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FFBC > SEC Filings for FFBC > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for FIRST FINANCIAL BANCORP /OH/

Form 10-Q for FIRST FINANCIAL BANCORP /OH/


6-Aug-2013

Quarterly Report


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

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.

SUMMARY

First Financial Bancorp. (First Financial or the Company) is a $6.3 billion bank holding company headquartered in Cincinnati, Ohio. As of June 30, 2013 First Financial, through its subsidiaries, operated primarily in Ohio, Indiana and Kentucky. These subsidiaries include a commercial bank, First Financial Bank, N.A. (First Financial Bank or the Bank) with 110 banking centers and 139 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 provides franchise lending products, primarily 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 amounts must be shared with the FDIC for an additional three year period, 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.

Covered assets represent approximately 10% of First Financial's total assets at June 30, 2013.

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 to help 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.

OVERVIEW OF OPERATIONS

Second quarter 2013 net income was $15.8 million and earnings per diluted common share were $0.27. This compares with second quarter 2012 net income of $17.8 million and earnings per diluted common share of $0.30.

For the six months ended June 30, 2013, net income was $29.7 million, and earnings per diluted common share were $0.51. This compares with net income of $34.8 million and earnings per diluted common share of $0.59 for the first six months of 2012.

Return on average assets for the second quarter of 2013 was 1.01% compared to 1.13% for the comparable period in 2012. Return on average shareholders' equity for the second quarter of 2013 was 9.02% compared to 9.98% for the comparable period in 2012.


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Return on average assets for the six months ended June 30, 2013 was 0.94% compared to 1.09% for the same period in 2012. Return on average shareholders' equity was 8.47% and 9.83% for the same periods in 2013 and 2012, respectively.

A discussion of First Financial's results of operations for the three and six months ended June 30, 2013 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.

                                          Three months ended               Six months ended
                                               June 30,                        June 30,
(Dollars in thousands)                   2013            2012            2013            2012
Net interest income                  $    58,078     $    64,830     $   116,744     $   131,519
Tax equivalent adjustment                    514             216             991             434
Net interest income - tax equivalent $    58,592     $    65,046     $   117,735     $   131,953

Average earning assets               $ 5,791,715     $ 5,813,267     $ 5,839,497     $ 5,881,709

Net interest margin (1)                     4.02 %          4.49 %          4.03 %          4.50 %
Net interest margin (fully tax
equivalent) (1)                             4.06 %          4.50 %          4.07 %          4.51 %

(1) Margins are calculated using annualized net interest income divided by average earning assets.

Net interest income for the second quarter 2013 was $58.1 million, declining $6.8 million or 10.4% from second quarter 2012 net interest income of $64.8 million. Net interest income on a fully tax-equivalent basis for the second quarter 2013 was $58.6 million as compared to $65.0 million for the second quarter 2012. Net interest margin was 4.02% for the second quarter 2013 as compared to 4.49% for the second quarter 2012. 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 second quarter 2013 as compared to the second quarter 2012 was the result of a $9.6 million or 13.4% decline in total interest income, partially offset by a $2.9 million or 40.2% 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, as well as lower interest income earned on the investment portfolio due to the current low rate environment.

Contributing to the lower interest income earned on loans, and a related decline in net interest margin, was a $296.3 million or 31.2% decline in the average balance of covered loans as compared to the second quarter 2012. 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 partially offset by growth in lower yielding assets as average uncovered loan balances increased $318.3 million or 10.7% from the second quarter of 2012.

While average uncovered loan balances increased from the second quarter 2012 as a result of strong new loan origination activity in recent periods, payoff activity has also been 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.

The decline in total interest income was also due to lower interest income earned on investment securities. While the average balance of investment securities decreased modestly in the second quarter 2013 as compared to the second quarter 2012, the average yield on investment securities declined 38 basis points, to 2.08% in the second quarter 2013 from 2.46% in the second


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quarter 2012. The lower yields on investment securities are primarily related to elevated prepayment activity on higher yielding mortgage-backed securities (MBS) and lower reinvestment rates in recent periods.

Interest expense and net interest margin continued to benefit from the impact of the Company's deposit pricing and rationalization strategies as the average balance of interest-bearing deposits declined $417.2 million or 9.9% and the cost of funds related to these deposits decreased 26 basis points to 35 basis points for the second quarter 2013 compared to 61 basis points for the comparable quarter in 2012. However, interest expense and net interest margin were also impacted by a $410.2 million increase in the average balance of short-term borrowings for the second quarter 2013 as compared with the comparable quarter in 2012. Short-term borrowings, which are utilized to manage the Company's normal liquidity needs, increased as a result of loan demand as well as deposit rationalization, banking center consolidation and investment portfolio strategies during 2012 and 2013.

For the six month period ended June 30, 2013, net interest income was $116.7 million, a decline of $14.8 million, from $131.5 million for the comparable period in 2012. Net interest income on a fully tax-equivalent basis for the period ended June 30, 2013, was $117.7 million as compared to $132.0 million for the comparable period in 2012. Similar to the quarterly year-over-year items discussed above, these declines were primarily related to lower covered loan balances, a reduced yield on the FDIC indemnification asset and declining yields on recent loan originations.

Net interest margin for the six month period ended June 30, 2013 declined 47 bps to 4.03% from 4.50% for the comparable period in 2012.

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


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CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

                                                           Quarterly Averages                                              Year-to Date Averages
                                    June 30, 2013            March 31, 2013             June 30, 2012             June 30, 2013             June 30, 2012
(Dollars in thousands)            Balance       Yield       Balance       Yield       Balance       Yield       Balance       Yield       Balance       Yield
Earning assets
Investments:
Investment securities          $ 1,705,219      2.08 %   $ 1,838,783      1.98 %   $ 1,713,503      2.46 %   $ 1,771,632      2.03 %   $ 1,689,073      2.53 %
Interest-bearing deposits
with other banks                    13,890      0.32 %         3,056      0.53 %         4,454      0.18 %         8,503      0.36 %        65,392      0.28 %
Gross loans (1)                  4,072,606      5.26 %     4,045,971      5.47 %     4,095,310      6.02 %     4,059,362      5.37 %     4,127,244      6.15 %
Total earning assets             5,791,715      4.32 %     5,887,810      4.37 %     5,813,267      4.96 %     5,839,497      4.35 %     5,881,709      5.04 %

Nonearning assets
Allowance for loan and lease
losses                             (92,033 )                 (95,512 )                 (98,317 )                 (93,763 )                 (99,491 )
Cash and due from banks            119,909                   111,599                   121,114                   115,777                   122,374
Accrued interest and other
assets                             491,011                   487,152                   498,909                   489,093                   502,360
Total assets                   $ 6,310,602               $ 6,391,049               $ 6,334,973               $ 6,350,604               $ 6,406,952

Interest-bearing liabilities
Deposits:
Interest-bearing demand        $ 1,141,767      0.09 %   $ 1,112,664      0.12 %   $ 1,192,868      0.11 %   $ 1,127,296      0.10 %   $ 1,239,032      0.12 %
Savings                          1,639,834      0.10 %     1,618,239      0.10 %     1,610,411      0.12 %     1,629,096      0.10 %     1,646,459      0.13 %
Time                             1,011,290      1.04 %     1,054,499      1.20 %     1,406,800      1.60 %     1,032,775      1.12 %     1,492,124      1.66 %
  Total interest-bearing
deposits                         3,792,891      0.35 %     3,785,402      0.41 %     4,210,079      0.61 %     3,789,167      0.38 %     4,377,615      0.65 %
Borrowed fund:
Short-term borrowings              569,929      0.21 %       660,587      0.20 %       159,681      0.09 %       615,008      0.21 %       122,786      0.08 %
Long-term debt                      74,129      3.54 %        74,740      3.55 %        75,314      3.59 %        74,433      3.54 %        75,667      3.61 %
  Total borrowed funds             644,058      0.60 %       735,327      0.54 %       234,995      1.22 %       689,441      0.57 %       198,453      1.43 %
Total interest-bearing
liabilities                      4,436,949      0.38 %     4,520,729      0.43 %     4,445,074      0.64 %     4,478,608      0.41 %     4,576,068      0.68 %

Noninterest-bearing
liabilities
Noninterest-bearing demand
deposits                         1,063,102                 1,049,943                 1,044,405                 1,056,559                   987,876
Other liabilities                  106,747                   111,515                   128,383                   109,118                   131,179
Shareholders' equity               703,804                   708,862                   717,111                   706,319                   711,829
Total liabilities and
shareholders' equity           $ 6,310,602               $ 6,391,049               $ 6,334,973               $ 6,350,604               $ 6,406,952

Net interest income            $    58,078               $    58,666               $    64,830               $   116,744               $   131,519

Net interest spread                             3.94 %                    3.94 %                    4.32 %                    3.94 %                    4.36 %
Contribution of
noninterest-bearing sources
of funds                                        0.08 %                    0.10 %                    0.17 %                    0.09 %                    0.14 %
Net interest margin (2)                         4.02 %                    4.04 %                    4.49 %                    4.03 %                    4.50 %

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

(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 table below:
                                                   Changes for the Three Months Ended June 30, 2013
                                       Linked Qtr. Income Variance                Comparable Qtr. Income Variance
(Dollars in thousands)              Rate           Volume         Total           Rate           Volume        Total
Earning assets
Investment securities          $      488        $    (589 )   $    (101 )   $    (1,602 )     $     (43 )   $ (1,645 )
Other earning assets                   (2 )              9             7               2               7            9
Gross loans (1)                    (2,027 )            933        (1,094 )        (7,668 )          (298 )     (7,966 )
Total earning assets               (1,541 )            353        (1,188 )        (9,268 )          (334 )     (9,602 )
Interest-bearing liabilities
Total interest-bearing
deposits                       $     (619 )      $      43     $    (576 )   $    (2,736 )     $    (361 )   $ (3,097 )
Borrowed funds
Short-term borrowings                  21              (45 )         (24 )            48             220          268
Federal Home Loan Bank
long-term debt                         (2 )              2             0             (11 )           (10 )        (21 )
Total borrowed funds                   19              (43 )         (24 )            37             210          247
Total interest-bearing
liabilities                          (600 )              0          (600 )        (2,699 )          (151 )     (2,850 )
Net interest income            $     (941 )      $     353     $    (588 )   $    (6,569 )     $    (183 )   $ (6,752 )

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

                                                        Changes for the Six Months Ended June 30, 2013
                                                                 Year-to-Date Income Variance
(Dollars in thousands)                                   Rate                Volume               Total
Earning assets
  Investment securities                           $        (4,170 )     $         830       $        (3,340 )
  Other earning assets                                         24                (100 )                 (76 )
  Gross loans (1)                                         (15,968 )            (1,806 )             (17,774 )
   Total earning assets                                   (20,114 )            (1,076 )             (21,190 )
Interest-bearing liabilities
  Total interest-bearing deposits                 $        (5,844 )     $      (1,109 )     $        (6,953 )
  Borrowed funds
   Short-term borrowings                                       78                 507                   585
   Federal Home Loan Bank long-term debt                      (25 )               (22 )                 (47 )
    Total borrowed funds                                       53                 485                   538
     Total interest-bearing liabilities                    (5,791 )              (624 )              (6,415 )
       Net interest income                        $       (14,323 )     $        (452 )     $       (14,775 )

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

NONINTEREST INCOME

Second quarter 2013 noninterest income was $11.6 million, a $21.9 million or 65.4% decrease from noninterest income of $33.5 million in the second quarter 2012. The decline in noninterest income from the comparable quarter in 2012 was due primarily to a $15.7 million decline in FDIC loss sharing income, a $1.8 million decline in accelerated discount on covered loans and a $5.1 million decline in other noninterest income. These declines were partially offset by a $0.6 million increase in bankcard income in the second quarter 2013 from the comparable quarter in 2012.

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 are referred to as FDIC loss sharing income and are recorded as noninterest income.


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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.

Lower FDIC loss sharing income during the second quarter 2013 was primarily the result of a decline in the Company's allowance for loan and lease losses on covered loans during the period reflecting lower estimated impairment on covered loans and lower loss reimbursements expected to be received from the FDIC as a result.

Accelerated discount is recognized when covered 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. Lower income from the accelerated discount on covered loans during the second quarter 2013 was related to declines in both the volume and size of covered loans prepaying during the period as well as declines in the size of the remaining discounts on these loans at the time of prepayment.

The decrease in other noninterest income was primarily related to a $5.0 million litigation settlement received by the Bank in the second quarter 2012.

Noninterest income for the six months ended June 30, 2013 was $38.3 million, a $27.2 million or 41.5% decrease from noninterest income of $65.5 million for the six months ended June 30, 2012. The decline in noninterest income from the comparable period in 2012 was due primarily to a $19.5 million decline in FDIC loss sharing income, a $3.5 million decline in accelerated discount on covered loans and a $5.9 million decline in other noninterest income primarily related to the previously mentioned $5.0 million litigation settlement received in the second quarter of 2012. These declines were partially offset by $1.7 million of gains on sales of investment securities during 2013.

NONINTEREST EXPENSE

Second quarter 2013 noninterest expense was $53.3 million compared with $57.5 million in the second quarter of 2012. The $4.2 million or 7.3% decrease from the comparable quarter in 2012 was primarily attributable to a $2.8 million decline in salaries and benefits expense, a $3.5 million decline in losses recorded on both covered and uncovered OREO, a $0.4 million decline in professional services expense, a $1.5 million decline in loss sharing expenses and a $0.7 million decline in other noninterest expense. These declines were partially offset by increases of $0.4 million in net occupancy expenses, $0.5 million in data processing expenses and $4.3 million of pension settlement charges.

The decline in salaries and benefits expenses was primarily attributable to staffing reductions and branch consolidations throughout 2012 and into 2013. The Company recognized net gains on covered OREO of $2.2 million during the quarter, which were partially offset by losses on uncovered OREO of $0.2 million during the quarter. Gains or losses on OREO are generally the result of declines in the estimated fair value of, and gains or losses on final disposition of, OREO properties during the period. Loss sharing expense represents costs incurred to resolve problem covered assets, including legal fees, appraisal costs and delinquent taxes. The decrease in loss sharing expense relates to a decline in collection costs incurred on covered assets. Losses on covered OREO and loss sharing expenses are partially reimbursed by the FDIC.

First Financial views the combination of provision expense on covered loans, gains or losses on covered OREO and loss sharing expense, net of the related reimbursements due under loss sharing agreements recorded as FDIC loss sharing income, as the total net credit costs associated with covered assets during the period. For additional discussion of the credit costs associated with covered assets, see "Allowance for loan and lease losses - covered loans."

The decline in other noninterest expenses was primarily due to $0.5 million of accelerated amortization expense recognized in the second quarter 2012 related to intangible assets associated with the disposal of certain acquired branches.

Higher net occupancy expenses during the second quarter of 2013 were primarily attributable to $0.3 million of additional costs associated with facilities that the Company began utilizing during 2012. The increase in data processing expense was due to software and system implementations, including new internet and mobile banking platforms introduced in late 2012.

During the second quarter 2013, First Financial recognized $4.3 million of pension settlement charges as a result of the year to date level of lump sum distributions from the Company's pension plan. Consistent with FASB ASC Topic 715, Compensation - Retirement Benefits, pension settlement charges are an acceleration of previously deferred costs that would have been recognized in future periods and are triggered when lump sum distributions exceed an annual accounting threshold for the plan. First Financial incurred these pension settlement charges as a result of employee-related actions, including staff retirements as


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well as recent efficiency initiatives, and the resulting lump sum distributions from the plan. As First Financial has exceeded the annual accounting threshold for lump sum distributions, the Company will recognize a proportionate share of any further lump sum distributions from its pension plan as additional pension settlement charges through the remainder of 2013. The accounting threshold for lump sum distributions will reset at the beginning of 2014.

During the third quarter 2012, First Financial completed a comprehensive efficiency study across all business lines and support functions. As a result, the Company identified approximately $17.1 million of annualized cost savings impacting several expense categories. In the second quarter 2013, the Company incurred certain pre-tax expenses resulting from its efficiency initiative and other staffing-related changes of $1.5 million. Approximately $0.5 million was related to employee benefit expenses associated with staffing reductions and $1.0 million was related to real estate expenses associated with previously announced banking center consolidation and closure plans. Realization of the identified cost savings began during the fourth quarter 2012, and the Company recognized annualized net savings of approximately $15.0 million through the end . . .

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