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FFBC > SEC Filings for FFBC > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for FIRST FINANCIAL BANCORP /OH/

Form 10-Q for FIRST FINANCIAL BANCORP /OH/


6-Nov-2012

Quarterly Report


ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
(Unaudited)

SUMMARY

First Financial Bancorp. (First Financial or the Company) is a $6.2 billion bank holding company headquartered in Cincinnati, Ohio. As of September 30, 2012 First Financial, through its subsidiaries, operated in Ohio, Indiana and Kentucky. These subsidiaries include a commercial bank, First Financial Bank, N.A. (First Financial Bank or the Bank) with 122 banking centers and 141 ATMs. First Financial conducts three primary activities through its bank subsidiary:
commercial banking, retail banking and wealth management. First Financial Bank provides credit-based products, deposit accounts, corporate cash management support and other services to commercial and retail clients. Additionally, the Bank conducts franchise lending by providing equipment and leasehold improvement financing for select franchisees and concepts in the quick service and casual dining restaurant sector throughout the United States. First Financial Wealth Management provides wealth planning, portfolio management, trust and estate, brokerage and retirement plan services.

First Financial acquired the banking operations of Peoples Community Bank (Peoples), and Irwin Union Bank and Trust Company and Irwin Union Bank, F.S.B. (collectively, Irwin), through Federal Deposit Insurance Corporation (FDIC)-assisted transactions in 2009. The acquisitions of the Peoples and Irwin franchises significantly expanded the First Financial footprint, opened new markets and strengthened the Company through the generation of additional capital.

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 reimburses First Financial for a percentage of losses with respect to certain loans (covered loans) and other real estate owned (covered OREO) (collectively, covered assets). 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. The FDIC's obligation to reimburse First Financial for losses with respect to covered assets for all three assisted transactions began with the first dollar of loss incurred.

First Financial must follow specific servicing and resolution procedures, as outlined in the loss sharing 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 services all covered assets with the same resolution practices and diligence as it does for assets that are not subject to a loss sharing agreement.

Covered loans represent approximately 21% of First Financial's loans at September 30, 2012.

MARKET STRATEGY

First Financial serves a combination of metropolitan and non-metropolitan markets in Ohio, Indiana and Kentucky through its full-service banking centers, while providing franchise lending services to borrowers throughout the United States. First Financial's market selection process includes 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 utilizing a local market focus, building long-term relationships with clients, helping them reach greater levels of success in their financial life and providing a superior level of service. First Financial intends to continue 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 remain an important part of its funding base. First Financial believes its historical strength in these markets should enable it to retain or improve its market share.

As part of the on-going evaluation of its banking center network, First Financial consolidated nine banking centers located in Ohio and Indiana and exited one Indiana market during the second quarter 2012. First Financial consolidated two additional Indiana-based banking centers and closed four other Indiana-based banking centers where the Company has a limited presence during the third quarter 2012. These banking center actions will allow the Company to focus additional resources in the Cincinnati, Dayton and Indianapolis metropolitan markets. Customer relationships related to the consolidated banking centers will be transferred to the nearest First Financial location where those customers will continue to receive the same high level of service.


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BUSINESS COMBINATIONS

On September 23, 2011, First Financial Bank, completed the purchase of 16 Ohio-based retail banking centers from Liberty Savings Bank, FSB (Liberty) including $126.5 million of performing loans and $341.9 million of deposits at their estimated fair values. First Financial also acquired $3.8 million of fixed assets at estimated fair value and paid Liberty a $22.4 million net deposit premium. Assets acquired in this transaction are not subject to a loss sharing agreement. First Financial recorded $17.1 million of goodwill related to the Liberty banking center acquisition.

On December 2, 2011, First Financial Bank completed the purchase of 22 Indiana-based retail banking centers from Flagstar Bank, FSB (Flagstar) and assumed approximately $464.7 million of deposits at their estimated fair value. First Financial also acquired $6.6 million of fixed assets at estimated fair value and paid Flagstar a $22.5 million net deposit premium. Assets acquired in this transaction are not subject to a loss sharing agreement. First Financial recorded $26.1 million of goodwill related to the Flagstar banking center acquisition.

The Liberty and Flagstar banking center acquisitions were accounted for in accordance with FASB ASC Topic 805, Business Combinations. The fair values of assets and liabilities acquired in a business combination are subject to refinement for up to one year after the closing date of the acquisition (the measurement period) as information relative to closing date fair values becomes available.

OVERVIEW OF OPERATIONS

Reclassifications of prior period amounts, if applicable, have been made to conform to the current period's presentation and had no effect on previously reported net income amounts or financial condition.

Third quarter 2012 net income was $16.2 million, and earnings per diluted share were $0.28. This compares with third quarter 2011 net income of $15.6 million and earnings per diluted share of $0.27.

For the nine months ended September 30, 2012, net income was $51.0 million and earnings per diluted share were $0.87. This compares to net income of $48.8 million and earnings per diluted share of $0.83 for the same period in 2011.

Return on average assets for the third quarter of 2012 was 1.05% compared to 1.01% for the comparable period in 2011. Return on average shareholders' equity for the third quarter of 2012 was 9.01% compared to 8.54% for the comparable period in 2011.

Return on average assets for the first nine months of 2012 was 1.08% compared to 1.05% for the same period in 2011. Return on average shareholders' equity was 9.56% and 9.19% for the same periods in 2012 and 2011, respectively.

A discussion of the first nine months and third quarter of 2012 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 to make peer comparisons.

The majority of First Financial's covered loans are accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (FASB ASC Topic 310-30). As such, the Company is required to periodically update its forecast of expected cash flows from these loans. Impairment, as a result of a decrease in expected cash flows, is recognized in the period it is measured as provision expense and has no impact on net interest income or net interest margin. Improvements in expected cash flows are recognized on a prospective basis through an upward adjustment to the yield earned on the portfolio. Impairment and improvement are both partially offset by the impact of changes in the value of the FDIC indemnification asset. Impairment is partially offset by an increase to the FDIC indemnification asset as a result of FDIC loss sharing income and has no impact on net interest income or net interest margin. Improvement, which is reflected as a higher yield on the loans, is partially offset by a lower yield earned on the FDIC indemnification asset until the next periodic valuation of the loans and the indemnification asset. The weighted average yield of the acquired loan portfolio can also be subject to


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change as loans with higher yields pay down more quickly or slowly than loans with lower yields.

                                          Three Months Ended               Nine months ended
                                             September 30,                   September 30,
(Dollars in thousands)                   2012            2011            2012            2011
Net interest income                  $    59,846     $    65,218     $   191,365     $   198,420
Tax equivalent adjustment                    255             236             689             714
Net interest income - tax equivalent $    60,101     $    65,454     $   192,054     $   199,134

Average earning assets               $ 5,658,059     $ 5,687,036     $ 5,806,615     $ 5,730,642

Net interest margin *                       4.21 %          4.55 %          4.40 %          4.63 %
Net interest margin (fully tax
equivalent) *                               4.23 %          4.57 %          4.42 %          4.65 %

* Margins are calculated using annualized net interest income divided by average earning assets.

Net interest income for the third quarter 2012 was $59.8 million, declining $5.4 million or 8.2% from third quarter 2011 net interest income of $65.2 million. Net interest income on a fully tax-equivalent basis for the third quarter 2012 was $60.1 million as compared to $65.5 million for the third quarter 2011. Net interest margin was 4.21% for the third quarter 2012 as compared to 4.55% for the third quarter 2011. The declines in net interest income and net interest margin were primarily related to changes in the composition of the Company's earning assets as well as the current low interest rate environment for loans and investment securities.

The decline in net interest income in the third quarter 2012 as compared to the third quarter 2011 was the result of a $9.6 million or 12.7% decline in total interest income partially offset by a $4.3 million or 39.8% decline in total interest expense. The decline in total interest income resulted from a decline in interest income and fees earned on loans, primarily as a result of continued amortization and paydowns in the Company's high-yielding covered loan portfolio, partially offset by higher interest income earned on the investment portfolio.

Contributing to the lower interest income earned on loans, and a related decline in net interest margin, was a $329.8 million or 27.6% decline in the average balance of the Company's high-yielding covered loan portfolio as compared to the third quarter 2011. Declines in covered loan balances are a result of payments received, including full payoffs, charge-offs and other loan resolution activities. The decline in covered loan balances was offset by growth in lower yielding assets as uncovered loan balances increased $220.7 million or 7.9%, while the investment securities portfolio increased $406.8 million or 33.9%, from the third quarter of 2011. Interest-bearing deposits with other banks also declined $295.6 million or 96.3% from the third quarter of 2011.

Elevated prepayment activity related to higher yielding mortgage-backed securities (MBSs) in the investment portfolio impacted both the average balances and portfolio yield during the third quarter 2012. This prepayment activity also resulted in accelerated premium amortization, negatively affecting interest income and contributing to the decline in net interest margin. A significant portion of the Company's higher-yielding investment grade single-issuer trust preferred securities were redeemed by the issuers' early in the third quarter 2012, impacting interest income and net interest margin as well.

While average uncovered loan balances increased from the third quarter 2011 as a result of strong new loan origination activity in recent periods, payoff activity was also elevated. As a result of the low interest rate environment and heightened competition, recent loan originations have been recorded at yields significantly lower than the yields on loans that paid off during the same period, muting the impact of increased balances on interest income earned and net interest margin. Interest income and net interest margin were also negatively impacted, to a lesser extent, by a decline in loan fees.

Interest expense and net interest margin continued to benefit from the impact of deposit pricing and rationalization strategies as the average balance of interest-bearing deposits declined $353.7 million or 8.1% and the cost of funds related to these deposits decreased 32 basis points to 57 basis points for the third quarter 2012 compared to 89 basis points for the comparable quarter in 2011.

For the nine month period ended September 30, 2012, net interest income was $191.4 million, a decline of $7.1 million or


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3.6%, from $198.4 million for the comparable period in 2011. Net interest income on a fully tax-equivalent basis for the nine month period ended September 30, 2012, was $192.1 million as compared to $199.1 million for the comparable period in 2011. Similar to the quarterly year-over-year items discussed above, these declines were primarily related to lower covered loan balances as well as a reduced yield on the FDIC indemnification asset, partially offset by higher interest income from investments and lower funding costs.

Net interest margin for the nine month period ended September 30, 2012 declined 23 bps to 4.40% from 4.63% for the comparable period in 2011.

The Consolidated Average Balance Sheets and Net Interest Income Analysis that follows are presented on a GAAP basis.


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QUARTERLY CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

                                                  September 30, 2012                         June 30, 2012                          September 30, 2011
                                           Average                    Average       Average                    Average       Average                    Average
(Dollars in thousands)                     Balance       Interest       Rate        Balance       Interest       Rate        Balance       Interest       Rate
Earning assets
Investments:
Interest-bearing deposits with other
banks                                   $    11,390     $      13       0.45 %   $     4,454     $       2       0.18 %   $   306,969     $     208       0.27 %
Investment securities                     1,606,313         8,469       2.09 %     1,713,503        10,500       2.46 %     1,199,473         7,587       2.51 %
Gross loans including covered loans
and indemnification asset (1)             4,040,356        57,823       5.68 %     4,095,310        61,421       6.02 %     4,180,594        68,157       6.47 %
Total earning assets                      5,658,059        66,305       4.65 %     5,813,267        71,923       4.96 %     5,687,036        75,952       5.30 %

Nonearning assets
Cash and due from banks                     118,642                                  121,114                                  110,336
Allowance for loan and lease losses        (102,636 )                                (98,317 )                               (107,101 )
Premises and equipment                      145,214                                  143,261                                  116,070
Other assets                                347,388                                  355,648                                  330,474
Total assets                            $ 6,166,667                              $ 6,334,973                              $ 6,136,815

Interest-bearing liabilities
Deposits:
Interest-bearing                        $ 1,164,111     $     384       0.13 %   $ 1,192,868           316       0.11 %   $ 1,153,178           690       0.24 %
Savings                                   1,588,708           476       0.12 %     1,610,411           464       0.12 %     1,659,152         1,412       0.34 %
Time                                      1,260,329         4,870       1.53 %     1,406,800         5,601       1.60 %     1,554,497         7,721       1.97 %
Short-term borrowings                       181,905            54       0.12 %       159,681            37       0.09 %       100,990            44       0.17 %
Long-term borrowings                         75,435           675       3.55 %        75,314           675       3.59 %        94,150           867       3.65 %
Total interest-bearing liabilities        4,270,488         6,459       0.60 %     4,445,074         7,093       0.64 %     4,561,967        10,734       0.93 %

Noninterest-bearing liabilities and
shareholders' equity
Noninterest-bearing demand                1,052,421                                1,044,405                                  735,621
Other liabilities                           126,961                                  128,383                                  113,418
Shareholders' equity                        716,797                                  717,111                                  725,809
Total liabilities and shareholders'
equity                                  $ 6,166,667                              $ 6,334,973                              $ 6,136,815
Net interest income                                     $  59,846                                $  64,830                                $  65,218

Net interest spread                                                     4.05 %                                   4.32 %                                   4.37 %
Contribution of noninterest-bearing
sources of funds                                                        0.16 %                                   0.17 %                                   0.18 %
Net interest margin (2)                                                 4.21 %                                   4.49 %                                   4.55 %

(1) Nonaccrual loans and loans held for sale are included in average balances.

(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.


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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.

                                             Changes for the Three Months Ended September 30, 2012
                                    Linked Qtr. Income Variance              Comparable Qtr. Income Variance
(Dollars in thousands)            Rate          Volume       Total           Rate           Volume        Total
Earning assets
Investment securities         $   (1,564 )    $   (467 )   $ (2,031 )   $    (1,263 )     $   2,145     $    882
Other earning assets                   3             8           11             142            (337 )       (195 )
Gross loans (1)                   (3,449 )        (149 )     (3,598 )        (8,327 )        (2,007 )    (10,334 )
Total earning assets              (5,010 )        (608 )     (5,618 )        (9,448 )          (199 )     (9,647 )
Interest-bearing
liabilities
Total interest-bearing
deposits                      $     (435 )    $   (216 )   $   (651 )   $    (3,588 )     $    (505 )   $ (4,093 )
Borrowed funds
Short-term borrowings                 10             7           17             (14 )            24           10
Federal Home Loan Bank
long-term debt                        (8 )           8            0             (25 )          (167 )       (192 )
Other long-term debt                   0             0            0               0               0            0
Total borrowed funds                   2            15           17             (39 )          (143 )       (182 )
Total interest-bearing
liabilities                         (433 )        (201 )       (634 )        (3,627 )          (648 )     (4,275 )
Net interest income           $   (4,577 )    $   (407 )   $ (4,984 )   $    (5,821 )     $     449     $ (5,372 )

(1) Loans held for sale, nonaccrual loans, covered loans and indemnification asset are included in gross loans.

                                                  Changes for the Nine Months Ended September 30, 2012
                                                              Year-to-Date Income Variance
(Dollars in thousands)                               Rate                 Volume                Total
Earning assets
  Investment securities                      $          (2,008 )     $       9,768       $           7,760
  Other earning assets                                    (114 )              (600 )                  (714 )
  Gross loans (1)                                      (18,625 )            (8,928 )               (27,553 )
   Total earning assets                                (20,747 )               240                 (20,507 )
Interest-bearing liabilities
  Total interest-bearing deposits            $         (11,489 )     $        (674 )     $         (12,163 )
  Borrowed funds
   Short-term borrowings                                   (69 )                34                     (35 )
   Federal Home Loan Bank long-term debt                   (61 )              (802 )                  (863 )
   Other long-term debt                                      0                (391 )                  (391 )
    Total borrowed funds                                  (130 )            (1,159 )                (1,289 )
     Total interest-bearing liabilities                (11,619 )            (1,833 )               (13,452 )
       Net interest income                   $          (9,128 )     $       2,073       $          (7,055 )

(1) Loans held for sale, nonaccrual loans, covered loans and indemnification asset are included in gross loans.

NONINTEREST INCOME

Third quarter 2012 noninterest income was $30.8 million, a $2.7 million or 9.7% increase from noninterest income of $28.1 million in the third quarter 2011. The increase in noninterest income from the comparable quarter in 2011 was due primarily to $2.6 million of gains recorded on the sale of investment securities, a $0.7 million increase in service charges on deposits related to the Liberty and Flagstar acquisitions, as well as an increase of other noninterest income of $0.5 million. This increase was partially offset by $1.4 million decline in accelerated discount on covered loans.


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While no material sales of covered loans occurred during the third quarter of 2012, covered loan activity continued to impact noninterest income due to prepayments. Accelerated discount is recognized when acquired loans, which are recorded on the Company's balance sheet at an amount less than the unpaid principal balance, prepay at an amount greater than their recorded book value. Prepayments can occur either through customer driven payments before the maturity date or loan sales. The amount of discount attributable to the credit loss component of each loan varies and the recognized amount is offset by a related reduction in the FDIC indemnification asset. First Financial recognized accelerated discount on covered loans of $3.8 million for the third quarter of 2012 and $5.2 million for the third quarter of 2011.

When losses are incurred on covered loans, the Company recognizes those credit losses as provision expense, while losses incurred on covered OREO are recognized as noninterest expense. Reimbursements due from the FDIC under loss sharing agreements related to these credit losses, referred to as loss sharing income, are recorded as noninterest income and were $8.5 million for the third quarter of 2012 and $8.4 million for the third quarter of 2011. The impact on earnings of this offsetting activity is the net effect of the credit losses and FDIC reimbursement, representing the Company's proportionate share of the credit losses realized on covered assets.

For the nine months ended September 30, 2012, noninterest income totaled $96.3 million compared to $112.9 million for the comparable year-over-year period. The $16.6 million or 14.7% decline in noninterest income from the comparable period in 2011 was primarily attributable to a $23.9 million decrease in FDIC loss sharing income and a $4.5 million decrease in accelerated discount on covered loans, offset by the $2.6 million gain on the sale of investment securities as well as the $5.0 million of other noninterest income associated with the settlement of litigation related to a subsidiary in the second quarter of 2012 and increases of $1.5 million and $0.7 million in service charges on deposit accounts and bankcard income, respectively.

NONINTEREST EXPENSE

Third quarter 2012 noninterest expense was $55.3 million compared with $53.1 million in the third quarter of 2011. The $2.1 million or 4.0% increase from the comparable quarter in 2011 was primarily attributable to a $2.5 million increase in loss sharing expense, a $1.0 million increase in net occupancy expenses related to the Liberty and Flagstar acquisitions as well as relocation of the Company's headquarters to downtown Cincinnati, an increase of $0.9 million in data processing expenses related to the implementation and maintenance of software utilized by the Bank and a $1.7 million increase in loss on OREO properties, offset by lower professional services expense and nominal gains recognized on covered OREO in 2012, compared to $2.7 million of losses incurred in the third quarter of 2011. Losses on OREO are generally the result of . . .

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