Earnings from continuing operations were $12,119,000 or 31 cents per diluted share and $7,819,000 or 18 cents per diluted share for the third quarter of 2006 and 2005, respectively. Year-to-date earnings from continuing operations were $20,444,000 and $27,974,000 for 2006 and 2005, respectively.
Summary of Key Drivers:
Net interest margin fell to 3.93 percent in the third quarter due largely to deposit account migration and a 7 basis point temporary effect of a large public fund deposit account. First Financial is lowering the 2006 margin estimate to between 3.95 percent and 4.00 percent for the full year. The 2007 margin forecast is within a larger range of 3.90 percent to 4.05 percent, dependent largely on the continuation of the asset mix shift and a tapering off of the deposit account migration and planned pricing changes. Earning asset levels in 2007 are expected to grow modestly as the counterbalancing effects of commercial loan growth and retail mortgage and indirect consumer loan runoff continue. Deposit account growth in 2007 is expected to occur with the introduction of new, competitive commercial deposit products.
Noninterest income, excluding the effects of the branch and loan sale gains, remains relatively stable with strong service charge income growth due largely to the continued benefits of the overdraft protection program introduced in 2005. The expectation for 2007 growth is commensurate with both market value growth expectations for assets under management in the Wealth Resources Group and deposit account growth.
Noninterest expense remains affected by the transition costs associated with the Strategic Plan execution. Management expects that 2007 expense levels will be more in line with peers with an anticipated efficiency ratio of between 60 and 65 percent, but is committed to the long-term goal of 55 to 60 percent.
Credit quality declined in the third quarter as measured by the nonperforming asset levels due to the addition of eight commercial and commercial real estate credits. However, annualized net charge-offs and delinquencies decreased. Management believes that the increase in nonperforming assets is not indicative of a portfolio-wide degradation of credit quality, but rather slowness in actively managing smaller credits in the nonperforming portfolio to a resolution. Management raised the level of reserves to 1.27 percent from 1.15 percent to accommodate the increase in nonperforming assets. Charge-offs were at an institutional low of 17 basis points.
Capital management efforts through share repurchase were resumed in the third quarter with the repurchase of 152,000 shares. First Financial expects to repurchase between 600,000 and 1,100,000 shares by the end of 2007.
Unless otherwise noted, all amounts discussed are pre-tax except income or loss from continuing operations, net income, and per-share data which is presented after-tax.
Due to the sale of the Fidelity Federal Savings Bank subsidiary in the third quarter of 2005, there was no 2006 activity from discontinued operations. In the third quarter of 2005, the earnings from discontinued operations were $6,665,000 or 15 cents per diluted share. Year-to-date 2005 earnings from discontinued operations were $7,125,000 or 17 cents per diluted share.
Return on average assets for the third quarter of 2006 was 1.40 percent compared to 1.50 percent for the same period in 2005. Return on average shareholders' equity was 16.09 percent for the third quarter of 2006, versus 15.64 percent for the comparable period in 2005. Year-to-date return on average assets was 0.79 percent for 2006, compared to 1.22 percent for 2005, while return on equity was 9.18 percent for 2006 versus 12.71 percent for 2005.
(The preceding overview of First Financial Bancorp's earnings is supplemented with the following detail:)
Strategic Plan Review & Update: Branch Plan
The sale of 10 branches and closure of 7 offices was completed in August of 2006. The sale of the 10 offices was completed in three separate transactions. Total net gains on sale were approximately $12.5 million or 20 cents per share. Total deposits of $109 million were assumed and total loans of $101 million were sold. The estimated proforma financial impact of the branch sales and closures, excluding the gain on sales, remains earnings neutral.
A summary of the linked-quarter balance sheet excluding the effects of the branch sales follows:
2Q06 As Branch 3Q 3Q06 As % Reported Sale Activity Reported Change * Loans (end of period): Commercial $646,662 $(11,501) $28,361 $663,522 4.47% Real estate - construction 95,603 (7,460) 4,291 92,434 4.87% Real estate - commercial 640,869 (18,476) 3,142 625,535 0.50% Real estate - retail 721,383 (54,169) (13,562) 653,652 -2.03% Installment 251,463 (9,540) (22,246) 219,677 -9.20% Home equity 226,974 (268) 5,035 231,741 2.22% Credit card 22,563 - 520 23,083 2.30% Lease financing 1,396 - (194) 1,202 -13.90% Total loans $2,606,913 $(101,414) $5,347 $2,510,846 0.21% 2Q06 % Change Average less 3Q06 over Adjusted Branch Sales Activity 2Q06 Deposits (average balances): Interest-bearing $153,607 $67,121 43.70% Savings 1,041,417 (28,333) -2.72% Time 1,190,988 16,535 1.39% Total interest-bearing deposits 2,386,012 55,323 2.32% Noninterest-bearing 406,613 (15,344) -3.77% Total deposits $2,792,625 $39,979 1.43% * % Change calculated as 3Q Activity divided by 2Q06 As Reported excluding the Branch Sale.
First Financial will continue to concentrate future growth plans and capital investments in larger metropolitan markets. Smaller markets have historically provided stable, low-cost funding sources to First Financial and are an important part of its funding plan. First Financial's historical strength in a number of these markets should enable it to retain market share.
First Financial's branch strategy is to serve a combination of metropolitan and non-metropolitan markets in Indiana, Ohio, and Kentucky. In addition to geographic fit, each market must have growth potential and the ability to meet profit targets.
Following the completion of the branch plan, First Financial has 87 offices serving 9 distinct markets with an average branch size of approximately $33 million. The operating model for growth includes market presidents managing distinct markets with the authority to make decisions at the point of client contact.
Information Technology Update
First Financial will be converting to the Jack Henry banking system in October of 2006. It is expected that the new operating platform will enhance First Financial's capability to deliver client services in a better, faster, and more efficient manner.
This decision is consistent with the strategic plan and is an integral component of First Financial's comprehensive review of the use of technology. This review includes analysis of our data and voice telecommunication usage, on-line and ATM services, and other ancillary services. Expected savings as a result of this comprehensive review remain between $3 million and $4 million per year and should be fully recognized in 2007. Costs associated with this conversion will include the early termination of some existing contracts. To date, $2.6 million in early termination penalties and other one-time charges have been recorded.
Summary of Changes
The prior period estimates of the combined improvements of the strategic initiatives remain between $13.4 million and $16.9 million or 21 cents and 27 cents per share on an annualized basis. The full effect of these changes should be recognized in 2007. Management continues to review all areas for both revenue enhancement and cost savings and remains committed to achieving a 55 to 60 percent efficiency ratio in the long-term.
Current Period Operating Results Net Interest Income:
Net interest income for the third quarter of 2006 was $30.8 million compared to $33.1 million in the third quarter of 2005, a decrease of $2.3 million or 7.00 percent. This decrease is due primarily to a planned reduction in earning assets through loan sales, exit of the indirect line of business, and the strategic decision to sell conforming mortgage loan production in the secondary market; compounded by the increase in deposit costs. Net interest income on a linked-quarter basis (third quarter of 2006 compared to second quarter of 2006) decreased $1.1 million or 3.52 percent. Net interest income on a year-to-date basis declined $6.1 million or 6.00 percent, which is primarily due to the continued effects of increased rates on deposits and account migration to higher yielding products.
First Financial's net interest margin increased to 3.93 percent in the third quarter of 2006 from 3.83 percent in the third quarter of 2005. Linked- quarter net interest margin decreased 18 basis points from 4.11 percent to 3.93 percent due to the combined effects of:
June 30, 2006 4.11 % Branch sale impact -0.07 % CD portfolio repricing -0.12 % Loan mix shift 0.03 % Impact of an increased public fund deposit -0.07 % Commercial loan volume increase 0.03 % Other 0.02 % September 30, 2006 3.93 %
On a year-to-date basis, net interest margin increased 11 basis points from 3.92 percent in 2005, to 4.03 percent. The primary risk to our margin remains unanticipated consumer and competitor behavior in deposit products, specifically the consumer preference for higher-yielding money market accounts rather than more traditional transaction accounts, and the aggressiveness in market pricing for both transaction and certificate of deposit accounts. First Financial is reducing the full year 2006 margin estimate to between 3.95 percent and 4.00 percent from a previous estimate of between 4.05 percent and 4.10 percent. This is due largely to the effect of a product mix shift in the consumer deposit portfolio.
On a tax-equivalent basis, the third quarter 2006, net interest margin was 4.01 percent compared to a linked-quarter 4.20 percent and a third quarter 2005, tax-equivalent margin of 3.92 percent. Year-to-date tax equivalent net interest margin was 4.11 percent compared to 4.01 percent in 2005.
Average loans, net of unearned income, for the third quarter of 2006 decreased $237 million or 8.50 percent from the comparable period a year ago. On a linked-quarter basis, average outstanding loan balances decreased $67 million or 2.58 percent. On a year-to-date basis, average outstanding loan balances decreased $203 million or 7.29 percent. The decrease in the loan portfolio from 2005 was affected by the sale of $42 million in indirect marine and recreational vehicle loans at the end of the third quarter of 2005, the sale in the fourth quarter of 2005 of approximately $64 million in retail mortgage loans that no longer fit the risk profile of the company, as well as the sale in the third quarter of 2006 of $38 million in problem loan credits. Furthermore, indirect installment originations ceased in the third quarter of 2005, resulting in approximately $18 million in quarterly runoff of this portfolio. Since the end of the second quarter of 2005, the indirect loan portfolio has decreased approximately $135 million. Additionally, First Financial has made the strategic decision to sell most of the mortgage loan production into the secondary market instead of keeping the loans in its portfolio. In total, First Financial has sold more than $245 million in total loans since announcing the Strategic Plan in 2005.
Securities available for sale were $329.2 million at September 30, 2006, compared to $554.7 million at December 31, 2005. The combined investment portfolio was 11.23 percent and 16.47 percent of total assets at September 30, 2006, and December 31, 2005, respectively. In February of 2006, First Financial sold $179 million in investment securities and paid down $184 million in Federal Home Loan Bank borrowings. Reliance on wholesale borrowings has been greatly reduced as a result of the restructuring and is likely to continue for the next several quarters as the bank continues to use excess liquidity to fund future growth.
Noninterest Income: Third Quarter 2006 vs. Third Quarter 2005
Third quarter 2006 noninterest income was $30.4 million, an increase of $16.4 million or 117.21 percent from the third quarter of 2005. Third quarter 2006 noninterest income included $12.5 million from the gain on the sale of the branches and $2.2 million from the gain on the problem loan sale. The third quarter of 2005 included a $1.6 million loss associated with the sale of $42 million in indirect loans. Excluding these items, noninterest income remained flat, increasing $26,000 or 0.17 percent, from the third quarter of 2005. First Financial had quarterly increases in service charges on deposit accounts of $728,000 which included the positive effects of its new overdraft program. Bankcard interchange income increased $123,000 due to both increased debit card issuance and usage, while bank-owned life insurance income decreased $155,000, trust fees decreased $218,000, and MSR impairment recapture decreased $255,000.
Third Quarter 2006 vs. Second Quarter 2006
On a linked-quarter basis, total noninterest income increased $14.6 million. This increase was due to the branch and loan sale gains discussed previously. Excluding these, noninterest income would have decreased $157,000. This decrease was primarily due to a $354,000 decrease in bank- owned life insurance income offset by a $241,000 increase in service charges on deposit accounts related to increases in nonsufficient funds charges.
Year-to-date 2006 vs. Year-to-date 2005
Year-to-date noninterest income increased $17.1 million or 39.06 percent from the comparable period in 2005. Excluding previously discussed gains in 2006 and loss in 2005, noninterest income would have increased $747,000 or 1.64 percent. This increase is primarily due to increases in service charges on deposit accounts of $2.5 million and an increase of $493,000 in miscellaneous collection fees offset by an $865,000 decrease in MSR impairment recapture, a $476,000 loss on investment securities sold, a $343,000 decrease in bank-owned life insurance income, a $256,000 decrease in trust fees, and a $246,000 decrease in investment advisory fees.
Noninterest Expense: Third Quarter 2006 vs. Third Quarter 2005
Total noninterest expense increased $4.6 million or 13.25 percent for the third quarter of 2006 from the third quarter of 2005. This increase was primarily due to the following items:
- increases in salaries and benefits of $615,000 due to an increase in severance-related salaries and benefits expense of $503,000 and an increase in production bonuses of $247,000 - $337,000 in occupancy expense primarily due to maintenance costs - $1.3 million in data processing expenses primarily related to early termination fees of $500,000 and acceleration of fees of $300,000 for the conversion of various systems as well as $171,000 in software license amortization - $810,000 in professional services primarily due to charges associated with the upcoming voice and data telecommunication improvements and with recruiting fees - $603,000 in marketing expense primarily associated with the new branding initiative - $1.3 million in other noninterest expense. The increase in other noninterest expense consists of increases in various accounts, including $511,000 in losses on fixed assets associated with the branch sale and the disposal of personal computers associated with the technology upgrade, $181,000 in credit card and merchant interchange expense that was more than offset by the increase in interchange income and merchant discount, and approximately $522,000 in conversion-related travel and supplies - equipment expense decrease of $397,000 due primarily to a decrease in equipment expense rent of $108,000 and service contracts of $156,000 that are not expected to continue Third Quarter 2006 vs. Second Quarter 2006
On a linked-quarter basis, noninterest expense was $1.4 million less than the second quarter. This decrease was due to the following items:
- decreases in salaries and employee benefits of $3.1 million due to decreased severance of $1.9 million, decreased salaries in period payroll of approximately $185,000, decreased healthcare of $395,000, and decreased retirement-related expense of $558,000 - decreases in data processing of $335,000 due to early termination fees paid in the second quarter offset by early termination fees paid in the third quarter - increases in marketing of $491,000 primarily due to the branding initiative discussed earlier - increases in professional services of $606,000 primarily due to the data and voice telecommunication upgrade discussed previously Year-to-date 2006 vs. Year-to-date 2005
Year-to-date noninterest expense increased $19.2 million. Excluding the effects of the $4.3 million prepayment penalty recorded in the first quarter of 2006, noninterest expense would have increased $14.9 million due to the following items:
- increases in salaries and employee benefits of $5.9 million due to severance charges of $3.5 million, retirement-related expense of $1.0 million, production bonuses of $658,000, and healthcare of $257,000 - increases in occupancy expense of $1.3 million due to increased maintenance costs, utilities, and new building rent consistent with First Financial's growth plans - increases in data processing of $3.3 million primarily due to early termination fees and acceleration of fees discussed previously - increases in professional services of $873,000 primarily due to the data and voice telecommunication upgrade discussed previously as well as consulting associated with a branch staffing model - increases in other noninterest expense of $3.9 million are due to increases in various accounts, including $799,000 in travel-related expenses, $706,000 in state intangible tax, and $589,000 in credit and collection expense
First Financial anticipates additional restructuring-related expenses in the fourth quarter primarily in data processing, professional services, and severance charges. These amounts will be disclosed when quantified and recognized in the period in which they are incurred.
Income Taxes:
Income tax expense related to operating income was $6.9 million and $3.3 million for the three months ended September 30, 2006 and 2005, respectively. Tax expense related to discontinued operations was $3.6 million for the three months ended September 30, 2005. Income tax expense related to operating income for the first nine months of 2006 was $10.9 million versus $12.9 million in 2005. Tax expense related to discontinued operations was $3.8 million for the nine months ended September 30, 2005.
First Financial's overall effective tax rate for the third quarter of 2006 was 36.32 percent compared to 31.98 percent for the same period in 2005. The effective tax rate for income from continuing operations was 29.36 percent and for income from discontinued operations was 34.82 percent for the third quarter of 2005. The overall effective tax rate for the first nine months of 2006 and 2005 was 34.69 percent and 32.28 percent, respectively. Effective tax rates for income from continuing operations was 31.57 percent and for income from discontinued operations was 34.93 percent for the nine months ended September 30, 2005. The 2006 increase in the effective rate is primarily due to the third quarter recognition of $1,032 in income tax expense as a result of an Internal Revenue Service audit of two prior year tax returns. The effect of this tax adjustment was approximately 3 cents per share and is not expected to recur.
Credit Quality:
First Financial completed the final phase of its previously announced sale of 193 problem credits as part of its strategy to reduce overall credit risk in the loan portfolio. The sale involved $38.1 million in primarily substandard commercial, commercial real estate, and retail real estate loans that were transferred to loans held for sale at the lower of cost or estimated fair value of $28.3 million. The loans were purchased by five independent parties for a combined price of $31.2 million. The gain associated with the problem loan sale previously announced was $2.2 million or approximately 4 cents per share resulting from a sale price in excess of the estimated value reported in the second quarter. The ongoing annual impact of the loan sale is estimated to be a reduction of net interest income of $181,000 due to the reduction of certain earning assets and the redeployment of the nonaccrual loans that were nonearning assets.
Net charge-offs of $1.1 million for the third quarter of 2006 were $1.7 million less than the $2.8 million reported as net charge-offs for the third quarter of 2005. Year-to-date net charge-offs, excluding the effect of the loan sale write-down recorded in the second quarter of 2006, were $6.2 million in 2006, up $645,000 from $5.6 million recorded in 2005. Including the write- down, net charge-offs were up $9.0 million.
Total underperforming assets, which includes nonaccrual loans, restructured loans, other real estate owned, and loans 90 days or more past due and still accruing, decreased $6.8 million to $22.9 million at the end of the third quarter of 2006 from $29.7 million at the end of the third quarter of 2005. The decrease in underperforming assets was due to a decrease in nonaccrual loans of $5.9 million primarily attributable to the impact of the loan sale. A large percentage of the underperforming loans are secured by real estate. On a linked-quarter basis, total underperforming assets decreased $7.0 million of which nonaccrual loans decreased $5.3 million primarily attributable to the impact of the loan sale. Excluding loans held for sale, total underperforming assets on a linked-quarter basis increased $7.1 million. The increase in underperforming assets on a linked-quarter basis is due to an increase in nonaccrual loans of $6.5 million primarily attributable to eight commercial and commercial real estate loan client relationships totaling $4.1 million. First Financial is actively focused on the nonaccrual loans remaining in the portfolio subsequent to the loan sale. Despite the increase in the nonaccrual loans on a linked-quarter basis, First Financial does not believe that this is indicative of an overall degradation in the credit quality of the portfolio. These credits have been appropriately considered in establishing the allowance for loan losses at September 30, 2006.
Nonperforming assets to ending loans decreased to 0.88 percent as of September 30, 2006, from 1.02 percent as of the end of the third quarter of 2005 and decreased from 1.10 percent on the linked-quarter. Excluding loans held for sale in the third quarter, the nonperforming assets to ending loans ratio as of June 30, 2006, was 0.58 percent.
The provision for loan losses for the third quarter of 2006 was $2,888,000 compared to $1,351,000 for the same period in 2005. The provision is a result of management's quarterly analysis of the adequacy of the allowance for loan losses. The allowance to ending loans ratio as of September 30, 2006, was 1.27 percent versus 1.54 percent for the same quarter a year ago and 1.15 percent as of June 30, 2006. It is management's belief that the allowance for loan losses of $31.9 million is adequate to absorb probable credit losses inherent in the portfolio, and the changes in the allowance and the resultant provision are consistent with the internal assessment of the risk in the loan portfolios.
Earnings Conference Call and Webcast
Anyone who wishes to hear a replay of the event by telephone may dial 1-877-660-6853, account number 286, conference ID number 216645 between 5:00 p.m. EDT on October 27, 2006, and 5:00 p.m. EST on November 3, 2006.
First Financial plans to file the SEC Form 10-Q on Tuesday, October 31, 2006.
FIRST FINANCIAL BANCORP. CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except per share) (Unaudited) Sep. 30, June 30, March 31, Dec. 31, Sep. 30, 2006 2006 2006 2005 2005 EARNINGS Net interest income $30,823 $31,947 $32,199 $31,939 $33,143 Earnings from continuing operations 12,119 4,358 3,967 2,834 7,819 Earnings from discontinued operations 0 0 0 0 6,665 Net earnings 12,119 4,358 3,967 2,834 14,484 Earnings per share from continuing operations - basic $0.31 $0.11 $0.10 $0.07 $0.18 Earnings per share from continuing operations - diluted $0.31 $0.11 $0.10 $0.07 $0.18 Earnings per share from discontinued operations - basic $0.00 $0.00 $0.00 $0.00 $0.15 Earnings per share from discontinued operations - diluted $0.00 $0.00 $0.00 $0.00 $0.15 Net earnings per share - basic $0.31 $0.11 $0.10 $0.07 $0.33 Net earnings per share - diluted $0.31 $0.11 $0.10 $0.07 $0.33 KEY RATIOS Return on average assets 1.40% 0.51% 0.45% 0.30% 1.50% Return on average shareholders' equity 16.09% 5.90% 5.39% 3.20% 15.64% Return on average tangible shareholders' equity 18.20% 6.70% 6.12% 3.57% 17.32% Average shareholders' equity to average assets 8.72% 8.64% 8.42% 9.44% 9.60% Net interest margin 3.93% 4.11% 4.04% 3.72% 3.83% Net interest margin (fully tax equivalent) (1) 4.01% 4.20% 4.12% 3.80% 3.92% COMMON STOCK DATA Average basic shares outstanding 39,612,408 39,605,631 39,560,109 42,069,965 43,166,270 Average diluted shares outstanding 39,619,786 39,619,729 39,612,496 42,180,824 43,262,371 Ending shares outstanding 39,507,716 39,660,341 39,562,350 39,563,480 42,978,981 Market price: High 16.04 $16.68 $18.32 $19.30 $19.80 Low 14.20 $14.63 $15.88 $17.51 $16.99 Close 15.91 $14.91 $16.64 $17.52 $18.61 Book value $7.58 $7.37 $7.50 $7.58 $8.59 Common dividend declared $0.16 $0.16 $0.16 $0.16 $0.16 AVERAGE BALANCE SHEET ITEMS Loans less unearned income (4) $2,580,005 $2,614,598 $2,596,755 $2,657,156 $2,783,315 Investment securities 370,095 380,532 497,528 620,868 625,418 Other earning assets 158,940 122,413 141,513 127,701 20,938 Total earning assets 3,109,040 3,117,543 3,235,796 3,405,725 3,429,671 Total assets 3,426,417 3,428,839 3,545,412 3,719,197 3,827,395 Noninterest- bearing deposits 401,685 424,227 417,061 433,228 428,881 Interest- bearing deposits 2,492,898 2,477,026 2,486,336 2,488,062 2,473,697 Total deposits 2,894,583 2,901,253 2,903,397 2,921,290 2,902,578 Borrowings 200,856 202,792 313,743 418,388 446,939 Shareholders' equity 298,909 296,087 298,578 350,934 367,472 CREDIT QUALITY Ending allowance for loan losses 31,888 $30,085 $40,656 $42,485 $42,036 Nonperforming assets: Nonaccrual (2) 18,692 12,202 26,838 24,961 24,563 Restructured (2) 603 610 3,293 3,408 808 OREO 2,859 2,277 2,675 3,162 2,595 Total nonperforming assets (2) 22,154 15,089 32,806 31,531 27,966 Loans delinquent over 90 days (2) 788 758 1,104 1,359 1,779 Gross charge-offs: Commercial (1,238) (3,521) (1,516) (1,066) (1,839) Commercial real estate (119) (5,818) (276) (449) (94) Retail real estate (111) (1,910) (202) (220) (121) All other (689) (762) (1,271) (1,583) (1,279) Total gross charge-offs (3) (2,157) (12,011) (3,265) (3,318) (3,333) Recoveries: Commercial 458 476 188 212 205 Commercial real estate 129 57 50 4 4 Retail real estate 130 78 10 141 24 All other 355 469 436 395 279 Total recoveries 1,072 1,080 684 752 512 Total net charge-offs (1,085) (10,931) (2,581) (2,566) (2,821) CREDIT QUALITY RATIOS Allowance to ending loans, net of unearned income 1.27% 1.15% 1.56% 1.62% 1.54% Nonperforming assets to ending loans, net of unearned income plus OREO (2) 0.88% 0.58% 1.25% 1.20% 1.02% 90 days past due to loans, net of unearned income (2) 0.03% 0.03% 0.04% 0.05% 0.07% Net charge-offs to average loans, net of unearned income (3) 0.17% 1.68% 0.40% 0.38% 0.40% Nine months ended Sep. 30, 2006 2005 EARNINGS Net interest income $94,969 $101,028 Earnings from continuing operations 20,444 27,974 Earnings from discontinued operations 0 7,125 Net earnings 20,444 35,099 Earnings per share from continuing operations - basic $0.52 $0.64 Earnings per share from continuing operations - diluted $0.52 $0.64 Earnings per share from discontinued operations - basic $0.00 $0.17 Earnings per share from discontinued operations - diluted $0.00 $0.17 Net earnings per share - basic $0.52 $0.81 Net earnings per share - diluted $0.52 $0.81 KEY RATIOS Return on average assets 0.79% 1.22% Return on average shareholders' equity 9.18% 12.71% Return on average tangible shareholders' equity 10.39% 14.07% Average shareholders' equity to average assets 8.59% 9.61% Net interest margin 4.03% 3.92% Net interest margin (fully tax equivalent) (1) 4.11% 4.01% COMMON STOCK DATA Average basic shares outstanding 39,592,908 43,422,516 Average diluted shares outstanding 39,623,911 43,503,393 Ending shares outstanding 39,507,716 42,978,981 Market price: High $18.32 $19.80 Low $14.20 $16.65 Close $15.91 $18.61 Book value $7.58 $8.59 Common dividend declared $0.48 $0.48 AVERAGE BALANCE SHEET ITEMS Loans less unearned income (4) $2,597,057 $2,789,031 Investment securities 415,585 638,729 Other earning assets 141,019 18,766 Total earning assets 3,153,661 3,446,526 Total assets 3,466,453 3,842,235 Noninterest-bearing deposits 414,268 429,221 Interest-bearing deposits 2,485,444 2,472,673 Total deposits 2,899,712 2,901,894 Borrowings 238,717 452,063 Shareholders' equity 297,859 369,247 CREDIT QUALITY Ending allowance for loan losses $31,888 $42,036 Nonperforming assets: Nonaccrual (2) 18,692 24,563 Restructured (2) 603 808 OREO 2,859 2,595 Total nonperforming assets (2) 22,154 27,966 Loans delinquent over 90 days (2) 788 1,779 Gross charge-offs: Commercial (6,275) (3,611) Commercial real estate (6,213) (301) Retail real estate (2,223) (676) All other (2,722) (3,684) Total gross charge-offs (3) (17,433) (8,272) Recoveries: Commercial 1,122 936 Commercial real estate 236 17 Retail real estate 218 96 All other 1,260 1,627 Total recoveries 2,836 2,676 Total net charge-offs (14,597) (5,596) CREDIT QUALITY RATIOS Allowance to ending loans, net of unearned income 1.27% 1.54% Nonperforming assets to ending loans, net of unearned income plus OREO (2) 0.88% 1.02% 90 days past due to loans, net of unearned income (2) 0.03% 0.07% Net charge-offs to average loans, net of unearned income (3) 0.75% 0.27% (1) The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate. 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 investors by allowing them to make peer comparisons. Management also uses these measures to make peer comparisons. (2) June 30, 2006 amounts and ratios exclude loans held for sale. (3) June 30, 2006 charge-offs include $8,356 in loans held for sale write-downs to the lower of cost or estimated fair market value. (4) Includes loans held for sale FIRST FINANCIAL BANCORP. CONSOLIDATED STATEMENTS OF EARNINGS (Dollars in thousands) (Unaudited) Three months ended, Sep. 30, June 30, March 31, Dec. 31, Sep. 30, 2006 2006 2006 2005 2005 Interest income Loans, including fees $45,484 $44,386 $42,857 $42,766 $44,122 Investment securities Taxable 3,728 3,798 5,141 5,481 5,219 Tax-exempt 996 1,057 1,104 1,173 1,221 Total investment securities interest 4,724 4,855 6,245 6,654 6,440 Interest-bearing deposits with other banks 0 0 0 0 0 Federal funds sold and securities purchased under agreements to resell 2,116 1,500 1,582 1,297 178 Total interest income 52,324 50,741 50,684 50,717 50,740 Interest expense Deposits 19,176 16,554 14,933 14,015 12,779 Short-term borrowings 953 892 896 473 520 Long-term borrowings 686 709 2,058 3,720 3,769 Subordinated debentures and capital securities 686 639 598 570 529 Total interest expense 21,501 18,794 18,485 18,778 17,597 Net interest income 30,823 31,947 32,199 31,939 33,143 Provision for loan losses 2,888 360 752 3,015 1,351 Net interest income after provision for loan losses 27,935 31,587 31,447 28,924 31,792 Noninterest income Service charges on deposit accounts 5,672 5,431 5,089 5,257 4,944 Trust revenues 3,756 3,882 4,053 4,041 3,974 Bankcard interchange income 1,700 1,745 1,648 1,621 1,577 Investment advisory fees 711 801 846 976 936 Gains (losses) from sales of loans 2,468 259 245 1,239 (1,280) Gain on sale of branches 12,545 0 0 0 0 (Losses) gains on sales of investment securities 0 0 (476) (6,519) 6 Other 3,577 3,723 3,349 2,764 3,852 Total noninterest income 30,429 15,841 14,754 9,379 14,009 Noninterest expenses Salaries and employee benefits 19,968 23,110 20,217 20,270 19,353 Net occupancy 2,802 2,698 2,839 2,555 2,465 Furniture and equipment 1,297 1,334 1,480 1,297 1,694 Data processing 3,058 3,393 1,944 1,785 1,776 Marketing 1,138 647 683 704 535 Communication 821 642 667 831 758 Professional services 2,275 1,669 1,307 2,088 1,465 Amortization of intangibles 220 224 217 220 220 Debt extinguishment 0 0 4,295 0 0 Other 7,755 6,979 7,011 6,009 6,466 Total noninterest expenses 39,334 40,696 40,660 35,759 34,732 Earnings from continuing operations before income taxes 19,030 6,732 5,541 2,544 11,069 Income tax expense (benefit) 6,911 2,374 1,574 (290) 3,250 Earnings from continuing operations 12,119 4,358 3,967 2,834 7,819 Discontinued operations Other operating (loss) income 0 0 0 0 (140) Gain on discontinued operations 0 0 0 0 10,366 Earnings from discontinued operations before income taxes 0 0 0 0 10,226 Income tax expense 0 0 0 0 3,561 Earnings from discontinued operations 0 0 0 0 6,665 Net earnings $12,119 $4,358 $3,967 $2,834 $14,484 ADDITIONAL DATA -- FULLY TAX EQUIVALENT NET INTEREST INCOME* Interest income $52,324 $50,741 $50,684 $50,717 $50,740 Tax equivalent adjustment 586 696 661 723 746 Interest income - tax equivalent 52,910 51,437 51,345 51,440 51,486 Interest expense 21,501 18,794 18,485 18,778 17,597 Net interest income - tax equivalent $31,409 $32,643 $32,860 $32,662 $33,889 Nine months ended, Sep. 30, 2006 2005 Interest income Loans, including fees $132,727 $129,870 Investment securities Taxable 12,667 16,016 Tax-exempt 3,157 3,690 Total investment securities interest 15,824 19,706 Interest-bearing deposits with other banks 0 1 Federal funds sold and securities purchased under agreements to resell 5,198 403 Total interest income 153,749 149,980 Interest expense Deposits 50,663 34,639 Short-term borrowings 2,741 1,488 Long-term borrowings 3,453 11,358 Subordinated debentures and capital securities 1,923 1,467 Total interest expense 58,780 48,952 Net interest income 94,969 101,028 Provision for loan losses 4,000 2,556 Net interest income after provision for loan losses 90,969 98,472 Noninterest income Service charges on deposit accounts 16,192 13,719 Trust revenues 11,691 11,947 Bankcard interchange income 5,093 4,565 Investment advisory fees 2,358 2,604 Gains (losses) from sales of loans 2,972 (336) Gain on sale of branches 12,545 0 (Losses) gains on sales of investment securities (476) 0 Other 10,649 11,384 Total noninterest income 61,024 43,883 Noninterest expenses Salaries and employee benefits 63,295 57,420 Net occupancy 8,339 7,055 Furniture and equipment 4,111 4,979 Data processing 8,395 5,082 Marketing 2,468 1,760 Communication 2,130 2,254 Professional services 5,251 4,378 Amortization of intangibles 661 660 Debt extinguishment 4,295 0 Other 21,745 17,889 Total noninterest expenses 120,690 101,477 Earnings from continuing operations before income taxes 31,303 40,878 Income tax expense (benefit) 10,859 12,904 Earnings from continuing operations 20,444 27,974 Discontinued operations Other operating (loss) income 0 583 Gain on discontinued operations 0 10,366 Earnings from discontinued operations before income taxes 0 10,949 Income tax expense . 0 3,824 Earnings from discontinued operations 0 7,125 Net earnings $20,444 $35,099 ADDITIONAL DATA -- FULLY TAX EQUIVALENT NET INTEREST INCOME* Interest income $153,749 $149,980 Tax equivalent adjustment 1,943 2,260 Interest income - tax equivalent 155,692 152,240 Interest expense 58,780 48,952 Net interest income - tax equivalent $96,912 $103,288 *The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate. 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 investors by allowing them to make peer comparisons. Management also uses these measures to make peer comparisons. FIRST FINANCIAL BANCORP. CONSOLIDATED STATEMENTS OF CONDITION (Dollars in thousands) (Unaudited) Sep.30, Dec. 31, Sep. 30, 2006 2005 2005 ASSETS Cash and due from banks $117,067 $163,281 $156,446 Federal funds sold and securities purchased under agreements to resell 101,000 98,000 48,000 Investment securities, held-to-maturity 8,059 12,555 14,227 Investment securities, available-for-sale 329,225 554,673 564,766 Other investments 34,137 40,755 40,420 Loans Commercial 663,522 582,594 587,691 Real estate - construction 92,434 86,022 103,314 Real estate - commercial 625,535 646,079 622,237 Real estate - retail 653,652 772,334 857,763 Installment, net of unearned 219,677 300,551 324,217 Home equity 231,741 214,649 212,335 Credit card 23,083 22,936 21,258 Lease financing 1,202 2,258 3,002 Total loans 2,510,846 2,627,423 2,731,817 Less Allowance for loan losses 31,888 42,485 42,036 Net loans 2,478,958 2,584,938 2,689,781 Premises and equipment 78,820 73,025 72,044 Goodwill 28,261 28,116 28,117 Other intangibles 6,471 7,920 7,490 Accrued interest and other assets 125,084 127,545 120,000 Total Assets $3,307,082 $3,690,808 $3,741,291 LIABILITIES Deposits Interest-bearing $225,670 $247,187 $264,413 Savings 971,055 989,990 981,517 Time 1,198,059 1,247,274 1,252,073 Total interest- bearing deposits 2,394,784 2,484,451 2,498,003 Noninterest-bearing 381,937 440,988 431,736 Total deposits 2,776,721 2,925,439 2,929,739 Short-term borrowings Federal funds purchased and securities sold under agreements to repurchase 54,129 66,634 58,273 Other 39,000 45,000 0 Total short-term borrowings 93,129 111,634 58,273 Federal Home Loan Bank long-term debt 68,197 286,655 317,660 Other long-term debt 30,930 30,930 30,930 Accrued interest and other liabilities 38,580 36,269 35,541 Total Liabilities 3,007,557 3,390,927 3,372,143 SHAREHOLDERS' EQUITY Common stock 392,156 392,607 391,962 Retained earnings 76,783 75,357 79,375 Accumulated comprehensive income (8,581) (7,876) (6,695) Treasury stock, at cost (160,833) (160,207) (95,494) Total Shareholders' Equity 299,525 299,881 369,148 Total Liabilities and Shareholders' Equity $3,307,082 $3,690,808 $3,741,291 ADDITIONAL DATA -- RISK BASED CAPITAL Sep. 30, June 30, March 31, Dec. 31, Sep. 30, 2006 2006 2006 2005 2005 Tier 1 Capital $300,551 $296,334 $297,602 $299,680 $369,735 Tier 1 Ratio 11.89% 11.37% 11.58% 11.49% 13.93% Total Capital $332,302 $326,464 $329,897 $332,458 $403,044 Total Capital Ratio 13.14% 12.52% 12.83% 12.75% 15.19% Total Risk- Adjusted Assets $2,528,102 $2,606,871 $2,570,847 $2,608,167 $2,653,795 Leverage Ratio 8.85% 8.72% 8.47% 8.12% 9.74% FIRST FINANCIAL BANCORP. AVERAGE CONSOLIDATED STATEMENTS OF CONDITION (Dollars in thousands) (Unaudited) Quarterly Averages Sep. 30, June 30, March 31, Dec. 31, Sep. 30, 2006 2006 2006 2005 2005 ASSETS Cash and due from banks $109,896 $115,406 $123,129 $129,663 $124,833 Interest- bearing deposits with other banks 0 0 0 0 0 Federal funds sold and securities purchased under agreements to resell 158,940 122,413 141,513 127,701 20,938 Investment securities 370,095 380,532 497,528 620,868 625,418 Loans Commercial 642,378 626,912 580,681 577,096 595,166 Real estate- construction 94,135 83,719 85,672 94,508 96,845 Real estate- commercial 611,602 651,156 642,386 629,497 623,829 Real estate- retail 709,539 743,948 762,353 806,516 862,600 Installment, net of unearned 235,492 262,019 287,182 312,215 370,194 Home equity 229,583 222,878 214,675 213,135 210,221 Credit card 22,741 22,017 21,748 21,517 21,224 Lease financing 1,290 1,599 2,058 2,672 3,236 Total loans 2,546,760 2,614,248 2,596,755 2,657,156 2,783,315 Less Allowance for loan losses 30,284 40,445 42,402 41,741 42,630 Net loans 2,516,476 2,573,803 2,554,353 2,615,415 2,740,685 Loans held for sale 33,245 350 0 0 0 Premises and equipment 78,798 76,150 73,556 72,351 71,256 Goodwill 28,260 28,261 28,134 28,120 28,478 Other intangibles 6,721 7,214 7,703 7,820 7,480 Accrued interest and other assets 123,986 124,710 119,496 117,259 123,395 Assets related to discontinued operations 0 0 0 0 84,912 Total Assets $3,426,417 $3,428,839 $3,545,412 $3,719,197 $3,827,395 LIABILITIES Deposits Interest- bearing $235,762 $180,046 $203,363 $180,999 $187,458 Savings 1,025,025 1,062,334 1,040,940 1,018,271 1,031,441 Time 1,232,111 1,234,646 1,242,033 1,288,792 1,254,798 Total interest- bearing deposits 2,492,898 2,477,026 2,486,336 2,488,062 2,473,697 Noninterest- bearing 401,685 424,227 417,061 433,228 428,881 Total deposits 2,894,583 2,901,253 2,903,397 2,921,290 2,902,578 Short-term borrowings Federal funds purchased and securities sold under agreements to repurchase 53,958 49,563 51,592 58,923 75,131 Federal Home Loan Bank short- term borrowings 0 0 0 0 11,618 Other 37,673 39,819 45,822 13,209 10,155 Total short- term borrowings 91,631 89,382 97,414 72,132 96,904 Federal Home Loan Bank long-term debt 78,295 82,480 185,399 315,326 319,105 Other long- term debt 30,930 30,930 30,930 30,930 30,930 Total borrowed funds 200,856 202,792 313,743 418,388 446,939 Accrued interest and other liabilities 32,069 28,707 29,694 28,585 32,694 Liabilities related to discontinued operations 0 0 0 0 77,712 Total Liabilities 3,127,508 3,132,752 3,246,834 3,368,263 3,459,923 SHAREHOLDERS' EQUITY Common stock 391,325 392,354 392,666 392,253 391,773 Retained earnings 77,487 73,237 73,710 80,135 74,114 Accumulated comprehensive income (10,708) (9,999) (7,538) (8,323) (6,301) Treasury stock, at cost (159,195) (159,505) (160,260) (113,131) (92,114) Total Shareholders' Equity 298,909 296,087 298,578 350,934 367,472 Total Liabilities and Shareholders' Equity $3,426,417 $3,428,839 $3,545,412 $3,719,197 $3,827,395 Year-to-Date Averages Sep. 30 2006 2005 ASSETS Cash and due from banks $116,095 $121,923 Interest-bearing deposits with other banks 0 49 Federal funds sold and securities purchased under agreements to resell 141,019 18,717 Investment securities 415,585 638,729 Loans Commercial 616,883 613,144 Real estate-construction 87,873 88,771 Real estate-commercial 634,935 620,475 Real estate-retail 738,420 860,846 Installment, net of unearned 261,375 377,623 Home equity 222,433 203,467 Credit card 22,172 20,771 Lease financing 1,646 3,934 Total loans 2,585,737 2,789,031 Less Allowance for loan losses 37,666 43,808 Net loans 2,548,071 2,745,223 Loans held for sale 11,320 0 Premises and equipment 76,187 69,058 Goodwill 28,219 28,572 Other intangibles 7,209 7,530 Accrued interest and other assets 122,748 114,954 Assets related to discontinued operations 0 97,480 Total Assets $3,466,453 $3,842,235 LIABILITIES Deposits Interest-bearing $206,509 $169,014 Savings 1,042,708 1,045,154 Time 1,236,227 1,258,505 Total interest-bearing deposits 2,485,444 2,472,673 Noninterest-bearing 414,268 429,221 Total deposits 2,899,712 2,901,894 Short-term borrowings Federal funds purchased and securities sold under agreements to repurchase 51,713 68,046 Federal Home Loan Bank short-term borrowings 0 21,652 Other 41,075 7,619 Total short-term borrowings 92,788 97,317 Federal Home Loan Bank long-term debt 114,999 323,816 Other long-term debt 30,930 30,930 Total borrowed funds 238,717 452,063 Accrued interest and other liabilities 30,165 29,339 Liabilities related to discontinued operations 0 89,692 Total Liabilities 3,168,594 3,472,988 SHAREHOLDERS' EQUITY Common stock 392,110 392,090 Retained earnings 74,825 70,280 Accumulated comprehensive income (9,427) (5,538) Treasury stock, at cost (159,649) (87,585) Total Shareholders' Equity 297,859 369,247 Total Liabilities and Shareholders' Equity $3,466,453 $3,842,235
First Financial Bancorp
