FORM
10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended
|
September 30, 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 ¨
|
Smaller
reporting company ¨
|
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 November 12, 2009
|
Common stock, No par value
|
|
51,430,722
|
FIRST
FINANCIAL BANCORP.
(Dollars
in thousands, except per share data)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
243,924 |
|
|
$ |
100,935 |
|
Fed
funds sold
|
|
|
728,853 |
|
|
|
0 |
|
Investment
securities trading
|
|
|
338 |
|
|
|
61 |
|
Investment
securities available-for-sale, at market value
|
|
|
523,355 |
|
|
|
659,756 |
|
(cost
$504,716 at September 30, 2009 and $648,845 at December 31,
2008)
|
|
|
|
|
|
|
|
|
Investment
securities held-to-maturity
|
|
|
17,928 |
|
|
|
4,966 |
|
(market
value $18,503 at September 30, 2009 and $5,135 at December 31,
2008)
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
87,693 |
|
|
|
27,976 |
|
Loans
held for sale
|
|
|
2,729 |
|
|
|
3,854 |
|
Loans:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
818,953 |
|
|
|
807,720 |
|
Real
estate-construction
|
|
|
245,535 |
|
|
|
232,989 |
|
Real
estate-commercial
|
|
|
1,039,599 |
|
|
|
846,673 |
|
Real
estate-residential
|
|
|
331,678 |
|
|
|
383,599 |
|
Installment
|
|
|
87,387 |
|
|
|
98,581 |
|
Home
equity
|
|
|
327,779 |
|
|
|
286,110 |
|
Credit
card
|
|
|
27,713 |
|
|
|
27,538 |
|
Lease
financing
|
|
|
18 |
|
|
|
50 |
|
Total
loans, excluding covered loans
|
|
|
2,878,662 |
|
|
|
2,683,260 |
|
Covered
loans
|
|
|
2,056,156 |
|
|
|
0 |
|
Total
loans
|
|
|
4,934,818 |
|
|
|
2,683,260 |
|
Less:
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
55,770 |
|
|
|
35,873 |
|
Net
loans
|
|
|
4,879,048 |
|
|
|
2,647,387 |
|
Premises
and equipment
|
|
|
105,707 |
|
|
|
84,105 |
|
Goodwill
|
|
|
46,931 |
|
|
|
28,261 |
|
Other
intangibles
|
|
|
7,105 |
|
|
|
1,002 |
|
OREO
covered by loss share
|
|
|
12,022 |
|
|
|
0 |
|
FDIC
indemnification asset
|
|
|
316,860 |
|
|
|
0 |
|
Accrued
interest and other assets
|
|
|
287,409 |
|
|
|
140,839 |
|
TOTAL
ASSETS
|
|
$ |
7,259,902 |
|
|
$ |
3,699,142 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Interest-bearing
|
|
$ |
1,364,556 |
|
|
$ |
636,945 |
|
Savings
|
|
|
965,750 |
|
|
|
583,081 |
|
Time
|
|
|
2,703,392 |
|
|
|
1,150,208 |
|
Total
interest-bearing deposits
|
|
|
5,033,698 |
|
|
|
2,370,234 |
|
Noninterest-bearing
|
|
|
802,286 |
|
|
|
413,283 |
|
Total
deposits
|
|
|
5,835,984 |
|
|
|
2,783,517 |
|
Short-term
borrowings:
|
|
|
|
|
|
|
|
|
Federal
funds purchased and securities sold
|
|
|
|
|
|
|
|
|
under
agreements to repurchase
|
|
|
35,763 |
|
|
|
147,533 |
|
Federal
Home Loan Bank
|
|
|
65,000 |
|
|
|
150,000 |
|
Other
|
|
|
0 |
|
|
|
57,000 |
|
Total
short-term borrowings
|
|
|
100,763 |
|
|
|
354,533 |
|
Long-term
debt
|
|
|
410,356 |
|
|
|
148,164 |
|
Other
long-term debt
|
|
|
20,620 |
|
|
|
20,620 |
|
Accrued
interest and other liabilities
|
|
|
220,932 |
|
|
|
43,981 |
|
TOTAL
LIABILITIES
|
|
|
6,588,655 |
|
|
|
3,350,815 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock - $1,000 par value
|
|
|
|
|
|
|
|
|
Authorized
- 80,000 shares
|
|
|
|
|
|
|
|
|
Outstanding
- 80,000 shares in 2009 and 2008
|
|
|
78,271 |
|
|
|
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
|
|
|
490,854 |
|
|
|
394,169 |
|
Retained
earnings
|
|
|
294,231 |
|
|
|
76,339 |
|
Accumulated
other comprehensive loss
|
|
|
(6,659 |
) |
|
|
(11,905 |
) |
Treasury
Stock, at cost, 10,927,192 shares in 2009 and 11,077,413 shares in
2008
|
|
|
(185,450 |
) |
|
|
(188,295 |
) |
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
671,247 |
|
|
|
348,327 |
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$ |
7,259,902 |
|
|
$ |
3,699,142 |
|
See notes
to consolidated financial statements.
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
(Dollars
in thousands, except per share data)
(Unaudited)
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$ |
44,913 |
|
|
$ |
39,754 |
|
|
$ |
112,548 |
|
|
$ |
122,121 |
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,241 |
|
|
|
5,349 |
|
|
|
22,954 |
|
|
|
13,257 |
|
Tax-exempt
|
|
|
352 |
|
|
|
631 |
|
|
|
1,172 |
|
|
|
2,214 |
|
Total
investment securities interest
|
|
|
6,593 |
|
|
|
5,980 |
|
|
|
24,126 |
|
|
|
15,471 |
|
Federal
funds sold
|
|
|
0 |
|
|
|
22 |
|
|
|
0 |
|
|
|
627 |
|
Total
interest income
|
|
|
51,506 |
|
|
|
45,756 |
|
|
|
136,674 |
|
|
|
138,219 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
11,490 |
|
|
|
13,608 |
|
|
|
30,373 |
|
|
|
45,982 |
|
Short-term
borrowings
|
|
|
261 |
|
|
|
1,720 |
|
|
|
1,295 |
|
|
|
3,642 |
|
Long-term
borrowings
|
|
|
1,977 |
|
|
|
707 |
|
|
|
4,534 |
|
|
|
1,497 |
|
Subordinated
debentures and capital securities
|
|
|
323 |
|
|
|
311 |
|
|
|
880 |
|
|
|
1,025 |
|
Total
interest expense
|
|
|
14,051 |
|
|
|
16,346 |
|
|
|
37,082 |
|
|
|
52,146 |
|
Net
interest income
|
|
|
37,455 |
|
|
|
29,410 |
|
|
|
99,592 |
|
|
|
86,073 |
|
Provision
for loan losses
|
|
|
26,655 |
|
|
|
3,219 |
|
|
|
41,272 |
|
|
|
8,935 |
|
Net
interest income after provision for loan losses
|
|
|
10,800 |
|
|
|
26,191 |
|
|
|
58,320 |
|
|
|
77,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
5,408 |
|
|
|
5,348 |
|
|
|
13,776 |
|
|
|
14,906 |
|
Trust
and wealth management fees
|
|
|
3,339 |
|
|
|
4,390 |
|
|
|
9,881 |
|
|
|
13,666 |
|
Bankcard
income
|
|
|
1,379 |
|
|
|
1,405 |
|
|
|
4,092 |
|
|
|
4,196 |
|
Net
gains from sales of loans
|
|
|
63 |
|
|
|
376 |
|
|
|
855 |
|
|
|
783 |
|
Gains
on sales of investment securities
|
|
|
0 |
|
|
|
0 |
|
|
|
3,349 |
|
|
|
1,585 |
|
Gain
on acquisition
|
|
|
383,330 |
|
|
|
0 |
|
|
|
383,330 |
|
|
|
0 |
|
Income
(loss) on preferred securities
|
|
|
154 |
|
|
|
(3,400 |
) |
|
|
277 |
|
|
|
(3,601 |
) |
Other
|
|
|
1,213 |
|
|
|
2,359 |
|
|
|
5,456 |
|
|
|
7,566 |
|
Total
noninterest income
|
|
|
394,886 |
|
|
|
10,478 |
|
|
|
421,016 |
|
|
|
39,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
22,051 |
|
|
|
16,879 |
|
|
|
55,927 |
|
|
|
49,847 |
|
Net
occupancy
|
|
|
3,442 |
|
|
|
2,538 |
|
|
|
8,912 |
|
|
|
8,000 |
|
Furniture
and equipment
|
|
|
1,874 |
|
|
|
1,690 |
|
|
|
5,527 |
|
|
|
4,960 |
|
Data
processing
|
|
|
973 |
|
|
|
791 |
|
|
|
2,585 |
|
|
|
2,398 |
|
Marketing
|
|
|
871 |
|
|
|
622 |
|
|
|
2,211 |
|
|
|
1,613 |
|
Communication
|
|
|
737 |
|
|
|
601 |
|
|
|
2,077 |
|
|
|
2,155 |
|
Professional
services
|
|
|
1,220 |
|
|
|
729 |
|
|
|
3,427 |
|
|
|
2,551 |
|
State
intangible tax
|
|
|
628 |
|
|
|
697 |
|
|
|
1,944 |
|
|
|
2,071 |
|
FDIC
expense
|
|
|
1,612 |
|
|
|
115 |
|
|
|
5,318 |
|
|
|
363 |
|
Other
|
|
|
12,409 |
|
|
|
3,678 |
|
|
|
20,619 |
|
|
|
11,371 |
|
Total
noninterest expenses
|
|
|
45,817 |
|
|
|
28,340 |
|
|
|
108,547 |
|
|
|
85,329 |
|
Income
before income taxes
|
|
|
359,869 |
|
|
|
8,329 |
|
|
|
370,789 |
|
|
|
30,910 |
|
Income
tax expense
|
|
|
133,682 |
|
|
|
2,597 |
|
|
|
137,417 |
|
|
|
10,032 |
|
Net
income
|
|
|
226,187 |
|
|
|
5,732 |
|
|
|
233,372 |
|
|
|
20,878 |
|
Dividends
on preferred stock
|
|
|
1,000 |
|
|
|
0 |
|
|
|
2,578 |
|
|
|
0 |
|
Net
income available to common shareholders
|
|
$ |
225,187 |
|
|
$ |
5,732 |
|
|
$ |
230,794 |
|
|
$ |
20,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per common share - basic
|
|
$ |
4.41 |
|
|
$ |
0.15 |
|
|
$ |
5.37 |
|
|
$ |
0.56 |
|
Net
earnings per common share - diluted
|
|
$ |
4.38 |
|
|
$ |
0.15 |
|
|
$ |
5.31 |
|
|
$ |
0.56 |
|
Cash
dividends declared per share
|
|
$ |
0.10 |
|
|
$ |
0.17 |
|
|
$ |
0.30 |
|
|
$ |
0.51 |
|
Average
basic shares outstanding
|
|
|
51,027,887 |
|
|
|
37,132,864 |
|
|
|
43,005,983 |
|
|
|
37,104,793 |
|
Average
diluted shares outstanding
|
|
|
51,457,189 |
|
|
|
37,504,231 |
|
|
|
43,502,561 |
|
|
|
37,487,037 |
|
See notes
to consolidated financial statements.
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
(Unaudited,
dollars in thousands)
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
233,372 |
|
|
$ |
20,878 |
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
operating
activities
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
41,272 |
|
|
|
8,935 |
|
Provision
for depreciation and amortization
|
|
|
5,613 |
|
|
|
5,021 |
|
Stock-based
compensation expense
|
|
|
2,073 |
|
|
|
1,440 |
|
Pension
expense
|
|
|
833 |
|
|
|
998 |
|
Net
amortization of premiums and accretion of discounts
|
|
|
|
|
|
|
|
|
on
investment securities
|
|
|
1,031 |
|
|
|
115 |
|
Gains
on sales of investment securities
|
|
|
(3,349 |
) |
|
|
(1,585 |
) |
(Income)
loss on trading securities
|
|
|
(277 |
) |
|
|
3,602 |
|
Gain
on acquisition
|
|
|
(383,330 |
) |
|
|
0 |
|
Originations
of loans held for sale
|
|
|
(114,966 |
) |
|
|
(68,568 |
) |
Net
gains from sales of loans held for sale
|
|
|
(948 |
) |
|
|
(783 |
) |
Proceeds
from sales of loans held for sale
|
|
|
113,558 |
|
|
|
68,180 |
|
Deferred
income taxes
|
|
|
153,056 |
|
|
|
(1,205 |
) |
(Increase)
decrease in interest receivable
|
|
|
(11,029 |
) |
|
|
2,605 |
|
Increase
in cash surrender value of life insurance
|
|
|
(3,178 |
) |
|
|
(3,043 |
) |
Increase
in prepaid expenses
|
|
|
(991 |
) |
|
|
(265 |
) |
Increase
(decrease) in accrued expenses
|
|
|
10,178 |
|
|
|
(2,601 |
) |
Decrease
in interest payable
|
|
|
(847 |
) |
|
|
(2,117 |
) |
Contribution
to pension plan
|
|
|
(30,800 |
) |
|
|
0 |
|
Other
|
|
|
(2,070 |
) |
|
|
(552 |
) |
Net
cash provided by operating activities
|
|
|
9,201 |
|
|
|
31,055 |
|
|
|
|
|
|
|
|
|
|
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
|
|
|
135,566 |
|
|
|
72,487 |
|
Purchases
of securities available-for-sale
|
|
|
(113,042 |
) |
|
|
(197,972 |
) |
Proceeds
from calls, paydowns and maturities of securities
|
|
|
|
|
|
|
|
|
held-to-maturity
|
|
|
647 |
|
|
|
602 |
|
Net
(increase) decrease in federal funds sold
|
|
|
(728,853 |
) |
|
|
106,990 |
|
Net
increase in loans and leases
|
|
|
(222,097 |
) |
|
|
(143,909 |
) |
Proceeds
from disposal of other real estate owned
|
|
|
5,046 |
|
|
|
1,578 |
|
Purchases
of premises and equipment
|
|
|
(13,880 |
) |
|
|
(8,095 |
) |
Net
cash acquired from acquisitions
|
|
|
245,944 |
|
|
|
0 |
|
Net
cash proceeds received in FDIC assisted acquisitions
|
|
|
967,391 |
|
|
|
0 |
|
Net
cash provided by (used in) investing activities
|
|
|
429,442 |
|
|
|
(167,195 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in total deposits
|
|
|
33,241 |
|
|
|
(182,510 |
) |
Net
(decrease) increase in short-term borrowings
|
|
|
(308,770 |
) |
|
|
215,206 |
|
Payments
on long-term borrowings
|
|
|
(101,463 |
) |
|
|
(8,328 |
) |
Proceeds
from long-term borrowings
|
|
|
0 |
|
|
|
115,000 |
|
Cash
dividends paid on common stock
|
|
|
(13,880 |
) |
|
|
(19,080 |
) |
Cash
dividends paid on preferred stock
|
|
|
(2,578 |
) |
|
|
0 |
|
Issuance
of common stock
|
|
|
97,985 |
|
|
|
0 |
|
Excess
tax liability on share-based compensation
|
|
|
(189 |
) |
|
|
(31 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(295,654 |
) |
|
|
120,257 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
142,989 |
|
|
|
(15,883 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
100,935 |
|
|
|
106,224 |
|
Cash
and cash equivalents at end of period
|
|
$ |
243,924 |
|
|
$ |
90,341 |
|
See notes
to consolidated financial statements.
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited,
dollars in thousands)
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Supplemental
Schedule for Investing Activities
|
|
|
|
|
|
|
Acquisitions
|
|
|
|
|
|
|
Assets
acquired-Peoples
|
|
$ |
565,992 |
|
|
$ |
0 |
|
Liabilities
assumed-Peoples
|
|
|
584,661 |
|
|
|
0 |
|
(Goodwill)
bargain purchase gain
|
|
$ |
(18,669 |
) |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
Assets
acquired-Irwin
|
|
$ |
3,269,532 |
|
|
$ |
0 |
|
Liabilities
assumed-Irwin
|
|
|
2,886,202 |
|
|
$ |
0 |
|
Bargain
purchase gain (goodwill)
|
|
$ |
383,330 |
|
|
$ |
0 |
|
See notes
to consolidated financial statements.
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
(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
|
|
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 |
|
Split
dollar life insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,499 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,499 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,878 |
|
Unrealized
holding losses on securities available-for-sale arising during the
period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(560 |
) |
|
|
|
|
|
|
|
|
|
|
(560 |
) |
Change
in retirement obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
279 |
|
Unrealized
gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
373 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,970 |
|
Cash
dividends declared ($0.34 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,090 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,090 |
) |
Excess
tax liability on share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31 |
) |
Restricted
stock awards, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,122 |
) |
|
|
|
|
|
|
|
|
|
|
108,799 |
|
|
|
1,969 |
|
|
|
(153 |
) |
Share-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,440 |
|
Balances
at September 30, 2008
|
|
|
0 |
|
|
|
0 |
|
|
|
48,558,614 |
|
|
|
391,249 |
|
|
|
80,632 |
|
|
|
(6,285 |
) |
|
|
(11,082,007 |
) |
|
|
(188,376 |
) |
|
|
277,220 |
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233,372 |
|
Unrealized
holding gains on securities available-for-sale arising during the
period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,939 |
|
|
|
|
|
|
|
|
|
|
|
4,939 |
|
Change
in retirement obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501 |
|
|
|
|
|
|
|
|
|
|
|
501 |
|
Unrealized
loss on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194 |
) |
|
|
|
|
|
|
|
|
|
|
(194 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238,618 |
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
13,800,000 |
|
|
|
97,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,985 |
|
Cash
dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Common
stock at $0.30 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,650 |
) |
Preferred
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,578 |
) |
Discount
on preferred stock
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
(252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Excess
tax liability on share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(189 |
) |
Restricted
stock awards, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,184 |
) |
|
|
|
|
|
|
|
|
|
|
150,221 |
|
|
|
2,845 |
|
|
|
(339 |
) |
Share-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,073 |
|
Balances
at September 30, 2009
|
|
|
80,000 |
|
|
$ |
78,271 |
|
|
|
62,358,614 |
|
|
$ |
490,854 |
|
|
$ |
294,231 |
|
|
$ |
(6,659 |
) |
|
|
(10,927,192 |
) |
|
$ |
(185,450 |
) |
|
$ |
671,247 |
|
See notes
to consolidated financial statements.
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
SEPTEMBER
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 (GAAP) 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 GAAP
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.
The
Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(ASC) became effective July 1, 2009. At that date, the ASC became the
FASB’s officially recognized source of authoritative GAAP applicable to all
public and non-public non-governmental entities, superseding existing FASB,
American Institute of Certified Public Accountants, Emerging Issues Tax Force,
and related literature. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under the authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. All other accounting literature is considered
non-authoritative. The change to ASC affects the way companies refer
to GAAP in financial statements and accounting policies. Citing
particular content in the ASC involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section, and Paragraph
structure.
NOTE
2: RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS
Effective
January 1, 2009, First Financial adopted FASB ASC Topic 805, Business
Combinations. This topic 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 topic 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. The Business Combinations topic 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, this topic
requires enhanced disclosures to enable users of the financial statements to
evaluate the nature and financial effects of the business
combination.
Effective
June 30, 2009, First Financial adopted the amended guidance on the initial
recognition and measurement, subsequent measurements and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination in ASC Topic 805. This guidance is effective for all
acquisitions of assets and liabilities arising from contingencies in a business
combination with closing dates after January 1, 2009.
The
guidance in FASB ASC Topic 805 was considered in the accounting for First
Financial’s business combinations during the third quarter of
2009. For further detail, see Note 3 – Business
Combinations.
Effective
January 1, 2009, First Financial adopted the requirements of FASB ASC Topic 810
on Noncontrolling Interests in Consolidated Financial Statements. This guidance
changes the accounting and reporting for minority
interests,
which are recharacterized as noncontrolling interests and classified as a
component of shareholders’ equity. The Noncontrolling Interests topic requires
retroactive adoption of the presentation and disclosure requirements for
existing consolidated minority interests. All other requirements of
this topic 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, this guidance did not have a material
impact on First Financial’s Consolidated Financial Statements.
In June
of 2009, the FASB amended the consolidation guidance on variable interest
entities in ASC Topic 810. This guidance affects all entities and
enterprises currently within its scope, as well as qualifying special purpose
entities that were previously outside of its scope, and is effective for fiscal
years beginning after November 15, 2009, with early adoption
prohibited. First Financial is evaluating the revised guidance and
does not anticipate a material impact on the Consolidated Financial
Statements.
Effective
January 1, 2009, First Financial adopted the requirements of FASB ASC Topic 815,
Derivatives and Hedging. This guidance 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 6 –
Derivatives.
Effective
January 1, 2009, First Financial adopted the requirements of the FASB ASC Topic
860, Transfers and Servicing. This topic applies to 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 topic 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. The adoption of this guidance did
not have a material impact on First Financial’s Consolidated Financial
Statements.
Effective
June 30, 2009, First Financial adopted the requirements of FASB ASC Topic 320,
Investments – Debt and Equity Securities. This topic 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. The adoption of this guidance did not have a
material impact on First Financial’s Consolidated Financial
Statements.
Effective
June 30, 2009, First Financial adopted the requirements of FASB ASC Topic 820,
Fair Value Measurements and Disclosures. This topic 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. The adoption of this guidance did not have a
material impact on First Financial’s Consolidated Financial
Statements.
Effective
September 30, 2009, First Financial adopted additional guidance clarifying the
appropriate techniques for measuring the fair value of liabilities in FASB ASC
Topic 820. This guidance was effective for the first reporting period, including
interim periods, after issuance. The adoption of this guidance did
not have a material impact on First Financial’s Consolidated Financial
Statements.
Effective
June 30, 2009, First Financial adopted the requirements of FASB ASC Topic 825,
Financial Instruments. This topic extends the original disclosure
requirements about the 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 12 – Fair Value
Disclosures.
Effective
June 30, 2009, First Financial adopted the requirements of FASB ASC Topic 855,
Subsequent Events. This topic 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. The Subsequent Events topic 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 15 – Subsequent Events.
In June
of 2009, the FASB amended the derecognition guidance on transfers of financial
assets in ASC Topic 860, Transfers and Servicing. This guidance
removes the concept of a qualifying special-purpose entity and removes the
exception from applying ASC Topic 810, Consolidations, to qualifying
special-purpose entities. This guidance is
effective
for fiscal years beginning after November 15, 2009, with early adoption
prohibited. First Financial is evaluating the revised guidance
included in this topic and does not anticipate a material impact on the
Consolidated Financial Statements.
In
December 2008, the FASB issued additional guidance on ASC Topic 715,
Compensation-Retirement Benefits-Defined Benefits. This guidance
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. This
guidance is effective for fiscal years ending after December 15, 2009 with
early adoption permitted. First Financial is evaluating the revised
disclosure requirements included in this topic and does not anticipate a
material impact on the Consolidated Financial Statements.
NOTE
3: BUSINESS COMBINATIONS
On July
31, 2009, First Financial Bank, N.A. (First Financial Bank), a wholly owned
subsidiary of First Financial Bancorp, entered into a purchase and assumption
agreement (Peoples Agreement) with the Federal Deposit Insurance Corporation
(FDIC), as receiver, pursuant to which First Financial acquired certain assets
and assumed substantially all of the deposits and certain liabilities of Peoples
Community Bank (Peoples).
Prior to
the acquisition, Peoples operated 19 banking centers in the Cincinnati, Ohio
metropolitan area. Excluding the effects of purchase accounting
adjustments, First Financial acquired $579.6 million in assets and assumed
approximately $520.8 million of the deposits of Peoples. Additionally, First
Financial purchased loans with an estimated fair value of $324.4 million, $11.7
million of other real estate owned (OREO) and $37.7 million of investment
securities.
In
connection with the Peoples acquisition, First Financial Bank entered into a
loss sharing agreement with the FDIC that covers $449.7 million of assets, based
upon seller’s records, including single family residential mortgage loans,
commercial real estate and commercial and industrial loans, and OREO (covered
assets). First Financial acquired other Peoples assets that are not
covered by the loss sharing agreement with the FDIC including investment
securities purchased at fair market value and other tangible
assets. Pursuant to the terms of the loss sharing agreement, the
covered assets are subject to a stated loss threshold of $190.0 million whereby
the FDIC will reimburse First Financial for 80% of losses of up to $190.0
million, and 95% of losses in excess of this amount. First Financial will
reimburse the FDIC for its share of recoveries with respect to losses for which
the FDIC paid First Financial a reimbursement under the loss sharing agreement.
The FDIC’s obligation to reimburse First Financial for losses with respect to
covered assets begins with the first dollar of loss incurred.
On
September 18, 2009, First Financial Bank, N.A, entered into separate purchase
and assumption agreements (Irwin Agreements) with the FDIC, as receiver,
pursuant to which First Financial acquired certain assets and assumed
substantially all of the deposits and certain liabilities of Irwin Union Bank
and Trust Company (Irwin Union Bank) and Irwin Union Bank, F.S.B. (Irwin FSB).
Irwin Union Bank and Irwin FSB are collectively referred to herein as
Irwin.
Prior to
the acquisition, Irwin operated 27 banking centers primarily located in Indiana,
with banking centers also located in Michigan, Nevada, Arizona, California,
Kentucky, Missouri, New Mexico and Utah. Excluding the effects of purchase
accounting adjustments, First Financial acquired $2.6 billion in assets and
assumed approximately $2.5 billion of the deposits of Irwin. Additionally, First
Financial purchased loans with a fair value of $1.8 billion, offices and other
bank properties of $13.0 million and $78.7 million of investment
securities.
In
connection with the Irwin acquisitions, First Financial Bank entered into loss
sharing agreements with the FDIC that collectively cover approximately $2.2
billion of assets, based upon seller’s records, which include single family
residential mortgage loans, commercial real estate and commercial and industrial
loans (covered assets). First Financial acquired other Irwin assets that are not
covered by loss sharing agreements with the FDIC including investment securities
purchased at fair market value and other tangible assets. Pursuant to the terms
of the loss sharing agreements, the covered assets of Irwin Union Bank are
subject to a stated loss threshold of $526.0 million whereby the FDIC will
reimburse First Financial for 80% of losses of up to $526.0 million, and 95% of
losses in excess of this amount. Also pursuant to the terms of the loss sharing
agreements, the covered assets of Irwin FSB are subject to a stated loss
threshold of $110.0 million whereby the FDIC will reimburse First Financial for
80% of losses of up to $110.0 million, and 95% of losses in excess of this
amount. First Financial will reimburse the FDIC for its share of recoveries with
respect to losses for which the FDIC paid First Financial a reimbursement under
the loss
sharing
agreements. The FDIC’s obligation to reimburse First Financial for losses with
respect to covered assets begins with the first dollar of loss
incurred.
The
amounts covered by the loss sharing agreements are the pre-acquisition book
values of the underlying covered assets, the contractual balance of unfunded
commitments that were acquired, and certain future net direct costs. The loss
sharing agreements applicable to single family residential mortgage loans
provide for FDIC loss sharing and First Financial reimbursement to the FDIC, in
each case as described above, for ten years. The loss sharing agreements
applicable to all other covered assets provide for FDIC loss sharing for five
years and First Financial reimbursement of recoveries to the FDIC for eight
years, in each case as described above.
The loss
sharing agreements are subject to certain servicing procedures as specified in
agreements with the FDIC. The expected reimbursements under the loss sharing
agreements were recorded as indemnification assets at their estimated fair
values of $68.5 million and $248.4 million for the Peoples Agreement and the
Irwin Agreements, respectively, on the acquisition dates. The indemnification
assets reflect the present value of the expected net cash reimbursement related
to the loss sharing agreements described above.
First
Financial has determined that the acquisitions of the net assets of Peoples and
Irwin constitute business combinations as defined by the FASB ASC Topic 805,
Business Combinations. Accordingly, the assets acquired and
liabilities assumed are presented at their fair values as
required. Fair values were determined based on the requirements of
FASB ASC Topic 820, Fair Value Measurements. In many cases the
determination of these fair values required management to make estimates about
discount rates, future expected cash flows, market conditions and other future
events that are highly subjective in nature and subject to
change. These fair value estimates are considered preliminary, and
are subject to change for up to one year after the closing dates of the
acquisitions as additional information relative to closing date fair values
becomes available. First Financial and the FDIC are engaged in
on-going discussions that may impact which assets and liabilities are ultimately
acquired or assumed by First Financial and/or the purchase prices. In
addition, the tax treatment of FDIC assisted acquisitions is complex and subject
to interpretations that may result in future adjustments of deferred taxes as of
the acquisition dates.
First
Financial did not acquire the real estate, banking facilities, furniture and
equipment of Peoples as part of the purchase and assumption agreement but has
the option to purchase these assets at fair market value from the FDIC. This
purchase option expires 90 days after acquisition date, but has been extended by
the FDIC. Fair market values for the real estate, facilities,
furniture and equipment will be based on current appraisals and determined at a
later date. First Financial is leasing these facilities and equipment
from the FDIC until current appraisals are received and a final decision is
made.
|
|
Peoples
|
|
|
Irwin
|
|
|
|
As Recorded
|
|
|
Fair Value
|
|
|
As Recorded
|
|
|
As Recorded
|
|
|
Fair Value
|
|
|
As Recorded
|
|
(dollars in $000's)
|
|
by FDIC
|
|
|
Adjustments
|
|
|
by FFB
|
|
|
by FDIC
|
|
|
Adjustments
|
|
|
by FFB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and interest-bearing deposits
|
|
$ |
87,158 |
|
|
$ |
0 |
|
|
$ |
87,158 |
|
|
$ |
158,786 |
|
|
$ |
0 |
|
|
$ |
158,786 |
|
Investment
securities
|
|
|
37,681 |
|
|
|
- |
|
|
|
37,681 |
|
|
|
78,735 |
|
|
|
- |
|
|
|
78,735 |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered
loans
|
|
|
431,217 |
|
|
|
(106,836 |
) |
|
|
324,381 |
|
|
|
2,237,158 |
|
|
|
(462,148 |
) |
|
|
1,775,010 |
|
Total
loans
|
|
|
431,217 |
|
|
|
(106,836 |
) |
|
|
324,381 |
|
|
|
2,237,158 |
|
|
|
(462,148 |
) |
|
|
1,775,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
(Bargain Purchase)
|
|
|
- |
|
|
|
18,669 |
|
|
|
18,669 |
|
|
|
- |
|
|
|
(383,330 |
) |
|
|
(383,330 |
) |
Core
deposit intangible
|
|
|
- |
|
|
|
1,578 |
|
|
|
1,578 |
|
|
|
- |
|
|
|
3,124 |
|
|
|
3,124 |
|
Covered
other real estate owned
|
|
|
18,457 |
|
|
|
(6,763 |
) |
|
|
11,694 |
|
|
|
832 |
|
|
|
- |
|
|
|
832 |
|
FDIC
indemnification asset
|
|
|
- |
|
|
|
68,456 |
|
|
|
68,456 |
|
|
|
- |
|
|
|
248,404 |
|
|
|
248,404 |
|
Other
assets
|
|
|
5,115 |
|
|
|
(4,695 |
) |
|
|
420 |
|
|
|
98,002 |
|
|
|
(26,127 |
) |
|
|
71,875 |
|
Total
assets acquired
|
|
$ |
579,628 |
|
|
$ |
(29,591 |
) |
|
$ |
550,037 |
|
|
$ |
2,573,513 |
|
|
$ |
(620,077 |
) |
|
$ |
1,953,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposit accounts
|
|
$ |
49,424 |
|
|
$ |
0 |
|
|
$ |
49,424 |
|
|
$ |
300,859 |
|
|
$ |
0 |
|
|
$ |
300,859 |
|
Interest-bearing
deposit accounts
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
741,525 |
|
|
|
- |
|
|
|
741,525 |
|
Savings
deposits
|
|
|
168,220 |
|
|
|
- |
|
|
|
168,220 |
|
|
|
79,987 |
|
|
|
- |
|
|
|
79,987 |
|
Time
deposits
|
|
|
303,135 |
|
|
|
- |
|
|
|
303,135 |
|
|
|
1,376,076 |
|
|
|
- |
|
|
|
1,376,076 |
|
Total
deposits
|
|
|
520,779 |
|
|
|
- |
|
|
|
520,779 |
|
|
|
2,498,447 |
|
|
|
- |
|
|
|
2,498,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
from Federal Home Loan Banks
|
|
|
58,940 |
|
|
|
4,598 |
|
|
|
63,538 |
|
|
|
337,433 |
|
|
|
17,685 |
|
|
|
355,118 |
|
Accrued
expenses and other liabilities
|
|
|
344 |
|
|
|
- |
|
|
|
344 |
|
|
|
32,638 |
|
|
|
- |
|
|
|
32,638 |
|
Total
liabilities assumed
|
|
$ |
580,063 |
|
|
$ |
4,598 |
|
|
$ |
584,661 |
|
|
$ |
2,868,518 |
|
|
$ |
17,685 |
|
|
$ |
2,886,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
from FDIC for net liabilities assumed
|
|
$ |
435 |
|
|
$ |
34,189 |
|
|
$ |
34,624 |
|
|
$ |
295,005 |
|
|
$ |
637,762 |
|
|
$ |
932,767 |
|
The
following is a description of the methods used to determine the fair values of
significant assets and liabilities presented above.
Cash and due from banks and
interest-bearing deposits in banks and the Federal Reserve – The carrying
amount of these assets is a reasonable estimate of fair value based on the
short-term nature of these assets.
Investment Securities
– Investment securities were acquired from the FDIC at fair market
value.
Loans – Fair values
for loans were based on a discounted cash flow methodology that considered
factors including the type of loan and related collateral, classification
status, fixed or variable interest rate, term of loan and whether or not the
loan was amortizing, and current discount rates. The discount rates
used for loans are based on current market rates for new originations of
comparable loans and include adjustments for liquidity concerns. The discount
rate does not include a factor for credit losses as that has been included in
the estimated cash flows.
Core deposit
intangible – This intangible asset represents the value of the
relationships that Peoples and Irwin had with its deposit customers. The fair
value of this intangible asset was estimated based on a discounted cash flow
methodology that gave appropriate consideration to expected customer attrition
rates, cost of the deposit base, and the net maintenance cost attributable to
customer deposits.
Other real estate
owned – OREO is presented at the estimated present value that management
expects to receive when the property is sold, net of related costs of
disposal.
FDIC indemnification
asset – This loss sharing asset is measured separately from the related
covered assets as it is not contractually embedded in the covered assets and is
not transferable with the covered assets should First Financial choose to
dispose of them. Fair value was estimated using projected cash flows related to
the loss sharing agreements based on the expected reimbursements for losses and
the applicable loss sharing percentages. These cash flows were
discounted to reflect the uncertainty of the timing and receipt of the loss
sharing reimbursement from the FDIC.
Deposits – The fair
values used for the demand and savings deposits that comprise the transaction
accounts acquired, by definition equal the amount payable on demand at the
acquisition date. No fair value adjustment was applied for time
deposits as First Financial was provided with the option, upon acquisition, to
reset deposit rates to market rates currently offered.
Advances from Federal Home
Loan Banks – The fair values of Federal Home Loan Bank (FHLB) advances
were based on contractual pre-payment penalties that are determined by the
FHLB.
The
operating results of First Financial for the period ended September 30,
2009 include the operating results produced by the acquired assets and assumed
liabilities for the period of July 31, 2009 to September 30, 2009 and
September 18, 2009 to September 30, 2009, for Peoples and Irwin,
respectively. Due primarily to the timing of the Irwin acquisition
and on-going discussions with the FDIC that may impact which assets and
liabilities are ultimately acquired or assumed by First Financial and/or the
purchase prices, no pro forma information is presented.
Other
Acquisitions
In a
separate and unrelated transaction, First Financial completed the purchase of 3
banking centers from Irwin Union Bank on August 28, 2009. The banking centers
were located in the Indiana communities of Carmel, Greensburg, and Shelbyville.
First Financial purchased $41.1 million of performing loans and assumed $84.6
million of deposits. Loans were acquired at par value and there was no premium
paid on assumed liabilities. Assets acquired in this transaction are not subject
to a loss share agreement. The acquisition was accounted for under the purchase
method of accounting in accordance with FASB ASC Topic 805. The
purchased assets and assumed liabilities were recorded at their estimated fair
values. Fair values are preliminary and subject to refinement for up
to one year after the closing date of the acquisition, as information relative
to closing date fair values becomes available. First Financial anticipates the
final determination of the fair values of these assets and liabilities will be
completed in the fourth quarter of 2009.
Loans
purchased in conjunction with the 3 banking centers were evaluated for
impairment in accordance with FASB ASC Topic 310-30, Loans and Debt Securities
Acquired with Deteriorated Credit Quality. These loans were
determined not to be impaired and will be accounted for under FASB ASC Topic
310, Receivables.
NOTE
4: COMMITMENTS AND CONTIGENCIES
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 $26.5 million and $22.5 million at September 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 $955.0 million and $767.3 million at
September 30,
2009, and
December 31, 2008, respectively. Management does not anticipate any
material losses as a result of these commitments.
Contingencies/Litigation
Irwin
Union Bank and Trust Company
The
following disclosure is in connection with the acquisition of certain assets and
assumption of certain liabilities of Irwin Union Bank by First Financial Bank
from the FDIC as receiver for Irwin Union Bank. The acquisition was pursuant to
a Purchase and Assumption Agreement by and among the FDIC, the FDIC as receiver,
and First Financial Bank dated September 18, 2009, as amended (the “Purchase
Agreement”). Some of these claims involve Irwin Union Bank prior to it being
placed in receivership and are thus the responsibility of the FDIC as receiver
pursuant to the Purchase Agreement. Furthermore, with respect to the claims set
forth below, First Financial Bank has or will submit requests for
indemnification to the FDIC as receiver pursuant to Section 12 of the Purchase
Agreement. Pursuant to the Purchase Agreement, the FDIC as receiver has agreed
to indemnify and hold harmless First Financial Bank against any and all costs,
losses, liabilities, expenses (including attorneys’ fees) prior to assumption of
the defense by the FDIC as receiver, judgments, fines, and amounts paid in
settlement actually and reasonably incurred in connection with certain claims
against Irwin Union Bank and the former subsidiaries of Irwin Union Bank for
actions taken on or prior to September 18, 2009. First Financial believes the
matters discussed below qualify for indemnification.
Litigation in Connection with Loans
Purchased by Former Irwin Subsidiaries from Freedom Mortgage Corporation.
On
January 22, 2008, Irwin Union Bank and Irwin Home Equity Corporation (“Irwin
Home Equity”), filed suit against Freedom Mortgage Corporation (“Freedom”) in
the United States District Court for the Northern District of California, Irwin Union Bank, et al. v.
Freedom Mortgage
Corp., (the “California Action”) for breach of contract and negligence
arising out of Freedom’s refusal to repurchase certain mortgage loans that Irwin
Union Bank and Irwin Home Equity had purchased from Freedom. Irwin Union Bank
and Irwin Home Equity are seeking damages in excess of $8.0 million from
Freedom.
In
response, in March 2008, Freedom moved to compel arbitration of the claims
asserted in the California Action and filed suit against Irwin Mortgage
Corporation (“Irwin Mortgage”) and its former indirect parent, Irwin Financial
Corporation (now in Chapter 7 bankruptcy), in the United States District Court
for the District of Delaware, Freedom Mortgage Corporation v.
Irwin Financial Corporation et al., (the “Delaware Action”). Freedom
alleged that the repurchase demands in the California Action represent various
breaches of an Asset Purchase Agreement dated as of August 7, 2007, which was
entered into by Irwin Financial Corporation, Irwin Mortgage and
Freedom in connection with the sale to Freedom of the majority of
Irwin Mortgage’s loan origination assets. In the Delaware Action, Freedom sought
damages in excess of $8.0 million and to compel Irwin Financial to order its
(now former) subsidiaries in the California Action to dismiss their
claims.
In April
2008, the California district court stayed the California Action pending
completion of arbitration. The arbitration remains pending. On March 23, 2009,
the Delaware district court granted Irwin’s motion to transfer the Delaware
Action to the Northern District of California, and ordered that the Delaware
case be closed. The California district judge previously stated on the record
that she would not hear Freedom’s claims in the Delaware Action until the
arbitration is completed. No reserves have been established for this
litigation.
First
Financial Bank is evaluating this matter, will begin discussions with
FDIC counsel on this litigation and expects to make a claim for indemnification
with respect to the subsidiaries.
Homer v. Sharp
This
lawsuit was filed by a mother and children on or about May 6, 2008 in the
Circuit Court for Baltimore City, Maryland, against various defendants,
including Irwin Mortgage and a former Irwin Mortgage employee, for injuries from
exposure to lead-based paint. Irwin Mortgage and its former employee are the
subject of three counts each of the 40-count complaint, which alleges, among
other things, negligence and violations of the Maryland Lead Poisoning
Prevention Act, unfair and deceptive trade practices in violation of the
Maryland Consumer Protection Act, loss of an infant’s services, incursion of
medical expenses, and emotional distress and mental anguish. Plaintiffs seek
damages of $5 million on each count. The counts against Irwin Mortgage and the
former employee allege involvement with one of six properties named in the
complaint. On October 23, 2009, Irwin Mortgage filed a motion to modify the
scheduling order, requesting a three-month extension of deadlines due to the
receivership of Irwin Union Bank and the sale of Irwin Mortgage to First
Financial.
This case
is in the early stages and we are unable at this time to form a reasonable
estimate of the amount of potential loss, if any, that Irwin Mortgage could
suffer. No reserves have been established for this litigation.
First
Financial Bank is evaluating this matter, will begin discussions with
FDIC counsel on this case and expects to make a claim for indemnification with
respect to the subsidiary.
EverBank v. Irwin Mortgage
Corporation and Irwin Union Bank and Trust Company-Demand for
Arbitration
On March
25, 2009, Irwin Mortgage and Irwin Union Bank received an arbitration demand
(“Demand”) from EverBank for administration by the American Arbitration
Association, claiming damages for alleged breach of an ”Agreement for Purchase
and Sale of Servicing” (the “EverBank Agreement”) under which Irwin Mortgage is
alleged to have sold the servicing of certain mortgage loans to EverBank. The
Demand also alleges that Irwin Union Bank is the guarantor of Irwin Mortgage’s
obligations under the EverBank Agreement, and that the EverBank Agreement was
amended November 1, 2006 to include additional loans. According to the Demand,
EverBank alleges that Irwin Mortgage and Irwin Union Bank breached certain
warranties and covenants under the EverBank Agreement by failing to repurchase
certain loans and failing to indemnify EverBank after EverBank had demanded
repurchase. The Demand sets forth several claims based on legal theories of
breach of warranty, breach of the covenant of good faith and fair dealing,
promissory estoppel, specific performance and unjust enrichment, and requests
damages, penalties, interest, attorneys’ fees, costs, and other appropriate
relief to be granted by the arbitration panel. The Demand also states that, as a
result of Irwin Mortgage’s alleged failure to repurchase loans, EverBank has
allegedly incurred and continues to incur damages that it claims could exceed
$10.0 million. A reserve has been established that is deemed
appropriate for resolution of all open repurchase issues with EverBank. In April
2009, Irwin Mortgage and Irwin Union Bank filed an answer and counter-claims to
the Demand.
On
October 23, 2009, First Financial Bank requested indemnification from the FDIC
for this litigation under the Agreement.
Additional
Repurchase Demands
Irwin
Mortgage has recorded a liability for losses from the potential repurchases by
Irwin Mortgage of loans it sold that allegedly contained origination errors.
Such alleged errors included inaccurate appraisals, errors in
underwriting, and ineligibility for inclusion in loan programs of
government-sponsored entities. In determining liability levels for
repurchases, we estimate the number of loans that may contain origination
errors, the year in which the loss is expected to occur, and the expected
severity of the loss upon occurrence applied to an average loan amount.
Inaccurate assumptions in setting this liability could result in changes in
future liabilities. A reserve has been established that is deemed
appropriate for resolution of verified repurchase issues.
In
addition, in August 2009, Irwin Mortgage received a request to repurchase
approximately 1,700 mobile home loans with an unpaid principal balance of $154
million. The request alleged that title was not perfected with respect to
these loans in accordance with contractual terms. However, Irwin Mortgage
believes the requesting party has failed to provide sufficient evidence to
support its claim. Irwin Mortgage disputed the claim in September 2009.
Based on the information available at the time of this filing, there is
insufficient evidence to warrant the recording of a reserve for this claim.
First
Financial Bank is evaluating this matter, will begin discussions with
FDIC counsel on this matter and expects to make a claim for indemnification with
respect to the subsidiaries.
We and
our subsidiaries are from time to time engaged in various matters of litigation,
including the matters described above, other assertions of improper or
fraudulent loan practices or lending violations, and other matters, and we have
a number of unresolved claims pending. In addition, as part of the ordinary
course of business, we and our subsidiaries are parties to litigation involving
claims to the ownership of funds in particular accounts, the collection of
delinquent accounts, challenges to security interests in collateral, and
foreclosure interests, that is incidental to our regular business activities.
While the ultimate liability with respect to these other litigation matters and
claims cannot be determined at this time, we believe that damages, if any, and
other amounts relating to pending matters are not likely to be material to our
consolidated financial position or results of operations. Reserves are
established for these various matters of litigation, when appropriate under FASB
ASC Topic 450, Contingencies, based in part upon the advice of legal
counsel.
NOTE
5: INVESTMENTS
The
following is a summary of held-to-maturity and available-for-sale investment
securities as of September 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
|
|
$ |
13,609 |
|
|
$ |
275 |
|
|
$ |
(39 |
) |
|
$ |
13,845 |
|
|
$ |
39,968 |
|
|
$ |
924 |
|
|
$ |
0 |
|
|
$ |
40,892 |
|
Mortgage-backed
securities
|
|
|
159 |
|
|
|
1 |
|
|
|
0 |
|
|
|
160 |
|
|
|
434,670 |
|
|
|
17,172 |
|
|
|
(124 |
) |
|
|
451,718 |
|
Obligations
of state and other political subdivisions
|
|
|
4,160 |
|
|
|
338 |
|
|
|
0 |
|
|
|
4,498 |
|
|
|
20,441 |
|
|
|
392 |
|
|
|
(107 |
) |
|
|
20,726 |
|
Other
securities
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
9,637 |
|
|
|
391 |
|
|
|
(9 |
) |
|
|
10,019 |
|
Total
|
|
$ |
17,928 |
|
|
$ |
614 |
|
|
$ |
(39 |
) |
|
$ |
18,503 |
|
|
$ |
504,716 |
|
|
$ |
18,879 |
|
|
$ |
(240 |
) |
|
$ |
523,355 |
|
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 nine months ended September 30, 2009, investment securities
available-for-sale were sold with a cost basis of $149.4 million and gross
proceeds of $152.7 million, resulting in net proceeds of $3.3
million.
The
following is a summary of debt investment securities by estimated maturity as of
September 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
|
|
$ |
6,679 |
|
|
$ |
6,819 |
|
|
$ |
13,009 |
|
|
$ |
13,153 |
|
Due
after one year through five years
|
|
|
9,791 |
|
|
|
10,062 |
|
|
|
355,179 |
|
|
|
369,876 |
|
Due
after five years through ten years
|
|
|
475 |
|
|
|
527 |
|
|
|
102,258 |
|
|
|
104,812 |
|
Due
after ten years
|
|
|
983 |
|
|
|
1,095 |
|
|
|
34,270 |
|
|
|
35,514 |
|
Total
|
|
$ |
17,928 |
|
|
$ |
18,503 |
|
|
$ |
504,716 |
|
|
$ |
523,355 |
|
The
following tables present the age of gross unrealized losses and associated fair
value by investment category (dollars in $000’s).
|
|
September 30, 2009
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
Securities
of U.S. government agencies and corporations
|
|
$ |
2,241 |
|
|
$ |
39 |
|
|
$ |
10 |
|
|
$ |
0 |
|
|
$ |
2,251 |
|
|
$ |
39 |
|
Mortgage-backed
securities
|
|
|
5,631 |
|
|
|
36 |
|
|
|
1,700 |
|
|
|
88 |
|
|
|
7,331 |
|
|
|
124 |
|
Obligations
of state and other political subdivisions
|
|
|
0 |
|
|
|
0 |
|
|
|
1,869 |
|
|
|
107 |
|
|
|
1,869 |
|
|
|
107 |
|
Other
securities
|
|
|
146 |
|
|
|
9 |
|
|
|
0 |
|
|
|
0 |
|
|
|
146 |
|
|
|
9 |
|
Total
|
|
$ |
8,018 |
|
|
$ |
84 |
|
|
$ |
3,579 |
|
|
$ |
195 |
|
|
$ |
11,597 |
|
|
$ |
279 |
|
|
|
December 31, 2008
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
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 nine months
ended September 30, 2009.
First
Financial had trading securities with a fair value of $0.4 million at September
30, 2009, $0.1 million at December 31, 2008, and $0.2 million at September 30,
2008. For further detail on the fair value of investment securities,
see Note 13 – Fair Value Disclosures.
NOTE
6: 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):
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
September 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
|
|
$ |
432,257 |
|
|
$ |
- |
|
|
$ |
432,257 |
|
|
$ |
283,419 |
|
|
$ |
- |
|
|
$ |
283,419 |
|
|
$ |
237,854 |
|
|
$ |
50,000 |
|
|
$ |
287,854 |
|
Other
long-term debt
|
|
|
- |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
- |
|
Total
notional value
|
|
$ |
432,257 |
|
|
$ |
20,000 |
|
|
$ |
452,257 |
|
|
$ |
283,419 |
|
|
$ |
- |
|
|
$ |
283,419 |
|
|
$ |
237,854 |
|
|
$ |
50,000 |
|
|
$ |
287,854 |
|
While
authorized to use a variety of derivative products, First Financial primarily
utilizes interest rate swaps as a means to offer borrowers products that meet
their needs and may from time to time utilize interest rate swaps to manage the
macro interest rate risk profile of the company. These agreements establish the basis on
which interest rate payments are exchanged with counterparties and are referred
to as the notional amount. As only interest rate payments are exchanged, cash
requirements and credit risk are significantly less than the notional amount and
the company’s credit risk exposure is limited to the market value of the
instrument.
First
Financial manages this market value credit risk through counterparty credit
policies. These policies require the company to maintain a total derivative
notional position of less than 10 percent of assets, total credit exposure of
less than 3 percent of capital, and no single counterparty credit risk exposure
greater than $20 million. The company is currently well below all single
counterparty and portfolio limits. At September 30, 2009, the company had a
total counterparty notional amount outstanding of approximately $247.5 million,
spread among six counterparties, with an outstanding liability from these
contracts of $14.3 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 $8.7 million,
$12.1 million, and $1.9 million at September 30, 2009, December 31, 2008, and
September 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):
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
September 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
|
|
$ |
22,795 |
|
|
|
- |
|
|
$ |
(2,331 |
) |
|
$ |
24,703 |
|
|
$ |
2 |
|
|
$ |
(3,339 |
) |
|
$ |
24,923 |
|
|
$ |
19 |
|
|
$ |
(997 |
) |
Matched interest rate
swaps with borrower
|
|
Accrued interest
and other assets
|
|
|
204,731 |
|
|
$ |
12,353 |
|
|
|
- |
|
|
|
129,358 |
|
|
|
15,074 |
|
|
|
- |
|
|
|
106,466 |
|
|
|
4,110 |
|
|
|
(32 |
) |
Matched interest rate
swaps with counterparty
|
|
Accrued interest
and other liabilities
|
|
|
204,731 |
|
|
|
- |
|
|
|
(12,353 |
) |
|
|
129,358 |
|
|
|
- |
|
|
|
(15,020 |
) |
|
|
106,466 |
|
|
|
32 |
|
|
$ |
(4,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Preferred Swap
|
|
Accumulated other
comprehensive loss
|
|
|
20,000 |
|
|
|
253 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Prime Swap
|
|
Accumulated other
comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
50,000 |
|
|
|
373 |
|
|
|
- |
|
Total
|
|
|
|
$ |
452,257 |
|
|
|
12,606 |
|
|
$ |
(14,684 |
) |
|
$ |
283,419 |
|
|
$ |
15,076 |
|
|
$ |
(18,359 |
) |
|
$ |
287,855 |
|
|
$ |
4,534 |
|
|
$ |
(5,139 |
) |
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 September 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
|
|
$ |
22,795 |
|
|
|
6.0 |
|
|
$ |
(2,331 |
) |
|
|
2.31 |
% |
|
|
6.82 |
% |
Receive
fixed, matched interest rate swaps with borrower
|
|
|
204,731 |
|
|
|
5.2 |
|
|
|
12,353 |
|
|
|
6.19 |
% |
|
|
2.80 |
% |
Pay
fixed, matched interest rate swaps with counterparty
|
|
|
204,731 |
|
|
|
5.2 |
|
|
|
(12,353 |
) |
|
|
2.80 |
% |
|
|
6.19 |
% |
Total
asset conversion swaps
|
|
$ |
432,257 |
|
|
|
5.3 |
|
|
$ |
(2,331 |
) |
|
|
4.53 |
% |
|
|
4.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
conversion swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
Preferred Swap
|
|
$ |
20,000 |
|
|
|
9.5 |
|
|
$ |
253 |
|
|
|
3.38 |
% |
|
|
6.20 |
% |
Total
liability conversion swaps
|
|
$ |
20,000 |
|
|
|
9.5 |
|
|
$ |
253 |
|
|
|
3.38 |
% |
|
|
6.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
swap portfolio
|
|
$ |
452,257 |
|
|
|
5.5 |
|
|
$ |
(2,078 |
) |
|
|
4.48 |
% |
|
|
4.85 |
% |
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. The following table details the location and amounts
recognized for fair value hedges (dollars in
$000’s):
|
|
|
|
Increase (decrease) to Interest Income
|
|
|
|
|
|
Three Months Ended
|
|
Derivatives in fair value
|
|
Location of change in fair value
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
hedging relationships
|
|
recognized in earnings on derivative
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Interest
Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
Interest
Income - Loans
|
|
$ |
(252 |
) |
|
$ |
(123 |
) |
|
$ |
(144 |
) |
Total
|
|
|
|
$ |
(252 |
) |
|
$ |
(123 |
) |
|
$ |
(144 |
) |
|
|
Increase (decrease) to Interest Income
|
|
|
|
Nine Months Ended
|
|
Derivatives in fair value
|
|
Location of change in fair value
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
hedging relationships
|
|
recognized in earnings on derivative
|
|
2009
|
|
|
|
|
|
2008
|
|
Interest
Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
Interest
Income – Loans
|
|
$ |
(755 |
) |
|
|
|
|
|
$ |
(344 |
) |
Total
|
|
|
|
$ |
(755 |
) |
|
|
|
|
|
$ |
(344 |
) |
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. The following table details
the location and amounts recognized for cash flow hedges (dollars in
$000’s).
|
|
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
|
|
September 30,
|
|
earnings (effective
|
|
September 30,
|
|
hedging relationships
|
|
2009
|
|
portion)
|
|
2009
|
|
Interest
Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense -
|
|
|
|
Other
long-term debt
|
|
$ |
312 |
|
Other
long-term debt
|
|
$ |
(128 |
) |
Total
|
|
$ |
312 |
|
|
|
$ |
(128 |
) |
|
|
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)
|
|
|
|
Nine Months Ended
|
|
accumulated OCI into
|
|
Nine Months Ended
|
|
Derivatives in cash flow
|
|
September 30,
|
|
earnings (effective
|
|
September 30,
|
|
hedging relationships
|
|
2009
|
|
portion)
|
|
2009
|
|
Interest
Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense -
|
|
|
|
Other
long-term debt
|
|
$ |
161 |
|
Other
long-term debt
|
|
$ |
(225 |
) |
Total
|
|
$ |
161 |
|
|
|
$ |
(225 |
) |
First
Financial expects approximately $0.4 million of the unrecognized losses on cash
flow hedges, net of taxes, at September 30, 2009 to be reclassified into
earnings within the next 12 months.
NOTE
7: LONG-TERM DEBT
Long-term
debt on the Consolidated Balance Sheets consists of 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 such as pledging investment securities to collateralize $65
million in repurchase agreements and borrowing $50.0 million 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. First
Financial assumed additional FHLB long term advances in the Peoples and Irwin
acquisitions of $63.5 million and $216.3 million respectively. The
$279.8 million of additional borrowings have remaining maturities between less
than one month and 15 years and a weighted average rate of 4.71%. As
of September 30, 2009, First Financial had total long-term debt of $410.4
million with a weighted average rate of 4.35%.
NOTE
8: 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 6.
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 $65.9
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 |
|
|
|
3.38 |
% |
|
|
6.20 |
% |
|
09/30/2033
|
|
NOTE
9: COVERED LOANS
First
Financial evaluated loans purchased in conjunction with the acquisitions of
Peoples and Irwin described in Note 3, Business Combinations, for impairment in
accordance with the provisions of FASB ASC Topic 310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality. Purchased loans are
considered impaired if there is evidence of credit deterioration since
origination and if it is probable that not all contractually required payments
will be collected. The following table reflects the carrying value of all
purchased impaired and nonimpaired loans as of September 30, 2009 for both the
Peoples and Irwin FDIC-assisted transactions (dollars in $000’s):
|
|
FASB ASC
Topic 310-30
|
|
|
Loans Excluded
from FASB ASC
Topic 310-30
|
|
|
Total Purchased
Loans
|
|
Commercial
|
|
$ |
560,612 |
|
|
$ |
- |
|
|
$ |
560,612 |
|
Real
estate - construction
|
|
|
88,779 |
|
|
|
- |
|
|
|
88,779 |
|
Real
estate - commercial
|
|
|
1,071,156 |
|
|
|
- |
|
|
|
1,071,156 |
|
Real
estate - residential
|
|
|
224,322 |
|
|
|
- |
|
|
|
224,322 |
|
Installment
|
|
|
12,135 |
|
|
|
- |
|
|
|
12,135 |
|
Total
loans
|
|
|
1,957,004 |
|
|
|
- |
|
|
|
1,957,004 |
|
Other
covered loans (1)
|
|
|
- |
|
|
|
99,152 |
|
|
|
99,152 |
|
Total
covered loans
|
|
$ |
1,957,004 |
|
|
$ |
99,152 |
|
|
$ |
2,056,156 |
|
(1)
Includes loans with revolving privileges which are scoped out of FASB ASC Topic
310-30 and certain loans which First Financial has elected to treat under the
cost recovery method of accounting.
As of the
respective acquisition dates, the preliminary estimates of contractually
required payments receivable, including interest, for all impaired loans
acquired in the Peoples and Irwin transactions were $1.1 billion. The
cash flows expected to be collected as of the acquisition dates for these loans
were $738.1 million, including interest. These amounts were
determined based upon the estimated remaining life of the underlying loans,
which includes the effects of estimated prepayments. These loans were not
classified as nonperforming assets at September 30, 2009 as the loans are
accounted for on a pooled basis and the pools are considered to be performing.
Therefore, interest income, through accretion of the difference between the
carrying amount of the loans and the expected cash flows, is being recognized on
all purchased impaired loans.
Changes
in the carrying amount of accretable yield for purchased impaired and
nonimpaired loans were as follows for both the three and nine months ended
September 30, 2009 for both Peoples and Irwin (dollars in $000’s):
|
|
Accretable
Yield
|
|
|
Carrying
Amount
of Loans
|
|
Balance
at beginning of period
|
|
$ |
- |
|
|
$ |
- |
|
Additions
(1)
|
|
|
553,832 |
|
|
|
1,970,877 |
|
Accretion
|
|
|
(7,691 |
) |
|
|
7,690 |
|
Payments
received, net
|
|
|
- |
|
|
|
(21,562 |
) |
Balance
at end of period
|
|
$ |
546,141 |
|
|
$ |
1,957,005 |
|
(1) Represents
the fair value of the loans at the date of acquisition. Excludes
covered loans with revolving privileges which are scoped out of FASB ASC
Topic 310-30 and certain loans which First Financial has elected to value
under the cost recovery method of accounting.
As of the
respective acquisition dates, the preliminary estimates of the contractually
required payments receivable, including interest, for all nonimpaired loans
acquired in the Peoples and Irwin transactions were $2.2 billion. The
cash flows expected to be collected as of the acquisition dates for these loans
were $1.8 billion, including interest. The difference between the
carrying value of the purchased nonimpaired loans and the expected cash flows is
being accreted to interest income over the remaining life of the
loans.
There
were no allowances for loan and lease losses related to the purchased impaired
and nonimpaired loans at September 30, 2009.
Due to
the short time period between the execution of the respective purchase and
assumption agreements and September 30, 2009, certain amounts related to the
purchased impaired and nonimpaired loans are preliminary
estimates. Additionally, First Financial and the FDIC are engaged in
on-going discussions that may impact which assets and liabilities are ultimately
acquired or assumed by First Financial and/or the purchase
prices. The estimated fair values for the purchased impaired and
nonimpaired loans were based upon the FDIC’s estimated data for excluded
loans. First Financial anticipates the final determination of the
excluded loans will be completed in the fourth quarter of 2009 and expects to
finalize its analysis of these loans when this occurs.
NOTE 10: ALLOWANCE FOR LOAN
AND LEASE LOSSES (excluding covered loans)
All loans
acquired in the Peoples and Irwin acquisitions are covered by loss sharing
agreements with the FDIC, whereby the FDIC reimburses First Financial for the
majority of the losses incurred. Additionally, these loans were recorded at fair
value as of the acquisition date. Generally the determination of the fair
value of the loans resulted in a significant write-down in the value of the
loans, which was assigned to an accretable or nonaccretable balance, with the
accretable balance being recognized as interest income over the remaining term
of the loan. In accordance with the acquisition method of accounting, there was
no allowance brought forward on any of the acquired loans, as the credit losses
evident in the loans were included in the determination of the fair value of the
loans at the acquisition date and are represented by the nonaccretable balance.
The majority of the nonaccretable balance is expected to be received from the
FDIC through the loss sharing agreements and is recorded as a separate asset
from the covered loans and reflected on the Consolidated Balance Sheets. As a
result, all of the loans acquired in the Peoples and Irwin acquisitions were
considered to be accruing loans as of the acquisition date. In accordance with
regulatory reporting standards, covered loans that are contractually past due
will continue to be reported as past due and still accruing based on the number
of days past due. Because of the significant change in the accounting for
the covered loans and the loss sharing agreements with the FDIC, management
believes that asset quality measures excluding the covered loans are generally
more meaningful. Therefore, management has included asset quality measures that
exclude covered loans in the tables below.
Changes
in the allowance for loan and lease losses for the previous five quarters are
presented in the table that follows (dollars in $000’s):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
Sep. 30,
|
|
|
|
Sep. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
2009
|
|
|
2008
|
|
Balance
at beginning of period
|
|
$ |
38,649 |
|
|
$ |
36,437 |
|
|
$ |
35,873 |
|
|
$ |
30,353 |
|
|
$ |
29,580 |
|
|
$ |
35,873 |
|
|
$ |
29,057 |
|
Provision
for loan losses
|
|
|
26,655 |
|
|
|
10,358 |
|
|
|
4,259 |
|
|
|
10,475 |
|
|
|
3,219 |
|
|
|
41,272 |
|
|
|
8,935 |
|
Loans
charged off
|
|
|
(10,063 |
) |
|
|
(8,771 |
) |
|
|
(4,060 |
) |
|
|
(5,403 |
) |
|
|
(2,936 |
) |
|
|
(22,894 |
) |
|
|
(9,234 |
) |
Recoveries
|
|
|
529 |
|
|
|
625 |
|
|
|
365 |
|
|
|
448 |
|
|
|
490 |
|
|
|
1,519 |
|
|
|
1,595 |
|
Balance
at end of period
|
|
$ |
55,770 |
|
|
$ |
38,649 |
|
|
$ |
36,437 |
|
|
$ |
35,873 |
|
|
$ |
30,353 |
|
|
$ |
55,770 |
|
|
$ |
30,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses to total ending loans
|
|
|
1.94 |
% |
|
|
1.34 |
% |
|
|
1.33 |
% |
|
|
1.34 |
% |
|
|
1.14 |
% |
|
|
1.94 |
% |
|
|
1.14 |
% |
The
allowance for loan and lease losses related to loans that are identified as
impaired, as defined by FASB ASC 310-10-35-4, 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
|
|
|
|
Sep. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
Impaired
loans requiring a valuation
|
|
$ |
23,579 |
|
|
$ |
16,229 |
|
|
$ |
7,137 |
|
|
$ |
1,472 |
|
|
$ |
5,642 |
|
Impaired
loans not requiring a valuation
|
|
|
40,113 |
|
|
|
21,364 |
|
|
|
17,554 |
|
|
|
16,509 |
|
|
|
8,188 |
|
Total
impaired loans
|
|
$ |
63,692 |
|
|
$ |
37,593 |
|
|
$ |
24,691 |
|
|
$ |
17,981 |
|
|
$ |
13,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
$ |
9,789 |
|
|
$ |
5,890 |
|
|
$ |
3,024 |
|
|
$ |
864 |
|
|
$ |
2,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
impaired loans year-to-date
|
|
$ |
50,643 |
|
|
$ |
31,142 |
|
|
$ |
21,336 |
|
|
$ |
15,906 |
|
|
$ |
14,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income included in revenue
|
|
$ |
117 |
|
|
$ |
25 |
|
|
$ |
12 |
|
|
$ |
216 |
|
|
$ |
182 |
|
NOTE
11: INCOME TAXES
First
Financial’s effective tax rate for the third quarter of 2009 was 37.1%, compared
to 31.2% for the
third quarter of 2008. The 2009 year-to-date effective tax rate was
37.1% compared to 32.5% for 2008. The increase in the 2009 effective
tax rate is primarily due to the significant increase in pre-tax income as a
result of the Irwin transaction as well as a lower percentage of tax-exempt
investment interest and bank-owned life insurance income.
At
September 30, 2009, and December 31, 2008, First Financial had no unrecognized
tax benefits recorded as referred to in FASB ASC 740-10-35. 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 would commence a routine examination of the income tax return
for the calendar year 2007. That exam commenced in the second quarter
of 2009. The company is not aware of any significant findings and has
not yet received any recommendations for adjustments.
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. This exam commenced in the third quarter of
2009. The company is not aware of any significant findings and has
not yet received any recommendations for adjustments.
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 tax examination matters.
NOTE
12: 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
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
590 |
|
|
$ |
562 |
|
|
$ |
1,770 |
|
|
$ |
1,679 |
|
Interest
cost
|
|
|
675 |
|
|
|
637 |
|
|
|
2,025 |
|
|
|
1,922 |
|
Expected
return on assets
|
|
|
(918 |
) |
|
|
(1,000 |
) |
|
|
(2,753 |
) |
|
|
(3,049 |
) |
Amortization
of transition asset
|
|
|
0 |
|
|
|
(9 |
) |
|
|
0 |
|
|
|
(26 |
) |
Amortization
of prior service cost
|
|
|
(105 |
) |
|
|
(105 |
) |
|
|
(315 |
) |
|
|
(317 |
) |
Recognized
net actuarial loss
|
|
|
388 |
|
|
|
308 |
|
|
|
1,163 |
|
|
|
789 |
|
Net
periodic benefit cost
|
|
$ |
630 |
|
|
$ |
393 |
|
|
$ |
1,890 |
|
|
$ |
998 |
|
Amounts
recognized in accumulated other comprehensive income (loss):
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
actuarial loss
|
|
$ |
388 |
|
|
$ |
308 |
|
|
$ |
1,163 |
|
|
$ |
789 |
|
Net
prior service (credit) cost
|
|
|
(105 |
) |
|
|
(105 |
) |
|
|
(315 |
) |
|
|
(317 |
) |
Net
transition asset
|
|
|
0 |
|
|
|
(9 |
) |
|
|
0 |
|
|
|
(26 |
) |
Deferred
tax assets
|
|
|
(141 |
) |
|
|
(80 |
) |
|
|
(347 |
) |
|
|
(172 |
) |
Net
amount recognized
|
|
$ |
142 |
|
|
$ |
114 |
|
|
$ |
501 |
|
|
$ |
274 |
|
NOTE
13: 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 FASB Topic 820-10, Fair
Value Measurements and Disclosures (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 FASB Topic 820-10 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 FASB Topic
820-10, Financial Instruments, effective January 1, 2008, the $0.8 million
unrealized loss was reclassified from accumulated other comprehensive income
(loss) to beginning retained earnings as part of a cumulative-effect
adjustment. There was no impact on total shareholders’ equity upon
adoption. The equity securities of government sponsored entities are
included as trading investment securities on First Financial’s Consolidated
Balance Sheets effective January 1, 2008.
At
September 30, 2009, the fair value of the equity securities of government
sponsored entities for which the FVO was elected was $0.4 million, a decrease of
approximately $3.4 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 fair
value framework as disclosed in the Fair Value Measurements and Disclosure Topic
of the FASB Accounting Standards Codification (Fair Value Topic) 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 the Fair Value Topic. 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.
Covered loans – Fair
values for loans were based on a discounted cash flow methodology that
considered factors including the type of loan and related collateral,
classification status, fixed or variable interest rate, term of loan and whether
or not the loan was amortizing, and current discount rates. Loans were grouped
together according to similar characteristics and were treated in the aggregate
when applying various valuation techniques. The discount rates used for loans
are based on current market rates for new originations of comparable loans and
include adjustments for liquidity concerns. The discount rate does not include a
factor for credit losses as that has been included in the estimated cash
flows.
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.
FDIC indemnification
asset – These loss sharing assets are measured separately from the
related covered assets as they are not contractually embedded in the assets and
are not transferable with the assets should the Bank choose to dispose of them.
Fair value was estimated using projected cash flows related to the loss sharing
agreements based on the expected reimbursements for losses and the applicable
loss sharing percentages. These expected reimbursements do not include
reimbursable amounts related to future covered expenditures. These cash flows
were discounted to reflect the uncertainty of the timing and receipt of the loss
sharing reimbursement from the FDIC.
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
(dollars in $000’s):
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
value
|
|
|
value
|
|
|
value
|
|
|
value
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments
|
|
$ |
972,777 |
|
|
$ |
972,777 |
|
|
$ |
100,935 |
|
|
$ |
100,935 |
|
Investment
securities trading
|
|
|
338 |
|
|
|
338 |
|
|
|
61 |
|
|
|
61 |
|
Investment
securities held-to-maturity
|
|
|
17,928 |
|
|
|
18,502 |
|
|
|
4,966 |
|
|
|
5,135 |
|
Investment
securities available-for-sale
|
|
|
523,355 |
|
|
|
523,355 |
|
|
|
659,756 |
|
|
|
659,756 |
|
Other
investments
|
|
|
87,693 |
|
|
|
87,693 |
|
|
|
27,976 |
|
|
|
27,976 |
|
Loans
held for sale
|
|
|
2,729 |
|
|
|
2,729 |
|
|
|
3,854 |
|
|
|
3,854 |
|
Loans,
net of allowance
|
|
|
2,822,892 |
|
|
|
2,854,420 |
|
|
|
2,647,387 |
|
|
|
2,665,024 |
|
Covered
loans
|
|
|
2,056,156 |
|
|
|
2,056,156 |
|
|
|
0 |
|
|
|
0 |
|
Mortgage-servicing
rights
|
|
|
2,275 |
|
|
|
2,275 |
|
|
|
398 |
|
|
|
398 |
|
FDIC
indemnification asset
|
|
|
316,860 |
|
|
|
316,860 |
|
|
|
0 |
|
|
|
0 |
|
Accrued
interest receivable
|
|
|
26,252 |
|
|
|
26,252 |
|
|
|
15,223 |
|
|
|
15,223 |
|
Derivative
financial instruments
|
|
|
253 |
|
|
|
253 |
|
|
|
56 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$ |
802,286 |
|
|
$ |
802,286 |
|
|
$ |
413,283 |
|
|
$ |
413,283 |
|
Interest-bearing
demand
|
|
|
1,364,556 |
|
|
|
1,364,556 |
|
|
|
636,945 |
|
|
|
636,945 |
|
Savings
|
|
|
965,750 |
|
|
|
965,750 |
|
|
|
583,081 |
|
|
|
583,081 |
|
Time
|
|
|
2,703,392 |
|
|
|
2,711,215 |
|
|
|
1,150,208 |
|
|
|
1,168,228 |
|
Total
deposits
|
|
|
5,835,984 |
|
|
|
5,843,807 |
|
|
|
2,783,517 |
|
|
|
2,801,537 |
|
Short-term
borrowings
|
|
|
100,763 |
|
|
|
100,763 |
|
|
|
354,533 |
|
|
|
354,533 |
|
Long-term
debt
|
|
|
410,356 |
|
|
|
420,967 |
|
|
|
148,164 |
|
|
|
155,702 |
|
Other
long-term debt
|
|
|
20,620 |
|
|
|
20,620 |
|
|
|
20,620 |
|
|
|
20,620 |
|
Accrued
interest payable
|
|
|
14,990 |
|
|
|
14,990 |
|
|
|
6,033 |
|
|
|
6,033 |
|
Derivative
financial instruments
|
|
|
2,331 |
|
|
|
2,331 |
|
|
|
3,339 |
|
|
|
3,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the financial assets and liabilities measured at fair
value on a recurring basis at September 30, 2009 (dollars in
$000’s):
|
|
Fair Value Measurements Using
|
|
|
Netting
|
|
|
Assets/Liabilities
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Adjustments (1)
|
|
|
at Fair Value
|
|
Trading
investment securities (2)
|
|
$ |
338 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
338 |
|
Derivatives
|
|
|
0 |
|
|
|
12,759 |
|
|
|
(153 |
) |
|
|
(12,353 |
) |
|
|
253 |
|
Available-for-sale
investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
121 |
|
|
|
523,234 |
|
|
|
0 |
|
|
|
0 |
|
|
|
523,355 |
|
Total
|
|
$ |
459 |
|
|
$ |
535,993 |
|
|
$ |
(153 |
) |
|
$ |
(12,353 |
) |
|
$ |
523,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
- Derivatives
|
|
$ |
0 |
|
|
$ |
14,684 |
|
|
$ |
0 |
|
|
$ |
(12,353 |
) |
|
$ |
2,331 |
|
(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
the Financial Instruments Topic of the FASB ASC.
Certain
financial assets and liabilities are measured at fair value on a nonrecurring
basis. Adjustments to the fair market value of these assets usually
result from the application of lower-of-cost-or-market accounting or write-downs
of individual assets. The following table summarizes financial assets
and liabilities measured at fair value on a nonrecurring basis at September 30,
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 |
|
|
$ |
2,729 |
|
|
$ |
0 |
|
|
|
0 |
|
Impaired
loans
(1)
|
|
|
0 |
|
|
|
13,788 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Amounts represent the fair value of collateral for impaired loans allocated to
the allowance for loan and lease losses.
NOTE
14: 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
nine months ended September 30 were as follows (dollars in $000’s):
|
|
Transactions
|
|
|
Balances
|
|
|
|
Pre-tax
|
|
|
Tax-effect
|
|
|
Net
of tax
|
|
|
Net
of tax
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on securities available-for-sale
|
|
$ |
7,728 |
|
|
$ |
(2,789 |
) |
|
$ |
4,939 |
|
|
$ |
11,878 |
|
Unrealized
loss on derivatives
|
|
|
307 |
|
|
|
(113 |
) |
|
|
194 |
|
|
|
575 |
|
Unfunded
pension obligation
|
|
|
848 |
|
|
|
(347 |
) |
|
|
501 |
|
|
|
(19,112 |
) |
Total
|
|
$ |
8,883 |
|
|
$ |
(3,249 |
) |
|
$ |
5,634 |
|
|
$ |
(6,659 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
adjustment for accounting change-fair value option
|
|
$ |
1,181 |
|
|
$ |
(431 |
) |
|
$ |
750 |
|
|
$ |
0 |
|
Unrealized
gain on securities available-for-sale
|
|
|
(883 |
) |
|
|
323 |
|
|
|
(560 |
) |
|
|
518 |
|
Unrealized
gain on derivatives
|
|
|
373 |
|
|
|
0 |
|
|
|
373 |
|
|
|
373 |
|
Unfunded
pension obligation
|
|
|
454 |
|
|
|
(175 |
) |
|
|
279 |
|
|
|
(7,176 |
) |
Total
|
|
$ |
1,125 |
|
|
$ |
(283 |
) |
|
$ |
842 |
|
|
$ |
(6,285 |
) |
NOTE
15: 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
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator
for basic and diluted earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
income
available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
226,187 |
|
|
$ |
5,732 |
|
|
$ |
233,372 |
|
|
$ |
20,878 |
|
Dividends
on preferred stock
|
|
|
1,000 |
|
|
|
0 |
|
|
|
2,578 |
|
|
|
0 |
|
Income
available to common shareholders:
|
|
$ |
225,187 |
|
|
$ |
5,732 |
|
|
$ |
230,794 |
|
|
$ |
20,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share - weighted average shares
|
|
|
51,027,887 |
|
|
|
37,132,864 |
|
|
|
43,005,983 |
|
|
|
37,104,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock awards
|
|
|
429,302 |
|
|
|
371,367 |
|
|
|
496,578 |
|
|
|
382,244 |
|
Warrants
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Denominator
for diluted earnings per share
-
adjusted weighted average shares
|
|
|
51,457,189 |
|
|
|
37,504,231 |
|
|
|
43,502,561 |
|
|
|
37,487,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share available to common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
4.41 |
|
|
$ |
0.15 |
|
|
$ |
5.37 |
|
|
$ |
0.56 |
|
Diluted
|
|
$ |
4.38 |
|
|
$ |
0.15 |
|
|
$ |
5.31 |
|
|
$ |
0.56 |
|
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 3,272,093 and 1,946,094 at September 30, 2009 and
2008, respectively. The out-of-the-money warrant to purchase common
stock of 930,233 was also outstanding at September 30, 2009.
NOTE
16: SUBSEQUENT EVENTS
First
Financial evaluated events and transactions that occurred after the balance
sheet date of September 30, 2009 through November 16, 2009, the date the
financial statements were issued, for adjustment to or disclosure in the
consolidated financial statements. There were no reportable
events.
CONDITION
AND RESULTS OF OPERATIONS
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
(Unaudited)
SUMMARY
MARKET
STRATEGY
First
Financial serves a combination of strategic metropolitan and non-metropolitan
markets in Ohio, Indiana, Michigan and Kentucky through 118 full-service banking
centers. In addition, the company operates 10 banking centers in the
western United States that were obtained through a business combination but does
not consider those markets strategic. The company announced plans to
divest of those locations as allowable by its agreements with the Federal
Deposit Insurance Corporation (FDIC). 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, and has a banking center scheduled to open during the fourth
quarter in both St. Marys, Ohio and in Edgewood, Kentucky. 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.
BUSINESS
COMBINATIONS
All
references to acquired balances reflect the fair value unless stated
otherwise.
During
the third quarter of 2009, through FDIC-assisted transactions, First Financial
acquired the banking operations of Peoples Community Bank (Peoples), Irwin Union
Bank and Trust Company (Irwin Union Bank) and Irwin Union Bank, F.S.B. (Irwin
FSB) (collectively, Irwin). The company also acquired 3 Indiana banking centers
from Irwin in a separate and unrelated transaction. The acquisitions of the
Peoples and Irwin franchises significantly expands the First Financial
footprint, opens new markets and strengthens the company through the generation
of additional capital. Through these three transactions, the company added a
total of 49 banking centers, including 39 banking centers within the company’s
primary markets.
In
connection with the Peoples and Irwin FDIC-assisted transactions, First
Financial entered into loss sharing agreements with the FDIC. Under the terms of
these agreements the FDIC will reimburse First Financial for losses with respect
to certain loans and other real estate owned (OREO) (collectively, “covered
assets”), with covered loans now representing nearly half of First Financial’s
loans, beginning with the first dollar of loss. These agreements provide for
loss protection on single-family, residential loans for a period of ten years
and First Financial is required to share any recoveries of previously
charged-off amounts for the same time period, on the same pro-rata basis with
the FDIC. All other loans are provided loss protection for a period of five
years and recoveries of previously charged-off loans must be shared with the
FDIC for a period of eight years, again on the same pro-rata basis.
First
Financial must follow specific servicing and resolution procedures, as outlined
in the loss share agreements, in order to receive reimbursement from the FDIC
for losses on covered assets. The company has established separate and dedicated
teams of legal, finance, credit and technology staff to execute and monitor all
activity related to each agreement, including the required periodic reporting to
the FDIC. First Financial intends to service all covered assets with the same
resolution practices and diligence as it does for the assets that are not
subject to a loss share agreement.
An
overview of the transactions and their respective loss share agreements are
discussed below.
Peoples
Community Bank
Including
cash received from the FDIC, First Financial acquired $566.0 million in assets,
including $336.1 million in loans and other real estate, and assumed $584.7
million in liabilities, including $520.8 million in deposits, with all assets
and liabilities recorded at their estimated fair market value.
Covered
assets totaling $324.4 million in fair value are subject to a stated loss
threshold of $190.0 million whereby the FDIC will reimburse First Financial for
80% of covered asset losses up to $190.0 million, and 95% of losses beyond
$190.0 million.
First
Financial holds a purchase option from the FDIC for each of Peoples bank
properties and their associated contents. The company’s review of the former
Peoples locations is still in progress.
In late
October, First Financial successfully completed the technology conversion and
operational integration of Peoples. In conjunction with these efforts, two
former Peoples banking centers were consolidated into First Financial locations
and one First Financial banking center was consolidated into a former Peoples
location. In addition, of the approximately 115 associates who were employed at
Peoples on the acquisition date, 96 have accepted full-time positions at First
Financial. The positions are primarily located within the banking center
network.
Irwin
Including
cash received from the FDIC, First Financial acquired $3.3 billion in assets,
including $1.8 billion in loans, and assumed $2.9 billion in liabilities,
including $2.5 billion in deposits, with all assets and liabilities recorded at
their estimated fair market value.
The loans
were acquired under a modified transaction structure with the FDIC whereby
certain non-performing loans, foreclosed real estate, acquisition, development
and construction loans, and residential and commercial land loans were excluded
from the acquired portfolio. The estimated fair value for loans acquired was
based upon the FDIC’s estimated data for excluded loans. The company anticipates
the final determination of the excluded loans will be completed in the fourth
quarter of 2009.
Covered
assets acquired from Irwin Union Bank totaling $1.5 billion in fair value are
subject to a stated loss threshold of $526.0 million whereby the FDIC will
reimburse First Financial for 80% of covered asset losses up to $526.0 million,
and 95% of losses beyond $526.0 million.
Covered
assets acquired from Irwin FSB totaling $259.4 million in fair value are subject
to a stated loss threshold of $110.0 million whereby the FDIC will reimburse
First Financial for 80% of covered asset losses up to $110.0 million, and 95% of
losses beyond $110.0 million.
As the
estimated fair value of assets acquired exceeded the estimated fair value of
liabilities assumed, First Financial recorded a bargain purchase gain of $383.3
million, as required by Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 805, Business Combinations.
Integration
planning is underway for the conversion of Irwin’s technology and operational
systems; however, a specific timeline has not yet been established for these
conversions.
Irwin
Banking Centers
Separate
and unrelated to the previously mentioned FDIC-assisted transactions, the
company purchased 3 banking centers located in Indiana from Irwin Union Bank,
including $84.6 million in deposits and $41.1 million in performing loans.
Assets acquired in this transaction are not subject to a loss share agreement.
Loans were acquired at par value and there was no premium paid on assumed
liabilities. The technology conversion and operational integration of
all assets acquired and liabilities assumed was complete at the acquisition
date. The purchased assets and assumed liabilities were recorded
at their estimated fair values. Fair values are preliminary
and subject to refinement for up to one year after the closing date of the
acquisition, as information relative to closing date fair values becomes
available. First Financial anticipates the final determination of the
fair values of these assets and liabilities will be completed in the fourth
quarter of 2009.
Strategic
Decisions
Management
has concluded that the markets previously operated by Irwin in the western
United States do not align with the long-term strategic plans for the company.
Though profitable, each of these markets will pursue an exit strategy whereby
the market presidents will work with an institution of their choosing to refer
existing client relationships. If a suitable financial institution is not
identified, an exit date will be selected for each market and the office will
close in compliance with the applicable regulatory requirements. The western
offices combined had an estimated $730.1 million in loans and $494.9 million in
deposits on the acquisition date, based on the seller’s book value. First
Financial will continue to service the loans in these markets in compliance with
the terms of the purchase agreements with the FDIC and FDIC as receiver and
related loss share agreements.
First
Financial also acquired, as part of the Irwin transaction, a franchise finance
business. This business is a specialty lender in the quick service and casual
dining segments of the restaurant industry. It has been consistently
profitable
and is
led by a seasoned management team with strong underwriting, credit management
and loss mitigation experience. There were outstanding principal balances of
approximately $647.9 million in franchise finance loans at September 30, 2009,
all of which are covered under a loss share agreement with the
FDIC.
This
niche business offers First Financial the ability to diversify its earning
assets and will be supported as part of the company’s ongoing strategy. The
overall portfolio size will be managed to a risk-appropriate level so as not to
create an industry concentration.
OVERVIEW
OF OPERATIONS
Third
quarter 2009 net income was $226.2 million, net income available to common
shareholders was $225.2 million and earnings per diluted common share were
$4.38. This compares with net income of $5.7 million and earnings per diluted
common share of $0.15 for the third quarter of 2008, and net income of $1.5
million, net income available to common shareholders of $0.5 million and
earnings per diluted common share of $0.01 for the second quarter of
2009.
Year-to-date
2009 net income was $233.4 million, net income available to common shareholders
was $230.8 million, and earnings per diluted common share were $5.31. This
compares with year-to-date 2008 net income of $20.9 million and earnings per
diluted common share of $0.56.
Third
quarter 2009 results, when compared with the third quarter of 2008, and the
second quarter of 2009, were impacted by the following significant
items:
|
§
|
On
September 18, 2009, the company assumed the banking operations of Irwin in
FDIC assisted transactions, which included 27 banking centers. The
estimated fair value of assets acquired exceeded the estimated fair value
of liabilities assumed, resulting in a bargain purchase gain of $383.3
million and the recognition of a $241.0 million after-tax
gain.
|
|
§
|
On
July 31, 2009, the company assumed the banking operations of Peoples in an
FDIC-assisted transaction, which included 19 banking centers. The
estimated fair value of liabilities assumed exceeded the estimated fair
value of assets acquired, resulting in the recognition of goodwill in the
amount of approximately $18.7
million.
|
|
§
|
On
August 28, 2009, in a separate and unrelated transaction, the company
purchased 3 banking centers located in Indiana from Irwin. Associated
loans were acquired at par value and there was no premium paid on assumed
liabilities.
|
|
§
|
In
the third quarter of 2009, First Financial experienced increased credit
costs, including higher provision expense and elevated
net-charge-offs. Provision expense increased from the second
quarter of 2009 by $16.3 million to $26.7 million, or 280% of total net
charge-offs, further strengthening the allowance for loan and lease losses
(excludes covered assets) to 1.94%. Included in total net
charge-offs was a $2.2 million loss on the sale of the entire $34.5
million shared national credit
portfolio.
|
Each
acquisition in the third quarter of 2009 was considered a business combination
and accounted for under FASB ASC Topic 805, Business Combinations, ASC Topic
820, Fair Value Measurements and Disclosures, and ASC Topic 310-30, Loans and
Debt Securities Acquired with Deteriorated Credit Quality. All acquired assets
and liabilities were recorded at their estimated fair market values as of the
date of acquisition, and identifiable intangible assets were recorded at their
estimated fair value. These estimated fair market values are considered
preliminary, and are subject to change for up to one year after the acquisition
date as additional information relative to closing date fair values becomes
available. For a more detailed discussion of the transactions please
see Note 3, Business Combinations.
Return on
average assets for the third quarter of 2009 was 19.96% compared to 0.66% for
the comparable period in 2008 and 0.15% for the linked-quarter (third quarter of
2009 compared to the second quarter of 2009). Return on average
shareholders’ equity for the third quarter of 2009 was 195.16% compared to 8.24%
for the comparable period in 2008 and 1.53% for the linked-quarter.
Return on
average assets for the first nine months of 2009 was 7.76% compared to 0.83% for
the comparable period in 2008. Return on average shareholders’ equity
was 78.54% for the first nine months of 2009, versus 10.05% for the comparable
period in 2008.
A
discussion of the first nine months and third 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
|
|
|
Nine Months Ended
|
|
(dollars in $000’s)
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net interest income
|
|
$ |
37,455 |
|
|
$ |
29,410 |
|
|
$ |
99,592 |
|
|
$ |
86,073 |
|
Tax
equivalent adjustment
|
|
|
300 |
|
|
|
424 |
|
|
|
970 |
|
|
|
1,448 |
|
Net
interest income - tax equivalent
|
|
$ |
37,755 |
|
|
$ |
29,834 |
|
|
$ |
100,562 |
|
|
$ |
87,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
earning assets
|
|
$ |
4,144,429 |
|
|
$ |
3,180,290 |
|
|
$ |
3,708,643 |
|
|
$ |
3,087,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin *
|
|
|
3.59 |
% |
|
|
3.68 |
% |
|
|
3.59 |
% |
|
|
3.72 |
% |
Net
interest margin (fully tax equivalent) *
|
|
|
3.61 |
% |
|
|
3.73 |
% |
|
|
3.63 |
% |
|
|
3.79 |
% |
* Margins are calculated using net
interest income annualized divided by average earning
assets.
Third
quarter 2009 net interest income increased $8.0 million from the third quarter
of 2008 and $6.2 million from the second quarter of 2009. The third quarter 2009
net interest margin declined 9 basis points from the third quarter of 2008 and 1
basis point from the second quarter of 2009. Year-to-date 2009 net interest
income increased $13.5 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 average loan balances largely driven by the
purchase of $145.1 million in performing loans at the end of the second quarter
of 2009 and the Peoples and Irwin FDIC-assisted transactions in the third
quarter. This increase was partially offset by the sales of securities at the
end of the second quarter and the cash flows from the investment portfolio that
were not reinvested into securities.
The
year-over-year quarter, linked quarter and year-to-date net interest margin
declines were primarily related to the impact from the cash received from the
FDIC-assisted transactions in the third quarter. These funds, as currently
invested, earn a federal funds rate and are being utilized to fund anticipated
runoff from deposit repricing. This negatively impacted the net interest margin
by 11 basis points in the third quarter of 2009. The year-to-date net interest
margin declines were also impacted by the lower overall market interest rate
environment. The net interest margin, however, continues to benefit from the
growth in average total loans and the continued mix shifts in the loan portfolio
from consumer to commercial and in the deposit portfolio from time to
transaction deposits.
On a tax
equivalent basis, the third quarter of 2009 net interest margin of 3.61%
decreased 12 basis points from 3.73% for the third quarter of 2008 and 3 basis
points from the second quarter of 2009. The 2009 year-to-date tax
equivalent net interest margin of 3.63% decreased 16 basis points from the 3.79%
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
|
|
September
30, 2009
|
|
|
June
30, 2009
|
|
|
September
30, 2008
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$ |
136,210 |
|
|
$ |
- |
|
|
|
0.25 |
% |
|
$ |
8,614 |
|
|
$ |
- |
|
|
|
0.00 |
% |
|
$ |
3,137 |
|
|
$ |
22 |
|
|
|
2.79 |
% |
Investment
securities
|
|
|
578,243 |
|
|
|
6,593 |
|
|
|
4.52 |
% |
|
|
731,119 |
|
|
|
8,409 |
|
|
|
4.61 |
% |
|
|
467,524 |
|
|
|
5,980 |
|
|
|
5.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
loans including covered loans and indemnification asset(1)
|
|
|
3,429,976 |
|
|
|
44,913 |
|
|
|
5.20 |
% |
|
|
2,744,063 |
|
|
|
33,978 |
|
|
|
4.97 |
% |
|
|
2,709,629 |
|
|
|
39,754 |
|
|
|
5.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
earning assets
|
|
|
4,144,429 |
|
|
|
51,506 |
|
|
|
4.93 |
% |
|
|
3,483,796 |
|
|
|
42,387 |
|
|
|
4.89 |
% |
|
|
3,180,290 |
|
|
|
45,756 |
|
|
|
5.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
107,216 |
|
|
|
|
|
|
|
|
|
|
|
72,402 |
|
|
|
|
|
|
|
|
|
|
|
89,498 |
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
|
(42,034 |
) |
|
|
|
|
|
|
|
|
|
|
(36,644 |
) |
|
|
|
|
|
|
|
|
|
|
(29,739 |
) |
|
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
90,997 |
|
|
|
|
|
|
|
|
|
|
|
85,433 |
|
|
|
|
|
|
|
|
|
|
|
81,000 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
195,719 |
|
|
|
|
|
|
|
|
|
|
|
179,471 |
|
|
|
|
|
|
|
|
|
|
|
155,599 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
4,496,327 |
|
|
|
|
|
|
|
|
|
|
$ |
3,784,458 |
|
|
|
|
|
|
|
|
|
|
$ |
3,476,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
|
|
$ |
745,604 |
|
|
|
448 |
|
|
|
0.24 |
% |
|
$ |
630,885 |
|
|
|
389 |
|
|
|
0.25 |
% |
|
$ |
609,992 |
|
|
|
1,175 |
|
|
|
0.77 |
% |
Savings
|
|
|
835,615 |
|
|
|
2,300 |
|
|
|
1.09 |
% |
|
|
645,197 |
|
|
|
487 |
|
|
|
0.30 |
% |
|
|
611,713 |
|
|
|
1,227 |
|
|
|
0.80 |
% |
Time
|
|
|
1,484,158 |
|
|
|
8,742 |
|
|
|
2.34 |
% |
|
|
1,131,972 |
|
|
|
8,204 |
|
|
|
2.91 |
% |
|
|
1,158,332 |
|
|
|
11,206 |
|
|
|
3.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
150,878 |
|
|
|
261 |
|
|
|
0.69 |
% |
|
|
385,769 |
|
|
|
527 |
|
|
|
0.55 |
% |
|
|
297,053 |
|
|
|
1,720 |
|
|
|
2.30 |
% |
Long-term
borrowings
|
|
|
226,528 |
|
|
|
2,300 |
|
|
|
4.03 |
% |
|
|
156,809 |
|
|
|
1,571 |
|
|
|
4.02 |
% |
|
|
97,655 |
|
|
|
1,018 |
|
|
|
4.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
3,442,783 |
|
|
|
14,051 |
|
|
|
1.62 |
% |
|
|
2,950,632 |
|
|
|
11,178 |
|
|
|
1.52 |
% |
|
|
2,774,745 |
|
|
|
16,346 |
|
|
|
2.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
|
543,320 |
|
|
|
|
|
|
|
|
|
|
|
425,330 |
|
|
|
|
|
|
|
|
|
|
|
402,604 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
50,415 |
|
|
|
|
|
|
|
|
|
|
|
28,552 |
|
|
|
|
|
|
|
|
|
|
|
22,705 |
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
459,809 |
|
|
|
|
|
|
|
|
|
|
|
379,944 |
|
|
|
|
|
|
|
|
|
|
|
276,594 |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
4,496,327 |
|
|
|
|
|
|
|
|
|
|
$ |
3,784,458 |
|
|
|
|
|
|
|
|
|
|
$ |
3,476,648 |
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
37,455 |
|
|
|
|
|
|
|
|
|
|
$ |
31,209 |
|
|
|
|
|
|
|
|
|
|
$ |
29,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.31 |
% |
|
|
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
3.38 |
% |
Contribution
of noninterest-bearing sources of funds
|
|
|
|
|
|
|
|
|
|
|
0.27 |
% |
|
|
|
|
|
|
|
|
|
|
0.23 |
% |
|
|
|
|
|
|
|
|
|
|
0.30 |
% |
Net interest margin
(2)
|
|
|
|
|
|
|
|
|
|
|
3.59 |
% |
|
|
|
|
|
|
|
|
|
|
3.60 |
% |
|
|
|
|
|
|
|
|
|
|
3.68 |
% |
(1)
Nonaccrual loans and loans held for sale are included in average balances for
each applicable loan category.
(2)
Because noninterest-bearing funding sources, demand deposits, other liabilities,
and shareholders' equity also support earning assets, the net interest margin
exceeds
the interest spread.
RATE/VOLUME
ANALYSIS
The
impact of changes in the volume of interest-earning assets and interest-bearing
liabilities and interest rates on net interest income is illustrated in the
following tables (dollars in
$000’s).
|
|
Changes for the Three Months Ended September 30, 2009
|
|
|
|
Linked Qtr. Income Variance
|
|
|
Comparable Qtr. Income Variance
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
Earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$ |
(164 |
) |
|
$ |
(1,652 |
) |
|
$ |
(1,816 |
) |
|
$ |
(649 |
) |
|
$ |
1,262 |
|
|
$ |
613 |
|
Federal
funds sold
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(22 |
) |
|
|
0 |
|
|
|
(22 |
) |
Gross
loans
(1)
|
|
|
1,563 |
|
|
|
9,372 |
|
|
|
10,935 |
|
|
|
(4,273 |
) |
|
|
9,432 |
|
|
|
5,159 |
|
Total
earning assets
|
|
|
1,399 |
|
|
|
7,720 |
|
|
|
9,119 |
|
|
|
(4,944 |
) |
|
|
10,694 |
|
|
|
5,750 |
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing deposits
|
|
$ |
(152 |
) |
|
$ |
2,562 |
|
|
$ |
2,410 |
|
|
$ |
(4,687 |
) |
|
$ |
2,569 |
|
|
$ |
(2,118 |
) |
Borrowed
funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
133 |
|
|
|
(399 |
) |
|
|
(266 |
) |
|
|
(1,206 |
) |
|
|
(253 |
) |
|
|
(1,459 |
) |
Federal
Home Loan Bank long-term debt
|
|
|
42 |
|
|
|
684 |
|
|
|
726 |
|
|
|
33 |
|
|
|
1,237 |
|
|
|
1,270 |
|
Other
long-term debt
|
|
|
(1 |
) |
|
|
4 |
|
|
|
3 |
|
|
|
12 |
|
|
|
0 |
|
|
|
12 |
|
Total
borrowed funds
|
|
|
174 |
|
|
|
289 |
|
|
|
463 |
|
|
|
(1,161 |
) |
|
|
984 |
|
|
|
(177 |
) |
Total
interest-bearing liabilities
|
|
|
22 |
|
|
|
2,851 |
|
|
|
2,873 |
|
|
|
(5,848 |
) |
|
|
3,553 |
|
|
|
(2,295 |
) |
Net
interest income
(2)
|
|
$ |
1,377 |
|
|
$ |
4,869 |
|
|
$ |
6,246 |
|
|
$ |
904 |
|
|
$ |
7,141 |
|
|
$ |
8,045 |
|
(1) Loans
held for sale, nonaccrual loans, covered loans, and indemnification asset are
included in gross loans.
(2) Not
tax equivalent.
|
|
Changes for the
|
|
|
|
Nine Months Ended September 30, 2009
|
|
|
|
Year-to-Date Income Variance
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
Earning
assets
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$ |
(1,036 |
) |
|
$ |
9,691 |
|
|
$ |
8,655 |
|
Federal
funds sold
|
|
|
(627 |
) |
|
|
0 |
|
|
|
(627 |
) |
Gross loans (1)
|
|
|
(21,511 |
) |
|
|
11,938 |
|
|
|
(9,573 |
) |
Total
earning assets
|
|
|
(23,174 |
) |
|
|
21,629 |
|
|
|
(1,545 |
) |
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing deposits
|
|
$ |
(18,123 |
) |
|
$ |
2,514 |
|
|
$ |
(15,609 |
) |
Borrowed
funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
(2,832 |
) |
|
|
485 |
|
|
|
(2,347 |
) |
Federal
Home Loan Bank long-term debt
|
|
|
21 |
|
|
|
3,016 |
|
|
|
3,037 |
|
Other
long-term debt
|
|
|
(145 |
) |
|
|
0 |
|
|
|
(145 |
) |
Total
borrowed funds
|
|
|
(2,956 |
) |
|
|
3,501 |
|
|
|
545 |
|
Total
interest-bearing liabilities
|
|
|
(21,079 |
) |
|
|
6,015 |
|
|
|
(15,064 |
) |
Net interest income (2)
|
|
$ |
(2,095 |
) |
|
$ |
15,614 |
|
|
$ |
13,519 |
|
(1) Loans
held for sale, nonaccrual loans, covered loans, and indemnification asset are
included in gross loans.
(2) Not
tax equivalent.
NONINTEREST
INCOME
Third
quarter 2009 noninterest income was $394.9 million, an increase of $384.4
million from the third quarter of 2008, and an increase of $380.8 million from
the second quarter of 2009. Excluding the $383.3 million gain on acquisition and
the $0.2 million gain on FHLMC shares in the third quarter of 2009, the $0.1
million gain on FHLMC shares and $3.3 million gain on investment securities in
the second quarter of 2009, and the $3.4 million loss on FHMLC shares in the
third quarter of 2008, third quarter 2009 noninterest income declined $2.5
million from the third quarter of 2008 and increased $0.8 million from the
second quarter of 2009. The year-over-year decline was primarily a result of
lower net gains from loan sales, trust and wealth management fees and other
noninterest income. The decline in other noninterest income was related to lower
revenue earned on bank-owned life insurance and the sale of the company’s
property
and casualty liability portion of the insurance business that was sold in 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 trust and wealth management fees, but was also
negatively impacted by lower net gains from loan sales.
Year-to-date
2009 noninterest income was $421.0 million, an increase of $381.9 million from
$39.1 million in 2008’s comparable period. Excluding the items mentioned
previously and a $0.6 million gain on the insurance business in the first
quarter of 2009 and a $1.6 million gain on investment securities in the first
quarter of 2008, year-to-date 2009 noninterest income declined $7.6 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 declines in income from bank-owned life
insurance and brokerage income.
Over the
past five 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 and
third quarters of 2009, a number of deposit and consumer-based fee income
categories began to show improvement over prior quarters. Third quarter 2009
total service charges on deposit accounts increased $1.1 million from the second
quarter of 2009 reflecting higher fee income on the company’s legacy deposit
accounts as well as additional income resulting from acquired deposit accounts
during the quarter. Bankcard income declined slightly from the second quarter of
2009 but showed improvement from the first quarter of 2009.
Between
June 30, 2008 and March 31, 2009, assets under management by the company’s
wealth management division declined by over $470.0 million from $2.0 billion to
$1.6 billion, primarily as a result of equity market declines. A rebound in the
equity markets over the past several months has positively impacted market
values, and assets under management increased by over $230.0 million to $1.8
billion at September 30, 2009 from $1.6 billon at March 31, 2009, excluding
approximately $200.0 million in assets acquired in the third quarter 2009
acquisition of the banking operations of Irwin.
NONINTEREST
EXPENSE
Third
quarter 2009 noninterest expense was $45.8 million, compared with $28.3 million
in the third quarter of 2008, and $32.8 million in the second quarter of
2009. Third quarter 2009 results included increases in staffing and
occupancy expenses as a result of additional associates and banking centers that
were added during the quarter, an increase of approximately $3.0 million related
to various incentive and retirement-based benefit plans, approximately $0.9
million in additional marketing and charitable giving in new strategic markets,
FDIC expense of $1.6 million, and $7.3 million in merger and integration related
expenses.
Year-to-date
2009 noninterest expense increased $23.2 million to $108.5 million from $85.3
million in 2008’s comparable period. This increase was primarily
related to higher salaries and benefit expenses of $6.1 million, FDIC expense of
$5.0 million, merger and integration related expenses of $7.7 million, occupancy
and furniture and equipment expenses of $1.5 million, professional services of
$0.9 million, marketing expenses of $0.6 million, and expenses related to loan
collection and resolution efforts of $0.6 million. The higher
marketing and furniture and equipment costs were related to First Financial’s
market expansion efforts, including the costs associated with two new banking
centers opened in late 2008 and one new banking center in the Cincinnati market
earlier this year.
Deposit
insurance premium expense represents assessments from the FDIC and The Financing
Corporation (“FICO”). In the third quarter of 2009 and the nine months ending
September 30, 2009, these expenses totaled $1.6 million and $5.3 million,
respectively, as compared with $0.1 million and $0.4 million for the prior years
same periods. The FDIC’s deposit insurance fund reserves have been
significantly depleted by recent bank failures, primarily driven by
deteriorating economic conditions. As a result, the FDIC has
significantly increased its deposit assessment premiums for all federally
insured financial institutions. There have also been increases in
FDIC assessments resulting from the Temporary Liquidity Guaranty Program, which
temporarily increases the deposit insurance coverage for depositors until June
30, 2010. In addition, in an effort to improve its liquidity, the
FDIC imposed a one-time special assessment of $1.7 million in the second quarter
of 2009.
First
Financial has incurred certain merger and integration related
expenses. These expenses include those related to the due diligence
efforts and professional advisory services provided by investment bankers,
attorneys, accountants and tax advisors. Also included are expenses
necessary to convert and combine the acquired banking centers and operations of
merged companies, related direct media advertising and costs to supply newly
acquired clients with customized account information and supplies related to
their relationship with First Financial. Merger related and
integration related expenses during the third quarter of 2009 were $7.3 million
and for the nine months ending September 30, 2009 were $7.7
million. While the technology conversion and operational integration
of Peoples was completed early in the fourth quarter of 2009, the conversion and
integration initiatives for Irwin are in the
early
planning stages and additional costs of this nature are
likely. There were no material merger related expenses incurred
during the nine month period ending September 30, 2008.
INCOME
TAXES
Income
tax expense was $133.7 million and $2.6 million for the third quarters of 2009
and 2008, respectively. The effective taxes rates for the third quarters of 2009
and 2008 were 37.1% and 31.2%, respectively. Income tax expense was
$137.4 million and $10.0 million for the nine months ended September 30, 2009,
and 2008, respectively with a tax expense related to securities transactions of
$1.2 million and $0.6 million for the nine months ended September 30, 2009, and
2008, respectively. The effective tax rates for the nine months ended
September 30, 2009, and 2008, were 37.1% and 32.5%, respectively. The
increase in the overall effective tax rate for both the third quarter and
year-to-date 2009 was driven by the tax impact of the bargain purchase gain as
well as reduced tax-exempt investment interest and executive life insurance
income.
LOANS
(excluding covered loans)
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 $179.1 million or 6.6% from the third quarter of 2008,
excluding loans held for sale of $2.6 million for the third quarter of 2009 and
$2.1 million for the third quarter of 2008. Average commercial,
commercial real estate, and construction loans increased $311.7 million or 17.2%
from the third quarter of 2008.
Average
total loans increased $148.5 million or 21.7% on an annualized basis, from the
second quarter of 2009, excluding loans held for sale of $2.6 million for the
third quarter of 2009 and $5.9 million for the second quarter of
2009. Average commercial, commercial real estate, and construction
loans increased $150.1 million or 30.5% on an annualized basis from the
second quarter of 2009. First Financial purchased $145.1 million in
select performing commercial and consumer loans from Irwin Union Bank 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 and were not purchased
under a loss share agreement.
On a
year-to-date basis, excluding loans held for sale of $4.5 million for the nine
months ended September 30, 2009 and $2.7 million for the comparable period in
2008, average total loans increased $130.6 million or 4.9%. Average
commercial, commercial real estate, and construction loans increased $275.6
million or 15.7% from September of 2008.
Loan
balances include $41.1 million of performing loans which were purchased on
August 28, 2009, at par, from Irwin. These loans were not purchased under a loss
share agreement.
First
Financial continues to experience overall loan portfolio 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.
INVESTMENTS
Securities
available-for-sale at September 30, 2009, totaled $523.4 million, compared with
$492.6 million at September 30, 2008, and $528.2 million at June 30, 2009. The
total investment portfolio represented 8.7% and 15.2% of total assets at
September 30, 2009 and 2008, respectively, and 14.8% of total assets at June 30,
2009.
At
September 30, 2009, the company held 71.8% 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 $12.5 million at September 30, 2009, compared with an
unrealized after-tax gain of $0.5 million at September 30, 2008, and an
unrealized after-tax gain of $7.5 million at June 30, 2009.
First
Financial has not purchased any securities in the investment portfolio since the
first quarter of 2009 due to higher pricing on bonds, which has persisted since
the beginning of the year. The increase in portfolio balances during the third
quarter of 2009 was the result of acquired securities from the Peoples and Irwin
transactions. All securities acquired through these FDIC-assisted transactions
are conforming investments as outlined in First Financial’s investment
policy.
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 $56.4 million at
September 30, 2009, $59.8 million at June 30, 2009, and $225.4 million at March
31, 2009.
The
acquired Peoples and Irwin investment securities, excluding regulatory stock,
were acquired from the FDIC at their fair market values as of the date of the
acquisitions.
DEPOSITS
AND FUNDING
Deposits
balances were elevated by the $3.0 billion in deposits assumed as part of the
Peoples and Irwin transactions, and by $84.6 million in deposits assumed on
August 28, 2009 directly from Irwin.
As
permitted by the FDIC, First Financial had the option to reprice the acquired
deposit portfolios to current market rates within seven days of the acquisition
dates. If First Financial elected to reprice the rates on deposit accounts the
clients then had the option to withdraw funds from those accounts without
penalty. The company chose to reprice approximately $1.0 billion in deposits
comprised of all assumed brokered deposits, all time deposits from Peoples, as
well as time deposits of Irwin Union Bank, F.S.B. First Financial received
approximately $948.3 million from the FDIC associated with the transactions and
believes that this provides sufficient liquidity to fund the potential at-risk
deposit outflows. Through the end of October, 2009, approximately 36% of the
repriced deposit accounts were redeemed without penalty.
First
Financial assumed $279.8 million in additional Federal Home Loan Bank debt in
the Peoples and Irwin acquisitions. Approximately $83.7 million in short-term
advances from Irwin matured prior to the end of the third quarter of
2009.
At
September 30, 2009, First Financial had unused and available overnight wholesale
funding of approximately $2.5 billion.
ALLOWANCE
FOR LOAN AND LEASE LOSSES (Excluding covered assets)
All loans
acquired in the Peoples and Irwin acquisitions are covered by loss sharing
agreements with the FDIC, whereby the FDIC reimburses First Financial for the
majority of the losses incurred. Additionally, these loans were recorded at fair
value as of the acquisition date. Generally the determination of the fair
value of the loans resulted in a significant write-down in the value of the
loans, which was assigned to an accretable or nonaccretable balance, with the
accretable balance being recognized as interest income over the remaining term
of the loan. In accordance with the acquisition method of accounting, there was
no allowance brought forward on any of the acquired loans, as the credit losses
evident in the loans were included in the determination of the fair value of the
loans at the acquisition date and are represented by the nonaccretable balance.
The majority of the nonaccretable balance is expected to be received from the
FDIC through the loss sharing agreements and is recorded as a separate asset
from the covered loans and reflected on the Consolidated Balance Sheets. As a
result, all of the loans acquired in the Peoples and Irwin acquisitions were
considered to be accruing loans as of the acquisition date. In accordance with
regulatory reporting standards, covered loans that are contractually past due
will continue to be reported as past due and still accruing
based on
the number of days past due. Because of the significant change in the
accounting for the covered loans and the loss sharing agreements with the FDIC,
management believes that asset quality measures excluding the covered loans are
generally more meaningful. Therefore, management has included asset quality
measures that exclude covered loans in the table in this section.
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.
The
provision for loan and lease losses for the third quarter of 2009 was $26.7
million compared to $3.2 million for the same period in 2008 and $10.4 million
for the linked-quarter. Year-to-date provision for loan and lease
losses was $41.3 for 2009 and $8.9 million for 2008. The year-to-date
2009 provision expense, represented approximately 175% of year-to-date 2009
total net charge-offs. The allowance for loan and lease losses at
September 30, 2009, was 2.0 times the first nine months annualized net
charge-offs. The allowance for loan and lease losses to period-end
loans ratio was 1.94% as of September 30, 2009, compared to the September 30,
2008, and June 30, 2009, ratios of 1.14% and 1.34%,
respectively. First Financial’s allowance for loan and lease losses
was $55.8 million at September 30, 2009, compared to $38.6 million at June 30,
2009, and $30.4 million at September 30, 2008.
The
elevated net charge-offs and higher level of nonperforming assets reflects the
continued adverse impact of the prolonged economic downturn and its effect on
the loan portfolio. The elevated provision expense in the quarter is due largely
to the company’s expectation of the risk inherent in the commercial real estate
portfolio. While not necessarily credit specific for First Financial, generally
the outlook for this sector has continued to deteriorate and is not likely to
recover over the next 12 months, according to most industry data. Therefore, the
company has increased reserves for this category. Approximately $10.2 million of
the $17.1 million net increase to the allowance is due to the company’s estimate
of sector risk in the commercial real estate portfolio. Although there have been
some signs of economic stabilization and emerging optimism, unemployment rates
remain at near-record levels, consumer spending is stagnant, and operating
conditions continue to be challenging for many commercial
borrowers.
The
commercial and commercial real estate construction lending portfolios continued
to experience elevated levels of stress during the third quarter of 2009. The
quarter’s increase in total net charge-offs compared with last quarter and a
year ago was driven primarily by deterioration within these segments. Late in
2008 and continuing into 2009, pressure from the prolonged recession began to
adversely impact clients who up until that time, had not been severely
affected.
At
September 30, 2009, the commercial real estate and real estate construction loan
portfolio totaled $1.3 billion, or 44.6% of total loans, including $170.5
million or 5.9% of total loans for commercial real estate construction, and
$75.0 million or 2.6% of total loans for residential construction, land
acquisition, and development. First Financial closely monitors the
status of the $75.0 million in residential construction, land acquisition and
development projects and works proactively with borrowers throughout all stages
of the lending relationship. At September 30, 2009, there were $8.0 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.
Third
quarter 2009 total net charge-offs were $9.5 million, or 131 basis points of
average loans and leases, compared with $8.1 million or 119 basis points of
average loans and leases in the second quarter of 2009, and $2.4 million or 36
basis points of average loans and leases in the third quarter of 2008.
Year-to-date 2009, total net charge-offs were $21.4 million or 103 basis points
of average loans and leases, compared with $7.6 million or 39 basis points of
average loans and leases year-to-date 2008.
During
the third quarter of 2009, primarily due to a rebound in market values and the
desire to eliminate portfolio risk from the shared national credit segment, the
entire $34.5 million portfolio of shared national credits was sold, resulting in
a net charge-off of $2.2 million or 30 basis points of average loans and leases.
Included in this loan sale was a $1.4 million relationship, in bankruptcy, which
represented approximately 20% of the loss on the portfolio sale.
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 $327.4
million and $236.7 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.
At
September 30, 2009, the allowance for loan and lease losses increased to $55.8
million from $38.6 million at June 30, 2009, and $30.4 million at September 30,
2008. The higher reserve reflects the company’s expectation that certain credit
metrics, particularly those related to commercial real estate and construction,
may remain volatile and at these higher levels until more consistent economic
growth, increased consumer spending and lower unemployment rates occur. The
company believes that the $55.8 million allowance for loan and lease losses at
September 30, 2009, or 1.94% 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, excluding
covered loans, for the quarterly and year-to-date periods presented (dollars in
$000’s).
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
September 30,
|
|
|
|
Sep. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
2009
|
|
|
2008
|
|
ALLOWANCE
FOR LOAN AND LEASE LOSS ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
38,649 |
|
|
$ |
36,437 |
|
|
$ |
35,873 |
|
|
$ |
30,353 |
|
|
$ |
29,580 |
|
|
$ |
35,873 |
|
|
$ |
29,057 |
|
Provision
for loan losses
|
|
|
26,655 |
|
|
|
10,358 |
|
|
|
4,259 |
|
|
|
10,475 |
|
|
|
3,219 |
|
|
|
41,272 |
|
|
|
8,935 |
|
Gross
charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3,622 |
|
|
|
4,707 |
|
|
|
2,521 |
|
|
|
2,168 |
|
|
|
1,568 |
|
|
|
10,850 |
|
|
|
3,059 |
|
Real
estate-construction
|
|
|
3,854 |
|
|
|
1,340 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5,194 |
|
|
|
0 |
|
Real
estate-commercial
|
|
|
927 |
|
|
|
1,351 |
|
|
|
382 |
|
|
|
2,083 |
|
|
|
48 |
|
|
|
2,660 |
|
|
|
1,443 |
|
Real
estate-residential
|
|
|
471 |
|
|
|
351 |
|
|
|
231 |
|
|
|
47 |
|
|
|
335 |
|
|
|
1,053 |
|
|
|
601 |
|
Installment
|
|
|
315 |
|
|
|
304 |
|
|
|
400 |
|
|
|
493 |
|
|
|
424 |
|
|
|
1,019 |
|
|
|
1,470 |
|
Home
equity
|
|
|
382 |
|
|
|
332 |
|
|
|
218 |
|
|
|
238 |
|
|
|
135 |
|
|
|
932 |
|
|
|
1,311 |
|
All
other
|
|
|
492 |
|
|
|
386 |
|
|
|
308 |
|
|
|
374 |
|
|
|
426 |
|
|
|
1,186 |
|
|
|
1,350 |
|
Total
gross charge-offs
|
|
|
10,063 |
|
|
|
8,771 |
|
|
|
4,060 |
|
|
|
5,403 |
|
|
|
2,936 |
|
|
|
22,894 |
|
|
|
9,234 |
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
91 |
|
|
|
333 |
|
|
|
60 |
|
|
|
165 |
|
|
|
179 |
|
|
|
484 |
|
|
|
489 |
|
Real
estate-construction
|
|
|
81 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
81 |
|
|
|
0 |
|
Real
estate-commercial
|
|
|
86 |
|
|
|
14 |
|
|
|
16 |
|
|
|
40 |
|
|
|
37 |
|
|
|
116 |
|
|
|
59 |
|
Real
estate-residential
|
|
|
2 |
|
|
|
20 |
|
|
|
2 |
|
|
|
5 |
|
|
|
4 |
|
|
|
24 |
|
|
|
20 |
|
Installment
|
|
|
205 |
|
|
|
203 |
|
|
|
254 |
|
|
|
189 |
|
|
|
225 |
|
|
|
662 |
|
|
|
786 |
|
Home
equity
|
|
|
9 |
|
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
10 |
|
|
|
30 |
|
All
other
|
|
|
55 |
|
|
|
54 |
|
|
|
33 |
|
|
|
49 |
|
|
|
45 |
|
|
|
142 |
|
|
|
211 |
|
Total
recoveries
|
|
|
529 |
|
|
|
625 |
|
|
|
365 |
|
|
|
448 |
|
|
|
490 |
|
|
|
1,519 |
|
|
|
1,595 |
|
Total
net charge-offs
|
|
|
9,534 |
|
|
|
8,146 |
|
|
|
3,695 |
|
|
|
4,955 |
|
|
|
2,446 |
|
|
|
21,375 |
|
|
|
7,639 |
|
Ending
allowance for loan losses
|
|
$ |
55,770 |
|
|
$ |
38,649 |
|
|
$ |
36,437 |
|
|
$ |
35,873 |
|
|
$ |
30,353 |
|
|
$ |
55,770 |
|
|
$ |
30,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
CHARGE-OFFS TO AVERAGE LOANS AND LEASES (ANNUALIZED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1.64 |
% |
|
|
2.08 |
% |
|
|
1.21 |
% |
|
|
0.98 |
% |
|
|
0.67 |
% |
|
|
1.65 |
% |
|
|
0.43 |
% |
Real
estate-construction
|
|
|
5.72 |
% |
|
|
2.09 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
2.69 |
% |
|
|
0.00 |
% |
Real
estate-commercial
|
|
|
0.33 |
% |
|
|
0.62 |
% |
|
|
0.17 |
% |
|
|
0.98 |
% |
|
|
0.01 |
% |
|
|
0.37 |
% |
|
|
0.25 |
% |
Real
estate-residential
|
|
|
0.56 |
% |
|
|
0.38 |
% |
|
|
0.25 |
% |
|
|
0.04 |
% |
|
|
0.27 |
% |
|
|
0.39 |
% |
|
|
0.15 |
% |
Installment
|
|
|
0.50 |
% |
|
|
0.45 |
% |
|
|
0.62 |
% |
|
|
1.18 |
% |
|
|
0.71 |
% |
|
|
0.53 |
% |
|
|
0.75 |
% |
Home
equity
|
|
|
0.47 |
% |
|
|
0.44 |
% |
|
|
0.30 |
% |
|
|
0.34 |
% |
|
|
0.20 |
% |
|
|
0.41 |
% |
|
|
0.66 |
% |
All
other
|
|
|
6.35 |
% |
|
|
5.00 |
% |
|
|
4.18 |
% |
|
|
4.79 |
% |
|
|
5.66 |
% |
|
|
5.19 |
% |
|
|
5.77 |
% |
Total
net charge-offs
|
|
|
1.31 |
% |
|
|
1.19 |
% |
|
|
0.55 |
% |
|
|
0.73 |
% |
|
|
0.36 |
% |
|
|
1.03 |
% |
|
|
0.39 |
% |
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 (Excluding covered assets)
Third
quarter 2009 nonperforming loans were $63.6 million compared with $37.8 million
in the second quarter of 2009 and $14.0 million in the third quarter of 2008.
Both the linked-quarter and year-over-year increases were primarily attributable
to continued deterioration within the commercial lending portfolios,
specifically, commercial real estate construction. During the quarter, the
company placed a single relationship totaling $13.6 million of commercial land
development loans on nonaccrual.
Similar
to the past several quarters, the higher level of nonperforming loans, which are
accounted for under FASB Codification Topic 310-10-35: Subsequent Measurement of
Receivables, continues to adversely impact the company’s nonperforming loan
coverage ratios. The third quarter 2009 allowance for loan and lease losses as a
percent of nonaccrual loans was 92.2% compared with 102.8% in the second quarter
of 2009, and 219.5% in the third quarter of 2008, and the allowance for loan and
lease losses as a percent of nonperforming loans was 87.7% at September 30,
2009, compared with 102.3% in the second quarter of 2009, and 216.2% in the
third quarter of 2008.
Restructured
Loans
During
the third quarter of 2009, the company restructured approximately $2.9 million
of residential mortgage loans for borrowers. The terms of the modifications
included a combination of temporary interest rate reductions, term extensions
and re-amortizations. These actions did not have a significant financial impact
on the company. There can be no assurance these actions will be successful in
improving the long-term performance of the borrowers.
Delinquent
Loans
Total
loans 30 to 89 days past due at September 30, 2009 were $20.8 million, or 0.72%
of period end loans, compared with $20.5 million, or 0.71% at June 30, 2009, and
$22.3 million, or 0.84% at September 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.
Other
Real Estate Owned
At
September 30, 2009, OREO was $4.3 million, compared with $5.2 million at June
30, 2009, and $4.6 million at September 30, 2008.
The table
that follows shows the categories that are included in nonperforming and
underperforming assets, excluding covered assets, as of September 30, 2009, and
the four previous quarters, as well as related credit quality ratios (dollars in
$000’s).
|
|
Quarter
Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Sep.
30
|
|
|
June
30
|
|
|
Mar.
31
|
|
|
Dec.
31
|
|
|
Sep.
30
|
|
Nonaccrual
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
13,244 |
|
|
$ |
8,100 |
|
|
$ |
8,412 |
|
|
$ |
5,930 |
|
|
$ |
5,194 |
|
Real
estate - construction
|
|
|
26,575 |
|
|
|
11,936 |
|
|
|
240 |
|
|
|
240 |
|
|
|
0 |
|
Real
estate - commercial
|
|
|
12,407 |
|
|
|
10,130 |
|
|
|
9,170 |
|
|
|
4,779 |
|
|
|
3,361 |
|
Real
estate - residential
|
|
|
5,253 |
|
|
|
4,897 |
|
|
|
4,724 |
|
|
|
5,363 |
|
|
|
3,742 |
|
Installment
|
|
|
493 |
|
|
|
394 |
|
|
|
464 |
|
|
|
459 |
|
|
|
417 |
|
Home
equity
|
|
|
2,534 |
|
|
|
2,136 |
|
|
|
1,681 |
|
|
|
1,204 |
|
|
|
1,084 |
|
All
other
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
6 |
|
|
|
32 |
|
Total
nonaccrual loans
|
|
|
60,506 |
|
|
|
37,593 |
|
|
|
24,691 |
|
|
|
17,981 |
|
|
|
13,830 |
|
Restructured
loans
|
|
|
3,102 |
|
|
|
197 |
|
|
|
201 |
|
|
|
204 |
|
|
|
208 |
|
Total
nonperforming loans
|
|
|
63,608 |
|
|
|
37,790 |
|
|
|
24,892 |
|
|
|
18,185 |
|
|
|
14,038 |
|
Other
real estate owned (OREO)
|
|
|
4,301 |
|
|
|
5,166 |
|
|
|
3,513 |
|
|
|
4,028 |
|
|
|
4,610 |
|
Total
nonperforming assets
|
|
|
67,909 |
|
|
|
42,956 |
|
|
|
28,405 |
|
|
|
22,213 |
|
|
|
18,648 |
|
Accruing
loans past due 90 days or more
|
|
|
308 |
|
|
|
318 |
|
|
|
255 |
|
|
|
138 |
|
|
|
241 |
|
Total
underperforming assets
|
|
$ |
68,217 |
|
|
$ |
43,274 |
|
|
$ |
28,660 |
|
|
$ |
22,351 |
|
|
$ |
18,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans
|
|
|
92.17 |
% |
|
|
102.81 |
% |
|
|
147.57 |
% |
|
|
199.51 |
% |
|
|
219.47 |
% |
Nonperforming
loans
|
|
|
87.68 |
% |
|
|
102.27 |
% |
|
|
146.38 |
% |
|
|
197.27 |
% |
|
|
216.22 |
% |
Total
ending loans
|
|
|
1.94 |
% |
|
|
1.34 |
% |
|
|
1.33 |
% |
|
|
1.34 |
% |
|
|
1.14 |
% |
Nonperforming
loans to total loans
|
|
|
2.21 |
% |
|
|
1.31 |
% |
|
|
0.91 |
% |
|
|
0.68 |
% |
|
|
0.53 |
% |
Nonperforming
assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
loans, plus OREO
|
|
|
2.36 |
% |
|
|
1.48 |
% |
|
|
1.04 |
% |
|
|
0.83 |
% |
|
|
0.70 |
% |
Total
assets, including covered assets
|
|
|
0.94 |
% |
|
|
1.14 |
% |
|
|
0.75 |
% |
|
|
0.60 |
% |
|
|
0.53 |
% |
NONPERFORMING/UNDERPERFORMING
COVERED ASSETS
The
following is a summary of covered nonperforming assets (dollars in
$000’s).
|
|
SEPTEMBER
30, 2009
|
|
|
|
Peoples
|
|
|
Irwin
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
Covered
nonaccrual loans
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
21 |
|
|
$ |
16,826 |
|
|
$ |
16,847 |
|
Real
estate - commercial
|
|
|
314 |
|
|
|
4,876 |
|
|
|
5,190 |
|
Real
estate - residential
|
|
|
0 |
|
|
|
19 |
|
|
|
19 |
|
Installment
|
|
|
5,987 |
|
|
|
8 |
|
|
|
5,995 |
|
Home
equity
|
|
|
1,981 |
|
|
|
0 |
|
|
|
1,981 |
|
Leases
|
|
|
0 |
|
|
|
1,270 |
|
|
|
1,270 |
|
Total
nonaccrual loans
|
|
|
8,303 |
|
|
|
22,999 |
|
|
|
31,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
90 days or more past due and still accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
143 |
|
|
|
8,415 |
|
|
|
8,558 |
|
Real
estate - construction
|
|
|
27,414 |
|
|
|
9,616 |
|
|
|
37,030 |
|
Real
estate - commercial
|
|
|
1,978 |
|
|
|
75,506 |
|
|
|
77,484 |
|
Real
estate - residential
|
|
|
7,957 |
|
|
|
19,432 |
|
|
|
27,389 |
|
Installment
|
|
|
0 |
|
|
|
1,089 |
|
|
|
1,089 |
|
Home
equity
|
|
|
0 |
|
|
|
709 |
|
|
|
709 |
|
Loans
90 days or more past due and still accruing
|
|
|
37,492 |
|
|
|
114,767 |
|
|
|
152,259 |
|
Total
nonperforming loans
|
|
|
45,795 |
|
|
|
137,766 |
|
|
|
183,561 |
|
Other
real estate owned (OREO)
|
|
|
11,227 |
|
|
|
795 |
|
|
|
12,022 |
|
Total
covered nonperforming assets
|
|
$ |
57,022 |
|
|
$ |
138,561 |
|
|
$ |
195,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
covered loans as a percentage of total covered loans
|
|
|
14.84 |
% |
|
|
7.88 |
% |
|
|
8.87 |
% |
The FDIC
utilized a modified structure in the Irwin transaction where most, but not all,
non-performing loans and OREO were retained by the FDIC at
closing. The FDIC determined a measurement date whereby the stated
loss threshold was established, as well as the cut-off date for determining the
non-performing loans that they would assume. This structure differed
from that utilized in the Peoples transaction as First Financial assumed all
non-performing loans and OREO at the closing date.
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.
First
Financial’s wholly owned subsidiary, First Financial Bank, received
approximately $948.3 million from the FDIC associated with the FDIC-assisted
transactions involving Peoples and Irwin. First Financial believes
this provides sufficient liquidity to fund potential at-risk deposit outflows
from those institutions.
Capital
expenditures, such as banking center expansions and technology investments, were
$13.9 million and $8.1 million for the first nine 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 September 30, 2009 and December 31, 2008, total
short-term borrowings from the FHLB were $65.0 million and $150.0,
respectively. At September 30, 2009, and December 31, 2008, total
long-term borrowings from the FHLB were $323.1 million and
$83.2 million, respectively. The total remaining borrowing
capacity from the FHLB at September 30, 2009, was
$265.2 million.
As of
September 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 $636.9 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 $523.4 million at
September 30, 2009. Securities classified as held-to-maturity that
are maturing in one year or less are also a source of liquidity and totaled $6.7
million at September 30, 2009. The market value of securities
classified as trading totaled $0.4 million at September 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 $16.5 million for the first
nine months of 2009. As of September 30, 2009, First Financial’s
subsidiaries had retained earnings of $356.7 million of which
$233.7 million was available for distribution to First Financial without
prior regulatory approval. Management is not aware of any other
events or regulatory requirements that, if implemented, are likely to have a
material effect on First Financial’s liquidity.
First
Financial Bancorp maintains a short-term revolving credit facility with an
unaffiliated bank. This facility provides First Financial additional
liquidity for various corporate activities, including the repurchase of First
Financial shares and the payment of dividends to shareholders. As of
September 30, 2009, there was no outstanding balance 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 facility was
subsequently amended to reduce the maximum outstanding balance to $25.0
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 September 30,
2009, First Financial was in compliance with all covenants.
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 September 30, 2009, and 2008. Interest expense
for the nine months ended September 30, 2009 and 2008 was $0.9 million and $1.0
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 raise
during the second 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 September 30, 2009, included the leverage ratio of
14.58%, Tier 1 ratio of 16.21%, and total capital ratio of
17.46%. All regulatory capital ratios exceeded the amounts necessary
to be classified as “well capitalized,” and total regulatory capital exceeded
the “minimum” requirement by approximately $380.5 million, on a consolidated
basis. The tangible capital ratio was 8.57% and the tangible common
equity ratio was 7.48% at September 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 September 30, 2009, that First Financial met all capital
adequacy requirements to which it was subject. At September 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 FASB ASC Topic 715, Compensation-Retirement
Benefits, 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.
The
Peoples and Irwin FDIC-assisted transactions, which were each accounted for
as a business combination, resulted in the recognition of an FDIC
Indemnification Asset, which represents the fair value of estimated future
payments by the FDIC to First Financial for losses on covered assets. The
FDIC Indemnification Asset, as well as covered assets, are risk-weighted at
20% for regulatory capital requirement purposes.
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 $98.0 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.
U.S. Department of the
Treasury Troubled Asset Relief Program
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 $80.0
million 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.
During
the third quarter of 2009, the company paid a $1.0 million dividend to the
Treasury. Year-to-date 2009 dividends paid to the Treasury total $2.6
million.
Associated
with the sale of the company’s perpetual preferred securities to the U.S.
Treasury under its Capital Purchase Plan (CPP) in December of 2008, the U.S.
Treasury received one warrant to purchase 930,233 shares of First Financial
common stock at an exercise price of $12.90 per share. As a result of the common
equity raised during
the second quarter of 2009, the
number of common shares eligible for purchase under the warrant agreement will
be reduced by 50% to 465,116 shares.
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.
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 and the considering the capital generated in the FDIC-assisted
transaction of Irwin. At this time a decision on First Financial’s continued
participation in the CPP, including the timing of any repayment, has not been
made and a formal application for repayment has not been
submitted. First Financial has initiated discussions with the board
and regulators on the proper timing for redemption.
The
following table illustrates the actual and required capital amounts and ratios
as of September 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
|
|
SEPTEMBER
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
702,102 |
|
|
|
17.46 |
% |
|
|
321,632 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
10.00 |
% |
First
Financial Bank
|
|
|
638,579 |
|
|
|
15.93 |
% |
|
|
320,634 |
|
|
|
8.00 |
% |
|
|
400,793 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
651,604 |
|
|
|
16.21 |
% |
|
|
160,816 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
6.00 |
% |
First
Financial Bank
|
|
|
580,881 |
|
|
|
14.49 |
% |
|
|
160,317 |
|
|
|
4.00 |
% |
|
|
240,476 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to average assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
651,604 |
|
|
|
14.58 |
% |
|
|
178,001 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
5.00 |
% |
First
Financial Bank
|
|
|
580,881 |
|
|
|
13.05 |
% |
|
|
177,326 |
|
|
|
4.00 |
% |
|
|
221,658 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
Be Well
|
|
|
|
|
|
|
|
|
|
Capitalized
Under
|
|
|
|
|
|
|
For
Capital
|
|
|
Prompt
Corrective
|
|
|
|
Actual
|
|
|
Adequacy
Purposes
|
|
|
Action
Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
DECEMBER
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
392,180 |
|
|
|
13.62 |
% |
|
|
230,284 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
10.00 |
% |
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 |
|
|
|
6.00 |
% |
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 |
|
|
|
5.00 |
% |
First
Financial Bank
|
|
|
311,037 |
|
|
|
8.77 |
% |
|
|
141,188 |
|
|
|
4.00 |
% |
|
|
176,485 |
|
|
|
5.00 |
% |
The
capital levels for First Financial Bank reflect the net capital generated during
the third quarter of 2009, as well as capital contributions totaling $71.5 from
its parent, First Financial in cash capital contributions. The
remaining capital proceeds that the company received from the U.S. Treasury in
December 2008, under its CPP, and the proceeds from the second quarter 2009
common equity stock offering remain at the parent company at this
time.
In
connection with First Financial’s adoption of FASB ASC Topic 825, Financial
Instruments, 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 FASB ASC Topic 715-60, Compensation-Retirement
Benefits for Other Postretirement Defined Benefit Plans, effective January 1,
2008. This topic 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
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. FASB ASC Topic 350,
Intangibles-Goodwill and Other, 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) of Management’s Discussion and Analysis and the 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.
Management’s
analysis contains forward-looking statements that are provided to assist in the
understanding of anticipated future financial performance. However, such
performance involves risk and uncertainties that may cause actual results to
differ materially. 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 continue to
deteriorate, resulting in, among other things, a further deterioration in credit
quality or a reduced demand for credit, including the resultant effect on First
Financial’s loan portfolio, allowance for loan and lease losses and overall
financial purpose; 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, including costs or
difficulties related to the integration of acquired companies; expected cost
savings in connection with the consolidation of recent acquisitions may not be
fully realized or realized within the expected time frames; and deposit
attrition, customer loss and for revenue loss following completed acquisitions
may be greater than expected; 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, and 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; 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.
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
September 30, 2009, assuming immediate, parallel shifts in interest rates.
This analysis excludes the impact of the Irwin Acquisition due to the timing of
the transaction and the on-going discussions with the FDIC that may impact which
assets and liabilities are ultimately acquired or assumed by First
Financial:
|
|
-200 basis points
|
|
|
-100 basis points
|
|
|
+100 basis points
|
|
|
+200 basis points
|
|
September
30, 2009
|
|
|
(4.97 |
)% |
|
|
(2.25 |
)% |
|
|
3.70 |
% |
|
|
5.52 |
% |
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 September 30, 2009,
assuming immediate, parallel shifts in interest rates and excluding the impact
of the Irwin acqusition as noted above:
|
|
-200 basis points
|
|
|
-100 basis points
|
|
|
+100 basis points
|
|
|
+200 basis points
|
|
September
30, 2009
|
|
|
(16.48 |
)% |
|
|
(6.80 |
)% |
|
|
3.70 |
% |
|
|
3.92 |
% |
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 1.48% 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.
See also
“Item 2-Management’s Discussion and Analysis of Financial Condition and Results
of Operations—Net Interest Income.”
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.
On July
31, 2009, First Financial acquired the banking operations of Peoples Community
Bank (Peoples) through an agreement with the Federal Deposit Insurance
Corporation. On September 18, 2009, First Financial acquired the banking
operations of Irwin Union Bank and Trust Company and Irwin Union Bank, FSB
(Irwin, collectively) through an agreement with the Federal Deposit Insurance
Corporation. The internal control over financial reporting of
Peoples’ and Irwin’s banking operations were excluded from the evaluation of
effectiveness of First Financial’s disclosure controls and procedures as of the
period end covered by this report as a result of the timing of the
acquisitions. As a result of the Peoples and Irwin acquisitions,
First Financial will be evaluating changes to processes, information technology
systems and other components of internal control over financial reporting as
part of its integration activities.
The
acquired Peoples banking operations represents 8.5% of total consolidated
deposits and 6.8% of total consolidated assets as of the period covered by this
report. The acquired Irwin banking operations represents 40.6% of
total consolidated deposits and 28.1% of total consolidated assets as of the
period covered by this report.
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.
Since the time we
filed our Report on Form 10-Q for the quarter ended June 30, 2009, we
experienced developments as noted in the litigation due to the recent
acquisitions of the operations of Irwin Union Bank described elsewhere in this
Form 10-Q.
The
following disclosure is in connection with the acquisition of certain assets and
assumption of certain liabilities of Irwin Union Bank by First Financial Bank
from the FDIC as receiver for Irwin Union Bank. The acquisition was pursuant to
a Purchase and Assumption Agreement by and among the FDIC, the FDIC as receiver,
and First Financial Bank dated September 18, 2009, as amended (the “Purchase
Agreement”). Some of these claims involve Irwin Union Bank prior to it being
placed in receivership and are thus the responsibility of the FDIC as receiver
pursuant to the Purchase Agreement. Furthermore, with respect to the claims set
forth below, First Financial Bank has or will submit requests for
indemnification to the FDIC as receiver pursuant to Section 12 of the Purchase
Agreement. Pursuant to the Purchase Agreement, the FDIC as receiver has agreed
to indemnify and hold harmless First Financial Bank against any and all costs,
losses, liabilities, expenses (including attorneys’ fees) prior to the
assumption of the defense by the FDIC as receiver, judgments, fines, and amounts
paid in settlement actually and reasonably incurred in connection with certain
claims against Irwin Union Bank and the former subsidiaries of Irwin Union Bank
for actions taken on or prior to September 18, 2009. First Financial
believes the matters discussed below qualify for
indemnification.
Litigation in Connection with Loans
Purchased by Former Irwin Subsidiaries from Freedom Mortgage Corporation.
On
January 22, 2008, Irwin Union Bank and Irwin Home Equity Corporation (“Irwin
Home Equity”), filed suit against Freedom Mortgage Corporation (“Freedom”) in
the United States District Court for the Northern District of California, Irwin Union Bank, et al. v.
Freedom Mortgage
Corp., (the “California Action”) for breach of contract and negligence
arising out of Freedom’s refusal to repurchase certain mortgage loans that Irwin
Union Bank and Irwin Home Equity had purchased from Freedom. Irwin Union Bank
and Irwin Home Equity are seeking damages in excess of $8 million from
Freedom.
In
response, in March 2008, Freedom moved to compel arbitration of the claims
asserted in the California Action and filed suit against Irwin Mortgage
Corporation (“Irwin Mortgage”) and its former indirect parent, Irwin Financial
Corporation (now in Chapter 7 bankruptcy), in the United States District Court
for the District of Delaware, Freedom Mortgage Corporation v.
Irwin Financial Corporation et al., (the “Delaware Action”). Freedom
alleged that the repurchase demands in the California Action represent various
breaches of an Asset Purchase Agreement dated as of August 7, 2007, which was
entered into by Irwin Financial Corporation, Irwin Mortgage and
Freedom in connection with the sale to Freedom of the majority of
Irwin Mortgage’s loan origination assets. In the Delaware Action, Freedom sought
damages in excess of $8 million and to compel Irwin Financial to order its (now
former) subsidiaries in the California Action to dismiss their
claims.
In April
2008, the California district court stayed the California Action pending
completion of arbitration. The arbitration remains pending. On March 23, 2009,
the Delaware district court granted Irwin’s motion to transfer the Delaware
Action to the Northern District of California, and ordered that the Delaware
case be closed. The California district judge previously stated on the record
that she would not hear Freedom’s claims in the Delaware Action until the
arbitration is completed. No reserves have been established for this
litigation.
First
Financial Bank is evaluating this matter, will begin discussions with
FDIC counsel on this litigation and expects to make a claim for indemnification
with respect to the subsidiaries.
Homer v. Sharp
This
lawsuit was filed by a mother and children on or about May 6, 2008 in the
Circuit Court for Baltimore City, Maryland, against various defendants,
including Irwin Mortgage and a former Irwin Mortgage employee, for injuries from
exposure to lead-based paint. Irwin Mortgage and its former employee are the
subject of three counts each of the 40-count complaint, which alleges, among
other things, negligence and violations of the Maryland Lead Poisoning
Prevention Act, unfair and deceptive trade practices in violation of the
Maryland Consumer Protection Act, loss of an infant’s services, incursion of
medical expenses, and emotional distress and mental anguish. Plaintiffs seek
damages of $5 million on each count. The counts against Irwin Mortgage and the
former employee allege involvement with one of six properties named in the
complaint. On October 23, 2009, Irwin Mortgage filed a motion to modify the
scheduling order, requesting a three-month extension of deadlines due to the
receivership of Irwin Union Bank and the sale of Irwin Mortgage to First
Financial.
This case
is in the early stages and we are unable at this time to form a reasonable
estimate of the amount of potential loss, if any, that Irwin Mortgage could
suffer. No reserves have been established for this litigation.
First
Financial Bank is evaluating this matter, will begin discussions with
FDIC counsel on this case and expects to make a claim for indemnification with
respect to the subsidiary.
EverBank v. Irwin Mortgage
Corporation and Irwin Union Bank and Trust Company-Demand for
Arbitration
On March
25, 2009, Irwin Mortgage and Irwin Union Bank received an arbitration demand
(“Demand”) from EverBank for administration by the American Arbitration
Association, claiming damages for alleged breach of an ”Agreement for Purchase
and Sale of Servicing” (the “EverBank Agreement”) under which Irwin Mortgage is
alleged to have sold the servicing of certain mortgage loans to EverBank. The
Demand also alleges that Irwin Union Bank is the guarantor of Irwin Mortgage’s
obligations under the EverBank Agreement, and that the EverBank Agreement was
amended November 1, 2006 to include additional loans. According to the Demand,
EverBank alleges that Irwin Mortgage and Irwin Union Bank breached certain
warranties and covenants under the EverBank Agreement by failing to repurchase
certain loans and failing to indemnify EverBank after EverBank had demanded
repurchase. The Demand sets forth several claims based on legal theories of
breach of warranty, breach of the covenant of good faith and fair dealing,
promissory estoppel, specific performance and unjust enrichment, and requests
damages, penalties, interest, attorneys’ fees, costs, and other appropriate
relief to be granted by the arbitration panel. The Demand also states that, as a
result of Irwin Mortgage’s alleged failure to repurchase loans, EverBank has
allegedly incurred and continues to incur damages that it claims could exceed
$10,000,000. A reserve has been established that is deemed
appropriate for resolution of all open repurchase issues with EverBank. In April
2009, Irwin Mortgage and Irwin Union Bank filed an answer and counter-claims to
the Demand.
On
October 23, 2009, First Financial Bank requested indemnification from the FDIC
for this litigation under the Agreement.
We and
our subsidiaries are from time to time engaged in various matters of litigation,
including the matters described above, other assertions of improper or
fraudulent loan practices or lending violations, and other matters, and we have
a number of unresolved claims pending. In addition, as part of the ordinary
course of business, we and our subsidiaries are parties to litigation involving
claims to the ownership of funds in particular accounts, the collection of
delinquent accounts, challenges to security interests in collateral, and
foreclosure interests, that is incidental to our regular business activities.
While the ultimate liability with respect to these other litigation matters and
claims cannot be determined at this time, we believe that damages, if any, and
other amounts relating to pending matters are not likely to be material to our
consolidated financial position or results of operations. Reserves are
established for these various matters of litigation, when appropriate under FASB
ASC Topic 450, Contingencies, based in part upon the advice of legal
counsel.
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 and much of 2010, notably in commercial real estate.
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 in recent quarters has and may continue
to 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 have conducted a number of internal stress tests. These stress tests
were 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 tests, 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 tests, 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 tests 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 tests.
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 at September 30, 2009 had an outstanding balance of $0
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 accounting, 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.
Risks
Related to the Acquisition of the Business and Assets of Peoples Community Bank,
Irwin Union Bank and Trust Company and Irwin Union, FSB.
Changes in national and
local economic conditions could lead to higher loan charge-offs in connection
with the acquisitions all of which may not be supported by the loss sharing
agreements with the FDIC.
In
connection with the acquisitions, we acquired a significant portfolio of loans.
Although we expect to mark down the loan portfolio we have acquired, there is no
assurance that the non-impaired loans we acquired will not become impaired or
that the impaired loans will not suffer further deterioration in value resulting
in additional charge-offs to this loan portfolio. The fluctuations in national,
regional and local economic conditions, including those related to local
residential, commercial real estate and construction markets, which may increase
the level of charge-offs that we make to our loan portfolio, and, consequently,
reduce our net income, may also increase the level of charge-offs on the loan
portfolios that we have acquired in the acquisitions and correspondingly reduce
our net income. These fluctuations are not predictable, cannot be controlled and
may have a material adverse impact on our operations and financial condition
even if other favorable events occur. See “Business Risks – Credit Risks“ in our
Annual Report on Form 10-K for the year ended December 31, 2008 for more
information on the factors affecting the levels of these
charge-offs.
Although
we have entered into loss sharing agreements with the FDIC, which provide that a
significant portion of losses related to specified loan portfolios that we have
acquired in connection with the acquisitions will be borne by the FDIC, we are
not protected for all losses resulting from charge-offs with respect to those
specified loan portfolios. Additionally, the loss sharing agreements have
limited terms; therefore, any charge-off of related losses that we experience
after the term of the loss sharing agreements will not be reimbursed by the FDIC
and will negatively impact our net income.
We may fail to realize any
benefits and incur unanticipated losses related to the assets of Peoples
Community Bank, Irwin Union Bank and Trust Company and Irwin Union Bank,
FSB that First Financial Bank acquired and the liabilities of Peoples
Community Bank, Irwin Union Bank and Trust Company and Irwin Union Bank,
FSB that were assumed.
The
success of these acquisitions will depend, in part, on First Financial’s ability
to successfully combine the acquired businesses and assets with First
Financial’s business and First Financial’s ability to successfully manage the
significant loan portfolio that was acquired. As with any acquisition involving
a financial institution, particularly with respect to the acquisition nearly
doubling the size of First Financial and the large increase in the number of
bank branches, there may be business and service changes and disruptions that
result in the loss of customers or cause customers to close their accounts and
move their business to competing financial institutions. It is possible that the
integration process could result in the loss of key employees, the disruption of
ongoing business, or inconsistencies in standards, controls, procedures and
policies that adversely affect First Financial’s ability to maintain
relationships with clients, customers, depositors and employees or to achieve
the anticipated benefits of the acquisition. Successful integration may also be
hampered by differences between the organizations. Although First Financial had
significant operations in the principal regional markets in which the acquired
entities operated, the loss of key employees of these entities could adversely
affect First Financial’s ability to successfully conduct business in certain
local markets in which the entities operated, which could have an adverse effect
on First Financial’s financial results. Integration efforts will also divert
attention and resources from First Financial’s management. Additionally, general
market and economic conditions or governmental actions affecting the financial
industry generally may inhibit the ability to successfully integrate the
institutions. If First Financial experiences difficulties with, or delays in,
the integration process, the
anticipated benefits of the acquisitions may not be realized
fully, or at all, or may take longer to realize than expected. Furthermore, any
cost savings that are realized may be offset by losses in revenues or other
charges to earnings.
Finally,
First Financial will need to ensure that the banking operations of the acquired
entities maintain effective disclosure controls as well as internal controls and
procedures for financial reporting, and such compliance efforts may be costly
and may divert the attention of management.
First Financial’s Exchange
Act reports contain limited financial information on which to evaluate the
acquisition of Irwin Union Bank and Trust Company and Irwin Union Bank,
FSB.
The
acquisition of the banking operations and certain assets of Irwin Union Bank and
Irwin FSB are significant acquisitions for First Financial; however, First
Financial’s Exchange Act reports contain limited financial information on which
to evaluate theses acquisitions. First Financial’s Exchange Act
reports may not contain all of the financial and other information about Irwin
Union Bank and Trust Company and Irwin Union, FSB and the assets that were
acquired and liabilities assumed that investors may consider important,
including information related to the loan portfolio acquired and the impact of
the acquisition on First Financial.
First Financial will be
expanding operations into new geographic areas.
Portions
of the market areas represented by Irwin Union Bank and Irwin FSB, including
those in Arizona, California, Missouri, Nevada and Utah, are areas in which
First Financial historically conducted no banking activities. Although First
Financial has indicated it plans to divest itself of banking centers in areas
outside its strategic footprint, in the interim, First Financial must
effectively integrate these new markets to retain and expand the business
currently conducted by these branches while maintaining appropriate risk
controls. The ability to compete effectively in the new markets will be
dependent on First Financial’s ability to understand the local market and
competitive dynamics and identify and retain certain employees from Irwin who
know their markets better than First Financial does.
Furthermore,
the operations of the franchise business acquired will increase the
concentration risk of First Financial’s lending in this area and First Financial
will rely on the expertise of those individuals currently at the acquired
franchise group.
Prior to the acquisition,
Irwin Union Bank and Trust Company and a number of its subsidiaries, notably
Irwin Home Equity and Irwin Mortgage Corporation were the subject of a number of
legal actions regarding their mortgage and/or home equity lines of business and
these matters may require significant resources and management
attention.
As
discussed in Note 4 - Commitments and Contingencies, in connection
with the acquisition of certain assets and assumption of certain liabilities
Irwin Union Bank by First Financial Bank from the FDIC as receiver for Irwin
Union Bank, First Financial assumed, subject to the terms of a Purchase and
Assumption Agreement by and among the FDIC, the FDIC as receiver, and First
Financial Bank dated September 18, 2009, as amended (the “Purchase Agreement”),
certain legal claims against the subsidiaries of Irwin Union
Bank. Some of these claims involve Irwin Union Bank prior to it being
placed in receivership and are thus the responsibility of the FDIC as receiver
pursuant to the Agreement. Furthermore, with respect to the claims
involving the subsidiaries, First Financial Bank has or will submit requests for
indemnification to the FDIC as receiver pursuant to Section 12 of the Purchase
Agreement as amended. Pursuant to the Purchase Agreement, the FDIC as
receiver has agreed to indemnify and hold harmless First Financial Bank for
certain actions by the former subsidiaries of Irwin Union Bank taken on or prior
to September 18, 2009.
Although
the assets and liabilities that the FDIC as receiver determines are subject to
First Financial’s indemnification claims will be covered by the FDIC as receiver
and thus excluded from the acquisition of Irwin Union Bank, during the process
of integrating Irwin Union Bank and its subsidiaries with First Financial Bank,
First Financial may discover other inconsistencies in standards, controls,
procedures and policies that adversely affect First Financial’s ability to
achieve the anticipated benefits of the acquisition of Irwin Union Bank and
could distract management from implementing its strategic
plan. Furthermore, unless the FDIC as receiver assumes the defense of
such claims, First Financial will have to expend considerable time and effort to
defend the actions, subject to such indemnification.
The acquisitions have
increased First Financial’s commercial real estate, which have a greater credit
risk than residential mortgage loans.
With the
acquisition of the Irwin entities loan portfolios, the commercial loan and
construction loan portfolios have become a larger portion of First Financial
Bank’s total loan portfolio than it was prior to the acquisitions. This type of
lending is generally considered to have more complex credit risks than
traditional single-family residential lending, because the principal is
concentrated in a limited number of loans with repayment dependent on the
successful
operation of the related real estate or construction project.
Consequently, these loans are more sensitive to the current adverse conditions
in the real estate market and the general economy. These loans are generally
less predictable and more difficult to evaluate and monitor and collateral may
be more difficult to dispose of in a market decline.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
|
(c)
|
The
following table shows the total number of shares repurchased in the third
quarter of 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
|
|
July
1 through
|
|
|
|
|
|
|
|
|
|
|
|
|
July
31, 2009
|
|
|
3,632 |
|
|
$ |
7.80 |
|
|
|
0 |
|
|
|
4,969,105 |
|
August
1 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
4,969,105 |
|
September
1 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
4,969,105 |
|
Total
|
|
|
3,632 |
|
|
$ |
7.80 |
|
|
|
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
|
|
|
|
Purchased
|
|
|
Per Share
|
|
Period
|
|
|
|
|
|
|
First
Financial Bancorp Thrift Plan
|
|
|
|
|
|
|
July
1 through
|
|
|
|
|
|
|
July
31, 2009
|
|
|
0 |
|
|
$ |
0.00 |
|
August
1 through
|
|
|
|
|
|
|
|
|
August
31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
September
1 through
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
0 |
|
|
|
0.00 |
|
Total
|
|
|
0 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
Director
Fee Stock Plan
|
|
|
|
|
|
|
July
1 through
|
|
|
|
|
|
|
July
31, 2009
|
|
|
3,632 |
|
|
$ |
7.80 |
|
August
1 through
|
|
|
|
|
|
|
|
|
August
31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
September
1 through
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
0 |
|
|
|
0.00 |
|
Total
|
|
|
3,632 |
|
|
$ |
7.80 |
|
|
|
|
|
|
|
|
|
|
Stock
Option Plans
|
|
|
|
|
|
|
|
|
July
1 through
|
|
|
|
|
|
|
|
|
July
31, 2009
|
|
|
0 |
|
|
$ |
0.00 |
|
August
1 through
|
|
|
|
|
|
|
|
|
August
31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
September
1 through
|
|
|
|
|
|
|
|
|
September
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 September 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
|
|
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).*
|
|
10.28
|
First
Financial Bancorp. 2009 Employee Stock Plan (filed as Appendix A to the
DEF 14 Definitive Proxy Statement filed on April 23, 2009 and incorporated
herein by reference).*
|
|
10.29
|
First
Financial Bancorp. 2009 Non-Employee Director Stock Plan (filed as
Appendix B to the DEF 14 Definitive Proxy Statement filed on April 23,
2009 and incorporated herein by
reference).*
|
|
10.30
|
Form
of Agreement for Restricted Stock Awards for 2009 Awards under the First
Financial Bancorp. 1999 Stock Incentive Plan for Officers and
Employees.*
|
|
10.31
|
Form
of Agreement for Restricted Stock Awards for Awards under the First
Financial Bancorp. 2009 Stock Employee Stock
Plan.*
|
|
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.
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
|
|
|
|
Date
|
11/16/09
|
|
Date
|
11/16/09
|