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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, 1999
---------------------------
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
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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
-------------------
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, 1999
- ------------------------------ ------------------------------------
Common stock, No par value 36,250,299
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FIRST FINANCIAL BANCORP.
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 1
Consolidated Statements of Earnings -
Three Months Ended March 31, 1999 and 1998 2
Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 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 6 Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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PART I - FINANCIAL INFORMATION
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in thousands)
March 31, December 31,
ASSETS 1999 1998
---------- -----------
Cash and due from banks $ 124,222 $ 136,489
Interest-bearing deposits with other banks 9,029 2,498
Federal funds sold and securities purchased
under agreements to resell 11,354 4,921
Investment securities held-to-maturity, at cost
(market value - $33,746 at March 31, 1999 and
$37,214 at December 31, 1998) 32,087 34,920
Investment securities available-for-sale, at market 288,971 313,175
Loans
Commercial 641,344 631,906
Real estate-construction 75,634 72,518
Real estate-mortgage 1,060,070 1,042,579
Installment 494,882 474,783
Credit card 16,793 18,521
Lease financing 35,361 29,212
---------- ----------
Total loans 2,324,084 2,269,519
Less
Unearned income 2,803 2,646
Allowance for loan losses 30,502 29,684
---------- ----------
Net loans 2,290,779 2,237,189
Premises and equipment 52,181 50,902
Goodwill 31,039 31,416
Other intangibles 11,126 11,164
Deferred income taxes 1,565 1,261
Accrued interest and other assets 53,182 47,169
---------- ----------
TOTAL ASSETS $2,905,535 $2,871,104
========== ==========
LIABILITIES
Deposits
Noninterest-bearing $ 304,936 $ 323,763
Interest-bearing 2,012,361 2,002,833
---------- ----------
Total deposits 2,317,297 2,326,596
Short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase 43,580 44,720
Federal Home Loan Bank borrowings 88,000 64,000
Other 482 643
---------- ----------
Total short-term borrowings 132,062 109,363
Long-term borrowings 116,165 105,335
Accrued interest and other liabilities 32,465 27,877
---------- ----------
TOTAL LIABILITIES 2,597,989 2,569,171
SHAREHOLDERS' EQUITY
Common stock - no par value
Authorized - 60,000,000 shares
Issued - 36,320,338 in 1999 and 36,320,338 in 1998 297,687 298,285
Retained earnings 11,062 5,366
Accumulated comprehensive income 1,162 1,835
Restricted stock awards (509) (408)
Treasury stock, at cost, 70,039 shares in 1999
and 118,638 shares in 1998 (1,856) (3,145)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 307,546 301,933
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,905,535 $2,871,104
========== ==========
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)
Three months ended
March 31,
--------------------
1999 1998
--------- ---------
INTEREST INCOME
Loans, including fees $ 50,701 $ 45,911
Investment securities
Taxable 4,239 5,484
Tax-exempt 785 1,070
--------- ---------
Total investment interest 5,024 6,554
Interest-bearing deposits with
other banks 54 63
Federal funds sold and securities
purchased under agreements to resell 29 160
--------- ---------
TOTAL INTEREST INCOME 55,808 52,688
INTEREST EXPENSE
Deposits 19,074 19,577
Short-term borrowings 1,257 871
Long-term borrowings 1,369 769
--------- ---------
TOTAL INTEREST EXPENSE 21,700 21,217
--------- ---------
NET INTEREST INCOME 34,108 31,471
Provision for loan losses 1,939 1,250
--------- ---------
Net interest income after
provision for loan losses 32,169 30,221
NONINTEREST INCOME
Service charges on deposit accounts 3,059 2,822
Trust revenues 3,396 2,798
Investment securities gains 17 44
Other 2,300 2,141
--------- ---------
Total noninterest income 8,772 7,805
NONINTEREST EXPENSES
Salaries and employee benefits 13,028 11,986
Net occupancy 1,574 1,422
Furniture and equipment 1,257 1,176
Data processing 1,450 1,396
Deposit insurance 119 100
State taxes 476 399
Amortization of intangibles 943 947
Other 4,958 5,166
--------- ---------
Total noninterest expenses 23,805 22,592
--------- ---------
Income before income taxes 17,136 15,434
Income tax expense 6,006 5,331
--------- ---------
NET EARNINGS $ 11,130 $ 10,103
========= =========
Net earnings per share - basic $ 0.31 $ 0.28
========= =========
Net earnings per share - diluted $ 0.31 $ 0.28
========= =========
Cash dividends declared per share $ 0.15 $ 0.14
========= =========
Average shares outstanding 36,225,639 36,421,422
========== ==========
See notes to consolidated financial statements.
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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
Three months ended
March 31,
--------------------
1999 1998
--------- ---------
NET INCOME $ 11,130 $ 10,103
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding losses arising
during period (663) (100)
Less: reclassification adjustment for gains
included in net income 10 27
-------- -------
Other comprehensive income (673) (127)
-------- -------
COMPREHENSIVE INCOME $ 10,457 $ 9,976
======== =======
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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three months ended
March 31,
-------------------
1999 1998
------- -------
OPERATING ACTIVITIES
Net earnings $ 11,130 $ 10,103
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 1,939 1,250
Provision for depreciation and amortization 3,084 1,933
Net amortization of investment security
premiums and accretion of discounts 79 33
Realized investment security gains (17) (44)
Originations of mortgage loans held for sale (60,767) (40,392)
Gains from sales of mortgage loans held for sale (988) (422)
Proceeds from sale of mortgage loans held for sale 61,755 40,814
Deferred income taxes (1,059) (29)
Increase in interest receivable (1,114) (1,594)
Increase in cash surrender value of life insurance (3,252) (2,841)
Increase in prepaid expenses (1,164) (230)
Increase in accrued expenses 4,201 5,220
(Decrease)increase in interest payable (231) 337
Other (249) 1,743
-------- --------
Net cash provided by operating activities 13,347 15,881
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available-for-sale 9,989 0
Proceeds from calls, paydowns and maturities of
investment securities available-for-sale 36,470 32,956
Purchases of investment securities available-for-sale (23,474) (66,192)
Proceeds from calls, paydowns and maturities of
investment securities held-to-maturity 2,934 10,697
Purchases of investment securities held-to-maturity 0 (925)
Net (increase) decrease in interest-bearing deposits
with other banks (6,531) 198
Net (increase) decrease in federal funds sold and
securities purchased under agreements to resell (6,433) 14,682
Net increase in loans and leases (55,838) (24,580)
Recoveries from loans and leases previously charged off 268 259
Proceeds from disposal of other real estate owned 102 63
Cash and cash equivalents acquired in merger 0 0
Purchases of premises and equipment (2,443) (497)
-------- --------
Net cash used in investing activities (44,956) (33,339)
FINANCING ACTIVITIES
Net decrease in total deposits (9,299) (29,865)
Net increase in short-term borrowings 22,699 21,997
Net increase in long-term borrowings 10,830 19,302
Cash dividends declared (5,436) (4,967)
Purchase of common stock 0 (1,068)
Proceeds from exercise of stock options,
net of shares purchased 548 258
-------- --------
Net cash provided by financing activities 19,342 5,657
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (12,267) (11,801)
Cash and cash equivalents at beginning of period 136,489 142,334
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $124,222 $130,533
======== ========
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FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three months ended
March 31,
----------------------
1999 1998
---------- ---------
Supplemental disclosures
Interest paid $ 21,931 $ 20,881
========== =========
Income taxes paid $ 904 $ 0
========== =========
Recognition of deferred tax assets
attributable to FASB Statement No. 115 $ 386 $ 88
========== =========
Acquisition of other real estate owned through
foreclosure $ 67 $ 130
========== =========
Issuance of restricted stock awards $ 146 $ 220
========== =========
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,
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 27, 1999, the shareholders approved an amendment to the Articles of
Incorporation to increase the number of authorized common shares from 60,000,000
to 160,000,000.
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 a contractual commitment to produce or deliver
goods or services. The risk to Bancorp arises from
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its obligation to make payment in the event of the customers' contractual
default. As of March 31, 1999, Bancorp had issued standby letters of credit
aggregating $16,426,000 compared to $17,242,000 issued as of December 31, 1998.
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 $484,731,000 at March 31, 1999 and $422,481,000 at
December 31, 1998. Management does not anticipate any material losses as a
result of these commitments.
NOTE 3: PENDING MERGERS AND ACQUISITIONS
On December 31, 1998, First Financial Bancorp. and Hebron Bancorp, Inc., Hebron,
Kentucky, signed a Plan and Agreement of Merger. This represents Bancorp's first
association with a Kentucky bank. Hebron Bancorp, Inc., is the parent company of
Hebron Deposit Bank (Hebron). Hebron has $107 million in assets.
On December 16, 1998, First Financial Bancorp. and Sand Ridge Financial
Corporation, Highland, Indiana, signed a Plan and Agreement of Merger. Sand
Ridge Financial Corporation is the parent company of Sand Ridge Bank (Sand
Ridge). Sand Ridge has $527 million in assets.
Both mergers are expected to be completed in the second quarter of 1999 and be
accounted for as a pooling-of-interests. In conjunction with these acquisitions,
Bancorp expects to have a one-time merger and restructuring charge. These
expenses are expected to be recorded in the second quarter of 1999 and were
estimated to be approximately $4.6 million after tax.
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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
1999 1998
---------- -------------------------------------------------
Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31
---------- ---------- ---------- ---------- ---------
(Dollars in thousands)
Net Earnings $ 11,130 $ 11,759 $ 11,176 $ 11,068 $ 10,103
Average Consolidated Balance Sheet Items:
Loans less unearned income 2,284,291 2,217,337 2,144,456 2,059,142 1,986,149
Investment securities 334,279 365,157 397,993 417,942 413,893
Other earning assets 7,421 14,540 10,433 15,635 16,359
---------- ---------- ---------- ---------- ----------
Total Earning Assets 2,625,991 2,597,034 2,552,882 2,492,719 2,416,401
Total assets 2,845,859 2,814,166 2,779,792 2,705,412 2,628,149
Deposits 2,295,495 2,293,307 2,256,427 2,261,056 2,179,267
Shareholders' equity 303,681 301,068 300,228 292,555 290,111
Key Ratios:
Average equity to average total assets 10.67% 10.70% 10.80% 10.81% 11.04%
Return on average total assets 1.59% 1.66% 1.60% 1.64% 1.56%
Return on average equity 14.86% 15.50% 14.77% 15.17% 14.12%
Net interest margin (fully tax equivalent) 5.35% 5.26% 5.21% 5.37% 5.39%
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 $2,517,000 over
the first quarter of 1998. Continued loan growth in all major loan categories
and improved interest bearing liability pricing contributed to higher net
interest income in the first quarter of 1999.
Quarter Ended
1999 1998
------- -----------------------------------------
Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31
------- ------- ------- ------- -------
(Dollars in thousands)
Interest income $55,808 $56,404 $55,841 $54,578 $52,688
Interest expense 21,700 22,523 22,884 21,823 21,217
------- ------- ------- ------- -------
Net interest income 34,108 33,881 32,957 32,755 31,471
Tax equivalent adjustment to interest income 527 536 536 599 647
------- ------- ------- ------- -------
Net interest income (fully tax equivalent) $34,635 $34,417 $33,493 $33,354 $32,118
======= ======= ======= ======= =======
RATE/VOLUME ANALYSIS
The impact of changes in volume and interest rates on net interest income is
illustrated on the following page. As shown, average earning assets had a
decrease in rates for the three month period ended March 31, 1999 in comparison
to the same period in 1998. The Federal Reserve initiated three 25 basis point
rate decreases in the fourth quarter of 1998. This action has resulted in lower
average earning asset yields in the first quarter of 1999, as anticipated.
Bancorp's management routinely evaluates and implements strategies to limit or
offset this effect to every extent possible. Bancorp has effectively lowered its
interest bearing liability costs as one means of offsetting a lower earning
asset yield. The primary factor, however, for increased net
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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.
Three Months
Ended Change Due To:
Mar. 31, 1999 -------------------
Over 1998 Rate Volume
------------- -------- --------
(Dollars in thousands)
Interest income $ 3,120 $ (1,360) $ 4,480
Interest expense 483 (1,265) 1,748
-------- -------- --------
Net interest income $ 2,637 $ (95) $ 2,732
======== ======== ========
OPERATING RESULTS
Net operating income represents net earnings before net securities transactions.
Net operating income for the first three months of 1999 was $11,120,000 which
was an increase of $1,044,000 or 10.4% over that reported in the same period in
1998. This increase in net operating income can be primarily attributed to an
increase in net interest income of $2,637,000 or 8.38%. The increase in net
interest income was driven by the loan growth and effective interest bearing
liability pricing as discussed previously. Noninterest income, excluding
securities transactions, for the first three months of 1999 increased 12.8% in
comparison to the same period in 1998 as a result of continued strong growth in
trust fee income and fees on deposit accounts. 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 5.37% primarily as a result of
increased salary and employee benefit expense.
INCOME TAXES
For the first three months of 1999, income tax expense was $6,006,000 compared
to $ 5,331,000 for the same period in 1998, or an increase of $675,000. In 1999,
$5,999,000 of the tax expense was related to operating income with a tax expense
of $7,000 related to securities transactions. In the first three months of 1998,
income tax expense related to operating income was $5,315,000 with a tax expense
related to securities transactions of $16,000. The increase in taxes on
operating income was due to the increase in operating income before taxes and
securities transactions of $1,728,000 or 11.2% over that reported for the first
three months of 1998 and a slightly higher effective tax rate for the period in
1999.
NET EARNINGS
Net earnings for the first three months of 1999 were $11,130,000 or 10.2%
greater than that recorded during the same period in 1998. As was discussed
previously, net operating income was $11,120,000 which was 10.4% greater than
the same period in 1998. Net securities gains through March 31, 1999 were
$10,000 compared to $27,000 for the period ending March 31, 1998.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to cover losses inherent in the portfolio. 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
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of future payments), the estimated value of any underlying collateral,
composition of the loan portfolio, 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 March 31, 1999 and 1998, the recorded investment in loans that are considered
to be impaired with an allowance under FASB Statement No. 114 was $2,283,000 and
$2,115,000, respectively, all of which were on a nonaccrual basis. The related
allowance for loan losses on these impaired loans was $359,000 at March 31, 1999
and $1,046,000 at March 31, 1998. There were $56,000 and $16,000 in 1998 and
1999, respectively, 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, 1999 and 1998 was
approximately $2,335,000 and $3,217,000. For the three months ended March 31,
1999, Bancorp recognized interest income on those impaired loans of $14,000
compared to $3,000 for the same period in 1998. 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
1999 1998
---------- ---------------------------------------------
Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31
---------- ---------- ---------- --------- ---------
(Dollars in thousands)
Balance at beginning of period $ 29,684 $29,397 $28,917 $27,967 $27,510
Allowance acquired through merger 0 0 0 806 0
Provision for loan losses 1,939 2,011 1,618 1,198 1,250
Loans charged off (1,389) (1,960) (1,403) (1,344) (1,052)
Recoveries 268 236 265 290 259
-------- --------- -------- -------- -------
Net charge offs (1,121) (1,724) (1,138) (1,054) (793)
-------- --------- -------- -------- --------
Balance at end of period $30,502 $29,684 $29,397 $28,917 $27,967
======== ========= ======== ======== ========
Ratios:
Allowance to period end loans,
net of unearned income 1.31% 1.31% 1.34% 1.38% 1.40%
Recoveries to charge offs 19.29% 12.04% 18.89% 21.58% 24.62%
Allowance as a multiple of
net charge offs 27.21X 17.22X 25.83X 27.44X 35.27X
NONPERFORMING/UNDERPERFORMING ASSETS
The table on the following page shows the categories which are included in
nonperforming and underperforming assets.
Bancorp's loan quality remains high when compared to peers and industry
standards. Nonperforming assets decreased $2,287,000 or 25.9% in the first
quarter of 1999 when compared to the first quarter of 1998, and in that same
period, accruing loans past due 90 days or more decreased $139,000. Restructured
loans decreased 68.5% from the first quarter of 1999 compared to first quarter
1998. OREO (other real estate owned) decreased 84.8% over the same period. Some
of the improvement is due to nonperforming assets being charged off. 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.
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Quarter Ended
1999 1998
---------- ---------------------------------------------
Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31
---------- ---------- ---------- --------- ---------
(Dollars in thousands)
Nonaccrual loans $ 5,792 $ 6,152 $ 6,993 $ 5,306 $ 5,985
Restructured loans 570 78 512 1,170 1,812
OREO 165 221 857 237 1,017
------- ------- ------- ------- -------
Total nonperforming assets 6,527 6,451 8,362 6,713 8,814
Accruing loans past due
90 days or more 2,446 1,839 1,993 1,746 2,585
------- ------- ------- ------- -------
Total underperforming assets $ 8,973 $ 8,290 $10,355 $ 8,459 $11,399
======= ======= ======= ======= =======
Nonperforming assets as a percent
of loans, net of unearned income
plus OREO 0.28% 0.28% 0.38% 0.32% 0.44%
======= ======= ======= ======= =======
Underperforming assets as a percent
of loans, net of unearned income
plus OREO 0.39% 0.37% 0.47% 0.40% 0.57%
======= ======= ======= ======= =======
*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 1999 Bancorp's deposit
liabilities had decreased slightly by 0.40% from December 31, 1998. Another
source of funding is through short-term borrowings. Bancorp's short-term
borrowings increased to $132,062,000 at March 31, 1999, compared to $109,363,000
at December 31, 1998, an increase of 20.8%.
The principal source of asset-funded liquidity is marketable investment
securities, particularly those of shorter maturities. At March 31, 1999,
securities maturing in one year or less amounted to $30,521,000 representing
9.51% 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, 1999,
amounted to $581,093,000 representing 20.0% 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, 1999, Bancorp had classified $288,971,000 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 $2,443,000 for the first three
months of 1999. In addition, remodeling is a planned and ongoing process given
the 109 offices of Bancorp and its subsidiaries. Material
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commitments for capital expenditures as of March 31, 1999 were approximately
$1,052,000. 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, 1999, was 12.5%, its Total risked-based
capital was 13.8% and its Leverage ratio was 9.50%. 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
1999 1998
---------- ----------------------------------------------
Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31
---------- ---------- ---------- ---------- ---------
(Dollars in thousands)
Tier I Capital:
Shareholder's equity $ 307,546 $ 301,933 $ 302,384 $ 295,616 $ 290,493
Less: Intangible assets 39,802 40,605 41,382 42,321 38,316
Less: Unrealized net securities
gains (losses) 1,162 1,835 2,707 1,584 1,967
---------- ---------- ---------- ---------- ----------
Total Tier I Capital $ 266,582 $ 259,493 $ 258,295 $ 251,711 $ 250,210
========== ========== ========== ========== ==========
Total Risk-Based Capital:
Tier I Capital $ 266,582 $ 259,493 $ 258,295 $ 251,711 $ 250,210
Qualifying Allowance for Loan Losses 26,662 26,903 25,711 25,122 24,313
---------- ---------- ---------- ---------- ----------
Total Risk-Based Capital $ 293,244 $ 286,396 $ 284,006 $ 276,833 $ 274,523
========== ========== ========== ========== ==========
Risk Weighted Assets $2,129,089 $2,149,489 $2,053,120 $2,005,962 $1,941,265
========== ========== ========== ========== ==========
Risk-Based Ratios:
Tier I 12.52% 12.07% 12.58% 12.55% 12.89%
========== ========== ========== ========== ==========
Total Risk-Based Capital 13.77% 13.32% 13.83% 13.80% 14.14%
========== ========== ========== ========== ==========
Leverage 9.50% 9.36% 9.44% 9.45% 9.66%
========== ========== ========== ========== ==========
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YEAR 2000 ISSUES
Many computer systems process transactions using two digits for the year of the
transaction, rather than a full four digits. As a result, these systems may not
function properly at the beginning of the year 2000 without some proactive
hardware or software change. 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 that financial institutions must use in measuring their progress
toward Year 2000 preparedness. Five commonly recognized phases of Year 2000
remediation are awareness, assessment, renovation, validation and
implementation.
During 1997 and 1998, the awareness and assessment phases were completed for all
systems and service providers. Additionally, renovations were completed for
mission critical systems and validation is well underway. As in 1997 and 1998,
Bancorp's Year 2000 Operating Committee continued to meet regularly during 1999
to direct and oversee all significant Year 2000 tasks. The Operating Committee
regularly updates senior management and the Board of Directors, who have pledged
their full support to the Year 2000 project.
Bancorp has inventoried and assessed the many hardware and software programs
that must be remediated. A vendor management program is bringing those
relationships into compliance. Bancorp realized in early 1997 that qualified
personnel were required to guide the organization through the Year 2000 Project.
Some Bancorp associates were reallocated, some new employees were hired and
contract staff have been used.
Our Year 2000 Loan Committee, comprised of affiliate senior lenders, has
assessed the impact of Year 2000 on commercial and retail borrowers and has
taken steps to mitigate the risk that is inherent in those loans. Our
Asset/Liability Committee and Operating Committee have assessed and estimated
the impact of liquidity and currency demands that may occur during the latter
part of 1999 and the impact into the year 2000. Management of each subsidiary is
taking steps to insure that they have appropriate funding resources and currency
on hand to meet anticipated customer demands.
Bancorp's computer systems fall into three broad categories: those processed
through a service bureau relationship, those processed in-house, and those
processed on a personal computer or client/server platform. The service bureau
systems were renovated, validated, and implemented in 1998. The mission critical
in-house systems were renovated in 1998 and validation was completed in first
quarter, 1999. The mission critical personal computer and client/server systems
were renovated in 1998 and all but one has been validated. Validation of this
system is in progress and will be completed in the second quarter, 1999.
Bancorp's Year 2000 Team continues to renovate and validate those systems that
are less critical in nature. Implementation follows successful validation
testing and this phase is anticipated to be substantially completed by mid-year
1999.
Bancorp has spent a great deal of time ensuring that it has an effective program
in place to address and resolve the Year 2000 issue in a timely manner. Should
Bancorp successfully complete its Year 2000 program, however, it will not be
isolated from potential impact. General disruptions in the economy or at other
significant service providers, such as
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telecommunication and utility companies, could adversely affect Bancorp. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
To mitigate both controlled and uncontrolled risks, Bancorp has developed
contingency plans in the event any particular system may not function properly.
The contingency plans for information technology systems primarily call for
manual intervention where required. Management has also developed contingency
plans to support our reliance on transportation, communication, outside vendors,
etc. where possible.
During first quarter 1999, Bancorp incurred approximately $240,000 in
noninterest expense for costs related to Year 2000 issues, bringing the total
amount charged to operations since 1997 to $2,131,000. An additional $212,000
was capitalized, bringing the total amount capitalized to $348,000. Based on
management's current assessment and anticipated reprogramming costs, Bancorp
expects to spend an additional $2,016,000, of which about $1,315,000 will be
capitalized. However, there can be no assurance as to the accuracy of these
estimates.
This Year 2000 information is designated as a "Year 2000 Readiness Disclosure"
falling under the provision of the "Year 2000 Information and Readiness
Disclosure Act."
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,
1998.
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 1998 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 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1999, 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/ C. Douglas Lefferson
- ---------------------------------- -------------------------------
Michael R. O'Dell, Senior Vice C. Douglas Lefferson
President, Chief Financial Comptroller
Officer and Secretary (Principal Accounting Officer)
Date May 14, 1999 Date May 14, 1999
----------------------------- --------------------------
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