First Financial Bancorp., an Ohio corporation (First Financial), was formed in 1982. First Financial is a bank holding company headquartered in Hamilton, Ohio.
First Financial engages in the business of commercial banking and other banking and banking-related activities through its wholly owned subsidiary, First Financial Bank, National Association (First Financial Bank), a national banking association. First Financial Capital Advisors LLC (FFCA) is First Financial’s registered investment advisory company and serves as investment advisor to The Legacy Funds Group, First Financial’s proprietary mutual funds introduced in May 2002, and assists First Financial with the investment management of trust assets. Two other subsidiaries of First Financial are First Financial (OH) Statutory Trust I (Statutory Trust I) and First Financial (OH) Statutory Trust II (Statutory Trust II) which were established to facilitate raising Tier I capital in the form of corporation-obligated mandatorily redeemable capital securities of subsidiary trust—commonly referred to as Trust Preferred Securities. These two subsidiaries were deconsolidated effective January 1, 2004, in accordance with FASB Interpretation No. 46 “Consolidation of Variable Interest Entities.” First Financial provides management and similar services for its subsidiary financial institution. Since it does not itself conduct any operating businesses, First Financial must depend largely upon its subsidiaries for funds with which to pay the expenses of its operation and, to the extent applicable, any dividends on its outstanding shares of common stock. For further information see Note 4 of the Notes to Consolidated Financial Statements appearing on page 43 of First Financial’s Annual Report to Shareholders, which is incorporated by reference in response to this item. First Financial’s oldest subsidiary was founded in 1883.
The range of banking services provided by First Financial to its customers includes commercial lending, real estate lending, consumer credit, credit card, and other personal loan financing. In addition, First Financial offers deposit products that include interest-bearing and noninterest-bearing deposit accounts, including time deposits, and cash management services for commercial customers. A full range of trust and asset management services is provided by First Financial’s Wealth Resource Group.
First Financial makes a variety of loans to individuals and businesses. Loan interest and fees make up the majority of First Financial’s revenue, approximately 63% in 2006. The principal types of lending in which First Financial engages are commercial, real estate, and consumer. Real estate loans are loans secured by a mortgage lien on the real property of the borrower, which may either be residential property (one to four family residential housing units) or commercial property (owner-occupied and investor income producing real estate, such as apartments, shopping centers, office buildings). The majority of residential real estate loans made by First Financial Bank conforms to secondary market underwriting standards. These credit underwriting standards adhere to a certain level of documentation, verifications, valuation, and overall credit performance of the borrower. The underwriting of these loans includes an evaluation of these and other pertinent factors prior to the extension of credit. These underwriting standards help in the management of the credit risk elements and increase the marketability of the loans.
Commercial real estate loans are also secured by a mortgage lien on the real property. The credit underwriting for both owner-occupied and investor income producing real estate loans involves
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detailed market analysis, historical and projected cash flow analysis, appropriate equity margins, assessment of lessees and lessors, type of real estate and other analysis. Risk of loss is managed by adherence to a standard loan policy that establishes certain levels of performance prior to the extension of a loan to the borrower. Diversification in market areas within First Financial’s service area, as well as a diversification by industry, are other means by which the risk of loss is managed by First Financial.
Commercial loans are made to all types of businesses, from the local retail outlet for its seasonal sales needs, to the manufacturing company for new equipment financing. First Financial works with rapidly growing businesses to meet their working capital needs while at the same time providing long-term financing for their acquisition and expansion plans. First Financial also works closely with agricultural customers to provide financing for new farm implements, livestock, and crop production. Credit risk is managed by a standard loan policy, established authorized credit limits, centralized portfolio management and the diversification of market area and industries. The overall strength of the borrower is evaluated through the credit underwriting process and includes a review of historical and projected cash flows, historical financial performance, financial strength of the principals and guarantors, and collateral values, where applicable.
Consumer loans are primarily loans made to individuals. Types of loans include new and used vehicle loans, second mortgages on residential real estate, and unsecured loans to individuals. Risk elements in the consumer loan portfolio are primarily focused on the borrowers cash flow and credit history, key indicators of the ability to repay. Some security is provided through liens on automobile titles and second mortgage liens, where applicable. Consumer loans are generally smaller dollar amounts than other types of lending and are made to a large number of customers. Both factors help provide diversification of the portfolio. Economic conditions that affect consumers in First Financial’s markets have a direct impact on the credit quality of these loans. Higher levels of unemployment, lower levels of income growth and weaker economic growth are factors that may adversely impact consumer loan credit quality.
Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate. Home equity lines of credit are generally governed by the same lending policies and subject to the same credit risk as described previously for residential real estate loans.
In 2005, First Financial began evaluating its performance based on two activities: banking and wealth management. First Financial has minimal foreign currency transactions or exposure to foreign currencies. Information regarding statistical disclosure required by Industry Guide 3 is included in First Financial’s Annual Report to Shareholders for the year ended December 31, 2006, and is incorporated herein by reference.
At December 31, 2006, First Financial and its subsidiaries employed 1,283 employees.
First Financial’s executive office is located at 300 High Street, Hamilton, Ohio 45011, and the telephone number is (513) 979-5782. First Financial makes available, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after filing with the Securities and Exchange Commission (SEC), through its website, www.ffbc-oh.com or www.bankatfirst.com under the “Investor Relations” link, under “SEC Filings.” Copies of such reports also can be found on the SEC’s website at www.sec.gov.
Subsidiaries
The following table lists each of First Financial’s subsidiaries, their date established, the number of banking centers that each subsidiary has, their total assets, and the number of automated teller machines (ATMs) owned by each subsidiary:
| Assets | ||||||||||||||||
| Date | 12/31/06 | Number of | Number of | |||||||||||||
| Subsidiary/Location | Established | ($ in 000) | Banking centers | ATMs | ||||||||||||
First Financial/
Hamilton, Ohio |
04/26/83 | $ | 3,262,897 | 88 | 104 | |||||||||||
FFCA/
Hamilton, Ohio |
05/13/02 | 287 | N/A | N/A | ||||||||||||
Statutory Trust I/
Hamilton, Ohio |
09/25/02 | 10,376 | N/A | N/A | ||||||||||||
Statutory Trust II/
Hamilton, Ohio |
07/15/03 | 20,766 | N/A | N/A | ||||||||||||
Historically, First Financial has operated under a community banking philosophy. In the past, this philosophy was implemented by multiple, small banking subsidiaries. In January 2001, First Financial began a process of regionalization and market expansion, known as “Project Renaissance,” the purpose of which was to reduce the number of banking subsidiaries to four and to convert each banking subsidiary to a common data processing system. First Financial initiated this plan to gain efficiencies through consolidation, to provide a structure with a smaller number of subsidiaries that could more easily be managed, and to better position the company for growth; for instance, by reducing operational burdens on certain employees and enabling them to focus more on customer sales and service.
• In November 2001, First Financial completed the first consolidation of “Project Renaissance” by merging four of its wholly owned subsidiaries, Union Bank & Trust Company, Peoples Bank and Trust Company, Farmers State Bank, and Vevay Deposit Bank, to form Heritage, which was headquartered in Columbus, Indiana.
• In July 2002, First Financial formed its second regional financial institution by merging two of its wholly owned subsidiaries, First National Bank of Southwestern Ohio and Hebron Deposit Bank, to form First Financial, which is headquartered in Hamilton, Ohio.
• First Financial merged three of its wholly owned subsidiaries, Bright National Bank, National Bank of Hastings, and Sand Ridge, in November 2002. Sand Ridge, which is headquartered in Schererville, Indiana, was the surviving subsidiary and became the third regional financial institution to be formed under “Project Renaissance.”
• In the third quarter of 2004, First Financial’s subsidiaries, The Clyde Savings Bank Company and Indiana Lawrence Bank merged into Community First, which at that time began the process of forming First Financial’s fourth and final regional financial institution.
• In March 2005, First Financial merged Citizens First into Community First and merged Heritage into First Financial.
Furthermore, in March of 2005, First Financial adopted a new Strategic Plan, which provided for a new organizational structure for First Financial, whereby its remaining subsidiary banks would be merged into a single bank charter: First Financial Bank. On August 19, 2005, that consolidation was completed.
During 2005, First Financial also organized its trust, investment, brokerage, and private banking into the Wealth Resource Group. This included First Financial’s family of proprietary mutual funds, The Legacy Funds Group, introduced in May of 2002. Management changed the name of its insurance business from Flagstone Insurance and Financial Services to First Financial Insurance. Non-client support functions were aligned to support the combined company.
On September 16, 2005, First Financial completed both the sale of substantially all of the assets of its wholly-owned subsidiary, Fidelity Federal Savings Bank and the consolidation of its operations center.
First Financial still believes in the philosophy of community banking. First Financial’s goal in this process was to achieve efficiencies of size and standardization, while maintaining each division’s customer relationships.
Market and Competitive Information
First Financial, through its regionalization efforts and Strategic Plan, has focused its subsidiary bank around nine distinct markets. First Financial serves a combination of metropolitan and non-metropolitan markets in Indiana, Ohio, and Kentucky through its full-service banking centers. Market selection is based upon a number of factors, but markets are primarily chosen for their potential for growth, long-term profitability, and customer reach. First Financial’s goal is to develop a competitive advantage through a local market focus; building long-term relationships with clients and helping them reach greater levels of success in their financial life.
The company’s nine distinct markets support many different types of activities, such as manufacturing, agriculture, education, healthcare, and service-based companies. Within these markets, growth is projected to continue in key demographic groups and population. First Financial’s market evaluation includes demographic measures such as income levels, median household income, and population growth within key segments. The Midwest markets that First Financial serves experienced a slowing and more uncertain economy from 2002 through 2003, as indicated by such items as increased unemployment rates and personal bankruptcy growth rates in Ohio and Indiana. However, 2004 and 2005 showed signs of economic recovery, which stabilized throughout 2006. First Financial expects continuing stable to improving trends, although moderate fluctuations could occur.
First Financial, as a mid-sized regional bank holding company, believes that it is well positioned to compete in these markets. Smaller than super-regional and multi-national bank holding companies, First Financial believes that it can meet the needs of its markets through a local decision making network of local management. First Financial believes that it is better positioned to compete for business than other smaller banks that may have size or geographic limitations. First Financial’s strategy is to differentiate itself by providing superior customer service and delivering innovative products in its markets. First Financial’s targeted customers include individuals and small to medium sized businesses within the geographic region of its subsidiary bank’s banking center network. Through the delivery systems of banking centers, ATMs, internet banking, and telephone-based transactions, First Financial meets the needs of its customers in an ever-changing marketplace.
First Financial faces strong competition from financial institutions and other non-financial organizations. Its competitors include local and regional financial institutions, savings and loans, and bank holding companies, as well as some of the largest banking organizations in the United States. In addition, other types of financial institutions, such as credit unions, offer a wide range of loan and deposit services that are competitive with those offered by First Financial. The consumer is also served by brokerage firms and mutual funds that provide checking services, credit cards, and other services similar to those offered by First Financial. Major stores compete for loans by offering credit cards and retail installment contracts. It is anticipated that competition from other financial services entities will continue.
Regulation
First Financial Bank, as a national banking association, is subject to supervision and regular examination by the Comptroller of the Currency. All depository institutions and its deposits are insured up to the legal limits by the Bank Insurance Fund which is administered by the Federal Deposit Insurance Corporation and is subject to the provisions of the Federal Deposit Insurance Act.
As a bank holding company, First Financial is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the Act). The Act requires bank holding companies to register under the Act and to be subject to supervision and examination by the Federal Reserve Board. First Financial is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the Act. The Act requires prior approval by the Federal Reserve Board of the acquisition of 5% or more of the voting stock or substantially all the assets of any bank within the United States. Following the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, bank holding companies may acquire thrift institutions subject to approval by the Federal Reserve Board and the Office of Thrift Supervision. As a bank holding company located in the State of Ohio, First Financial is not permitted to acquire a bank located in another state unless such acquisition is specifically authorized by the statutes of such state, as is the case in Indiana, Michigan, and Kentucky. The Act further provides that the Federal Reserve Board shall not approve any such acquisition that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States, or the effect of which may be to substantially lessen competition or to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.
The Act and the regulations of the Federal Reserve Board prohibit a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services. The Act also imposes certain restrictions upon dealings by affiliated banks with the holding company and among themselves, including restrictions on inter-bank borrowing and upon dealings in the securities or obligations of the holding company or other affiliates.
The Act was amended by the Gramm-Leach-Bliley Act of 1999 (GLBA), which was enacted on November 12, 1999. The GLBA also repealed portions of the Glass-Steagall Act, a piece of depression-era legislation intended to separate banking and commerce. Under the GLBA, bank holding companies that satisfy certain requirements may elect to become financial holding companies. The GLBA allows financial holding companies to engage in certain activities that are “financial in nature” and that are not permitted for bank holding companies. First Financial’s current strategic
plans do not include utilizing theses expanded activities and as a result it has not elected to become a financial holding company.
The earnings of banks, and, therefore, the earnings of First Financial (and its subsidiaries), are affected by the policies of regulatory authorities, including the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the national supply of bank credit in an effort to prevent recession and to restrain inflation. Among the procedures used to implement these objectives are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements on member bank deposits.
These procedures are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use also may affect interest rates charged on loans or paid for deposits.
Monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effect, if any, of such policies upon the future business and earnings of First Financial cannot accurately be predicted.
First Financial makes no attempt to predict the effect on its revenues and earnings of changes in general economic, industrial, and international conditions or in legislation and governmental regulations.
Compliance Matter
On July 2, 2002, Community First, which has since been merged with and into First Financial Bank, entered into an agreement with the Federal Reserve Board regarding the steps necessary to bring the bank into the compliance with the Bank Secrecy Act. Community First fully satisfied the provisions of the agreement, and, as a result, the agreement was terminated by the Federal Reserve Board effective January 29, 2004.
Item 1A. Risk Factors.
Investments in First Financial common shares involve risk. The market price of First Financial common shares may fluctuate significantly in response to a number of factors, including:
• management’s ability to effectively execute its business plan;
• the strength of the local economies in which operations are conducted;
• the effects of and changes in policies and laws of regulatory agencies;
• inflation, interest rates, market and monetary fluctuations;
• acts of terrorism and any governmental response to such acts;
• technological changes;
• mergers and acquisitions;
• the ability to increase market share and control expenses;
• the effect of changes in accounting policies and practices that may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board and the Securities and Exchange Commission;
• the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;
• the success of First Financial at managing the risks involved in the foregoing.
If management of First Financial is not able to effectively execute its business plan, First Financial’s stock price may decline. Management has set an aggressive business plan and restructuring of the corporation in an effort to cause the corporation to improve its efficiency and earnings. If the plan is not implemented successfully, First Financial may not perform relative to its peers and securities analysts’ may change their estimates of the company’s financial performance, potentially decreasing the company’s stock price.
If First Financial does not adjust to changes in the financial services industry, its financial performance may suffer. First Financial’s ability to maintain its history of strong financial performance and return on investment to shareholders will depend in part on its ability to expand its scope of available financial services to its customers. In addition to other banks, competitors include securities dealers, brokers, mortgage bankers, investment advisors, credit unions, and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers.
Future governmental regulation and legislation could limit growth. First Financial and its subsidiaries are subject to extensive state and federal regulation, supervision and legislation that govern nearly every aspect of operations. Changes to these laws could affect First Financial’s ability to deliver or expand its services and diminish the value of its business.
Changes in interest rates could reduce income and cash flow. First Financial’s income and cash flow depends to a great extent on the difference between the interest earned on loans and investment securities, and the interest paid on deposits and other borrowings. Interest rates are beyond First Financial’s control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits.
Additional factors, risks, and uncertainties could have a negative effect on the financial performance of First Financial. Some of these factors are general economic and financial market conditions, competition, continuing consolidation in the financial services industry, new litigation or changes in existing litigation, regulatory actions, and losses.
Item 1B. Unresolved Staff Comments.
None.
