-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BehhNMQQ9wiRz6L/9xCFTUDwfaV+zSFzIVR4TXwCZ+V7YtJoMkokmebJRvQGP9Nm MviVMejg3RkkMRkTe8O66A== 0000950152-97-002017.txt : 19970321 0000950152-97-002017.hdr.sgml : 19970321 ACCESSION NUMBER: 0000950152-97-002017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970320 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FINANCIAL BANCORP /OH/ CENTRAL INDEX KEY: 0000708955 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 311042001 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12379 FILM NUMBER: 97559798 BUSINESS ADDRESS: STREET 1: THIRD & HIGH ST CITY: HAMILTON STATE: OH ZIP: 45011 BUSINESS PHONE: 5138674700 MAIL ADDRESS: STREET 1: THIRD & HIGH ST CITY: HAMILTON STATE: OH ZIP: 45011 10-K 1 FIRST FINANCIAL 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 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 45011 Hamilton, Ohio (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (513) 867-4700 ------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $8 Par Value 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 such 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] As of March 1, 1997, there were issued and outstanding 15,035,362 shares of Registrant's Common Stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the sales price of the last trade of such stock as of March 1, 1997, was $507,443,000. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the Registrant.) DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1996 are incorporated by reference into Parts I, II, and IV. Portions of the proxy statement dated March 17, 1997 for the annual meeting of shareholders to be held April 22, 1997 are incorporated by reference into Part III. 2 FORM 10-K CROSS REFERENCE INDEX
Page PART I Item 1 Business F-1 Item 2 Properties F-6 Item 3 Legal Proceedings F-6 Item 4 Submission of Matters to a Vote of Security Holders (during the fourth quarter of 1996) F-6 Additional Item - Executive Officers F-6 - -------------------------------------------------------------------------------------------------- PART II Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters F-8 Item 6 Selected Financial Data F-8 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations F-8 Item 8 Financial Statements and Supplementary Data F-11 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure F-11 - -------------------------------------------------------------------------------------------------- PART III Item 10 Directors and Executive Officers of the Registrant F-12 Item 11 Executive Compensation F-12 Item 12 Security Ownership of Certain Beneficial Owners and Management F-12 Item 13 Certain Relationships and Related Transactions F-12 - -------------------------------------------------------------------------------------------------- PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K F-13 - -------------------------------------------------------------------------------------------------- SIGNATURES F-15
3 F-1 PART I ITEM 1. BUSINESS. FIRST FINANCIAL BANCORP. First Financial Bancorp., an Ohio corporation (Bancorp), is a bank and savings and loan holding company that engages in the business of commercial banking, and other permissible activities closely related to banking, through fourteen wholly owned subsidiaries: First National Bank of Southwestern Ohio (First Southwestern), Van Wert National Bank (Van Wert National), Bright National Bank (Bright National), all national banking associations, Citizens Commercial Bank & Trust Company (Citizens Commercial), Clyde Savings Bank Company (Clyde), both Ohio banking corporations, Union Trust Bank (Union Trust), Indiana Lawrence Bank (Indiana Lawrence), Citizens First State Bank (Citizens First), Union Bank & Trust Company (Union Bank), Peoples Bank and Trust Company (Peoples Bank), and Farmers State Bank (Farmers), all Indiana banking corporations, Fidelity Federal Savings Bank (Fidelity Federal), and Home Federal Bank, A Federal Savings Bank (Home Federal), both federal savings banks. First Finance Mortgage Company of Southwestern Ohio (First Finance), is Bancorp's only finance company. Bancorp provides management and similar services for its fourteen subsidiary financial institutions. Since it does not itself conduct any operating businesses, Bancorp must depend largely upon its fourteen subsidiaries for funds with which to pay the expenses of its operation and, to the extent applicable, any dividends on its outstanding shares of stock. For further information see Note 6 of the Notes to Consolidated Financial Statements appearing on page 37 of Bancorp's Annual Report to Shareholders, which is incorporated by reference in response to this item. Bancorp was formed in 1982 for the purpose of becoming the parent holding company of First Southwestern. For additional information, please see "Subsidiaries" on page F-2. Bancorp is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Bancorp is also a savings and loan holding company under the savings and loan holding company provisions of the Home Owners' Loan Act of 1933, as amended by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). As such, Bancorp is subject to strict regulation regarding the acquisition of additional financial institutions and the conduct, through subsidiaries, of non-banking activities (see "Regulation" on page F-4). Bancorp faces strong competition from both financial institutions and other non-financial organizations. Its competitors include local and regional financial institutions, savings and loans, and bank holding companies, as well as some of the largest banking organizations in the United States. In addition, other types of financial institutions, such as credit unions, also offer a wide range of loan and deposit services that are directly competitive with those offered by Bancorp's subsidiaries. The consumer is also served by brokerage firms and mutual funds that provide checking services, credit cards, and other services similar to those offered by Bancorp's subsidiaries. Major stores compete for loans by offering credit cards and retail installment contracts. It is anticipated that competition from entities other than financial institutions will continue to grow. The range of banking services provided by Bancorp's subsidiaries to their customers includes commercial lending, real estate lending, consumer credit, credit card, and other personal loan financing. Fidelity Federal and Home Federal are full service savings banks with their primary business being the promotion of thrift through the solicitation of savings accounts from the general public and the promotion of home ownership through the granting of mortgage loans, 4 F-2 primarily to finance the purchase, construction, and improvement of residential real estate. First Southwestern, Citizens Commercial, Van Wert National, Citizens First, Clyde, and Bright National also offer lease financing. In addition, the institutions offer deposit services that include interest-bearing and noninterest-bearing deposit accounts and time deposits. Most subsidiaries provide safe deposit facilities. A full range of trust and asset management services is provided by Bancorp's subsidiaries, excluding the savings banks and the finance company. Each subsidiary retains its local identity and operates under the direction of its own board of directors and officers. Bancorp and its subsidiaries operate in one business segment--the financial institutions industry. Foreign transactions are nominal. Information regarding statistical disclosure required by Industry Guide 3 is included in Bancorp's Annual Report to Shareholders for the year ended December 31, 1996, and is incorporated herein by reference. At December 31, 1996, Bancorp and its subsidiaries employed 1,315 employees. Bancorp's executive office is located at 300 High Street, Hamilton, Ohio 45011, and its telephone number is (513) 867-4700. SUBSIDIARIES First Southwestern was formed as the result of a consolidation of the First National Bank and Trust Company of Hamilton and the First National Bank of Middletown in 1980. On April 26, 1983, Bancorp acquired all of the outstanding capital stock of First Southwestern. At December 31, 1996, First Southwestern had 31 offices located in Butler, Warren, Preble, and Hamilton Counties in Ohio with total deposits of $745 million. First Southwestern has a total of 30 automated teller machines (ATM) of which five ATM's are at sites other than branches. Bancorp acquired 100% of the outstanding stock of Citizens Commercial on April 29, 1983. Citizens Commercial operates five offices and three ATM's in Mercer County, Ohio (one of which is at a site other than a branch) and had deposits of $174 million at December 31, 1996. On July 31, 1988, NB Banc Corp, the parent holding company of Van Wert National, merged into and out of existence with Bancorp leaving Van Wert National as a wholly owned subsidiary of Bancorp. Van Wert National operates five offices and has two ATM's in Van Wert County, Ohio with deposits of $101 million at December 31, 1996. Union Trust merged with Bancorp on September 1, 1989, as a wholly owned subsidiary. Union Trust has one ATM and operates two offices in Randolph County, Indiana and had $40 million in deposits on December 31, 1996. On September 1, 1989, ILB Financial Corp. was merged into and out of existence with Bancorp. ILB Financial Corp. was the one bank holding company of Indiana Lawrence. This merger resulted in Indiana Lawrence becoming a wholly owned subsidiary of Bancorp. In April 1996, Bancorp's new affiliate, Farmers & Merchants Bank of Rochester, Rochester, Indiana was merged with Indiana Lawrence. As of December 31, 1996, Indiana Lawrence had deposits of $139 million, two ATM's, of which one is at a remote site, and operated five offices in Wabash County, Indiana and three offices in Fulton County, Indiana. 5 F-3 Fidelity Federal merged with Bancorp on September 21, 1990 as a wholly owned subsidiary. Fidelity Federal operates three offices in Grant County, Indiana and has one ATM. Total deposits at December 31, 1996 were $61 million. Citizens First joined Bancorp on October 1, 1990 as two separate entities, Trustcorp Bank, Hartford City, and Trustcorp Bank, Dunkirk. These two entities were purchased from Society Corporation for cash. On that same date, Trustcorp Bank, Hartford City was renamed Citizens First State Bank of Hartford City and Trustcorp Bank, Dunkirk was renamed Citizens First State Bank of Dunkirk. On July 1, 1991, those two banks merged to become one wholly owned subsidiary of Bancorp. Citizens First operates four offices in Blackford County, Indiana, one office in Jay County, Indiana, and one office in Delaware County, Indiana. Citizens First has four ATM's of which one is at a site other than branches, and had total deposits of $89 million at December 31, 1996. Bancorp purchased Home Federal on October 1, 1991. In November, 1995, Home Federal and Fayette Federal combined operations, with Fayette Federal operating as a division of Home Federal. Home Federal operates five offices in Butler County, Ohio, two offices in Hamilton County, Ohio, one office in Fayette County, Indiana and one office in Franklin County, Indiana, with total deposits of $234 million at December 31, 1996. Home Federal has six ATM's of which three are at sites other than branches. On January 4, 1993, Jennings Union Bankcorp, the parent holding company of Union Bank, merged into and out of existence with Bancorp leaving Union Bank as a wholly owned subsidiary of Bancorp. Union Bank operates two offices in Jennings County, Indiana with total deposits at December 31, 1996 of $78 million. Union Bank has two ATM's, both of which are at sites other than branches. On June 1, 1994, First Clyde Banc Corp., the parent holding company of Clyde, merged into and out of existence with Bancorp leaving Clyde as a wholly owned subsidiary of Bancorp. Clyde operates two offices and one ATM in Sandusky County in Ohio, with $59 million in total deposits as of December 31, 1996. On July 16, 1995, Peoples Bank and Trust Company merged with Bancorp. Located in Sunman, Indiana, Peoples Bank operates one office in Ripley County, Indiana with total deposits of $46 million at December 31, 1996. On October 1, 1995, Bright Financial Services, Inc., Flora, Indiana merged with and into Bancorp leaving its subsidiary, Bright National Bank, as a wholly owned Bancorp subsidiary. With deposits at December 31, 1996 of $116 million, Bright National operates four offices in Carroll County, Indiana, two offices in Tippecanoe County, Indiana and one office in Clinton County, Indiana. Bright National has six ATM's. First Finance Mortgage Company of Southwestern Ohio, Inc. (First Finance) began full operations on May 8, 1996. First Finance, incorporated and wholly owned by Bancorp, is a retail finance company and operates from an office in Fairfield, Ohio. Bancorp purchased Farmers State Bancorp, Liberty, Indiana, on December 1, 1996. Farmers State Bancorp was dissolved, leaving its only subsidiary, Farmers State Bank, (Farmers) as a 6 F-4 wholly owned Bancorp subsidiary. Farmers operates two offices in Union County, Indiana and four offices in Rush County, Indiana. At December 31, 1996, Farmers had total deposits of $55 million and has 1 ATM location. REGULATION First Southwestern, Van Wert National and Bright National, as national banking associations, are subject to supervision and regular examination by the Comptroller of the Currency. Citizens Commercial and Clyde, as Ohio state chartered banks, are subject to supervision and regular examination by the Superintendent of Banks of the State of Ohio. First Southwestern, Citizens Commercial, Van Wert National, Clyde, Peoples Bank and Bright National are members of the Federal Reserve System and, as such, are subject to the applicable provisions of the Federal Reserve Act. Citizens Commercial is also subject to regular examination by the Federal Reserve System. Union Trust, Indiana Lawrence, Citizens First, Union Bank, Peoples Bank and Farmers, as Indiana state chartered banks, are subject to supervision and regular examination by the Indiana Department of Financial Institutions. Fidelity Federal and Home Federal, as federal savings banks, are subject to supervision and regular examination by the Office of Thrift Supervision. Since Fidelity Federal is located in Indiana, it is also subject to examination by the Indiana Department of Financial Institutions. First Finance is subject to supervision and regular examinations by the State of Ohio Division of Consumer Finance. All depository institutions are insured by the Federal Deposit Insurance Corporation and are subject to the provisions of the Federal Deposit Insurance Act. To the extent that the information below consists of summaries of certain statutes or regulations, it is qualified in its entirety by reference to the statutory or regulatory provisions described. Bancorp is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the Act), which requires a bank holding company to register under the Act and to be subject to supervision and examination by the Board of Governors of the Federal Reserve System. As a bank holding company, Bancorp is required to file with the Board of Governors an annual report and such additional information as the Board of Governors may require pursuant to the Act. The Act requires prior approval by the Board of Governors of the acquisition by a bank holding company, or any subsidiary thereof, of 5% or more of the voting stock or substantially all the assets of any bank within the United States. Prior to the passage of FIRREA, it was not possible for bank holding companies, such as Bancorp, to acquire "healthy" thrift institutions. Although such acquisitions are now authorized, mergers between bank holding companies and thrift institutions must be approved by the Federal Reserve Board and the Office of Thrift Supervision. Once a bank holding company acquires a thrift institution, it is then considered a savings and loan holding company, as well, which is subject to regulation and examination by the Office of Thrift Supervision. As a bank holding company located in the State of Ohio, Bancorp is not permitted to acquire a bank or other financial institution located in another state unless such acquisition is specifically authorized by the statutes of such state, as is the case in Indiana. The Act further provides that the Board of Governors shall not approve any such acquisition that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States, or the effect of which may be to substantially lessen competition or to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served. 7 F-5 The Act also prohibits a bank holding company, with certain exceptions, from acquiring 5% or more of the voting stock of any company that is not a bank and from engaging in any business other than banking or performing services for its banking subsidiaries without the approval of the Board of Governors. In addition, the acquisition of a thrift institution must be approved by the Office of Thrift Supervision pursuant to the savings and loan holding company provisions of the Home Owners' Loan Act of 1933, as amended by FIRREA. The Board of Governors is also authorized to approve, among other things, the ownership of shares by a bank holding company in any company the activities of which the Board of Governors has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Board of Governors has, by regulation, determined that certain activities, including mortgage banking, operating small loan companies, factoring, furnishing certain data processing operations, holding or operating properties used by banking subsidiaries or acquired for such future use, providing certain investment and financial advice, leasing (subject to certain conditions) real or personal property, providing management consulting advice to certain depository institutions, providing securities brokerage services, arranging commercial real estate equity financing, underwriting and dealing in government obligations and money market instruments, providing consumer financial counseling, operating a collection agency, owning and operating a savings association, operating a credit bureau and conducting certain real estate investment activities and acting as insurance agent for certain types of insurance, are closely related to banking within the meaning of the Act. It also has determined that certain other activities, including real estate brokerage and syndication, land development, and property management, are not related to credit transactions and are not permissible. The Act and the regulations of the Board of Governors prohibit a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services. The Act also imposes certain restrictions upon dealings by affiliated banks with the holding company and among themselves including restrictions on interbank borrowing and upon dealings in respect to the securities or obligations of the holding company or other affiliates. The earnings of banks, and therefore the earnings of Bancorp (and its subsidiaries), are affected by the policies of regulatory authorities, including the Board of Governors of the Federal Reserve System. An important function of the Federal Reserve Board is to regulate the national supply of bank credit in an effort to prevent recession and to restrain inflation. Among the procedures used to implement these objectives are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These procedures are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use also may affect interest rates charged on loans or paid for deposits. Monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effect, if any, of such policies upon the future business and earnings of Bancorp cannot accurately be predicted. 8 F-6 Bancorp makes no attempt to predict the effect on its revenues and earnings of changes in general economic, industrial, and international conditions or in legislation and governmental regulations. ITEM 2. PROPERTIES. The registrant and its subsidiaries operate from 52 offices in Ohio, including Bancorp's executive office in Hamilton, Ohio, and 35 offices in Indiana. Thirty of the offices are located in Butler County, Ohio, of which four branches are built on leased land and there are seven branches wherein the land and building are leased. Excess space in three facilities is leased to third parties. Five offices are located in Mercer County, Ohio, five in Van Wert County, Ohio, three in Preble County, Ohio, three in Warren County, Ohio, three in Hamilton County, Ohio, and two in Sandusky County, Ohio. Five offices are located in Wabash County, Indiana, of which one office is built on leased land with a purchase option on the land. Two offices are in Randolph County, Indiana, three in Grant County, Indiana, one in Jay County, Indiana, four in Blackford County, Indiana, one in Fayette County, Indiana, one in Franklin County, Indiana, two in Jennings County, Indiana, four in Carroll County, Indiana, two in Tippecanoe County, Indiana, three in Fulton, County, Indiana, two in Union County, Indiana, four in Rush County, Indiana, and one in Clinton County, Indiana. One office is located in Delaware County, Indiana, of which both the land and building are leased. All leases are comparable to other leases in the respective market areas and do not contain provisions detrimental to the registrant or its subsidiaries. ITEM 3. LEGAL PROCEEDINGS. Except for routine litigation incident to their business, the registrant and its subsidiaries are not a party to any material pending legal proceedings and none of their property is the subject of any such proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the shareholders during the fourth quarter of 1996. ADDITIONAL ITEM - EXECUTIVE OFFICERS. Listed below are the Executive Officers of Bancorp as of December 31, 1996. The Executive Officers will serve until the first meeting of the Board of Directors following the next annual meeting of shareholders, scheduled to be held on April 22, 1997 or until their successors are elected and duly qualified. All Executive Officers are chosen by the Board of Directors by a majority vote.
Name Age Position - ----------------- --- ---------------------------------------------- Stanley N. Pontius 50 President and Chief Executive Officer, Director James J. Ashburn 66 Senior Vice President Rick L. Blossom 49 Senior Vice President, Chief Lending Officer Michael R. O'Dell 45 Senior Vice President, Chief Financial Officer and Secretary Michael T. Riley 46 Senior Vice President Brian D. Moriarty 54 Senior Vice President Joseph M. Gallina 41 Comptroller
9 F-7 The following is a brief description of the business experience over the past five years of the individuals named above. Stanley N. Pontius became Chief Executive Officer of Bancorp in July 1992. Mr. Pontius was Chief Operating Officer from March 1991 until July 1992. Upon joining Bancorp in March, 1991 he assumed the responsibilities of President and Chief Operating Officer, as well as a director. He also became President, Chief Executive Officer, and a director of First Southwestern. Prior to coming to Bancorp, Mr. Pontius served as President and Chief Executive Officer of Bank One, Mansfield, Mansfield, Ohio from 1988 to 1991. James J. Ashburn retired in the first quarter 1997. He became Senior Vice President of Bancorp on December 30, 1988. He had been Vice President of Bancorp since April 1983. He had served as a Senior Vice President and Senior Trust Officer of First Southwestern for over five years. Rick L. Blossom became Chief Lending Officer of Bancorp effective January 12, 1996. Mr. Blossom remains Senior Vice President of Bancorp, a position he has held since September 26, 1990. On January 12, 1996, he also became Executive Vice President of First Southwestern, retaining his Chief Lending Officer status. He previously held the title of Senior Vice President/Retail Lending of First Southwestern. On March 4, 1991, he was promoted to Chief Lending Officer of First Southwestern, while retaining his Senior Vice President status. He had served as First Vice President/Retail Lending of First Southwestern since March, 1989. Michael R. O'Dell became Senior Vice President, Chief Financial Officer and Secretary of Bancorp on January 12, 1996. He had served as Bancorp's Comptroller since December 1994. Mr. O'Dell was also promoted to Senior Vice President and Chief Financial Officer of First Southwestern in January 1996. He had served as First Vice President and Comptroller of First Southwestern since 1991. Michael T. Riley became Senior Vice President of Bancorp, responsible for communications and public relations, on January 12, 1996. Mr. Riley was also promoted to Senior Vice President of First Southwestern in January 1996, where his duties include marketing, data processing, and operations. He had served as First Vice President of Marketing since 1989. Brian D. Moriarty became Senior Vice President of Bancorp, responsible for the human resources function, on January 12, 1996. Mr. Moriarty also became Senior Vice President of First Southwestern in January 1996, where he had been First Vice President since 1991. Joseph M. Gallina became Comptroller of Bancorp effective January 12, 1996. He had served as Bancorp's Auditor since April 1, 1992. Prior to joining Bancorp in 1992, he worked for an international accounting firm and specialized in financial reporting and auditing of financial institutions. On January 12, 1996, Mr. Gallina was also appointed First Vice President of Acocunting and Financial Control of First Southwestern. 10 F-8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. Bancorp had 4,088 common stock shareholders of record as of March 1, 1997. Bancorp's common equity is listed with the National Association of Securities Dealers, Inc. (NASDAQ) and is traded on the Over-the-Counter Market. The information contained on page 48 of Bancorp's Annual Report to Shareholders for the year ended December 31, 1996 is incorporated herein by reference in response to this item. ITEM 6. SELECTED FINANCIAL DATA. The information contained in Table 1 on page 22 of Bancorp's Annual Report to Shareholders for the year ended December 31, 1996 is incorporated herein by reference in response to this item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information contained on pages 21 through 30 of Bancorp's Annual Report to Shareholders for the year ended December 31, 1996 is incorporated herein by reference in response to this item. The financial and statistical data presented on the following pages, when viewed along with the financial and statistical data presented in pages 21 through 48 of Bancorp's Annual Report to Shareholders, provides a detailed review of Bancorp's business activities. INVESTMENT PORTFOLIO At December 31, 1996, Bancorp's investment portfolio included no investments which were not issued by the U.S. Government, its agencies, or corporations and which exceeded ten percent of Bancorp's shareholders' equity. LOAN PORTFOLIO The following table shows the composition of Bancorp's loan portfolio at the end of each of the last five years:
December 31 -------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ----------- (Dollars in thousands) Commercial $ 398,034 $ 340,942 $ 286,635 $ 247,052 $ 237,935 Real estate--construction 43,262 41,845 29,273 31,597 15,283 Real estate--mortgage 863,414 788,805 746,150 665,390 658,689 Installment 366,051 329,034 285,412 214,600 195,947 Credit card 16,107 15,406 15,599 16,703 17,946 Lease financing 14,821 16,557 16,102 14,872 13,035 ---------- ---------- ---------- ---------- ---------- Total loans $1,701,689 $1,532,589 $1,379,171 $1,190,214 $1,138,835 ========== ========== ========== ========== ==========
NONPERFORMING ASSETS The accrual of interest on a loan is discontinued and interest collected on such loan is credited to loan principal if, in the opinion of management, full collection of principal is doubtful. The following table summarizes Bancorp's nonaccrual loans, restructured loans, other real estate owned/in-substance foreclosures, and past due loans as of the end of each of the last five years: 11 F-9
December 31 --------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (Dollars in thousands) Nonaccrual loans $ 4,850 $ 2,764 $ 2,412 $ 4,679 $ 9,216 Restructured loans 890 517 1,429 605 719 OREO and ISF* 264 1,677 2,116 3,673 9,549 ------- ------- ------- ------- ------- Total nonperforming assets $ 6,004 $ 4,958 $ 5,957 $ 8,957 $19,484 ======= ======= ======= ======= ======= Nonperforming assets as a percent of total loans plus OREO and ISF 0.35% 0.32% 0.43% 0.75% 1.70% Accruing loans past due 90 days or more $ 906 $ 1,071 $ 683 $ 1,321 $ 1,547 *Other Real Estate Owned and In-Substance Foreclosures
As a result of management's continued effort to improve asset quality, OREO and ISF decreased $1,413,000 in 1996, $439,000 in 1995 and $1,557,000 in 1994. While the dollar amount of nonaccrual loans has increased, the percentage of total nonperforming assets to total loans remains lower than historical levels. POTENTIAL PROBLEM LOANS At December 31, 1996, Bancorp had $1,195,000 in loans for which payments were presently current, but the borrowers were experiencing financial difficulties. These loans are a combination of commercial, real estate, and installment loans and are not included as part of nonaccrual loans, nor are they included within restructured loans or loans past due 90 days or more and still accruing. However, these loans are subject to constant monitoring by management, and their status is reviewed on a continual basis. These loans were considered by management in determining the adequacy of the recorded allowance for loan losses at December 31, 1996. 12 F-10 LOAN LOSS DATA
1996 1995 1994 1993 1992 ------- ------- ------- ------- ----- (Dollars in thousands) Transactions in the allowance for loan losses: Balance at January 1 $20,437 $18,609 $18,380 $17,014 $17,739 Loans Charged off: Commercial 1,210 790 648 1,634 3,600 Real estate--construction 1,059 Real estate--mortgage 226 26 124 320 1,763 Installment and other consumer financing 2,340 1,721 1,248 1,580 1,936 Lease financing 187 107 132 155 44 ------- ------- ------- ------- ------- Total loans charged off 3,963 2,644 2,152 3,689 8,402 ------- ------- ------- ------- ------- Recoveries of loans previously charged off: Commercial 346 546 384 538 346 Real estate--construction 8 56 Real estate--mortgage 54 39 41 65 143 Installment and other consumer financing 711 592 653 676 582 Lease financing 62 17 35 29 7 ------- ------- ------- ------- ------- Total recoveries 1,173 1,202 1,113 1,308 1,134 ------- ------- ------- ------- ------- Net charge-offs 2,790 1,442 1,039 2,381 7,268 Allowance acquired through mergers and acquisitions 1,592 1,162 Provision for loan losses 3,433 2,108 1,268 3,747 6,543 ------- ------- ------- ------- ------- Balance at December 31 $22,672 $20,437 $18,609 $18,380 $17,014 ======= ======= ======= ======= ======= Ratios: Net charge-offs as a percent of: Average loans outstanding 0.17% 0.10% 0.08% 0.21% 0.63% Provision 81.27% 68.41% 81.94% 63.54% 111.08% Allowance 12.31% 7.06% 5.58% 12.95% 42.72% Allowance as a percent of: 5 year moving average of net charge-offs 759.79% 603.64% 402.18% 347.24% 313.95% Year-end loans, net of unearned income 1.33% 1.33% 1.35% 1.54% 1.50%
13 F-11 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The following table shows an allocation of the allowance for loan losses for each of the five years indicated:
December 31 ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------------- ------------- ------------ ----------- $ % $ % $ % $ % $ % ------- ---- ------- ---- ------- ---- ------- ---- ------ --- (Dollars in thousands) Balance at End of Period Appli- cable to: Commercial $ 4,826 23% $ 4,254 22% $ 4,395 21% $ 4,457 21% $ 5,088 21% Real estate- construction 172 3% 210 3% 340 2% 300 3% 64 1% Real estate- mortgage 3,510 51% 3,713 52% 2,552 54% 4,305 56% 4,796 58% Installment & credit card 5,419 22% 4,184 22% 3,298 22% 3,104 19% 3,308 19% Lease financing 327 1% 196 1% 154 1% 512 1% 733 1% Unallocated 8,418 N/A 7,880 N/A 7,870 N/A 5,702 N/A 3,025 N/A ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- $22,672 100% $20,437 100% $18,609 100% $18,380 100% $17,014 100% ======= ==== ======= ==== ======= ==== ======= ==== ======= ==== $ - Dollar Amount % - Percent of Loans in Each Category to Total Loans
DIVIDEND PAYOUT RATIO The dividend payout ratios for 1996, 1995 and 1994 were 48.1%, 42.5%, and 41.9%, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and report of independent auditors included on pages 31 through 47 of the Annual Report to Shareholders for the year ended December 31, 1996 are incorporated herein by reference. The Quarterly Financial and Common Stock Data on page 48 of the Annual Report to Shareholders for the year ended December 31, 1996 is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No disagreements with accountants on any accounting or financial disclosure occurred during the periods covered by this report. 14 F-12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information called for by Item 10 is contained under "Shareholdings of Directors, Executive Officers, and Nominees for Director" on pages 3 through 5 of Bancorp's Proxy Statement, dated March 17, 1997 with respect to the Annual Meeting of Shareholders to be held on April 22, 1997 which was filed pursuant to Regulation 14(A) of the Securities Exchange Act of 1934 and which is incorporated herein by reference in response to this item. Reference is also made to "Additional Item - Executive Officers" included in Part I of this Form 10-K in partial response to Item 10. ITEM 11. EXECUTIVE COMPENSATION. The information appearing under "Meetings of the Board of Directors and Committees of the Board" on page 16, "Executive Compensation" on pages 18 through 22, and under "Compensation Committee Report" on pages 24 through 26 of Bancorp's Proxy Statement dated March 17, 1997 is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information appearing under "Shareholdings of Directors, Executive Officers, and Nominees for Director" on pages 3 through 5 of Bancorp's Proxy Statement dated March 17, 1997 is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information appearing in Note 15 of the Notes to Consolidated Financial Statements included on page 44 of Bancorp's Annual Report to Shareholders is incorporated herein by reference in response to this item. 15 F-13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the Report: Page* ---- (1) Report of Ernst & Young LLP, Independent Auditors ................... 47 Consolidated Balance Sheets as of December 31, 1996 and 1995.......... 31 Consolidated Statements of Earnings for year ended December 31, 1996, 1995 and 1994 .................................... 32 Consolidated Statements of Cash Flows for year ended December 31, 1996, 1995 and 1994 .................................... 33 Consolidated Statements of Changes in Shareholders' Equity for year ended December 31, 1996, 1995 and 1994 ..................... 34 Notes to Consolidated Financial Statements............................ 35 (2) Financial Statement Schedules: Schedules to the consolidated financial statements required by Regulation S-X are not required under the related instructions, or are inapplicable, and therefore have been omitted .................... N/A - ------------------------------------------------------------------------------- *THE PAGE NUMBERS INDICATED REFER TO PAGES OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 WHICH ARE INCORPORATED HEREIN BY REFERENCE.
16 F-14 (3) Exhibits: Exhibit Number ------- (3)a* Articles of Incorporation, revised April 26, 1994 and incorporated herein by reference to Exhibit (3)a to Form 10-K for the year ended December 31, 1994. (3)b Restated Code of Regulations, revised April 23, 1996. (10)* First Financial Bancorp. 1991 Stock Incentive Plan, dated September 24, 1991 and incorporated herein by reference to a Registration Statement on Form S-8, Registration No. 33-46819. (11) Computation of Consolidated Net Earnings Per Share for the Year Ended December 31, 1996, 1995 and 1994. (13) Registrant's annual report to security holders for the year ended December 31, 1996. (22) First Financial Bancorp. Subsidiaries. (23) Consent of Ernst & Young LLP, Independent Auditors. (b) Reports on Form 8-K: During the fourth quarter of the year ended December 31, 1996, the registrant did not file any reports on Form 8-K. - -------------------------------------------------------------------------------- *COPIES OF THIS EXHIBIT HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. SHAREHOLDERS MAY OBTAIN A COPY OF ANY EXHIBIT, UPON PAYMENT OF REPRODUCTION COSTS, BY WRITING JOSEPH M. GALLINA, COMPTROLLER, FIRST FINANCIAL BANCORP, 2 NORTH MAIN STREET, MIDDLETOWN, OHIO, 45042. 17 F-15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST FINANCIAL BANCORP. By: /s/ Stanley N. Pontius ----------------------------------- Stanley N. Pontius, Director President and Chief Executive Officer Date 3/19/97 ---------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Richard J. Fitton /s/ Michael R. O'Dell - -------------------------------------- ---------------------------------- Richard J. Fitton, Director Michael R. O'Dell, Chairman of the Board Senior Vice President, Chief Financial Officer, and Secretary Date 3/19/97 Date 3/19/97 ---------------------------------- ------------------------------ /s/ Stanley N. Pontius /s/ Charles T. Koehler - -------------------------------------- ---------------------------------- Stanley N. Pontius, Director Charles T. Koehler, Director President and Chief Executive Officer Date 3/19/97 Date 3/11/97 ---------------------------------- ------------------------------ /s/ Carl R. Fiora /s/ Lauren N. Patch - -------------------------------------- ---------------------------------- Carl R. Fiora, Director Lauren N. Patch, Director Date 3/11/97 Date 3/10/97 ---------------------------------- ------------------------------ /s/ Don M. Cisle /s/ Thomas C. Blake - -------------------------------------- ---------------------------------- Don M. Cisle, Director Thomas C. Blake, Director Date 3/10/97 Date 3/11/97 ---------------------------------- ------------------------------ 18 F-16 SIGNATURES (CONT'D) /s/ Barry S. Porter /s/ F. Elden Houts - -------------------------------------- ---------------------------------- Barry S. Porter, Director F. Elden Houts, Director Date 3/10/97 Date 3/18/97 ---------------------------------- ------------------------------ /s/ Murph Knapke /s/ Joseph M. Gallina - -------------------------------------- ---------------------------------- Murph Knapke, Director Joseph M. Gallina, Comptroller Date 3/18/97 Date 3/10/97 ---------------------------------- ------------------------------ EX-3.B 2 EXHIBIT 3(B) 1 Exhibit 3(b) Revised April 27, 1993 Revised April 23, 1996 RESTATED CODE OF REGULATIONS OF FIRST FINANCIAL BANCORP. ARTICLE I MEETINGS OF SHAREHOLDERS SECTION 1.1. ANNUAL MEETING. The regular annual meeting of the shareholders for the election of directors and the transaction of whatever other business may properly come before the meeting, shall be held at the main office of the Corporation, 300 High Street, Hamilton, Ohio, or such other place as the Board of Directors may designate, at 2:00 P.M., on the fourth Tuesday of April each year. Notice of such meeting shall be mailed, postage prepaid, at least ten days prior to the date thereof, addressed to each shareholder at his address appearing on the books of the Corporation. If, from any cause, an election of directors is not made on said day, the Board of Directors shall order the election to be held on some subsequent day, as soon thereafter as practicable, according to the provisions of law; and notice thereof shall be given in the manner herein provided for the annual meeting. SECTION 1.2. SPECIAL MEETINGS. Except as otherwise specifically provided by statute, special meetings of the shareholders may be called for any purpose at any time by the Board of Directors or by any three or more shareholders owning, in the aggregate, not less than fifty percent of the stock of the Corporation. Every such special meeting, unless otherwise provided by law, shall be called by mailing, postage prepaid, not less than ten days prior to the date fixed for such meetings, to each shareholder at his address appearing on the books of the Corporation, a notice stating the purpose of the meeting. SECTION 1.3. QUORUM. Except as otherwise provided by the statutes of Ohio, the holders of record of a majority of shares entitled to vote, whether present in person, or by proxy, shall constitute a quorum at any and all meetings of shareholders, but less than a quorum may adjourn any meeting from time to time. SECTION 1.4. PROXIES. Any shareholder entitled to vote at a meeting of shareholders may be represented and vote thereat by proxy appointed by an instrument in writing subscribed by the shareholder or his duly authorized agent, and submitted to the secretary of the Corporation or the inspectors of election at or before said meeting. 2 -2- ARTICLE II DIRECTORS SECTION 2.1. NOMINATION. Nominations for the election of directors may be made by the Board of Directors or may be made by any shareholder entitled to vote for the election of directors. Any nomination by a shareholder shall be made by notice in writing, delivered or mailed by registered United States mail, postage prepaid, to the secretary of the corporation not less than fourteen (14) days nor more than fifty (50) days prior to any meeting of the shareholders called for the election of directors;provided, however, that if less than twenty-one (21) days' notice of the meeting is given to shareholders, such written nomination shall be delivered or mailed, as prescribed, to the secretary of the Corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to shareholders. Each such notice shall contain the following information to the extent known to the notifying shareholder: (a) name and address of each proposed nominee; (b) principal occupation of each proposed nominee; (c) total number of shares of stock of the Corporation that will be voted for each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of stock of the corporation owned by the notifying shareholder. The Chairman of the meeting may, in his discretion, determine and declare to the meeting that the nomination was not made in accordance with the foregoing procedure and, in such event, the defective nomination shall be disregarded. SECTION 2.2. NUMBER. The number of directors of the Corporation, which shall not be less than nine nor more than twenty-five, shall be fifteen until increased or decreased at any time by the affirmative note of two-thirds of the whole authorized number of directors or, at a meeting of the shareholders called the purpose of electing directors at which a quorum is present, by the affirmative vote of the holders of a majority of the shares which are represented at the meeting and entitled to vote on the proposal. Directors shall hold office in their respective classes for three-year terms. The election of directors shall be held at the annual meeting of shareholders for the class year of directors whose terms expire at the annual meeting, except that a majority of the directors in office at any time, though less than a majority of the whole authorized number of directors, may, by the vote of a majority of their number, fill any director's office that is created by an increase in the number of directors or by a vacancy; provided, however, that in any period between annual meetings of shareholders, the directors will not increase the number of directors by more than three. A vacancy is created by the death, resignation, removal or incapacity of a director prior to the end of his term or by the failure of the shareholders at any time to elect the whole authorized number of directors. A director may be removed for cause. Cause if defined to exist if a court of law finds a director guilty of a felony or has breached his fiduciary duty under the laws of Ohio. SECTION 2.3. CLASSES OF DIRECTORS. The directors' terms are divided into three classes of terms consecutively expiring. The classes are known as Classes I, II and III. The directors of each class are shown on the Proxy Statement issued to shareholders of record. 3 -3- SECTION 2.4. MEETINGS. Meetings of the Board of Directors shall be held at the main office of the Corporation or at such other place, within or without the State of Ohio, as may be determined by the Board. One day's notice of such meeting shall be given to each director, unless the Board of Directors has fixed a regular time and place for such meetings, in which case no notice shall be required for meetings held at such time and place. Meetings may be called by the Chairman of the Board, the President, or by any seven directors, upon giving the notice as herein required. SECTION 2.5. No person shall be elected or re-elected a director after reaching his seventieth (70th) birthday. SECTION 2.6. DIRECTOR EMERITUS. The Board shall have the right from time to time to choose as Directors Emeritus persons who have had prior service as members of the Board and who may receive such compensation as shall be fixed from time to time by the Board of Directors. SECTION 2.7. EXECUTIVE COMMITTEE. The Board of Directors is authorized to create an Executive Committee of not less than three (3) members of the Board and such other committees as it sees fit, which, to the extent authorized by the Board of Directors, may exercise all powers of the Board of Directors between meetings of said Board, except to the extent prohibited by the laws of the State of Ohio. The Chairman of the Board of Directors or in his absence, the President, may designate any one of the directors of the Corporation as an alternate member of any committee to replace any absent or disqualified member at any meeting of such committee. ARTICLE III OFFICERS SECTION 3.1. CHAIRMAN OF THE BOARD. The Board of Directors may appoint one of its members to be Chairman of the Board to serve at the pleasure of the Board. He shall preside at all meetings of the Board of Directors. He shall exercise such powers and duties, as from time to time may be conferred upon, or assigned to, him by the Board of Directors. SECTION 3.2. PRESIDENT. The Board of Directors shall appoint one of its members to be President of the Corporation. In the absence of the Chairman, he shall preside at any meeting of the Board. The President shall have general executive powers, and shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice, to the office of President, or imposed by these Regulations. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to, him by the Board of Directors. SECTION 3.3. VICE PRESIDENT. The Board of Directors may appoint one or more Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the Chief Executive Officer. 4 -4- SECTION 3.4. SECRETARY. The Board of Directors shall appoint a Secretary who shall keep accurate minutes of all meetings. He shall attend to the giving of all notices required by these Regulations to be given. He shall be custodian of the corporate seal, records, documents and papers of the Corporation. He shall provide for the keeping of proper records of all transactions of the Corporation. He shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice, to the office of the Secretary or imposed by these Regulations. He shall also perform such other duties as may be assigned to him, from time to time by the Chief Executive Officer. SECTION 3.5. OTHER OFFICERS. All other officers appointed by the Board of Directors shall have such duties as defined by law and as may from time to time be assigned to them by the Chief Executive Officer or the Board of Directors. SECTION 3.6. TERM OF OFFICE. All officers of the Corporation shall be chosen by the Board of Directors by a majority vote and shall hold office until the first meeting of the Board of Directors following the next annual meeting of shareholders or until their successors are elected and duly qualified. The Board of Directors may remove any officer at any time with or without cause by a majority vote. SECTION 3.7. RETIREMENT DATE. Normal retirement date for all employees is the employee's 65th birthday. ARTICLE III-A INDEMNIFICATION AND INSURANCE SECTION 3-A.1. MANDATORY INDEMNIFICATION. The Corporation shall indemnify any officer or director, or any other employee of the Corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceedings, whether civil, criminal, administrative or investigative (including, without limitation, any action threatened or instituted by or in the right of the Corporation), by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, against expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs), judgment, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. A person claiming indemnification under this Section 3-A.1 shall be presumed to have met the applicable standard of conduct set forth herein, and the termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contenders or its equivalent, shall not, of itself, rebut such presumption. 5 -5- SECTION 3-A.2. COURT-APPROVED INDEMNIFICATION. Anything contained in the Regulations or elsewhere to the contrary notwithstanding: (A) the Corporation shall not indemnify any officer or director or employee of the Corporation who was a party to any completed action or suit instituted by or in the right of the Corporation to procure a judgment in its favor by reason of the fact he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, in respect of any claim, issue or matter asserted in such action or suit as to which he shall have been adjudged to be liable for misconduct (other than negligence of any degree) in the performance of his duty to the Corporation unless and only to the extent that the Court of Common Pleas of Butler County, Ohio or the court in which such action or suit was brought shall determine upon application that, despite such adjudication of liability, and in view of all the circumstances of the case, he is fairly and reasonably entitled to such indemnity as such Court of Common Pleas or such other court shall deem proper; and (B) the Corporation shall promptly make any such unpaid indemnification as is determined by a court to be proper as contemplated by this Section 3-A.2. SECTION 3-A.3. INDEMNIFICATION FOR EXPENSES. Anything contained in the Regulations or elsewhere to the contrary notwithstanding, to the extent that an officer, director or employee of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 3-A.1, or in defense of any claim, issue or matter therein, he shall be promptly indemnified by the Corporation against expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs) actually and reasonably incurred by him in connection therewith. SECTION 3-A.4. DETERMINATION REQUIRED. Any indemnification required under Section 3-A.1 and not precluded under Section 3-A.2 shall be made by the Corporation only upon a determination that such indemnification of the officer or director or employee is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 3-A.1. Such determination may be made only (A) by a majority vote of a quorum consisting of directors of the Corporation who were not and are not parties to, or threatened with, any such action, suit or proceeding, or (B) if such a quorum is not obtainable or if a majority of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the Corporation, or any person to be indemnified, within the past five years, or (C) by the shareholders, or (D) by the Court of Common Pleas of Butler County, Ohio or (if the Corporation is a party thereto) the court in which such action, suit or proceeding was brought, if any. Any determination made by the disinterested directors under subparagraph (A) of this Section or by independent legal counsel under subparagraph (B) of this Section to make indemnification in respect of any claim, issue or matter asserted in an action or suit threatened or brought by or in the right of the Corporation shall be promptly communicated to the person who threatened or brought such 6 -6- action or suit, and within ten (10) days after receipt of such notification such person shall have the right to petition the Court of Common Pleas of Butler County, Ohio or the court in which such action or suit was brought, if any, to review the reasonableness of such determination. SECTION 3-A.5. ADVANCES FOR EXPENSES. Unless the only liability asserted against a director in an action, suit or proceeding referred to in Section 3-A.1 of this article arises pursuant to Section 1701.95 of the Ohio Revised Code, expenses, including attorney's fees, incurred by a director in defending the action, suit or proceeding shall be paid by the Corporation as they are incurred, in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director in which he agrees: (i) to repay amounts so advanced if it is proved by clear and convincing evidence in a court of competent jurisdiction that his action or failure to act was undertaken with deliberate intent to cause injury to the Corporation or with reckless disregard for the best interests of the Corporation; and (ii) to reasonably cooperate with the Corporation with respect to the action, suit or proceeding. Expenses, including attorney's fees, incurred by a director, trustee, officer, employee or agent in defending any action, suit or proceeding referred to in Section 3-A.3 of this Article, may be paid by the Corporation as they are incurred, in advance of the final disposition of the action, suit or proceeding as authorized by the directors in the specific case, upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Corporation. SECTION 3-A.6. ARTICLE III-A NOT EXCLUSIVE. The indemnification provided by this Article III-A shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under the Articles or the Regulations or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be an officer or director or employee of the Corporation and shall inure to the benefit of the heirs, executors, and administrators of such a person. SECTION 3-A.7. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the obligation or the power to indemnify him against such liability under the provisions of this Article III-A. SECTION 3-A.8. VENUE. Any action by a person claiming indemnification under this Article III-A, or by the Corporation, to determine such claim for indemnification may be filed as to the Corporation and each such person in Butler County, State of Ohio. The Corporation and (by claiming such indemnification) each such person consent to the exercise of jurisdiction over its or his person by the Court of Common Pleas of Butler County, Ohio. The foregoing is in further amplification of Article Sixth of the Articles of Incorporation. 7 -7- ARTICLE IV CERTIFICATES SECTION 4.1. Certificates evidencing the ownership of shares of the Corporation shall be issued to those entitled to them by transfer or otherwise. Each certificate for shares shall bear a distinguishing number, the signature of the President or Chairman of the Board, and of the Secretary of the Corporation, the corporate seal, and such recitals as may be required by law. Such signatures and seal on the certificate may be facsimile signatures. SECTION 4.2. Subject to any applicable provision of law or the Articles, transfers of shares of the Corporation shall be made only upon its books, upon surrender and cancellation of a certificate or certificates for the shares so transferred. Any certificate so presented for transfer shall be endorsed or shall be accompanied by separate written assignment or a power of attorney, signed by the person appearing by the certificate to be the owner of the shares represented thereby. SECTION 4.3. LOST, STOLEN, DESTROYED, OR MUTILATED CERTIFICATES. The Corporation may, in its discretion, upon evidence satisfactory to it of the loss, theft, or destruction of any certificate for shares of the Corporation, authorize the issuance of a new certificate in lieu thereof, and may, in its discretion, require as a condition precedent to such issuance, the giving, by the owner of such alleged lost, stolen, or destroyed certificate, of a bond of indemnity, in form and amount, with surety, satisfactory to the Corporation, against any loss or damage which may result to, or claim which may be made against, the Corporation, or any transfer agent or registrar of its shares, in connection with such alleged lost, stolen, or destroyed, or such new, certificate. If any certificate for shares of the Corporation becomes worn, defaced, or mutilated, the Corporation may, upon production and surrender thereof, order that the same be cancelled and that a new certificate be issued in lieu thereof. ARTICLE V CORPORATE SEAL SECTION 5.1. CORPORATE SEAL. The Chairman of the Board, the President, Vice President, or Secretary or other officers designated by the Board of Directors, shall have authority to affix the corporate seal to any document requiring such seal, and to attest the same. Such seal shall be substantially in the following form: ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 6.1. FISCAL YEAR. The fiscal year of the Corporation shall be the calendar year. 8 -8- SECTION 6.2. EXECUTION OF INSTRUMENTS. All agreements, deeds, conveyances, transfers, certificates, and any other documents may be signed on behalf of the Corporation by the Chairman of the Board, or the President, or such other designated officers that the Board may designate from time to time. SECTION 6.3. RECORDS. The Articles of the Corporation, the Code of Regulations and the proceedings of all meetings of the shareholders, the Board of Directors, standing committees of the Board, shall be recorded in appropriate minute books provided for the purpose. The minutes of each meeting shall be signed by the Secretary or other officer appointed to act as Secretary of the meeting. ARTICLE VII CODE OF REGULATIONS SECTION 7.1. INSPECTION. A copy of the Code of Regulations, with all amendments thereto, shall at all times be kept in a convenient place at the office of the Corporation, and shall be open for inspection during all business hours. SECTION 7.2. AMENDMENTS. The Code of Regulations may be amended, altered, repealed, or replaced by an affirmative vote of a majority of the shares empowered to vote thereon at any regular or special meeting of the shareholders. EX-11 3 EXHIBIT 11 1 EXHIBIT 11 FIRST FINANCIAL BANCORP. COMPUTATION OF CONSOLIDATED NET EARNINGS PER SHARE FOR THE YEAR ENDED DECEMBER 31
1996 1995** 1994** ---- ---- ---- Weighted Average: Net earnings $33,940,000 $31,789,000 $28,173,000 =========== =========== =========== Weighted average number of shares outstanding 14,611,371 13,736,984 13,431,828 =========== =========== =========== Per share (net earnings divided by the weighted average number of shares outstanding) $ 2.32 $ 2.31 $ 2.10 =========== =========== =========== Primary: Net earnings $33,940,000 $31,789,000 $28,173,000 =========== =========== =========== Adjusted weighted average number of shares outstanding 14,629,810 13,762,487 13,457,100 =========== =========== =========== Per share (net earnings divided by the adjusted weighted average number of shares outstanding) $ 2.32 $ 2.31 $ 2.09 =========== =========== =========== Fully Diluted: Net earnings $33,940,000 $31,789,000 $28,173,000 =========== =========== =========== Adjusted weighted average number of shares outstanding 14,637,793 13,766,847 13,464,630 =========== =========== =========== Per share (net earnings divided by the adjusted weighted average number of shares outstanding) $ 2.32 $ 2.31 $ 2.09 =========== =========== =========== - -------------------------------------------------------------------------------- ** Per share data has been restated for a five-for-four stock split distributed in the form of a 25% stock dividend on December 1, 1994 and a 10% stock dividend distributed on November 1, 1996.
EX-13 4 EXHIBIT 13 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is presented to facilitate the understanding of the financial position and results of operations of First Financial Bancorp. (Bancorp). It identifies trends and material changes that occurred during the reporting periods and should be read in conjunction with the consolidated financial statements and accompanying notes. Bancorp is a bank and savings and loan holding company headquartered in Hamilton, Ohio. As of December 31, 1996, Bancorp owned fourteen subsidiaries located in western Ohio and eastern and west-central Indiana. Bancorp entered the southern Michigan market on January 1, 1997, when a merger with Hastings Financial Corporation, Hastings, Michigan, occurred. First Finance Mortgage Company of Southwestern Ohio, Inc. (First Finance) began full operations on May 8, 1996. First Finance, incorporated and wholly owned by Bancorp, is a retail finance company and operates from an office in Fairfield, Ohio. On September 24, 1996, Bancorp's Board of Directors declared a 10% stock dividend distributed on November 1, 1996, to shareholders of record as of October 4, 1996. All per share data has been restated to reflect the stock dividend. On November 26, 1996, the Board of Directors approved a quarterly cash dividend of 30 cents per share payable January 2, 1997, to shareholders of record as of December 6, 1996. The major components of Bancorp's operating results for the past five years are summarized in Table 1 and discussed in greater detail on subsequent pages which should be read in conjunction with the statistical data and consolidated financial statements on pages 30 through 48. RECENT MERGERS On December 1, 1996, Bancorp paid $7,575,004 in cash for all the outstanding common stock of Farmers State Bancorp. Upon consummation of the merger, Farmers State Bancorp was merged out of existence and its only subsidiary, Farmers State Bank, became a wholly owned subsidiary of Bancorp. Farmers State Bank has its main office in Liberty, Indiana and one office in each of the following cities: West College Corner, Rushville, Glenwood, Carthage and Mays, Indiana. This merger was accounted for using the purchase method of accounting and, accordingly, the consolidated financial statements include Farmers State Bank's results of operations from the date of acquisition. On April 1, 1996, Bancorp issued 363,373 shares of its common stock for all the outstanding common stock of F & M Bancorp (F&M). Upon consummation of the merger, F&M was merged out of existence and its only subsidiary, Farmers & Merchants Bank of Rochester (Farmers & Merchants) was merged with and into Indiana Lawrence Bank, a wholly owned subsidiary of Bancorp. Farmers & Merchants' three offices - two in Rochester, Indiana and one in Kewanna, Indiana became branches of Indiana Lawrence Bank, the surviving entity. The merger was accounted for using the pooling-of-interests method of accounting. The consolidated financial statements for prior periods have not been restated due to immateriality. On October 1, 1995, Bancorp issued 442,876 shares of its common stock for all the outstanding common stock of Bright Financial Services, Inc. (Bright Financial). Upon consummation of the merger, Bright Financial was merged out of existence and its only subsidiary, Bright National Bank (Bright), became a wholly owned subsidiary of Bancorp. Bright has its main office and one other office in Flora, Indiana, two offices in Lafayette, Indiana, and one office in each of the following cities: Delphi, Rossville and Burlington, Indiana. This merger was accounted for using the pooling-of-interests method of accounting. The consolidated financial statements for prior periods have not been restated due to immateriality. On July 16, 1995, Bancorp issued 354,645 shares of its common stock for all the outstanding common stock of Peoples Bank and Trust Company (Peoples). Upon consummation of the merger, Peoples became a wholly owned subsidiary of Bancorp. At the time of the merger, Peoples had one office located in Sunman, Indiana. This merger was accounted for using the pooling-of-interests accounting method. The consolidated financial statements for prior periods have not been restated due to immateriality. On June 1, 1994, Bancorp issued 287,699 shares of its common stock for all the outstanding common stock of First Clyde Banc Corp. Upon consummation of the merger, First Clyde Banc Corp was merged out of existence and its only subsidiary, The Clyde Savings Bank Company (Clyde), became a wholly owned subsidiary of Bancorp. Clyde has two offices in Clyde, Ohio. This merger was accounted for as a pooling-of-interests, and accordingly, the consolidated financial statements, including earnings per share, have been restated for the periods prior to the merger to include the accounts and operations of Clyde. On February 1, 1994, Bancorp issued 198,386 shares of its common stock for all the outstanding shares of Highland Federal Savings Bank (Highland). Upon consummation of the merger, Highland was merged into Home Federal Bank, A Federal Savings Bank (Home Federal). Home Federal, a wholly owned subsidiary of Bancorp, was the surviving entity with Highland's two offices, one in Mt. Healthy, Ohio and the other in Mariemont, Ohio, becoming branches of Home Federal. This merger was accounted for as a pooling-of-interests and, accordingly, the consolidated financial statements, including earnings per share, have been restated for the periods prior to the merger to include the accounts and operations of Highland. PENDING MERGERS On January 13, 1997, Bancorp signed a Plan and Agreement of Merger with Southeastern Indiana Bancorp (SIB). SIB's only subsidiary, Vevay Deposit Bank, has its main office and two other offices in Vevay, Indiana and an additional office in East Enterprise, Indiana. Under the terms of the merger agreement, Bancorp will pay $7,800,000 for all the outstanding common stock of SIB. Upon consummation of the merger, SIB will be merged out of existence and Vevay Deposit Bank will become a wholly owned subsidiary of Bancorp. Subject to regulatory approval and approval by SIB's shareholders, the merger is expected to occur during the second quarter of 1997. Bancorp anticipates the merger will be accounted for using the purchase method of accounting. On January 1, 1997, Bancorp issued 322,386 shares of its common stock for all the outstanding common stock of Hastings Financial Corporation (Hastings Financial). Upon consummation of the merger, Hastings Financial was merged out of existence and its only subsidiary, National Bank of Hastings (National Bank), became a wholly owned subsidiary of Bancorp. National Bank has its main office in Hastings, Michigan and one other office in Wayland, Michigan. This merger represents Bancorp's first association with a Michigan bank. This transaction was accounted for using the pooling-of-interests method of accounting. OVERVIEW OF OPERATIONS Bancorp's net earnings during 1996 were $33,940,000 or $2.32 per share, representing a 6.77% increase over 1995 net earnings and a 0.43% increase over 1995 earnings per share. The 1996 financial results include the effect of a $2,144,000 ($1,389,000 after tax) charge for a special assessment paid to the Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC). (See "Noninterest Expenses" of this Management Discussion and Analysis for more information concerning the special assessment.) Before this charge, Bancorp's 1996 net earnings were 11.1% greater than 1995 net earnings and 4.76% greater on a per share basis. Net earnings in 1995 were $31,789,000 ($2.31 per share) reflecting a 12.8% increase over 1994 net earnings of $28,173,000 ($2.10 per share). The 1996 earnings increase was achieved primarily through an increase in net interest income, partially offset by increases in noninterest expenses. FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 2
TABLE 1 - FINANCIAL SUMMARY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 SUMMARY OF OPERATIONS Interest income $ 171,275 $ 153,851 $ 133,504 $ 130,739 $ 143,439 Tax equivalent adjustment 3,510 4,286 5,482 5,922 5,875 --------- --------- ---------- ---------- ----------- Interest income - tax equivalent 174,785 158,137 138,986 136,661 149,314 Interest expense 69,707 63,516 49,587 51,880 66,958 --------- --------- ---------- ---------- ----------- NET INTEREST INCOME - TAX EQUIVALENT $ 105,078 $ 94,621 $ 89,399 $ 84,781 $ 82,356 ========= ========= ========== ========== =========== Interest income $ 171,275 $ 153,851 $ 133,504 $ 130,739 $ 143,439 Interest expense 69,707 63,516 49,587 51,880 66,958 --------- --------- ---------- ---------- ----------- Net interest income 101,568 90,335 83,917 78,859 76,481 Provision for loan losses 3,433 2,108 1,268 3,747 6,543 Noninterest income 22,097 20,558 17,462 19,589 19,814 Noninterest expenses 71,261 63,345 62,139 62,038 60,639 --------- --------- ---------- ---------- ----------- Income before income taxes and cumulative effect of changes in accounting principles 48,971 45,440 37,972 32,663 29,113 Income tax expense 15,031 13,651 9,799 7,469 7,343 --------- --------- ---------- ---------- ----------- Income before cumulative effect of changes in accounting principles 33,940 31,789 28,173 25,194 21,770 Cumulative effect of changes in accounting principles 1,698 --------- --------- ---------- ---------- ----------- NET EARNINGS $ 33,940 $ 31,789 $ 28,173 $ 25,194 $ 23,468 ========= ========= ========== ========== =========== Tax equivalent basis was calculated using a 35.0% tax rate in all years presented except 1992 which was calculated using a 34.0% tax rate. PER SHARE DATA (1) Income before cumulative effect of changes in accounting principles $ 2.32 $ 2.31 $ 2.10 $ 1.88 $ 1.61 Cumulative effect of changes in accounting principles 0.13 --------- --------- ---------- ---------- ----------- NET EARNINGS $ 2.32 $ 2.31 $ 2.10 $ 1.88 $ 1.74 ========= ========= ========== ========== =========== Cash dividends declared First Financial Bancorp $ 1.11 $ 0.98 $ 0.89 $ 0.75 $ 0.67 Jennings Union Bankcorp(2) N/A N/A N/A $ 2.00 Highland Federal Savings Bank N/A N/A $ 0.85 $ 0.75 First Clyde Banc Corp(3) N/A N/A $ 0.50 $ 2.00 $ 1.80 Average common shares outstanding (in thousands) 14,611 13,737 13,432 13,432 13,551 SELECTED YEAR-END BALANCES Total assets $2,261,711 $2,103,375 $1,922,643 $1,810,673 $1,816,414 Earning assets 2,087,190 1,941,274 1,764,616 1,670,009 1,662,413 Investment securities held-to-maturity 78,945 93,522 135,187 438,461 457,919 Investment securities available-for-sale 290,701 294,052 242,410 Loans, net of unearned income 1,700,264 1,532,016 1,378,867 1,189,790 1,137,482 Deposits 1,879,966 1,785,562 1,587,324 1,580,546 1,604,053 Noninterest-bearing demand deposits 238,415 220,061 201,331 182,192 181,696 Interest-bearing demand deposits 317,187 302,119 266,601 277,444 249,531 Savings deposits 381,903 359,638 374,378 403,845 400,632 Time deposits 942,461 903,744 745,014 717,065 772,194 Long-term borrowings 6,506 2,820 3,983 4,564 Shareholders' equity 258,482 234,175 194,673 181,252 167,694 RATIOS BASED ON AVERAGE BALANCES Loans to deposits 89.16% 89.01% 80.79% 74.14% 72.40% Net charge-offs to loans 0.17% 0.10% 0.08% 0.21% 0.63% Shareholders' equity to Total assets 11.52% 10.98% 10.29% 9.73% 8.84% Deposits 13.75% 13.06% 12.05% 11.10% 9.94% Return on Assets 1.58% 1.64% 1.54% 1.41% 1.30% Return on Equity 13.72% 14.97% 14.93% 14.54% 14.70% Net interest margin (tax equivalent basis) 5.25% 5.24% 5.25% 5.14% 4.91% (1) First Financial Bancorp's per share data has been restated for all stock dividends and material pooling-of-interests mergers through 1996. (2) Jennings Union Bankcorp was the parent company of Union Bank & Trust Company and was merged out of existence on January 4, 1993. (3) First Clyde Banc Corp was the parent company of The Clyde Savings Bank Company and was merged out of existence on June 1, 1994. ====================================================================================================================================
22 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 3 The 1995 earnings increase was achieved primarily through an increase in net interest income. Bancorp's return on assets before the SAIF special assessment charge for 1996 was 1.65%. This compares with return on asset ratios of 1.64% and 1.54% for 1995 and 1994, respectively. Bancorp's return on equity before the SAIF special assessment for 1996 was 14.3%, which compares to 15.0% and 14.9% for 1995 and 1994, respectively. Bancorp's return on assets and return on equity after the SAIF special assessment were 1.58% and 13.7%, respectively. NET INTEREST INCOME Net interest income, Bancorp's principal source of earnings, is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. Bancorp's net interest income for the years 1992 through 1996 is shown in Table 1. For analytical purposes, a section showing interest income on a tax equivalent basis is also presented in Table 1. The tax equivalent adjustment recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35.0% tax rate in 1996, 1995, 1994 and 1993 and a 34.0% tax rate in 1992. The amount of net interest income is determined by the volume and mix of earning assets, the rates earned on such earning assets and the volume, mix and rates paid for the deposits and borrowed money that support the earning assets. Table 2 describes the extent to which changes in interest rates and changes in volume of earning assets and interest-bearing liabilities have affected Bancorp's net interest income during the years indicated. The combined effect of changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. Table 2 should be read in conjunction with the Statistical Information shown on page 30. Tax equivalent total interest income was $174,785,000 in 1996, an increase of $16,648,000 over 1995. Substantially all of this increase was due to an increase of $193,643,000 in the volume of earning assets, from an average of $1,806,276,000 during 1995 to $1,999,919,000 during 1996. Outstanding loan balances increased $157,251,000 and investment securities and other instruments increased $36,392,000. Total interest expense was $69,707,000 in 1996, an increase of $6,191,000 over 1995. The increase was due to an increase of $152,262,000 in total interest-bearing liabilities, from an average of $1,516,752,000 during 1995 to an average of $1,669,014,000 during 1996. Tax equivalent net interest income, the difference between tax equivalent total interest income and total interest expense, increased $10,457,000 during 1996 due primarily to the volume increases described above. The increased interest income was greater than the increased interest expense, thereby causing net interest income to increase. Because average interest rates were stable during 1996, they did not have a material effect on net interest income. The average yield on total earning assets was 8.74% and 8.75% during 1996 and 1995, respectively, and the average rate paid for interest-bearing liabilities was 4.18% and 4.19% during 1996 and 1995, respectively. This stableness in rates is reflected in Bancorp's interest rate spread and net interest margin. The interest rate spread (the average rate on earning assets minus the average rate on interest-bearing liabilities) was 4.56% for both 1996 and 1995. As with Bancorp's interest rate spread, the net interest margin (net interest income on a tax equivalent basis divided by average earning assets) also remained steady, increasing only one basis point (a basis point equals 0.01%) during 1996. The net interest margin was 5.25% and 5.24% for 1996 and 1995, respectively. Nonaccruing loans were included in the daily average loan balances used in determining the yields in Table 2. Interest foregone on nonaccruing loans is disclosed in Note 9 of the Notes to Consolidated Financial Statements and is not considered to have a material effect on the reasonableness of these presentations. In addition, the amount of loan fees included in the interest income computation for 1996, 1995 and 1994 was $3,677,000, $2,928,000 and $2,742,000, respectively. During 1996 and 1995, approximately $15,076,000 and $51,193,000, respectively, of tax-exempt municipal securities earning a tax equivalent yield of 12.0% and 13.4%, respectively, were called by their issuers or matured. The result of these calls and maturities has been a
TABLE 2 - VOLUME/RATE ANALYSIS - TAX EQUIVALENT BASIS (1) (DOLLARS IN THOUSANDS) - ----------------------------------------------------------------------------------------------------------------------------------- 1996 change from 1995 due to 1995 change from 1994 due to VOLUME RATE TOTAL VOLUME RATE TOTAL INTEREST INCOME Loans $ 14,210 $ 1,645 $ 15,855 $ 15,884 $ 8,238 $ 24,122 Investment securities (2) Taxable 2,912 (175) 2,737 (3,320) 1,684 (1,636) Tax-exempt (1,371) (761) (2,132) (3,129) (312) (3,441) ---------- ---------- --------- -------- --------- --------- Total investment securities interest (2) 1,541 (936) 605 (6,449) 1,372 (5,077) Interest-bearing deposits with other banks 105 (6) 99 (138) 101 (37) Federal funds sold and securities purchased under agreements to resell 115 (26) 89 9 134 143 ---------- ---------- --------- -------- --------- --------- TOTAL 15,971 677 16,648 9,306 9,845 19,151 INTEREST EXPENSE Interest-bearing demand deposits 881 186 1,067 (140) 182 42 Savings deposits 345 (240) 105 (990) 430 (560) Time deposits 5,304 18 5,322 4,567 8,322 12,889 Short-term borrowings (88) (442) (530) 615 1,015 1,630 Long-term borrowings 228 (1) 227 (46) (26) (72) ---------- ---------- --------- -------- --------- --------- TOTAL 6,670 (479) 6,191 4,006 9,923 13,929 ---------- ---------- --------- -------- --------- --------- NET INTEREST INCOME $ 9,301 $ 1,156 $ 10,457 $ 5,300 $ (78) $ 5,222 ========== ========== ========= ======== ========= ========= (1) Tax equivalent basis was calculated using a 35.0% tax rate. (2) Includes both investment securities held-to-maturity and investment securities available-for-sale. ====================================================================================================================================
FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 23 4 continued decline in the average tax equivalent yields earned on tax-exempt securities, from 12.3% during 1994 to 12.0% during 1995 and 11.2% during 1996. The yield declines in tax-exempt securities during the past several years have been counterbalanced by yield increases in loans outstanding - increases which, absent the decline in tax equivalent yields, would have increased net interest income, the interest rate spread and the net interest margin. Another $19,047,000 of municipal securities earning a tax equivalent yield of 11.7% are scheduled to mature or may be called during 1997. In the current economic environment, Bancorp may not be able to reinvest these funds in similar earning assets at acceptable risk levels. The loss of such tax-exempt municipal securities will likely continue to negatively influence Bancorp's interest rate spread and net interest margin in the future. NONINTEREST INCOME AND NONINTEREST EXPENSES A listing of noninterest income and noninterest expenses for 1996, 1995 and 1994 is reported in Table 3. Although the mergers that occurred during 1996 and 1995 did not materially affect net earnings, they influenced the individual line items for noninterest income and expense. Affiliates that joined Bancorp during 1996 and 1995 are included in the consolidated statements of earnings starting with their date of acquisition. The two affiliates that joined Bancorp during 1995 are therefore included in the Consolidated Statements of Earnings for all of 1996 and only a portion of the year during 1995. Likewise, the two affiliates that joined Bancorp during 1996 are included in the Consolidated Statements of Earnings for their respective portions of 1996. NONINTEREST INCOME Noninterest income, excluding securities transactions, increased $1,887,000 or 9.33% in 1996, while 1995 showed an increase of $1,002,000 or 5.21% from 1994. Service charges on deposit accounts during 1996 increased $586,000 or 6.82% over 1995 primarily due to Bancorp's new affiliates. Service charges during 1995 increased $374,000 or 4.55% from 1994 primarily due to increases in noninterest-bearing demand deposit balances. Trust revenues in 1996 increased $655,000 or 8.59% over 1995 and increased $606,000 or 8.64% in 1995 over 1994. The increase during 1996 was due to an increase of $104,444,000 in trust assets serviced, from $1,140,997,000 at December 31, 1995, to $1,245,441,000 at December 31, 1996. The increase during 1995 was due to a $115,609,000 increase in trust assets serviced, from $1,025,388,000 at December 31, 1994, to $1,140,997,000 at December 31, 1995. Nearly all of the increases in 1996 and 1995 are attributed to new business, estate settlement fees and growth in the number of accounts. Other income during 1996 increased $646,000 or 16.2% over 1995 primarily due to fees received for lockbox services first offered by Bancorp's First Southwestern affiliate during 1996, increased gains on sales of real estate mortgage loans and income contributed by the new affiliates. The increased gain on sale of loans was primarily due to a higher volume of loan sales during 1996 as compared to 1995. Other income during 1995 increased $22,000 or 0.55% over 1994 primarily due to an increase in safe deposit box rental income recognized, partially offset by a decrease in gains on sales of other real estate owned. The decrease in gains on sales of other real estate owned reflected a lower amount of foreclosed real estate properties held during 1995. Investment securities gains (losses) decreased from a net gain of $340,000 during 1995 to a net loss of $8,000 during 1996. Investment securities gains increased $2,094,000 in 1995, from a loss of $1,754,000 in 1994 to a gain of $340,000 in 1995. Bancorp recorded a net loss of $1,754,000 in 1994 primarily due to a restructuring of the available-for-sale securities portfolio. Proceeds from the sales were reinvested in higher yielding securities, which benefited future periods. NONINTEREST EXPENSES Noninterest expenses in 1996 increased $7,916,000 or 12.5% over 1995 and noninterest expenses in 1995 were $1,206,000 or 1.94% greater than the amount recorded during 1994. The largest component of noninterest expenses is salaries and employee benefits, which increased $4,324,000 or 13.0% over 1995 primarily due to the addition of new affiliates during 1996 and 1995 and to wage and salary increases. Salaries and employee benefits during 1995 increased $1,966,000 or 6.28% over 1994 primarily due to wage and salary increases, an increased number of employees (primarily due to the addition of two new subsidiaries during 1995) and increased expense relating to the pension plan covering substantially all employees of Bancorp and its subsidiaries. Net occupancy expense increased $450,000 or 10.4%, and furniture and equipment expense increased $559,000 or 16.7%, during 1996 largely
TABLE 3 - NONINTEREST INCOME & NONINTEREST EXPENSES (DOLLARS IN THOUSANDS) - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------------------------------------------------------------------- % CHANGE % CHANGE % CHANGE INCREASE INCREASE INCREASE TOTAL (DECREASE) TOTAL (DECREASE) TOTAL (DECREASE) ----- --------- ----- ---------- ----- ---------- NONINTEREST INCOME Service charges on deposit accounts $ 9,182 6.8% $ 8,596 4.5% $ 8,222 (3.4%) Trust revenues 8,278 8.6% 7,623 8.6% 7,017 9.2% Other 4,645 16.2% 3,999 0.6% 3,977 (15.8%) -------- ------- -------- Subtotal 22,105 9.3% 20,218 5.2% 19,216 (2.3%) Investment securities (losses) gains (8) N/M 340 N/M (1,754) N/M -------- ------- -------- TOTAL $ 22,097 7.5% $20,558 17.7% $ 17,462 (10.9%) ======== ======= ======== ====== ========= ========= NONINTEREST EXPENSES Salaries and employee benefits $ 37,586 13.0% $33,262 6.3% $ 31,296 5.6% Net occupancy 4,790 10.4% 4,340 3.1% 4,211 (0.2%) Furniture and equipment 3,911 16.7% 3,352 11.5% 3,006 (4.5%) Data processing 4,773 (7.6%) 5,165 (0.8%) 5,205 9.8% Deposit insurance 2,889 31.1% 2,204 (37.7%) 3,537 2.0% State taxes 1,706 4.2% 1,637 (5.2%) 1,726 1.3% Other 15,606 16.6% 13,385 1.7% 13,158 (13.0%) -------- ------- -------- TOTAL $ 71,261 12.5% $63,345 1.9% $ 62,139 0.2% ======== ======== ======== ======= ======== ======== N/M = Not meaningful ================================================================================================================================
24 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 5 because of Bancorp's new affiliates. Increased costs for service contracts on Bancorp's equipment also affected equipment expense. The renegotiation of Bancorp's contract with its data processing service provider and benefits received from an ongoing effort to standardize computer applications among all affiliates contributed to a $392,000 or 7.59% decrease in data processing expenses during 1996, as compared with 1995. On September 30, 1996, the U.S. Congress enacted and President Clinton signed an omnibus appropriations package that included provisions for recapitalizing the Savings Association Insurance Fund (SAIF). Substantially all savings institutions with SAIF insured deposits were required to pay a one-time assessment of $0.657 per $100 in domestic deposits held as of March 31, 1995. Banks with SAIF insured deposits, usually obtained through mergers with savings institutions or through purchasing deposits of failed savings institutions from the Resolution Trust Corporation (the RTC), received a 20% reduction in their special assessment. First Financial has two savings institution subsidiaries - Fidelity Federal Savings Bank and Home Federal Bank, A Federal Savings Bank - and one bank subsidiary, Bright National Bank, that had purchased SAIF insured deposits from the RTC. These three subsidiaries had total SAIF insured deposits of approximately $326 million at March 31, 1995, and their special assessment totaled $2,144,000, which is included in deposit insurance expense. Not including the special assessment, deposit insurance expense during 1996 was $745,000, which was a $1,459,000 decrease from 1995 expense of $2,204,000. Bancorp's subsidiaries with deposits insured by the Bank Insurance Fund (the BIF) paid the statutory minimum of $2,000 per institution during 1996, compared with $0.23 per $100 of insured deposits during the first five months of 1995 and $0.04 per $100 during the rest of 1995. Deposit insurance expense decreased $1,333,000 during 1995 primarily due to a decrease in the BIF premium paid by Bancorp's subsidiaries from $0.23 per $100 of insured deposits to $0.04 per $100, effective June 1, 1995. The FDIC lowered the BIF premium after meeting its capitalization target of $1.25 per $100 of deposits in May, 1995. The premium paid by Bancorp's subsidiaries on their SAIF insured deposits during 1995, 1994 and 1993 was $0.23 per $100 of insured deposits for all years. Because of the recapitalization of the SAIF through the special assessment during 1996, the premium for SAIF insured deposits will decline to $0.0644 per $100 of insured deposits for a three year period beginning January 1, 1997, and to $0.0243 per $100 for a seventeen year period beginning January 1, 1997. Because the omnibus appropriations package referred to above requires BIF insured banks to begin sharing in financing the interest on bonds issued by the Financing Corporation (the FICO), which savings institutions had been financing, BIF premiums will increase to $0.0129 per $100 of insured deposits for a three year period beginning January 1, 1997, and to $0.0243 per $100 for the seventeen year period beginning January 1, 2000. According to Bancorp estimates and assuming current deposit levels, the aggregate premium decrease for its SAIF insured deposits will be greater than the aggregate premium increase for its BIF insured deposits. Deposit insurance expenses during the foreseeable future are therefore expected to be significantly less than amounts paid during the last several years. Other noninterest expenses increased $2,221,000 or 16.6% partially due to Bancorp's new affiliates and to smaller increases in a number of categories. The efficiency ratio (noninterest expenses as a percentage of noninterest income, excluding securities transactions, plus fully tax equivalent net interest income) reflects how much, on average, an institution expended to generate each dollar of revenue. Bancorp's 1996 efficiency ratio before the SAIF assessment was 54.3%, compared to ratios of 55.2% and 57.2% for 1995 and 1994, respectively. The 1996 efficiency ratio after the SAIF assessment was 56.0%. INCOME TAXES Net deferred tax assets at December 31, 1996, 1995 and 1994, were $2,802,000, $3,369,000 and $5,904,000, respectively. Due to Bancorp's strong historical earnings trend and the expectation that this trend will continue, management has determined that it is more likely than not that the net deferred tax asset will be realized. Therefore, no valuation allowance has been established. Management will continue to evaluate quarterly the need for a valuation allowance. Bancorp's tax expense in 1996 totaled $15,031,000 compared to $13,651,000 in 1995 and $9,799,000 in 1994, resulting in effective tax rates of 30.7%, 30.0% and 25.8% in 1996, 1995 and 1994, respectively. The increase in 1996's effective rate was primarily due to a decline in the amount of tax-exempt investments held during 1996. The increase in 1995's effective tax rate was primarily due to the absence of tax losses recognized on tax-exempt municipal securities called during 1994 and to a decline in average tax-exempt investments held during 1995 as compared to 1994. The tax effects of securities transactions were a benefit of $77,000 during 1996, an expense of $17,000 during 1995 and a benefit of $1,634,000 in 1994. Further analysis of income taxes is presented in Note 10 of the Notes to Consolidated Financial Statements. LOANS Total loans, net of unearned income, increased $168,248,000 or 11.0% during 1996. Approximately $76,396,000 of the increase was due to the mergers with Farmers & Merchants and Farmers State Bank. All loan categories, except lease financing, increased during 1996. In addition to the new affiliates, a favorable market with respect to loan demand, combined with aggressive loan campaigns and the pursuit of new business, led to net increases during 1996 of $57,092,000 or 16.7% in commercial loans, $1,417,000 or 3.39% in construction loans, $74,609,000 or 9.46% in mortgage loans, $36,165,000 or 11.0% in installment loans and $701,000 or 4.55% in credit card loans. Lease financing decreased $1,736,000 or 10.5% during 1996. Bancorp's loans cover a broad range of borrowers characterizing the western Ohio and eastern and west-central Indiana markets. There were no loan concentrations of multiple borrowers in similar activities at December 31, 1996, which exceeded 10.0% of total loans. Bancorp's subsidiaries consist of community banks dedicated to meeting the financial needs of individuals and businesses living and operating in the communities they serve. Bancorp's loan portfolio is therefore primarily composed of residential and commercial real estate mortgage loans, commercial loans and installment loans. At December 31, 1996, real estate mortgage loans composed 50.8% of Bancorp's total loan portfolio and installment loans composed another 21.5% of the total loan portfolio. Commercial loans equaled 23.4% of the total portfolio and real estate construction, credit card lending and lease financing made up the remaining 4.30% of the portfolio. Real estate mortgage loans are generally considered to be the safest loan investments because of the real estate securing the loans. Installment loans include unsecured loans, second mortgage loans, secured lines of credit, secured and unsecured home improvement loans, automobile loans, student loans and loans secured by savings, stocks or life insurance. Bancorp subsidiaries offer a wide variety of commercial loans, including small business loans, agricultural loans, equipment loans and lines of credit. In accordance with Bancorp's decentralized management structure and subject to Bancorp guidelines, credit underwriting and approval occur within the subsidiary originating the loan. Depending on the subsidiary, loan applications are approved by either a loan committee or by one or more loan personnel with designated approval authority. Loan committees are composed of senior management and loan personnel and, at some subsidiaries, members of the subsidiary's board of directors. Loan applications for principal amounts greater than a designated amount, which varies by subsidiary, require Bancorp approval. Any plans to purchase or sell a participation in a loan also require Bancorp approval. FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 25 6
TABLE 4 - LOAN MATURITY/RATE SENSITIVITY DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) ------------------------------------------------------------------------------ Maturity AFTER ONE WITHIN BUT WITHIN AFTER ONE YEAR FIVE YEARS FIVE YEARS TOTAL -------- ---------- ---------- ----- Commercial $ 251,844 $ 89,415 $ 56,775 $ 398,034 Real estate-construction 34,630 6,248 2,384 43,262 ----------- ----------- ------------ ------------ TOTAL $ 286,474 $ 95,663 $ 59,159 $ 441,296 =========== =========== ============ ============ ----------------------------------------------------------- Sensitivity to changes in interest rates PREDETERMINED VARIABLE RATE RATE Due after one year but within five years $ 36,608 $ 59,055 Due after five years 8,058 51,101 ---------- ----------- TOTAL $ 44,666 $ 110,156 ========== =========== =================================================================================================
Bancorp subsidiaries receive requests to renew maturing loans as a normal part of business. Such requests are especially common with real estate loans that are scheduled to mature before being fully amortized and with commercial loans. The requests are reviewed by the subsidiary's loan committee or by designated loan personnel, as appropriate, and may be approved, approved with modifications or disapproved. Required modifications may include, among other items, a reduction in the loan balance, a change in the interest rate or the initiation of monthly principal payments. Table 4 indicates the contractual maturity of commercial loans and real estate-construction loans outstanding at December 31, 1996. Loans due after one year are classified according to their sensitivity to changes in interest rates. ASSET QUALITY Bancorp's subsidiaries record a provision for loan losses (provision) in the Consolidated Statements of Earnings to provide for expected credit losses. Actual losses on loans and leases are charged against the allowance for loan losses (allowance), which is a reserve accumulated on the Consolidated Balance Sheets through the provision. The recorded values of the loans and leases actually removed from the Consolidated Balance Sheets are referred to as charge-offs and, after netting out recoveries on previously charged off assets, become net charge-offs. Bancorp's policy is to charge off loans when, in management's opinion, collection of principal is in doubt. All loans charged off are subject to continuous review and concerted efforts are made to maximize recovery. Management records the provision, on an individual subsidiary basis, in amounts sufficient to result in an allowance that will cover future risks believed to be inherent in the loan portfolio of each subsidiary. Management's evaluation in establishing the provision includes such factors as the historical loss and recovery experience, estimated future loss for loans, known deterioration in loans, periodic external loan evaluations, prevailing economic conditions that might have an impact on the portfolio and ratios of delinquencies and nonaccrual loans. The 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. The evaluation of these factors is completed at Bancorp's subsidiaries through a group of senior officers from the financial and lending areas. The provision increased from $2,108,000 in 1995 to $3,433,000 in 1996. The provision recorded during 1995 was $840,000 greater than 1994's provision of $1,268,000. The increases during 1996 and 1995 were primarily due to the increase in loan volume mentioned previously. The allowance at December 31, 1996, was $22,672,000 or 1.33% of loans, net of unearned income. This compares to $20,437,000 or 1.33% of loans, net of unearned income, at December 31, 1995. Although the balance of the allowance increased $2,235,000, the significant increase in total loans outstanding resulted in a constant allowance to loan ratio. The level of nonaccrual and restructured loans and leases is an important element in assessing asset quality. Loans are classified nonaccrual when, in the opinion of management, collection of interest is doubtful. Nonaccrual loans at December 31, 1996, 1995 and 1994, were $4,850,000, $2,764,000 and $2,412,000, respectively. The increase in nonaccrual loans during 1996 occurred in the commercial, real estate mortgage and consumer loan categories. Nonaccrual loans to total loans at December 31, 1996, 1995 and 1994, were 0.29%, 0.18% and 0.17%, respectively. Loans are classified as restructured when management, to protect its investment, grants concessions to the debtor that it would not otherwise consider. Restructured loans at December 31, 1996, 1995 and 1994, were $890,000, $517,000 and $1,429,000, respectively. Another element associated with asset quality is Other Real Estate Owned (OREO). OREO primarily represents properties acquired by Bancorp's subsidiaries through loan defaults by customers. The balances of OREO at December 31, 1996, 1995 and 1994, were $264,000, $1,677,000 and $2,116,000, respectively. The decrease in OREO during 1996 reflects the sale of vacant land that had a book value of $1,325,000 at December 31, 1995 and 1994. Loans 90 days or more past due which were still accruing interest totaled $906,000, $1,071,000 and $683,000 at December 31, 1996, 1995 and 1994, respectively. Nonaccrual and restructured loans and leases and OREO are discussed or summarized in Notes 1 and 9 of the Notes to Consolidated Financial Statements. Bancorp adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" in January, 1995. SFAS No. 114 and SFAS No. 118 require that lenders measure an impaired loan, as defined in the statements, at the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the creditor's recorded investment in the loan, the creditor must record a valuation allowance for the amount of the difference. Implementation of this statement did not have a material effect on Bancorp's allowance or provision. 26 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 7 INVESTMENT SECURITIES Bancorp's investment securities decreased $17,928,000 or 4.63% during 1996 to a balance of $369,646,000. The decrease in the investment portfolio was used to fund loan growth. Bancorp follows a conservative investment policy, investing primarily for interest rate risk management and liquidity management purposes. U.S. Treasury Securities, generally considered to have the least credit risk and the highest liquidity, composed 11.8% of Bancorp's investment portfolio at December 31, 1996. All U.S. Treasury Securities were classified as available- for-sale at that date and are available for liquidity management purposes. Another 21.2% of the investment portfolio is composed of securities issued by U.S. government agencies and corporations, primarily the Federal Home Loan Bank (FHLB), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Student Loan Marketing Association (SLMA) and Federal Farm Credit Bank. Included in the U.S. government agencies and corporations securities category at December 31, 1996, were structured notes totaling $1,499,000. The structured notes held by Bancorp are multistep coupon debentures issued by the FHLB, FHLMC, FNMA and SLMA and, accordingly, are rated AAA. All U.S. government agencies and corporations securities were classified as available-for-sale at December 31, 1996, and are available for liquidity management purposes. Due to the government guarantees, either expressed or implied, U.S. government agency and corporation obligations are considered to have low credit risk and high liquidity. Investments in mortgage-backed securities (MBSs), including collateralized mortgage obligations (CMOs), composed 39.9% of the investment portfolio at December 31, 1996. MBSs represent participations in pools of mortgage loans, the principal and interest payments of which are passed to the security investors. MBSs are subject to prepayment risk, especially during periods of decreasing interest rates. Prepayments of the underlying mortgage loans may shorten the lives of the securities, thereby affecting yields to maturity and market values. Bancorp invests primarily in MBSs issued by U.S. government agencies, such as FHLMC, FNMA, and the Government National Mortgage Association (GNMA). Such securities, because of government agency guarantees, are considered to have low credit risk and high liquidity. Accordingly, about 90.2% of Bancorp's MBSs are classified as available-for-sale. CMOs totaled $66,852,000 at December 31, 1996, all of which were classified as available-for-sale. CMOs are collateralized by pools of mortgage loans or MBSs. Substantially all of the CMOs held by Bancorp are rated AAA by Standard & Poor's Corporation or similar rating agencies. Bancorp does not own any interest only securities, principal only securities, accrual bonds, inverse floaters or high risk CMOs, as defined by regulatory guidelines. All CMOs held as of December 31, 1996, passed the stress test required by the Federal Financial Institutions Examination Council at the last testing date and, therefore, are not considered high risk by regulatory definition. State, county, and municipal securities composed 22.4% of Bancorp's investment portfolio at December 31, 1996. The securities are highly diversified as to states and issuing authorities within states, thereby decreasing portfolio risk. Bancorp management views investments in state, county, and municipal securities as primarily long-term investments and, accordingly, about 75.5% of such investments at December 31, 1996, were classified as held-to-maturity. The remaining 4.70% of Bancorp's investment portfolio at December 31, 1996, termed "other securities," was primarily composed of stock ownership in the Indianapolis and Cincinnati District Federal Home Loan Banks and in the Federal Reserve Bank and in corporate debt securities. Bancorp invests only in corporate debt securities that are rated investment grade by nationally recognized rating organizations. Table 5 sets forth the maturities of investment securities held-to-maturity and investment securities available-for-sale as of December 31, 1996, and the average yields of such securities calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Tax equivalent adjustments (using a 35.0% rate) have been made in calculating yields on tax-exempt obligations of state, counties, and municipalities. At December 31, 1996, the market value of Bancorp's held-to-maturity investment securities portfolio exceeded the carrying value by $4,496,000. The available-for-sale investment securities are reported at their market value of $290,701,000, as required by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." See Note 8 of the Notes to Consolidated Financial Statements for additional information.
TABLE 5 - INVESTMENT SECURITIES DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) ---------------------------------------------------------------------------------------------------------------- Maturing ------------------------------------------------------------------------------------------------- AFTER ONE BUT AFTER FIVE BUT WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS --------------- ----------------- ---------------- --------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------ ----- ------ ----- ------ ----- ------ ----- HELD-TO-MATURITY Mortgage-backed securities(2) $ 128 9.42% $ 758 8.15% $ 3,677 6.54% $ 9,943 8.78% State, county, and municipal securities 6,137 9.27% 33,305 11.99% 13,829 12.22% 9,203 12.61% Other securities 899 8.25% 1,066 6.26% --------- --------- -------- --------- TOTAL $ 7,164 9.15% $ 35,129 11.74% $ 17,506 11.03% $ 19,146 10.62% ========= ====== ========= ====== ======== ====== ========= ====== AVAILABLE-FOR-SALE U.S. Treasury securities $ 16,859 6.36% $ 26,678 5.34% Securities of other U.S. government agencies and corporations 38,724 6.94% 33,226 5.69% $ 4,716 7.06% $ 1,662 6.45% Mortgage-backed securities(2) 2,690 6.31% 7,795 6.51% 11,088 6.61% 111,585 6.77% State, county, and municipal securities 1,940 7.92% 7,652 8.59% 8,063 8.08% 2,606 9.38% Other securities 252 6.59% 3,430 6.20% 201 6.83% 11,534 7.06% --------- --------- -------- --------- TOTAL $ 60,465 6.77% $ 78,781 5.95% $ 24,068 7.18% $ 127,387 6.85% ========= ====== ========= ====== ======== ====== ========= ====== (1) Tax equivalent basis was calculated using a marginal federal income tax rate of 35.0%. (2) 41.3% of the mortgage-backed securities maturing after five years are variable rate. ===================================================================================================================================
FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 27 8 Bancorp's federal funds sold and securities purchased under agreements to resell decreased $2,601,000, from $14,802,000 at December 31, 1995, to $12,201,000 at December 31, 1996. The decrease was used to fund loan growth. Bancorp monitors this position as part of its asset/liability management. Bancorp does not use off-balance-sheet derivative financial instruments (such as interest rate swaps) as defined in SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." DEPOSITS AND BORROWINGS Bancorp's subsidiaries solicit deposits by offering a wide variety of savings and transaction accounts, including checking accounts, regular savings accounts, money market deposit accounts and time deposits of various maturities and rates. In accordance with Bancorp's decentralized management structure and in an effort to respond to local conditions, each Bancorp subsidiary designs and prices the savings and transaction accounts offered in its local market area. Total deposits increased $94,404,000 or 5.29% in 1996. The two banks that joined Bancorp during 1996 had total deposits of $105,459,000 at December 31, 1996; the other affiliates therefore experienced a slight decrease in deposits during 1996. Looking at Bancorp totals at December 31, 1996 and 1995, time deposits increased $38,717,000, savings deposits increased $22,265,000, interest-bearing demand deposits increased $15,068,000 and noninterest-bearing demand deposits increased $18,354,000. The average rate paid on time deposits was 5.40% for both 1996 and 1995. The average rate paid on interest-bearing demand deposits increased only seven basis points, from 2.23% in 1995 to 2.30% in 1996, and the average rate paid for savings deposits decreased seven basis points, from 2.57% during 1995 to 2.50% during 1996. The weighted average rate for all interest-bearing deposits increased only two basis points, from 4.12% during 1995 to 4.14% during 1996. Table 6 shows the contractual maturity of time deposits of $100,000 and over that were outstanding at December 31, 1996. These deposits represented only 8.02% of total deposits. Short-term borrowings increased from $58,372,000 at December 31, 1995, to $93,779,000 at December 31, 1996. Long-term borrowings increased from $2,820,000 at December 31, 1995, to $6,506,000 at December 31, 1996. The increases in short-term and long-term borrowings were used to fund loan growth.
TABLE 6 - MATURITIES OF TIME DEPOSITS GREATER THAN OR EQUAL TO $100,000* DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) ----------------------------------------------------------- Maturing in 3 months or less $ 75,476 3 months to 6 months 27,818 6 months to 12 months 23,169 over 12 months 24,241 ---------- Total $ 150,704 ========== *All time deposits greater than or equal to $100,000 were in certificates of deposits. =========================================================================
LIQUIDITY Liquidity management is the process by which Bancorp ensures that adequate liquid funds are available for the corporation and its subsidiaries. These funds are necessary in order for Bancorp and its subsidiaries to meet financial commitments on a timely basis. These commitments include withdrawals by depositors, funding credit obligations to borrowers, paying dividends to shareholders, paying operating expenses, funding capital expenditures and maintaining deposit reserve requirements. Liquidity is monitored and closely managed by the asset/liability committees at Bancorp's subsidiaries. Liquidity may be used to fund capital expenditures. Capital expenditures were $4,381,000 for 1996 and $3,615,000 for 1995. Remodeling is a planned and ongoing process given the 87 offices of Bancorp and its subsidiaries. Material commitments for capital expenditures as of December 31, 1996, were $2,170,000. Bancorp subsidiaries' source of funding is predominately deposits within each of their respective market areas. The deposit base is diversified among individuals, partnerships, corporations and public entities. This diversification helps Bancorp avoid dependence on large concentrations of funds. Bancorp does not solicit time deposits from brokers. Liquidity is derived primarily from core deposit growth, principal payments received on loans, the sale and maturation of investment securities, net cash provided by operating activities and access to other funding sources. 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. In addition, Bancorp utilizes advances from the Federal Home Loan Bank as a funding source. The principal source of asset-funded liquidity is investment securities classified as available-for-sale, the market values of which totaled $290,701,000 at December 31, 1996. Securities classified as held-to-maturity that are maturing within a short period of time can also be a source of liquidity. Securities classified as held-to-maturity and that are maturing in one year or less totaled $7,164,000 at December 31, 1996. In addition, other types of assets--such as cash and due from banks, federal funds sold and securities purchased under agreements to resell and loans and interest-bearing deposits with other banks maturing within one year--are sources of liquidity. Certain restrictions exist regarding the ability of Bancorp's subsidiaries to transfer funds to Bancorp (see Note 6 of the Notes to Consolidated Financial Statements). Management is not aware of any other events or regulatory requirements which, if implemented, are likely to have a material effect on Bancorp's liquidity. INTEREST RATE SENSITIVITY Interest rate risk is the exposure to Bancorp's earnings and capital arising from changes in future interest rates. All financial institutions assume interest rate risk as an integral part of normal operations. Managing and measuring interest rate risk is a dynamic, multi-faceted process that ranges from reducing the exposure of Bancorp's net interest margin to swings in interest rates to assuring that there is sufficient capital and liquidity to support future balance sheet growth. Bancorp manages interest rate risk through the asset/liability committees of Bancorp's subsidiaries. The asset/liability committees are comprised of bank officers from various disciplines. Each subsidiary committee establishes policies and rates which lead to the prudent investment of resources, the effective management of risks associated with changing interest rates, the existence of adequate liquidity and the earning of an adequate return on shareholders' equity. Bancorp has a holding company asset/liability committee, made up of representatives of various subsidiaries and disciplines, whose function is to develop policies and guidelines for effective asset/liability management throughout Bancorp's subsidiaries. Table 7 shows Bancorp's interest rate sensitivity position based on the distribution of earning assets and interest-bearing liabilities among the maturity categories. Product lines repricing in time periods predetermined by contractual agreement are included in the respective maturity categories. Some products, such as federal funds and commercial loans which reprice overnight, are recorded in the 1-30 days category. Table 7 indicates that, at December 31, 1996, Bancorp had an asset- sensitive position of $202,964,000 or 9.70% within a one year maturity range. The asset-sensitive position indicates that maturing or repricing interest-sensitive assets exceeded maturing or repricing interest-sensitive liabili- 28 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 9 ties within a one-year period. An asset-sensitive position suggests that a rising rate environment will positively influence net interest income as earning assets will reprice upward more quickly than the underlying interest-bearing liabilities. Likewise, a declining rate environment will negatively influence net interest income as earning assets will reprice downward more quickly than interest-bearing liabilities. The rate sensitivity analysis presented in Table 7 is a static gap model. The balances in this table are distributed among future periods based primarily on contractual interest rate repricing dates or on contractual maturity dates. Distributions of interest-bearing demand deposits and savings deposits, neither of which have contractual maturity dates or set repricing dates, reflect management's current assumptions as to repricing frequency and to changes in deposit balances in reaction to interest rate levels. These assumptions are based on recent historical deposit account rate changes and changes in deposit balances. They are also influenced by the Federal Reserve Bank and other regulators' guidance for the measurement of interest rate risk. Another measurement technique used by Bancorp's subsidiaries to identify and manage exposure to changing interest rates is a simulation model that estimates the effect on net interest income and the market value of portfolio equity caused by changes in interest rates, interest rate spreads, the shape of the yield curve and changing product growth patterns. Liabilities are distributed based on historical deposit rate relationships to changes in market interest rate changes over long-term rate changes. These assumptions are based upon the individual markets and customers and include projections of how management expects to price in response to the marketplace and market rate changes. However, adjustments are necessary as customer preferences, competitive market conditions, liquidity, loan growth rates and mix change.
TABLE - RATE SENSITIVITY ANALYSIS DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) s ------------------------------------------------------------------------------------------------------------------ 1-30 31-90 91-180 181-365 TOTAL 1 YEAR OVER DAYS DAYS DAYS DAYS & UNDER 1 YEAR TOTAL ------------------------------------------------------------------------------------ EARNING ASSETS Loans, net of unearned income $ 351,755 $ 117,033 $ 132,964 $ 285,486 $ 887,238 $ 813,026 $1,700,264 Investment securities held-to-maturity Taxable 2,515 687 4,926 8,128 9,012 17,140 Tax-exempt 4,090 6,208 1,094 5,996 17,388 44,417 61,805 Investment securities available-for-sale Taxable 44,292 11,042 9,052 57,219 121,605 151,705 273,310 Tax-exempt 435 726 1,161 16,230 17,391 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total investment securities 51,332 17,937 10,146 68,867 148,282 221,364 369,646 Interest-bearing deposits with other banks 2,785 1,197 100 299 4,381 698 5,079 Federal funds sold and securities purchased under agreements to resell 12,201 12,201 12,201 ----------- --------- ---------- ---------- ---------- ---------- ---------- TOTAL EARNING ASSETS 418,073 136,167 143,210 354,652 1,052,102 1,035,088 2,087,190 INTEREST-BEARING LIABILITIES Interest-bearing demand deposits 47,579 47,579 269,608 317,187 Savings deposits 57,285 57,285 324,618 381,903 Time deposits 115,348 143,375 164,255 227,517 650,495 291,966 942,461 Short-term borrowings 86,805 1,674 3,300 2,000 93,779 93,779 Long-term borrowings 6,506 6,506 ---------- ---------- ---------- ---------- ---------- ---------- ---------- TOTAL INTEREST-BEARING LIABILITIES 307,017 145,049 167,555 229,517 849,138 892,698 1,741,836 ---------- ---------- ---------- ---------- ---------- ---------- --------- RATE SENSITIVITY GAP $ 111,056 $ (8,882) $ (24,345) $ 125,135 $ 202,964 $ 142,390 $ 345,354 ========== ========== ========== ========== ========== ========== ========== CUMULATIVE GAP $ 111,056 $ 102,174 $ 77,829 $ 202,964 $ 345,354 ========== ========== ========== ========== ========== CUMULATIVE GAP AS A PERCENTAGE OF EARNING ASSETS 5.3% 4.9% 3.7% 9.7% 16.5% ========== ========== ========== ========= ========== ====================================================================================================================================
FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 29 10
STATISTICAL INFORMATION (UNAUDITED) - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------- ---------------------------- --------------------------- BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD ------- -------- ----- ------- -------- ----- ------- -------- ----- (Daily average balances and interest rates; tax equivalent basis; dollars in thousands) EARNING ASSETS Loans (1) Commercial (2) $368,838 $ 36,817 9.98% $ 316,414 $ 32,581 10.30% $ 261,799 $ 23,594 9.01% Real estate (2) 857,947 70,119 8.17% 793,379 63,400 7.99% 725,468 55,053 7.59% Installment and other consumer 362,164 37,094 10.24% 321,978 32,131 9.98% 262,498 25,378 9.67% Lease financing (2) 15,653 1,154 7.37% 15,580 1,217 7.81% 15,504 1,182 7.62% --------- -------- --------- --------- --------- --------- Total loans 1,604,602 145,184 9.05% 1,447,351 129,329 8.94% 1,265,269 105,207 8.31% Investment securities (3) Taxable 294,898 19,330 6.55% 250,492 16,593 6.62% 302,307 18,229 6.03% Tax-exempt (2) 83,251 9,314 11.19% 95,182 11,446 12.03% 121,151 14,887 12.29% --------- -------- --------- --------- --------- --------- Total investment securities (3) 378,149 28,644 7.57% 345,674 28,039 8.11% 423,458 33,116 7.82% Interest-bearing deposits with other banks 7,736 450 5.82% 5,932 351 5.92% 8,574 388 4.53% Federal funds sold and securities purchased under agreements to resell 9,432 507 5.38% 7,319 418 5.71% 7,086 275 3.88% --------- -------- --------- --------- --------- --------- TOTAL EARNING ASSETS 1,999,919 174,785 8.74% 1,806,276 158,137 8.75% 1,704,387 138,986 8.15% NONEARNING ASSETS Allowance for loan losses (21,547) (19,341) (18,554) Cash and due from banks 85,993 75,904 76,988 Accrued interest and other assets 83,159 71,076 71,179 --------- --------- --------- TOTAL ASSETS $2,147,524 $1,933,915 $1,834,000 ========== ========== ========== INTEREST-BEARING LIABILITIES Deposits Interest-bearing demand $298,975 6,866 2.30% $ 260,419 5,799 2.23% $ 266,841 5,757 2.16% Savings 372,169 9,317 2.50% 358,517 9,212 2.57% 397,579 9,772 2.46% Time 920,474 49,724 5.40% 822,289 44,402 5.40% 725,479 31,513 4.34% --------- -------- --------- --------- --------- --------- Total interest-bearing deposits 1,591,618 65,907 4.14% 1,441,225 59,413 4.12% 1,389,899 47,042 3.38% Borrowed funds Short-term borrowings 73,095 3,521 4.82% 74,744 4,051 5.42% 61,109 2,421 3.96% Long-term borrowings 4,301 279 6.49% 783 52 6.64% 1,400 124 8.86% --------- -------- --------- --------- --------- --------- Total borrowed funds 77,396 3,800 4.91% 75,527 4,103 5.43% 62,509 2,545 4.07% --------- -------- --------- --------- --------- --------- TOTAL INTEREST-BEARING LIABILITIES 1,669,014 69,707 4.18% 1,516,752 63,516 4.19% 1,452,408 49,587 3.41% NONINTEREST-BEARING LIABILITIES Noninterest-bearing demand deposits 208,017 184,797 176,128 Other liabilities 23,043 19,970 16,712 SHAREHOLDERS' EQUITY 247,450 212,396 188,752 --------- -------- ---------- --------- ---------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,147,524 $1,933,915 $1,834,000 ========== ========== ========== NET INTEREST INCOME AND INTEREST RATE SPREAD $105,078 4.56% $ 94,621 4.56% $ 89,399 4.74% ======== ======= ========= ======= ========== ====== NET INTEREST MARGIN 5.25% 5.24% 5.25% ======= ======= ====== (1) Nonaccrual loans are included in average loan balance and loan fees are included in interest income. (2) Interest income on tax-exempt investments and on certain tax-exempt loans and leases has been adjusted to a taxable equivalent basis using a marginal federal income tax rate of 35.0%. (3) Includes both investment securities held-to-maturity and investment securities available-for-sale. ===================================================================================================================================
30 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 11
CONSOLIDATED BALANCE SHEETS DECEMBER 31, (DOLLARS IN THOUSANDS) ----------------------------------------------------------------------------------------------------- 1996 1995 ---- ----- ASSETS Cash and due from banks $ 110,767 $ 108,685 Interest-bearing deposits with other banks 5,079 6,882 Federal funds sold and securities purchased under agreements to resell 12,201 14,802 Investment securities held-to-maturity (market value-$83,441 at December 31, 1996; $100,512 at December 31, 1995) 78,945 93,522 Investment securities available-for-sale, at market 290,701 294,052 Loans Commercial 398,034 340,942 Real estate-construction 43,262 41,845 Real estate-mortgage 863,414 788,805 Installment 366,051 329,034 Credit card 16,107 15,406 Lease financing 14,821 16,557 ----------- ----------- Total loans 1,701,689 1,532,589 Less Unearned income 1,425 573 Allowance for loan losses 22,672 20,437 ----------- ----------- Net loans 1,677,592 1,511,579 Premises and equipment 42,633 39,931 Deferred income taxes 2,802 3,369 Accrued interest and other assets 40,991 30,553 ----------- ----------- TOTAL ASSETS $ 2,261,711 $ 2,103,375 =========== =========== LIABILITIES Deposits Noninterest-bearing $ 238,415 $ 220,061 Interest-bearing 1,641,551 1,565,501 ----------- ----------- Total deposits 1,879,966 1,785,562 Short-term borrowings Federal funds purchased and securities sold under agreements to repurchase 35,304 47,483 Federal Home Loan Bank borrowings 56,500 10,000 Other 1,975 889 ----------- ----------- Total short-term borrowings 93,779 58,372 Long-term borrowings 6,506 2,820 Accrued interest and other liabilities 22,978 22,446 ----------- ----------- TOTAL LIABILITIES 2,003,229 1,869,200 SHAREHOLDERS' EQUITY Common stock -- par value $8 per share Authorized -- 25,000,000 shares Issued -- 14,727,772 shares in 1996 and 13,013,422 shares in 1995 117,822 104,107 Surplus 47,125 13,577 Retained earnings 93,369 115,102 Unrealized net gains on securities available-for-sale, net of tax 1,162 1,437 Restricted stock awards (220) (48) Treasury stock, at cost, 25,907 shares (776) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 258,482 234,175 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,261,711 $ 2,103,375 =========== =========== See Notes to Consolidated Financial Statements =============================================================================================================
FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 31 12
CONSOLIDATED STATEMENTS OF EARNINGS YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ---------------------------------------------------------------------------------------------------------- 1996 1995 1994 ----------- ----------- ------------ INTEREST INCOME Loans, including fees $ 144,941 $ 129,058 $ 104,936 Investment securities Taxable 19,330 16,593 18,229 Tax-exempt 6,047 7,431 9,676 ----------- ----------- ----------- Total investment securities interest 25,377 24,024 27,905 Interest-bearing deposits with other banks 450 351 388 Federal funds sold and securities purchased under agreements to resell 507 418 275 ----------- ----------- ----------- TOTAL INTEREST INCOME 171,275 153,851 133,504 INTEREST EXPENSE Deposits 65,907 59,413 47,042 Short-term borrowings 3,521 4,051 2,421 Long-term borrowings 279 52 124 ----------- ----------- ----------- TOTAL INTEREST EXPENSE 69,707 63,516 49,587 ----------- ----------- ----------- NET INTEREST INCOME 101,568 90,335 83,917 Provision for loan losses 3,433 2,108 1,268 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 98,135 88,227 82,649 NONINTEREST INCOME Service charges on deposit accounts 9,182 8,596 8,222 Trust revenues 8,278 7,623 7,017 Investment securities (losses) gains (8) 340 (1,754) Other 4,645 3,999 3,977 ----------- ----------- ----------- TOTAL NONINTEREST INCOME 22,097 20,558 17,462 NONINTEREST EXPENSE Salaries and employee benefits 37,586 33,262 31,296 Net occupancy 4,790 4,340 4,211 Furniture and equipment 3,911 3,352 3,006 Data processing 4,773 5,165 5,205 Deposit insurance 2,889 2,204 3,537 State taxes 1,706 1,637 1,726 Other 15,606 13,385 13,158 ----------- ----------- ----------- TOTAL NONINTEREST EXPENSES 71,261 63,345 62,139 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 48,971 45,440 37,972 Income tax expense 15,031 13,651 9,799 ----------- ----------- ----------- NET EARNINGS $ 33,940 $ 31,789 $ 28,173 =========== =========== =========== NET EARNINGS PER SHARE $ 2.32 $ 2.31 $ 2.10 =========== =========== =========== AVERAGE SHARES OUTSTANDING 14,611,371 13,736,984 13,431,828 =========== =========== =========== See Notes to Consolidated Financial Statements. ==================================================================================================================================== 32 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT
13
CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) ----------------------------------------------------------------------------------------------- 1996 1995 1994 --------- ---------- ---------- OPERATING ACTIVITIES Net earnings $ 33,940 $ 31,789 $ 28,173 Adjustments to reconcile net earnings to net cash provided by operating activities Provision for loan losses 3,433 2,108 1,268 Provision for depreciation and amortization 4,027 3,981 3,722 Net amortization of premiums and accretion of discounts on investment securities 715 1,114 2,025 Deferred income taxes 680 171 1,412 Realized losses (gains) on investment securities 8 (340) 1,754 Originations of mortgage loans held for sale (43,943) (33,009) (30,046) Gains from sales of mortgage loans held for sale (667) (501) (348) Proceeds from sales of mortgage loans held for sale 44,610 33,510 30,394 Increase in cash surrender value of life insurance (8,159) (37) (847) Decrease (increase) in interest receivable 815 220 (3,969) (Increase) decrease in prepaid expenses (199) 143 (48) (Decrease) increase in accrued expenses (338) 1,041 114 (Decrease) increase in interest payable (384) 1,638 470 Other 1,113 (58) 687 --------- --------- --------- Net cash provided by operating activities 35,651 41,770 34,761 INVESTING ACTIVITIES Proceeds from sales of investment securities available-for-sale 4,984 39,514 82,735 Proceeds from calls, paydowns, and maturities of investment securities available-for-sale 150,957 58,798 90,212 Purchases of investment securities available-for-sale (133,449) (112,372) (142,217) Proceeds from calls, paydowns, and maturities of investment securities held-to-maturity 17,594 56,118 32,795 Purchases of investment securities held-to-maturity (3,053) (525) (8,903) Net decrease in interest-bearing deposits with other banks 1,803 2,470 9,366 Net decrease (increase) in federal funds sold and securities purchased under agreements to resell 23,426 (6,042) 24,240 Net increase in loans and leases (96,361) (56,235) (191,398) Proceeds from disposal of other real estate owned 1,765 1,028 1,729 Recoveries from loans and leases previously charged off 1,173 1,202 1,113 Purchase of financial institution, net of cash acquired (6,427) Cash acquired in merger with other financial institution 1,845 5,999 Purchases of premises and equipment (4,381) (3,615) (4,364) --------- --------- --------- Net cash used in investing activities (40,124) (13,660) (104,692) FINANCING ACTIVITIES Net (decrease) increase in total deposits (15,416) 54,765 6,778 Net increase (decrease) in short-term borrowings 35,389 (63,747) 93,984 Proceeds from long-term borrowings 5,000 49 Principal payments of long-term borrowings (1,314) (850) (3,983) Cash dividends (16,341) (13,521) (11,809) Purchase of common stock (994) (388) Proceeds from exercise of stock options 231 127 151 --------- --------- --------- Net cash provided by (used in) financing activities 6,555 (23,177) 84,733 --------- --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 2,082 4,933 14,802 Cash and cash equivalents at beginning of year 108,685 103,752 88,950 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 110,767 $ 108,685 $ 103,752 ========= ========= ========= SUPPLEMENTAL DISCLOSURES Interest paid $ 70,091 $ 61,878 $ 49,117 ========= ========= ========= Income taxes paid $ 14,919 $ 12,140 $ 7,878 ========= ========= ========= Recognition of deferred tax assets (liabilities) attributable to SFAS No. 115 $ 139 $ (2,364) $ 1,514 ========= ========= ========= Acquisition of other real estate owned through foreclosure $ 375 $ 635 ========= ========= Issuance of restricted stock awards $ 226 $ 33 ========= ========= Transfer of investment securities to available-for-sale upon adoption of SFAS No. 115 $ 272,856 ========= See Notes to Consolidated Financial Statements. ======================================================================================================================
FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 33 14
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) - ----------------------------------------------------------------------------------------------------------------------------------- COMMON COMMON UNREALIZED RESTRICTED TREASURY TREASURY STOCK STOCK RETAINED GAINS AND STOCK STOCK STOCK SHARES AMOUNT SURPLUS EARNINGS (LOSSES) AWARDS SHARES AMOUNT TOTAL ------ ------ -------- -------- ---------- ---------- -------- -------- --------- Balances at December 31, 1993, as previously reported 9,765,603 $ 78,125 $ 15,252 $ 87,908 $ (33) $181,252 Adjustment to beginning balance for change in accounting method, net of income taxes of $1,960 $ 3,638 3,638 Change in unrealized gains and (losses), net of income tax benefit of $3,474 (6,350) (6,350) Net earnings 28,173 28,173 Cash dividends declared (Bancorp - $0.89 per share; First Clyde Banc Corp - $0.50 per share) (11,809) (11,809) Purchase of common stock (10,000) (80) (308) (388) Exercise of stock options, net of shares purchased 8,416 68 83 151 25.0% stock split 2,440,556 19,524 (19,524) Amortization of restricted stock awards 6 6 ---------- ---------- --------- --------- ---------- -------- ------- Balances at December 31, 1994 12,204,575 97,637 15,027 84,748 (2,712) (27) 194,673 Net earnings 31,789 31,789 Cash dividends declared (Bancorp - $0.98 per share) (13,521) (13,521) Shares issued in Peoples Bank & Trust Company merger 354,645 2,837 (867) 6,351 8,321 Shares issued in Bright Financial Services, Inc. merger 442,876 3,543 (653) 5,735 8,625 Change in unrealized gains and (losses), net of income taxes of $2,364 4,149 4,149 Exercise of stock options, net of shares purchased 10,326 82 45 127 Restricted stock awards 1,000 8 25 (33) Amortization of restricted stock awards 12 12 ---------- ---------- --------- --------- ---------- -------- ------- Balances at December 31, 1995 13,013,422 104,107 13,577 115,102 1,437 (48) 234,175 Net earnings 33,940 33,940 Cash dividends declared (Bancorp - $1.11 per share) (16,341) (16,341) Shares issued in F&M Bancorp merger 363,373 2,907 (1,238) 6,023 7,692 Change in unrealized gains and (losses), net of income tax benefit of $139 (275) (275) Purchase of common stock (30,174) $ (994) (994) Exercise of stock options, net of shares purchased 5,589 45 (32) 6,934 218 231 Restricted stock awards 6,500 52 174 (226) 10% stock dividend 1,338,888 10,711 34,644 (45,355) (2,667) Amortization of restricted stock awards 54 54 ---------- ---------- --------- --------- ---------- -------- --------- --------- -------- Balances at December 31, 1996 14,727,772 $ 117,822 $ 47,125 $ 93,369 $ 1,162 $ (220) (25,907) $ (776) $258,482 ========== ========== ========= ========= ========== ========= ======== ========= ======== ==================================================================================================================================
34 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation - The consolidated financial statements of First Financial Bancorp. (Bancorp), a bank and savings and loan holding company, principally serving western Ohio and eastern and west-central Indiana, include the accounts and operations of Bancorp and its 14 wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates. Interest on loans, securities and other earning assets is recognized primarily on the accrual basis. Intangible assets arising from the acquisition of subsidiaries are being amortized over varying periods, none of which exceeds 15 years. Core deposit intangibles are being amortized over varying periods, none of which exceeds 10 years. Investment securities - Bancorp adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" on January 1, 1994. SFAS No. 115 classifies debt and equity securities in three categories: trading, held-to-maturity and available-for-sale. Bancorp does not hold any investment securities for trading purposes. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when Bancorp has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at aggregate fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in interest income from investments. Realized gains and losses, and declines in value judged to be other than temporary, are included in investment securities (losses) gains. The cost of securities sold is based on the specific identification method. Loans - Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount amortized as an adjustment to the related loan's yield. The accrual of interest income is discontinued when the collection of a loan or interest, in whole or in part, is doubtful. This applies generally to all loans, including loans impaired under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." When interest accruals are suspended, interest income accrued in the current period is reversed and interest accrued in the prior year is charged to the allowance for loan losses. Bancorp's subsidiaries sell certain mortgage loans immediately after origination on a flow basis. Due to Bancorp's policy of selling loans on a flow basis, loans held for sale are not material and therefore not disclosed separately on the Consolidated Balance Sheets. Loans held for sale are carried at the lower of cost or market value. SFAS No. 122, "Accounting for Mortgage Servicing Rights" requires companies engaging in mortgage banking operations, that is, the selling of mortgage loans, to recognize as separate assets the estimated value of rights to service mortgage loans for others. A company that acquires mortgage servicing rights either through origination or purchase of mortgage loans and sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to mortgage servicing rights and to loans without mortgage servicing rights based on their relative fair values. This allocation increases the gain or decreases the loss from the sale of the mortgage loans and decreases income in the future as the mortgage servicing rights are amortized against servicing income. The adoption of this statement by Bancorp in 1996 did not have a material impact on its consolidated financial position or earnings. Allowance for loan losses - The level of the allowance for loan losses (allowance) is based upon management's evaluation of the loan and lease portfolios, 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, economic conditions and other pertinent 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. The level maintained is believed by management to be adequate to cover future potential losses. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged off. Lease financing - Bancorp principally uses the finance method of accounting for direct lease contracts. Under this method of accounting, a receivable is recorded for the total amount of lease payments due and estimated residual values. Lease income, represented by the excess of the total contract receivable plus estimated equipment residual value over the cost of the related equipment, is recorded over the terms of the leases at a level rate of return on the unrecovered net investment. Premises and equipment - Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed principally on the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred. Other real estate owned/in-substance foreclosures - Other real estate owned primarily represents properties acquired by Bancorp's subsidiaries through loan defaults by customers. In accordance with SFAS No. 114, a loan is classified as in-substance foreclosure when Bancorp's subsidiaries have taken possession of a collateral regardless of whether formal foreclosure proceedings take place. Loans previously classified as in-substance foreclosure but for which Bancorp's subsidiaries had not taken possession of the collateral have not been reclassified to loans due to immateriality. The property is recorded at the lower of cost or fair value minus estimated costs to sell at the date acquired or when an in-substance foreclosure exists. Subsequently, the property is valued at the lower of the amount recorded when the property was placed into other real estate owned/in-substance foreclosures or fair value minus estimated costs to sell based on periodic valuations performed by management. An allowance for losses on other real estate owned may be maintained for subsequent valuation adjustments on a specific property basis. Any gains or losses realized at the time of disposal are reflected in income. Income taxes - Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Bancorp and its subsidiaries file a consolidated federal income tax return. Each subsidiary provides for income taxes on a separate return basis, and remits to Bancorp amounts determined to be currently payable. Earnings per share - Earnings per share are based upon the weighted average number of common shares outstanding each year and include the effects of all mergers, stock dividends and stock splits, distributed in the form of stock dividends, declared through 1996. The assumed exercise of stock options would not have a materially dilutive effect. Cash flow information - For purposes of the statement of cash flows, Bancorp considers cash and due from banks as cash and cash equivalents. FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 35 16 Transfers and servicing of financial assets and extinguishment of liabilities - SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" was released in June, 1996, and is effective for transactions occurring after December 31, 1996. Early adoption of SFAS No. 125 is not permitted. Under the provisions of SFAS No. 125, each party to a transaction recognizes only assets it controls and liabilities it has incurred, derecognizes assets only when control has been surrendered and derecognizes liabilities only when they have been extinguished. Transactions are to be separated into components and separate assets and liabilities may need to be recorded for the different components. Bancorp anticipates this statement will not have a material effect on its consolidated financial position or earnings. Reclassifications - Certain reclassifications of prior years' amounts have been made to conform to current year presentation. Such reclassifications had no effect on net earnings. NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS Bancorp's subsidiaries are required to maintain average reserve balances either in the form of vault cash or reserves held on deposit with the Federal Reserve Bank, Federal Home Loan Bank or in pass-through reserve accounts with correspondent banks. The average amounts of these required reserve balances for 1996 and 1995 were approximately $24,178,000 and $21,081,000, respectively. NOTE 3 - BUSINESS COMBINATIONS Bancorp consummated the following business combinations in 1996, 1995 and 1994:
(DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------------------------------------------- ACQUISITION SHARES PURCHASE DATE ASSETS DEPOSITS ISSUED PRICE ----------- ----------- ----------- -------- ----------- Purchase transactions FARMERS STATE BANCORP DECEMBER 1, 1996 $ 64,860 $ 56,283 $ 7,575 Pooling-of-interests F&M BANCORP APRIL 1, 1996 61,721 53,638 363,373 Bright Financial Services, Inc. October 1, 1995 112,813 98,251 442,876 Peoples Bank and Trust Company July 16, 1995 54,005 45,220 354,645 The Clyde Savings Bank Company June 1, 1994 68,280 60,664 287,699 Highland Federal Savings Bank February 1, 1994 52,173 43,599 198,386 =====================================================================================================================
On December 1, 1996, Bancorp purchased Farmers State Bancorp, Liberty, Indiana in a cash transaction. Upon consummation of the merger, Farmers State Bancorp was dissolved and its subsidiary, the $65 million Farmers State Bank, became a wholly owned subsidiary of Bancorp. This merger was accounted for under the purchase method of accounting, and accordingly, the consolidated financial statements include Farmers State Bank's results of operations from the date of merger. On April 1, 1996, Bancorp issued 363,373 shares of its common stock in exchange for all the outstanding common stock of F&M Bancorp, Rochester, Indiana. Upon consummation of the merger, F&M Bancorp was merged out of existence and its only subsidiary, the $62 million Farmers & Merchants Bank of Rochester, was merged with and into Indiana Lawrence Bank, a wholly owned subsidiary of Bancorp. Farmers & Merchants Bank of Rochester's offices became branches of Indiana Lawrence Bank, the surviving entity. This merger was accounted for as an immaterial pooling-of-interests and, accordingly, the consolidated financial statements, including earnings per share, have not been restated for periods prior to April 1, 1996. On July 2, 1996, Bancorp signed a Plan and Agreement of Merger with Hastings Financial Corporation, Hastings, Michigan. Hastings Financial Corporation is a one-bank holding company with the $50 million National Bank of Hastings as its only subsidiary. Upon consummation of the merger, Hastings Financial Corporation was dissolved and National Bank of Hastings became a wholly owned subsidiary of Bancorp. The transaction was structured as an exchange of stock and was accounted for using the pooling-of-interests method of accounting. This merger was consummated effective January 1, 1997. NOTE 4 - LEASE FINANCING Leases included in the loan portfolio at December 31 were composed as follows:
(DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- 1996 1995 ---- ---- Direct financing $ 12,725 $ 14,754 Leveraged 1,302 1,302 Non-recourse debt, principal and interest (936) (936) -------- -------- Net rentals receivable 13,091 15,120 Estimated residual value of leased assets 4,202 4,184 Less unearned income 2,472 2,747 -------- -------- INVESTMENT IN LEASES, NET $ 14,821 $ 16,557 ======== ========
Direct financing lease payments receivable as of December 31, 1996, for the next five years and thereafter are as follows: (DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- 1997 $ 5,261 1998 3,683 1999 2,312 2000 1,197 2001 253 Thereafter 19 ================================================================================
36 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 17 NOTE 5 - PREMISES & EQUIPMENT
Premises and equipment at December 31 were summarized as follows: (DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- 1996 1995 ---- ---- Land and land improvements $ 8,426 $ 8,143 Buildings 43,148 38,891 Furniture and fixtures 31,619 28,423 Leasehold improvements 792 387 Construction in progress 530 2,269 ----------- ----------- 84,515 78,113 Less accumulated depreciation and amortization 41,882 38,182 ----------- ----------- TOTAL $ 42,633 $ 39,931 =========== ===========
NOTE 6 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES Dividends paid by Bancorp are mainly provided by dividends from its subsidiaries. However, certain restrictions exist regarding the ability of these subsidiaries to transfer funds to Bancorp in the form of cash dividends, loans or advances. The approval of the subsidiaries' respective primary federal regulators is required for Bancorp's subsidiaries to pay dividends in excess of regulatory limitations. As of December 31, 1996, Bancorp's subsidiaries had retained earnings of $114,209,000 of which $52,201,000 was available for distribution to Bancorp as dividends without prior regulatory approval. NOTE 7 - 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. 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 SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." Bancorp's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit and commitments outstanding to extend credit is represented by the contractual amounts of those instruments. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Following is a discussion of these transactions: Standby letters of credit - These transactions 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. Bancorp has issued standby letters of credit aggregating $9,706,000 and $10,989,000 at December 31, 1996 and 1995, respectively. 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 - Commitments to extend credit 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 $270,232,000 and $243,430,000 at December 31, 1996 and 1995, respectively. Management does not anticipate any material losses as a result of these commitments. FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 37 18 NOTE 8 - INVESTMENT SECURITIES
The following is a summary of investment securities as of December 31, 1996: (DOLLARS IN THOUSANDS) - ----------------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY AVAILABLE-FOR-SALE AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE --------- ------- -------- ------ ---------- ------- ------- -------- U.S. Treasury securities $ 43,361 $ 192 $ (16) $ 43,537 Securities of U.S. government agencies and corporations 77,767 579 (18) 78,328 Mortgage-backed securities $14,506 $ 396 $(125) $14,777 132,683 995 (520) 133,158 State, county, and municipal securities 62,474 4,240 (19) 66,695 19,780 500 (19) 20,261 Other securities 1,965 7 (3) 1,969 15,238 185 (6) 15,417 ------- ------ ----- ------- -------- ------ ----- -------- TOTAL $78,945 $4,643 $(147) $83,441 $288,829 $2,451 $(579) $290,701 ===================================================================================================================================
The following is a summary of investment securities as of December 31, 1995: (DOLLARS IN THOUSANDS) - ----------------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY AVAILABLE-FOR-SALE AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE --------- ------ -------- -------- -------- ------ ------- -------- U.S. Treasury securities $ 68,010 $ 388 $ (16) $ 68,382 Securities of U.S. government agencies and corporations 103,610 1,372 (78) 104,904 Mortgage-backed securities $18,060 $ 699 $(104) $ 18,655 93,831 489 (251) 94,069 State, county, and municipal securities 72,778 6,380 (37) 79,121 11,195 344 (8) 11,531 Other securities 2,684 53 (1) 2,736 15,120 137 (91) 15,166 ------- ------ ----- -------- -------- ------ ----- -------- TOTAL $93,522 $7,132 $(142) $100,512 $291,766 $2,730 $(444) $294,052 ======= ====== ===== ======== ======== ====== ===== ======== ===================================================================================================================================
The carrying value of investment securities as of December 31, 1994, by category was as follows: U.S. Treasury $100,344,000, U.S. government agencies and corporations $62,599,000, mortgage-backed $86,203,000, state, county, and municipal $116,750,000 and other $11,701,000. During the year ended December 31, 1996, available-for-sale securities with a fair value at the date of sale of $5,000,000 were sold. The gross realized losses on such sales totaled $16,000. During the year ended December 31, 1995, available-for-sale securities with a fair value at the date of sale of $39,220,000 were sold. The gross realized gains on such sales totaled $297,000 and the gross realized losses totaled $3,000. During the year ended December 31, 1994, available-for-sale securities with a fair value at the date of sale of $82,735,000 were sold. The gross realized gains on such sales totaled $3,000 and the gross realized losses totaled $1,553,000. There were net investment gains after taxes of $69,000 and $323,000 for the years ended December 31, 1996 and 1995, respectively and a net investment loss after taxes of $120,000 for the year ended December 31, 1994. The applicable income tax effects were a benefit of $77,000 in 1996, an expense of $17,000 in 1995, and a benefit of $1,634,000 in 1994. The carrying value of investment securities pledged to secure public deposits and for other purposes as required by law amounted to $179,534,000 at December 31, 1996. The amortized cost and market value of investment securities, including mortgage-backed securities at December 31, 1996, by contractual maturity, are shown in the table below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
(DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------------------- HELD-TO-MATURITY AVAILABLE-FOR-SALE AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE --------- ------- --------- --------- Due in one year or less $ 7,164 $ 7,186 $ 60,028 $ 60,465 Due after one year through five years 35,129 37,429 78,310 78,781 Due after five years through ten years 17,506 18,506 23,814 24,068 Due after ten years 19,146 20,320 126,677 127,387 ------- ------- -------- -------- TOTAL $78,945 $83,441 $288,829 $290,701 ======= ======= ======== ========
38 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 19 NOTE 9 - LOANS Information as to nonaccrual and restructured loans at December 31 was as follows:
(DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- 1996 1995 1994 ----- ----- ---- Principal balance Nonaccrual loans $4,850 $2,764 $2,412 Restructured loans 890 517 1,429 ------ ------ ------ TOTAL $5,740 $3,281 $3,841 ====== ====== ====== Interest income effect Gross amount of interest that would have been recorded at original rate $ 717 $ 276 $ 203 Interest included in income 371 135 80 ------ ------ ------ NET IMPACT ON INTEREST INCOME $ 346 $ 141 $ 123 ====== ====== ======
================================================================================ At December 31, 1996, there were no commitments outstanding to lend additional funds to borrowers with nonaccrual or restructured loans. The balances of other real estate acquired through loan foreclosures, in-substance foreclosures, repossessions or other workout situations, net of the related allowance, totaled $264,000, $1,677,000 and $2,116,000 at December 31, 1996, 1995 and 1994, respectively. Changes in the allowance for loan losses for the three years ended December 31 were as follows:
(DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Balance at beginning of year $20,437 $18,609 $18,380 Allowance acquired through merge 1,592 1,162 Provision for loan losses 3,433 2,108 1,268 Loans charged off (3,963) (2,644) (2,152) Recoveries 1,173 1,202 1,113 ------ ------ ------ BALANCE AT END OF YEAR $22,672 $20,437 $18,609 ======= ======= =======
================================================================================ The 1996 and 1995 allowances for loan losses related to loans that are identified for evaluation in accordance with SFAS No. 114 are based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Prior to 1995, the allowance for loan losses related to these loans was based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. At December 31, 1996 and 1995, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $1,935,000 and $889,000, respectively, all of which were on a nonaccrual basis. The related allowance for loan losses on these impaired loans was $694,000 at December 31, 1996, and $514,000 at December 31, 1995. There were no impaired loans that as a result of write-downs did not have an allowance for loan losses. The average recorded investment in impaired loans during the year ended December 31, 1996, was approximately $1,962,000 versus $1,325,000 for the year ended December 31, 1995. For the years ended December 31, 1996 and 1995, Bancorp recognized interest income on those impaired loans of $54,000 and $57,000, respectively. Bancorp recognizes income on impaired loans using the cash basis method. Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of these loans totaled $191,066,000, $221,519,000 and $186,114,000 at December 31, 1996, 1995 and 1994, respectively. Custodial escrow balances maintained in connection with these mortgage loans serviced were approximately $1,417,000, $1,485,000 and $1,297,000 at December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, Bancorp had pledged $583,376,000 of 1-4 family mortgage loans to secure Federal Home Loan Bank borrowings. NOTE 10 - INCOME TAXES Income tax expense consisted of the following components:
(DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- 1996 1995 1994 ------ ------ ---- Current Federal $13,098 $12,486 $7,607 State 1,228 994 780 ------- ------- ------ TOTAL 14,326 13,480 8,387 Deferred expense 705 171 1,412 ------- ------- ------ INCOME TAX EXPENSE $15,031 $13,651 $9,799 ======= ======= ======
================================================================================ FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 39 20 The difference between the federal income tax rates, applied to income before income taxes, and the effective rates were due to the following as shown in the table below:
(DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Income taxes computed at federal statutory rate of 35% 17,139 $15,904 $13,290 State income taxes, net of federal tax benefit 798 646 507 Effect of tax-exempt interest (2,224) (2,687) (3,326) Other (682) (212) (672) ------- ------- ------ INCOME TAX EXPENSE $15,031 $13,651 $9,799 ======= ======= ====== ================================================================================
On August 21, 1996, The Small Business Job Protection Act, which repeals the favorable bad debt deduction method available to savings banks, was signed into law. Bancorp's savings banks are required to change their bad debt method to the specific charge-off method effective for the year ending December 31, 1996. As of December 31, 1996, Bancorp's two savings bank subsidiaries had a bad debt reserve for federal tax purposes of approximately $5,600,000, all of which represents the base year amount. A deferred tax liability has not been recognized for the base year amount. If the savings bank subsidiaries use the base year reserve for any reason other than to absorb loan losses, a tax liability could be incurred. It is not anticipated that the reserve will be used for any other purpose. SFAS No. 109, "Accounting for Income Taxes" requires that deferred tax assets and liabilities be carried at the enacted tax rate. The enacted tax rate was 35% for years ended December 31, 1996, 1995 and 1994. The major components of the temporary differences that give rise to deferred tax assets and liabilities at December 31, 1996 and 1995, were as follows: (DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------- 1996 1995 ---------- --------- Deferred tax assets Allowance for loan losses $ 7,399 $ 6,091 Other real estate owned 118 182 Postretirement benefits other than pensions liability 971 939 Other 413 196 ---------- ---------- Total deferred tax assets 8,901 7,408 Deferred tax liabilities Tax greater than book depreciation 1,129 536 Leasing activities 1,875 1,620 Federal Home Loan Bank stock basis difference 568 442 Prepaid pension asset 626 91 Deferred loan fees 284 237 Purchase accounting adjustment 320 Other 586 263 ---------- ---------- Total deferred tax liabilities 5,388 3,189 ---------- ---------- Net deferred tax asset recognized through the statement of earnings 3,513 4,219 Net deferred tax liability from valuation adjustments of investment securities available-for-sale, recognized in equity section of balance sheet (711) (850) ---------- ---------- TOTAL NET DEFERRED TAX ASSET $ 2,802 $ 3,369 ========== ===========
================================================================================ SFAS No. 109 requires that a valuation allowance be established if management has evidence that part or all of the deferred tax assets may not be realized. Management has determined that it is more likely than not that all of the deferred tax assets will be realized. Therefore, no valuation allowance is required at this time. Management examines the deferred tax assets quarterly and reassesses the need for a valuation allowance for future accounting periods. 40 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 21 NOTE 11 - RISK BASED CAPITAL 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 risk-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 1 ratio at December 31, 1996, was 15.9%, its Total risk-based capital ratio was 17.2% and its Leverage ratio was 11.8%. 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.
(DOLLARS IN THOUSANDS) DECEMBER 31,------------------------------------------------------------------- 1996 1995 ---- ---- Tier I capital Shareholders' equity $258,482 $234,175 Less intangibles 4,154 3,770 Less unrealized net securities gains, net of tax 1,162 1,437 ---------- ---------- TOTAL TIER I CAPITAL $253,166 $228,968 ========== ========== Total risk-based capital Tier I capital $253,166 $228,968 Qualifying allowance for loan losses 19,856 19,127 ---------- ---------- TOTAL RISK-BASED CAPITAL $273,022 $248,095 ========== ========== RISK WEIGHTED ASSETS $1,588,464 $1,530,181 ========== ========== RISK-BASED RATIOS TIER I CAPITAL 15.9% 15.0% ========== ========== TOTAL RISK-BASED CAPITAL 17.2% 16.2% ========== ========== LEVERAGE 11.8% 11.9% ========== ========== ================================================================================
NOTE 12 - EMPLOYEE BENEFIT PLANS Bancorp sponsors a non-contributory defined benefit pension plan covering substantially all employees. Benefits are based on age, years of service and the employee's compensation during a five year period of employment. The funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. The following tables set forth the plan's funded status and amounts recognized in Bancorp's Consolidated Balance Sheets:
Actuarial present value of accumulated plan benefits: (DOLLARS IN THOUSANDS) JANUARY 1, --------------------------------------------------------------------- Actuarial present value of accumulated plan benefits: 1996 1995 ---- ---- Vested $16,498 $15,364 Nonvested 1,324 1,355 ------- ------- TOTAL $17,822 $16,719 ======= ======= ===========================================================================================================================
(DOLLARS IN THOUSANDS) DECEMBER 31,---------------------------------------------------------------------------------------------------------------- 1996 1995 ---- ---- Reconciliation of funded status: Projected benefit obligation for service rendered to date $(21,639) $(21,883) Plan assets at fair value, primarily listed stocks, bonds and U.S. bonds 21,963 22,101 -------- -------- Plan assets in excess of projected benefit obligation 324 218 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (159) (175) Prior service cost not yet recognized in net periodic pension cost 1,839 2,083 Unrecognized net asset at January 1, 1986, net of amortization (1,810) (2,103) -------- -------- NET PENSION ASSET RECOGNIZED IN THE BALANCE SHEETS $ 194 $ 23 ======== ======== ===================================================================================================================================
FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 41 22
YEAR END DECEMBER 31, (DOLLARS IN THOUSANDS) ---------------------------------------------------------- 1996 1995 1994 ------ ----- ------ The net periodic pension expense included the following components: Service cost benefits earned during the period $ 1,324 $ 1,129 $ 1,051 Interest cost on projected benefit obligation 1,628 1,505 1,478 Actual return on plan assets (2,212) (4,300) 163 Net amortization and deferral 425 2,744 (2,013) ----------- ----------- ----------- NET PERIODIC PENSION EXPENSE $ 1,165 $ 1,078 $ 679 =========== =========== =========== =============================================================================================================
DECEMBER 31,-------------------------------------------------------------------------------------------------
1996 1995 ------ ------ Assumptions used in the actuarial present value determinations of the projected benefit obligation were: Weighted-average discount rate used in determining projected benefit obligations 7.50% 7.50% Rate of increase in future compensation 3.50% 3.50% Long-term rate of return on plan assets 8.00% 8.00% =============================================================================================================
Bancorp also sponsors a defined contribution 401(k) thrift plan which covers substantially all employees. Employees may contribute up to 12.0% of their base salaries into the plan. Under the plan, Bancorp matches $.50 for each $1.00 an employee contributed, up to a maximum Bancorp contribution of 3.00% of the employee's base salary. All Bancorp matching contributions vest immediately. The plan allows for amendment or termination upon a resolution adopted by the Board of Directors. Total Bancorp contributions to the 401(k) plan were $537,000 during 1996, $489,000 during 1995 and $435,000 during 1994. NOTE 13 - POST RETIREMENT BENEFITS OTHER THAN PENSIONS Some Bancorp subsidiaries maintain health care and, in limited instances, life insurance plans for employees who retired prior to 1994. Under the current policy, the health care plans are unfunded and pay medically necessary expenses incurred by retirees, after subtracting payments by Medicare or other providers and after stated deductibles have been met. Bancorp has reserved the right to change or eliminate these benefit plans. The following table sets forth the funded status and amounts recognized in Bancorp's Consolidated Balance Sheets: - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS)
1996 1995 ------- ------ Actuarial present value of accumulated benefits other than pension $1,715 $2,297 Plan assets ------- ------ Accumulated obligation in excess of plan assets 1,715 2,297 Unrecognized prior service cost 380 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions 618 404 -------- -------- NET POSTRETIREMENT LIABILITY RECOGNIZED IN THE BALANCE SHEETS $2,713 $2,701 ======== ======== Net periodic postretirement benefit cost includes the following components: Interest cost on accumulated postretirement benefit obligation $166 $179 Net amortization and deferral (14) -------- -------- NET PERIODIC COST $152 $179 ======== ======== ====================================================================================================================
The discount rate used to determine the accumulated postretirement benefit obligation was 7.50% at December 31, 1996 and 1995. For 1996, the assumed health care cost trend rates used in determining the accumulated postretirement benefit obligation were 10.5% for the first seven years, 8.50% for the next five years and 6.50% thereafter. For 1995, the assumed trend was 10.5% for the first eight years, 8.50% for the next five years and 6.50% thereafter. If the health care cost trend rate assumptions were increased by 1.00%, the accumulated postretirement benefit obligation as of December 31, 1996, would be increased by approximately $158,000. 42 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 23 NOTE 14 - STOCK OPTIONS On April 28, 1992, the shareholders of Bancorp approved the 1991 Stock Incentive Plan. This plan provides incentive stock options and stock awards to certain key employees and non-qualified stock options to directors of Bancorp who are not employees for up to 665,500 common shares of Bancorp. The options are not exercisable for at least one year from the date of grant and are thereafter exercisable for such periods (which may not exceed 10 years), as the Board of Directors, or a committee thereof, may specify, provided that the optionee has remained in the employment of Bancorp or its subsidiaries. The Board or the committee may accelerate the exercise period for an option upon the optionee's disability, retirement, or death. All options expire at the end of the exercise period. Cancelled and expired options become available for issuance and are reflected in the available for future grant figure. Bancorp has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation" requires use of option valuation models that were not developed for use in valuing stock options. Under APB 25, because the exercise price of Bancorp's employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if Bancorp had accounted for its stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.65% and 7.13%; dividend yields of 3.57% and 3.73%; volatility factors of the expected market price of Bancorp's common stock of 0.206 and 0.222; and a weighted average expected life of the options of 5.45 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Bancorp's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Bancorp's pro forma information follows:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 Pro forma net earnings $33,686 $31,715 Pro forma earnings per share $2.31 $2.31 ====================================================================================================================================
Activity in the above plan for 1996, 1995 and 1994 is summarized as follows: - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 NUMBER OF OPTION NUMBER OF OPTION NUMBER OF OPTION SHARES PRICE SHARES PRICE SHARES PRICE --------------------------------------------------------------------------------- Outstanding at beginning of year 137,581 153,921 129,966 Granted 53,029 $30.45-31.59 14,921 $30.23-30.91 46,513 $27.82-29.45 Exercised (32,846) $20.58-29.45 (26,825) $19.96-30.23 (22,558) $19.96-22.91 Cancelled (1,100) $ 31.59 (2,218) $ 30.91 Expired (3,149) $ 29.45 (2,218) $ 19.96 ------- ------- ------- OUTSTANDING AT END OF YEAR 153,515 $19.96-31.59 137,581 $19.96-30.91 153,921 $19.96-29.45 ======= ======= ======= EXERCISABLE AT END OF YEAR 108,736 $19.96-30.23 122,660 $19.96-29.45 107,408 $19.96-22.91 ======= ======= ======= AVAILABLE FOR FUTURE GRANT UNDER THE 1991 STOCK INCENTIVE PLAN 394,057 442,815 453,300 ======= ======= ======= WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING THE YEAR $ 6.05 $ 6.87 N/A ======= ======= ======= ====================================================================================================================================
FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 43 24 NOTE 15 - LOANS TO RELATED PARTIES Loans to directors, executive officers, principal holders of Bancorp's common stock and certain related persons totaled $16,058,000 and $18,929,000 at December 31, 1996 and 1995, respectively. Activity of these loans was as follows:
(DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- 1996 1995 ----------------- Beginning balance $18,929 $19,154 Additions 4,656 6,515 Collected 7,527 6,740 Charged off 0 0 ------- ------- ENDING BALANCE $16,058 $18,929 ======= ======= LOANS 90 DAYS PAST DUE $0 $0 ======= ======= ================================================================================
Related parties of Bancorp, as defined above, were customers of and had transactions with subsidiaries of Bancorp in the ordinary course of business during the periods noted above. Additional transactions may be expected in the ordinary course of business in the future. All outstanding loans, commitments, financing leases, transactions in money market instruments and deposit relationships included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others, and did not involve more than a normal risk of collectibility or present other unfavorable features. NOTE 16 - SHAREHOLDER RIGHTS PLAN On November 26, 1993, Bancorp adopted a "shareholder rights plan" and declared a dividend of one "right" on each outstanding share of Bancorp common stock. Under the plan, each "right" would be distributed only on the 20th business day after any one of the following events occur: 1) A public announcement that a person or group has acquired 20 percent or more (an "acquiring person") of Bancorp's outstanding common shares, 2) The beginning of a tender offer or exchange offer that would result in a person or group owning 30 percent or more of the corporation's outstanding common shares, or 3) A declaration by the Board of Directors of a shareholder as an "adverse person." (An adverse person is a person who owns at least 10 percent of the common shares and attempts "greenmail," or is likely to cause a material adverse impact on the Bancorp - such as impairing customer relationships, harming the company's competitive position or hindering the Board's ability to effect a transaction it deems to be in the shareholders' best interest.) In the event of such a distribution, each "right" would entitle the holder to purchase, at an exercise price of $109, one share of common stock of the corporation. If a person or group acquires 30 percent or more of Bancorp's outstanding common shares or is declared an "adverse person" by the Board of Directors of the corporation, each "right" would entitle the holder to purchase, at an exercise price of $109, a number (to be determined under the plan) of shares of common stock of the corporation at a price equal to 50 percent of its then current market price. However, any "rights" held by an "acquiring person" or an "adverse person" could not be exercised. Additionally, each "right" holder would be entitled to receive common stock of any acquiring company worth two times the exercise price of the "right," should either of the following happen after a person becomes an "acquiring person": 1) Bancorp is acquired in a merger or other transaction other than a merger which the independent directors determine to be in the best interest of Bancorp and its shareholders, or 2) 50 percent or more of Bancorp's assets or earning power is sold or transferred. Bancorp may redeem "rights" for $0.01 per "right" at any time prior to the 20th business day following the date when a person acquires 20 percent of the outstanding shares. Bancorp may not redeem the "rights" when a holder has become an "adverse person." The Board's adoption of this "rights" plan has no financial effect on Bancorp, is not dilutive to Bancorp shareholders, is not taxable to the corporation or its shareholders and will not change the way in which Bancorp common shares are traded. "Rights" are not exercisable until distributed; and all "rights" will expire at the close of business on December 6, 2003, unless earlier redeemed by Bancorp. NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by Bancorp in estimating its fair value disclosures for financial instruments: Cash and short-term investments - The carrying amounts reported in the balance sheet for cash and short-term investments, such as interest-bearing deposits with other banks and federal funds sold, approximated the fair value of those instruments. Investment securities (including mortgage-backed securities) - Fair values for investment securities were based on quoted market prices, where available. If quoted market prices were not available, fair values were based on quoted market prices of comparable instruments. Refer to Note 8 for further disclosure. Loans - For variable-rate loans that reprice frequently with no significant change in credit risk, fair values were based on carrying values. The fair values of other loans and leases, such as commercial real estate and consumer loans were estimated by discounting the future cash flows using the current rates at which similar loans and leases would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amount of accrued interest approximated its fair value. Deposit liabilities - The fair value of demand deposits, savings accounts, and certain money market deposits was the amount payable on demand at the reporting date. The carrying amounts for variable-rate certificates of deposit approximated their fair values at the reporting date. The fair value of fixed-rate certificates of deposit was estimated using a discounted cash flow calculation which applies the interest rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest approximated its fair value. Borrowings - The carrying amounts of federal funds purchased and securities sold under agreements to repurchase and other short-term 44 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 25 borrowings approximated their fair values. The fair value of long-term borrowings was estimated using a discounted cash flow calculation which utilizes the interest rates currently offered for borrowings of similar remaining maturities. Commitments to extend credit and standby letters of credit - Pricing of these financial instruments is based on the credit quality and relationship, fees, interest rates, probability of funding and compensating balance and other covenants or requirements. Loan commitments generally have fixed expiration dates, are variable rate and contain termination and other clauses which provide for relief from funding in the event that there is a significant deterioration in the credit quality of the customer. Many loan commitments are expected to expire without being drawn upon. The rates and terms of the commitments to extend credit and the standby letters of credit are competitive with those in Bancorp's market area. The carrying amounts are reasonable estimates of the fair value of these financial instruments. Carrying amounts which are comprised of the unamortized fee income and, where necessary, reserves for any expected credit losses from these financial instruments, are immaterial. Refer to Note 7 for additional information. Bancorp does not carry financial instruments which are held or issued for trading purposes. The estimated fair values of Bancorp's financial instruments at December 31 were as follows: (DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ----------- ----------- ----------- ----------- Financial assets Cash and short-term investments $ 128,047 $ 128,047 $ 130,369 $ 130,369 Investment securities held-to-maturity 78,945 83,441 93,522 100,512 Investment securities available-for-sale 290,701 290,701 294,052 294,052 Loans Commercial 398,034 394,197 340,942 335,377 Real estate-construction 43,262 43,152 41,845 41,650 Real estate-mortgage 863,414 878,052 788,805 761,190 Installment, net of unearned income 364,626 362,449 328,461 359,679 Credit card 16,107 16,029 15,406 15,042 Leasing 14,821 15,693 16,557 15,642 Less allowance for loan losses 22,672 20,437 ----------- ----------- ----------- ----------- Net loans 1,677,592 1,709,572 1,511,579 1,528,580 Accrued interest receivable 21,613 21,613 18,494 18,494 Financial liabilities Deposits Noninterest-bearing 238,415 238,415 220,061 220,061 Interest-bearing demand 317,187 317,187 302,119 302,119 Savings 381,903 381,903 359,638 359,638 Time 942,461 940,563 903,744 895,303 ----------- ----------- ----------- ----------- Total deposits 1,879,966 1,878,068 1,785,562 1,777,121 Short-term borrowings 93,779 93,779 58,372 58,372 Long-term borrowings 6,506 6,016 2,820 2,834 Accrued interest payable 6,422 6,422 6,125 6,125 ====================================================================================================================================
NOTE 18 - FIRST FINANCIAL BANCORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS DECEMBER 31, (DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------- 1996 1995 -------- -------- ASSETS Cash $ 57,103 $ 40,971 Receivables from subsidiaries 2,865 Securities purchased under agreements to resell to affiliates 15,000 Investment in subsidiaries Commercial banks 173,636 153,270 Stock savings banks 30,312 29,967 -------- -------- Total investment in subsidiaries 203,948 183,237 Other assets 94 175 -------- -------- TOTAL ASSETS $264,010 $239,383 ======== ======== LIABILITIES Dividends payable $ 4,409 $ 3,904 Other liabilities 1,119 1,304 -------- -------- TOTAL LIABILITIES 5,528 5,208 SHAREHOLDERS' EQUITY 258,482 234,175 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $264,010 $239,383 ======== ======== ============================================================================== FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 45
26 STATEMENTS OF EARNINGS YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 ---- ---- ---- INCOME Interest income $ 29 $ 40 $ 21 Dividends from subsidiaries 31,211 33,572 24,273 ------- ------- ------- TOTAL INCOME 31,240 33,612 24,294 EXPENSES Salaries and employee benefits 1,091 966 863 Other 955 608 500 ------- ------- ------- TOTAL EXPENSES 2,046 1,574 1,363 ------- ------- ------- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 29,194 32,038 22,931 Income tax (benefit) expense (282) (95) 72 ------- ------- ------- INCOME BEFORE EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 29,476 32,133 22,859 Equity in undistributed net earnings of subsidiaries 4,464 (344) 5,314 ------- ------- ------- NET EARNINGS $33,940 $31,789 $28,173 ======= ======= ======= ====================================================================================================================================
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- OPERATING ACTIVITIES Net earnings $33,940 $31,789 $28,173 Adjustments to reconcile net earnings to net cash provided by operating activities Equity in undistributed net earnings of subsidiaries (4,464) 344 (5,314) Provision for amortization 14 17 20 Deferred income taxes 91 104 (42) Increase (decrease) in dividends payable 505 (1) 1,400 (Decrease) increase in accrued expenses (185) 109 15 (Increase) decrease in receivables (2,865) 2,061 (572) ------- ------- ------ Net cash provided by operating activities 27,036 34,423 23,680 INVESTING ACTIVITIES Securities purchased under agreements to resell to affiliates 15,000 15,279 (7,702) Capital contributions to subsidiary (1,300) Purchase of subsidiary (7,575) Other 75 (43) (61) ------- ------- ------ Net cash provided by (used in) investing activities 6,200 15,236 (7,763) FINANCING ACTIVITIES Cash dividends (16,341) (13,521) (11,809) Purchase of common stock (994) (388) Proceeds from exercise of stock options, net of shares purchased 231 127 151 Principal payment of long-term borrowings (850) ------- ------- ------ Net cash used in financing activities (17,104) (14,244) (12,046) ------- ------- ------ INCREASE IN CASH 16,132 35,415 3,871 Cash at beginning of year 40,971 5,556 1,685 ------- ------- ------ CASH AT END OF YEAR $57,103 $40,971 $5,556 ======= ======= ====== ===================================================================================================================================
46 - FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT 27 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders First Financial Bancorp. We have audited the accompanying consolidated balance sheets of First Financial Bancorp. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Financial Bancorp. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1994 First Financial Bancorp. and subsidiaries changed their method of accounting for investment securities. /s/ Ernst & Young LLP Cincinnati, Ohio January 15, 1997 FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 47 28 QUARTERLY FINANCIAL AND COMMON STOCK DATA (1)
(UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------------------------------------------------------------- (Dollars in thousands, except per share data.) 1996 Interest income $ 40,937 $ 42,259 $ 43,582 $ 44,497 Interest expense 16,807 17,049 17,793 18,058 ---------- ---------- ---------- --------- Net interest income 24,130 25,210 25,789 26,439 Provision for loan losses 606 764 1,097 966 Noninterest income Investment securities (losses) gains (3) (14) 9 All other 5,257 5,408 5,694 5,746 Noninterest expenses 17,128 16,789 19,667 17,677 ---------- ---------- ---------- --------- Income before income taxes 11,653 13,062 10,705 13,551 Income tax expense 3,827 4,017 3,125 4,062 ---------- ---------- ---------- --------- NET EARNINGS $ 7,826 $ 9,045 $ 7,580 $ 9,489 ========== ========== ========== ========= Per share NET EARNINGS $0.55 $0.61 $0.52 $0.65 ========== ========== ========== ========= CASH DIVIDENDS PAID $0.27 $0.27 $0.27 $0.27 ========== ========== ========== ========= Market price High bid $32.27 $31.82 $31.82 $32.50 ========== ========== ========== ========= Low bid $30.45 $28.64 $29.09 $30.22 ========== ========== ========== ========= 1995 Interest income $ 36,162 $ 37,144 $ 38,860 $ 41,685 Interest expense 14,495 15,476 16,152 17,393 ---------- ---------- ---------- --------- Net interest income 21,667 21,668 22,708 24,292 Provision for loan losses 393 226 532 957 Noninterest income Investment securities gains 13 238 49 40 All other 4,860 5,026 5,042 5,290 Noninterest expenses 15,661 15,575 15,559 16,550 ---------- ---------- ---------- --------- Income before income taxes 10,486 11,131 11,708 12,115 Income tax expense 3,117 3,142 3,591 3,801 ---------- ---------- ---------- --------- NET EARNINGS $ 7,369 $ 7,989 $ 8,117 $ 8,314 ========== ========== ========== ========= Per share NET EARNINGS $0.55 $0.60 $0.59 $0.58 ========== ========== ========== ========= CASH DIVIDENDS PAID $0.29 $0.24 $0.24 $0.24 ========== ========== ========== ========= Market price HIGH BID $31.59 $31.36 $32.27 $32.05 ========== ========== ========== ========= LOW BID $29.55 $30.00 $30.00 $30.00 ========== ========== ========== ========= The stock of First Financial Bancorp. is listed with the National Association of Securities Dealers, Inc. (NASDAQ), under the symbol FFBC. (1) All financial information has been restated to reflect a 10% stock dividend distributed on November 1, 1996. ====================================================================================================================================
FIRST FINANCIAL BANCORP 1996 ANNUAL REPORT - 48 EX-22 5 EXHIBIT 22 1 EXHIBIT 22 FIRST FINANCIAL BANCORP. SUBSIDIARIES First National Bank of Southwestern Ohio, organized as a national banking association under the laws of the United States Citizens Commercial Bank & Trust Company, incorporated in the state of Ohio Van Wert National Bank, organized as a national banking association under the laws of the United States Union Trust Bank, incorporated in the state of Indiana Indiana Lawrence Bank, incorporated in the state of Indiana Fidelity Federal Savings Bank, organized as a federal stock savings bank under the laws of the United States Citizens First State Bank, incorporated in the state of Indiana Home Federal Bank, A Federal Savings Bank, organized as a federal stock savings bank under the laws of the United States Union Bank & Trust Company, incorporated in the state of Indiana Clyde Savings Bank Company, incorporated in the state of Ohio Peoples Bank and Trust Company, incorporated in the state of Indiana Bright National Bank, organized as a national banking association under the laws of the United States First Finance Mortgage Company of Southwestern Ohio, Inc., incorporated in the state of Ohio Farmers State Bank, incorporated in the state of Indiana EX-23 6 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of First Financial Bancorp. of our report dated January 15, 1997, included in the 1996 Annual Report to Shareholders of First Financial Bancorp. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-46819) pertaining to the First Financial Bancorp. 1991 Stock Incentive Plan and in the related Prospectus of our report dated January 15, 1997, with respect to the consolidated financial statements of First Financial Bancorp. incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1996. Ernst & Young LLP March 17, 1997 Cincinnati, Ohio EX-27 7 EXHIBIT 27
9 0000708955 FIRST FINANCIAL BANCORP. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 110,767 5,079 12,201 0 290,701 78,945 83,441 1,700,264 22,672 2,261,711 1,879,966 93,779 22,978 6,506 0 0 117,822 140,660 2,261,711 144,941 25,377 957 171,275 65,907 69,707 101,568 3,433 (8) 71,261 48,971 0 0 0 33,940 2.32 2.32 8.74 4,850 906 890 1,195 20,437 3,963 1,173 22,672 22,672 0 0
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