1
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is presented to facilitate the
understanding of the financial position and results of operations of First
Financial Bancorp. (Bancorp). It identifies trends and material changes that
occurred during the reporting periods and should be read in conjunction with the
consolidated financial statements and accompanying notes.
Bancorp is a bank and savings and loan holding company headquartered in
Hamilton, Ohio. As of December 31, 1997, Bancorp owned fifteen subsidiaries
located in western Ohio, eastern and west-central Indiana, and southern
Michigan. These subsidiaries include twelve commercial banks, two savings banks,
and one finance company.
Community First Finance (First Finance) began full operations on May 8,
1996. First Finance is a retail finance company and operates from offices
located in Fairfield and Middletown, Ohio.
On August 26, 1997, Bancorp's Board of Directors declared a 10% stock
dividend distributed on October 1, 1997, to shareholders of record as of
September 5, 1997. All per share data has been restated to reflect the stock
dividend.
On November 25, 1997, the Board of Directors approved a quarterly cash
dividend of 30 cents per share payable January 2, 1998, to shareholders of
record as of December 5, 1997.
The major components of Bancorp's operating results for the past five
years are summarized in Table 1 and discussed in greater detail on subsequent
pages which should be read in conjunction with the statistical data and
consolidated financial statements on pages 32 through 50.
RECENT MERGERS AND ACQUISITIONS
Two of Bancorp's subsidiaries, The Citizens Commercial Bank & Trust
Company and Van Wert National Bank, merged during November, 1997, to form
Community First Bank & Trust (Community First). On December 8, 1997, Community
First acquired 11 branches from KeyBank National Association. In addition to the
11 branches located in Mercer, Auglaize, Allen, Paulding, and Williams counties
of Ohio, the transaction included the purchase of approximately $60 million of
loans and the assumption of $246 million in deposits. Following the acquisition,
Community First had total assets of $586 million and served 12 northwestern Ohio
cities in six counties through a network of 21 offices.
On June 1, 1997, Bancorp paid $7,800,000 for all the outstanding common
stock of Southeastern Indiana Bancorp (SIB). Upon consummation of the merger,
SIB was merged out of existence and its only subsidiary, Vevay Deposit Bank,
became a wholly owned subsidiary of Bancorp. Vevay Deposit Bank has its main
office and two other offices in Vevay, Indiana and an additional office in East
Enterprise, Indiana. This merger was accounted for using the purchase method of
accounting and, accordingly, the consolidated financial statements include Vevay
Deposit Bank's results of operations from the date of acquisition.
On January 1, 1997, Bancorp issued 322,386 shares of its common stock for
all the outstanding common stock of Hastings Financial Corporation (Hastings
Financial). Upon consummation of the merger, Hastings Financial was merged out
of existence and its only subsidiary, National Bank of Hastings (National Bank),
became a wholly owned subsidiary of Bancorp. National Bank has its main office
in Hastings, Michigan and one other office in Wayland, Michigan. This merger
represents Bancorp's first association with a Michigan bank. This transaction
was accounted for using the pooling-of-interests method of accounting. The
consolidated financial statements for prior periods have not been restated due
to immateriality.
On December 1, 1996, Bancorp paid $7,575,004 in cash for all the
outstanding common stock of Farmers State Bancorp. Upon consummation of the
merger, Farmers State Bancorp was merged out of existence and its only
subsidiary, Farmers State Bank, became a wholly owned subsidiary of Bancorp. At
the time of the merger, Farmers State Bank had its main office in Liberty,
Indiana and one office in each of the following cities: West College Corner,
Rushville, Glenwood, Carthage, and Mays, Indiana. The Glenwood office was closed
during 1997. This merger was accounted for using the purchase method of
accounting and, accordingly, the consolidated financial statements include
Farmers State Bank's results of operations from the date of acquisition.
On April 1, 1996, Bancorp issued 363,373 shares of its common stock for
all the outstanding common stock of F & M Bancorp (F&M). Upon consummation of
the merger, F&M was merged out of existence and its only subsidiary, Farmers &
Merchants Bank of Rochester (Farmers & Merchants) was merged with and into
Indiana Lawrence Bank, a wholly owned subsidiary of Bancorp. Farmers &
Merchants' three offices - two in Rochester, Indiana and one in Kewanna, Indiana
became branches of Indiana Lawrence Bank, the surviving entity. The merger was
accounted for using the pooling-of-interests method of accounting. The
consolidated financial statements for prior periods have not been restated due
to immateriality.
On October 1, 1995, Bancorp issued 442,876 shares of its common stock for
all the outstanding common stock of Bright Financial Services, Inc. (Bright
Financial). Upon consummation of the merger, Bright Financial was merged out of
existence and its only subsidiary, Bright National Bank (Bright), became a
wholly owned subsidiary of Bancorp. Bright has its main office and one other
office in Flora, Indiana, two offices in Lafayette, Indiana, and one office in
each of the following cities: Delphi, Rossville, and Burlington, Indiana. This
merger was accounted for using the pooling-of-interests method of accounting.
The consolidated financial statements for prior periods have not been restated
due to immateriality.
On July 16, 1995, Bancorp issued 354,645 shares of its common stock for
all the outstanding common stock of Peoples Bank and Trust Company (Peoples).
Upon consummation of the merger, Peoples became a wholly owned subsidiary of
Bancorp. At the time of the merger, Peoples had one office located in Sunman,
Indiana. Peoples opened a second office inside a Wal-Mart store located in
Aurora, Indiana during 1997. The merger was accounted for using the
pooling-of-interests accounting method. The consolidated financial statements
for prior periods have not been restated due to immateriality.
PENDING MERGERS
On December 23, 1997, Bancorp signed a Plan and Agreement of Merger with
The Union State Bank (USB). Under the terms of the merger agreement, Bancorp
will pay $13.6 million for all the outstanding common stock of USB. After
consummation of the merger, USB will be merged into Community First and USB's
only office in Payne, Ohio will become Community First's 22nd branch office.
Subject to regulatory approval and approval by USB's shareholders, the merger is
expected to occur during the first or second quarter of 1998. The merger will be
accounted for using the purchase method of accounting.
OVERVIEW OF OPERATIONS
Bancorp's net earnings during 1997 were $40,308,000 or $2.44 per share,
representing an 18.8% increase over 1996 net earnings and a 15.6% increase over
1996 earnings per share. The 1996 financial results include the effect of a
$2,144,000 ($1,389,000 after tax) charge for a special assessment paid to the
Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance
Corporation (FDIC). (See "Noninterest Expenses" of this Management's Discussion
and Analysis for more information concerning the special assessment.) If this
charge is not included in 1996's financial results, Bancorp's 1997 net earnings
were 14.1% greater than 1996 net earnings and 10.9% greater on a per share
basis. The 1997 earnings increase was achieved primarily through increases in
net interest income and noninterest income, partially offset by increases in
provision for loan losses, noninterest expenses, and income tax expense.
Net earnings in 1996 were $33,940,000 ($2.11 per share) reflecting a
6.77% increase over 1995 net earnings of $31,789,000 ($2.10 per share). The 1996
earnings increase was achieved primarily through increases in net interest
income and noninterest income, partially offset by increases in provision for
loan losses, noninterest expenses, and income tax expense. Not including the
effect of
FIRST FINANCIAL BANCORP 23
2
TABLE 1 - FINANCIAL SUMMARY
1997 1996 1995 1994 1993
(Dollars in thousands, except per share data)
SUMMARY OF OPERATIONS
Interest income $ 192,185 $ 171,275 $ 153,851 $ 133,504 $ 130,739
Tax equivalent adjustment 2,946 3,510 4,286 5,482 5,922
---------- ---------- ---------- ---------- ----------
Interest income - tax equivalent 195,131 174,785 158,137 138,986 136,661
Interest expense 76,833 69,707 63,516 49,587 51,880
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME - TAX EQUIVALENT $ 118,298 $ 105,078 $ 94,621 $ 89,399 $ 84,781
========== ========== ========== ========== ==========
Interest income $ 192,185 $ 171,275 $ 153,851 $ 133,504 $ 130,739
Interest expense 76,833 69,707 63,516 49,587 51,880
---------- ---------- ---------- ---------- ----------
Net interest income 115,352 101,568 90,335 83,917 78,859
Provision for loan losses 4,736 3,433 2,108 1,268 3,747
Noninterest income 26,977 22,097 20,558 17,462 19,589
Noninterest expenses 77,677 71,261 63,345 62,139 62,038
---------- ---------- ---------- ---------- ----------
Income before income taxes 59,916 48,971 45,440 37,972 32,663
Income tax expense 19,608 15,031 13,651 9,799 7,469
---------- ---------- ---------- ---------- ----------
NET EARNINGS $ 40,308 $ 33,940 $ 31,789 $ 28,173 $ 25,194
========== ========== ========== ========== ==========
Tax equivalent basis was calculated using a 35.0%
tax rate in all years presented
PER SHARE DATA (1)
NET EARNINGS - BASIC $ 2.44 $ 2.11 $ 2.10 $ 1.91 $ 1.71
========== ========== ========== ========== ==========
NET EARNINGS - DILUTED $ 2.43 $ 2.11 $ 2.10 $ 1.90 $ 1.70
========== ========== ========== ========== ==========
Cash dividends declared
First Financial Bancorp $ 1.14 $ 1.01 $ 0.89 $ 0.81 $ 0.68
Average common shares outstanding (in thousands) 16,547 16,073 15,111 14,775 14,775
SELECTED YEAR-END BALANCES
Total assets $2,636,111 $2,261,711 $2,103,375 $1,922,643 $1,810,673
Earning assets 2,390,255 2,087,190 1,941,274 1,764,616 1,670,009
Investment securities held-to-maturity 58,347 78,945 93,522 135,187 438,461
Investment securities available-for-sale 332,617 290,701 294,052 242,410
Loans, net of unearned income 1,977,031 1,700,264 1,532,016 1,378,867 1,189,790
Deposits 2,230,178 1,879,966 1,785,562 1,587,324 1,580,546
Noninterest-bearing demand deposits 314,051 238,415 220,061 201,331 182,192
Interest-bearing demand deposits 281,151 317,187 302,119 266,601 277,444
Savings deposits 521,372 381,903 359,638 374,378 403,845
Time deposits 1,113,604 942,461 903,744 745,014 717,065
Long-term borrowings 41,054 6,506 2,820 3,983
Shareholders' equity 286,259 258,482 234,175 194,673 181,252
RATIOS BASED ON AVERAGE BALANCES
Loans to deposits 93.40% 89.16% 89.01% 80.79% 74.14%
Net charge-offs to loans 0.16% 0.17% 0.10% 0.08% 0.21%
Shareholders' equity to
Total assets 11.60% 11.52% 10.98% 10.29% 9.73%
Deposits 14.17% 13.75% 13.06% 12.05% 11.10%
Return on Assets 1.71% 1.58% 1.64% 1.54% 1.41%
Return on Equity 14.70% 13.72% 14.97% 14.93% 14.54%
Net interest margin (tax equivalent basis) 5.39% 5.25% 5.24% 5.25% 5.14%
<FN>
(1) First Financial Bancorp's per share data has been restated for all stock
dividends and material pooling-of-interests mergers through 1997.
(2) 1996 net earnings includes the effect of a $2,144,000 ($1,389,000 after
tax) charge for a special assessment paid to the Savings Association
Insurance Fund which reduced earnings by 4.0%.
24 FIRST FINANCIAL BANCORP
3
the SAIF assessment, Bancorp's 1996 net earnings were 11.1% greater than 1995
net earnings and 4.76% greater on a per share basis.
Bancorp's return on assets for 1997 was 1.71%. This compares with return
on asset ratios of 1.65% (before the SAIF assessment) and 1.64% for 1996 and
1995, respectively. Bancorp's return on equity for 1997 was 14.7%, which
compares to 14.3% (before the SAIF assessment) and 15.0% for 1996 and 1995,
respectively. Bancorp's 1996 return on assets and return on equity including the
SAIF special assessment were 1.58% and 13.7%, respectively.
NET INTEREST INCOME
Net interest income, Bancorp's principal source of earnings, is the
excess of interest received from earning assets over interest paid on
interest-bearing liabilities. Bancorp's net interest income for the years 1993
through 1997 is shown in Table 1. For analytical purposes, a section showing
interest income on a tax equivalent basis is also presented in Table 1. The tax
equivalent adjustment recognizes the income tax savings when comparing taxable
and tax-exempt assets and assumes a 35.0% tax rate for all years presented.
The amount of net interest income is determined by the volume and mix of
earning assets, the rates earned on such earning assets and the volume, mix and
rates paid for the deposits and borrowed money that support the earning assets.
Table 2 describes the extent to which changes in interest rates and changes in
volume of earning assets and interest-bearing liabilities have affected
Bancorp's net interest income during the years indicated. The combined effect of
changes in both volume and rate has been allocated proportionately to the change
due to volume and the change due to rate. Table 2 should be read in conjunction
with the Statistical Information shown on page 32.
Tax equivalent total interest income was $195,131,000 in 1997, an
increase of $20,346,000 or 11.6% over 1996. Substantially all of this increase
was due to an increase of $196,863,000 in the volume of earning assets, from an
average of $1,999,919,000 during 1996 to $2,196,782,000 during 1997. Average
outstanding loan balances increased $203,438,000 and investment securities and
other instruments decreased $6,575,000. A small portion of the increase was due
to a 14 basis point (a basis point equals 0.01%) increase in average yields
earned on total earning assets, from 8.74% during 1996 to 8.88% during 1997.
Total interest expense was $76,833,000 in 1997, an increase of $7,126,000
over 1996. The increase was predominately due to an increase of $158,540,000 in
total interest-bearing liabilities, from an average of $1,669,014,000 during
1996 to an average of $1,827,554,000 during 1997.
Tax equivalent net interest income, the difference between tax equivalent
total interest income and total interest expense, increased $13,220,000 during
1997 due primarily to the volume increases described above. The increased
interest income was greater than the increased interest expense, thereby causing
net interest income to increase.
The interest rate spread and the net interest margin are two ratios
frequently used to measure differences in net interest income. The interest rate
spread (the average rate on earning assets minus the average rate on
interest-bearing liabilities) was 4.68% for 1997 and 4.56% for 1996, a
difference of 12 basis points. The net interest margin (net interest income on a
tax equivalent basis divided by average earning assets) increased 14 basis
points, to 5.39% during 1997 from 5.25% during 1996.
Nonaccruing loans were included in the daily average loan balances used
in determining the yields in Table 2. Interest foregone on nonaccruing loans is
disclosed in Note 9 of the Notes to Consolidated Financial Statements and is not
considered to have a material effect on the reasonableness of these
presentations. In addition, the amount of loan fees included in the interest
income computation for 1997, 1996, and 1995 was $4,629,000, $3,677,000, and
$2,928,000, respectively.
During 1997, 1996, and 1995, approximately $20,480,000, $15,076,000, and
$51,193,000, respectively, of tax-exempt municipal securities earning a tax
equivalent yield of 15.3%, 12.0%, and 13.4%, respectively, were called by their
issuers or matured. The result of these calls and maturities has been a
continued decline in the average tax equivalent yields earned on tax-exempt
securities, from 12.0% during 1995 to 11.2% during 1996, and 10.6% during 1997.
The yield declines in tax-exempt securities during the past several years have
been counterbalanced in part by yield increases in loans outstanding.
Another $23,550,000 of municipal securities earning a tax equivalent
yield of 12.3% are scheduled to mature or may be called during 1998. In the
current economic environment, Bancorp may not be able to reinvest these funds
TABLE 2 - VOLUME/RATE ANALYSIS - TAX EQUIVALENT BASIS(1)
1997 change from 1996 due to 1996 change from 1995 due to
VOLUME RATE TOTAL VOLUME RATE TOTAL
(Dollars in thousands)
INTEREST INCOME
Loans $ 18,702 $ 2,701 $ 21,403 $ 14,210 $ 1,645 $ 15,855
Investment securities(2)
Taxable 405 276 681 2,912 (175) 2,737
Tax-exempt (1,185) (448) (1,633) (1,371) (761) (2,132)
-------- -------- -------- -------- -------- --------
Total investment securities interest(2) (780) (172) (952) 1,541 (936) 605
Interest-bearing deposits with other banks (225) 28 (197) 105 (6) 99
Federal funds sold and securities
purchased under agreements to resell 103 (11) 92 115 (26) 89
-------- -------- -------- -------- -------- --------
TOTAL 17,800 2,546 20,346 15,971 677 16,648
INTEREST EXPENSE
Interest-bearing demand deposits (1,143) 121 (1,022) 881 186 1,067
Savings deposits 2,449 (227) 2,222 345 (240) 105
Time deposits 3,044 160 3,204 5,304 18 5,322
Short-term borrowings 1,913 84 1,997 (88) (442) (530)
Long-term borrowings 748 (23) 725 228 (1) 227
-------- -------- -------- -------- -------- --------
TOTAL 7,011 115 7,126 6,670 (479) 6,191
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ 10,789 $ 2,431 $ 13,220 $ 9,301 $ 1,156 $ 10,457
======== ======== ======== ======== ======== ========
<FN>
(1) Tax equivalent basis was calculated using a 35.0% tax rate.
(2) Includes both investment securities held-to-maturity and investment
securities available-for-sale.
FIRST FINANCIAL BANCORP 25
4
in similar earning assets at acceptable risk levels. The loss of such tax-exempt
municipal securities will likely continue to negatively influence Bancorp's
interest rate spread and net interest margin in the future.
NONINTEREST INCOME AND NONINTEREST EXPENSES
A listing of noninterest income and noninterest expenses for 1997, 1996,
and 1995 is reported in Table 3. Although the mergers that occurred during 1995
through 1997 did not materially affect net earnings, they influenced the
individual line items for noninterest income and expense. Affiliates that joined
Bancorp during the past three years are included in the Consolidated Statements
of Earnings starting with their date of acquisition.
NONINTEREST INCOME
1997 vs. 1996. Noninterest income, excluding securities transactions,
increased $4,818,000 or 21.8% in 1997.
Service charges on deposit accounts increased $1,216,000 or 13.2% over
1996 primarily due to higher total deposits created by recent mergers and to
pricing adjustments.
Trust revenues, which are primarily calculated using the market value of
trust assets managed, increased $1,627,000 or 19.7% over 1996. The increase was
driven by the general strength of the stock market, superior investment results
of the trust department common funds, strong investment management sales in 1996
and 1997, and by pricing adjustments. As a result of these factors, the market
value of trust assets serviced increased $520,368,000 or 30.6%, from
$1,701,799,000 on December 31, 1996 to $2,222,167,000 on December 31, 1997.
Other noninterest income increased $1,975,000 or 42.5%. Contributing to
the increase were ATM guest user fees, increased gains from sales of real estate
loans, income from new affiliates, and other miscellaneous items.
1996 vs. 1995. Noninterest income, excluding securities transactions,
increased $1,887,000 or 9.33% in 1996.
Service charges on deposit accounts during 1996 increased $586,000 or
6.82% over 1995 primarily due to Bancorp's new affiliates.
Trust revenues in 1996 increased $655,000 or 8.59% over 1995. The
increase during 1996 was due to an increase of $137,367,000 in the market value
of trust assets serviced, from $1,564,432,000 at December 31, 1995, to
$1,701,799,000 at December 31, 1996.
Other noninterest income during 1996 increased $646,000 or 16.2% over
1995 primarily due to fees received for lockbox services first offered by
Bancorp's First Southwestern affiliate during 1996, increased gains on sales of
real estate mortgage loans, and income contributed by the new affiliates. The
increased gain on sale of loans was primarily due to a higher volume of loan
sales during 1996 as compared to 1995.
NONINTEREST EXPENSES
1997 vs. 1996. Noninterest expenses in 1997 increased $6,416,000 or 9.00%
over 1996.
The largest component of noninterest expenses is salaries and employee
benefits, which increased $4,799,000 or 12.8% over 1996 primarily due to
additional employees from the addition of new affiliates during 1997 and 1996,
wage and salary increases, and increased health care costs.
Net occupancy expense increased $235,000 or 4.91%, and furniture and
equipment expense increased $463,000 or 11.8%, during 1997 largely because of
Bancorp's new affiliates. Increased costs for service contracts on Bancorp's
equipment also affected equipment expense.
The addition of new affiliates and contractual fee increases paid to
Bancorp's data service providers contributed to the $187,000 or 3.92% increase
in data processing expense during 1997, as compared with 1996.
Deposit insurance expense decreased substantially, from $2,889,000
during 1996 to $375,000 during 1997, an 87.0% decrease. Included in the 1996
expense is a $2,144,000 special assessment paid to the FDIC for recapitalization
of the SAIF. The assessment was paid by Bancorp's two savings bank subsidiaries
Fidelity Federal Savings Bank and Home Federal Bank, a Federal Savings Bank -
and by one bank subsidiary, Bright National Bank, that had purchased SAIF
insured deposits from the Resolution Trust Corporation.
Not including the special assessment, deposit insurance expense for 1997
was $370,000 less than 1996's adjusted expense of $745,000. Because of the
recapitalization of the SAIF during 1996, the premium for SAIF insured deposits
declined from $0.23 per $100 of insured deposits to $0.0644 per $100 of insured
deposits, effective January 1, 1997. Most deposits of commercial banks are
insured by the FDIC's Bank Insurance Fund (BIF). Because BIF insured banks are
now required to share in financing the interest on bonds issued by the Financing
Corporation (the FICO), which savings institutions had been financing, BIF
pre-
TABLE 3 - NONINTEREST INCOME AND NONINTEREST EXPENSES
1997 1996 1995
% CHANGE % CHANGE % CHANGE
INCREASE INCREASE INCREASE
TOTAL (DECREASE) TOTAL (DECREASE) TOTAL (DECREASE)
(Dollars in thousands)
NONINTEREST INCOME
Service charges on deposit accounts $ 10,398 13.2% $ 9,182 6.8% $ 8,596 4.5%
Trust revenues 9,905 19.7% 8,278 8.6% 7,623 8.6%
Other 6,620 42.5% 4,645 16.2% 3,999 0.6%
-------- -------- --------
Subtotal 26,923 21.8% 22,105 9.3% 20,218 5.2%
Investment securities gains (losses) 54 N/M (8) N/M 340 N/M
-------- -------- --------
TOTAL $ 26,977 22.1% $ 22,097 7.5% $ 20,558 17.7%
======== ==== ======== === ======== ====
NONINTEREST EXPENSES
Salaries and employee benefits $ 42,385 12.8% $ 37,586 13.0% $ 33,262 6.3%
Net occupancy 5,025 4.9% 4,790 10.4% 4,340 3.1%
Furniture and equipment 4,374 11.8% 3,911 16.7% 3,352 11.5%
Data processing 4,960 3.9% 4,773 (7.6%) 5,165 (0.8%)
Deposit insurance 375 (87.0%) 2,889 31.1% 2,204 (37.7%)
State taxes 1,718 0.7% 1,706 4.2% 1,637 (5.2%)
Other 18,840 20.7% 15,606 16.6% 13,385 1.7%
-------- -------- --------
TOTAL $ 77,677 9.0% $ 71,261 12.5% $ 63,345 1.9%
======== ==== ======== === ======== ====
<FN>
N/M = Not meaningful
26 FIRST FINANCIAL BANCORP
5
miums increased to $0.0129 per $100, also effective January 1, 1997. Before
this increase, Bancorp's subsidiaries with BIF insured deposits paid the
statutory minimum of $2,000 per institution during 1996. Because the aggregate
decrease in the rate for Bancorp's SAIF insured deposits outweighed the
aggregate increase in BIF rates, Bancorp's deposit insurance expense decreased.
The FDIC currently intends to charge a deposit insurance rate for both
SAIF and BIF insured deposits of $0.0243 per $100 beginning January 1, 2000,
representing a decrease for SAIF insured deposits and an increase for BIF
insured deposits. According to Bancorp estimates and assuming current deposit
levels, the aggregate premium decrease for its SAIF insured deposits will be
greater than the aggregate premium increase for its BIF insured deposits, so
deposit insurance expense for Bancorp is therefore projected to decrease again.
Other noninterest expenses increased $3,234,000 or 20.7%. Included in
this category are costs related to the year 2000 computer issue, expenses
related to the merger of The Citizens Commercial Bank & Trust Company and Van
Wert National Bank to form Community First, expenses related to the purchase by
Community First of 11 branches from KeyBank National Association, and costs
incurred by Bancorp's new affiliates. Offsetting these costs was a gain
recognized from the sale of property.
The efficiency ratio (noninterest expenses as a percentage of noninterest
income, excluding securities transactions, plus tax equivalent net interest
income) reflects how much, on average, an institution expends to generate each
dollar of revenue. Bancorp's 1997 efficiency ratio was 53.5%, compared to ratios
of 54.3% (before the SAIF assessment) and 55.2% for 1996 and 1995, respectively.
The 1996 efficiency ratio after the SAIF assessment was 56.0%.
1996 vs. 1995. Noninterest expenses in 1996 were $7,916,000 or 12.5%
higher than the amount recorded during 1995. Salaries and employee benefits
increased $4,324,000 or 13.0% over 1995 primarily due to the addition of new
affiliates during 1996 and 1995 and to wage and salary increases.
Net occupancy expense increased $450,000 or 10.4%, and furniture and
equipment expense increased $559,000 or 16.7% during 1996, largely because of
Bancorp's new affiliates. Increased costs for service contracts on Bancorp's
equipment also affected equipment expense.
The renegotiation of Bancorp's contract with its data service provider
and benefits received from an ongoing effort to standardize computer
applications among all affiliates contributed to a $392,000 or 7.59% decrease in
data processing expenses during 1996, as compared with 1995.
Not including the $2,144,000 special assessment paid to the SAIF, deposit
insurance expense during 1996 was $745,000, which was a $1,459,000 decrease from
the 1995 expense of $2,204,000. Bancorp's subsidiaries with deposits insured by
BIF paid the statutory minimum of $2,000 per institution during 1996, compared
with $0.23 per $100 of insured deposits during the first five months of 1995 and
$0.04 per $100 during the rest of 1995.
Other noninterest expenses increased $2,221,000 or 16.6% partially due to
Bancorp's new affiliates and to smaller increases in a number of categories.
YEAR 2000 ISSUES
Many computer systems process transactions using two digits for the year
of the transaction, rather than a full four digits. These systems may not
function properly at the beginning of the year 2000. Bancorp has devoted
significant time and attention to the Year 2000 issue, and will repair or
replace non-compliant hardware and software prior to the new millennium.
Several regulatory agencies and authorities have issued regulations and
guidelines which regulated financial institutions must use in measuring their
progress. Five commonly recognized phases of Year 2000 remediation are
awareness, assessment, renovation, validation, and implementation.
During 1997, the awareness phase was completed by Bancorp and each of its
subsidiaries. Bancorp's Data Processing Steering Committee formalized their
project plans for both Information Technology (IT) systems, computers and
peripherals, and non-IT systems, elevators, security systems, etc. Bancorp
assembled an Operating Committee, which meets at least weekly, to direct and
implement all Year 2000 issues. In addition, Bancorp's work groups and
consultants made several presentations to Bancorp's management and Board of
Directors, who have pledged their support for this issue.
Bancorp has inventoried and assessed the magnitude of hardware and
software programs which must be remediated, contacted vendors, identified
resource needs, and appropriately hired or contracted for qualified personnel to
guide Bancorp through the Year 2000 issue. A Year 2000 Loan Committee, comprised
of senior lenders of Bancorp's affiliates, is assessing the impact of Year 2000
on lending customers and the related risks inherent in those loans as they
relate to the year 2000.
Bancorp is currently in the renovation process, having completed the
major demand deposit, savings, and certificate of deposit systems. Several
ancillary systems have also been completed. Remaining mission critical systems
are currently in the process of renovation or are scheduled to begin renovation
during the second and third quarters of 1998. Management's goal is to have the
renovation phase completed by the end of 1998.
Management has tested incremental changes made to renovated software
applications, but has not yet validated overall Year 2000 compliance. Overall
validation testing is anticipated to begin in the first quarter, 1999.
Implementation will follow satisfactory results of validation testing and
is anticipated to be completed during the third quarter, 1999.
During 1997, Bancorp incurred approximately $700,000 in noninterest
expense for costs related to Year 2000 issues. Based on management's current
assessment and anticipated reprogramming costs, Bancorp expects to spend an
additional $3,500,000 during 1998 and 1999, of which about $1,200,000 will be
capitalized. However, there can be no assurance as to the accuracy of these
estimates.
INCOME TAXES
Net deferred tax assets at December 31, 1997, 1996, and 1995 were
$3,070,000, $2,802,000, and $3,369,000, respectively. Due to Bancorp's strong
historical earnings trend and the expectation that this trend will continue,
management has determined that it is more likely than not that the net deferred
tax asset will be realized. Therefore, no valuation allowance has been
established.
Bancorp's income tax expense in 1997 totaled $19,608,000 compared to
$15,031,000 in 1996 and $13,651,000 in 1995, resulting in effective tax rates of
32.7%, 30.7%, and 30.0% in 1997, 1996, and 1995, respectively. The increase in
1997 and 1996's effective rate was primarily due to a decline in the amount of
tax-exempt investments held during those years.
The tax effects of securities transactions were an expense of $5,000
during 1997, a benefit of $77,000 during 1996, and an expense of $17,000 during
1995.
Further analysis of income taxes is presented in Note 11 of the Notes to
Consolidated Financial Statements.
LOANS
Total loans, net of unearned income, increased $276,767,000 or 16.3%
during 1997. Approximately $65,000,000 of the increase was due to the mergers
with Hastings Financial Corporation and Southeastern Indiana Bancorp and another
$60,000,000 of loans were purchased from KeyBank as part of the branch
acquisition. In addition to the new affiliates and loan purchase, a favorable
market with respect to loan demand, combined with aggressive loan campaigns and
the pursuit of new business, led to net increases during 1997 of $104,885,000 or
26.4% in commercial loans, $20,046,000 or 46.3% in construction loans,
$64,571,000 or 7.48% in mortgage loans, $73,564,000 or 20.2% in installment
loans, $1,262,000 or 7.84% in credit card loans, and $12,439,000 or 83.9% in
lease financing.
Bancorp's loans cover a broad range of borrowers characterizing the
western Ohio, southern Michigan and eastern and west-central Indiana markets.
There were no loan concentrations of multiple borrowers in similar activities at
December 31, 1997, which exceeded 10.0% of total loans.
Bancorp's subsidiaries consist of community banks dedicated to meeting
the financial needs of individuals and businesses living and operating in the
communities they serve. Bancorp's loan portfolio is therefore primarily composed
of
FIRST FINANCIAL BANCORP 27
6
TABLE 4 - LOAN MATURITY/RATE SENSITIVITY
DECEMBER 31, 1997
(Dollars in thousands)
Maturity
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
Commercial $ 320,302 $106,748 $ 75,869 $ 502,919
Real estate-construction 53,028 7,622 2,658 63,308
---------- -------- --------- ---------
TOTAL $ 373,330 $114,370 $ 78,527 $ 566,227
========== ======== ========= =========
Sensitivity to changes in interest rates
PREDETERMINED VARIABLE
RATE RATE
Due after one year but within five years $ 43,636 $ 70,734
Due after five years 17,998 60,529
-------- ---------
TOTAL $ 61,634 $ 131,263
======== =========
residential and commercial real estate mortgage loans, commercial loans, and
installment loans. At December 31, 1997, real estate mortgage loans composed
46.9% of Bancorp's total loan portfolio and installment loans composed another
22.2% of the total loan portfolio. Commercial loans equaled 25.4% of the total
portfolio and real estate construction, credit card lending, and lease financing
made up the remaining 5.50% of the portfolio.
Real estate mortgage loans are generally considered to be the safest loan
investments because of the real estate securing the loans. Installment loans
include unsecured loans, second mortgage loans, secured lines of credit, secured
and unsecured home improvement loans, automobile loans, student loans, and loans
secured by savings, stocks, or life insurance. Bancorp subsidiaries offer a wide
variety of commercial loans, including small business loans, agricultural loans,
equipment loans, and lines of credit.
In accordance with Bancorp's decentralized management structure and
subject to Bancorp guidelines, credit underwriting and approval occur within the
subsidiary originating the loan. Depending on the subsidiary, loan applications
are approved by either a loan committee or by one or more loan personnel with
designated approval authority. Loan committees are composed of senior management
and loan personnel and, at some subsidiaries, members of the subsidiary's board
of directors. Loan applications for principal amounts greater than a designated
amount, which varies by subsidiary, require Bancorp approval. Any plans to
purchase or sell a participation in a loan also require Bancorp approval.
Bancorp subsidiaries receive requests to renew maturing loans as a normal
part of business. Such requests are especially common with real estate loans
that are scheduled to mature before being fully amortized and with commercial
loans. The requests are reviewed by the subsidiary's loan committee or by
designated loan personnel, as appropriate, and may be approved, approved with
modifications, or disapproved. Required modifications may include, among other
items, a reduction in the loan balance, a change in the interest rate, or the
initiation of monthly principal payments.
Table 4 indicates the contractual maturity of commercial loans and real
estate-construction loans outstanding at December 31, 1997. Loans due after one
year are classified according to their sensitivity to changes in interest rates.
ASSET QUALITY
Bancorp's subsidiaries record a provision for loan losses (provision) in
the Consolidated Statements of Earnings to provide for expected credit losses.
Actual losses on loans and leases are charged against the allowance for loan
losses (allowance), which is a reserve accumulated on the Consolidated Balance
Sheets through the provision. The recorded values of the loans and leases
actually removed from the Consolidated Balance Sheets are referred to as
charge-offs and, after netting out recoveries on previously charged off assets,
become net charge-offs. Bancorp's policy is to charge off loans when, in
management's opinion, collection of principal is in doubt. All loans charged off
are subject to continuous review and concerted efforts are made to maximize
recovery.
Management records the provision, on an individual subsidiary basis, in
amounts sufficient to result in an allowance that will cover future risks
believed to be inherent in the loan portfolio of each subsidiary. Management's
evaluation in establishing the provision includes such factors as historical
loss and recovery experience, estimated future loss for loans, known
deterioration in loans, periodic external loan evaluations, prevailing economic
conditions that might have an impact on the portfolio, and ratios of
delinquencies and nonaccrual loans. The 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. The evaluation of these factors is completed at Bancorp's
subsidiaries through a group of senior officers from the financial and lending
areas.
The provision increased from $3,433,000 in 1996 to $4,736,000 in 1997.
The provision recorded during 1996 was $1,325,000 greater than 1995's provision
of $2,108,000. The increases during 1997 and 1996 were primarily due to the
increase in loan volume mentioned previously. The 1997 increase also provided
for a 6 basis point increase in the allowance to loan ratio. The allowance at
December 31, 1997, was $27,510,000 or 1.39% of loans, net of unearned income,
which compares to $22,672,000 or 1.33% of loans, net of unearned income, at
December 31, 1996.
The level of nonaccrual and restructured loans and leases is an important
element in assessing asset quality. Loans are classified as nonaccrual when, in
the opinion of management, collection of interest is doubtful. Nonaccrual loans
at December 31, 1997, 1996, and 1995, were $5,257,000, $4,850,000, and
$2,764,000, respectively. The increase in nonaccrual loans during 1997 occurred
in the commercial mortgage, real estate mortgage, and consumer loan categories.
Nonaccrual loans to total loans at December 31, 1997, 1996, and 1995, were
0.27%, 0.29%, and 0.18%, respectively.
Loans are classified as restructured when management, to protect its
investment, grants concessions to the debtor that it would not otherwise
consider. Restructured loans at December 31, 1997, 1996, and 1995, were
$1,581,000, $890,000, and $517,000, respectively. The increase in restructured
loans during 1997 is primarily due to the restructuring of a commercial loan
during the year.
Another element associated with asset quality is Other Real Estate Owned
(OREO). OREO primarily represents properties acquired by Bancorp's subsidiaries
through loan defaults by customers. The balances of OREO at December 31, 1997,
1996, and 1995, were $950,000, $264,000, and $1,677,000, respectively. The
increase in OREO during 1997 is comprised primarily of single family residences.
The decrease during 1996 reflects the sale of vacant land that had a book value
of $1,325,000 at December 31, 1995.
Loans 90 days or more past due which were still accruing interest totaled
$1,203,000, $906,000, and $1,071,000 at December 31, 1997, 1996, and 1995,
respectively.
Nonaccrual and restructured loans and leases and OREO are discussed or
summarized in Notes 1 and 9 of the Notes to Consolidated Financial Statements.
Bancorp adopted Statement of Financial Accounting Standards (SFAS) No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures," in January, 1995. SFAS No. 114 and SFAS No. 118 require that
lenders measure an impaired loan, as defined in the statements, at the
28 FIRST FINANCIAL BANCORP
7
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
If the measure of the impaired loan is less than the creditor's recorded
investment in the loan, the creditor must record a valuation allowance for the
amount of the difference. Implementation of this statement did not have a
material effect on Bancorp's allowance or provision.
INVESTMENT SECURITIES
Bancorp's investment securities increased $21,318,000 or 5.77% during
1997 to a balance of $390,964,000. Bancorp follows a conservative investment
policy, investing primarily for interest rate risk management and liquidity
management purposes. U.S. Treasury Securities, generally considered to have the
least credit risk and the highest liquidity, composed 11.5% of Bancorp's
investment portfolio at December 31, 1997. All U.S. Treasury Securities were
classified as available-for-sale at that date and are available for liquidity
management purposes.
Another 25.7% of the investment portfolio is composed of securities
issued by U.S. government agencies and corporations, primarily the Federal Home
Loan Bank (FHLB), Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA), Student Loan Marketing Association (SLMA),
and Federal Farm Credit Bank. Included in the U.S. government agencies and
corporations securities category at December 31, 1997, were structured notes
totaling $2,000,000. The structured notes held by Bancorp are multi-step coupon
debentures issued by the FHLB, FHLMC, FNMA, and SLMA and, accordingly, are rated
AAA. All U.S. government agencies and corporations securities were classified as
available-for-sale at December 31, 1997, and are available for liquidity
management purposes. Due to the government guarantees, either expressed or
implied, U.S. government agency and corporation obligations are considered to
have low credit risk and high liquidity.
Investments in mortgage-backed securities (MBSs), including
collateralized mortgage obligations (CMOs), composed 39.1% of the investment
portfolio at December 31, 1997. MBSs represent participations in pools of
mortgage loans, the principal and interest payments of which are passed to the
security investors. MBSs are subject to prepayment risk, especially during
periods of decreasing interest rates. Prepayments of the underlying mortgage
loans may shorten the lives of the securities, thereby affecting yields to
maturity and market values. Bancorp invests primarily in MBSs issued by U.S.
government agencies, such as FHLMC, FNMA, and the Government National Mortgage
Association (GNMA). Such securities, because of government agency guarantees,
are considered to have low credit risk and high liquidity. Accordingly, about
92.5% of Bancorp's MBSs are classified as available-for-sale.
CMOs totaled $58,138,000 at December 31, 1997, all of which were
classified as available-for-sale. CMOs are collateralized by pools of mortgage
loans or MBSs. All of the CMOs held by Bancorp are rated AAA by Standard &
Poor's Corporation or similar rating agencies. Bancorp does not own any interest
only securities, principal only securities, accrual bonds, inverse floaters, or
high risk CMOs, as defined by regulatory guidelines. All CMOs held as of
December 31, 1997, passed the stress test required by the Federal Financial
Institutions Examination Council at the last testing date and, therefore, are
not considered high risk by regulatory definition.
State, county, and municipal securities composed 18.6% of Bancorp's
investment portfolio at December 31, 1997. The securities are highly diversified
as to states and issuing authorities within states, thereby decreasing portfolio
risk. Bancorp management views investments in state, county, and municipal
securities as primarily long-term investments and, accordingly, about 63.0% of
such investments at December 31, 1997, were classified as held-to-maturity.
The remaining 5.10% of Bancorp's investment portfolio at December 31,
1997, termed "other securities," was primarily composed of stock ownership in
the Indianapolis and Cincinnati District Federal Home Loan Banks and in the
Federal Reserve Bank, and in taxable municipal securities.
Table 5 sets forth the maturities of investment securities
held-to-maturity and investment securities available-for-sale as of December 31,
1997, and the average yields of such securities calculated on the basis of the
cost and effective yields weighted for the scheduled maturity of each security.
Tax equivalent adjustments (using a 35.0% rate) have been made in calculating
yields on tax-exempt obligations of state, counties, and municipalities.
At December 31, 1997, the market value of Bancorp's held-to-maturity
investment securities portfolio exceeded the carrying value by $2,614,000. The
available-for-sale investment securities are reported at their market value of
TABLE 5 - INVESTMENT SECURITIES
DECEMBER 31, 1997
Maturing
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
(Dollars in thousands)
HELD-TO-MATURITY
Mortgage-backed securities(2) $ 196 5.77% $ 472 9.06% $ 3,584 6.82% $ 7,146 8.87%
State, county, and
municipal securities 16,868 12.71% 17,001 10.85% 6,979 10.45% 5,033 13.03%
Other securities 555 6.16% 513 6.38%
------- -------- ------- --------
TOTAL $17,619 12.43% $ 17,986 10.68% $10,563 9.22% $ 12,179 10.59%
======= ==== ======== ===== ======= ==== ======== ====
AVAILABLE-FOR-SALE
U.S. Treasury securities $26,238 6.08% $ 18,641 6.22%
Securities of other U.S.
government agencies
and corporations 9,767 6.37% 69,102 6.11% $20,425 7.08% $ 1,219 6.57%
Mortgage-backed securities(2) 107 6.38% 22,076 6.62% 13,934 6.45% 105,439 6.95%
State, county, and
municipal securities 1,676 7.24% 12,043 8.25% 6,710 8.29% 6,471 8.28%
Other securities 3,165 5.89% 766 7.61% 102 6.65% 14,736 7.33%
------- -------- ------- --------
TOTAL $40,953 6.18% $122,628 6.43% $41,171 7.06% $127,865 7.06%
======= ==== ======== ===== ======= ==== ======== ====
<FN>
(1) Tax equivalent basis was calculated using a marginal federal income tax
rate of 35.0%.
(2) 39.4% of the mortgage-backed securities maturing after five years are
variable rate.
FIRST FINANCIAL BANCORP 29
8
$332,617,000, as required by SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." See Note 8 of the Notes to Consolidated
Financial Statements for additional information.
Bancorp's federal funds sold and securities purchased under agreements to
resell increased $6,572,000, from $12,201,000 at December 31, 1996, to
$18,773,000 at December 31, 1997. Bancorp monitors this position as part of its
asset/liability management.
Bancorp does not use off-balance-sheet derivative financial instruments
(such as interest rate swaps) as defined in SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments."
DEPOSITS AND BORROWINGS
Bancorp's subsidiaries solicit deposits by offering a wide variety of
savings and transaction accounts, including checking accounts, regular savings
accounts, money market deposit accounts, and time deposits of various maturities
and rates. In accordance with Bancorp's decentralized management structure and
in an effort to respond to local conditions, each Bancorp subsidiary designs and
prices the savings and transaction accounts offered in its local market area.
Total deposits increased $350,212,000 or 18.6% in 1997. The two banks
that joined Bancorp during 1997 had total deposits of $89,540,000 at December
31, 1997, and deposits assumed from KeyBank as part of the branch acquisition
totaled $245,632,000; the other affiliates therefore experienced a smaller
increase in deposits during 1997. The growth in deposits was used to finance
loan growth and allowed for paydowns of borrowings. Comparing Bancorp totals at
December 31, 1997 and 1996, time deposits increased $171,143,000, savings
deposits increased $139,469,000, interest-bearing demand deposits decreased
$36,036,000, and noninterest-bearing demand deposits increased $75,636,000. The
average rate paid on time deposits increased only 2 basis points, from 5.40% for
1996 to 5.42% for 1997. The average rate paid on interest-bearing demand
deposits increased 4 basis points, from 2.30% in 1996 to 2.34% in 1997, and the
average rate paid for savings deposits decreased 6 basis points, from 2.50%
during 1996 to 2.44% during 1997. The weighted average rate for all
interest-bearing deposits remained constant at 4.14% for both 1997 and 1996.
Table 6 shows the contractual maturity of time deposits of $100,000 and
over that were outstanding at December 31, 1997. These deposits represented only
7.64% of total deposits.
During 1997, management decided to lengthen the maturities of Bancorp's
borrowings. In addition, the increase in deposits, especially the deposits
assumed from KeyBank, allowed for paydowns in short-term borrowings. As a
result, short-term borrowings decreased from $93,779,000 at December 31, 1996 to
$52,288,000 at December 31, 1997. During the same period, long-term borrowings
increased from $6,506,000 to $41,054,000.
TABLE 6 - MATURITIES OF TIME DEPOSITS
GREATER THAN OR EQUAL TO $100,000*
DECEMBER 31, 1997
(Dollars in thousands)
Maturing in
3 months or less $ 68,835
3 months to 6 months 32,671
6 months to 12 months 30,030
over 12 months 38,743
--------
TOTAL $170,279
========
<FN>
* All time deposits greater than or equal to $100,000 were in certificates of
deposit.
LIQUIDITY
Liquidity management is the process by which Bancorp ensures that
adequate liquid funds are available for the corporation and its subsidiaries.
These funds are necessary in order for Bancorp and its subsidiaries to meet
financial commitments on a timely basis. These commitments include withdrawals
by depositors, funding credit obligations to borrowers, paying dividends to
shareholders, paying operating expenses, funding capital expenditures, and
maintaining deposit reserve requirements. Liquidity is monitored and closely
managed by the asset/liability committees at Bancorp's subsidiaries.
Liquidity may be used to fund capital expenditures. Capital expenditures
were $3,438,000 for 1997 and $4,381,000 for 1996. Remodeling is a planned and
ongoing process given the 105 offices of Bancorp and its subsidiaries. Material
commitments for capital expenditures as of December 31, 1997, were $2,050,000.
Bancorp subsidiaries' source of funding is predominately deposits within
each of their respective market areas. The deposit base is diversified among
individuals, partnerships, corporations, and public entities. This
diversification helps Bancorp avoid dependence on large concentrations of funds.
Bancorp does not solicit time deposits from brokers.
Liquidity is derived primarily from core deposit growth, principal
payments received on loans, the sale and maturation of investment securities,
net cash provided by operating activities, and access to other funding sources.
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. In
addition, Bancorp utilizes advances from the Federal Home Loan Bank as a funding
source. The principal source of asset-funded liquidity is investment securities
classified as available-for-sale, the market values of which totaled
$332,617,000 at December 31, 1997. Securities classified as held-to-maturity
that are maturing within a short period of time can also be a source of
liquidity. Securities classified as held-to-maturity and that are maturing in
one year or less totaled $17,619,000 at December 31, 1997. In addition, other
types of assets--such as cash and due from banks, federal funds sold and
securities purchased under agreements to resell, and loans and interest-bearing
deposits with other banks maturing within one year--are sources of liquidity.
Certain restrictions exist regarding the ability of Bancorp's
subsidiaries to transfer funds to Bancorp (see Note 6 of the Notes to
Consolidated Financial Statements). Management is not aware of any other events
or regulatory requirements which, if implemented, are likely to have a material
effect on Bancorp's liquidity.
INTEREST RATE SENSITIVITY
Table 7 details the maturities and yields of interest-bearing financial
instruments at December 31, 1997, for the next five years and thereafter. Also
included with each category is the fair value of those instruments. The values
represent the contractual maturity of each instrument. For loan instruments
without contractual maturities, such as credit card loans, management has
allocated principal payments based upon historical trends of payment activity.
Where there is no set maturity, as in the case of some interest-bearing
liabilities, management has allocated the amounts based upon its expectation of
cash flows, incorporating internal core deposit studies and current expectations
of customer behavior. For loans, securities, and liabilities with contractual
maturities, the table presents principal cash flows and related weighted-average
interest rates by contractual maturities.
The data in Table 7 was aggregated by type of financial instrument --
fixed and variable rate loans, fixed and variable rate investments, other
earning assets, fixed and variable rate deposits, and other fixed and variable
rate interest-bearing liabilities. First Financial Bancorp has no interest rate
swaps, interest rate caps, or interest rate floors. Therefore, data concerning
these instruments is not included in the table.
The primary source of market risk for the finanical instruments presented
is interest rate risk. That is, the risk that an adverse change in market rates
will adversely affect the market value of the instruments. Generally, the longer
the maturity, the higher the interest rate risk exposure. While maturity
information does not necessarily present all aspects of exposure, it may provide
an indication of where risks are prevalent.
All financial institutions assume interest rate risk as an integral part
of normal operations. Managing and measuring interest rate risk is a dynamic,
multi-faceted process that ranges from reducing the exposure of Bancorp's net
interest margin to swings in interest rates, to assuring sufficient capital and
liquidity to support future balance sheet growth. Bancorp manages interest rate
risk
30 FIRST FINANCIAL BANCORP
9
through the asset/liability committees of Bancorp's subsidiaries. The
asset/liability committees are comprised of bank officers from various
disciplines. Each subsidiary committee establishes policies and rates which lead
to the prudent investment of resources, the effective management of risks
associated with changing interest rates, the existence of adequate liquidity,
and the earning of an adequate return on shareholders' equity.
Bancorp has a holding company asset/liability committee, made up of
representatives of various subsidiaries and disciplines, whose function is to
develop policies and guidelines for effective asset/liability management
throughout Bancorp's subsidiaries.
TABLE 7 - MARKET RISK DISCLOSURE
Principal Amount Maturing In: FAIR VALUE
1998 1999 2000 2001 2002 THEREAFTER TOTAL DECEMBER 31,1997
(Dollars in thousands)
RATE SENSITIVE ASSETS
Fixed interest rate loans $ 71,314 $ 44,614 $75,510 $86,688 $87,847 $278,718 $ 644,691 $ 632,588
Average interest rate 9.78% 9.57% 9.94% 9.44% 9.23% 8.64% 9.17%
Variable interest rate loans 408,781 72,230 41,999 36,151 60,818 712,361 1,332,340 1,361,060
Average interest rate 9.49% 9.10% 9.31% 9.30% 8.59% 8.14% 8.70%
Fixed interest rate securities 57,812 61,393 33,628 15,298 29,622 126,337 324,090 324,758
Average interest rate 6.64% 6.21% 6.10% 6.92% 6.43% 7.03% 6.65%
Variable interest rate securities 760 481 -- 88 104 65,441 66,874 68,820
Average interest rate 6.22% 8.39% -- 7.82% 7.00% 6.42% 6.43%
Other earning assets 21,448 712 100 -- -- -- 22,260 22,260
Average interest rate 6.22% 6.30% 6.10% -- -- -- 6.22%
RATE SENSITIVE LIABILITIES
Noninterest - bearing checking 218,353 -- 95,698 -- -- -- 314,051 314,051
Savings & interest- bearing checking 120,585 681,938 -- -- -- -- 802,523 802,523
Average interest rate 2.09% 1.99% -- -- -- -- 2.00%
Time deposits 747,542 249,729 85,600 15,491 13,959 1,283 1,113,604 1,113,061
Average interest rate 5.36% 5.58% 5.78% 5.61% 5.73% 6.35% 5.45%
Fixed interest rate borrowings 3,536 3,000 10,581 695 15,950 2,829 36,591 33,288
Average interest rate 5.55% 5.56% 5.60% 5.47% 5.75% 6.80% 5.75%
Variable interest rate borrowings 53,751 -- -- -- 3,000 -- 56,751 56,751
Average interest rate 5.33% -- -- -- 5.32% -- 5.33%
FIRST FINANCIAL BANCORP 31
10
STATISTICAL INFORMATION
(Unaudited)
1997 1996 1995
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD
Daily average balances and interest rates; (Tax equivalent basis; dollars in thousands)
EARNING ASSETS
Loans(1)
Commercial(2) $ 432,579 $ 43,732 10.11% $ 368,838 $ 36,817 9.98% $ 316,414 $ 32,581 10.30%
Real estate(2) 944,080 78,613 8.33% 857,947 70,119 8.17% 793,379 63,400 7.99%
Installment
and other consumer 412,564 42,793 10.37% 362,164 37,094 10.24% 321,978 32,131 9.98%
Lease financing(2) 18,817 1,449 7.70% 15,653 1,154 7.37% 15,580 1,217 7.81%
---------- ---------- ---------- -------- --------- --------
Total loans 1,808,040 166,587 9.21% 1,604,602 145,184 9.05% 1,447,351 129,329 8.94%
Investment securities(3)
Taxable 301,022 20,011 6.65% 294,898 19,330 6.55% 250,492 16,593 6.62%
Tax-exempt(2) 72,258 7,681 10.63% 83,251 9,314 11.19% 95,182 11,446 12.03%
---------- ---------- ---------- -------- --------- --------
Total investment securities(3) 373,280 27,692 7.42% 378,149 28,644 7.57% 345,674 28,039 8.11%
Interest-bearing deposits
with other banks 4,083 253 6.20% 7,736 450 5.82% 5,932 351 5.92%
Federal funds sold and securities
purchased under agreements
to resell 11,379 599 5.26% 9,432 507 5.38% 7,319 418 5.71%
---------- ---------- ---------- -------- --------- --------
TOTAL EARNING ASSETS 2,196,782 195,131 8.88% 1,999,919 174,785 8.74% 1,806,276 158,137 8.75%
NONEARNING ASSETS
Allowance for loan losses (24,470) (21,547) (19,341)
Cash and due from banks 94,253 85,993 75,904
Accrued interest and other assets 96,508 83,159 71,076
---------- ---------- ----------
TOTAL ASSETS $2,363,073 $2,147,524 $1,933,915
========== ========== ==========
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand $ 250,005 5,844 2.34% $ 298,975 6,866 2.30%$ 260,419 5,799 2.23%
Savings 472,180 11,539 2.44% 372,169 9,317 2.50% 358,517 9,212 2.57%
Time 976,643 52,928 5.42% 920,474 49,724 5.40% 822,289 44,402 5.40%
---------- ---------- ---------- -------- --------- --------
Total interest-bearing deposits 1,698,828 70,311 4.14% 1,591,618 65,907 4.14% 1,441,225 59,413 4.12%
Borrowed funds
Short-term borrowings 111,944 5,518 4.93% 73,095 3,521 4.82% 74,744 4,051 5.42%
Long-term borrowings 16,782 1,004 5.98% 4,301 279 6.49% 783 52 6.64%
---------- ---------- ---------- -------- --------- --------
Total borrowed funds 128,726 6,522 5.07% 77,396 3,800 4.91% 75,527 4,103 5.43%
---------- ---------- ---------- -------- --------- --------
TOTAL INTEREST-BEARING LIABILITIES 1,827,554 76,833 4.20% 1,669,014 69,707 4.18% 1,516,752 63,516 4.19%
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 236,998 208,017 184,797
Other liabilities 24,298 23,043 19,970
SHAREHOLDERS' EQUITY 274,223 247,450 212,396
---------- ---------- ---------- -------- --------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,363,073 $2,147,524 $1,933,915
========== ========== ==========
NET INTEREST INCOME AND
INTEREST RATE SPREAD $ 118,298 4.68% $105,078 4.56% $ 94,621 4.56%
========== ==== ======== ==== ======== ====
NET INTEREST MARGIN 5.39% 5.25% 5.24%
==== ==== ====
(1) Nonaccrual loans are included in average loan balance and loan fees are
included in interest income.
(2) Interest income on tax-exempt investments and on certain tax-exempt loans
and leases has been adjusted to a taxable equivalent basis using a marginal
federal income tax rate of 35.0%.
(3) Includes both investment securities held-to-maturity and investment
securities available-for-sale.
32 FIRST FINANCIAL BANCORP
11
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1997 1996
(Dollars in thousands)
ASSETS
Cash and due from banks $ 142,334 $ 110,767
Interest-bearing deposits with other banks 3,487 5,079
Federal funds sold and securities purchased under agreements to resell 18,773 12,201
Investment securities held-to-maturity
(market value of $60,961 at December 31, 1997;
$83,441 at December 31, 1996) 58,347 78,945
Investment securities available-for-sale, at market value
(cost of $329,261 at December 31, 1997;
$288,829 at December 31, 1996) 332,617 290,701
Loans
Commercial 502,919 398,034
Real estate-construction 63,308 43,262
Real estate-mortgage 927,985 863,414
Installment 439,744 366,051
Credit card 17,369 16,107
Lease financing 27,260 14,821
----------- -----------
Total loans 1,978,585 1,701,689
Less
Unearned income 1,554 1,425
Allowance for loan losses 27,510 22,672
----------- -----------
Net loans 1,949,521 1,677,592
Premises and equipment 47,013 42,633
Deferred income taxes 3,070 2,802
Accrued interest and other assets 80,949 40,991
----------- -----------
TOTAL ASSETS $ 2,636,111 $ 2,261,711
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 314,051 $ 238,415
Interest-bearing 1,916,127 1,641,551
----------- -----------
Total deposits 2,230,178 1,879,966
Short-term borrowings
Federal funds purchased and securities sold under agreements to repurchase 46,638 35,304
Federal Home Loan Bank borrowings 2,000 56,500
Other 3,650 1,975
----------- -----------
Total short-term borrowings 52,288 93,779
Federal Home Loan Bank long-term borrowings 41,054 6,506
Accrued interest and other liabilities 26,332 22,978
----------- -----------
TOTAL LIABILITIES 2,349,852 2,003,229
SHAREHOLDERS' EQUITY
Common stock -- par value $8 per share
Authorized -- 60,000,000 shares
Issued -- 16,558,108 shares in 1997
and 14,727,772 shares in 1996 132,464 117,822
Surplus 100,129 47,125
Retained earnings 51,973 93,369
Unrealized net gains on securities available-for-sale, net of tax 2,094 1,162
Restricted stock awards (338) (220)
Treasury stock, at cost, 1,319 and 25,907 shares (63) (776)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 286,259 258,482
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,636,111 $ 2,261,711
=========== ===========
See Notes to Consolidated Financial Statements.
FIRST FINANCIAL BANCORP 33
12
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
1997 1996 1995
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees $ 166,336 $ 144,941 $ 129,058
Investment securities
Taxable 20,011 19,330 16,593
Tax-exempt 4,986 6,047 7,431
----------- ----------- -----------
Total investment securities interest 24,997 25,377 24,024
Interest-bearing deposits with other banks 253 450 351
Federal funds sold and securities purchased under agreements to resell 599 507 418
----------- ----------- -----------
Total interest income 192,185 171,275 153,851
INTEREST EXPENSE
Deposits 70,311 65,907 59,413
Short-term borrowings 5,518 3,521 4,051
Long-term borrowings 1,004 279 52
----------- ----------- -----------
TOTAL INTEREST EXPENSE 76,833 69,707 63,516
----------- ----------- -----------
NET INTEREST INCOME 115,352 101,568 90,335
Provision for loan losses 4,736 3,433 2,108
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 110,616 98,135 88,227
NONINTEREST INCOME
Service charges on deposit accounts 10,398 9,182 8,596
Trust revenues 9,905 8,278 7,623
Investment securities gains (losses) 54 (8) 340
Other 6,620 4,645 3,999
----------- ----------- -----------
TOTAL NONINTEREST INCOME 26,977 22,097 20,558
NONINTEREST EXPENSES
Salaries and employee benefits 42,385 37,586 33,262
Net occupancy 5,025 4,790 4,340
Furniture and equipment 4,374 3,911 3,352
Data processing 4,960 4,773 5,165
Deposit insurance 375 2,889 2,204
State taxes 1,718 1,706 1,637
Other 18,840 15,606 13,385
----------- ----------- -----------
TOTAL NONINTEREST EXPENSES 77,677 71,261 63,345
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 59,916 48,971 45,440
Income tax expense 19,608 15,031 13,651
----------- ----------- -----------
NET EARNINGS $ 40,308 $ 33,940 $ 31,789
=========== =========== ===========
NET EARNINGS PER SHARE - BASIC $ 2.44 $ 2.11 $ 2.10
=========== =========== ===========
NET EARNINGS PER SHARE - DILUTED $ 2.43 $ 2.11 $ 2.10
=========== =========== ===========
AVERAGE SHARES OUTSTANDING 16,546,552 16,072,510 15,110,682
=========== =========== ===========
See Notes to Consolidated Financial Statements.
34 FIRST FINANCIAL BANCORP
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1997 1996 1995
(Dollars in thousands)
OPERATING ACTIVITIES
Net earnings $ 40,308 $ 33,940 $ 31,789
Adjustments to reconcile net earnings to net cash provided by operating activities
Provision for loan losses 4,736 3,433 2,108
Provision for depreciation and amortization 5,204 4,027 3,981
Net amortization of premiums and accretion of discounts
on investment securities 376 715 1,114
Deferred income taxes (158) 680 171
Realized (gains) losses on investment securities (54) 8 (340)
Originations of mortgage loans held for sale (65,748) (43,943) (33,009)
Gains from sales of mortgage loans held for sale (839) (667) (501)
Proceeds from sales of mortgage loans held for sale 66,587 44,610 33,510
Increase in cash surrender value of life insurance (3,264) (8,159) (37)
(Increase) decrease in interest receivable (229) 815 220
(Increase) decrease in prepaid expenses (563) (199) 143
Increase (decrease) in accrued expenses 920 (338) 1,041
Increase (decrease) in interest payable 69 (384) 1,638
Other (97) 1,113 (58)
--------- --------- ---------
Net cash provided by operating activities 47,248 35,651 41,770
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale 972 4,984 39,514
Proceeds from calls, paydowns, and maturities of investment securities available-for-sale 127,409 150,957 58,798
Purchases of investment securities available-for-sale (149,707) (133,449) (112,372)
Proceeds from calls, paydowns, and maturities of investment securities held-to-maturity 22,361 17,594 56,118
Purchases of investment securities held-to-maturity (1,293) (3,053) (525)
Net decrease in interest-bearing deposits with other banks 1,592 1,803 2,470
Net decrease (increase) in federal funds sold and
securities purchased under agreements to resell 5,129 23,426 (6,042)
Net increase in loans and leases (164,896) (96,361) (56,235)
Proceeds from disposal of other real estate owned 560 1,765 1,028
Recoveries from loans and leases previously charged off 999 1,173 1,202
Net cash acquired (used) in purchase of financial institutions and branches 147,963 (6,427)
Cash acquired in merger with other financial institutions 8,288 1,845 5,999
Purchases of premises and equipment (3,438) (4,381) (3,615)
--------- --------- ---------
Net cash used in investing activities (4,061) (40,124) (13,660)
FINANCING ACTIVITIES
Net increase (decrease) in total deposits 13,906 (15,416) 54,765
Net (decrease) increase in short-term borrowings (41,491) 35,389 (63,747)
Proceeds from long-term borrowings 34,951 5,000 49
Principal payments of long-term borrowings (403) (1,314) (850)
Cash dividends (18,958) (16,341) (13,521)
Purchase of common stock (282) (994)
Proceeds from exercise of stock options 657 231 127
--------- --------- ---------
Net cash (used in) provided by financing activities (11,620) 6,555 (23,177)
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 31,567 2,082 4,933
Cash and cash equivalents at beginning of year 110,767 108,685 103,752
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 142,334 $ 110,767 $ 108,685
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 76,764 $ 70,091 $ 61,878
========= ========= =========
Income taxes paid $ 21,030 $ 14,919 $ 12,140
========= ========= =========
Recognition of deferred tax (liabilities) assets attributable to SFAS No. 115 $ (551) $ 139 $ (2,364)
========= ========= =========
Acquisition of other real estate owned through foreclosure $ 1,265 $ 375 $ 635
========= ========= =========
Issuance of restricted stock awards $ 220 $ 226 $ 33
========= ========= =========
See Notes to Consolidated Financial Statements.
FIRST FINANCIAL BANCORP 35
14
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON COMMON UNREALIZED RESTRICTED TREASURY TREASURY
STOCK STOCK RETAINED GAINS AND STOCK STOCK STOCK
SHARES AMOUNT SURPLUS EARNINGS (LOSSES) AWARDS SHARES AMOUNT TOTAL
(Dollars in thousands)
Balances at December 31, 1994 12,204,575 $ 97,637 $ 15,027 $ 84,748 $(2,712) $ (27) $194,673
Net earnings 31,789 31,789
Cash dividends declared
(Bancorp - $0.89 per share) (13,521) (13,521)
Shares issued in Peoples
Bank and Trust Company
merger 354,645 2,837 (867) 6,351 8,321
Shares issued in Bright
Financial Services, Inc. merger 442,876 3,543 (653) 5,735 8,625
Change in unrealized gains
and (losses), net of income
tax expense of $2,364 4,149 4,149
Exercise of stock options,
net of shares purchased 10,326 82 45 127
Restricted stock awards 1,000 8 25 (33)
Amortization of restricted
stock awards 12 12
---------- -------- -------- -------- ------ ----- --------
Balances at December 31, 1995 13,013,422 104,107 13,577 115,102 1,437 (48) 234,175
Net earnings 33,940 33,940
Cash dividends declared
(Bancorp - $1.01 per share) (16,341) (16,341)
Shares issued in
F&M Bancorp merger 363,373 2,907 (1,238) 6,023 7,692
Change in unrealized gains
and (losses), net of income
tax benefit of $139 (275) (275)
Purchase of common stock (30,174) $ (994) (994)
Exercise of stock options,
net of shares purchased 5,589 45 (32) 6,934 218 231
Restricted stock awards 6,500 52 174 (226)
10% stock dividend 1,338,888 10,711 34,644 (45,355) (2,667)
Amortization of restricted
stock awards 54 54
---------- -------- -------- -------- ------ ----- ------ ------ --------
Balances at December 31, 1996 14,727,772 117,822 47,125 93,369 1,162 (220) (25,907) (776) 258,482
NET EARNINGS 40,308 40,308
CASH DIVIDENDS DECLARED
(BANCORP - $1.14 PER SHARE) (18,958) (18,958)
SHARES ISSUED IN HASTINGS
FINANCIAL CORPORATION MERGER 322,386 2,579 (1,733) 4,238 1 5,085
CHANGE IN UNREALIZED GAINS
AND (LOSSES), NET OF INCOME
TAX EXPENSE OF $551 931 931
EXERCISE OF STOCK OPTIONS,
NET OF SHARES PURCHASED 2,471 38 (168) 23,817 787 657
10% STOCK DIVIDEND 1,505,479 12,025 54,896 (66,984) (212) (63)
PURCHASE OF COMMON STOCK (5,965) (282) (282)
RESTRICTED STOCK AWARDS 9 (220) 6,948 208 (3)
AMORTIZATION OF RESTRICTED
STOCK AWARDS 102 102
---------- -------- -------- -------- ------ ----- ------ ------ --------
BALANCES AT DECEMBER 31, 1997 16,558,108 $132,464 $100,129 $ 51,973 $2,094 $(338) (1,319) $ (63) $286,259
========== ======== ======== ======== ====== ===== ====== ====== ========
See Notes to Consolidated Financial Statements.
36 FIRST FINANCIAL BANCORP
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The consolidated financial statements of First
Financial Bancorp. (Bancorp), a bank and savings and loan holding company,
principally serving western Ohio, eastern and west-central Indiana and southern
Michigan, include the accounts and operations of Bancorp and its 15 wholly owned
subsidiaries. All significant intercompany transactions and accounts have been
eliminated in consolidation. The preparation of financial statements in
conformity with generally accepted accounting principles requires the use of
management's estimates. Interest on loans, securities, and other earning assets
is recognized primarily on the accrual basis. Intangible assets arising from the
acquisition of subsidiaries are being amortized over varying periods, none of
which exceeds 25 years. Core deposit intangibles are being amortized over
varying periods, none of which exceeds 10 years.
Investment securities - Statement of Financial Accounting Standards
(SFAS)No. 115 classifies debt and equity securities in three categories:
trading, held-to-maturity, and available-for-sale.
Bancorp does not hold any investment securities for trading purposes.
Management determines the appropriate classification of debt securities at the
time of purchase. Debt securities are classified as held-to-maturity when
Bancorp has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Debt securities not
classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are stated at aggregate fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be other
than temporary, are included in investment securities gains (losses). The cost
of securities sold is based on the specific identification method.
Loans - Loan origination and commitment fees and certain direct loan
origination costs are deferred, and the net amount amortized as an adjustment to
the related loan's yield. The accrual of interest income is discontinued when
the collection of a loan or interest, in whole or in part, is doubtful. This
applies generally to all loans, including impaired loans. When interest accruals
are suspended, interest income accrued in the current period is reversed and
interest accrued in the prior year is charged to the allowance for loan losses.
Bancorp's subsidiaries sell certain mortgage loans immediately after
origination on a flow basis. Due to Bancorp's policy of selling loans on a flow
basis, loans held for sale are not material and therefore not disclosed
separately on the Consolidated Balance Sheets. Loans held for sale are carried
at the lower of cost or market value.
SFAS No. 122, "Accounting for Mortgage Servicing Rights," requires
companies engaging in mortgage banking operations, that is, the selling of
mortgage loans, to recognize as separate assets the estimated value of rights to
service mortgage loans for others. A company that acquires mortgage servicing
rights either through origination or purchase of mortgage loans and sells or
securitizes those loans with servicing rights retained should allocate the total
cost of the mortgage loans to mortgage servicing rights and to loans without
mortgage servicing rights based on their relative fair values. This allocation
increases the gain or decreases the loss from the sale of the mortgage loans and
decreases income in the future as the mortgage servicing rights are amortized
against servicing income. The adoption of this statement by Bancorp in 1996 did
not have a material impact on its consolidated financial position or earnings.
Allowance for loan losses - The level of the allowance for loan losses
(allowance) is based upon management's evaluation of the loan and lease
portfolios' 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, economic conditions, and other
pertinent 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. The level of the allowance maintained is believed by management to be
adequate to cover future potential losses. The allowance is increased by
provisions charged to expense and decreased by charge-offs, net of recoveries of
amounts previously charged off.
Lease financing - Bancorp principally uses the finance method of
accounting for direct lease contracts. Under this method of accounting, a
receivable is recorded for the total amount of lease payments due and estimated
residual values. Lease income, represented by the excess of the total contract
receivable plus estimated equipment residual value over the cost of the related
equipment, is recorded over the terms of the leases at a level rate of return on
the unrecovered net investment.
Premises and equipment - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed principally on the straight-line method over the estimated useful lives
of the assets. Maintenance and repairs are charged to operations as incurred.
Other real estate owned - Other real estate owned represents properties
acquired by Bancorp's subsidiaries through loan defaults by customers. The
property is recorded at the lower of cost or fair value minus estimated costs to
sell at the date acquired. Subsequently, the property is valued at the lower of
the amount recorded when the property was placed into other real estate owned or
fair value minus estimated costs to sell based on periodic valuations performed
by management. An allowance for losses on other real estate owned may be
maintained for subsequent valuation adjustments on a specific property basis.
Any gains or losses realized at the time of disposal are reflected in income.
Income taxes - Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Bancorp and its subsidiaries file a consolidated federal income tax
return. Each subsidiary provides for income taxes on a separate return basis,
and remits to Bancorp amounts determined to be currently payable.
Earnings per share - SFAS No. 128, "Earnings per Share," issued in 1997
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to SFAS No. 128 requirements.
Cash flow information - For purposes of the statement of cash flows,
Bancorp considers cash and due from banks as cash and cash equivalents.
Transfers and servicing of financial assets and extinguishment of
liabilities - SFAS No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities," was released in June, 1996, and is
effective for transactions occurring after December 31, 1996. Under the
provisions of SFAS No. 125, each party to a transaction recognizes only assets
it controls and liabilities it has incurred, derecognizes assets only when
control has been surrendered and derecognizes liabilities only when they have
been extinguished. Transactions are to be separated into components and separate
assets and liabilities may need
FIRST FINANCIAL BANCORP 37
16
to be recorded for the different components. Adoption of this statement did not
have a material effect on Bancorp's consolidated financial position or earnings.
Reporting comprehensive income - SFAS No. 130, "Reporting Comprehensive
Income," was issued in June, 1997, and is effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a set of financial
statements. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources. Bancorp believes that adoption of this
statement will not have a material impact on its financial statements.
Disclosure about segments and related information - SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," was
released in June, 1997, and is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for reporting information
about operating segments. Operating segments are components of a business about
which separate financial information is available, that are evaluated regularly
by the chief operating decision maker in deciding how to allocate resources and
in assessing performance. Bancorp believes that adoption of this statement will
not have a material impact on its financial statements.
Reclassifications - Certain reclassifications of prior years' amounts
have been made to conform to current year presentation. Such reclassifications
had no effect on net earnings.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
Bancorp's subsidiaries are required to maintain average reserve balances
either in the form of vault cash or reserves held on deposit with the Federal
Reserve Bank, Federal Home Loan Bank, or in pass-through reserve accounts with
correspondent banks. The average amounts of these required reserve balances for
1997 and 1996 were approximately $21,707,000 and $24,178,000, respectively.
NOTE 3 - BUSINESS COMBINATIONS
Bancorp consummated the following business combinations in 1997, 1996, and 1995:
ACQUISITION SHARES PURCHASE
DATE ASSETS DEPOSITS ISSUED PRICE
(Dollars in thousands)
Purchase transactions
KEYBANK BRANCHES DECEMBER 8, 1997 $ 93,486 $246,120 $28,837
SOUTHEASTERN INDIANA BANCORP JUNE 1, 1997 55,071 46,774 7,800
Farmers State Bancorp December 1, 1996 64,860 56,283 7,575
Pooling-of-interests
HASTINGS FINANCIAL CORPORATION JANUARY 1, 1997 49,989 44,156 322,386
F&M Bancorp April 1, 1996 61,721 53,638 363,373
Bright Financial Services, Inc. October 1, 1995 112,813 98,251 442,876
Peoples Bank and Trust Company July 16, 1995 54,005 45,220 354,645
On November 1, 1997, two of Bancorp's subsidiaries, The Citizens
Commercial Bank & Trust Company and Van Wert National Bank, combined to form
Community First Bank & Trust (Community First). In addition to this merger, on
December 8, 1997, Community First purchased the assets and assumed the
liabilities of eleven branches from KeyBank National Association (Key),
Cleveland, Ohio. This group of offices includes branches in Mercer, Auglaize,
Allen, Paulding, and Williams counties in Ohio. This acquisition was accounted
for using the purchase method of accounting and, accordingly, the consolidated
financial statements include the results of operations of the eleven branches
from the date of purchase.
On June 1, 1997, Bancorp paid $7.8 million in cash for all outstanding
common shares of Southeastern Indiana Bancorp (SIB). Upon consummation of the
merger, SIB was merged out of existence and its only subsidiary, the $55 million
Vevay Deposit Bank, became a wholly owned subsidiary of Bancorp. Vevay Deposit
Bank has its main office and two other offices in Vevay, Indiana and one office
in East Enterprise, Indiana. This merger was accounted for using the purchase
method of accounting and, accordingly, the consolidated financial statements
include Vevay Deposit Bank's results of operations from the date of purchase.
On January 1, 1997, Bancorp issued 322,386 shares of its common stock in
exchange for all the outstanding common stock of Hastings Financial Corporation
(Hastings) of Hastings, Michigan. Upon consummation of the merger, Hastings was
merged out of existence and the $50 million National Bank of Hastings, Hastings'
only subsidiary, became a wholly owned subsidiary of Bancorp. This merger was
accounted for as an immaterial pooling-of-interests and accordingly, the
consolidated financial statements, including earnings per share, were not
restated for periods prior to January 1, 1997.
On December 23, 1997, Bancorp signed a Plan and Agreement of Merger with
The Union State Bank, a $60 million bank in Payne, Ohio. Upon completion of the
merger process, which is subject to regulatory and shareholder approval, The
Union State Bank will be dissolved and become the 22nd branch of Community First
Bank & Trust. The purchase price of this cash acquisition will be $13.6 million
and will be accounted for using the purchase method of accounting.
38 FIRST FINANCIAL BANCORP
17
NOTE 4 - LEASE FINANCING
Leases included in the loan portfolio at December 31 were composed as follows:
1997 1996
(Dollars in thousands)
Direct financing $ 22,097 $ 12,725
Leveraged 1,302 1,302
Non-recourse debt, principal and interest (936) (936)
-------- --------
Net rentals receivable 22,463 13,091
Estimated residual value of leased assets 10,580 4,202
Less unearned income 5,783 2,472
-------- --------
INVESTMENT IN LEASES, NET $ 27,260 $ 14,821
======== ========
Direct financing lease payments receivable as of December 31, 1997, for the next
five years and thereafter are as follows:
(Dollars in thousands)
1998 $ 6,656
1999 6,025
2000 4,637
2001 3,162
2002 1,592
Thereafter 25
NOTE 5 -PREMISES AND EQUIPMENT
Premises and equipment at December 31 were summarized as follows:
1997 1996
(Dollars in thousands)
Land and land improvements $ 8,896 $ 8,426
Buildings 48,109 43,148
Furniture and fixtures 34,588 31,619
Leasehold improvements 1,088 792
Construction in progress 676 530
------- -------
93,357 84,515
Less accumulated depreciation
and amortization 46,344 41,882
------- -------
TOTAL $47,013 $42,633
======= =======
NOTE 6 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES
Dividends paid by Bancorp are mainly provided by dividends from its
subsidiaries. However, certain restrictions exist regarding the ability of these
subsidiaries to transfer funds to Bancorp in the form of cash dividends, loans,
or advances. The approval of the subsidiaries' respective primary federal
regulators is required for Bancorp's subsidiaries to pay dividends in excess of
regulatory limitations. As of December 31, 1997, Bancorp's subsidiaries had
retained earnings of $115,993,000 of which $17,035,000 was available for
distribution to Bancorp as dividends without prior regulatory approval.
NOTE 7 - 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. 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
SFAS 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.
Standby letters of credit-These transactions 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. Bancorp had issued standby letters of credit aggregating $19,210,000
and $9,706,000 at December 31, 1997 and 1996, respectively.
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-Commitments to extend credit 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 termi-
FIRST FINANCIAL BANCORP 39
18
nation 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 $335,092,000 and
$270,232,000 at December 31, 1997 and 1996, respectively. Management does not
anticipate any material losses as a result of these commitments.
NOTE 8 - INVESTMENT SECURITIES
The following is a summary of investment securities as of December 31, 1997:
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
(Dollars in thousands)
U.S. Treasury securities $ 44,732 $ 151 $ (4) $ 44,879
Securities of U.S. government
agencies and corporations 100,041 504 (32) 100,513
Mortgage-backed securities $11,398 $ 375 $ (57) $11,716 139,874 1,872 (190) 141,556
State, county, and municipal securities 45,881 2,344 (53) 48,172 26,131 770 (1) 26,900
Other securities 1,068 5 1,073 18,483 286 18,769
------- ------ ----- ------- -------- ------ ----- --------
Total $58,347 $2,724 $(110) $60,961 $329,261 $3,583 $(227) $332,617
======= ====== ===== ======= ======== ====== ===== ========
The following is a summary of investment securities as of December 31, 1996:
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
(Dollars in thousands)
U.S. Treasury securities $ 43,361 $ 192 $ (16) $ 43,537
Securities of U.S. government
agencies and corporations 77,767 579 (18) 78,328
Mortgage-backed securities $14,506 $ 396 $(125) $14,777 132,683 995 (520) 133,158
State, county, and municipal securities 62,474 4,240 (19) 66,695 19,780 500 (19) 20,261
Other securities 1,965 7 (3) 1,969 15,238 185 (6) 15,417
------- ------- ----- ------- -------- ------ ----- --------
Total $78,945 $ 4,643 $(147) $83,441 $288,829 $2,451 $(579) $290,701
======= ======= ===== ======= ======== ====== ===== ========
The carrying value of investment securities as of December 31, 1995, by
category was as follows: U.S. Treasury $68,382,000, U.S. government agencies and
corporations $104,904,000, mortgage-backed $112,129,000, state, county, and
municipal $84,309,000, and other $17,850,000.
During the year ended December 31, 1997, available-for-sale securities
with a fair value at the date of sale of $971,000 were sold. The gross realized
gains on such sales totaled $1,000.
During the year ended December 31, 1996, available-for-sale securities
with a fair value at the date of sale of $5,000,000 were sold. The gross
realized losses on such sales totaled $16,000.
During the year ended December 31, 1995, available-for-sale securities
with a fair value at the date of sale of $39,220,000 were sold. The gross
realized gains on such sales totaled $297,000 and the gross realized losses
totaled $3,000.
There were net investment gains after taxes of $49,000, $69,000, and
$323,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
The applicable income tax effects were an expense of $5,000 in 1997, a benefit
of $77,000 in 1996, and an expense of $17,000 in 1995.
The carrying value of investment securities pledged to secure public
deposits and for other purposes as required by law amounted to $186,574,000 at
December 31, 1997.
The amortized cost and market value of investment securities, including
mortgage-backed securities at December 31, 1997, by contractual maturity, are
shown in the table below. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
(Dollars in thousands)
Due in one year or less $17,619 $17,920 $ 40,892 $ 40,953
Due after one year through five years 17,986 19,145 122,025 122,628
Due after five years through ten years 10,563 11,424 40,543 41,171
Due after ten years 12,179 12,472 125,801 127,865
------- ------- -------- --------
TOTAL $58,347 $60,961 $329,261 $332,617
======= ======= ======== ========
40 FIRST FINANCIAL BANCORP
19
NOTE 9 - LOANS
Information as to nonaccrual and restructured loans at December 31 was as
follows:
1997 1996 1995
(Dollars in thousands)
Principal balance
Nonaccrual loans $5,257 $4,850 $2,764
Restructured loans 1,581 890 517
------ ------ ------
TOTAL $6,838 $5,740 $3,281
====== ====== ======
Interest income effect
Gross amount of interest that would
have been recorded at original rate $ 474 $ 717 $ 276
Interest included in income 165 371 135
------ ------ ------
NET IMPACT ON INTEREST INCOME $ 309 $ 346 $ 141
====== ====== ======
At December 31, 1997, there were no commitments outstanding to lend
additional funds to borrowers with nonaccrual or restructured loans.
The balances of other real estate acquired through loan foreclosures,
repossessions or other workout situations, net of the related allowance, totaled
$950,000, $264,000, and $1,677,000 at December 31, 1997, 1996, and 1995,
respectively.
Changes in the allowance for loan losses for the three years ended
December 31 were as follows:
1997 1996 1995
(Dollars in thousands)
Balance at beginning of year $22,672 $20,437 $18,609
Allowance acquired through mergers 3,013 1,592 1,162
Provision for loan losses 4,736 3,433 2,108
Loans charged off (3,910) (3,963) (2,644)
Recoveries 999 1,173 1,202
------- -------- -------
BALANCE AT END OF YEAR $27,510 $ 22,672 $20,437
======= ======== =======
The 1997, 1996, and 1995 allowances for loan losses related to loans that
are identified for evaluation in accordance with SFAS No. 114 are 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.
At December 31, 1997, 1996, and 1995, the recorded investment in loans
that are considered to be impaired under SFAS No. 114 was $3,313,000,
$1,935,000, and $889,000, respectively. The related allowance for loan losses on
these impaired loans was $995,000 at December 31, 1997, $694,000 at December 31,
1996, and $514,000 at December 31, 1995. 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 during the year ended December 31, 1997,
was approximately $3,016,000 versus $1,962,000 for the year ended December 31,
1996, and $1,325,000 for the year ended December 31, 1995. For the years ended
December 31, 1997, 1996, and 1995, Bancorp recognized interest income on those
impaired loans of $22,000, $54,000, and $57,000, respectively. Bancorp
recognizes income on impaired loans using the cash basis method.
Mortgage loans serviced for others are not included in the accompanying
Consolidated Balance Sheets. The unpaid principal balances of these loans
totaled $222,615,000, $223,012,000, and $221,519,000 at December 31, 1997, 1996,
and 1995, respectively.
Custodial escrow balances maintained in connection with these mortgage
loans serviced were approximately $1,670,000, $1,580,000, and $1,485,000 at
December 31, 1997, 1996, and 1995, respectively.
NOTE 10 - FEDERAL HOME LOAN BANK LONG-TERM BORROWINGS
Long-term borrowings at December 31, 1997, consisted exclusively of
Federal Home Loan Bank (FHLB) advances with rates ranging from 5.19% to 6.90%,
with interest payable monthly. The advances were secured by certain residential
mortgage loans with a book value of $534,284,000 at December 31, 1997. The
advances mature as follows: $1,000,000 in 1998, $3,000,000 in 1999, $14,581,000
in 2000, $695,000 in 2001, $18,950,000 in 2002, and $2,828,000 in 2006.
FIRST FINANCIAL BANCORP 41
20
NOTE 11 - INCOME TAXES
Income tax expense consisted of the following components:
1997 1996 1995
(Dollars in thousands)
Current
Federal $18,928 $13,098 $12,486
State 1,500 1,228 994
------- ------- -------
Total 20,428 14,326 13,480
Deferred (benefit) expense (820) 705 171
------- ------- -------
INCOME TAX EXPENSE $19,608 $15,031 $13,651
======= ======= =======
The difference between the federal income tax rates, applied to income before
income taxes, and the effective rates were due to the following:
1997 1996 1995
(Dollars in thousands)
Income taxes computed at federal statutory 35% $20,970 $17,139 $15,904
State income taxes, net of federal tax bene 975 798 646
Effect of tax-exempt interest (2,017) (2,224) (2,687)
Other (320) (682) (212)
------- ------- -------
INCOME TAX EXPENSE $19,608 $15,031 $13,651
======= ======= =======
On August 21, 1996, The Small Business Job Protection Act, which repeals
the favorable bad debt deduction method available to savings banks, was signed
into law. Bancorp's savings banks were required to change their bad debt method
to the specific charge-off method effective for the year ending December 31,
1996. As of December 31, 1996, Bancorp's two savings bank subsidiaries had a bad
debt reserve for federal tax purposes of approximately $5,600,000, all of which
represents the base year amount. A deferred tax liability has not been
recognized for the base year amount. If the savings bank subsidiaries use the
base year reserve for any reason other than to absorb loan losses, a tax
liability could be incurred. It is not anticipated that the reserve will be used
for any other purpose.
SFAS No. 109, "Accounting for Income Taxes," requires that deferred tax
assets and liabilities be carried at the enacted tax rate. The enacted tax rate
was 35% for years ended December 31, 1997, 1996, and 1995. The major components
of the temporary differences that give rise to deferred tax assets and
liabilities at December 31, 1997 and 1996 were as follows:
1997 1996
(Dollars in thousands)
Deferred tax assets
Allowance for loan losses $ 8,288 $ 7,399
Other real estate owned 44 118
Postretirement benefits other than pensions liability 980 971
Pension liability 338
Other 482 413
-------- -------
Total deferred tax assets 10,132 8,901
Deferred tax liabilities
Tax greater than book depreciation 1,105 1,129
Leasing activities 2,019 1,875
Federal Home Loan Bank stock basis difference 631 568
Prepaid pension asset 626
Deferred loan fees 343 284
Purchase accounting basis differences 614 320
Other 1,088 586
-------- -------
Total deferred tax liabilities 5,800 5,388
-------- -------
Net deferred tax asset recognized through the statement of earnings 4,332 3,513
Net deferred tax liability associated with investment securities
available-for-sale, recognized in equity section of balance sheet (1,262) (711)
-------- -------
TOTAL NET DEFERRED TAX ASSET $ 3,070 $ 2,802
======== =======
SFAS No. 109 requires that a valuation allowance be established if
management has evidence that part or all of the deferred tax assets may not be
realized. Management has determined that it is more likely than not that all of
the deferred tax assets will be realized. Therefore, no valuation allowance is
required at this time.
42 FIRST FINANCIAL BANCORP
21
NOTE 12 - RISK-BASED CAPITAL
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
ratios compared to minimum standards to determine whether a bank has adequate
capital.
Regulatory guidelines require a 4.00% Tier 1 capital ratio, an 8.00%
Total risk-based capital ratio, and a 4.00% Leverage ratio. Tier 1 capital
consists primarily of common shareholders' equity, net of certain intangibles,
and Total risk-based capital is Tier 1 capital plus Tier 2 supplementary
capital, which is primarily the allowance for loan losses subject to certain
limits. The Leverage ratio is a result of Tier 1 capital divided by average
total assets less certain intangibles.
Bancorp's Tier 1 ratio at December 31, 1997, was 13.0%, its Total
risk-based capital ratio was 14.3%, and its Leverage ratio was 10.5%. While
Bancorp's subsidiaries' ratios are well above regulatory requirements,
management will continue to monitor the asset mix which affects these ratios due
to the risk weights assigned various assets, and the allowance for loan losses,
which influences the Total risk-based capital ratio.
The table below illustrates the risk-based capital calculations and
ratios for the last two years.
DECEMBER 31,
1997 1996
(Dollars in thousands)
Tier I capital
Shareholders' equity $ 286,259 $ 258,482
Less intangibles 39,169 4,154
Less unrealized net
securities gains, net of tax 2,094 1,162
---------- ----------
TOTAL TIER I CAPITAL $ 244,996 $ 253,166
========== ==========
Total risk-based capital
Tier I capital $ 244,996 $ 253,166
Qualifying allowance for loan losses 23,591 19,856
---------- ----------
TOTAL RISK-BASED CAPITAL $ 268,587 $ 273,022
========== ==========
RISK WEIGHTED ASSETS $1,883,335 $1,588,464
========== ==========
RISK-BASED RATIOS
TIER I CAPITAL 13.0% 15.9%
========== ==========
TOTAL RISK-BASED CAPITAL 14.3% 17.2%
========== ==========
LEVERAGE 10.5% 11.8%
========== ==========
NOTE 13 - EMPLOYEE BENEFIT PLANS
Bancorp sponsors a non-contributory defined benefit pension plan covering
substantially all employees. Benefits are based on age, years of service, and
the employee's compensation during a five year period of employment. The funding
policy is to contribute annually the maximum amount that can be deducted for
federal income tax purposes.
The following tables set forth the plan's funded status and amounts
recognized in Bancorp's Consolidated Balance Sheets:
JANUARY 1,
1997 1996
(Dollars in thousands)
Actuarial present value of accumulated plan benefits:
Vested $16,531 $16,498
Nonvested 1,670 1,324
------- -------
Total $18,201 $17,822
======= =======
DECEMBER 31,
1997 1996
(Dollars in thousands)
Reconciliation of funded status:
Projected benefit obligation for service rendered to date $(24,393) $(21,639)
Plan assets at fair value, primarily listed stocks, bonds and U.S. bonds 23,738 21,963
-------- --------
Plan assets (less than) in excess of projected benefit obligation (655) 324
Unrecognized net gain from past experience different from that assumed
and effects of changes in assumptions (751) (159)
Prior service cost not yet recognized in net periodic pension cost 1,831 1,839
Unrecognized net asset at January 1, 1986, net of amortization (1,647) (1,810)
-------- --------
NET PENSION (LIABILITY) ASSET RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS $ (1,222) $ 194
======== ========
FIRST FINANCIAL BANCORP 43
22
Year Ended December 31,
1997 1996 1995
The net periodic pension expense included the following components:
(Dollars in thousands)
Service cost benefits earned during the period $ 1,502 $ 1,324 $ 1,129
Interest cost on projected benefit obligation 1,734 1,628 1,505
Actual return on plan assets (4,572) (2,212) (4,300)
Net amortization and deferral 2,827 425 2,744
------- -------- -------
NET PERIODIC PENSION EXPENSE $ 1,491 $ 1,165 $ 1,078
======= ======== =======
1997 1996
Assumptions used in the actuarial present value determinations of the projected
benefit obligation were:
Weighted-average discount rate used in
determining projected benefit obligations 7.25% 7.50%
Rate of increase in future compensation 3.50% 3.50%
Long-term rate of return on plan assets 8.00% 8.00%
Bancorp also sponsors a defined contribution 401(k) thrift plan which
covers substantially all employees. Employees may contribute up to 12.0% of
their base salaries into the plan. Bancorp contributions are at the discretion
of the Board of Directors. During 1997, 1996, and 1995, Bancorp contributed $.50
for each $1.00 an employee contributed, up to a maximum Bancorp contribution of
3.00% of the employee's base salary. All Bancorp matching contributions vest
immediately. Total Bancorp contributions to the 401(k) plan were $566,000 during
1997, $537,000 during 1996, and $489,000 during 1995.
NOTE 14 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Some Bancorp subsidiaries maintain health care and, in limited instances,
life insurance plans for employees who retired prior to 1994. Under the current
policy, the health care plans are unfunded and pay medically necessary expenses
incurred by retirees, after subtracting payments by Medicare or other providers
and after stated deductibles have been met. Bancorp has reserved the right to
change or eliminate these benefit plans.
The following table sets forth the funded status and amounts recognized
in Bancorp's Consolidated Balance Sheets:
1997 1996
(Dollars in thousands)
Actuarial present value of accumulated benefits other than pension $ 1,669 $ 1,715
Plan assets
------- -------
Accumulated obligation in excess of plan assets 1,669 1,715
Unrecognized prior service cost 36 380
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions 1,044 618
------- -------
NET POSTRETIREMENT LIABILITY RECOGNIZED IN THE BALANCE SHEETS $ 2,749 $ 2,713
======= =======
Net periodic postretirement benefit cost includes the following
components:
Interest cost on accumulated postretirement benefit obligation $ 127 $ 166
Net amortization and deferral (74) (14)
------- -------
NET PERIODIC COST $ 53 $ 152
======= =======
The discount rate used to determine the accumulated postretirement
benefit obligation was 7.25% at December 31, 1997, and 7.50% at December 31,
1996. For 1997, the assumed health care cost trend rates used in determining the
accumulated postretirement benefit obligation were 9.00% for 1998, 8.10% for
1999, 7.30% for 2000, 6.60% for 2001, 6.00% for 2002, 5.50% for 2003, and 5.00%
thereafter. For 1996, the assumed trend rates were 10.5% for the first seven
years, 8.50% for the next five years, and 6.50% thereafter. If the health care
cost trend rate assumptions were increased by 1.00%, the accumulated
postretirement benefit obligation as of December 31, 1997, would be increased by
approximately $130,000.
44 FIRST FINANCIAL BANCORP
23
NOTE 15 - EARNINGS PER SHARE
1997 1996 1995
The following table sets forth the computation of basic and diluted earnings per share:
(Dollars in thousands, except per share data)
Net income--numerator for basic and diluted earnings per share -
income available to common stockholders $ 40,308 $ 33,940 $ 31,789
=========== =========== ===========
Denominator for basic earnings per share - weighted average shares 16,546,552 16,072,510 15,110,682
Effect of dilutive securities - employee stock options 59,237 20,280 28,052
----------- ----------- -----------
Denominator for diluted earnings per share - adjusted weighted average shares 16,605,789 16,092,790 15,138,734
=========== =========== ===========
Basic earnings per share $ 2.44 $ 2.11 $ 2.10
=========== =========== ===========
Diluted earnings per share $ 2.43 $ 2.11 $ 2.10
=========== =========== ===========
NOTE 16 - STOCK OPTIONS
On April 28, 1992, the shareholders of Bancorp approved the 1991 Stock
Incentive Plan. This plan provides incentive stock options and stock awards to
certain key employees and non-qualified stock options to directors of Bancorp
who are not employees for up to 665,500 common shares of Bancorp. The options
are not exercisable for at least one year from the date of grant and are
thereafter exercisable for such periods (which may not exceed 10 years) as the
Board of Directors, or a committee thereof, specify, provided that the optionee
has remained in the employment of Bancorp or its subsidiaries. The Board or the
committee may accelerate the exercise period for an option upon the optionee's
disability, retirement, or death. All options expire at the end of the exercise
period. Cancelled and expired options become available for issuance and are
reflected in the available for future grant figure.
Bancorp has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation" requires use of option valuation models that were not
developed for use in valuing stock options. Under APB 25, because the exercise
price of Bancorp's employee stock options equaled the market price of the
underlying stock on the date of grant, no compensation expense was recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if Bancorp had accounted
for its stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996, and 1995, respectively: risk-free interest rates of 6.72%, 5.65%, and
7.13%; dividend yields of 3.67%, 3.57%, and 3.73%; volatility factors of the
expected market price of Bancorp's common stock of 0.195, 0.206, and 0.222; and
a weighted average expected life of the options of 7.57, 5.45, and 5.45 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Bancorp's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
option is amoritized to expense over the options' vesting period. Bancorp's pro
forma information follows:
1997 1996 1995
(Dollars in thousands, except per share data)
Pro forma net earnings $ 39,946 $ 33,686 $ 31,715
========= ========= ========
Pro forma earnings per share $ 2.42 $ 2.10 2.10
========= ========= ========
Activity in the above plan for 1997, 1996, and 1995 is summarized as follows:
1997 1996 1995
NUMBER OF OPTION NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 168,866 151,339 169,313
Granted 53,649 $28.30-33.41 58,332 $27.68-28.72 16,413 $27.48-28.10
Exercised (34,994) $18.71-28.72 (36,131) $18.71-26.77 (29,507) $18.15-27.48
Cancelled (550) $ 28.30 (1,210) $ 28.72 (2,440) $ 28.10
Expired $ (3,464) $ 26.77 (2,440) $ 18.15
--------- --------- ------
OUTSTANDING AT END OF YEAR 186,971 $18.15-33.41 168,866 $18.15-28.72 151,339 $18.15-28.10
========= ========= ======
EXERCISABLE AT END OF YEAR 133,843 $18.15-28.72 119,610 $18.15-27.48 134,926 $18.15-26.77
========= ========= ======
AVAILABLE FOR FUTURE GRANT UNDER
THE 1991 STOCK INCENTIVE PLAN 372,409 433,463 487,096
========= ========= ======
WEIGHTED-AVERAGE FAIR VALUE OF
OPTIONS GRANTED DURING THE YEAR $ 6.20 $ 5.50 $ 6.25
========= ========= ======
FIRST FINANCIAL BANCORP 45
24
NOTE 17 -LOANS TO RELATED PARTIES
Loans to directors, executive officers, principal holders of Bancorp's
common stock, and certain related persons totaled $30,692,000 and $16,058,000 at
December 31, 1997 and 1996, respectively.
Activity of these loans was as follows:
1997 1996
(Dollars in thousands)
Beginning balance $ 16,058 $ 18,929
Additions 20,502 4,656
Collected 5,868 7,527
Charged off 0 0
-------- --------
ENDING BALANCE $ 30,692 $ 16,058
======== ========
LOANS 90 DAYS PAST DUE $ 0 $ 0
======== ========
Related parties of Bancorp, as defined above, were customers of and had
transactions with subsidiaries of Bancorp in the ordinary course of business
during the periods noted above. Additional transactions may be expected in the
ordinary course of business in the future. All outstanding loans, commitments,
financing leases, transactions in money market instruments, and deposit
relationships included in such transactions were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others, and did not involve more than a normal
risk of collectibility or present other unfavorable features.
NOTE 18 - SHAREHOLDER RIGHTS PLAN
On November 26, 1993, Bancorp adopted a "shareholder rights plan" and
declared a dividend of one "right" on each outstanding share of Bancorp common
stock.
Under the plan, each "right" would be distributed only on the 20th
business day after any one of the following events occur: 1) A public
announcement that a person or group has acquired 20 percent or more (an
"acquiring person") of Bancorp's outstanding common shares, 2) The beginning of
a tender offer or exchange offer that would result in a person or group owning
30 percent or more of the corporation's outstanding common shares, or 3) A
declaration by the Board of Directors of a shareholder as an "adverse person."
(An adverse person is a person who owns at least 10 percent of the common shares
and attempts "greenmail," or is likely to cause a material adverse impact on the
Bancorp - such as impairing customer relationships, harming the company's
competitive position or hindering the Board's ability to effect a transaction it
deems to be in the shareholders' best interest.)
In the event of such a distribution, each "right" would entitle the
holder to purchase, at an exercise price of $99, one share of common stock of
the corporation. If a person or group acquires 30 percent or more of Bancorp's
outstanding common shares or is declared an "adverse person" by the Board of
Directors of the corporation, each "right" would entitle the holder to purchase,
at an exercise price of $99, a number (to be determined under the plan) of
shares of common stock of the corporation at a price equal to 50 percent of its
then current market price. However, any "rights" held by an "acquiring person"
or an "adverse person" could not be exercised.
Additionally, each "right" holder would be entitled to receive common
stock of any acquiring company worth two times the exercise price of the
"right," should either of the following happen after a person becomes an
"acquiring person": 1) Bancorp is acquired in a merger or other transaction -
other than a merger which the independent directors determine to be in the best
interest of Bancorp and its shareholders, or 2) 50 percent or more of Bancorp's
assets or earning power is sold or transferred.
Bancorp may redeem "rights" for $0.01 per "right" at any time prior to
the 20th business day following the date when a person acquires 20 percent of
the outstanding shares. Bancorp may not redeem the "rights" when a holder has
become an "adverse person."
The Board's adoption of this "rights" plan has no financial effect on
Bancorp, is not dilutive to Bancorp shareholders, is not taxable to the
corporation or its shareholders, and will not change the way in which Bancorp
common shares are traded. "Rights" are not exercisable until distributed; and
all "rights" will expire at the close of business on December 6, 2003, unless
earlier redeemed by Bancorp.
46 FIRST FINANCIAL BANCORP
25
NOTE 19 - DISCLOSURES ABOUT FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by Bancorp in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments-The carrying amounts reported in the
balance sheet for cash and short-term investments, such as interest-bearing
deposits with other banks and federal funds sold, approximated the fair value of
those instruments.
Investment securities (including mortgage-backed securities)-Fair values
for investment securities were based on quoted market prices, where available.
If quoted market prices were not available, fair values were based on quoted
market prices of comparable instruments. Refer to Note 8 for further disclosure.
Loans-For variable-rate loans that reprice frequently with no significant
change in credit risk, fair values were based on carrying values. The fair
values of other loans and leases, such as commercial real estate and consumer
loans were estimated by discounting the future cash flows using the current
rates at which similar loans and leases would be made to borrowers with similar
credit ratings and for the same remaining maturities. The carrying amount of
accrued interest approximated its fair value.
Deposit liabilities-The fair value of demand deposits, savings accounts,
and certain money market deposits was the amount payable on demand at the
reporting date. The carrying amounts for variable-rate certificates of deposit
approximated their fair values at the reporting date. The fair value of
fixed-rate certificates of deposit was estimated using a discounted cash flow
calculation which applies the interest rates currently offered for deposits of
similar remaining maturities. The carrying amount of accrued interest
approximated its fair value.
Borrowings-The carrying amounts of federal funds purchased and securities
sold under agreements to repurchase and other short-term borrowings approximated
their fair values. The fair value of long-term borrowings was estimated using a
discounted cash flow calculation which utilizes the interest rates currently
offered for borrowings of similar remaining maturities.
Commitments to extend credit and standby letters of credit-Pricing of
these financial instruments is based on the credit quality and relationship,
fees, interest rates, probability of funding and compensating balance and other
covenants or requirements. Loan commitments generally have fixed expiration
dates, are variable rate and contain termination and other clauses which provide
for relief from funding in the event that there is a significant deterioration
in the credit quality of the customer. Many loan commitments are expected to
expire without being drawn upon. The rates and terms of the commitments to
extend credit and the standby letters of credit are competitive with those in
Bancorp's market area. The carrying amounts are reasonable estimates of the fair
value of these financial instruments. Carrying amounts which are comprised of
the unamortized fee income and, where necessary, reserves for any expected
credit losses from these financial instruments, are immaterial. Refer to Note 7
for additional information.
Bancorp does not carry financial instruments which are held or issued for
trading purposes.
The estimated fair values of Bancorp's financial instruments at December
31 were as follows:
1997 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(Dollars in thousands)
Financial assets
Cash and short-term investments $ 164,594 $ 164,594 $ 128,047 $ 128,047
Investment securities held-to-maturity 58,347 60,961 78,945 83,441
Investment securities available-for-sale 332,617 332,617 290,701 290,701
Loans
Commercial 502,919 498,755 398,034 394,197
Real estate-construction 63,308 63,304 43,262 43,152
Real estate-mortgage 927,985 951,183 863,414 878,052
Installment, net of unearned income 438,190 434,341 364,626 362,449
Credit card 17,369 17,437 16,107 16,029
Leasing 27,260 28,628 14,821 15,693
Less allowance for loan losses 27,510 22,672
---------- ----------- ----------- -----------
Net loans 1,949,521 1,993,648 1,677,592 1,709,572
Accrued interest receivable 20,293 20,293 21,613 21,613
Financial liabilities
Deposits
Noninterest-bearing 314,051 314,051 238,415 238,415
Interest-bearing demand 281,151 281,151 317,187 317,187
Savings 521,372 521,372 381,903 381,903
Time 1,113,604 1,113,061 942,461 940,563
---------- ----------- ----------- -----------
Total deposits 2,230,178 2,229,635 1,879,966 1,878,068
Short-term borrowings 52,288 52,288 93,779 93,779
Federal Home Loan Bank long-term borrowings 41,054 37,751 6,506 6,016
Accrued interest payable 7,415 7,415 6,422 6,422
FIRST FINANCIAL BANCORP 47
26
NOTE 20 - FIRST FINANCIAL BANCORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
DECEMBER 31,
1997 1996
(Dollars in thousands)
ASSETS
Cash $ 37,429 $ 57,103
Receivables from subsidiaries 2,865
Investment in subsidiaries
Commercial banks 216,371 173,636
Stock savings banks 28,464 30,312
-------- -------
Total investment in subsidiaries 244,835 203,948
Other assets 9,332 94
-------- -------
Total assets $291,596 $264,010
======== =======
LIABILITIES
Dividends payable $ 4,967 $ 4,409
Other liabilities 370 1,119
-------- -------
Total liabilities 5,337 5,528
SHAREHOLDERS' EQUITY 286,259 258,482
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $291,596 $264,010
======== =======
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
1997 1996 1995
(Dollars in thousands)
INCOME
Interest income $ 24 $ 29 $ 40
Dividends from subsidiaries 45,811 31,211 33,572
-------- ------- -------
TOTAL INCOME 45,835 31,240 33,612
EXPENSES
Salaries and employee benefits 1,198 1,091 966
Other 1,945 955 608
-------- ------- -------
TOTAL EXPENSES 3,143 2,046 1,574
-------- ------- -------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 42,692 29,194 32,038
Income tax benefit (768) (282) (95)
-------- ------- -------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 43,460 29,476 32,133
Equity in undistributed net earnings of subsidiaries (3,152) 4,464 (344)
-------- ------- -------
NET EARNINGS $ 40,308 $33,940 $31,789
======== ======= =======
48 FIRST FINANCIAL BANCORP
27
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1997 1996 1995
(Dollars in thousands)
OPERATING ACTIVITIES
Net earnings $ 40,308 $ 33,940 $ 31,789
Adjustments to reconcile net earnings to net cash provided by operating activities
Equity in undistributed net earnings of subsidiaries 3,152 (4,464) 344
Provision for amortization 13 14 17
Deferred income taxes (71) 91 104
Increase (decrease) in dividends payable 558 505 (1)
(Decrease) increase in accrued expenses (749) (185) 109
Decrease (increase) in receivables 2,865 (2,865) 2,061
-------- -------- --------
Net cash provided by operating activities 46,076 27,036 34,423
INVESTING ACTIVITIES
Securities purchased under agreements to resell to affiliates 15,000 15,279
Capital contributions to subsidiaries (39,400) (1,300)
Purchase of subsidiary (7,800) (7,575)
Other 33 75 (43)
-------- -------- --------
Net cash (used in) provided by investing activities (47,167) 6,200 15,236
FINANCING ACTIVITIES
Cash dividends (18,958) (16,341) (13,521)
Purchase of common stock (282) (994)
Proceeds from exercise of stock options, net of shares purchased 657 231 127
Principal payment of long-term borrowings (850)
-------- -------- --------
Net cash used in financing activities (18,583) (17,104) (14,244)
-------- -------- --------
(DECREASE) INCREASE IN CASH (19,674) 16,132 35,415
Cash at beginning of year 57,103 40,971 5,556
-------- -------- --------
CASH AT END OF YEAR $ 37,429 $ 57,103 $ 40,971
======== ======== ========
REPORT OF ERNST & YOUNG LLP. INDEPENDENT AUDITORS
The Board of Directors and Shareholders
First Financial Bancorp.
We have audited the accompanying consolidated balance sheets of First
Financial Bancorp. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Financial Bancorp. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Cincinnati, Ohio
January 15, 1998
FIRST FINANCIAL BANCORP 49
28
QUARTERLY FINANCIAL AND COMMON STOCK DATA(1)
(Unaudited)
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
(Dollars in thousands, except per share data)
1997
Interest income $ 45,369 $ 47,267 $48,918 $50,631
Interest expense 18,131 18,814 19,658 20,230
-------- -------- ------- -------
Net interest income 27,238 28,453 29,260 30,401
Provision for loan losses 860 1,123 1,076 1,677
Noninterest income
Investment securities gains (losses) 9 (2) 22 25
All other 6,178 6,232 7,068 7,445
Noninterest expenses 18,520 18,711 20,146 20,300
-------- -------- ------- -------
Income before income taxes 14,045 14,849 15,128 15,894
Income tax expense 4,631 4,835 4,898 5,244
-------- -------- ------- -------
NET EARNINGS $ 9,414 $ 10,014 $10,230 $10,650
======== ======== ======= =======
Per share
NET EARNINGS - BASIC $ 0.57 $ 0.61 $ 0.62 $ 0.64
======== ======== ======= =======
NET EARNINGS - DILUTED $ 0.57 $ 0.60 $ 0.62 $ 0.64
======== ======== ======= =======
CASH DIVIDENDS PAID $ 0.27 $ 0.27 $ 0.27 $ 0.30
======== ======== ======= =======
Market price
HIGH BID $ 33.41 $ 37.73 $ 50.75 $ 50.50
======== ======== ======= =======
LOW BID $ 27.73 $ 30.68 $ 35.45 $ 46.50
======== ======== ======= =======
1996
Interest income $ 40,937 $ 42,259 $43,582 $44,497
Interest expense 16,807 17,049 17,793 18,058
-------- -------- ------- -------
Net interest income 24,130 25,210 25,789 26,439
Provision for loan losses 606 764 1,097 966
Noninterest income
Investment securities (losses) gains (3) (14) 9
All other 5,257 5,408 5,694 5,746
Noninterest expenses 17,128 16,789 19,667 17,677
-------- ------- ------------ -----------
Income before income taxes 11,653 13,062 10,705 13,551
Income tax expense 3,827 4,017 3,125 4,062
-------- -------- ------- -------
NET EARNINGS $ 7,826 $ 9,045 $ 7,580 $ 9,489
======== ======== ======= =======
Per share
NET EARNINGS - BASIC $ 0.50 $ 0.55 $ 0.47 $ 0.59
======== ======== ======= =======
NET EARNINGS - DILUTED $ 0.50 $ 0.55 $ 0.47 $ 0.59
======== ======== ======= =======
CASH DIVIDENDS PAID $ 0.25 $ 0.25 $ 0.25 $ 0.25
======== ======== ======= =======
Market price
HIGH BID $ 29.34 $ 28.93 $ 28.93 $ 29.55
======== ======== ======= =======
LOW BID $ 27.68 $ 26.04 $ 26.45 $ 27.47
======== ======== ======= =======
<FN>
The stock of First Financial Bancorp. is listed with the National Association of
Securities Dealers, Inc. (NASDAQ), under the symbol FFBC.
(1) First Financial Bancorp's per share data and market price information is
stated as if the 10.0% stock dividends declared in 1996 and 1997 occurred
January 1, 1996.
50 FIRST FINANCIAL BANCORP