<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, 1997
-------------------------------------
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, 1997
----------------------------- ----------------------------------
Common stock, $8.00 par value 16,553,992
<PAGE> 2
PART I - FINANCIAL INFORMATION
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 100,326 $ 110,767
Interest-bearing deposits with other banks 3,244 5,079
Federal funds sold and securities purchased
under agreements to resell 2,546 12,201
Investment securities held-to-maturity, at cost
(market value - $63,621 at September 30, 1997 and
$83,441 at December 31, 1996) 60,122 78,945
Investment securities available-for-sale,
at market value (cost of $312,563 at September 30, 1997
and $288,829 at December 31, 1996) 315,684 290,701
Loans
Commercial 449,465 398,034
Real estate-construction 56,434 43,262
Real estate-mortgage 915,626 863,414
Installment 408,186 366,051
Credit card 15,802 16,107
Lease financing 21,678 14,821
---------- ----------
Total loans 1,867,191 1,701,689
Less
Unearned income 1,470 1,425
Allowance for loan losses 24,875 22,672
---------- ----------
Net loans 1,840,846 1,677,592
Premises and equipment 43,357 42,633
Deferred income taxes 2,012 2,802
Accrued interest and other assets 52,959 40,991
---------- ----------
TOTAL ASSETS $2,421,096 $2,261,711
========== ==========
LIABILITIES
Deposits
Noninterest-bearing $ 242,770 $ 238,415
Interest-bearing 1,697,332 1,641,551
---------- ----------
Total deposits 1,940,102 1,879,966
Short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase 93,838 35,304
Federal Home Loan Bank borrowings 67,500 56,500
Other 2,216 1,975
---------- ----------
Total short-term borrowings 163,554 93,779
Long-term borrowings 12,133 6,506
Accrued interest and other liabilities 24,714 22,978
---------- ----------
TOTAL LIABILITIES 2,140,503 2,003,229
SHAREHOLDERS' EQUITY
Common stock - par value, $8 per share
Authorized - 60,000,000 shares
Issued - 16,557,935 in 1997 and 14,727,772 in 1996 132,463 117,822
Surplus 100,263 47,125
Retained earnings 46,291 93,369
Unrealized net gains on investment securities
available-for-sale, net of deferred income taxes 1,945 1,162
Restricted stock awards (369) (220)
Treasury stock, at cost, 0 and 25,907 shares 0 (776)
---------- -----------
TOTAL SHAREHOLDERS' EQUITY 280,593 258,482
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,421,096 $2,261,711
========== ===========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 3
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,
----------------- ------------------
1997 1996 1997 1996
-------- ------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 122,298 $ 107,090 $ 42,580 $ 36,978
Investment securities
Taxable 14,917 14,377 5,059 4,906
Tax-exempt 3,779 4,567 1,173 1,522
--------- --------- --------- ---------
Total investment interest 18,696 18,944 6,232 6,428
Interest-bearing deposits with
other banks 180 339 47 101
Federal funds sold and securities
purchased under agreements to resell 380 405 59 75
--------- --------- --------- ---------
TOTAL INTEREST INCOME 141,554 126,778 48,918 43,582
INTEREST EXPENSE
Deposits 51,810 49,113 17,727 16,467
Short-term borrowings 4,304 2,343 1,766 1,248
Long-term borrowings 489 193 165 78
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 56,603 51,649 19,658 17,793
--------- --------- --------- ---------
NET INTEREST INCOME 84,951 75,129 29,260 25,789
Provision for loan losses 3,059 2,467 1,076 1,097
--------- --------- --------- ---------
Net interest income after
provision for loan losses 81,892 72,662 28,184 24,692
NONINTEREST INCOME
Service charges on deposit accounts 7,560 6,848 2,677 2,323
Trust income 7,024 6,223 2,222 2,063
Investment securities gains (losses) 29 (17) 22 (14)
Other 4,894 3,288 2,169 1,308
--------- --------- --------- ---------
Total noninterest income 19,507 16,342 7,090 5,680
NONINTEREST EXPENSES
Salaries and employee benefits 31,066 27,853 10,845 9,526
Net occupancy expenses 3,790 3,614 1,288 1,262
Furniture and equipment expenses 3,298 2,882 1,086 991
Data processing expenses 3,680 3,562 1,263 1,208
Deposit insurance expense 263 2,732 91 2,339
State taxes 1,277 1,267 439 429
Other 14,003 11,674 5,134 3,912
--------- --------- --------- ---------
Total noninterest expenses 57,377 53,584 20,146 19,667
--------- --------- --------- ---------
Income before income taxes 44,022 35,420 15,128 10,705
Income tax expense 14,364 10,969 4,898 3,125
--------- --------- --------- ---------
NET EARNINGS $ 29,658 $ 24,451 $ 10,230 $ 7,580
========= ========= ========= =========
Net earnings per common share $ 1.79 $ 1.52 $ 0.62 $ 0.47
========= ========= ========= =========
Cash dividends declared per share $ 0.85 $ 0.75 $ 0.30 $ 0.25
========= ========= ========= =========
Average shares outstanding 16,543,523 16,040,280 16,554,080 16,167,821
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 29,658 $ 24,451
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 3,059 2,467
Provision for depreciation and amortization 3,761 2,963
Net amortization of investment security
premiums and accretion of discounts 344 508
Realized investment security (gains) losses (29) 17
Originations of mortgage loans held for sale (42,452) (27,097)
Gains from sales of mortgage loans held for sale (529) (381)
Proceeds from sale of mortgage loans held for sale 42,981 27,478
Deferred income taxes 450 8
Increase in interest receivable (2,504) (1,093)
Increase in cash surrender value of life insurance (3,289) (8,132)
Increase in prepaid expenses (977) (872)
(Decrease) increase in accrued expenses (108) 1,608
Increase (decrease) in interest payable 89 (48)
Other (1,468) (1,547)
---------- ----------
Net cash provided by operating activities 28,986 20,330
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available-for-sale 501 4,984
Proceeds from calls, paydowns and maturities of
investment securities available-for-sale 85,659 109,020
Purchases of investment securities available-for-sale (90,959) (108,268)
Proceeds from calls, paydowns and maturities of
investment securities held-to-maturity 20,440 12,407
Purchases of investment securities held-to-maturity (1,240) (2,985)
Net decrease in interest-bearing deposits
with other banks 1,835 179
Net decrease in federal funds sold and securities
purchased under agreements to resell 21,356 31,726
Net increase in loans and leases (109,524) (88,200)
Recoveries from loans and leases previously charged off 745 861
Proceeds from disposal of other real estate owned 448 749
Cash acquired in merger 8,288 1,845
Purchase of other financial institutions, net
of cash acquired (5,909) 0
Purchases of premises and equipment (2,449) (2,336)
---------- ----------
Net cash used in investing activities (70,809) (40,018)
FINANCING ACTIVITIES
Net decrease in total deposits (30,538) (18,731)
Net increase in short-term borrowings 69,775 45,926
Increase in long-term borrowings 5,627 4,714
Cash dividends declared (13,990) (11,931)
Purchase of common stock 0 (994)
Proceeds from exercise of stock options, net of shares
purchased 508 226
---------- ---------
Net cash provided by financing activities 31,382 19,210
---------- ---------
(DECREASE) IN CASH AND CASH EQUIVALENTS (10,441) (478)
Cash and cash equivalents at beginning of period 110,767 108,685
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $100,326 $108,207
========== =========
</TABLE>
3
<PAGE> 5
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Supplemental disclosures
Interest paid $ 58,472 $ 51,429
========== =========
Income taxes paid $ 16,465 $ 12,139
========== =========
Recognition of deferred tax (liabilities) assets
attributable to FASB Statement No. 115 $ (465) $ 740
========== =========
Acquisition of other real estate owned through
foreclosure $ 903 $ 210
========== =========
Issuance of restricted stock awards $ 226 $ 226
========== =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
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, 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. Goodwill arising from the
acquisition of subsidiaries is 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.
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 August 26, 1997, distributed on October 1,
1997. 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".
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
5
<PAGE> 7
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,
1997, Bancorp had issued standby letters of credit aggregating $20,451,000
compared to $9,706,000 issued as of December 31, 1996. 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 $313,497,000 at September 30, 1997 and $270,232,000 at
December 31, 1996. Management does not anticipate any material losses as a
result of these commitments.
NOTE 3: BUSINESS COMBINATIONS
On June 1, 1997, Bancorp paid $7,800,000 in cash for all the outstanding common
stock of Southeastern Indiana Bancorp (SIB). Upon consummation of the merger,
SIB was merged out of existence and its only subsidiary, Vevay Deposit Bank,
became a wholly owned subsidiary of Bancorp. Vevay Deposit Bank has its main
office and two other offices in Vevay, Indiana and one office in East
Enterprise, Indiana. This merger was accounted for using the purchase method of
accounting and, accordingly, the consolidated financial statements include Vevay
Deposit Bank's results of operations from the date of acquisition.
On January 1, 1997, Bancorp issued 322,386 shares of its common stock in
exchange for all the outstanding common stock of Hastings Financial Corporation
(Hastings) of Hastings, Michigan. Upon consummation of the merger, Hastings was
merged out of existence and National Bank of Hastings, Hastings' only subsidiary
became a wholly owned subsidiary of Bancorp. This merger was accounted for as an
immaterial pooling-of-interests and accordingly, the consolidated financial
statements, including earnings per share, were not restated for periods prior to
January 1, 1997.
NOTE 4: PENDING MERGERS AND ACQUISITIONS
On June 23, 1997, Bancorp announced its intentions to merge two of its wholly
owned subsidiaries, Citizens Commercial Bank (Citizens) and Van Wert National
Bank (Van Wert). The newly formed bank will be operating under a new name,
Community First Bank & Trust. Subject to regulatory approval, the merger is
expected to be completed in the fourth quarter of 1997.
6
<PAGE> 8
In addition, the combined banks plan to acquire a cluster of branches currently
owned by KeyBank National Association (Key), Cleveland, Ohio. The group of Key
offices includes 11 branches in Mercer, Auglaize, Allen, Paulding and Williams
counties with deposits of approximately $231,000,000. This acquisition is also
expected to be completed in the fourth quarter of 1997.
On September 29, 1997, officials of First Financial Bancorp and Union State Bank
signed an Agreement in Principle which is the first step toward First
Financial's purchase of the Payne, Ohio, financial institution. The merger of
the $60 million bank is expected to be completed in the first quarter of 1998
following appropriate regulatory and shareholder approval.
NOTE 5: ACCOUNTING CHANGES
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," was released in June 1996 and was effective for
transactions occurring after December 31, 1996. Early adoption of SFAS No. 125
was 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. The financial impact of adopting this
statement was immaterial.
7
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996
------------------------------------ -----------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET EARNINGS $ 10,230 $ 10,014 $ 9,414 $ 9,489 $ 7,580
AVERAGE CONSOLIDATED BALANCE SHEET ITEMS:
LOANS LESS UNEARNED INCOME 1,836,612 1,770,479 1,730,946 1,665,127 1,635,564
INVESTMENT SECURITIES 372,769 373,697 369,438 376,345 381,986
OTHER EARNING ASSETS 7,070 12,549 20,266 15,131 12,848
---------- ---------- --------- --------- ----------
TOTAL EARNING ASSETS 2,216,451 2,156,725 2,120,650 2,056,603 2,030,398
TOTAL ASSETS 2,376,040 2,320,075 2,281,811 2,211,307 2,180,410
DEPOSITS 1,925,615 1,907,229 1,888,159 1,813,974 1,803,351
SHAREHOLDERS' EQUITY 277,732 269,380 266,008 255,733 249,941
KEY RATIOS:
AVERAGE EQUITY TO AVERAGE TOTAL ASSETS 11.69% 11.61% 11.66% 11.56% 11.46%
RETURN ON AVERAGE TOTAL ASSETS 1.72% 1.73% 1.65% 1.72% 1.39%
RETURN ON AVERAGE EQUITY 14.73% 14.87% 14.16% 14.84% 12.13%
NET INTEREST MARGIN (FULLY TAX EQUIVALENT) 5.41% 5.41% 5.29% 5.31% 5.25%
</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 $3,294,000 over
the third quarter of 1996 and $764,000 over the second quarter of 1997.
Continued loan growth, in all major categories of loans, contributed to higher
net interest income in the third quarter of 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
1997 1996
----------------------------- -------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME $48,918 $47,267 $45,369 $44,497 $43,582
INTEREST EXPENSE 19,658 18,814 18,131 18,058 17,793
------- ------- ------- ------- -------
NET INTEREST INCOME 29,260 28,453 27,238 26,439 25,789
TAX EQUIVALENT ADJUSTMENT TO INTEREST INCOME 702 745 782 856 879
------- ------- ------- ------- -------
NET INTEREST INCOME (FULLY TAX EQUIVALENT) $29,962 $29,198 $28,020 $27,295 $26,668
======= ======= ======= ======= =======
</TABLE>
RATE/VOLUME ANALYSIS
The impact of changes in volume and interest rates on net interest income is
illustrated in the table below. The primary factor 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.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED CHANGE DUE TO: ENDED CHANGE DUE TO:
SEP. 30, 1997 ------------------- SEP. 30, 1997 ------------------
OVER 1996 RATE VOLUME OVER 1996 RATE VOLUME
------------- -------- -------- ------------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME $ 14,776 $ 2,781 $ 11,995 $ 5,336 $ 1,256 $ 4,080
INTEREST EXPENSE 4,954 316 4,638 1,865 378 1,487
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ 9,822 $ 2,465 $ 7,357 $ 3,471 $ 878 $ 2,593
======== ======== ======== ======== ======== ========
</TABLE>
8
<PAGE> 10
OPERATING RESULTS
Net operating income represents net earnings before net securities transactions.
Net operating income for the first nine months of 1997 was $29,633,000 which was
an increase of $5,199,000 or 21.3% over that reported in the same period in
1996. 1996 operations were negatively impacted by the Savings Association
Insurance Fund (SAIF) one-time assessment legislation. This legislation impacted
all entities with deposits insured under the SAIF fund. The assessment caused
Bancorp's 1996 net earnings to decrease by $1,389,000. The increase in net
operating income can also be attributed to an increase in net interest income of
$9,822,000 or 13.1%. Noninterest income, excluding securities transactions, for
the first nine months of 1997 increased 19.1% in comparison to the same period
in 1996 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. During the third quarter, planned software and hardware evaluation
expenses of approximately $650,000 were incurred relating to Bancorp's
multi-phased preparation for Year 2000 which were partially offset by other
non-recurring income of approximately $500,000. Adjusting for the Year 2000
expenses and non-recurring income in 1997 and the SAIF assessment in 1996, net
operating income increased 15.2%. The increase in income tax expense is
discussed in the next section. The increase in noninterest expense was 7.08%.
Net operating income for the third quarter of 1997 increased $2,628,000 or 34.6%
over the same period in 1996 due to the same reasons discussed above. Net
operating income for the quarter increased 14.9%, adjusting for the Year 2000
expenses and non-recurring income in the third quarter of 1997 and the SAIF
assessment in the third quarter of 1996.
INCOME TAXES
For the first nine months of 1997, income tax expense was $14,364,000 compared
to $10,969,000 for the same period in 1996, or an increase of $3,395,000. In
1997, $14,360,000 of the tax expense was related to operating income with a tax
expense of $4,000 related to securities transactions. In the first nine months
of 1996, income tax expense related to operating income was $11,003,000, with a
tax benefit related to securities transactions of $34,000. The increase in taxes
on operating income was due to the increase in operating income before taxes and
securities transactions of $8,556,000 or 24.1% over that reported for the first
nine months of 1996 and a higher effective tax rate for the period in 1997. 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 third quarter of 1997 was $4,898,000 compared to
$3,125,000 for the same period in 1996, which was an increase of $1,773,000. Tax
expense relating to operating income totaled $4,889,000 and $3,130,000 for the
quarters ended September 30, 1997 and 1996, respectively, with a tax expense
related to securities transactions of $9,000 in 1997 and a tax benefit of $5,000
in 1996.
NET EARNINGS
Net earnings for the first nine months of 1997 were $5,207,000 or 21.3% greater
than that recorded during the same period in 1996. As was discussed previously,
net operating income was $29,633,000 which was 21.3% greater than the same
period in 1996. Net securities gains through September 30, 1997 were $25,000
compared to $17,000 for the period ending September 30, 1996.
Net earnings for the three months ended September 30, 1997 were $2,650,000 or
35.0% greater than the same period in 1996. As was discussed above, net
operating income was $10,217,000
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<PAGE> 11
or 34.6% greater than third quarter 1996. Net securities gains for the third
quarter of 1997 were $13,000 and net securities losses for the same period in
1996 were $9,000.
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.
At September 30, 1997 and 1996, the recorded investment in loans that are
considered to be impaired under FASB Statement No. 114 was $2,842,000 and
$2,482,000, respectively, all of which were on a nonaccrual basis. The related
allowance for loan losses on these impaired loans was $826,000 at September 30,
1997 and $834,000 at September 30, 1996. 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, 1997 and 1996, was approximately $2,929,000 and
$2,726,000 for 1997 and $1,847,000 and $1,976,000 in 1996. For the nine months
and quarter ended September 30, 1997, Bancorp recognized interest income on
those impaired loans of $150,000 and $43,000 compared to $36,000 and $9,000 for
the same periods in 1996. 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.
<TABLE>
<CAPTION>
QUARTER ENDED
1997 1996
---------------------------------- ----------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
-------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 24,553 $ 23,651 $ 22,672 $ 21,972 $ 21,605
ALLOWANCE ACQUIRED THROUGH MERGER 0 474 438 869
PROVISION FOR LOAN LOSSES 1,076 1,123 860 966 1,097
LOANS CHARGED OFF (956) (892) (665) (1,447) (1,026)
RECOVERIES 202 197 346 312 296
--------- --------- --------- --------- ---------
NET CHARGE OFFS (754) (695) (319) (1,135) (730)
--------- --------- --------- --------- ---------
BALANCE AT END OF PERIOD $ 24,875 $ 24,553 $ 23,651 $ 22,672 $ 21,972
========= ========= ========= ========= =========
RATIOS:
ALLOWANCE TO PERIOD END LOANS,
NET OF UNEARNED INCOME 1.33% 1.35% 1.36% 1.33% 1.33%
RECOVERIES TO CHARGE OFFS 21.13% 22.09% 52.03% 21.56% 28.85%
ALLOWANCE AS A MULTIPLE OF
NET CHARGE OFFS 32.99X 35.33X 74.14X 19.98X 30.10X
</TABLE>
NONPERFORMING/UNDERPERFORMING ASSETS
The table on the following page shows the categories which are included in
nonperforming and underperforming assets.
Nonperforming assets increased $1,095,000 or 16.5% in the third quarter of 1997
when compared to the third quarter of 1996, and in that same period, accruing
loans past due 90 days or more decreased $449,000. Nonperforming assets
decreased $233,000 or 2.92% in the third quarter of 1997 when compared to the
second quarter of 1997. There were no individually large loans contributing to
the increase in nonperforming assets from 1996 to 1997. While the 16.5% increase
may seem large, the level of nonperforming assets as a percentage of loans in
the current quarter has only increased a small amount compared to 1996 levels.
Accruing
10
<PAGE> 12
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
1997 1996
------------------------------- -------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NONACCRUAL LOANS $ 6,418 $ 7,089 $ 6,611 $ 4,850 $ 5,028
RESTRUCTURED LOANS 630 704 550 890 507
OREO/ISF* 700 188 345 264 1,118
------- ------- ------- ------- -------
TOTAL NONPERFORMING ASSETS 7,748 7,981 7,506 6,004 6,653
ACCRUING LOANS PAST DUE
90 DAYS OR MORE 789 1,026 1,009 906 1,238
------- ------- ------- ------- -------
TOTAL UNDERPERFORMING ASSETS $ 8,537 $ 9,007 $ 8,515 $ 6,910 $ 7,891
======= ======= ======= ======= =======
NONPERFORMING ASSETS AS A PERCENT
OF LOANS, NET OF UNEARNED INCOME
PLUS OREO/ISF 0.42% 0.44% 0.43% 0.35% 0.40%
======= ======= ======= ======= =======
UNDERPERFORMING ASSETS AS A PERCENT
OF LOANS, NET OF UNEARNED INCOME
PLUS OREO/ISF 0.46% 0.50% 0.49% 0.41% 0.48%
======= ======= ======= ======= =======
*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.
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 1997 Bancorp's deposit
liabilities had increased by 3.20% from December 31, 1996. 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 $163,554,000
at September 30, 1997, compared to $93,779,000 at December 31, 1996, as one
source of funding loan growth.
The principal source of asset-funded liquidity is marketable investment
securities, particularly those of shorter maturities. At September 30, 1997,
securities maturing in one year or less amounted to $73,086,000, representing
19.45% 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, 1997,
amounted to $527,749,000, representing 21.8% 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, 1997, Bancorp had classified $315,684,000 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.
11
<PAGE> 13
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 $2,449,000 for the first nine
months of 1997. In addition, remodeling is a planned and ongoing process given
the 93 offices of Bancorp and its subsidiaries. Material commitments for capital
expenditures as of September 30, 1997 were approximately $875,000. 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 September 30, 1997, was 15.5%, its Total risked-based
capital was 16.8% and its Leverage ratio was 11.4%. 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.
<TABLE>
<CAPTION>
QUARTER ENDED
1997 1996
------------------------------------ -----------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TIER I CAPITAL:
SHAREHOLDER'S EQUITY $ 280,593 $ 274,511 $ 267,498 $ 258,482 $ 252,376
LESS: INTANGIBLE ASSETS 8,684 8,926 5,187 4,154 1,528
LESS: UNREALIZED NET SECURITIES
GAINS (LOSSES) 1,945 1,398 129 1,162 154
---------- ---------- ---------- ---------- ----------
TOTAL TIER I CAPITAL $ 269,964 $ 264,187 $ 262,182 $ 253,166 $ 250,694
========== ========== ========== ========== ==========
TOTAL RISK-BASED CAPITAL:
TIER I CAPITAL $ 269,964 $ 264,187 $ 262,182 $ 253,166 $ 250,694
QUALIFYING ALLOWANCE FOR LOAN LOSSES 21,818 21,364 20,468 19,856 19,263
---------- ---------- ---------- ---------- ----------
TOTAL RISK-BASED CAPITAL $ 291,782 $ 285,551 $ 282,650 $ 273,022 $ 269,957
========== ========== ========== ========== ==========
RISK WEIGHTED ASSETS $1,742,394 $1,705,949 $1,637,465 $1,588,464 $1,538,359
========== ========== ========== ========== ==========
RISK-BASED RATIOS:
TIER I 15.49% 15.49% 16.04% 15.94% 16.30%
========== ========== ========== ========== ==========
TOTAL RISK-BASED CAPITAL 16.75% 16.74% 17.30% 17.19% 17.55%
========== ========== ========== ========== ==========
LEVERAGE 11.40% 11.43% 11.52% 11.83%
========== ========== ========== ==========
</TABLE>
12
<PAGE> 14
ACCOUNTING AND REGULATORY MATTERS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128 on earnings per share presentation. This Statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. FASB Statement No. 128 requires the presentation of
basic (excludes dilution) and fully diluted earnings per share. The impact to
Bancorp from adoption of this Statement is not material.
Considerable attention has been devoted by the press for the computer
complications that may arise when the current century ends and the next century
begins. Bancorp has retained the services of a consulting group who is assisting
Bancorp in determining what steps are needed to ensure that its computer systems
are compliant with Year 2000 issues. Bancorp has substantially completed this
assessment phase for a cost of approximately $650,000. Bancorp is currently
analyzing the recommendations of the consulting group, and at this time the
total dollar impact of all Year 2000 issues is unknown.
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> 15
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
During the quarter ended September 30, 1997, the registrant did not
file any reports on form 8-K.
14
<PAGE> 16
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.
<TABLE>
<CAPTION>
<S> <C>
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 13, 1997 Date November 13, 1997
----------------------------- ----------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000708955
<NAME> FIRST FINANCIAL BANCORP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 100,326
<INT-BEARING-DEPOSITS> 3,244
<FED-FUNDS-SOLD> 2,546
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 315,684
<INVESTMENTS-CARRYING> 60,122
<INVESTMENTS-MARKET> 63,621
<LOANS> 1,865,721
<ALLOWANCE> 24,875
<TOTAL-ASSETS> 2,421,096
<DEPOSITS> 1,940,102
<SHORT-TERM> 163,554
<LIABILITIES-OTHER> 24,714
<LONG-TERM> 12,133
0
0
<COMMON> 280,593
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 2,421,096
<INTEREST-LOAN> 122,298
<INTEREST-INVEST> 18,696
<INTEREST-OTHER> 560
<INTEREST-TOTAL> 141,554
<INTEREST-DEPOSIT> 51,810
<INTEREST-EXPENSE> 56,603
<INTEREST-INCOME-NET> 84,951
<LOAN-LOSSES> 3,059
<SECURITIES-GAINS> 29
<EXPENSE-OTHER> 57,377
<INCOME-PRETAX> 44,022
<INCOME-PRE-EXTRAORDINARY> 44,022
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,658
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.79
<YIELD-ACTUAL> 8.66
<LOANS-NON> 6,418
<LOANS-PAST> 789
<LOANS-TROUBLED> 630
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 22,672
<CHARGE-OFFS> 2,513
<RECOVERIES> 745
<ALLOWANCE-CLOSE> 24,875
<ALLOWANCE-DOMESTIC> 24,875
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
