1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1995
--------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission file number 0-12379
FIRST FINANCIAL BANCORP.
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(Exact name of registrant as specified in its charter)
Ohio 31-1042001
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 High Street, Hamilton, Ohio 45011
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 867-4700
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 1, 1995
----------------------------- -----------------------------
Common stock, $8.00 par value 12,567,476
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FIRST FINANCIAL BANCORP.
INDEX
Page No.
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PART I-FINANCIAL INFORMATION
Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994 1
Consolidated Statements of Earnings -
Six and Three Months Ended
June 30, 1995 and 1994 2
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1995 and 1994 3
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II-OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURE 14
3
PART I - FINANCIAL INFORMATION
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
June 30, December 31,
1995 1994
---------- -----------
ASSETS
Cash and due from banks $ 99,632 $ 103,752
Interest-bearing deposits with other banks 4,923 8,055
Federal funds sold and securities purchased
under agreements to resell 8,660 97
Investment securities held-to-maturity
(market value - $119,262 at June 30, 1995 and
$140,319 at December 31, 1994) 111,278 135,187
Investment securities available-for-sale,
at market value (cost of $204,663 at June 30, 1995
and $246,637 at December 31, 1994) 205,911 242,410
Loans
Commercial 322,840 286,635
Real estate-construction 34,355 29,273
Real estate-mortgage 736,281 746,150
Installment 306,423 285,412
Credit card 13,822 15,599
Lease financing 15,350 16,102
---------- ----------
Total loans 1,429,071 1,379,171
Less
Unearned income 357 304
Allowance for loan losses 18,948 18,609
---------- ----------
Net loans 1,409,766 1,360,258
Premises and equipment 37,608 37,999
Deferred income taxes 3,907 5,904
Accrued interest and other assets 30,002 28,981
---------- ---------
TOTAL ASSETS $1,911,687 $1,922,643
========== ==========
LIABILITIES
Deposits
Noninterest-bearing $ 189,818 $ 201,331
Interest-bearing 1,401,535 1,385,993
---------- ----------
Total deposits 1,591,353 1,587,324
Short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase 70,280 81,609
Other 24,364 41,510
---------- ----------
Total short-term borrowings 94,644 123,119
Accrued interest and other liabilities 18,411 17,527
---------- ----------
TOTAL LIABILITIES 1,704,408 1,727,970
SHAREHOLDERS' EQUITY
Common stock - par value, $8 per share
Authorized - 25,000,000 shares
Issued - 12,212,156 in 1995, 12,204,575 in 1994 97,697 97,637
Surplus 15,120 15,027
Retained earnings 93,757 84,748
Unrealized net gain (losses) on securities
available-for-sale, net of deferred income taxes 759 (2,712)
Restricted stock awards (54) (27)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 207,279 194,673
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,911,687 $1,922,643
========== ==========
See notes to consolidated financial statements.
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4
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share data)
Six months ended Three months ended
June 30, June 30,
-----------------------------------------
1995 1994 1995 1994
---------- -------- --------- ---------
INTEREST INCOME
Loans, including fees $ 61,385 $ 49,562 $ 31,397 $ 25,271
Investment securities
Taxable 7,738 9,231 3,740 4,599
Tax-exempt 4,014 5,005 1,931 2,457
--------- --------- --------- ---------
Total investment interest 11,752 14,236 5,671 7,056
Interest-bearing deposits with
other banks 139 208 64 82
Federal funds sold and securities
purchased under agreements to resell 30 268 12 130
--------- --------- --------- ---------
TOTAL INTEREST INCOME 73,306 64,274 37,144 32,539
INTEREST EXPENSE
Deposits 27,503 22,729 14,468 11,317
Short-term borrowings 2,468 600 1,008 412
Long-term borrowings 0 86 0 33
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 29,971 23,415 15,476 11,762
--------- --------- --------- ---------
NET INTEREST INCOME 43,335 40,859 21,668 20,777
Provision for loan losses 619 359 226 190
--------- --------- --------- ---------
Net interest income after
provision for loan losses 42,716 40,500 21,442 20,587
NONINTEREST INCOME
Service charges on deposit accounts 4,143 4,069 2,121 2,091
Trust income 3,824 3,611 1,930 1,814
Investment securities gains (losses) 251 (98) 238 (104)
Other 1,919 2,240 975 917
--------- --------- --------- ---------
Total noninterest income 10,137 9,822 5,264 4,718
NONINTEREST EXPENSES
Salaries and employee benefits 15,915 15,674 7,839 7,866
Net occupancy expenses 2,141 2,091 1,060 995
Furniture and equipment expenses 1,616 1,510 810 746
Data processing expenses 2,620 2,558 1,303 1,274
Deposit insurance expense 1,783 1,768 897 885
State taxes 811 899 411 422
Other 6,350 6,228 3,255 3,151
--------- --------- --------- ---------
Total noninterest expenses 31,236 30,728 15,575 15,339
--------- --------- --------- ---------
Income before income taxes 21,617 19,594 11,131 9,966
Income tax expense 6,259 5,098 3,142 2,472
--------- --------- --------- ---------
NET EARNINGS $ 15,358 $ 14,496 $ 7,989 $ 7,494
========= ========= ========= =========
Net earnings per common share $ 1.26 $ 1.18 $ 0.66 $ 0.61
========= ========= ========= =========
Cash dividends declared per share $ 0.52 $ 0.44 $ 0.26 $ 0.22
========= ========= ========= =========
Average shares outstanding 12,208,840 12,212,566 12,211,127 12,214,405
========== ========== ========== ==========
See notes to consolidated financial statements.
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5
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six months ended
June 30,
----------------------
1995 1994
---------- ---------
OPERATING ACTIVITIES
Net earnings $ 15,358 $ 14,496
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 619 359
Provision for depreciation and amortization 1,845 1,758
Net amortization of investment security
premiums and accretion of discounts 743 1,038
Deferred income taxes 0 (40)
Realized investment security (gains) losses (251) 98
Originations of mortgage loans held for sale (6,298) (26,482)
Gains from sales of mortgage loans held for sale (117) (290)
Proceeds from sale of mortgage loans held for sale 6,415 26,772
Decrease (increase) in interest receivable 321 (1,592)
Increase in prepaid expenses (1,453) (710)
Increase (decrease) in accrued expenses 305 (469)
Increase (decrease) in interest payable 1,100 (131)
Other (1,843) (1,354)
--------- ---------
Net cash provided by operating activities 16,744 13,453
INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale 28,041 499
Proceeds from calls, paydowns and maturities of
securities available-for-sale 29,484 67,622
Purchases of securities available-for-sale (15,683) (76,300)
Proceeds from calls, paydowns and maturities of
securities held-to-maturity 23,901 17,653
Purchases of securities held-to-maturity (129) (7,496)
Net decrease in interest-bearing deposits
with other banks 3,132 10,232
Net (increase) decrease in federal funds sold and
securities purchased under agreements to resell (8,563) 22,798
Net increase in loans and leases (50,612) (75,946)
Recoveries from loans and leases previously charged off 652 561
Proceeds from disposal of other real estate owned 700 874
Purchases of premises and equipment (1,113) (2,092)
--------- ---------
Net cash provided by (used in) investing activities 9,810 (41,595)
FINANCING ACTIVITIES
Net increase (decrease) in total deposits 4,029 (11,714)
Net (decrease) increase in short-term borrowings (28,475) 55,421
Principal payments of long-term borrowings 0 (2,418)
Cash dividends declared (6,349) (5,198)
Proceeds from exercise of stock options, net of shares
purchased 121 145
--------- ---------
Net cash (used in) provided by financing activities (30,674) 36,236
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,120) 8,094
Cash and cash equivalents at beginning of period 103,752 88,926
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 99,632 $ 97,020
========= =========
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6
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six months ended
June 30,
---------------------
1995 1994
-------- --------
Supplemental disclosures
Interest paid $ 30,057 $ 23,547
======== ========
Income taxes paid $ 5,685 $ 4,905
======== ========
Recognition of deferred tax (liabilities) assets
attributable to FASB Statement No. 115 $ (1,997) $ 231
======== ========
Acquisition of other real estate owned through
foreclosure $ 207 $ 176
======== ========
Issuance of restricted stock awards $ 33
========
Transfer of securities to available-for-sale upon
adoption of FASB Statement No. 115 $272,856
========
See notes to consolidated financial statements.
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7
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The consolidated financial statements for interim periods are unaudited;
however, in the opinion of the management of First Financial Bancorp.
("Bancorp"), all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation have been included.
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements of Bancorp, a bank and savings and loan
holding company, include the accounts of Bancorp and its wholly-owned
subsidiaries - First National Bank of Southwestern Ohio, Citizens Commercial
Bank & Trust Company, Van Wert National Bank, Union Trust Bank, Indiana
Lawrence Bank, Fidelity Federal Savings Bank, Citizens First State Bank,
Fayette Federal Savings Bank, Home Federal Bank - A Federal Savings Bank,
Union Bank & Trust Company, and The Clyde Savings Bank Company. All
significant intercompany transactions and accounts have been eliminated in
consolidation. Intangible assets arising from the acquisition of subsidiaries
are being amortized over varying periods, none of which currently exceeds 15
years. Core deposit balances are being amortized over varying periods, none of
which currently exceeds 10 years.
The accompanying financial statements have been prepared in accordance with the
instructions for Form 10-Q and therefore, do not include all information and
footnotes necessary to be in conformity with generally accepted accounting
principles.
The Consolidated Statements of Cash Flows has been presented utilizing the
indirect method. For purposes of the Consolidated Statements of Cash Flows,
Bancorp considers cash and due from banks as cash and cash equivalents.
The assumed exercise of stock options would not have a materially dilutive
effect, therefore, fully diluted earnings per share is not presented.
NOTE 2: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, Bancorp offers a variety of financial
instruments with off-balance-sheet risk to its customers to aid them in meeting
their requirements for liquidity and credit enhancement and to reduce its own
exposure to fluctuations in interest rates. These financial instruments
include standby letters of credit and commitments outstanding to extend credit.
Generally accepted accounting principles do not require these financial
instruments to be recorded in the consolidated financial statements, and
accordingly, they are not. Bancorp does not use off-balance-sheet derivative
financial instruments (such as interest rate swaps) as defined in the Financial
Accounting Standards Board's (FASB) Statement No. 119 "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments".
Bancorp's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for standby letters of credit and commitments
outstanding to extend credit is represented by the contractual amounts of those
instruments. Bancorp uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Following
is a discussion of these transactions.
5
8
Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a customer to a third party. Bancorp's portfolio
of standby letters of credit consists primarily of performance assurances made
on behalf of customers who have a contractual commitment to produce or deliver
goods or services. The risk to Bancorp arises from its obligation to make
payment in the event of the customers' contractual default. As of June 30,
1995, Bancorp had issued standby letters of credit aggregating $8,109,000
compared to $9,976,000 issued as of December 31, 1994. Management conducts
regular reviews of these instruments on an individual customer basis, and the
results are considered in assessing the adequacy of Bancorp's allowance for
loan losses. Management does not anticipate any material losses as a result of
these letters of credit.
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. Bancorp evaluates each customer's creditworthiness
on an individual basis. The amount of collateral obtained, if deemed necessary
by Bancorp upon extension of credit, is based on management's credit evaluation
of the counterparty. The collateral held varies, but may include securities,
real estate, inventory, plant, or equipment. Bancorp had commitments
outstanding to extend credit totaling $226,237,000 at June 30, 1995 and
$216,802,000 at December 31, 1994. Management does not anticipate any material
losses as a result of these commitments.
NOTE 3: PENDING MERGERS
On February 20, 1995, Bancorp signed a Definitive Agreement of Merger with
Bright Financial Services, Inc., Flora, Indiana. Bright Financial Services,
Inc. is a one-bank holding company whose only subsidiary is the $110 million
Bright National Bank. Subject to required shareholder and regulatory
approvals, this merger is expected to be consummated during the fourth quarter
of 1995 and be accounted for using the pooling-of-interests method of
accounting.
On May 22, 1995, Bancorp signed an Agreement in Principle to affiliate with F&M
Bancorp of Rochester, Indiana. F&M Bancorp is a one-bank holding company with
the $60 million Farmers & Merchants Bank as its only subsidiary. Subject to
required shareholder and regulatory approval, this merger is expected to be
consummated during the first quarter of 1996 and be accounted for using the
pooling-of-interests method of accounting.
NOTE 4: ACCOUNTING CHANGES
Bancorp adopted FASB Statement No. 114 "Accounting by Creditors for Impairment
of a Loan", as amended by FASB Statement No. 118 "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures" effective January 1,
1995. The adoption of the standard did not have a material impact on Bancorp's
financial position or results of operations. For additional disclosures refer
to the MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ALLOWANCE FOR LOAN LOSSES and NONPERFORMING/UNDERPERFORMING
ASSETS sections.
NOTE 5: SUBSEQUENT EVENTS
On July 16, 1995, Bancorp issued 354,645 shares of its common stock in exchange
for all the outstanding common stock of Peoples Bank and Trust Company, Sunman,
Indiana. The acquisition of the $54 million bank has been accounted for as an
immaterial pooling-of-interests and accordingly, the consolidated financial
statements, including earnings per share, have not been restated for periods
prior to July 16, 1995.
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9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
1995 1994
------------------------ ------------------------------------
JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
NET EARNINGS $ 7,989 $ 7,369 $ 6,516 $ 7,161 $ 7,494
AVERAGE CONSOLIDATED BALANCE SHEET ITEMS:
LOANS LESS UNEARNED INCOME 1,418,520 1,394,024 1,345,953 1,291,400 1,232,887
INVESTMENT SECURITIES (INCLUDING
AVAILABLE-FOR-SALE) 321,336 347,172 393,912 421,654 437,978
OTHER EARNING ASSETS 4,084 7,056 5,696 9,761 16,616
---------- ---------- ---------- ---------- ----------
TOTAL EARNING ASSETS 1,743,940 1,748,252 1,745,561 1,722,815 1,687,481
TOTAL ASSETS 1,868,384 1,871,532 1,878,577 1,851,992 1,817,432
DEPOSITS 1,573,997 1,551,899 1,576,111 1,567,006 1,566,535
SHAREHOLDERS' EQUITY 203,469 197,050 192,414 191,555 187,922
KEY RATIOS:
AVERAGE EQUITY TO AVERAGE TOTAL ASSETS 10.89% 10.53% 10.24% 10.34% 10.34%
RETURN ON AVERAGE TOTAL ASSETS 1.71% 1.57% 1.39% 1.55% 1.65%
RETURN ON AVERAGE EQUITY 15.71% 14.96% 13.55% 14.95% 15.95%
NET INTEREST MARGIN (FULLY TAX EQUIVALENT) 5.22% 5.23% 5.30% 5.24% 5.26%
NET INTEREST INCOME
Net interest income, the principal source of earnings, is the amount by which
interest and fees generated by earning assets exceed the interest costs of
liabilities obtained to fund them. For analytical purposes, interest income
presented in the table below has been adjusted to a tax equivalent basis
assuming a 35% marginal tax rate for interest earned on tax-exempt assets such
as municipal loans, tax-free leases and investments. This is to recognize the
income tax savings which facilitates a comparison between taxable and
tax-exempt assets. As shown below, net interest income on a fully tax
equivalent basis has increased $593,000 over the second quarter of 1994.
However, net interest income declined slightly from the first quarter of 1995.
The rise in interest rates during the fourth quarter of 1994 significantly
impacted competitive pressures to raise core deposit rates during the first
quarter of 1995. It is anticipated that it will be difficult to maintain the
same high level of net interest margin realized in 1994 during 1995. The tax
equivalent adjustment to interest income has gradually declined over the
periods presented as a result of a decline in tax-exempt assets.
QUARTER ENDED
1995 1994
-------------------- ---------------------------------
JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30
-------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
INTEREST INCOME $37,144 $36,162 $35,317 $33,913 $32,539
INTEREST EXPENSE 15,476 14,495 13,487 12,685 11,762
------- ------- ------- ------- -------
NET INTEREST INCOME 21,668 21,667 21,830 21,228 20,777
TAX EQUIVALENT ADJUSTMENT TO INTEREST INCOME 1,111 1,191 1,308 1,336 1,409
------- ------- ------- ------- -------
NET INTEREST INCOME (FULLY TAX EQUIVALENT) $22,779 $22,858 $23,138 $22,564 $22,186
======= ======= ======= ======= =======
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RATE/VOLUME ANALYSIS
The impact of changes in volume and interest rates on net interest income is
illustrated in the table below. As shown, increases in rates had a significant
impact on both interest income and interest expense for the six month and three
month periods ended June 30, 1995 in comparison to 1994. The increase in rates
had slightly more impact on interest income than interest expense. A
significant increase in the volume of earning assets also contributed favorably
to net interest income. The change in interest due to the combined effect of
both rate and volume has been allocated to the volume and rate variance on a
prorated basis.
SIX MONTHS THREE MONTHS
ENDED ENDED
JUN. 30, 1995 CHANGE DUE TO: JUNE. 30, 1995 CHANGE DUE TO:
------------------- --------------------
OVER 1994 RATE VOLUME OVER 1994 RATE VOLUME
------------- -------- -------- --------------- --------- --------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
INTEREST INCOME $ 9,032 $ 6,187 $ 2,845 $ 4,605 $ 3,489 $ 1,116
INTEREST EXPENSE 6,556 5,758 798 3,714 3,446 268
-------- -------- -------- ---------- --------- -------
NET INTEREST INCOME $ 2,476 $ 429 $ 2,047 $ 891 $ 43 $ 848
======== ======== ======== ========== ========= =======
OPERATING RESULTS
Net operating income represents net earnings before net securities
transactions. Net operating income for the first six months of 1995 was
$15,131,000 which was an increase of $1,117,000 or 7.97% over that reported in
the same period in 1994. This increase in net operating income can be
primarily attributed to an increase in net interest income of $2,476,000 or
6.06%. Noninterest income for the first six months of 1995 increased 3.21% in
comparison to the same period in 1994. These positive variances were offset by
increases in provision for loan losses, noninterest expense and income tax
expense. The increase in income tax expense is discussed in the next section.
Net operating income for the second quarter of 1995 increased $778,000 or 11.1%
over the same period in 1994 due to the same reasons discussed above.
INCOME TAXES
For the first six months of 1995, income tax expense was $6,259,000 compared to
$5,098,000 for the same period in 1994, or an increase of $1,161,000. In 1995,
$6,235,000 of the tax expense was related to operating income with a tax
expense of $24,000 related to securities transactions. In the first six months
of 1994, income tax expense related to operating income was $5,678,000 with a
tax benefit related to securities transactions of $580,000. The increase in
taxes on operating income was due to the increase in operating income before
taxes and securities transactions of $1,674,000 or 8.50% over that reported for
the first six months of 1994 and a higher effective tax rate for the period in
1995. The higher effective tax rate was somewhat attributable to the effect of
calls and decreased income from tax-exempt securities.
For the second quarter of 1995, income tax expense was $3,142,000 compared to
$2,472,000 for the same period in 1994, or an increase of $670,000. In 1995,
$3,099,000 of the tax expense was related to operating income with a tax
expense of $43,000 related to securities transactions. In the second quarter
of 1994, income tax expense related to operating income was $3,054,000 with a
tax benefit related to securities transactions of $582,000.
NET EARNINGS
Net earnings for the first six months of 1995 were $862,000 or 5.95% more than
that recorded during the same period in 1994. As was discussed previously, net
operating income was $15,131,000 which was 7.97% greater than the same period
in 1994. Net securities gains through June 30, 1995 were $227,000 compared to
$482,000 for the same period in 1994.
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11
Net earnings for the quarter ending June 30, 1995 were $495,000 or 6.61% more
than that recorded during the same period in 1994. Net operating income was
$7,794,000 which was 11.1% greater than the same period in 1994. Net
securities gains for the quarter ended June 30, 1995 were $195,000 compared to
$478,000 for the same period in 1994.
ALLOWANCE FOR LOAN LOSSES
Beginning in 1995, Bancorp adopted FASB Statement No. 114. Under the new
standard, the 1995 allowance for loan losses related to loans that are
identified for evaluation in accordance with FASB Statement No. 114 is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans. Prior to
1995, the allowance for loan losses related to these loans was based on
undiscounted cash flows or the fair value of the collateral for collateral
dependent loans.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on Bancorp's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.
At June 30, 1995, the recorded investment in loans that are considered to be
impaired under FASB Statement No. 114 was $2,070,000, all of which were on a
nonaccrual basis. The related allowance for loan losses on these impaired
loans was $420,000. There were no impaired loans that as a result of
write-downs did not have an allowance for loan losses. The average recorded
investment in impaired loans for the six months and quarter ended June 30,
1995, was approximately $1,212,000 and $1,275,000, respectively. For the six
months and quarter ended June 30, 1995, Bancorp recognized interest income on
those impaired loans of $57,000 and $30,000, respectively. Bancorp recognizes
income on impaired loans using the cash basis method. The table on the
following page indicates the activity in the allowance for loan losses for the
quarters presented.
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12
QUARTER ENDED
1995 1994
-------------------- ----------------------------
JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE AT BEGINNING OF PERIOD $18,904 $18,609 $18,441 $18,504 $18,367
PROVISION FOR LOAN LOSSES 226 393 611 298 190
LOANS CHARGED OFF (565) (367) (713) (643) (372)
RECOVERIES 383 269 270 282 319
-------- -------- -------- -------- --------
NET CHARGE OFFS (182) (98) (443) (361) (53)
-------- -------- -------- -------- --------
BALANCE AT END OF PERIOD $18,948 $18,904 $18,609 $18,441 $18,504
======== ======== ======== ======== ========
RATIOS:
ALLOWANCE TO PERIOD END LOANS,
NET OF UNEARNED INCOME 1.33% 1.34% 1.35% 1.40% 1.46%
RECOVERIES TO CHARGE OFFS 67.79% 73.30% 37.87% 43.86% 85.75%
ALLOWANCE AS A MULTIPLE OF
NET CHARGE OFFS 104.11X 192.90X 42.01X 51.08X 349.13X
NONPERFORMING/UNDERPERFORMING ASSETS
The table below shows the categories which are included in nonperforming and
underperforming assets.
Nonperforming assets decreased $827,000 or 11.0% in the second quarter of 1995
when compared to the second quarter of 1994. In that same period, accruing
loans past due 90 days or more decreased $18,000. Accruing loans, including
loans impaired under FASB Statement No. 114, which are past due 90 days or more
where there is not a likelihood of becoming current are transferred to
nonaccrual loans. However, those loans, which management feels will become
current and, therefore accruing, will be classified as "Accruing loans 90 days
or more past due" until they become current.
QUARTER ENDED
1995 1994
------------------ ----------------------------
JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
NONACCRUAL LOANS $ 3,631 $ 3,457 $ 2,412 $ 2,938 $ 3,288
RESTRUCTURED LOANS 1,426 1,173 1,429 1,245 1,259
OREO/ISF* 1,616 1,669 2,116 2,164 2,953
-------- -------- -------- -------- --------
TOTAL NONPERFORMING ASSETS 6,673 6,299 5,957 6,347 7,500
ACCRUING LOANS PAST DUE
90 DAYS OR MORE 859 700 683 944 877
-------- -------- -------- -------- --------
TOTAL UNDERPERFORMING ASSETS $ 7,532 $ 6,999 $ 6,640 $ 7,291 $ 8,377
======== ======== ======== ======== ========
NONPERFORMING ASSETS AS A PERCENT
OF LOANS, NET OF UNEARNED INCOME
PLUS OREO/ISF 0.47% 0.45% 0.43% 0.48% 0.59%
======== ======== ======== ======== ========
UNDERPERFORMING ASSETS AS A PERCENT
OF LOANS, NET OF UNEARNED INCOME
PLUS OREO/ISF 0.53% 0.50% 0.48% 0.55% 0.66%
======== ======== ======== ======== ========
<FN>
*OTHER REAL ESTATE OWNED/IN-SUBSTANCE FORECLOSURE
In accordance with FASB Statement No. 114, a loan is classified as in-substance
foreclosure when Bancorp has taken possession of the collateral regardless of
whether formal foreclosure proceedings take place. Loans previously classified
as in-substance foreclosure but for which Bancorp had not taken possession of
the collateral have not been reclassified to loans due to immateriality. At
December 31, 1994, loans classified as in-substance foreclosure were $70,000.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management is the process by which Bancorp provides for the
continuing flow of funds necessary to meet its financial commitments on a
timely basis. These commitments include withdrawals by depositors, funding
credit commitments to borrowers, shareholder dividends, paying expenses of
operations, and funding capital expenditures.
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Liquidity is derived primarily from deposit growth, maturing loans, the
maturity of investment securities, access to other funding sources and markets,
and a strong capital position. The most stable source of liability-funded
liquidity for both the long-term and short-term is deposit growth and retention
in the core deposit base. At the end of the second quarter of 1995 Bancorp's
deposit liabilities had increased by 25.4% from December 31, 1994. Another
source of funding is through short-term borrowings. Bancorp's short-term
borrowings decreased to $94,644,000 at June 30, 1995, compared to $123,119,000
at December 31, 1994. This higher short-term funding was required at December
31, 1994 in anticipation of maturing investment securities.
The principal source of asset-funded liquidity is marketable investment
securities, particularly those of shorter maturities. At June 30, 1995,
securities maturing in one year or less amounted to $75,344,000, representing
23.8% of the total of the investment securities portfolio. In addition, other
types of assets such as cash and due from banks, federal funds sold and
securities purchased under agreements to resell, as well as loans and
interest-bearing deposits with other banks maturing within one year, are
sources of liquidity. Total asset-funded sources of liquidity at June 30,
1995, amounted to $444,123,000, representing 23.2% of total assets. Sources of
long-term asset funded liquidity are derived from the maturity of investment
securities and maturing loans in excess of one year.
At June 30, 1995, Bancorp had classified $205,911,000 in investment securities
available-for-sale. Management examines Bancorp's liquidity needs in
establishing this classification in accordance with the Financial Accounting
Standards Board Statement No. 115 on accounting for certain investments in debt
and equity securities.
Liquidity is very important and as such is both monitored and managed closely
by the asset/liability committee at each affiliate. Liquidity may be used to
fund capital expenditures. Capital expenditures were $1,113,000 for the first
six months of 1995. In addition, remodeling is a planned and ongoing process
given the 68 offices of Bancorp and its subsidiaries. Material commitments for
capital expenditures as of June 30, 1995 were approximately $1,452,000. A
significant portion of these commitments are associated with plans for an
additional branch office at First National Bank of Southwestern Ohio.
Management believes that Bancorp has sufficient liquidity to fund its current
commitments.
CAPITAL ADEQUACY
The Federal Reserve established risk-based capital requirements for U.S.
banking organizations which have been adopted by the Office of Thrift
Supervision for savings and loan associations. Risk weights are assigned to
on-and off-balance sheet items in arriving at risk-adjusted total assets.
Regulatory capital is divided by risk-adjusted total assets, with the resulting
ratio compared to a minimum standard to determine whether a bank has adequate
capital.
Fully phased-in guidelines require 4.00% for Tier 1 capital, which consists
mainly of common shareholders' equity net of intangibles, and 8.00% for total
capital (Tier 1 plus Tier 2 supplementary capital).
Bancorp's Tier 1 ratio at June 30, 1995, was 14.4% and its total capital ratio
was 15.6%. While Bancorp's ratios are well above the guidelines, management
will continue to monitor the asset mix, product pricing, and the allowance for
loan losses, which are the areas determined to be most affected by these
requirements. The following table illustrates the risk-based capital
calculations and ratios for the past five quarters.
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QUARTER ENDED
1995 1994
------------------------ ----------------------------------
JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
TIER I CAPITAL:
SHAREHOLDER'S EQUITY $ 207,279 $ 201,252 $ 194,673 $ 194,033 $ 190,060
LESS: INTANGIBLE ASSETS 3,883 4,056 4,230 4,446 4,625
LESS: UNREALIZED NET SECURITIES
GAINS (LOSSES) 759 (384) (2,712) (934) (571)
---------- ---------- ---------- ---------- ----------
TOTAL TIER I CAPITAL $ 202,637 $ 197,580 $ 193,155 $ 190,521 $ 186,006
========== ========== ========== ========== ==========
TOTAL RISK-BASED CAPITAL:
TIER I CAPITAL $ 202,637 $ 197,580 $ 193,155 $ 190,521 $ 186,006
QUALIFYING ALLOWANCE FOR LOAN LOSSES 17,603 17,290 17,074 16,803 16,047
---------- ---------- ---------- ---------- ----------
TOTAL RISK-BASED CAPITAL $ 220,240 $ 214,870 $ 210,229 $ 207,324 $ 202,053
========== ========== ========== ========== ==========
RISK WEIGHTED ASSETS $1,408,270 $1,383,180 $1,365,882 $1,344,203 $1,283,793
========== ========== ========== ========== ==========
RISK-BASED RATIOS:
TIER I 14.39% 14.28% 14.14% 14.17% 14.49%
========== ========== ========== ========== ==========
TOTAL RISK-BASED CAPITAL 15.64% 15.53% 15.39% 15.42% 15.74%
========== ========== ========== ========== ==========
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ACCOUNTING AND REGULATORY MATTERS
In May 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 122 on accounting for mortgage servicing rights. This Statement is
required to be adopted for financial statements for fiscal years beginning
after December 15, 1995. Bancorp is in the process of analyzing the Statement
and at this time its financial impact is unknown but is expected to be
immaterial.
On August 8, 1995, the Federal Deposit Insurance Corporation (FDIC) voted to
retroactively lower the deposit insurance premiums commercial banks pay from
$0.23 to $0.04 per $100 in insured deposits for well-capitalized institutions.
At the time of filing, the FDIC had not finalized the effective date of this
change, and therefore, the impact is not reflected in the June 30, 1995
Consolidated Financial Statements. This change, when finalized, is anticipated
to have a positive impact on Bancorp's commercial banking subsidiaries.
Premiums for thrifts were not revised. Bancorp currently has approximately
$300,000,000 in deposits at its thrift subsidiaries insured under the Savings
Association Insurance Fund (SAIF). Currently, the SAIF reserves are considered
underfunded and regulatory discussions continue regarding options for restoring
SAIF levels. These discussions include the possibility of a one-time charge to
thrifts which could have a material negative impact on Bancorp's thrifts.
Management is not aware of any other events or regulatory recommendations
which, if implemented, are likely to have a material effect on Bancorp's
liquidity, capital resources, or operations.
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(b) Reports on Form 8-K
During the quarter ended June 30, 1995, the registrant did not file
any reports on Form 8-K.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST FINANCIAL BANCORP.
------------------------------
(Registrant)
Date August 11, 1995 /S/ MICHAEL R. O'DELL
-------------------- ------------------------------
Michael R. O'Dell,
Comptroller
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