering, the company has
the ability to raise additional capital of $96.5 million under this amended
shelf registration statement. Specific terms and prices will be
determined at the time of any future 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,
established late in 2008 the Troubled Asset Relief Program (TARP) Capital
Purchase Program (CPP), which was intended to stabilize the financial services
industry. One of the components of the CPP included a $250 billion
voluntary capital purchase program for certain qualified and healthy banking
institutions. Pursuant to the CPP, Treasury purchased from First
Financial 80,000 shares of $1,000 par value senior perpetual preferred
securities at a price of $80,000 equal to approximately 3.0% of the
company’s then risk-weighted assets. Treasury also received a warrant
for the purchase of common stock in the amount of 930,233 shares at a strike
price of $12.90 per share. Such preferred shares 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 are prohibited from (a) increasing their dividend to
common shareholders and (b) conducting share repurchases without the prior
approval of the Treasury. Participating financial institutions are
also subject to certain limitations on executive compensation as well as other
conditions. On January 21, 2009, First Financial filed a registration
statement on Form S-3 with the SEC to register these securities as required
by the security purchase agreement with the Treasury. On February 19,
2009, the registration statement was deemed effective by the SEC.
First
Financial also opted to participate in the FDIC’s temporary liquidity guarantee
program. The components of this program include the guarantee, until
December 31, 2012, of certain newly issued senior unsecured debt issued by banks
and bank holding companies through October 31, 2009 and full deposit insurance
coverage for noninterest-bearing transaction accounts, regardless of size, until
the end of 2009. Participation in these programs will result in an
increase in deposit insurance premiums and any debt will be subject to an
insurance premium.
First
Financial designated an investment portfolio specifically supported by the CPP
capital. This investment portfolio, referred to as the CPP Investment Portfolio
totaled $59.8 million at June 30, 2009, compared with $225.4 million at March
31, 2009, and $121.9 million at December 31, 2008. During the second
quarter of 2009, the company sold $149.4 million of CPP Investment
Portfolio securities to fund the $145.1 million loan purchase from
Irwin. Additional details on this redeployment strategy are discussed
in the Assets section of this Form 10-Q.
Earnings
from the CPP Investment Portfolio in the first and second quarters had a
positive effect on net interest income and exceeded the quarterly dividends paid
to the Treasury on their investment in the preferred shares. During the second
quarter of 2009, the company paid a $1.0 million dividend to the Treasury.
Year-to-date 2009 dividends paid to the Treasury total $1.6
million.
Many
financial institutions that elected to participate in the CPP have now redeemed
the preferred shares they issued to the Treasury and repaid the Treasury in
full. First Financial’s board of directors continues to evaluate the company’s
capital plan and structure, including the merits of continued participation in
the CPP after having successfully raised approximately $98.0 million in common
equity. At this time a decision on First Financial’s continued participation in
the CPP has not been made.
The
following table illustrates the actual and required capital amounts and ratios
as of June 30, 2009, and the year ended December 31, 2008 (dollars in
$000’s).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
|
Prompt Corrective
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
492,696 |
|
|
|
16.02 |
% |
|
$ |
246,083 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
First
Financial Bank
|
|
|
351,141 |
|
|
|
11.46 |
% |
|
|
245,071 |
|
|
|
8.00 |
% |
|
$ |
306,339 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
454,243 |
|
|
|
14.77 |
% |
|
|
123,042 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
First
Financial Bank
|
|
|
305,343 |
|
|
|
9.97 |
% |
|
|
122,535 |
|
|
|
4.00 |
% |
|
|
183,803 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to average assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
454,243 |
|
|
|
12.02 |
% |
|
|
150,457 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
First
Financial Bank
|
|
|
305,343 |
|
|
|
8.11 |
% |
|
|
149,950 |
|
|
|
4.00 |
% |
|
|
187,437 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
392,180 |
|
|
|
13.62 |
% |
|
$ |
230,284 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
First
Financial Bank
|
|
|
354,333 |
|
|
|
12.37 |
% |
|
|
229,086 |
|
|
|
8.00 |
% |
|
$ |
286,358 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
356,307 |
|
|
|
12.38 |
% |
|
|
115,142 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
First
Financial Bank
|
|
|
311,037 |
|
|
|
10.86 |
% |
|
|
114,543 |
|
|
|
4.00 |
% |
|
|
171,815 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to average assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
356,307 |
|
|
|
10.00 |
% |
|
|
141,689 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
First
Financial Bank
|
|
|
311,037 |
|
|
|
8.77 |
% |
|
|
141,188 |
|
|
|
4.00 |
% |
|
|
176,485 |
|
|
|
5.00 |
% |
The
capital levels for First Financial Bank do not include the additional capital
that the company received from the U.S. Treasury in December 2008, under its
CPP, nor do they include the proceeds from the recently completed common equity
stock offering. Proceeds from these recent capital raise initiatives
remain at the parent company at this time.
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.
CRITICAL
ACCOUNTING POLICIES
First
Financial’s Consolidated Financial Statements are prepared based on the
application of accounting policies. These policies require the reliance on
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,
goodwill, pension and income taxes.
Allowance for Loan and Lease
Losses. First Financial maintains the allowance for loan and
lease losses at a level sufficient to absorb potential losses inherent in the
loan portfolio given the conditions at the time. Management determines the
adequacy of the allowance based on periodic evaluations of the loan portfolio
and other factors. These
evaluations are inherently subjective as they require material estimates, all of
which may be susceptible to significant change, including, among
others:
• Probability of
default,
• Loss given
default,
• Exposure at date of
default,
• Amounts and timing of expected future
cash flows on impaired loans,
• Value of
collateral,
• Historical loss exposure,
and
• The effects of changes in economic
conditions that may not be reflected in historical
results.
To the
extent actual outcomes differ from management's estimates, additional provision
for credit losses may be required that would impact First Financial's operating
results.
Goodwill. Goodwill
arising from business acquisitions represents the value attributable to
unidentifiable intangible elements in the business acquired. SFAS No. 142,
"Goodwill and Other Intangible Assets," requires goodwill to be tested for
impairment on an annual basis and more frequently in certain circumstances. At
least annually, First Financial reviews goodwill for impairment using both
income and asset based approaches. The income-based approach utilizes a multiple
of earnings method in which First Financial's annualized earnings are compared
to equity to provide an implied book-value-to-earnings multiple. First Financial
then compares the implied multiple to current marketplace earnings multiples for
which banks are being traded. An implied multiple less than current marketplace
earnings multiples is an indication of possible goodwill impairment. The
asset-based approach uses the discounted cash flows of First Financial's assets
and liabilities, inclusive of goodwill, to determine an implied fair value. This
input is used to calculate the fair value of the company, including goodwill,
and is compared to the company's book value. An implied fair value that exceeds
the company's book value is an indication that goodwill is not impaired. If
First Financial's book value exceeds the implied fair value, an impairment loss
equal to the excess amount would be recognized. Based on First Financial's
analysis at year-end 2008 and during the first quarter of 2009, there have been
no impairment charges required.
Pension. First
Financial sponsors a non-contributory defined-benefit pension plan covering
substantially all employees. Accounting for the pension plan involves material
estimates regarding future plan obligations and investment returns on plan
assets. Significant assumptions used in the pension plan include the discount
rate, expected return on plan assets, and the rate of compensation increase.
First Financial determines the discount rate assumption using published
Corporate Bond Indices, projected cash flows of the pension plan, and
comparisons to external industry surveys for reasonableness. The expected
long-term return on plan assets is based on the composition of plan assets and a
consensus of estimates of expected future returns from similarly managed
portfolios while the rate of compensation increase is compared to historical
increases for plan participants. Changes in these assumptions can have a
material impact on the amount of First Financial's future pension obligations,
on the funded status of the plan and can impact First Financial's operating
results.
Income Taxes. First
Financial evaluates and assesses the relative risks and appropriate tax
treatment of transactions after considering statutes, regulations, judicial
precedent and other information and maintains tax accruals consistent with its
evaluation of these relative risks. Changes to 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 changes to
statutory, judicial and regulatory guidance that impact the relative risks of
tax positions. These changes, when they occur, can affect deferred taxes and
accrued taxes as well as the current period's income tax expense and can be
material to First Financial's operating results.
ACCOUNTING
AND REGULATORY MATTERS
Note 2 to
the Consolidated Financial Statements discusses new accounting standards adopted
by First Financial during 2009 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 impact of recent upheaval
in the financial markets and the effectiveness of domestic and international
governmental actions taken in response such as the U.S. Treasury’s TARP and the
FDIC’s Temporary Liquidity Guarantee Program, and the effect of such
governmental actions on First Financial, its competitors and counterparties,
financial markets generally and availability of credit specifically, and the
U.S. and international economies, including potentially higher FDIC premiums
arising from participation in the Temporary Liquidity Guarantee Program or from
increased payments from FDIC insurance funds as a result of depository
institution failures; 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 and debt markets; First Financial’s success in
recruiting and retaining the necessary personnel to support business growth and
expansion and maintain sufficient expertise to support increasingly complex
products and services; the cost and effects of litigation and of unexpected or
adverse outcomes in such litigation; uncertainties arising from First
Financial’s participation in the TARP, including impacts on employee recruitment
and retention and other business practices, uncertainties concerning the
potential redemption of the U.S. Treasury’s preferred stock investment under the
program, including the timing of, regulatory approvals for, and conditions
placed upon, any such redemption; the ability to attract, motivate and retain
key executives and other key personnel; 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, 2008, 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-bearing 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
June 30, 2009, assuming immediate, parallel shifts in interest
rates:
|
|
-200 basis points
|
|
|
-100 basis points
|
|
|
+100 basis points
|
|
|
+200 basis points
|
|
June
30, 2009
|
|
|
(4.85 |
)% |
|
|
(2.23 |
)% |
|
|
4.04 |
% |
|
|
5.92 |
% |
Modeling
the sensitivity of net interest income and the economic value of equity to
changes in market interest rates is highly dependent on numerous assumptions
incorporated into the modeling process. Due to the current low
interest rate environment, funding rates on deposit and wholesale funding
instruments were not reduced below 0.0% in the down 200 and down 100 basis
points scenarios. The analysis provides a framework as to what our
overall sensitivity is as of our most recent reported
position. Management strategies may impact future reporting periods,
as our actual results may differ from simulated results due to the timing,
magnitude, and frequency of interest rate changes, the difference between actual
experience, and the characteristics assumed, as well as changes in market
conditions. 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.
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 June 30, 2009,
assuming immediate, parallel shifts in interest rates:
|
|
-200 basis points
|
|
|
-100 basis points
|
|
|
+100 basis points
|
|
|
+200 basis points
|
|
June
30, 2009
|
|
|
(12.64 |
)% |
|
|
(4.77 |
)% |
|
|
2.17 |
% |
|
|
1.05 |
% |
First
Financial, utilizing interest rates primarily based upon external industry
studies, models additional scenarios covering the next twelve
months. Based on these scenarios, First Financial has a relatively
neutral rate risk position of a positive 0.97% when compared to a base-case
scenario with interest rates held constant. Given its outlook for
future interest rates, First Financial is managing its balance sheet with a bias
toward asset sensitivity. First Financial’s second quarter 2009
interest rate risk position is influenced by the short-term funding related to
securities purchased for the CPP portfolio and the loans recently acquired from
Irwin.
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
In
addition to the following discussion, see Part I, Item 1A, “Risk Factors”
and Part II, Item 7A, “Quantitative and Qualitative Disclosure about Market
Risk” in the 2008 Annual Report on Form 10-K for a detailed discussion of the
risk factors affecting First Financial.
Deteriorating credit
quality, particularly in real estate loans, has adversely impacted us and may
continue to adversely impact us.
Late in
2008 we began to experience a downturn in the overall credit performance of our
loan portfolio, as well as acceleration in the deterioration of general economic
conditions. This deterioration, including a significant increase in national and
regional unemployment levels and decreased sources of liquidity are the primary
drivers of the increased stress being placed on most borrowers and is negatively
impacting their ability to repay. These conditions resulted in an increases in
our loan loss reserves.
We expect
credit quality to remain challenging and continue to deteriorate for at least
the remainder of 2009. Continued deterioration in the quality of our credit
portfolio could significantly increase nonperforming loans, require additional
increases in loan loss reserves, elevate charge-off levels and have a material
adverse effect on our capital, financial condition, and results of operations.
Furthermore, given the size of our loan portfolio, it is possible that a
deterioration in the credit quality of one or two of our largest credits could
have a material adverse effect on our capital, financial condition, and results
of operations. Because we have substantially fewer nonperforming assets than
many of our peers, the credit quality of our loan portfolio may deteriorate at a
faster rate than many of our peers.
The results of the internal
stress test that we have released may not accurately predict the impact on our
company if the condition of the economy were to continue to
deteriorate.
During
2009 we conducted an internal stress test. The stress test was based on the
tests that were recently administered to the nation’s 19 largest banks by the
U.S. Treasury in connection with its Supervisory Capital Assessment Program.
Under the stress test, we applied the U.S. Treasury’s assumptions to estimate
our credit losses, resources available to absorb those losses and any necessary
additions to capital that would be required under the “more adverse” stress test
scenario.
While we
believe we have appropriately applied the U.S. Treasury’s assumptions in
performing this internal stress test, we can not assure you that the results of
this test are comparable to the results of stress tests performed and publicly
released by the U.S. Treasury or that the results of our stress test would be
the same if it had been performed by the U.S. Treasury. Moreover, the results of
the stress test may not accurately reflect the impact on our company if the
economy does not improve or continues to deteriorate. Any continued
deterioration of the economy could result in credit losses significantly higher,
with a corresponding impact on our resources and capital requirements, than
those predicted by our internal stress test.
Our allowance for loan
losses may prove to be insufficient to absorb losses in our loan
portfolio.
Like all
financial institutions, we maintain an allowance for loan losses to provide for
loans in our portfolio that may not be repaid in their entirety. We believe that
our allowance for loan losses is maintained at a level adequate to absorb
probable losses inherent in our loan portfolio as of the corresponding balance
sheet date. However, our allowance for loan losses may not be sufficient to
cover actual loan losses, and future provisions for loan losses could materially
and adversely affect our operating results. We have seen a significant increase
in the level of potential problem loans and other loans with higher than normal
risk. We expect to receive more frequent requests from borrowers to modify
loans. The related accounting measurements related to impairment and the loan
loss allowance require significant estimates which are subject to uncertainty
and changes relating to new information and changing circumstances. Our
estimates of the risk of loss and amount of loss on any loan are complicated by
the significant uncertainties surrounding our borrowers’ abilities to
successfully execute their business models through changing economic
environments, competitive challenges and other factors. Because of the degree of
uncertainty and susceptibility of these factors to change, our actual losses may
vary from our current estimates.
State and
federal regulators, as an integral part of their examination process,
periodically review our allowance for loan losses and may require us to increase
our allowance for loan losses by recognizing additional provisions for loan
losses charged to expense, or to decrease our allowance for loan losses by
recognizing loan charge-offs, net of recoveries. Any such additional provisions
for loan losses or charge-offs, as required by these regulatory agencies, could
have a material adverse effect on our financial condition and results of
operations.
We expect
fluctuations in our loan loss provisions due to the uncertain economic
conditions.
Our liquidity is dependent
upon our ability to receive dividends from our subsidiaries, which accounts for
most of our revenue and could affect our ability to pay dividends, and we may be
unable to enhance liquidity from other sources.
We are a
separate and distinct legal entity from our subsidiaries, including First
Financial Bank. We receive substantially all of our revenue from dividends from
our subsidiaries. These dividends are the principal source of funds to pay
dividends on our common and Series A Preferred Stock and interest and principal
on our debt. Various federal and/or state laws and regulations limit the amount
of dividends that our bank and certain of our non-bank subsidiaries may pay us.
Additionally, if our subsidiaries’ earnings are not sufficient to make dividend
payments to us while maintaining adequate capital levels, we may not be able to
make dividend payments to our common shareholders.
To
enhance liquidity, we may depend upon borrowings under credit facilities or
other indebtedness. We currently maintain a $25 million credit facility with an
unaffiliated bank, which is fully drawn and expires in March, 2010. It is
uncertain whether we may be successful in renewing such facility. As a result of
recent turbulence in the capital and credit markets, many lenders and
institutional investors have reduced or ceased to provide funding to borrowers
and, as a result, we may not be able to further increase liquidity through
additional borrowings. In addition, if we decide to repurchase the Series A
Preferred Stock and the Warrants and use cash available to us other than from
the proceeds of this offering, our liquidity could be negatively impacted
further.
Limitations
on our ability to receive dividends from our subsidiaries or an inability to
increase liquidity through additional borrowings, or inability to maintain,
renew or replace our existing credit facility, could have a material adverse
effect on our liquidity and on our ability to pay dividends on our common and
preferred shares and interest and principal on our debt.
Potential acquisitions may
disrupt our business and dilute shareholder value and we may not be able to
successfully consummate or integrate such acquisitions.
Acquiring
other banks, businesses, or branches involves various risks commonly associated
with acquisitions, including, among other things:
|
•
|
potential
exposure to unknown or contingent liabilities of the target
company;
|
|
•
|
exposure
to potential asset quality issues of the target
company;
|
|
•
|
difficulty
and expense of integrating the operations and personnel of the target
company;
|
|
•
|
potential
disruption to our
business;
|
|
•
|
potential
diversion of our management’s time and
attention;
|
|
•
|
the
possible loss of key employees and customers of the target
company;
|
|
•
|
difficulty
in estimating the value (including goodwill) of the target
company;
|
|
•
|
difficulty
in receiving appropriate regulatory approval for any proposed
transaction;
|
|
•
|
difficulty
in estimating the fair value of acquired assets, liabilities and
derivatives of the target company;
and
|
|
•
|
potential
changes in banking or tax laws or regulations that may affect the target
company.
|
We
regularly evaluate merger and acquisition opportunities and conduct due
diligence activities related to possible transactions with other financial
institutions and financial services companies. As a result, merger or
acquisition discussions and, in some cases, negotiations may take place and
future mergers or acquisitions involving cash, debt or equity securities may
occur at any time. Acquisitions typically involve the payment of a premium over
book and market values, and, therefore, some dilution of our tangible book value
and net income per common share may occur in connection with any future
transaction.
Any
merger or acquisition opportunity that we decide to pursue will ultimately be
subject to regulatory approval and other closing conditions. We may expend
substantial time and resources pursuing potential acquisitions which may not be
consummated because regulatory approval is not received or other closing
conditions are not satisfied. In addition, our existing credit facility and the
terms of other indebtedness that we may subsequently incur may restrict our
ability to consummate certain acquisitions. Furthermore, any difficulty
integrating businesses acquired as a result of a merger or acquisition and the
failure to realize the expected revenue increases, cost savings, increases in
geographic or product presence, and/or other projected benefits from an
acquisition could have an adverse impact on our liquidity, results of
operations, and financial condition and any such integration could divert
management’s time and attention from managing our company in an effective manner
and could be significantly more expensive than we anticipate.
We may fail to realize the
anticipated benefits of the Peoples Community Bank
acquisition.
The
success of the acquisition by First Financial Bank of certain assets and
assumption of certain liabilities of Peoples Community Bank on July 31, 2009
from the FDIC as receiver for Peoples Community Bank, will depend on, among
other things, our ability to realize anticipated cost savings and to combine the
business of First Financial Bancorp. and the branches acquired from Peoples
Community Bank in a manner that permits growth opportunities and does not
materially disrupt the existing customer relationships of the Peoples Community
Bank branches or result in decreased revenues resulting from any loss of
customers. If we are not able to successfully achieve these objectives, the
anticipated benefits of the acquisition may not be realized fully or at all or
may take longer to realize than expected. Additionally, we will make fair value
estimates of certain assets and liabilities in recording the acquisition. Actual
values of these assets and liabilities could differ from our estimates, which
could result in our not achieving the anticipated benefits of the
acquisition.
Our
future growth and profitability depends, in part, on our ability to successfully
imanage combined operations. For the acquisition to be successful, we will have
to succeed in combining our personnel and operations with those of Peoples
Community Bank. We cannot assure you that our plan to integrate and operate the
combined operations will be timely or efficient, or that we will successfully
retain existing customer relationships of Peoples Community Bank.
It is
possible that the integration process could result in the disruption of Peoples
Community Bank’s ongoing operations, or we could discover inconsistencies in
standards, controls, procedures and policies that adversely affect our ability
to maintain relationships with customers and employees or to achieve the
anticipated benefits of the Branch Acquisition.
Item 2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
(c) The
following table shows the total number of shares repurchased in the second
quarter of 2009.
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
|
|
April
1 through
|
|
|
|
|
|
|
|
|
|
|
|
|
April
30, 2009
|
|
|
2,408 |
|
|
$ |
11.24 |
|
|
|
0 |
|
|
|
4,969,105 |
|
May
1 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
31, 2009
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
4,969,105 |
|
June
1 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
4,969,105 |
|
Total
|
|
|
2,408 |
|
|
$ |
11.24 |
|
|
|
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
|
|
|
|
|
|
|
April
1 through
|
|
|
|
|
|
|
April
30, 2009
|
|
|
0 |
|
|
$ |
0.00 |
|
May
1 through
|
|
|
|
|
|
|
|
|
May
31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
June
1 through
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
|
0 |
|
|
|
0.00 |
|
Total
|
|
|
0 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
Director
Fee Stock Plan
|
|
|
|
|
|
|
|
|
April
1 through
|
|
|
|
|
|
|
|
|
April
30, 2009
|
|
|
2,408 |
|
|
$ |
11.24 |
|
May
1 through
|
|
|
|
|
|
|
|
|
May
31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
June
1 through
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
|
0 |
|
|
|
0.00 |
|
Total
|
|
|
2,408 |
|
|
$ |
11.24 |
|
|
|
|
|
|
|
|
|
|
Stock
Option Plans
|
|
|
|
|
|
|
|
|
April
1 through
|
|
|
|
|
|
|
|
|
April
30, 2009
|
|
|
0 |
|
|
$ |
0.00 |
|
May
1 through
|
|
|
|
|
|
|
|
|
May
31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
June
1 through
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
|
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 June 30, 2009, 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
|
|
Completed
|
Item
4. Submission
of Matters to a Vote of Security Holders
On June
15, 2009, First Financial held its annual meeting of
shareholders. There were 37,474,422 shares eligible to vote at the
annual meeting with a total of 33,726,847 shares voted or 89.99% of the total
shares eligible to vote. The voting results of the meeting are as
follows:
|
1)
|
Three
directors wee elected and the aggregate votes cast for or withheld were as
follows:
|
|
|
|
|
|
|
|
Votes
|
|
Name
|
|
Term
|
|
Votes For
|
|
|
Withheld
|
|
Mark
A. Collar
|
|
3
years
|
|
|
32,736,599 |
|
|
|
990,248 |
|
Murph
Knapke
|
|
3
years
|
|
|
26,241,055 |
|
|
|
7,485,793 |
|
William
J. Kramer
|
|
3
years
|
|
|
32,217,740 |
|
|
|
1,509,108 |
|
Directors
whose terms continue beyond the 2008 Annual Meeting:
Class III expiring in
2010:
J.
Wickliffe Ach
Donald M.
Cisle, Sr.
Corinne
R. Finnerty
Class II expiring in
2011:
Claude E.
Davis
Susan L.
Knust
Richard
E. Olszewski
|
|
|
Number
of shares
|
|
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Broker Non-
Votes
|
|
2)
|
The
proposal to approve the 2009 Employee Stock Plan was approved as set forth
in this table.
|
|
|
21,881,601 |
|
|
|
8,444,897 |
|
|
|
397,156 |
|
|
|
3,003,193 |
|
3)
|
The
proposal to approve the 2009 Non-Employee Director Stock Plan was approved
as set forth in this table.
|
|
|
27,077,907 |
|
|
|
3,163,840 |
|
|
|
481,906 |
|
|
|
3,003,194 |
|
4)
|
The
proposal to approve an amendment to the Articles of Incorporation to allow
for issuance of additional shares of preferred stock was
withdrawn.
|
|
|
|
|
Proposal
was withdrawn
|
|
|
|
|
|
5)
|
The
proposal to consider and approve a non-binding advisory resolution on
First Financial’s executive compensation was approved as set forth in this
table.
|
|
|
24,573,061 |
|
|
|
8,522,322 |
|
|
|
631,463 |
|
|
|
|
|
6)
|
The
proposal to ratify the appointment of Ernst & Young as the
Corporation’s independent registered accounting firm for the year ending
December 31, 2009 was approved as set forth in this table.
|
|
|
33,034,717 |
|
|
|
469,695 |
|
|
|
222,433 |
|
|
|
|
|
7)
|
The
proposal for the consideration of a non-binding shareholder proposal
regarding the annual election of directors was approved as set forth in
this table. The Board of Directors will evaluate its options
regarding the non-binding proposal.
|
|
|
17,017,098 |
|
|
|
12,881,118 |
|
|
|
525,437 |
|
|
|
3,003,194 |
|
8)
|
The
proposal to adjourn the annual meeting, if necessary to solicit additional
proxies was approved as set forth in this table. However, the
board of directors determined to not adjourn the meeting.
|
|
|
18,121,188 |
|
|
|
14,981,887 |
|
|
|
623,770 |
|
|
|
|
|
No other
matters were brought before the meeting for a vote.
Item
6. Exhibits
|
3.1
|
Amended
and Restated Articles of Incorporation (filed as Exhibit 3.1 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2007, and incorporated herein by
reference).
|
|
3.2
|
Certificate
of Amendment by the Board of Directors to the Amended and Restated
Articles of Incorporation (filed as Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K filed on December 24, 2008, and incorporated
herein by reference).
|
|
3.3
|
Certificate
of Amendment by Shareholders to the Amended and Restated Articles of
Incorporation (filed as Exhibit 4.2 to the Form S-3 filed on January 21,
2009, and incorporated herein by reference, Registration No.
333-156841).
|
|
3.4
|
Amended
and Restated Regulations, as amended as of May 1, 2007 (filed as Exhibit
3.2 to the Form 10-Q for the quarter ended June 30, 2007 and incorporated
herein by reference.
|
|
4.1
|
Letter
Agreement, dated as of December 23, 2008, between the Registrant and the
United States Department of the Treasury, which includes the Securities
Purchase Agreement – Standard Terms (filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on December 30, 2008, and
incorporated herein by reference).
|
|
4.2
|
Warrant
to Purchase up to 930,233 shares of Common Stock dated as of December 23,
2008 (filed as Exhibit 4.1 to the Form 8-K filed on December 30, 2008 and
incorporated herein by reference).
|
|
4.3
|
Form
of Series A Preferred Stock Certificate dated as of December 23, 2008
(filed as Exhibit 4.2 to the Form 8-K filed on December 30, 2008 and
incorporated herein by reference).
|
|
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.
|
|
10.1
|
Agreement
between Charles D. Lefferson and First Financial Bancorp. dated August 4,
2000 (filed as Exhibit 10.5 to the Form 10-K for the year ended December
31, 2002 and incorporated herein by reference).
*
|
|
10.2
|
Amendment
to Employment Agreement between Charles D. Lefferson and First Financial
Bancorp. dated May 23, 2003 (filed as Exhibit 10.5 to the Form 10-Q for
the quarter ended June 30, 2003 and incorporated herein by
reference).*
|
|
10.3
|
First
Financial Bancorp. 1991 Stock Incentive Plan, dated September 24, 1991
(incorporated herein by reference to a Registration Statement on Form S-8,
Registration No. 33-46819).*
|
|
10.4
|
First
Financial Bancorp. Dividend Reinvestment and Share Purchase Plan, dated
April 24, 1997 (incorporated herein by reference to a Registration
Statement on Form S-3, Registration No.
333-25745).
|
|
10.5
|
First
Financial Bancorp. 1999 Stock Incentive Plan for Officers and Employees,
dated April 27, 1999 (incorporated herein by reference to a Registration
Statement on Form S-3, Registration No.
333-86781).*
|
|
10.6
|
First
Financial Bancorp. 1999 Non-Employee Director Stock Plan, as dated April
27, 1999 and amended and restated as of April 26, 2006 (filed as Exhibit
10.11 to the Form 10-Q for the quarter ended March 31, 2006 and
incorporated herein by reference).*
|
|
10.7
|
First
Financial Bancorp. Director Fee Stock Plan amended and restated effective
April 20, 2004 (filed as Exhibit 10.12 to the Form10-Q for the quarter
ended June 30, 2004 and incorporated herein by
reference).*
|
|
10.8
|
Form
of Executive Supplemental Retirement Agreement (filed as Exhibit 10.11 to
the Form 10-K for the year ended December 31, 2002 and incorporated herein
by reference).*
|
|
10.9
|
Form
of Endorsement Method Split Dollar Agreement (filed as Exhibit 10.12 to
the Form 10-K for the year ended December 31, 2002 and incorporated herein
by reference).*
|
|
10.10
|
First
Financial Bancorp. Deferred Compensation Plan, effective June 1, 2003
(filed as Exhibit 10.1 to the Form 10-Q for the quarter ended June 30,
2003 and incorporated herein by
reference).*
|
|
10.11
|
Form
of Stock Option Agreement for Incentive Stock Options (2005 – 2008) (filed
as Exhibit 10.1 to the Form 8-K filed on April 22, 2005 and incorporated
herein by reference).*
|
|
10.12
|
Form
of Stock Option Agreement for Non-Qualified Stock Options (2005-2008)
(filed as Exhibit 10.2 to the Form 8-K filed on April 22, 2005 and
incorporated herein by reference).*
|
|
10.13
|
Form
of Agreement for Restricted Stock Awards (2005-2008) (filed as Exhibit
10.3 to the Form 8-K filed on April 22, 2005 and incorporated herein by
reference).*
|
|
10.14
|
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.*
|
|
10.15
|
First
Financial Bancorp. Amended and Restated Severance Pay Plan as approved
April 28, 2008 (filed as Exhibit 10.19 to the Form 10-Q filed on May 9,
2008 and incorporated herein by
reference).*
|
|
10.16
|
Terms
of First Financial Bancorp. Short-Term Incentive Plan (2007) (incorporated
herein by reference to the Form 8-K filed on May 4,
2007).*
|
|
10.17
|
First
Financial Bancorp. Amended and Restated Key Management Severance Plan as
approved February 26, 2008 (filed as Exhibit 10.21 to the Form 10-Q filed
on May 9, 2008 and incorporated herein by
reference).*
|
|
10.18
|
Form
of Agreement for Restricted Stock Award (2008) (filed as Exhibit 10.22 to
the Form 10-Q filed on May 9, 2008 and incorporated herein by
reference).*
|
|
10.19
|
Long-Term
Incentive Plan Grant Design (2008) (filed as Exhibit 10.23 to the Form
10-Q filed on May 9, 2008 and incorporated herein by
reference).*
|
|
10.20
|
Short-Term
Incentive Plan Design (2008) (filed as Exhibit 10.24 to the Form 10-Q
filed on May 9, 2008 and incorporated herein by
reference).*
|
|
10.21
|
Letter
Agreement, dated December 23, 2008, including Securities Purchase
Agreement – Standard Terms incorporated by reference therein, between
First Financial and the United States Department of the Treasury (filed as
Exhibit 10.1 to the Form 8-K filed on December 30, 2008 and incorporated
herein by reference).
|
|
10.22
|
Form
of Waiver, executed by each of Messrs. Claude E. Davis, C. Douglas
Lefferson, J. Franklin Hall, Samuel J. Munafo and Gregory A. Gehlmann
dated as of December 23, 2008 (filed as Exhibit 10.2 to the Form 8-K filed
on December 30, 2008 and incorporated herein by
reference).*
|
|
10.23
|
Form
of Letter Agreement, executed by each of Messrs. Claude E. Davis, C.
Douglas Lefferson, J. Franklin Hall, Samuel J. Munafo and Gregory A.
Gehlmann dated as of December 23, 2008 (filed as Exhibit 10.3 to the Form
8-K filed on December 30, 2008 and incorporated herein by
reference).*
|
|
10.24
|
Form
of Amendment No. 1 to Agreement for Restricted Stock Awards for 2005
Awards (filed as Exhibit 10.24 to the Form 10-K filed on March 11, 2009
and incorporated herein by
reference).*
|
|
10.25
|
Form
of Amendment No. 1 to Agreement for Restricted Stock Awards for 2006
Awards (filed as Exhibit 10.25 to the Form 10-K filed on March 11, 2009
and incorporated herein by
reference).*
|
|
10.26
|
Form
of Amendment No. 1 to Agreement for Restricted Stock Awards for 2007
Awards (filed as Exhibit 10.26 to the Form 10-K filed on March 11, 2009
and incorporated herein by
reference).*
|
|
10.27
|
Terms
of First Financial Bancorp. Short-Term Incentive Plan (2009) (incorporated
herein by reference to the Form 8-K filed on April 16,
2009).*
|
|
14
|
First
Financial Bancorp. Code of Business Conduct and Ethics as approved January
23, 2007, (filed as Exhibit 14 to the Form 10-K for the year ended
December 31, 2006 and incorporated herein by
reference).
|
|
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.
|
First
Financial will furnish, without charge, to a security holder upon request a copy
of the documents and will furnish any other Exhibit upon payment of
reproductions costs. Unless as otherwise, noted documents, those
documents incorporated by reference involve File No. 000-12379.
*
Compensatory plans or arrangements.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
|
FIRST FINANCIAL BANCORP.
|
|
|
(Registrant)
|
|
|
|
/s/
J. Franklin Hall
|
|
/s/
Anthony M. Stollings
|
J.
Franklin Hall
|
|
Anthony
M. Stollings
|
Executive
Vice President and
|
|
Senior
Vice President, Chief Accounting
|
Chief
Financial Officer
|
|
Officer,
and
Controller
|