<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended SEPTEMBER 30, 1998
-------------------------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from____________________ to________________
Commission file number 0-12379
FIRST FINANCIAL BANCORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1042001
---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 High Street, Hamilton, Ohio 45011
---------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 867-4700
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 12, 1998
----------------------------- ----------------------------------
Common stock, No par value 32,909,629
<PAGE> 2
FIRST FINANCIAL BANCORP.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I-FINANCIAL INFORMATION
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 1
Consolidated Statements of Earnings -
Nine Months and Three Months Ended September 30, 1998 and 1997 2
Consolidated Statements of Comprehensive Income -
Nine Months and Three Months Ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II-OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 123,398 $ 142,334
Interest-bearing deposits with other banks 2,677 3,487
Federal funds sold and securities purchased
under agreements to resell 4,850 18,773
Investment securities held-to-maturity, at cost
(market value - $40,551 at September 30, 1998
and $60,961 at December 31, 1997) 37,926 58,347
Investment securities available-for-sale,
at market value (cost of $329,212 at September 30, 1998
and $329,261 at December 31, 1997) 333,489 332,617
Loans
Commercial 593,730 502,919
Real estate-construction 75,846 63,308
Real estate-mortgage 1,011,366 927,985
Installment 469,565 439,744
Credit card 16,405 17,369
Lease financing 29,150 27,260
---------- ----------
Total loans 2,196,062 1,978,585
Less
Unearned income 2,626 1,554
Allowance for loan losses 29,397 27,510
----------- ----------
Net loans 2,164,039 1,949,521
Premises and equipment 48,602 47,013
Deferred income taxes 2,614 3,070
Accrued interest and other assets 92,122 80,949
---------- ----------
TOTAL ASSETS $2,809,717 $2,636,111
========== ==========
LIABILITIES
Deposits
Noninterest-bearing $ 283,543 $ 314,051
Interest-bearing 1,965,059 1,916,127
---------- ----------
Total deposits 2,248,602 2,230,178
Short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase 61,790 46,638
Federal Home Loan Bank borrowings 67,950 2,000
Other 468 3,650
---------- ----------
Total short-term borrowings 130,208 52,288
Long-term borrowings 101,216 41,054
Accrued interest and other liabilities 27,307 26,332
---------- ----------
TOTAL LIABILITIES 2,507,333 2,349,852
SHAREHOLDERS' EQUITY
Common stock - no par value
Authorized - 60,000,000 shares
Issued - 33,125,023 in 1998 and 16,558,108 in 1997 231,767 232,593
Retained earnings 69,422 51,973
Unrealized net gains on investment securities
available-for-sale, net of deferred income taxes 2,707 2,094
Restricted stock awards (444) (338)
Treasury stock, at cost, 37,694 and 1,319 shares (1,068) (63)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 302,384 286,259
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,809,717 $2,636,111
========== ==========
</TABLE>
See notes to consolidated financial statements.
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,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 143,294 $ 122,298 $ 49,590 $ 42,580
Investment securities
Taxable 16,299 14,917 5,235 5,059
Tax-exempt 2,931 3,779 866 1,173
--------- --------- --------- ---------
Total investment interest 19,230 18,696 6,101 6,232
Interest-bearing deposits with
other banks 213 180 80 47
Federal funds sold and securities
purchased under agreements to resell 370 380 70 59
--------- --------- --------- ---------
TOTAL INTEREST INCOME 163,107 141,554 55,841 48,918
INTEREST EXPENSE
Deposits 60,213 51,810 20,384 17,727
Short-term borrowings 3,311 4,304 1,545 1,766
Long-term borrowings 2,400 489 955 165
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 65,924 56,603 22,884 19,658
--------- --------- --------- ---------
NET INTEREST INCOME 97,183 84,951 32,957 29,260
Provision for loan losses 4,066 3,059 1,618 1,076
--------- --------- --------- ---------
Net interest income after
provision for loan losses 93,117 81,892 31,339 28,184
NONINTEREST INCOME
Service charges on deposit accounts 8,812 7,560 3,051 2,677
Trust income 8,426 7,024 2,907 2,222
Investment securities gains 494 29 157 22
Other 6,444 4,894 2,378 2,169
--------- --------- --------- ---------
Total noninterest income 24,176 19,507 8,493 7,090
NONINTEREST EXPENSES
Salaries and employee benefits 36,418 31,066 12,209 10,845
Net occupancy expenses 4,246 3,790 1,446 1,288
Furniture and equipment expenses 3,602 3,298 1,180 1,086
Data processing expenses 4,133 3,680 1,433 1,263
Deposit insurance expense 347 263 149 91
State taxes 1,289 1,277 448 439
Other 18,313 14,003 6,147 5,134
--------- --------- --------- ---------
Total noninterest expenses 68,348 57,377 23,012 20,146
--------- --------- --------- ---------
Income before income taxes 48,945 44,022 16,820 15,128
Income tax expense 16,598 14,364 5,644 4,898
--------- --------- --------- ---------
NET EARNINGS $ 32,347 $ 29,658 $ 11,176 $ 10,230
========= ========= ========= =========
Net earnings per share-basic $ 0.98 $ 0.90 $ 0.34 $ 0.31
========= ========= ========= =========
Net earnings per share-diluted $ 0.97 $ 0.89 $ 0.34 $ 0.31
========= ========= ========= =========
Cash dividends declared per share $ 0.45 $ 0.43 $ 0.15 $ 0.15
========= ========= ========= =========
Average shares outstanding 33,107,710 33,087,047 33,105,893 33,108,160
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
--------------------- -------------------
1998 1997 1998 1997
---------- --------- --------- --------
<S> <C> <C> <C> <C>
NET INCOME $ 32,347 $ 29,658 $ 11,176 $ 10,230
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains
arising during period 935 808 1,224 560
Less: reclassification adjustment
for gains included in net income 322 25 101 13
---------- --------- --------- --------
Other comprehensive income 613 783 1,123 547
---------- --------- --------- --------
COMPREHENSIVE INCOME $ 32,960 $ 30,441 $ 12,299 $ 10,777
========== ========= ========= ========
</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,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 32,347 $ 29,658
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 4,066 3,059
Provision for depreciation and amortization 6,128 3,761
Net amortization of investment security
premiums and accretion of discounts 195 344
Realized investment security gains (494) (29)
Originations of mortgage loans held for sale (117,161) (42,452)
Gains from sales of mortgage loans held for sale (1,609) (529)
Proceeds from sale of mortgage loans held for sale 118,770 42,981
Deferred income taxes 59 450
Increase in interest receivable (1,570) (2,504)
Increase in cash surrender value of life insurance (5,250) (3,289)
Decrease (increase) in prepaid expenses 44 (977)
Increase (decrease) in accrued expenses 1,977 (108)
Increase in interest payable 456 89
Other (3,515) (1,468)
--------- ---------
Net cash provided by operating activities 34,443 28,986
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available-for-sale 31,387 501
Proceeds from calls, paydowns and maturities of
investment securities available-for-sale 110,160 85,659
Purchases of investment securities available-for-sale (121,234) (90,959)
Proceeds from calls, paydowns and maturities of
investment securities held-to-maturity 23,577 20,440
Purchases of investment securities held-to-maturity (2,100) (1,240)
Net decrease in interest-bearing deposits
with other banks 810 1,835
Net decrease in federal funds sold and securities
purchased under agreements to resell 13,959 21,356
Net increase in loans and leases (182,252) (109,524)
Recoveries from loans and leases previously charged off 814 745
Proceeds from disposal of other real estate owned 1,139 448
Cash acquired in merger 0 8,288
Purchase of other financial institutions, net
of cash acquired (12,231) (5,909)
Purchases of premises and equipment (4,177) (2,449)
--------- ---------
Net cash used in investing activities (140,148) (70,809)
FINANCING ACTIVITIES
Net decrease in total deposits (34,374) (30,538)
Net increase in short-term borrowings 77,920 69,775
Increase in long-term borrowings 60,162 5,627
Cash dividends declared (14,899) (13,990)
Purchase of common stock (2,828) 0
Proceeds from exercise of stock options, net of shares
purchased 788 508
--------- ---------
Net cash provided by financing activities 86,769 31,382
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (18,936) (10,441)
Cash and cash equivalents at beginning of period 142,334 110,767
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $123,398 $100,326
========= =========
</TABLE>
4
<PAGE> 7
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1998 1997
---------- ---------
<S> <C> <C>
Supplemental disclosures
Interest paid $ 65,310 $ 58,472
======== ========
Income taxes paid $ 14,920 $ 16,465
======== ========
Recognition of deferred tax liabilities
attributable to FASB Statement No. 115 $ (307) $ (465)
======== ========
Acquisition of other real estate owned through
foreclosure $ 1,048 $ 903
======== ========
Issuance of restricted stock awards $ 215 $ 226
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 8
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The consolidated financial statements for interim periods are unaudited;
however, in the opinion of the management of First Financial Bancorp.
("Bancorp"), all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation have been included.
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements of Bancorp, a bank and savings and loan
holding company, include the accounts of Bancorp and its wholly-owned
subsidiaries - First National Bank of Southwestern Ohio, Community First Bank &
Trust, Union Trust Bank, Indiana Lawrence Bank, Fidelity Federal Savings Bank,
Citizens First State Bank, Home Federal Bank, A Federal Savings Bank, Union Bank
& Trust Company, The Clyde Savings Bank Company, Peoples Bank and Trust Company,
Bright National Bank, First Finance Mortgage Company of Southwestern Ohio
(d.b.a. Community First Finance), Farmers State Bank, National Bank of Hastings,
and Vevay Deposit Bank. All significant intercompany transactions and accounts
have been eliminated in consolidation. Intangible assets arising from the
acquisition of subsidiaries are being amortized over varying periods, none of
which exceeds 25 years. Core deposit balances are being amortized over varying
periods, none of which exceeds 10 years.
The accompanying financial statements have been prepared in accordance with the
instructions for Form 10-Q and, therefore, do not include all information and
footnotes necessary to be in conformity with generally accepted accounting
principles.
On April 28, 1998, the Board of Directors approved a 2 for 1 stock split, issued
to shareholders of record as of May 8, 1998, and distributed on June 1, 1998.
All per share amounts have been restated for all periods presented. Also on
April 28, 1998, the shareholders approved an amendment to the Articles of
Incorporation to eliminate the par value of Bancorp's common shares.
NOTE 2: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, Bancorp offers a variety of financial
instruments with off-balance sheet risk to its customers to aid them in meeting
their requirements for liquidity and credit enhancement and to reduce its own
exposure to fluctuations in interest rates. These financial instruments include
standby letters of credit and commitments outstanding to extend credit.
Generally accepted accounting principles do not require these financial
instruments to be recorded in the consolidated financial statements, and
accordingly, they are not. Bancorp does not use off-balance sheet derivative
financial instruments (such as interest rate swaps) as defined in the Financial
Accounting Standards Board's (FASB) Statement No. 119 "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments".
Bancorp's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for standby letters of credit and commitments
outstanding to extend credit is represented by the contractual amounts of those
instruments. Bancorp uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. Following
is a discussion of these transactions.
6
<PAGE> 9
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,
1998, Bancorp had issued standby letters of credit aggregating $17,298,000
compared to $19,210,000 issued as of December 31, 1997. Management conducts
regular reviews of these instruments on an individual customer basis, and the
results are considered in assessing the adequacy of Bancorp's allowance for loan
losses. Management does not anticipate any material losses as a result of these
letters of credit.
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Bancorp evaluates each customer's creditworthiness on an
individual basis. The amount of collateral obtained, if deemed necessary by
Bancorp upon extension of credit, is based on management's credit evaluation of
the counterparty. The collateral held varies, but may include securities, real
estate, inventory, plant, or equipment. Bancorp had commitments outstanding to
extend credit totaling $425,307,000 at September 30, 1998 and $335,092,000 at
December 31, 1997. Management does not anticipate any material losses as a
result of these commitments.
NOTE 3: BUSINESS COMBINATIONS
On April 1, 1998, Bancorp paid $13.6 million in cash for all the outstanding
common stock of The Union State Bank (USB). Upon consummation of the merger, USB
was merged into Community First and USB's only office in Payne, Ohio became
Community First's 22nd branch office. The merger was accounted for using the
purchase method of accounting and, accordingly, the consolidated financial
statements include The Union State Bank's results of operations from the date of
acquisition.
NOTE 5: ACCOUNTING CHANGES
SFAS No. 130, "Reporting Comprehensive Income," was issued in June, 1997, and
was effective for fiscal years beginning after December 15, 1997. SFAS No. 130
established standards for the reporting and display of comprehensive income and
its components in a set of financial statements. Comprehensive income is defined
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. Bancorp
adopted this statement effective January 1, 1998. See the Consolidated
Statements of Comprehensive Income.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was released in June, 1997, and was effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 established standards for
reporting information about operating segments. Operating segments are
components of a business about which separate financial information is
available, that are evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The adoption of
this statement did not have a material impact on Bancorp's financial statements.
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997
------------------------------------ -----------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET EARNINGS $ 11,176 $ 11,068 $ 10,103 $ 10,650 $ 10,230
Average consolidated balance sheet items:
Loans less unearned income 2,144,456 2,059,142 1,986,149 1,892,038 1,836,612
Investment securities 397,993 417,942 413,893 377,136 372,769
Other earning assets 10,433 15,635 16,359 21,673 7,070
---------- ---------- --------- --------- ----------
Total earning assets 2,552,882 2,492,719 2,416,401 2,290,847 2,216,451
Total assets 2,779,792 2,705,412 2,628,149 2,472,131 2,376,040
Deposits 2,256,427 2,261,056 2,179,267 2,020,955 1,925,615
Shareholders' equity 300,228 292,555 290,111 283,541 277,732
KEY RATIOS:
Average equity to average total assets 10.80% 10.81% 11.04% 11.47% 11.69%
Return on average total assets 1.60% 1.64% 1.54% 1.72% 1.72%
Return on average equity 14.77% 15.17% 13.93% 15.02% 14.73%
Net interest margin (fully tax equivalent) 5.21% 5.37% 5.39% 5.39% 5.36%
</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 $3,531,000 over
the third quarter of 1997 and $139,000 over the second quarter of 1998.
Continued loan growth, in all major categories of loans, contributed to higher
net interest income in the third quarter of 1998. This growth in earning assets
resulted in an increase in net interest income even though the net interest
margin had decreased.
Bancorp's net interest margin ranks very high when compared to its peers.
However, given the outlook for interest rates and the competitive environment
that exists in the banking industry, loan growth will occur only at lower
margins than previously earned. As such, the trend in the compression of the
margin is expected to continue as Bancorp increases income through quality loan
growth.
<TABLE>
<CAPTION>
QUARTER ENDED
1998 1997
----------------------------- ------------------
SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income $55,841 $54,578 $52,688 $50,631 $48,918
Interest expense 22,884 21,823 21,217 20,230 19,658
------- ------- ------- ------- -------
Net interest income 32,957 32,755 31,471 30,401 29,260
Tax equivalent adjustment to interest income 536 599 647 717 702
------- ------- ------- ------- -------
Net interest income (fully tax equivalent) $33,493 $33,354 $32,118 $31,118 $29,962
======= ======= ======= ======= =======
</TABLE>
8
<PAGE> 11
RATE/VOLUME ANALYSIS
The impact of changes in volume and interest rates on net interest income is
illustrated in the table on the following page. As shown, an increase in volume
had a significant impact on both interest income and interest expense for the
nine months ended September 30, 1998 in comparison to 1997. The increase in
volume had more impact on interest income than interest expense. The change in
interest due to the combined effect of both rate and volume has been allocated
to the volume and rate variance on a prorated basis.
<TABLE>
<CAPTION>
Nine months Three months
ended Change due to: ended Change due to:
Sep. 30, 1998 ------------------- Sep. 30, 1998 -----------------
over 1997 Rate Volume over 1997 Rate Volume
------------- -------- -------- ------------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 21,553 $ 394 $ 21,159 $ 6,923 $ (440) $ 7,363
Interest expense 9,321 474 8,847 3,226 395 2,831
-------- -------- -------- -------- ------- --------
Net interest income $ 12,232 $ (80) $ 12,312 $ 3,697 $ (835) $ 4,532
======== ======== ======== ======== ======== ========
</TABLE>
OPERATING RESULTS
Net operating income represents net earnings before net securities transactions.
Net operating income for the first nine months of 1998 was $32,025,000 which was
an increase of $2,392,000 or 8.07% over that reported in the same period in
1997. The increase in net operating income can partially be attributed to an
increase in net interest income of $12,232,000 or 14.4%. Noninterest income,
excluding securities transactions, for the first nine months of 1998 increased
21.6% in comparison to the same period in 1997 primarily as a result of new
services and fees. These positive variances were offset by increases in
provision for loan losses, noninterest expense and income tax expense. The
increase in income tax expense is discussed in the next section. The increase in
noninterest expense was 19.1%. Most operating income and expense amounts were
greater in 1998 versus 1997 due to the cash purchase of KeyBank branches on
December 8, 1997 and the cash purchase of The Union State Bank on April 1, 1998.
Net operating income for the third quarter of 1998 increased $858,000 or 8.40%
over the same period in 1997 due to the same reasons discussed above.
INCOME TAXES
For the first nine months of 1998, income tax expense was $16,598,000 compared
to $14,364,000 for the same period in 1997, or an increase of $2,234,000. In
1998, $16,426,000 of the tax expense was related to operating income with a tax
expense of $172,000 related to securities transactions. In the first nine months
of 1997, income tax expense related to operating income was $14,360,000, with a
tax expense related to securities transactions of $4,000. The increase in taxes
on operating income was due to the increase in operating income before taxes and
securities transactions of $4,458,000 or 10.1% over that reported for the first
nine months of 1997 and a higher effective tax rate for the period in 1998. The
higher effective tax rate was primarily attributable to significant calls and
maturities of tax-exempt securities which decreased tax-exempt income.
Income tax expense for the third quarter of 1998 was $5,644,000 compared to
$4,898,000 for the same period in 1997, which was an increase of $746,000. Tax
expense relating to operating income totaled $5,588,000 and $4,889,000 for the
quarters ended September 30, 1998 and 1997, respectively, with a tax expense
related to securities transactions of $56,000 in 1998 and a tax expense of
$9,000 in 1997.
9
<PAGE> 12
NET EARNINGS
Net earnings for the first nine months of 1998 were $2,689,000 or 9.07% greater
than that recorded during the same period in 1997. As was discussed previously,
net operating income was $32,025,000 which was 8.07% greater than the same
period in 1997. Net securities gains through September 30, 1998 were $322,000
compared to $25,000 for the period ending September 30, 1997.
Net earnings for the three months ended September 30, 1998 were $946,000 or
9.25% greater than the same period in 1997. As was discussed above, net
operating income was $858,000 or 8.40% greater than third quarter 1997. Net
securities gains for the third quarter of 1998 and 1997 were $101,000 and
$13,000, respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on Bancorp's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.
At September 30, 1998 and 1997, the recorded investment in loans that are
considered to be impaired under FASB Statement No. 114 was $4,738,000 and
$2,842,000, respectively, all of which were on a nonaccrual basis. The related
allowance for loan losses on these impaired loans was $1,853,000 at September
30, 1998 and $826,000 at September 30, 1997. There were no impaired loans that
as a result of write-downs did not have an allowance for loan losses. The
average recorded investment in impaired loans for the respective nine months and
quarters ended September 30, 1998 and 1997, was approximately $3,644,000 and
$5,384,000 for 1998 and $2,929,000 and $2,726,000 in 1997. For the nine months
and quarter ended September 30, 1998, Bancorp recognized interest income on
those impaired loans of $80,000 and $29,000 compared to $150,000 and $43,000 for
the same periods in 1997. Bancorp recognizes income on impaired loans using the
cash basis method. The table below indicates the activity in the allowance for
loan losses for the quarters presented.
<TABLE>
<CAPTION>
Quarter Ended
1998 1997
---------------------------------- ---------------------
Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 28,917 $ 27,967 $ 27,510 $ 24,875 $ 24,553
Allowance acquired through merger 0 806 0 2,101 0
Provision for loan losses 1,618 1,198 1,250 1,677 1,076
Loans charged off (1,403) (1,344) (1,052) (1,401) (956)
Recoveries 265 290 259 258 202
--------- --------- --------- --------- --------
Net charge offs (1,138) (1,054) (793) (1,143) (754)
--------- --------- --------- --------- ---------
Balance at end of period $ 29,397 $ 28,917 $ 27,967 $ 27,510 $ 24,875
========= ========= ========= ========= ========
Ratios:
Allowance to period end loans,
net of unearned income 1.34% 1.38% 1.40% 1.39% 1.33%
Recoveries to charge offs 18.89% 21.58% 24.62% 18.42% 21.13%
Allowance as a multiple of
net charge offs 25.83X 27.44X 35.27X 24.07X 32.99X
</TABLE>
10
<PAGE> 13
NONPERFORMING/UNDERPERFORMING ASSETS
The table below shows the categories which are included in nonperforming and
underperforming assets.
Nonperforming assets increased $614,000 or 7.92% in the third quarter of 1998
when compared to the third quarter of 1997, and in that same period, accruing
loans past due 90 days or more increased $1,204,000. Nonperforming assets
increased $1,649,000 in the third quarter of 1998 when compared to the second
quarter of 1998 however, nonperforming assets as a percent of loans has
remained consistent over the periods presented. 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
1998 1997
------------------------------- -------------------
Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 6,993 $ 5,306 $ 5,985 $ 5,257 $ 6,418
Restructured loans 512 1,170 1,812 1,581 630
OREO/ISF* 857 237 1,017 950 700
------- ------- ------- ------- -------
Total nonperforming assets 8,362 6,713 8,814 7,788 7,748
Accruing loans past due
90 days or more 1,993 1,746 2,585 1,203 789
------- ------- ------- ------- -------
Total underperforming assets $10,355 $ 8,459 $11,399 $ 8,991 $ 8,537
======= ======= ======= ======= =======
Nonperforming assets as a percent
of loans, net of unearned income
plus OREO/ISF 0.38% 0.32% 0.44% 0.39% 0.42%
======= ======= ======= ======= =======
Underperforming assets as a percent
of loans, net of unearned income
plus OREO/ISF 0.47% 0.40% 0.57% 0.45% 0.46%
======= ======= ======= ======= =======
*Other Real Estate Owned/In-Substance Foreclosure
</TABLE>
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 1998 Bancorp's deposit
liabilities had increased by 8.26% from December 31, 1997. Another source of
funding is through short-term borrowings. As part of Bancorp's asset/liability
management strategy, Bancorp's short-term borrowings increased to $130,208,000
at September 30, 1998, compared to $52,288,000 at December 31, 1997, as one
source of funding loan growth.
The principal source of asset-funded liquidity is marketable investment
securities, particularly those of shorter maturities. At September 30, 1998,
securities maturing in one year or less amounted to $44,936,000, representing
12.1% of the total of the investment securities portfolio. In addition, other
types of assets such as cash and due from banks, federal funds sold and
securities purchased under agreements to resell, as well as loans and
interest-bearing deposits with other banks maturing within one year, are sources
of liquidity. Total asset-funded sources of liquidity at September 30, 1998,
amounted to $635,876,000, representing 22.6% of total
11
<PAGE> 14
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, 1998, Bancorp had classified $333,489,000 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 $4,177,000 for the first nine
months of 1998. In addition, remodeling is a planned and ongoing process given
the 106 offices of Bancorp and its subsidiaries. Material commitments for
capital expenditures as of September 30, 1998 were approximately $1,375,000.
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, 1998, was 12.6%, its Total risked-based
capital was 13.8% and its Leverage ratio was 9.44%. 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 five quarters.
<TABLE>
<CAPTION>
Quarter Ended
1998 1997
------------------------------------ ----------------------
Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Tier I capital: (Dollars in thousands)
SHAREHOLDER'S EQUITY $ 302,384 $ 295,616 $ 290,493 $ 286,259 $ 280,593
Less: Intangible assets 41,382 42,321 38,316 39,169 8,684
Less: Unrealized net securities
gains 2,707 1,584 1,967 2,094 1,945
---------- ---------- ---------- ---------- ----------
Total Tier I capital $ 258,295 $ 251,711 $ 250,210 $ 244,996 $ 269,964
========== ========== ========== ========== ==========
Total risk-based capital:
Tier I Capital $ 258,295 $ 251,711 $ 250,210 $ 244,996 $ 269,964
Qualifying allowance for loan losses 25,711 25,122 24,313 23,591 21,818
---------- ---------- ---------- --------- ----------
Total risk-based capital $ 284,006 $ 276,833 $ 274,523 $ 268,587 $ 291,782
========== ========== ========== ========= ==========
Risk weighted assets $2,053,120 $2,005,962 $1,941,265 $1,883,335 $1,742,394
========== ========== ========== ========== ==========
Risk-based ratios:
Tier I 12.58% 12.55% 12.89% 13.01% 15.49%
========== ========== ========== ========== ==========
Total risk-based capital 13.83% 13.80% 14.14% 14.26% 16.75%
========== ========== ========== ========== ==========
Leverage 9.44% 9.45% 9.66% 10.07% 11.40%
========== ========== ========== ========== ==========
</TABLE>
12
<PAGE> 15
YEAR 2000
Many computer systems process transactions using two digits for the year of the
transaction, rather than a full four digits. These systems may not function
properly at the beginning of the year 2000. Bancorp has devoted significant time
and attention to the Year 2000 issue, and will repair or replace non-compliant
hardware and software prior to the new millennium.
Several regulatory agencies and authorities have issued regulations and
guidelines which regulated financial institutions must use in measuring their
progress. Five commonly recognized phases of Year 2000 remediation are
awareness, assessment, renovation, validation and implementation.
During 1997, the awareness phase was completed by Bancorp and each of its
subsidiaries. During 1998, Bancorp's Operating Committee continues to meet at
least weekly to direct and implement all Year 2000 tasks. In addition, Bancorp's
work groups continue to make presentations to Bancorp's management and Board of
Directors, who have pledged their support for this issue.
Bancorp has inventoried and assessed the magnitude of hardware and software
programs which must be remediated, contacted vendors, identified resource needs
and appropriately hired or contracted for qualified personnel to guide Bancorp
through the Year 2000 issue. A Year 2000 Loan Committee, comprised of senior
lenders of Bancorp's affiliates, has assessed the impact of Year 2000 on lending
customers and the related risks inherent in those loans as they relate to the
year 2000.
Management has also assessed non-information technology systems and issues.
Bancorp is currently in the renovation process of information technology
systems, having completed the major deposit systems and most of the loan
systems. Most mission critical ancillary systems have also been completed.
Remaining mission critical systems are currently in the process of renovation or
are scheduled to begin renovation during the fourth quarter of 1998.
Management's goal is to have the mission critical renovation phase completed by
the end of 1998. Non-information technology systems are substantially compliant
as of the end of third quarter 1998.
Management has tested incremental changes made to renovated software
applications, but has not yet validated overall Year 2000 compliance. Overall
validation testing is anticipated to begin in first quarter 1999.
Implementation will follow satisfactory results of validation testing and is
anticipated to be completed during third quarter 1999.
Management of Bancorp believes it has an effective program in place to resolve
the Year 2000 issue in a timely manner. As noted above, Bancorp has not yet
completed all necessary phases of the Year 2000 program. In the event that the
Bancorp does not complete any additional phases, it may be unable to properly
process customer transactions in a timely and accurate manner. In addition,
disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect Bancorp. For example, Bancorp could be subject to
litigation for computer systems failure. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
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 and outside vendors.
During third quarter 1998, Bancorp incurred approximately $402,000 in
noninterest expense for costs related to Year 2000 issues, bringing 1998 total
costs to approximately $1,028,000. Based on management's current assessment and
anticipated reprogramming costs, Bancorp
13
<PAGE> 16
expects to spend an additional $2,778,000 for the remainder of 1998 and in 1999,
of which about $1,500,000 will be capitalized. However, there can be no
assurance as to the accuracy of these estimates.
FORWARD-LOOKING INFORMATION
The Form 10-Q should be read in conjunction with the consolidated financial
statements, notes and table included elsewhere in the report and in the First
Financial Bancorp. Annual Report on Form 10-K for the year ended December 31,
1997.
Management's analysis may contain forward-looking statements that are provided
to assist in the understanding of anticipated future financial performance.
However, such performance involves risks and uncertainties which may cause
actual results to differ materially. For a discussion of certain factors that
may cause such forward-looking statements to differ materially from actual
results, refer to the 1997 Form 10-K.
ACCOUNTING AND REGULATORY MATTERS
Management is not aware of any other events or regulatory recommendations which,
if implemented, are likely to have a material effect on Bancorp's liquidity,
capital resources, or operations.
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Report on Form 8-K
On August 31, 1998, Bancorp filed a Form 8-K regarding the
announcement of two stock repurchase programs.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST FINANCIAL BANCORP.
------------------------
(Registrant)
/s/ Michael R. O'Dell /s/ Joseph M. Gallina
- ---------------------------------- ---------------------------------
Michael R. O'Dell, Senior Vice Joseph M. Gallina,
President, Chief Financial Comptroller
Officer and Secretary (Principal Accounting Officer)
Date November 12, 1998 Date November 12, 1998
----------------------------- -----------------------------
15
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000708955
<NAME> FIRST FINANCIAL BANCORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 123,398
<INT-BEARING-DEPOSITS> 2,677
<FED-FUNDS-SOLD> 4,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 333,489
<INVESTMENTS-CARRYING> 37,926
<INVESTMENTS-MARKET> 40,551
<LOANS> 2,193,436
<ALLOWANCE> 29,397
<TOTAL-ASSETS> 2,809,717
<DEPOSITS> 2,248,602
<SHORT-TERM> 130,208
<LIABILITIES-OTHER> 128,523
<LONG-TERM> 0
0
0
<COMMON> 231,767
<OTHER-SE> 70,617
<TOTAL-LIABILITIES-AND-EQUITY> 2,809,717
<INTEREST-LOAN> 143,294
<INTEREST-INVEST> 19,230
<INTEREST-OTHER> 583
<INTEREST-TOTAL> 163,107
<INTEREST-DEPOSIT> 60,213
<INTEREST-EXPENSE> 65,924
<INTEREST-INCOME-NET> 97,183
<LOAN-LOSSES> 4,066
<SECURITIES-GAINS> 494
<EXPENSE-OTHER> 68,348
<INCOME-PRETAX> 48,945
<INCOME-PRE-EXTRAORDINARY> 48,945
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,347
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.97
<YIELD-ACTUAL> 8.86
<LOANS-NON> 6,993
<LOANS-PAST> 1,993
<LOANS-TROUBLED> 512
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 27,510
<CHARGE-OFFS> (3,799)
<RECOVERIES> 814
<ALLOWANCE-CLOSE> 29,397
<ALLOWANCE-DOMESTIC> 29,397
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
