<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended SEPTEMBER 30, 1996
----------------------
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 November 1, 1996
----------------------------- ---------------------------------
Common stock, $8.00 par value 14,698,430
<PAGE> 2
FIRST FINANCIAL BANCORP.
INDEX
Page No.
--------
Part I-Financial Information
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 1
Consolidated Statements of Earnings -
Nine and Three Months Ended
September 30, 1996 and 1995 2
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 5
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 14
Signatures 14
<PAGE> 3
PART I - FINANCIAL INFORMATION
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
------------- ----------
<S> <C> <C>
Cash and due from banks $ 108,207 $ 108,685
Interest-bearing deposits with other banks 6,703 6,882
Federal funds sold and securities purchased
under agreements to resell 1,676 14,802
Investment securities held-to-maturity, at cost
(market value - $89,201 at September 30, 1996 and
$100,512 at December 31, 1995) 84,112 93,522
Investment securities available-for-sale,
at market value (cost of $295,311 at September 30, 1996
and $291,766 at December 31, 1995) 295,639 294,052
Loans
Commercial 387,638 340,942
Real estate-construction 35,782 41,845
Real estate-mortgage 835,581 788,805
Installment 360,456 329,034
Credit card 14,764 15,406
Lease financing 15,400 16,557
----------- ----------
Total loans 1,649,621 1,532,589
Less
Unearned income 1,269 573
Allowance for loan losses 21,972 20,437
----------- ----------
Net loans 1,626,380 1,511,579
Premises and equipment 41,364 39,931
Deferred income taxes 4,231 3,369
Accrued interest and other assets 40,520 30,553
---------- ----------
TOTAL ASSETS $2,208,832 $2,103,375
=========== ==========
LIABILITIES
Deposits
Noninterest-bearing $ 220,179 $ 220,061
Interest-bearing 1,600,271 1,565,501
----------- ----------
Total deposits 1,820,450 1,785,562
Short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase 69,129 49,483
Other 35,187 8,889
----------- ----------
Total short-term borrowings 104,316 58,372
Long-term borrowings 7,534 2,820
Accrued interest and other liabilities 24,156 22,446
----------- ----------
TOTAL LIABILITIES 1,956,456 1,869,200
SHAREHOLDERS' EQUITY
Common stock - par value, $8 per share
Authorized - 25,000,000 shares
Issued - 14,698,430 in 1996 and 13,013,422 in 1995 117,587 104,107
Surplus 46,489 13,577
Retained earnings 88,380 115,102
Unrealized net gains on investment securities
available-for-sale, net of deferred income taxes 154 1,437
Restricted stock awards (234) (48)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 252,376 234,175
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,208,832 $2,103,375
=========== ===========
See notes to consolidated financial statements.
</TABLE>
1
<PAGE> 4
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 107,090 $ 94,305 $ 36,978 $ 32,920
Investment securities
Taxable 14,377 11,751 4,906 4,013
Tax-exempt 4,567 5,758 1,522 1,744
--------- --------- --------- ---------
Total investment interest 18,944 17,509 6,428 5,757
Interest-bearing deposits with
other banks 339 224 101 85
Federal funds sold and securities
purchased under agreements to resell 405 128 75 98
--------- --------- --------- ---------
TOTAL INTEREST INCOME 126,778 112,166 43,582 38,860
INTEREST EXPENSE
Deposits 49,113 42,747 16,467 15,244
Short-term borrowings 2,343 3,376 1,248 908
Long-term borrowings 193 0 78 0
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 51,649 46,123 17,793 16,152
--------- --------- --------- ---------
NET INTEREST INCOME 75,129 66,043 25,789 22,708
Provision for loan losses 2,467 1,151 1,097 532
--------- --------- --------- ---------
Net interest income after
provision for loan losses 72,662 64,892 24,692 22,176
NONINTEREST INCOME
Service charges on deposit accounts 6,848 6,314 2,323 2,171
Trust income 6,223 5,706 2,063 1,882
Investment securities (losses) gains (17) 300 (14) 49
Other 3,288 2,908 1,308 989
--------- --------- --------- ---------
Total noninterest income 16,342 15,228 5,680 5,091
NONINTEREST EXPENSES
Salaries and employee benefits 27,853 24,321 9,526 8,406
Net occupancy expenses 3,614 3,260 1,262 1,119
Furniture and equipment expenses 2,882 2,415 991 799
Data processing expenses 3,562 3,977 1,208 1,357
Deposit insurance expense 2,732 1,860 2,339 77
State taxes 1,267 1,224 429 413
Other 11,674 9,738 3,912 3,388
--------- --------- --------- ---------
Total noninterest expenses 53,584 46,795 19,667 15,559
--------- --------- --------- ---------
Income before income taxes 35,420 33,325 10,705 11,708
Income tax expense 10,969 9,850 3,125 3,591
--------- --------- --------- ---------
NET EARNINGS $ 24,451 $ 23,475 $ 7,580 $ 8,117
========= ========= ========= =========
Net earnings per common share $ 1.68 $ 1.73 $ .52 $ 0.59
========= ========= ========= =========
Cash dividends declared per share $ 0.81 $ 0.71 $ 0.27 $ 0.24
========= ========= ========= =========
Average shares outstanding 14,582,072 13,542,770 14,698,018 13,765,175
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1996 1995
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 24,451 $ 23,475
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 2,467 1,151
Provision for depreciation and amortization 2,963 2,985
Net amortization of investment security
premiums and accretion of discounts 508 864
Realized investment security losses (gains) 17 (300)
Originations of mortgage loans held for sale (27,097) (18,247)
Gains from sales of mortgage loans held for sale (381) (254)
Proceeds from sale of mortgage loans held for sale 27,478 18,501
Deferred income taxes 8 (102)
Increase in interest receivable (1,093) (601)
Increase in cash surrender value of life insurance (8,132) 0
Increase in prepaid expenses (872) (509)
Increase in accrued expenses 1,608 2,384
(Decrease) increase in interest payable (48) 1,744
Other (1,547) (345)
---------- ----------
Net cash provided by operating activities 20,330 30,746
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available-for-sale 4,984 34,188
Proceeds from calls, paydowns and maturities of
investment securities available-for-sale 109,020 35,871
Purchases of investment securities available-for-sale (108,268) (59,442)
Proceeds from calls, paydowns and maturities of
investment securities held-to-maturity 12,407 37,236
Purchases of investment securities held-to-maturity (2,985) (520)
Net decrease in interest-bearing deposits
with other banks 179 3,740
Net decrease (increase) in federal funds sold and
securities purchased under agreements to resell 31,726 (1,184)
Net increase in loans and leases (88,200) (54,777)
Recoveries from loans and leases previously charged off 861 881
Proceeds from disposal of other real estate owned 749 833
Cash acquired in merger 1,845 2,577
Purchases of premises and equipment (2,336) (2,232)
---------- ----------
Net cash used in investing activities (40,018) (2,829)
FINANCING ACTIVITIES
Net (decrease) increase in total deposits (18,731) 8,506
Net increase (decrease) in short-term borrowings 45,926 (37,142)
Increase in long-term borrowings 4,714 0
Cash dividends (11,931) (9,617)
Purchase of common stock (994) 0
Proceeds from exercise of stock options, net of shares
purchased 226 123
---------- ----------
Net cash provided by (used in) financing activities 19,210 (38,130)
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (478) (10,213)
Cash and cash equivalents at beginning of period 108,685 103,752
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $108,207 $ 93,539
========== =========
</TABLE>
3
<PAGE> 6
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Supplemental disclosures
Interest paid $ 51,429 $ 45,171
========== =========
Income taxes paid $ 12,139 $ 8,260
========== =========
Recognition of deferred tax assets (liabilities)
attributable to FASB Statement No. 115 $ 740 $ (2,042)
========== ==========
Acquisition of other real estate owned through
foreclosure $ 210 $ 371
========== =========
Issuance of restricted stock awards $ 226 $ 33
========== =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The consolidated financial statements for interim periods are unaudited;
however, in the opinion of the management of First Financial Bancorp.
("Bancorp"), all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation have been included.
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements of Bancorp, a bank and savings and loan
holding company, include the accounts of Bancorp and its wholly-owned
subsidiaries - First National Bank of Southwestern Ohio, Citizens Commercial
Bank & Trust Company, Van Wert National Bank, Union Trust Bank, Indiana Lawrence
Bank, Fidelity Federal Savings Bank, Citizens First State Bank, Home Federal
Bank, A Federal Savings Bank, Union Bank & Trust Company, The Clyde Savings Bank
Company, Peoples Bank and Trust Company, Bright National Bank and First Finance
Mortgage Company of Southwestern Ohio. All significant intercompany transactions
and accounts have been eliminated in consolidation. Intangible assets arising
from the acquisition of subsidiaries are being amortized over varying periods,
none of which currently exceeds 15 years. Core deposit balances are being
amortized over varying periods, none of which currently exceeds 10 years.
The accompanying financial statements have been prepared in accordance with the
instructions for Form 10-Q and, therefore, do not include all information and
footnotes necessary to be in conformity with generally accepted accounting
principles.
The Consolidated Statements of Cash Flows has been presented utilizing the
indirect method. For purposes of the Consolidated Statements of Cash Flows,
Bancorp considers cash and due from banks as cash and cash equivalents.
Average common shares outstanding have been adjusted for a 10% stock dividend
declared by the Board of Directors on September 24, 1996. This dividend is
payable on November 1, 1996 to shareholders of record as of October 9, 1996.
Appropriately, shares outstanding and earnings and dividends per share in the
accompanying financial statements have been restated to reflect the
above-mentioned stock dividend. The 10% stock dividend was recorded by
transferring the fair market value of the shares issued from retained earnings
to common stock and surplus. The assumed exercise of stock options would not
have a materially dilutive effect; therefore, fully diluted earnings per share
is not presented.
NOTE 2: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, Bancorp offers a variety of financial
instruments with off-balance-sheet risk to its customers to aid them in meeting
their requirements for liquidity and credit enhancement and to reduce its own
exposure to fluctuations in interest rates. These financial instruments include
standby letters of credit and commitments outstanding to extend credit.
Generally accepted accounting principles do not require these financial
instruments to be recorded in the consolidated financial statements, and
accordingly, they are not. Bancorp does not use off-balance-sheet derivative
financial instruments (such as interest rate swaps) as defined in the Financial
Accounting Standards Board's (FASB) Statement No. 119 "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments".
5
<PAGE> 8
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 its obligation to make
payment in the event of the customers' contractual default. As of September 30,
1996, Bancorp had issued standby letters of credit aggregating $9,502,000
compared to $10,989,000 issued as of December 31, 1995. 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 $268,794,000 at September 30, 1996 and $243,430,000 at
December 31, 1995. Management does not anticipate any material losses as a
result of these commitments.
NOTE 3: BUSINESS COMBINATIONS
On April 1, 1996 Bancorp issued 363,373 shares of its common stock in exchange
for all the outstanding common stock of F&M Bancorp (F&M) of Rochester, Indiana.
Upon consummation of the merger, F&M was merged out of existence and Farmers &
Merchants Bank of Rochester, F&M's only subsidiary, was merged with and into
Indiana Lawrence Bank (Indiana Lawrence), a wholly owned subsidiary of Bancorp.
Farmers & Merchants Bank of Rochester's offices became branches of Indiana
Lawrence, the surviving entity. This merger was accounted for as an immaterial
pooling-of-interests and, accordingly, the consolidated financial statements,
including earnings per share, have not been restated for periods prior to April
1, 1996.
NOTE 4: PENDING MERGERS AND ACQUISITIONS
On July 16, 1996 Bancorp signed a Plan and Agreement of Merger with Farmers
State Bancorp (Farmers), a bank holding company which is headquartered in
Liberty, Indiana. The proposed transaction is structured as a cash purchase.
Farmers' wholly-owned subsidiary, Farmers State Bank, will become Bancorp's
fourteenth affiliate with $63 million in assets. The bank has six offices, two
in Union County, Indiana and the remaining four in Rush County, Indiana. The
purchase is expected to be completed in the fourth quarter of 1996, after
obtaining appropriate regulatory and shareholder approval.
6
<PAGE> 9
Bancorp and Hastings Financial Corporation of Hastings, Michigan (Hastings)
signed a Plan and Agreement of Merger on July 1, 1996. The proposed transaction
is structured as an exchange of stock and will use the pooling-of-interests
method of accounting. Hastings is a one-bank parent holding company of National
Bank of Hastings (National). National has assets of $47 million, and operates
two offices, one in Barry County and the other in Allegan County, Michigan.
After obtaining appropriate regulatory and shareholder approval, the merger is
expected to be consummated in the first quarter of 1997.
NOTE 5: ACCOUNTING CHANGES
In May 1995, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Standards ("SFAS") No. 122 on accounting for mortgage servicing
rights, which Bancorp adopted effective January 1, 1996. The financial impact of
adopting this statement was immaterial.
Bancorp is required to adopt SFAS No. 123, "Accounting for Stock-based
Compensation," by December 31, 1996. Bancorp is in the process of analyzing this
statement and does not anticipate the impact of adoption will have a material
effect on its consolidated financial position or earnings.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," was released in June 1996 and is effective for
transactions occurring after December 31, 1996. Early adoption of SFAS No. 125
is not permitted. Under the provisions of SFAS No. 125, each party to a
transaction recognizes only assets it controls and liabilities it has incurred,
derecognizes assets only when control has been surrendered and derecognizes
liabilities only when they have been extinguished. Transactions are to be
separated into components and separate assets and liabilities may need to be
recorded for the different components. Bancorp anticipates this statement will
not have a material effect on its consolidated financial position or earnings.
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
1996 1995
-------------------------------------- ----------------------
SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30
---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET EARNINGS $ 7,580 $ 9,045 $ 7,826 $ 8,314 $ 8,117
AVERAGE CONSOLIDATED BALANCE SHEET ITEMS:
LOANS LESS UNEARNED INCOME 1,635,564 1,588,249 1,528,462 1,526,017 1,449,366
INVESTMENT SECURITIES 381,986 380,887 373,359 381,238 332,720
OTHER EARNING ASSETS 12,848 22,283 18,482 28,359 13,269
---------- ---------- ---------- ---------- ----------
TOTAL EARNING ASSETS 2,030,398 1,991,419 1,920,303 1,935,614 1,795,355
TOTAL ASSETS 2,180,410 2,137,669 2,059,649 2,070,338 1,923,339
DEPOSITS 1,803,351 1,813,461 1,749,361 1,757,020 1,618,998
SHAREHOLDERS' EQUITY 249,941 247,468 236,539 232,471 216,164
KEY RATIOS:
AVERAGE EQUITY TO AVERAGE TOTAL ASSETS 11.46% 11.58% 11.48% 11.23% 11.24%
RETURN ON AVERAGE TOTAL ASSETS 1.39% 1.69% 1.52% 1.61% 1.69%
RETURN ON AVERAGE EQUITY 12.13% 14.62% 13.23% 14.31% 15.02%
NET INTEREST MARGIN (FULLY TAX EQUIVALENT) 5.25% 5.25% 5.21% 5.22% 5.28%
</TABLE>
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 $2,952,000 over
the third quarter of 1995 and $549,000 over the second quarter of 1996.
Continued loan growth, particularly in commercial and installment loans,
contributed to higher net interest income in the third quarter of 1996.
<TABLE>
<CAPTION>
QUARTER ENDED
1996 1995
------------------------------------ --------------------
SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30
-------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME $43,582 $42,259 $40,937 $41,685 $38,860
INTEREST EXPENSE 17,793 17,049 16,807 17,393 16,152
------- ------- ------- ------- -------
NET INTEREST INCOME 25,789 25,210 24,130 24,292 22,708
TAX EQUIVALENT ADJUSTMENT TO INTEREST INCOME 879 909 866 976 1,008
------- ------- ------- ------- -------
NET INTEREST INCOME (FULLY TAX EQUIVALENT) $26,668 $26,119 $24,996 $25,268 $23,716
======= ======= ======= ======= =======
</TABLE>
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, increases in rates had
an impact on both interest income and interest expense for the nine month period
ended September 30, 1996 in comparison to 1995. The increase in rates had
slightly more impact on interest income than interest expense. For the third
quarter, changes in rates caused both interest income and interest expense to
decrease, but had a greater effect on interest expense. 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
<PAGE> 11
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED CHANGE DUE TO: ENDED CHANGE DUE TO:
SEPT. 30, 1996 ------------------ SEPT. 30, 1996 ------------------
OVER 1995 RATE VOLUME OVER 1995 RATE VOLUME
------------- -------- -------- ------------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME $ 14,612 $ 651 $ 13,961 $ 4,722 $ (326) $ 5,048
INTEREST EXPENSE 5,526 248 5,278 1,641 (446) 2,087
-------- ------- -------- -------- ------ -------
NET INTEREST INCOME $ 9,086 $ 403 $ 8,683 $ 3,081 $ 120 $ 2,961
======== ======= ======== ======== ====== =======
</TABLE>
OPERATING RESULTS
Bancorp's earnings were negatively impacted on September 30, 1996 when an
omnibus appropriations package containing new deposit insurance legislation was
enacted. Bancorp has three affiliates which have approximately $326,000,000 in
deposits insured under the Savings Association Insurance Fund (SAIF). The
assessment caused Bancorp's net earnings to decrease by $1,389,000. Bancorp's
net operating income for the first nine months of 1996 was $24,434,000 which was
an increase of $1,243,000 or 5.36% over that reported in the same period in
1995. If the SAIF assessment had not occurred, net operating income would have
been up 11.3%. Net operating income represents net earnings before net
securities transactions. This increase in net operating income can be primarily
attributed to an increase in net interest income of $9,086,000 or 13.8%.
Noninterest income, excluding securities transactions, for the first nine months
of 1996 increased 9.59% in comparison to the same period in 1995. 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 14.5%. The SAIF
assessment was a significant factor in this increase.
Net operating income for the third quarter of 1996 had increased $918,000 over
1995 before the SAIF assessment occurred. Bancorp actually recorded a decrease
in net operating income of $471,000 or 5.84 % over the same period in 1995 due
to the same reasons discussed above.
INCOME TAXES
For the first nine months of 1996, income tax expense was $10,969,000 compared
to $9,850,000 for the same period in 1995, or an increase of $1,119,000. In
1996, $11,003,000 of the tax expense was related to operating income with a tax
benefit of $34,000 related to securities transactions. In the first nine months
of 1995, income tax expense related to operating income was $9,834,000 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 $2,412,000 or 7.30% over that reported for the first
nine months of 1995 and a higher effective tax rate for the period in 1996. The
higher effective tax rate was primarily attributable to significant calls of
tax-exempt securities which decreased tax-exempt income.
Income tax expense for the third quarter of 1996 was $3,125,000 compared to
$3,591,000 for the same period in 1995, which was a decrease of $466,000. Tax
expense relating to operating income totaled $3,130,000 and $3,599,000 for the
quarters ended September 30, 1996 and 1995, respectively, with tax benefits
related to securities transactions of $5,000 and $8,000 for 1996 and 1995,
respectively.
9
<PAGE> 12
NET EARNINGS
Net earnings for the first nine months of 1996 were $976,000 or 4.16% greater
than that recorded during the same period in 1995. Without the SAIF assessment,
net earnings would have been $25,840,000 or $2,365,000 better than prior year.
As was discussed previously, net operating income was $1,243,000 which was 5.36%
greater than the same period in 1995. Net securities gains through September 30,
1996 were $17,000 compared to $284,000 for the period ending September 30, 1995.
Net earnings for the three months ended September 30, 1996 were $537,000 or
6.62% less than the same period in 1995. Net earnings would have been $8,969,000
or $852,000 higher than 1995 had the SAIF assessment not occurred. As was
discussed above, net operating income was $471,000 or 5.84% less than third
quarter 1995. The third quarter of 1996 reported a net security loss of $9,000
and 1995 reported a net security gain of $57,000.
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.
In September, First Southwestern's management decided to replenish the reserve
for charge-offs recognized during the month, creating the large variance in
provision for loan losses from the quarter ended June 30, 1996 to September 30,
1996. At September 30, 1996 and 1995, the recorded investment in loans that are
considered to be impaired under FASB Statement No. 114 was $2,482,000 and
$863,000, respectively, all of which were on a nonaccrual basis. The related
allowance for loan losses on these impaired loans was $834,000 at September 30,
1996 and $513,000 at September 30, 1995. There were no impaired loans that as a
result of write-downs did not have an allowance for loan losses. The average
recorded investment in impaired loans for the respective nine months and
quarters ended September 30 were approximately $1,847,000 and $1,976,000 in 1996
and $1,478,000 and $2,001,000 in 1995. For the nine months and quarter ended
September 30, 1996, Bancorp recognized interest income on those impaired loans
of $36,000 and $9,000, respectively. For the nine months ended September 30,
1995, Bancorp recognized interest income on those impaired loans of $57,000.
Bancorp did not recognize any interest income on impaired loans during the third
quarter of 1995. Bancorp recognizes income on impaired loans using the cash
basis method. The table on the following page indicates the activity in the
allowance for loan losses for the quarters presented.
10
<PAGE> 13
<TABLE>
<CAPTION>
QUARTER ENDED
1996 1995
------------------------------------ ---------------------
SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $21,605 $20,659 $20,437 $19,364 $18,948
ALLOWANCE ACQUIRED THROUGH MERGER 723 956 206
PROVISION FOR LOAN LOSSES 1,097 764 606 957 532
LOANS CHARGED OFF (1,026) (880) (610) (1,161) (551)
RECOVERIES 296 339 226 321 229
-------- --------- -------- -------- -------
NET CHARGE OFFS (730) (541) (384) (840) (322)
-------- --------- -------- -------- --------
BALANCE AT END OF PERIOD $21,972 $21,605 $20,659 $20,437 $19,364
======== ========= ======== ======== ========
RATIOS:
ALLOWANCE TO PERIOD END LOANS,
NET OF UNEARNED INCOME 1.33% 1.34% 1.34% 1.33% 1.33%
RECOVERIES TO CHARGE OFFS 28.85% 38.52% 37.05% 27.65% 41.56%
ALLOWANCE AS A MULTIPLE OF
NET CHARGE OFFS 30.10X 39.94X 53.80% 24.33X 60.14X
</TABLE>
NONPERFORMING/UNDERPERFORMING ASSETS
The table below shows the categories which are included in nonperforming and
underperforming assets.
Nonperforming assets increased $932,000 or 16.3% in the third quarter of 1996
when compared to the third quarter of 1995, and in that same period, accruing
loans past due 90 days or more increased $357,000. Nonperforming assets
increased $372,000 or 5.92% in the third quarter of 1996 when compared to the
second quarter of 1996. There were no individually large loans contributing to
this increase. 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.
<TABLE>
<CAPTION>
QUARTER ENDED
1996 1995
------------------------------------ ---------------------
SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NONACCRUAL LOANS $ 5,028 $ 3,931 $ 3,789 $ 2,764 $ 3,522
RESTRUCTURED LOANS 507 573 582 517 551
OREO/ISF* 1,118 1,777 1,646 1,677 1,648
-------- -------- -------- -------- -------
TOTAL NONPERFORMING ASSETS 6,653 6,281 6,017 4,958 5,721
ACCRUING LOANS PAST DUE
90 DAYS OR MORE 1,238 1,198 1,037 1,071 881
-------- -------- -------- -------- -------
TOTAL UNDERPERFORMING ASSETS $ 7,891 $ 7,479 $ 7,054 $ 6,029 $ 6,602
======== ======== ======== ======== =======
NONPERFORMING ASSETS AS A PERCENT
OF LOANS, NET OF UNEARNED INCOME
PLUS OREO/ISF .40% 0.39% 0.39% 0.32% 0.39%
======== ======== ======== ======== ========
UNDERPERFORMING ASSETS AS A PERCENT
OF LOANS, NET OF UNEARNED INCOME
PLUS OREO/ISF .48% 0.46% 0.46% 0.39% 0.45%
======== ======== ======== ========= ========
*OTHER REAL ESTATE OWNED/IN-SUBSTANCE FORECLOSURE
</TABLE>
In accordance with FASB Statement No. 114, a loan is classified as in-substance
foreclosure when Bancorp has taken possession of the collateral regardless of
whether formal foreclosure proceedings take place.
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.
11
<PAGE> 14
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 third quarter of 1996 Bancorp's deposit
liabilities had increased by 1.95% from December 31, 1995. Another source of
funding is through short-term borrowings. As part of Bancorp's asset/liability
management strategy, short-term borrowings increased to $104,316,000 at
September 30, 1996, compared to $58,372,000 at December 31, 1995, as one source
of funding loan growth. Most of Bancorp's affiliates are currently utilizing
advances from the Federal Home Loan Bank (FHLB). The balances of FHLB borrowings
at September 30, 1996 and December 31, 1995 were $38,230,000 and $12,771,000,
respectively.
The principal source of asset-funded liquidity is marketable investment
securities, particularly those of shorter maturities. At September 30, 1996,
securities maturing in one year or less amounted to $82,691,000, representing
21.8% of the total of the investment securities portfolio. In addition, other
types of assets such as cash and due from banks, federal funds sold and
securities purchased under agreements to resell, as well as loans and
interest-bearing deposits with other banks maturing within one year, are sources
of liquidity. Total asset-funded sources of liquidity at September 30, 1996,
amounted to $501,244,000, representing 22.7% 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 September 30, 1996, Bancorp had classified $295,568,000 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 $2,336,000 for the first nine
months of 1996. In addition, remodeling is a planned and ongoing process given
the 80 offices of Bancorp and its subsidiaries. Material commitments for capital
expenditures as of September 30, 1996 were approximately $788,000. 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 ratio compared to a
minimum standard to determine whether a bank has adequate capital.
Fully phased-in guidelines require 4.00% for Tier I capital, which consists
mainly of common shareholders' equity net of intangibles, and 8.00% for total
capital (Tier I plus Tier II supplementary capital).
Bancorp's Tier I ratio at September 30, 1996 was 16.3% and its total capital
ratio was 17.6%. While Bancorp's ratios are well above the guidelines,
management will continue to monitor the asset mix, product pricing, and the
allowance for loan losses, which are the areas determined to be most affected by
these requirements. The following table illustrates the risk-based capital
calculations and ratios for the past five quarters.
12
<PAGE> 15
<TABLE>
<CAPTION>
QUARTER ENDED
1996 1995
------------------------------------ ----------------------
SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30
---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TIER I CAPITAL:
SHAREHOLDER'S EQUITY $ 252,376 $ 248,839 $ 237,430 $ 234,175 $ 220,561
LESS: INTANGIBLE ASSETS 1,528 1,586 1,644 1,701 1,512
LESS: UNREALIZED NET SECURITIES
(LOSSES) GAINS 154 (244) 695 1,437 865
---------- ---------- ---------- ---------- ----------
TOTAL TIER I CAPITAL $ 250,694 $ 247,497 $ 235,091 $ 231,037 $ 218,184
========== ========== ========== ========== ==========
TOTAL RISK-BASED CAPITAL:
TIER I CAPITAL $ 250,694 $ 247,497 $ 235,091 $ 231,037 $ 218,184
QUALIFYING ALLOWANCE FOR LOAN LOSSES 19,263 18,833 17,947 17,758 16,856
---------- ---------- ---------- ---------- ----------
TOTAL RISK-BASED CAPITAL $ 269,958 $ 266,331 $ 253,038 $ 248,795 $ 235,040
========== ========== ========== ========== ==========
RISK WEIGHTED ASSETS $1,538,359 $1,503,886 $1,433,051 $1,417,991 $1,345,951
========== ========== ========== ========== ==========
RISK-BASED RATIOS:
TIER I 16.30% 16.46% 16.40% 16.29% 16.21%
========== ========== ========== ========== ==========
TOTAL RISK-BASED CAPITAL 17.55% 17.71% 17.66% 17.55% 17.46%
========== ========== ========== ========== ==========
</TABLE>
ACCOUNTING AND REGULATORY MATTER
On August 8, 1995, the Federal Deposit Insurance Corporation (FDIC) voted to
retroactively lower the deposit insurance premiums commercial banks pay from
$0.23 to $0.04 per $100 in insured deposits for well-capitalized institutions.
In September of 1995, Bancorp's commercial banking subsidiaries received refunds
on excess deposit insurance premiums paid from June to September 1995.
Accordingly, these refunds are reflected in the September 30, 1995 Consolidated
Financial Statements. Premiums for thrifts were not revised. On September 30,
1996 an omnibus appropriations package containing new deposit insurance
legislation was enacted. This legislation states that in order to replenish the
depleted thrift deposit insurance system the savings and loan industry must pay
a one-time assessment rate of 65.7 cents per $100 in domestic deposits held as
of March 31, 1995. Bancorp has three affiliates which have approximately
$326,000,000 in deposits insured under the Savings Association Insurance Fund
(SAIF). The effect of this assessment is discussed in Management's Discussion
and Analysis of Financial Condition and Results of Operations - Operating
Results.
Management is not aware of any other events or regulatory recommendations which,
if implemented, are likely to have a material effect on Bancorp's liquidity,
capital resources, or operations.
13
<PAGE> 16
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(b) Reports on Form 8-K
During the quarter ended September 30, 1996, the registrant did
not file any reports on Form 8-K.
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 November 8, 1996 Date November 8, 1996
----------------------------- -----------------------------
14
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000708955
<NAME> FIRST FINANCIAL BANCORP
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 108,207
<INT-BEARING-DEPOSITS> 6,703
<FED-FUNDS-SOLD> 1,676
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 295,639
<INVESTMENTS-CARRYING> 84,112
<INVESTMENTS-MARKET> 89,201
<LOANS> 1,648,352
<ALLOWANCE> 21,972
<TOTAL-ASSETS> 2,208,832
<DEPOSITS> 1,820,450
<SHORT-TERM> 104,316
<LIABILITIES-OTHER> 24,156
<LONG-TERM> 7,534
<COMMON> 117,587
0
0
<OTHER-SE> 134,789
<TOTAL-LIABILITIES-AND-EQUITY> 252,376
<INTEREST-LOAN> 107,090
<INTEREST-INVEST> 18,944
<INTEREST-OTHER> 744
<INTEREST-TOTAL> 126,778
<INTEREST-DEPOSIT> 49,113
<INTEREST-EXPENSE> 51,649
<INTEREST-INCOME-NET> 75,129
<LOAN-LOSSES> 2,467
<SECURITIES-GAINS> (17)
<EXPENSE-OTHER> 53,584
<INCOME-PRETAX> 35,420
<INCOME-PRE-EXTRAORDINARY> 35,420
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,451
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 8.53
<LOANS-NON> 5,028
<LOANS-PAST> 1,238
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 21,605
<CHARGE-OFFS> 1,026
<RECOVERIES> 296
<ALLOWANCE-CLOSE> 21,972
<ALLOWANCE-DOMESTIC> 21,972
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
