1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended MARCH 31, 1998
---------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________________ to _________________
Commission file number 0-12379
FIRST FINANCIAL BANCORP.
(Exact name of registrant as specified in its charter)
Ohio 31-1042001
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 High Street, Hamilton, Ohio 45011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 867-4700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 1, 1998
Common stock, No par value 33,106,164
2
FIRST FINANCIAL BANCORP.
INDEX
Page No.
--------
PART I-FINANCIAL INFORMATION
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 1
Consolidated Statements of Earnings -
Three Months Ended March 31, 1998 and 1997 2
Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II-OTHER INFORMATION
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURES 15
3
PART I - FINANCIAL INFORMATION
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in thousands)
March 31, December 31,
1998 1997
------------ --------------
ASSETS
Cash and due from banks $ 130,533 $ 142,334
Interest-bearing deposits with other banks 3,289 3,487
Federal funds sold and securities purchased
under agreements to resell 4,091 18,773
Investment securities held-to-maturity, at cost
(market value - $51,011 at March 31, 1998 and
$60,961 at December 31, 1997) 48,678 58,347
Investment securities available-for-sale, at market 365,540 332,617
Loans
Commercial 524,340 502,919
Real estate-construction 59,566 63,308
Real estate-mortgage 928,583 927,985
Installment 445,642 439,744
Credit card 15,907 17,369
Lease financing 28,535 27,260
----------- -----------
Total loans 2,002,573 1,978,585
Less
Unearned income 2,144 1,554
Allowance for loan losses 27,967 27,510
----------- -----------
Net loans 1,972,462 1,949,521
Premises and equipment 46,512 47,013
Deferred income taxes 3,227 3,070
Accrued interest and other assets 84,027 80,949
----------- -----------
TOTAL ASSETS $ 2,658,359 $ 2,636,111
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 276,142 $ 314,051
Interest-bearing 1,924,171 1,916,127
----------- -----------
Total deposits 2,200,313 2,230,178
Short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase 55,146 46,638
Federal Home Loan Bank borrowings 17,950 2,000
Other 1,189 3,650
----------- -----------
Total short-term borrowings 74,285 52,288
Long-term borrowings 60,356 41,054
Accrued interest and other liabilities 32,912 26,332
----------- -----------
TOTAL LIABILITIES 2,367,866 2,349,852
SHAREHOLDERS' EQUITY
Common stock - par value, $8 per share
Authorized - 60,000,000 shares
Issued - 33,121,560 in 1998 and 16,556,789 in 1997 132,486 132,464
Surplus 99,895 100,129
Retained earnings 57,110 51,973
Accumulated other comprehensive income 1,967 2,094
Restricted stock awards (444) (338)
Treasury stock, at cost, 17,126 shares in 1998
and 1,319 shares in 1997 (521) (63)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 290,493 286,259
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,658,359 $ 2,636,111
=========== ===========
See notes to consolidated financial statements.
1
4
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share data)
Three months ended
March 31,
-----------------------------
1998 1997
----------- -----------
INTEREST INCOME
Loans, including fees $ 45,911 $ 39,016
Investment securities
Taxable 5,484 4,743
Tax-exempt 1,070 1,337
----------- -----------
Total investment interest 6,554 6,080
Interest-bearing deposits with
other banks 63 79
Federal funds sold and securities
purchased under agreements to resell 160 194
----------- -----------
TOTAL INTEREST INCOME 52,688 45,369
INTEREST EXPENSE
Deposits 19,577 16,825
Short-term borrowings 961 1,148
Long-term borrowings 679 158
----------- -----------
TOTAL INTEREST EXPENSE 21,217 18,131
----------- -----------
NET INTEREST INCOME 31,471 27,238
Provision for loan losses 1,250 860
----------- -----------
Net interest income after
provision for loan losses 30,221 26,378
NONINTEREST INCOME
Service charges on deposit accounts 2,822 2,373
Trust revenues 2,798 2,455
Investment securities gains 44 9
Other 2,141 1,350
----------- -----------
Total noninterest income 7,805 6,187
NONINTEREST EXPENSES
Salaries and employee benefits 11,986 10,239
Net occupancy 1,422 1,311
Furniture and equipment 1,176 1,111
Data processing 1,396 1,228
Deposit insurance 100 65
State taxes 399 407
Other 6,113 4,159
----------- -----------
Total noninterest expenses 22,592 18,520
----------- -----------
Income before income taxes 15,434 14,045
Income tax expense 5,331 4,631
----------- -----------
NET EARNINGS $ 10,103 $ 9,414
=========== ===========
Net earnings per share - basic $ 0.31 $ 0.28
=========== ===========
Net earnings per share - diluted $ 0.30 $ 0.28
=========== ===========
Cash dividends declared per share $ 0.15 $ 0.14
=========== ===========
Average shares outstanding 33,110,192 33,066,708
=========== ===========
See notes to consolidated financial statements.
2
5
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
Three months ended
March 31,
---------------------
1998 1997
--------- ----------
NET INCOME $ 10,103 $ 9,414
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising
during period 154 (1,027)
Less: reclassification adjustment for gains
included in net income 27 6
-------- -------
Other comprehensive income 127 (1,033)
-------- -------
COMPREHENSIVE INCOME $ 10,230 $ 8,381
======== =======
3
6
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three months ended
March 31,
-------------------------
1998 1997
--------- ---------
OPERATING ACTIVITIES
Net earnings $ 10,103 $ 9,414
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 1,250 860
Provision for depreciation and amortization 1,933 1,243
Net amortization of investment security
premiums and accretion of discounts 33 193
Realized investment security gains (44) (9)
Originations of mortgage loans held for sale (40,392) (10,673)
Gains from sales of mortgage loans held for sale (422) (139)
Proceeds from sale of mortgage loans held for sale 40,814 10,812
Deferred income taxes (29) (82)
Increase in interest receivable (1,594) (763)
Increase in cash surrender value of life insurance (2,841) (3,193)
Increase in prepaid expenses (230) (995)
Increase in accrued expenses 5,220 3,977
Increase in interest payable 337 147
Other 1,743 984
--------- ---------
Net cash provided by operating activities 15,881 11,776
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available-for-sale 0 0
Proceeds from calls, paydowns and maturities of
investment securities available-for-sale 32,956 17,431
Purchases of investment securities available-for-sale (66,192) (24,929)
Proceeds from calls, paydowns and maturities of
investment securities held-to-maturity 10,697 12,022
Purchases of investment securities held-to-maturity (925) (356)
Net decrease in interest-bearing deposits
with other banks 198 1,305
Net decrease in federal funds sold and
securities purchased under agreements to resell 14,682 5,343
Net increase in loans and leases (24,580) (14,483)
Recoveries from loans and leases previously charged off 259 346
Proceeds from disposal of other real estate owned 63 149
Cash and cash equivalents acquired in merger 0 8,288
Purchases of premises and equipment (497) (605)
--------- ---------
Net cash (used in) provided by investing activities (33,339) 4,511
FINANCING ACTIVITIES
Net decrease in total deposits (29,865) (26,586)
Net increase in short-term borrowings 21,997 10,176
Net increase in long-term borrowings 19,302 4,717
Cash dividends declared (4,967) (4,510)
Purchase of common stock (1,068) 0
Proceeds from exercise of stock options,
net of shares purchased 258 45
--------- ---------
Net cash provided by (used in) financing activities 5,657 (16,158)
--------- ---------
DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS (11,801) 129
Cash and cash equivalents at beginning of period 142,334 110,767
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 130,533 $ 110,896
========= =========
4
7
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three months ended
March 31,
---------------------
1998 1997
------- -------
Supplemental disclosures
Interest paid $20,881 $20,100
======= =======
Income taxes paid $ 0 $ 295
======= =======
Recognition of deferred tax assets
attributable to FASB Statement No. 115 $ 88 $ 610
======= =======
Acquisition of other real estate owned through
foreclosure $ 130 $ 238
======= =======
Issuance of restricted stock awards $ 220 $ 226
======= =======
See notes to consolidated financial statements.
5
8
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The consolidated financial statements for interim periods are unaudited;
however, in the opinion of the management of First Financial Bancorp.
("Bancorp"), all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation have been included.
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements of Bancorp, a bank and savings and loan
holding company, include the accounts of Bancorp and its wholly-owned
subsidiaries - First National Bank of Southwestern Ohio, Community First Bank &
Trust, Union Trust Bank, Indiana Lawrence Bank, Fidelity Federal Savings Bank,
Citizens First State Bank, Home Federal Bank, a Federal Savings Bank, Union Bank
& Trust Company, The Clyde Savings Bank Company, Peoples Bank and Trust Company,
Bright National Bank, First Finance Mortgage Company of Southwestern Ohio (dba
Community First Finance), Farmers State Bank, National Bank of Hastings, and
Vevay Deposit Bank. All significant intercompany transactions and accounts have
been eliminated in consolidation. Intangible assets arising from the acquisition
of subsidiaries are being amortized over varying periods, none of which exceeds
25 years. Core deposit balances are being amortized over varying periods, none
of which currently exceeds 10 years.
The accompanying financial statements have been prepared in accordance with the
instructions for Form 10-Q and, therefore, do not include all information and
footnotes necessary to be in conformity with generally accepted accounting
principles.
On April 28, 1998, the Board of Directors approved a 2 for 1 stock split, to be
issued to shareholders of record as of May 8, 1998, and distributed on June 1,
1998. All per share amounts have been restated for all periods presented. Also,
on April 28, 1998, the shareholders approved an amendment to the Articles of
Incorporation to eliminate the par value of Bancorp's common shares.
NOTE 2: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, Bancorp offers a variety of financial
instruments with off-balance sheet risk to its customers to aid them in meeting
their requirements for liquidity and credit enhancement and to reduce its own
exposure to fluctuations in interest rates. These financial instruments include
standby letters of credit and commitments outstanding to extend credit.
Generally accepted accounting principles do not require these financial
instruments to be recorded in the consolidated financial statements, and
accordingly, they are not. Bancorp does not use off-balance sheet derivative
financial instruments (such as interest rate swaps) as defined in the Financial
Accounting Standards Board's (FASB) Statement No. 119 "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments".Bancorp's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for standby letters of credit and
commitments outstanding to extend credit is represented by the contractual
amounts of those instruments. Bancorp uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. Following is a discussion of these transactions.
Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a customer to a third party. Bancorp's portfolio of
standby letters of credit consists primarily of performance assurances made on
behalf of customers who have
6
9
a contractual commitment to produce or deliver goods or services. The risk to
Bancorp arises from its obligation to make payment in the event of the
customers' contractual default. As of March 31, 1998, Bancorp had issued standby
letters of credit aggregating $16,883,000 compared to $19,210,000 issued as of
December 31, 1997. Management conducts regular reviews of these instruments on
an individual customer basis, and the results are considered in assessing the
adequacy of Bancorp's allowance for loan losses. Management does not anticipate
any material losses as a result of these letters of credit.
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Bancorp evaluates each customer's creditworthiness on an
individual basis. The amount of collateral obtained, if deemed necessary by
Bancorp upon extension of credit, is based on management's credit evaluation of
the counterparty. The collateral held varies, but may include securities, real
estate, inventory, plant, or equipment. Bancorp had commitments outstanding to
extend credit totaling $358,637,000 at March 31, 1998 and $335,092,000 at
December 31, 1997. Management does not anticipate any material losses as a
result of these commitments.
NOTE 3: BUSINESS COMBINATIONS
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 April 1, 1998, Bancorp paid $13.6 million for all the outstanding common
stock of The Union State Bank (USB). Upon consummation of the merger, USB was
merged into Community First and USB's only office in Payne, Ohio became
Community First's 22nd branch office. The merger was accounted for using the
purchase method of accounting and, accordingly, the consolidated financial
statements will include The Union State Bank's results of operations from the
date of acquisition.
NOTE 5: ACCOUNTING CHANGES
SFAS No. 130, "Reporting Comprehensive Income," was issued in June, 1997, and
was effective for fiscal years beginning after December 15, 1997. SFAS No. 130
established standards for the 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
adopted this statement effective January 1, 1998. See the Consolidated
Statements Of Comprehensive Income.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was released in June, 1997, and was effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 established 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
7
10
to allocate resources and in assessing performance. The adoption of this
statement did not have a material impact on its financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
1998 1997
---------- -------------------------------------------------
MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31
---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
NET EARNINGS $ 10,103 $ 10,650 $ 10,230 $ 10,014 $ 9,414
AVERAGE CONSOLIDATED BALANCE SHEET ITEMS:
LOANS LESS UNEARNED INCOME 1,986,149 1,892,038 1,836,612 1,770,479 1,730,946
INVESTMENT SECURITIES 413,893 377,136 372,769 373,697 369,438
OTHER EARNING ASSETS 16,359 21,673 7,070 12,549 20,266
---------- ---------- ---------- ---------- ----------
TOTAL EARNING ASSETS 2,416,401 2,290,847 2,216,451 2,156,725 2,120,650
TOTAL ASSETS 2,628,149 2,472,131 2,376,040 2,320,075 2,281,811
DEPOSITS 2,179,267 2,020,955 1,925,615 1,907,229 1,888,159
SHAREHOLDERS' EQUITY 290,111 283,541 277,732 269,380 266,008
KEY RATIOS:
AVERAGE EQUITY TO AVERAGE TOTAL ASSETS 11.04% 11.47% 11.69% 11.61% 11.66%
RETURN ON AVERAGE TOTAL ASSETS 1.54% 1.72% 1.72% 1.73% 1.65%
RETURN ON AVERAGE EQUITY 13.93% 15.02% 14.73% 14.87% 14.16%
NET INTEREST MARGIN (FULLY TAX EQUIVALENT) 5.32% 5.43% 5.41% 5.41% 5.29%
NET INTEREST INCOME
Net interest income, the principal source of earnings, is the amount by which
interest and fees generated by earning assets exceed the interest costs of
liabilities obtained to fund them. For analytical purposes, interest income
presented in the table below has been adjusted to a tax equivalent basis
assuming a 35% marginal tax rate for interest earned on tax-exempt assets such
as municipal loans, tax-free leases and investments. This is to recognize the
income tax savings which facilitates a comparison between taxable and tax-exempt
assets. The tax equivalent adjustment to interest income has been declining due
to increased calls and maturities of tax-exempt securities. As shown below, net
interest income on a fully tax equivalent basis has increased $4,098,000 over
the first quarter of 1997. Continued loan growth, particularly in commercial and
installment loans, contributed to higher net interest income in the first
quarter of 1998.
QUARTER ENDED
1998 1997
------- -----------------------------------------
MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
INTEREST INCOME $52,688 $50,631 $48,918 $47,267 $45,369
INTEREST EXPENSE 21,217 20,230 19,658 18,814 18,131
------- ------- ------- ------- -------
NET INTEREST INCOME 31,471 30,401 29,260 28,453 27,238
TAX EQUIVALENT ADJUSTMENT TO INTEREST INCOME 647 717 702 745 782
------- ------- ------- ------- -------
NET INTEREST INCOME (FULLY TAX EQUIVALENT) $32,118 $31,118 $29,962 $29,198 $28,020
======= ======= ======= ======= =======
RATE/VOLUME ANALYSIS
The impact of changes in volume and interest rates on net interest income is
illustrated in the table on the following page. As shown, average earning assets
had an increase in rates, while average interest-bearing liabilities experienced
a decrease in rates for the three month period ended March 31, 1998 in
comparison to the same period in 1997. The rates had more impact on interest
expense than interest income. The primary factor, however, for increased net
interest income for the periods presented was a significant increase in the
volume of earning assets. The change in interest due to the combined effect of
both rate and volume has been allocated to the volume and rate variance on a
prorated basis.
8
11
THREE MONTHS
ENDED CHANGE DUE TO:
MAR. 31, 1998 --------------
OVER 1997 RATE VOLUME
--------- ---- ------
(DOLLARS IN THOUSANDS)
INTEREST INCOME $ 7,319 $ 885 $ 6,434
INTEREST EXPENSE 3,086 (2,085) 5,171
-------- -------- --------
NET INTEREST INCOME $ 4,233 $ 2,970 $ 1,263
======== ======== ========
OPERATING RESULTS
Net operating income represents net earnings before net securities transactions.
Net operating income for the first three months of 1998 was $10,073,000 which
was an increase of $665,000 or 7.07% over that reported in the same period in
1997. This increase in net operating income can be primarily attributed to an
increase in net interest income of $4,233,000 or 15.5%. Noninterest income,
excluding securities transactions, for the first three months of 1998 increased
25.6% in comparison to the same period in 1997 as a result of new services and
fees. These positive variances were offset by increases in provision for loan
losses, noninterest expense and income tax expense. The increase in income tax
expense is discussed in the next section. The increase in noninterest expense
was 22.0%.
INCOME TAXES
For the first three months of 1998, income tax expense was $5,331,000 compared
to $4,631,000 for the same period in 1997, or an increase of $700,000. In 1998,
$5,317,000 of the tax expense was related to operating income with a tax expense
of $14,000 related to securities transactions. In the first three months of
1997, income tax expense related to operating income was $4,628,000 with a tax
expense related to securities transactions of $3,000. The increase in taxes on
operating income was due to the increase in operating income before taxes and
securities transactions of $1,354,000 or 9.65% over that reported for the first
three months of 1997 and a higher effective tax rate for the period in 1998. The
higher effective tax rate was primarily attributable to significant calls of
tax-exempt securities which decreased tax-exempt income.
NET EARNINGS
Net earnings for the first three months of 1998 were $10,103,000 or 7.32%
greater than that recorded during the same period in 1997. As was discussed
previously, net operating income was $10,073,000 which was 7.07% greater than
the same period in 1997. Net securities gains through March 31, 1998 were
$27,000 compared to $6,000 for the period ending March 31, 1997.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on Bancorp's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.
9
12
At March 31, 1998 and 1997, the recorded investment in loans that are considered
to be impaired with an allowance under FASB Statement No. 114 was $2,115,000 and
$3,458,000, respectively, all of which were on a nonaccrual basis. The related
allowance for loan losses on these impaired loans was $1,046,000 at March 31,
1998 and $1,415,000 at March 31, 1997. There were $16,000 in impaired loans that
as a result of write-downs did not have an allowance for loan losses. The
average recorded investment in impaired loans for the respective quarters ended
March 31, 1998 and 1997, was approximately $3,217,000 and $3,040,000. For the
three months ended March 31, 1998, Bancorp recognized interest income on those
impaired loans of $3,000 compared to $64,000 for the same period in 1997.
Bancorp recognizes income on impaired loans using the cash basis method. The
table below indicates the activity in the allowance for loan losses for the
quarters presented.
QUARTER ENDED
1998 1997
---------- ---------------------------------------------
MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
BALANCE AT BEGINNING OF PERIOD $27,510 $24,875 $24,553 $23,651 $22,672
ALLOWANCE ACQUIRED THROUGH MERGER 2,101 474 438
PROVISION FOR LOAN LOSSES 1,250 1,677 1,076 1,123 860
LOANS CHARGED OFF (1,052) (1,401) (956) (888) (665)
RECOVERIES 259 258 202 193 346
------- ------- ------- ------- -------
NET CHARGE OFFS (793) (1,143) (754) (695) (319)
------- ------- ------- ------- -------
BALANCE AT END OF PERIOD $27,967 $27,510 $24,875 $24,553 $23,651
======= ======= ======= ======= =======
RATIOS:
ALLOWANCE TO PERIOD END LOANS,
NET OF UNEARNED INCOME 1.40% 1.39% 1.33% 1.35% 1.36%
RECOVERIES TO CHARGE OFFS 24.62% 18.42% 21.13% 22.09% 52.03%
ALLOWANCE AS A MULTIPLE OF
NET CHARGE OFFS 35.27X 24.07X 32.99X 35.33X 74.14X
NONPERFORMING/UNDERPERFORMING ASSETS
The table on the following page shows the categories which are included in
nonperforming and underperforming assets.
Nonperforming assets increased $1,308,000 or 17.4% in the first quarter of 1998
when compared to the first quarter of 1997, and in that same period, accruing
loans past due 90 days or more increased $1,576,000. Nonperforming assets
increased $1,026,000 or 13.2% in the first quarter of 1998 when compared to the
fourth quarter of 1997. There were no individually large loans contributing to
this increase. While the increase may seem large, the level of nonperforming
assets as a percentage of loans in the current quarter has only increased a
small amount compared to 1997 levels. Accruing loans, including loans impaired
under FASB Statement No. 114, which are past due 90 days or more where there is
not a likelihood of becoming current are transferred to nonaccrual loans.
However, those loans, which management feels will become current and, therefore
accruing, will be classified as "Accruing loans 90 days or more past due" until
they become current.
10
13
QUARTER ENDED
1998 1997
---------- ---------------------------------------------
MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
NONACCRUAL LOANS $ 5,985 $ 5,257 $ 6,418 $ 7,089 $ 6,611
RESTRUCTURED LOANS 1,812 1,581 630 704 550
OREO 1,017 950 700 188 345
------- ------- ------- ------- -------
TOTAL NONPERFORMING ASSETS 8,814 7,788 7,748 7,981 7,506
ACCRUING LOANS PAST DUE
90 DAYS OR MORE 2,585 1,203 789 1,026 1,009
------- ------- ------- ------- -------
TOTAL UNDERPERFORMING ASSETS $11,399 $ 8,991 $ 8,537 $ 9,007 $ 8,515
======= ======= ======= ======= =======
NONPERFORMING ASSETS AS A PERCENT
OF LOANS, NET OF UNEARNED INCOME
PLUS OREO 0.44% 0.39% 0.42% 0.44% 0.43%
======= ======= ======= ======= =======
UNDERPERFORMING ASSETS AS A PERCENT
OF LOANS, NET OF UNEARNED INCOME
PLUS OREO 0.57% 0.45% 0.46% 0.50% 0.49%
======= ======= ======= ======== =======
*OTHER REAL ESTATE OWNED
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management is the process by which Bancorp provides for the continuing
flow of funds necessary to meet its financial commitments on a timely basis.
These commitments include withdrawals by depositors, funding credit commitments
to borrowers, shareholder dividends, paying expenses of operations, and funding
capital expenditures.
Liquidity is derived primarily from deposit growth, maturing loans, the maturity
of investment securities, access to other funding sources and markets, and a
strong capital position. The most stable source of liability-funded liquidity
for both the long-term and short-term is deposit growth and retention in the
core deposit base. At the end of the first quarter of 1998 Bancorp's deposit
liabilities had decreased by 1.34% from December 31, 1997. Another source of
funding is through short-term borrowings. Bancorp's short-term borrowings
increased to $74,285,000 at March 31, 1998, compared to $52,288,000 at December
31, 1997.
The principal source of asset-funded liquidity is marketable investment
securities, particularly those of shorter maturities. At March 31, 1998,
securities maturing in one year or less amounted to $58,365,000, representing
14.1% of the total of the investment securities portfolio. In addition, other
types of assets such as cash and due from banks, federal funds sold and
securities purchased under agreements to resell, as well as loans and
interest-bearing deposits with other banks maturing within one year, are sources
of liquidity. Total asset-funded sources of liquidity at March 31, 1998,
amounted to $561,612,000, representing 21.1% of total assets. Sources of
long-term asset funded liquidity are derived from the maturity of investment
securities and maturing loans in excess of one year.
At March 31, 1998, Bancorp had classified $365,540,000 in investment securities
available-for-sale. Management examines Bancorp's liquidity needs in
establishing this classification in accordance with the Financial Accounting
Standards Board Statement No. 115 on accounting for certain investments in debt
and equity securities.
Liquidity is very important and as such is both monitored and managed closely by
the asset/liability committee at each affiliate. Liquidity may be used to fund
capital expenditures. Capital expenditures were $497,000 for the first three
months of 1998. In addition, remodeling is a planned and ongoing process given
the 105 offices of Bancorp and its subsidiaries. Material commitments for
capital expenditures as of March 31, 1998 were approximately
11
14
$1,460,000. Management believes that Bancorp has sufficient liquidity to fund
its current commitments.
CAPITAL ADEQUACY
The Federal Reserve established risk-based capital requirements for U.S. banking
organizations which have been adopted by the Office of Thrift Supervision for
savings and loan associations. Risk weights are assigned to on-and off-balance
sheet items in arriving at risk-adjusted total assets. Regulatory capital is
divided by risk-adjusted total assets, with the resulting 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 intangibles, and Total
risked-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 I ratio at March 31, 1998, was 12.9%, its Total risked-based
capital was 14.1% and its Leverage ratio was 9.66%. While Bancorp 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 quarters presented.
QUARTER ENDED
1998 1997
---------- ----------------------------------------------
MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31
---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
TIER I CAPITAL:
SHAREHOLDER'S EQUITY $ 290,493 $ 286,259 $ 280,593 $ 274,511 $ 267,498
LESS: INTANGIBLE ASSETS 38,316 39,169 8,684 8,926 5,187
LESS: UNREALIZED NET SECURITIES
GAINS (LOSSES) 1,967 2,094 1,945 1,398 129
---------- ---------- ---------- ---------- ----------
TOTAL TIER I CAPITAL $ 250,210 $ 244,996 $ 269,964 $ 264,187 $ 262,182
========== ========== ========== ========== ==========
TOTAL RISK-BASED CAPITAL:
TIER I CAPITAL $ 250,210 $ 244,996 $ 269,964 $ 264,187 $ 262,182
QUALIFYING ALLOWANCE FOR LOAN LOSSES 24,313 23,591 21,818 21,364 20,468
---------- ---------- ---------- ---------- ----------
TOTAL RISK-BASED CAPITAL $ 274,523 $ 268,587 $ 291,782 $ 285,551 $ 282,650
========== ========== ========== ========== ==========
RISK WEIGHTED ASSETS $1,941,265 $1,883,335 $1,742,394 $1,705,949 $1,637,465
========== ========== ========== ========== ==========
RISK-BASED RATIOS:
TIER I 12.89% 13.01% 15.49% 15.49% 16.01%
========== ========== ========== ========== ==========
TOTAL RISK-BASED CAPITAL 14.14% 14.26% 16.75% 16.74% 17.26%
========== ========== ========== ========== ==========
LEVERAGE 9.66% 10.07% 11.40% 11.43% 11.52%
========== ========== ========== ========== ==========
12
15
YEAR 2000
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. During 1998 Bancorp's Operating Committee continues to meet at
least weekly to direct and implement all Year 2000 issues. In addition,
Bancorp's work groups continue to make 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 the first quarter 1998, Bancorp incurred approximately $248,000 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 for the remainder of 1998 and in 1999, of which about
$1,325,000 will be capitalized. However, there can be no assurance as to the
accuracy of these estimates.
FORWARD-LOOKING INFORMATION
The Form 10-Q should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this report and in the First
Financial Bancorp. Annual Report on Form 10-K for the year ended December 31,
1997.
Management's analysis may contain forward-looking statements that are provided
to assist in the understanding of anticipated future financial performance.
However, such
13
16
performance involves risks and uncertainties which may cause actual results to
differ materially. For a discussion of certain factors that may cause such
forward-looking statements to differ materially from actual results, refer to
the 1997 Form 10-K.
ACCOUNTING AND REGULATORY MATTERS
Management is not aware of any events or regulatory recommendations which, if
implemented, are likely to have a material effect on Bancorp's liquidity,
capital resources, or operations.
PART II-OTHER INFORMATION
Item 5. Other Information
On April 28, 1998, the Board of Directors of Bancorp approved an
amendment to the Rights Agreement dated as of November 23, 1993
providing for an exchange provision that would allow the Board of
Directors, at its option, at any time after any person becomes
either an Acquiring Person or an Adverse Person (as defined in the
Rights Agreement) to exchange all or part of the then outstanding
and exercisable Rights for shares of Common Stock at an exchange
ratio of one share of Common Stock per Right, subject to
appropriate adjustments.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i) Articles of Incorporation, Revised April 28, 1998
4.1, 10.2 First Amendment to Rights Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K
On March 26, 1998, Bancorp filed a Form 8-K on issues concerning
Bancorp's Year 2000 preparations.
14
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST FINANCIAL BANCORP.
----------------------------
(Registrant)
/s/ MICHAEL R. O'DELL /s/ JOSEPH M. GALLINA
- ------------------------------- ----------------------------
Michael R. O'Dell, Senior Vice Joseph M. Gallina,
President, Chief Financial Comptroller
Officer and Secretary (Principal Accounting Officer)
Date May 14, 1998 Date May 14, 1998
--------------------------- ---------------------
15