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 JUNE 30, 1998
------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission file number 0-12379
FIRST FINANCIAL BANCORP.
- --------------------------------------------------------------------------------
(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 867-4700
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 1, 1998
-------------------------- -----------------------------
Common stock, No par value 33,106,861
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FIRST FINANCIAL BANCORP.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 1
Consolidated Statements of Earnings -
Six Months and Three Months Ended June 30, 1998 and 1997 2
Consolidated Statements of Comprehensive Income -
Six Months and Three Months Ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 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 4 Submission of Matters to a Vote of Security Holders 15
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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PART I - FINANCIAL INFORMATION
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in thousands)
June 30, December 31,
1998 1997
---- ----
ASSETS
Cash and due from banks $ 125,990 $ 142,334
Interest-bearing deposits with other banks 3,578 3,487
Federal funds sold and securities purchased
under agreements to resell 6,811 18,773
Investment securities held-to-maturity, at cost
(market value - $43,763 at June 30, 1998 and
$60,961 at December 31, 1997) 41,706 58,347
Investment securities available-for-sale,
at market value (cost of $350,407 at June 30, 1998
and $329,261 at December 31, 1997) 352,932 332,617
Loans
Commercial 562,754 502,919
Real estate-construction 59,325 63,308
Real estate-mortgage 972,248 927,985
Installment 455,862 439,744
Credit card 15,917 17,369
Lease financing 28,322 27,260
---------- ----------
Total loans 2,094,428 1,978,585
Less
Unearned income 2,448 1,554
Allowance for loan losses 28,917 27,510
---------- ----------
Net loans 2,063,063 1,949,521
Premises and equipment 47,947 47,013
Deferred income taxes 3,215 3,070
Accrued interest and other assets 92,551 80,949
---------- ----------
TOTAL ASSETS $2,737,793 $2,636,111
========== ==========
LIABILITIES
Deposits
Noninterest-bearing $ 303,719 $ 314,051
Interest-bearing 1,957,966 1,916,127
---------- ----------
Total deposits 2,261,685 2,230,178
Short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase 56,428 46,638
Federal Home Loan Bank borrowings 32,950 2,000
Other 1,510 3,650
---------- ----------
Total short-term borrowings 90,888 52,288
Long-term borrowings 62,247 41,054
Accrued interest and other liabilities 27,357 26,332
---------- ----------
TOTAL LIABILITIES 2,442,177 2,349,852
SHAREHOLDERS' EQUITY
Common stock - no par value
Authorized - 60,000,000 shares
Issued - 33,125,023 in 1998 and 16,558,108 in 1997 231,837 232,593
Retained earnings 63,212 51,973
Unrealized net gains on investment securities
available-for-sale, net of deferred income taxes 1,584 2,094
Restricted stock awards (484) (338)
Treasury stock, at cost, 18,162 and 1,319 shares (533) (63)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 295,616 286,259
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,737,793 $2,636,111
========== ==========
See notes to consolidated financial statements.
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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share data)
Six months ended Three months ended
June 30, June 30,
---------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 93,704 $ 79,718 $ 47,793 $ 40,702
Investment securities
Taxable 11,064 9,858 5,580 5,115
Tax-exempt 2,065 2,606 995 1,269
--------- --------- --------- ---------
Total investment interest 13,129 12,464 6,575 6,384
Interest-bearing deposits with
other banks 133 133 70 54
Federal funds sold and securities
purchased under agreements to resell 300 321 140 127
--------- --------- --------- ---------
TOTAL INTEREST INCOME 107,266 92,636 54,578 47,267
INTEREST EXPENSE
Deposits 39,829 34,083 20,252 17,258
Short-term borrowings 1,766 2,538 805 1,390
Long-term borrowings 1,445 324 766 166
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 43,040 36,945 21,823 18,814
--------- --------- --------- ---------
NET INTEREST INCOME 64,226 55,691 32,755 28,453
Provision for loan losses 2,448 1,983 1,198 1,123
--------- --------- --------- ---------
Net interest income after
provision for loan losses 61,778 53,708 31,557 27,330
NONINTEREST INCOME
Service charges on deposit accounts 5,761 4,883 2,939 2,510
Trust income 5,519 4,802 2,721 2,347
Investment securities gains (losses) 337 7 293 (2)
Other 4,066 2,725 1,925 1,375
--------- --------- --------- ---------
Total noninterest income 15,683 12,417 7,878 6,230
NONINTEREST EXPENSES
Salaries and employee benefits 24,209 20,221 12,223 9,982
Net occupancy expenses 2,800 2,502 1,378 1,191
Furniture and equipment expenses 2,422 2,212 1,246 1,101
Data processing expenses 2,700 2,417 1,304 1,189
Deposit insurance expense 198 172 98 107
State taxes 841 838 442 431
Other 12,166 8,869 6,053 4,710
--------- --------- --------- ---------
Total noninterest expenses 45,336 37,231 22,744 18,711
--------- --------- --------- ---------
Income before income taxes 32,125 28,894 16,691 14,849
Income tax expense 10,954 9,466 5,623 4,835
--------- --------- --------- ---------
NET EARNINGS $ 21,171 $ 19,428 $ 11,068 $ 10,014
========= ========= ========= =========
Net earnings per share - basic $ 0.64 $ 0.59 $ 0.33 $ 0.30
========= ========= ========= =========
Net earnings per share - diluted $ 0.64 $ 0.59 $ 0.33 $ 0.30
========= ========= ========= =========
Cash dividends declared per share $ 0.30 $ 0.27 $ 0.15 $ 0.14
========= ========= ========= =========
Average shares outstanding 33,108,633 33,076,315 33,107,092 33,085,817
========== ========== ========== ==========
See notes to consolidated financial statements.
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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
Six months ended Three months ended
June 30, June 30,
---------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
NET INCOME $ 21,171 $ 19,428 $ 11,068 $ 10,014
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during period 731 (223) 577 804
Less: reclassification adjustment
for gains included in net income 221 12 194 6
--------- -------- --------- --------
Other comprehensive income (loss) 510 (235) 383 798
--------- -------- --------- --------
COMPREHENSIVE INCOME $ 21,681 $ 19,193 $ 11,451 $ 10,812
========= ======== ========= ========
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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)
Six months ended
June 30,
----------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net earnings $ 21,171 $ 19,428
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 2,448 1,983
Provision for depreciation and amortization 4,075 2,462
Net amortization of investment security
premiums and accretion of discounts 148 293
Realized investment security gains (337) (7)
Originations of mortgage loans held for sale (92,671) (24,071)
Gains from sales of mortgage loans held for sale (1,253) (324)
Proceeds from sale of mortgage loans held for sale 93,924 24,395
Deferred income taxes (32) 481
Increase in interest receivable (23) (960)
Increase in cash surrender value of life insurance (4,764) (3,158)
Increase (decrease) in prepaid expenses (553) (1,362)
Increase (decrease) in accrued expenses 756 (1,031)
Increase in interest payable 220 49
Other (4,191) (927)
--------- ---------
Net cash provided by operating activities 18,918 17,251
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available-for-sale 17,058 501
Proceeds from calls, paydowns and maturities of
investment securities available-for-sale 77,588 42,073
Purchases of investment securities available-for-sale (95,501) (45,112)
Proceeds from calls, paydowns and maturities of
investment securities held-to-maturity 19,582 14,051
Purchases of investment securities held-to-maturity (2,000) (806)
Net (increase) decrease in interest-bearing deposits
with other banks (91) 2,973
Net decrease in federal funds sold and securities
purchased under agreements to resell 11,998 17,972
Net increase in loans and leases (78,692) (57,352)
Recoveries from loans and leases previously charged off 549 543
Proceeds from disposal of other real estate owned 1,060 379
Cash acquired in merger 0 8,288
Purchase of other financial institutions, net
of cash acquired (12,231) (5,909)
Purchases of premises and equipment (2,520) (1,684)
--------- ---------
Net cash used in investing activities (63,200) (24,083)
FINANCING ACTIVITIES
Net decrease in total deposits (21,291) (25,283)
Net increase in short-term borrowings 38,600 46,001
Net increase in long-term borrowings 21,193 4,655
Cash dividends declared (9,932) (9,023)
Purchase of common stock (1,101) 0
Proceeds from exercise of stock options, net of shares
purchased 469 262
--------- ---------
Net cash provided by financing activities 27,938 16,612
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16,344) 9,780
Cash and cash equivalents at beginning of period 142,334 110,767
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $125,990 $120,547
========= =========
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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six months ended
June 30,
----------------
1998 1997
---- ----
Supplemental disclosures
Interest paid $ 42,662 $ 39,012
========= =========
Income taxes paid $ 10,800 $ 10,985
========= =========
Recognition of deferred tax assets (liabilities)
attributable to FASB Statement No. 115 $ 321 $ (136)
========= ==========
Acquisition of other real estate owned through
foreclosure $ 332 $ 315
========= =========
Issuance of restricted stock awards $ 220 $ 226
========= =========
See notes to consolidated financial statements.
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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 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, 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.
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Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a customer to a third party. Bancorp's portfolio of
standby letters of credit consists primarily of performance assurances made on
behalf of customers who have a contractual commitment to produce or deliver
goods or services. The risk to Bancorp arises from its obligation to make
payment in the event of the customers' contractual default. As of June 30, 1998,
Bancorp had issued standby letters of credit aggregating $17,089,000 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 $356,963,000 at June 30, 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
On April 1, 1998, Bancorp paid $13.6 million in cash 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 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 to allocate resources and in assessing performance. The adoption of
this statement did not have a material impact on Bancorp's financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
1998 1997
----------------------- ------------------------------------
JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Net Earnings $ 11,068 $ 10,103 $ 10,650 $ 10,230 $ 10,014
Average Consolidated Balance Sheet items:
Loans less unearned income 2,059,142 1,986,149 1,892,038 1,836,612 1,770,479
Investment securities 417,942 413,893 377,136 372,769 373,697
Other earning assets 15,635 16,359 21,673 7,070 12,549
---------- ---------- ---------- ---------- ----------
Total Earning Assets 2,492,719 2,416,401 2,290,847 2,216,451 2,156,725
Total Assets 2,705,412 2,628,149 2,472,131 2,376,040 2,320,075
Deposits 2,261,056 2,179,267 2,020,955 1,925,615 1,907,229
Shareholders' Equity 292,555 290,111 283,541 277,732 269,380
Key Ratios:
Average equity to average total assets 10.81% 11.04% 11.47% 11.69% 11.61%
Return on average total assets 1.64% 1.54% 1.72% 1.72% 1.73%
Return on average equity 15.17% 13.93% 15.02% 14.73% 14.87%
Net interest margin (fully tax equivalent) 5.37% 5.39% 5.39% 5.36% 5.43%
The net interest margin (fully tax equivalent) for prior quarters has been
restated to conform to the current quarter's calculation which annualized data
based on number of days in the quarter. The restatements were not material.
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 $4,156,000 over
the second quarter of 1997 and $1,236,000 over the first quarter of 1998.
Continued loan growth, in all major categories of loans, contributed to higher
net interest income in the second quarter of 1998.
QUARTER ENDED
1998 1997
------------------ -----------------------------
JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Interest income $54,578 $52,688 $50,631 $48,918 $47,267
Interest expense 21,823 21,217 20,230 19,658 18,814
------- ------- ------- ------- -------
Net interest income 32,755 31,471 30,401 29,260 28,453
Tax equivalent adjustment to interest income 599 647 717 702 745
------- ------- ------- ------- -------
Net interest income (fully tax equivalent) $33,354 $32,118 $31,118 $29,962 $29,198
======= ======= ======= ======= =======
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, an increase in volume
had a significant impact on both interest income and interest expense for the
six month and three month periods ended June 30, 1998 in
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11
comparison to 1997. The increase in volume had more impact on interest income
than interest expense. The change in interest due to the combined effect of both
rate and volume has been allocated to the volume and rate variance on a prorated
basis.
SIX MONTHS THREE MONTHS
ENDED CHANGE DUE TO: ENDED CHANGE DUE TO:
JUN. 30, 1998 ------------------- JUN. 30, 1998 -----------------
OVER 1997 RATE VOLUME OVER 1997 RATE VOLUME
------------- -------- -------- ------------- -------- -------
(DOLLARS IN THOUSANDS)
Interest income $ 14,630 $ 829 $ 13,801 $ 7,311 $ (46) $ 7,357
Interest expense 6,095 88 6,007 3,009 (139) 3,148
-------- --------- ------- -------- -------- --------
Net interest income $ 8,535 $ 741 $ 7,794 $ 4,302 $ 93 $ 4,209
======== ========= ======= ======== ======== ========
OPERATING RESULTS
Net operating income represents net earnings before net securities transactions.
Net operating income for the first six months of 1998 was $20,950,000 which was
an increase of $1,534,000 or 7.90% 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 $8,535,000 or 15.3%. Noninterest income,
excluding securities transactions, for the first six months of 1998 increased
23.7% 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 21.8%. Most operating income and expense amounts were greater in 1998 versus
1997 due to the cash purchase of KeyBank branches on December 8, 1997 and the
cash purchase of The Union State Bank on April 1, 1998.
Net operating income for the second quarter of 1998 increased $866,000 or 8.65%
over the same period in 1997 due to the same reasons discussed above.
INCOME TAXES
For the first six months of 1998, income tax expense was $10,954,000 compared to
$9,466,000 for the same period in 1997, or an increase of $1,488,000. In 1998,
$10,838,000 of the tax expense was related to operating income with a tax
expense of $116,000 related to securities transactions. In the first six months
of 1997, income tax expense related to operating income was $9,471,000 with a
tax benefit related to securities transactions of $5,000. The increase in taxes
on operating income was due to the increase in operating income before taxes and
securities transactions of $2,901,000 or 10.0% over that reported for the first
six 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 and
maturities of tax-exempt securities which decreased tax-exempt income.
Income tax expense for the second quarter of 1998 was $5,623,000 compared to
$4,835,000 for the same period in 1997, which was an increase of $788,000. Tax
expense relating to operating income totaled $5,524,000 and $4,843,000 for the
quarters ended June 30, 1998 and 1997, respectively, with tax expense (benefit)
related to securities transactions of $99,000 in 1998 and $8,000 in 1997.
NET EARNINGS
Net earnings for the first six months of 1998 were $1,743,000 or 8.97% greater
than that recorded during the same period in 1997. As was discussed previously,
net operating income was $20,950,000 which was 7.90% greater than the same
period in 1997. Net securities gains through June 30, 1998 were $221,000
compared to $12,000 for the period ending June 30, 1997.
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Net earnings for the three months ended June 30, 1998 were $1,054,000 or 10.5%
greater than the same period in 1997. As was discussed above, net operating
income was $10,874,000 or 8.65% greater than second quarter 1997. Net securities
gains for the second quarter of 1998 and 1997 were $194,000 and $6,000,
respectively.
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.
At June 30, 1998 and 1997, the recorded investment in loans that are considered
to be impaired under FASB Statement No. 114 was $5,244,000 and $3,023,000,
respectively, all of which were on a nonaccrual basis. The related allowance for
loan losses on these impaired loans was $2,030,000 at June 30, 1998 and
$1,136,000 at June 30, 1997. There were no impaired loans that as a result of
write-downs did not have an allowance for loan losses. The average recorded
investment in impaired loans for the respective six months and quarters ended
June 30, 1998 and 1997, was approximately $2,759,000 and $2,306,000 for 1998 and
$3,032,000 and $3,023,000 for 1997. For the six months and quarter ended June
30, 1998, Bancorp recognized interest income on those impaired loans of $51,000
and $48,000 compared to $107,000 and $43,000 for the same periods 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
--------------------- ----------------------------------
JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 27,967 $ 27,510 $ 24,875 $ 24,553 $ 23,651
Allowance acquired through merger 806 0 2,101 0 474
Provision for loan losses 1,198 1,250 1,677 1,076 1,123
Loans charged off (1,344) (1,052) (1,401) (956) (888)
Recoveries 290 259 258 202 193
-------- -------- -------- -------- --------
Net charge offs (1,054) (793) (1,143) (754) (695)
-------- -------- -------- -------- --------
Balance at end of period $ 28,917 $ 27,967 $ 27,510 $ 24,875 $ 24,553
======== ======== ======== ======== ========
Ratios:
Allowance to period end loans,
net of unearned income 1.38% 1.40% 1.39% 1.33% 1.35%
Recoveries to charge offs 21.58% 24.62% 18.42% 21.13% 21.73%
Allowance as a multiple of
net charge offs 27.44X 35.27X 24.07X 32.99X 35.33X
NONPERFORMING/UNDERPERFORMING ASSETS
The table on the following page shows the categories which are included in
nonperforming and underperforming assets.
Nonperforming assets decreased $1,268,000 or 15.9% in the second quarter of 1998
when compared to the second quarter of 1997, and in that same period, accruing
loans past due 90 days or more increased $720,000. Nonperforming assets
decreased $2,101,000 or 23.8% in the second quarter of 1998 when compared to the
first quarter of 1998. Accruing loans, including loans
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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, are classified as "Accruing loans 90 days or more past due"
until they become current.
QUARTER ENDED
1998 1997
------------------- -------------------------------
JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $ 5,306 $ 5,985 $ 5,257 $ 6,418 $ 7,089
Restructured loans 1,170 1,812 1,581 630 704
OREO/ISF* 237 1,017 950 700 188
------- ------- ------- ------- -------
Total nonperforming assets 6,713 8,814 7,788 7,748 7,981
Accruing loans past due
90 days or more 1,746 2,585 1,203 789 1,026
------- ------- ------- ------- -------
Total underperforming assets $ 8,459 $11,399 $ 8,991 $ 8,537 $ 9,007
======= ======= ======= ======= =======
Nonperforming assets as a percent
of loans, net of unearned income
plus OREO/ISF 0.32% 0.44% 0.39% 0.42% 0.44%
======= ======= ======= ======= =======
Underperforming assets as a percent
of loans, net of unearned income
plus OREO/ISF 0.40% 0.57% 0.45% 0.46% 0.50%
======= ======= ======= ======= =======
*Other real estate owned/in-substance foreclosure
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 second quarter of 1998 Bancorp's deposit
liabilities had increased by 1.41% from December 31, 1997. Another source of
funding is through short-term borrowings. As part of Bancorp's asset/liability
management strategy, Bancorp's short-term borrowings increased to $90,888,000 at
June 30, 1998, compared to $52,288,000 at December 31, 1997, as one source of
funding loan growth.
The principal source of asset-funded liquidity is marketable investment
securities, particularly those of shorter maturities. At June 30, 1998,
securities maturing in one year or less amounted to $52,297,000, representing
13.3% of the total of the investment securities portfolio. In addition, other
types of assets such as cash and due from banks, federal funds sold and
securities purchased under agreements to resell, as well as loans and
interest-bearing deposits with other banks maturing within one year, are sources
of liquidity. Total asset-funded sources of liquidity at June 30, 1998, amounted
to $600,155,000, representing 21.9% of total assets. Sources of long-term asset
funded liquidity are derived from the maturity of investment securities and
maturing loans in excess of one year.
At June 30, 1998, Bancorp had classified $352,932,000 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.
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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 $2,520,000 for the first six
months of 1998. In addition, remodeling is a planned and ongoing process given
the 107 offices of Bancorp and its subsidiaries. Material commitments for
capital expenditures as of June 30, 1998 were approximately $2,260,000.
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, and an 8.00% Total
risk-based capital ratio. A minimum of 3.00% leverage ratio is required for bank
holding companies that either are rated composite "1" under the BOPEC rating
system or have implemented the Board's risk-based capital market risk measure.
The minimum leverage ratio for all other bank holding companies is 4.0%. 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 June 30, 1998, was 12.6%, its Total risked-based
capital was 13.8% and its Leverage ratio was 9.45%. 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 last two years.
QUARTER ENDED
1998 1997
----------------------- -----------------------------------
JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30
---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Tier I Capital:
Shareholder's equity $ 295,616 $ 290,493 $ 286,259 $ 280,593 $ 274,511
Less: Intangible assets 42,321 38,316 39,169 8,684 8,926
Less: Unrealized net securities
gains (losses) 1,584 1,967 2,094 1,945 1,398
---------- ---------- ---------- ---------- ----------
Total Tier I Capital $ 251,711 $ 250,210 $ 244,996 $ 269,964 $ 264,187
========== ========== ========== ========== ==========
Total Risk-Based Capital:
Tier I Capital $ 251,711 $ 250,210 $ 244,996 $ 269,964 $ 264,187
Qualifying Allowance for Loan Losses 25,122 24,313 23,591 21,818 21,364
---------- ---------- ---------- ---------- ----------
Total Risk-BASED Capital $ 276,833 $ 274,523 $ 268,587 $ 291,782 $ 285,551
========== ========== ========== ========== ==========
Risk Weighted Assets $2,005,962 $1,941,265 $1,883,335 $1,742,394 $1,705,949
========== ========== ========== ========== ==========
Risk-Based Ratios:
Tier I 12.55% 12.89% 13.01% 15.49% 15.49%
========== ========== ========== ========== ==========
Total Risk-Based Capital 13.80% 14.14% 14.26% 16.75% 16.74%
========== ========== ========== ========== ==========
Leverage 9.45% 9.66% 10.07% 11.40% 11.43%
========== ========== ========== ========== ==========
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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, has assessed 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 renovaton
during the third quarter 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 second quarter 1998, Bancorp incurred approximately $378,000 in
noninterest expense for costs related to Year 2000 issues, bringing 1998 total
costs to approximately $626,000. Based on management's current assessment and
anticipated reprogramming costs, Bancorp expects to spend an additional
$3,000,000 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 shoud be read in conjunction with the
consoliidated 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.
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Management's analysis may contain forward-looking statements that are provided
to assist in the understanding of anticipated future financial performance.
However, such 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.
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PART II-OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On April 28, 1998, Bancorp held its annual meeting of
shareholders, the results of which follow:
1) Election of three directors:
% of Total Votes
Name Term Votes For Shares Voted Withheld
---- ---- --------- ------------ --------
Donald M. Cisle 3 years 14,220,932 99.67% 157,983
F. Elden Houts 3 years 14,224,656 99.70% 151,609
Corrine R. Finnerty 3 years 14,199,418 99.52% 150,340
Directors whose terms continue beyond the Annual Meeting in 1998:
Class I Term expiring in 1999:
Arthur W. Bidwell
Carl R. Fiora
Vaden Fitton
Barry J. Levey
Stephen S. Marcum
Steven C. Posey
Class II Term expiring in 2000:
Richard L. Alderson
James C. Garland
Murph Knapke
Stanley N. Pontius
Barry S. Porter
Perry D. Thatcher
2) Amend Corporation Articles of Incorporation to eliminate par
value of shares
14,089,726 shares, or 98.78% of the total shares voted, voted
to adopt the amended Articles of Incorporation. Of the total
shares voted, 76,728 shares voted against the amendment of the
regulations and there were 101,232 abstentions.
No other matters were brought before the meeting for a vote.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Forn 8-K
During the quarter ended June 30, 1998, the registrant did
not file any reports on Form 8-K.
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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 August 12, 1998 Date August 12, 1998
-------------------------- -------------------------
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