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
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
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
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
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
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
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
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
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
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 9
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
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
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
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
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
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>