-----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, NJn3fyi0l+bIxss1NpgEVrbDrBK1w1+3Mr/xVYfxdBVLL3xN26CJwvip4UPxoYm6 dk3ayjUFXfzIA08UxVAFUA== 0000950152-00-001844.txt : 20000322 0000950152-00-001844.hdr.sgml : 20000322 ACCESSION NUMBER: 0000950152-00-001844 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000321 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: SEC FILE NUMBER: 000-12379 FILM NUMBER: 574280 BUSINESS ADDRESS: STREET 1: 300 HIGH ST CITY: HAMILTON STATE: OH ZIP: 45011 BUSINESS PHONE: 5138674700 MAIL ADDRESS: STREET 1: 300 HIGH ST CITY: HAMILTON STATE: OH ZIP: 45011 10-K 1 FIRST FINANCIAL BANCORP 10-K 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, 1999 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, no 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 be 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 (subpart 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 February 18, 2000, there were issued and outstanding 46,789,754 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 February 18, 2000, was $865,610,000. (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, 1999 are incorporated by reference into Parts I, II and IV. Portions of the proxy statement dated March 21, 2000 for the annual meeting of shareholders to be held April 25, 2000 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-5 Item 3 Legal Proceedings F-6 Item 4 Submission of Matters to a Vote of Security Holders (during the fourth quarter of 1999) 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 7a Quantitative and Qualitative Disclosures about Market Risk F-9 Item 8 Financial Statements and Supplementary Data F-9 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure F-9 - ---------------------------------------------------------------------------------------------------------------------------- PART III Item 10 Directors and Executive Officers of the Registrant F-10 Item 11 Executive Compensation F-10 Item 12 Security Ownership of Certain Beneficial Owners and Management F-10 Item 13 Certain Relationships and Related Transactions F-10 - ---------------------------------------------------------------------------------------------------------------------------- PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K F-11 - ---------------------------------------------------------------------------------------------------------------------------- SIGNATURES F-14
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 seventeen wholly owned subsidiary institutions: First National Bank of Southwestern Ohio (First Southwestern), Bright National Bank (Bright National), and National Bank of Hastings (Hastings), all national banking associations, Community First Bank & Trust (Community First), The Clyde Savings Bank Company (Clyde), both Ohio banking corporations, Indiana Lawrence Bank (Indiana Lawrence), Citizens First State Bank (Citizens First), Union Bank & Trust Company (Union Bank), Peoples Bank and Trust Company (Peoples Bank), Farmers State Bank (Farmers), Vevay Deposit Bank (Vevay), and Sand Ridge Bank (Sand Ridge), all Indiana banking corporations, Hebron Deposit Bank (Hebron), a Kentucky banking corporation, 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 and First Financial Bancorp Service Corporation (Service Corporation) is Bancorp's operations subsidiary. Bancorp provides management and similar services for its subsidiary financial institutions. Since it does not itself conduct any operating businesses, Bancorp must depend largely upon its seventeen 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 19 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 pages F-2 and F-3. 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. The recent passage of the Gramm-Leach-Bliley Act of 1999, however, has created new opportunities for Bancorp by lifting some of the long-standing prohibitions against certain non-banking activities (see "Regulation" on page F-3). 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. 4 F-2 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. First Southwestern, Community First, Indiana Lawrence, Union Bank, Clyde, and Bright National also offer lease financing. In addition, Bancorp's financial 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, the finance company and the service corporation. 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, 1999, and is incorporated herein by reference. At December 31, 1999, Bancorp and its subsidiaries employed 1,871 employees. Bancorp's executive office is located at 300 High Street, Hamilton, Ohio 45011, and its telephone number is (513) 867-4700. SUBSIDIARIES The following table lists each of Bancorp's subsidiaries, their acquisition dates, the number of offices that each subsidiary has, total deposits, and the number of ATMs owned by each subsidiary:
Deposits Acquisition 12/31/99 Number of Number of Subsidiary/Location Date ($ in 000) Offices ATMs ------------------- ---------- ---------- -------- ---- First Southwestern/ Hamilton, Ohio 04/26/83 $853,955 30 33 Community First/ Celina/Van Wert, Ohio 04/29/83 589,944 24 14 Indiana Lawrence/ North Manchester, Indiana 09/01/89 126,923 8 3 Fidelity Federal/ Marion, Indiana 09/21/90 82,176 3 1 Citizens First/ Hartford City, Indiana 10/01/90 82,306 6 4 Home Federal/ Hamilton, Ohio 10/01/91 257,554 7 6 Union Bank/ North Vernon, Indiana 01/04/93 83,599 3 4 Clyde/ Clyde, Ohio 06/01/94 73,377 2 2 Peoples Bank/ Sunman, Indiana 07/16/95 46,588 2 3 Bright National/ Flora, Indiana 10/01/95 127,406 7 6 First Finance/ Fairfield, Ohio 05/08/96 N/A 3 N/A Farmers/ Liberty, Indiana 12/01/96 50,207 5 1
5 F-3
Deposits Acquisition 12/31/99 Number of Number of Subsidiary/Location Date ($ in 000) Offices ATMs ------------------- ----------- ---------- --------- ------- Hastings/ Hastings, Michigan 01/01/97 48,624 2 3 Vevay/ Vevay, Indiana 06/01/97 44,322 4 2 Sand Ridge/ Highland, Indiana 06/01/99 454,174 5 18 Hebron/ Hebron, Kentucky 06/01/99 90,165 3 4 Service Corporation/ Middletown, Ohio 06/01/99 N/A 1 0
Community First was formed on November 1, 1997 as a result of the merger of two of Bancorp's affiliates, the Citizens Commercial Bank & Trust Company and Van Wert National Bank. On December 8, 1997, Community First purchased the assets and assumed the liabilities of eleven branches of KeyBank National Association. The purchase of The Union State Bank, completed on April 1, 1998, resulted in the addition of another branch and $53 million in deposits for Community First. On June 30, 1999, Union Trust Bank, a wholly owned subsidiary of Bancorp, merged into Community First. In April 1996, Bancorp acquired Farmers & Merchants Bank of Rochester, Rochester, Indiana (F&M). Upon completion of the merger F&M was merged with Indiana Lawrence. In November 1995, Home Federal combined operations with Fayette Federal, resulting in Fayette Federal operating as a division of Home Federal. Regulation - ---------- First Southwestern, Bright National and Hastings, as national banking associations, are subject to supervision and regular examination by the Comptroller of the Currency. Community First 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, Community First, Clyde, Peoples Bank, Bright National, and Hastings are members of the Federal Reserve System and, as such, are subject to the applicable provisions of the Federal Reserve Act. Community First is also subject to regular examination by the Federal Reserve System. Indiana Lawrence, Citizens First, Union Bank, Peoples Bank, Farmers, Vevay, and Sand Ridge, as Indiana state chartered banks, are subject to supervision and regular examination by the Indiana Department of Financial Institutions. Hebron is subject to supervision and regular examination by the Kentucky 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 following information consists of summaries of certain statutes or regulations, it is qualified in its entirety by reference to the statutory or regulatory provisions described. 6 F-4 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. When a bank holding company acquires a thrift institution, it is then considered a savings and loan holding company which subjects the bank holding company 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, Michigan, and Kentucky. 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. 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 Act was recently amended by the Gramm-Leach-Bliley Act of 1999 (the Gramm Act), which was enacted on November 12, 1999. The Gramm Act also repealed portions of the Glass-Steagall Act, a piece of depression-era legislation intended to separate banking and commerce. Under the Gramm Act, bank holding companies that satisfy certain requirements may elect to become financial holding companies. The Gramm Act allows financial holding companies to engage in certain financial activities that are not permitted for bank holding companies. The Gramm Act provides a list of activities that are "financial in nature" and therefore permitted for financial holding companies. The list includes: lending, investing or safeguarding money or securities; underwriting insurance or annuities, or acting as an insurance or annuity principal, agent or broker; providing financial or investment advice; issuing or selling interests in pools of assets that a bank could hold; underwriting, dealing or making markets in securities; and, subject to certain conditions, merchant banking or insurance portfolio investing. The Board of Governors has the authority to determine that other activities are permitted for financial holding companies, if those activities satisfy certain criteria. On March 13, 2000, Bancorp filed an election with the Board of Governors to become a financial holding company in order to take advantage of the expanded activities available to financial holding companies. The election will become effective on April 13, 2000, unless the Board of Governors notifies Bancorp prior to that time that the election is ineffective. The Board of Governors may notify 7 F-5 Bancorp prior to April 13th that the election is effective. Bancorp anticipates that its election will become effective. The Gramm Act establishes the concept of functional regulation for bank holding companies and financial holding companies, which means that the authority to regulate will be determined by the nature of the activity involved. Bank holding companies, financial holding companies and their subsidiaries will be supervised by the regulatory agency that has traditionally regulated the particular activity in question, while the Board of Governors will serve as an "umbrella supervisor." Upon becoming a financial holding company, Bancorp and its affiliates will continue to be supervised by the various regulatory agencies as described above. However, if Bancorp expands its activities into new areas, those activities may be subject to the supervision of regulatory agencies that have not previously supervised Bancorp's activities. 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. 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. YEAR 2000 The information contained on page 5 of the Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's Discussion and Analysis) section of Bancorp's Annual Report to Shareholders for the year ended December 31, 1999 is incorporated herein by reference in response to this item. ITEM 2. PROPERTIES. The registrant and its subsidiaries operate from 61 offices in Ohio, including Bancorp's executive office in Hamilton, Ohio, 42 offices in Indiana, three in Kentucky and two in Michigan. 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. Three offices are located in Warren County, Ohio of which one is leased. Nine offices are located in Mercer County, Ohio, six in Van Wert County, Ohio, two in Preble County, Ohio, three in Hamilton County, Ohio, two in Sandusky County, Ohio, two in Paulding County, Ohio, one in Allen County, Ohio, three in Auglaize County, Ohio, and one in Williams County, Ohio. Five offices are located in Wabash County, Indiana, of which one office is built on leased land with a 8 F-6 purchase option on the land. Five offices are in Lake County, Indiana of which two are leased. Three 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, three in Rush County, Indiana, one in Clinton County, Indiana, one in Ripley County, Indiana, one in Dearborn County, Indiana, and four in Switzerland, County, Indiana. One office is located in Delaware County, Indiana, of which both the land and building are leased. One office is located in Barry County, Michigan and one in Allegan County, Michigan. Three offices are located in Boone County, Kentucky. 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 1999. ADDITIONAL ITEM - EXECUTIVE OFFICERS. Shown in the table below are the Executive Officers of Bancorp as of December 31, 1999. 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 25, 2000, 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 53 President and Chief Executive Officer, Director Mark W. Immelt 54 Senior Vice President, Trust Services Brian D. Moriarty 57 Senior Vice President, Human Resources Michael R. O'Dell 48 Senior Vice President, Chief Financial Officer and Secretary Michael T. Riley 49 Senior Vice President, Consumer Banking and Operations C. Douglas Lefferson 35 First Vice President, Comptroller
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. Upon joining Bancorp in March 1991, he assumed the responsibilities of President and Chief Operating Officer, as well as a director. He served as Chief Operating Officer until July 1992. Also in March 1991, he became President, Chief Executive Officer, and a director of First Southwestern. Effective July 1, 1997, Mr. 9 F-7 Pontius was promoted to Chairman of the Board of First Southwestern and retained the position of Chief Executive Officer until November 24, 1998. Mark W. Immelt became Senior Vice President of Bancorp Trust Services on July 1, 1997. Mr. Immelt joined First Southwestern in December 1996 as Senior Vice President and Senior Trust Officer. In December 1999, he was promoted to President and Chief Executive Officer of First Southwestern. Before joining First Southwestern, he spent 28 years managing personal trust, corporate trust, employee benefit programs and private banking programs in the Northern Indiana and Northeast Ohio area. 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. 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 had served as Senior Vice President and Chief Financial Officer of First Southwestern from January 1996 to July 1997, and as First Vice President and Comptroller of First Southwestern from 1991 to January 1996. Michael T. Riley became Senior Vice President of Bancorp, responsible for marketing, data processing, operations and public relations, on January 12, 1996. Mr. Riley became President and Chief Executive Officer of First Financial Bancorp Service Corporation on May 24, 1999. Mr. Riley had served as Senior Vice President of First Southwestern from January 1996 to May 1999, and First Vice President of Consumer Banking for First Southwestern since 1989. C. Douglas Lefferson became First Vice President and Comptroller of Bancorp effective November 25, 1998. He had served as Vice President and Chief Financial Officer of First Southwestern since July 1997. Mr. Lefferson previously held the title of Vice President and Comptroller of First Southwestern since December 1995 and Assistant Vice President and Assistant Comptroller since 1993. 10 F-8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. Bancorp had 4,747 common stock shareholders of record as of February 18, 2000. Bancorp's common equity is listed with the National Association of Securities Dealers, Inc. (NASDAQ) and is traded on The NASDAQ Stock Market. The information contained on page 31 of the Notes to Consolidated Financial Statements in Bancorp's Annual Report to Shareholders for the year ended December 31, 1999 is incorporated herein by reference in response to this item. ITEM 6. SELECTED FINANCIAL DATA. The information contained in Table 1 on page 2 of the Management's Discussion and Analysis section of Bancorp's Annual Report to Shareholders for the year ended December 31, 1999 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 in the Management's Discussion and Analysis section, (pages 1 through 31) of Bancorp's Annual Report to Shareholders for the year ended December 31, 1999 is incorporated herein by reference in response to this item. DIVIDEND PAYOUT RATIO The dividend payout ratios for 1999, 1998 and 1997 were 50.8%, 42.1%, and 43.3%, respectively. FORWARD LOOKING STATEMENTS Certain statements contained in this Annual Report on Form 10-K which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the "Act"). In addition, certain statements in future filings by Bancorp with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of Bancorp which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to, projections of revenues; income or loss; earnings or loss per share; the payment or non-payment of dividends; capital structure and other financial items, statements of plans and objectives of Bancorp or its management or Board of Directors; and statements of future economic performance and statements of assumptions underlying such statements. Words such as "believes," "anticipates," "intends," and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the strength of the local economies in which operations are conducted; the effects of and changes in policies and laws of regulatory agencies; inflation, interest rates, market and monetary fluctuations; technological changes; mergers and acquisitions; the ability to increase market share and control expenses; the effect of changes in accounting policies and practices that may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board and the Securities and Exchange Commission; the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; the ability to achieve satisfactory results regarding the Year 2000 issue; and the success of Bancorp at managing the risks involved in the foregoing. 11 F-9 Such forward-looking statements are meaningful only on the date when such statements are made and Bancorp undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such a statement is made to reflect the occurrence of unanticipated events. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information contained on pages 10 and 11 of the Management's Discussion and Analysis section of Bancorp's Annual Report to Shareholders for the year ended December 31, 1999 is incorporated herein by reference in response to this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and report of independent auditors included on pages 13 through 30 of the Consolidated Financial Statements and the Notes to Consolidated Financial Statements in Bancorp's Annual Report to Shareholders for the year ended December 31, 1999 are incorporated herein by reference. The Quarterly Financial and Common Stock Data on page 31 of the Notes to Consolidated Financial Statements in Bancorp's Annual Report to Shareholders for the year ended December 31, 1999 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. 12 F-10 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 2 through 4 of Bancorp's Proxy Statement, dated March 21, 2000 with respect to the Annual Meeting of Shareholders to be held on April 25, 2000, which was filed pursuant to Regulation 14A 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 5, "Executive Compensation" on pages 6 through 11, and under "Compensation Committee Report" on pages 13 and 14 of Bancorp's Proxy Statement dated March 21, 2000 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 2 through 4 of Bancorp's Proxy Statement dated March 21, 2000 is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information appearing in Note 17 of the Notes to Consolidated Financial Statements included on page 26 of Bancorp's Annual Report to Shareholders is incorporated herein by reference in response to this item. 13 F-11 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 ...................................... 30 Consolidated Balance Sheets as of December 31, 1999 and 1998............................. 13 Consolidated Statements of Earnings for year ended December 31, 1999, 1998, and 1997 ...................................................... 14 Consolidated Statements of Cash Flows for year ended December 31, 1999, 1998, and 1997 ...................................................... 15 Consolidated Statements of Changes in Shareholders' Equity for year ended December 31, 1999, 1998, and 1997 ....................................... 16 Notes to Consolidated Financial Statements............................................... 17 (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, 1999 which are incorporated herein by reference. 14 F-12 (3) Exhibits:
Exhibit Number ------ 3.1 Articles of Incorporation, as amended as of April 27, 1999 and incorporated herein by reference to Form 10-Q for the quarter ended June 30, 1999. 3.2 Amended and Restated Regulations, as of April 22, 1997 and incorporated herein by reference to Form10-K for year ended December 31, 1997. File No. 000-12379. 4.1 Rights Agreement between First Financial Bancorp and First National Bank of Southwestern Ohio dated as of November 23, 1993 and incorporated herein by reference to Form 10-K for year ended December 31, 1998. File No. 000-12379. 4.2 First Amendment to Rights Agreement dated as of May 1, 1998 and incorporated herein by reference to Form 10-Q for the quarter ended March 31, 1998. 10.1 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. 10.2 Agreement between Stanley N. Pontius and First Financial Bancorp dated January 27, 1998 and incorporated herein by reference to Form10-K for year ended December 31, 1997. File No. 000-12379. 10.3 Agreement between Rick L. Blossom and First Financial Bancorp dated January 27, 1998 and incorporated herein by reference to Form10-K for year ended December 31, 1997. File No. 000-12379. 10.4 Agreement between Michael R. O'Dell and First Financial Bancorp dated January 27, 1998 and incorporated herein by reference to Form10-K for year ended December 31, 1997. File No. 000-12379. 10.5 Agreement between Mark W. Immelt and First Financial Bancorp dated January 27, 1998 and incorporated herein by reference to Form10-K for year ended December 31, 1997. File No. 000-12379. 10.6 Agreement between Michael T. Riley and First Financial Bancorp dated January 27, 1998 and incorporated herein by reference to Form10-K for year ended December 31, 1997. File No. 000-12379. 10.7 Agreement between Brian D. Moriarty and First Financial Bancorp dated January 27, 1998. 10.8 First Financial Bancorp. Dividend Reinvestment and Share Purchase Plan, Dated April 24, 1997 and incorporated herein by reference to a Registration Statement on Form S-3, Registration No. 333-25745.
15 F-13
10.9 First Financial Bancorp. 1999 Stock Incentive Plan for Officers and Employees, dated April 27, 1999 and incorporated herein by reference to a Registration Statement on Form S-8, Registration No. 333-86781. 10.10 First Financial Bancorp. 1999 Stock Incentive Plan for Non-Employee Directors, dated April 27, 1999 and incorporated herein by reference to a Registration Statement on Form S-8, Registration No. 333-86781. 10.11 First Financial Bancorp. Director Fee Stock Plan dated May 25, 1999. 13 Registrant's annual report to security holders for the year ended December 31, 1999. 21 First Financial Bancorp. Subsidiaries. 23 Consent of Ernst & Young LLP, Independent Auditors. 27 Financial Data Schedule
- -------------------------------------------------------------------------------- The Company will furnish, without charge, to a security holder upon request a copy of the documents, portions of which are incorporated by reference (Annual Report to Shareholders and Proxy Statement), and will furnish any other Exhibit upon payment of reproductions costs. (b) Reports on Form 8-K: On November 4, 1999, Bancorp filed a Form 8-K regarding the announcement of the retirement of Rick L. Blossom, Senior Vice President and Chief Lending Officer of Bancorp and President and Chief Executive Officer of First National Bank of Southwestern Ohio, the lead bank, on December 3, 1999. 16 F-14 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 2/22/00 --------------------------------- 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/ Stanley N. Pontius /s/ Michael R. O'Dell - ----------------------------------------------------------------- -------------------------------------------------- Stanley N. Pontius, Director Michael R. O"Dell President and Chief Executive Officer Senior Vice President, Chief Financial Officer, and Secretary Date 2/22/00 Date 2/22/00 ---------------------------------------------------------------- ----------------------------------------------- /s/ James C. Garland /s/ Murph Knapke - ----------------------------------------------------------------- -------------------------------------------------- James C. Garland, Director Murph Knapke, Director Date 2/22/00 Date 2/22/00 ---------------------------------------------------------------- ----------------------------------------------- /s/ Donald M. Cisle /s/ Steve Posey - ----------------------------------------------------------------- -------------------------------------------------- Donald M. Cisle, Director Steven C. Posey, Director Date 2/22/00 Date 2/22/00 ---------------------------------------------------------------- ----------------------------------------------- /s/ Steven S. Marcum /s/ Barry S. Porter - ----------------------------------------------------------------- -------------------------------------------------- Steven S. Marcum, Director Barry S. Porter, Director Date 2/22/00 Date 2/22/00 ---------------------------------------------------------------- -----------------------------------------------
17 F-15 SIGNATURES (CONT'D)
/s/ Bruce E. Leep /s/ Corinne R. Finnerty - ---------------------------------------------------------------- ------------------------------------------------------ Bruce E. Leep, Director Corinne R. Finnerty, Director Date 2/22/00 Date 2/22/00 ------------------------------------------------------------ -------------------------------------------------- /s/ Perry D. Thatcher /s/ Carl R. Fiora - ---------------------------------------------------------------- ------------------------------------------------------ Perry D. Thatcher, Director Carl R. Fiora, Director Date 2/22/00 Date 2/22/00 ------------------------------------------------------------ -------------------------------------------------- /s/ F. Elden Houts /s/ Dan. R. Dalton - ---------------------------------------------------------------- ------------------------------------------------------ F. Elden Houts, Director Dan R. Dalton, Director Date 2/22/00 Date 2/22/00 ------------------------------------------------------------ -------------------------------------------------- /s/ Richard L. Alderson /s/ Martin J. Bidwell - ---------------------------------------------------------------- ------------------------------------------------------ Richard L. Alderson, Director Martin J. Bidwell, Director Date 2/22/00 Date 2/22/00 ------------------------------------------------------------- -------------------------------------------------- /s/ C. Douglas Lefferson - ----------------------------------------------------------------- C. Douglas Lefferson, First Vice President and Comptroller Date 2/22/00 -------------------------------------------------------------
EX-10.7 2 EXHIBIT 10.7 1 EXHIBIT 10.7 CONFIDENTIAL - ------------ January 27, 1998 Brian D. Moriarty Senior Vice President Human Resources First Financial Bancorp 300 High Street P.O. Box 476 Hamilton, OH 45012 Dear Brian: You are employed by First Financial Bancorp and First National Bank of Southwestern Ohio, a wholly owned subsidiary of FFBC, ("FFBC") in a key executive position. Continuity of the management of FFBC and its affiliate banks is a critical factor in the continued success of FFBC. The Board of Directors of FFBC believes it is in the best interest of FFBC to encourage the continued effort and dedication of key members of management to their assigned duties. In consideration of the mutual promises contained in this letter, FFBC shall provide to you, and you shall receive from FFBC, the benefits set forth in this letter ("Agreement"), if your employment with FFBC, or its affiliate bank, is terminated during the term of this Agreement. 1. PURPOSE. This Agreement establishes certain basic terms and conditions relating to your employment with FFBC, and special arrangements and dispute resolution proceedings relating to the termination of your employment for any reason other than: (i) your retirement; (ii) your becoming totally and permanently disabled under the FFBC long-term disability plan or policy; or (iii) your death. This Agreement supersedes all prior agreements with FFBC and any of its affiliate banks or any predecessor businesses, 2 Brian D. Moriarty January 27, 1998 Page 2 except the Confidentiality Agreement concurrently entered, or previously entered, between you and FFBC, and the special severance benefits provided under this Agreement are to be provided instead of any other severance arrangements offered by FFBC or its affiliate banks. Notwithstanding the foregoing, neither your termination of employment nor anything contained in this Agreement shall have any affect upon your rights under any tax-qualified "pension benefit plan," as such term is defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); or under any "welfare benefit plan" as defined in ERISA, including by way of illustration and not limitation, any medical surgical or hospitalization benefit coverage or long-term disability benefit coverage; or under any non-qualified deferred compensation arrangement, including by way of illustration and not limitation, any stock incentive plan or non-qualified pension plan; or under the FFBC Performance Incentive Plan for any completed plan year. 2. EMPLOYMENT. FFBC agrees that, during the term of this Agreement, you will be employed with FFBC, and any other direct or indirect subsidiary or affiliate of FFBC to which you may be transferred, in your present position or in a position that is comparable to your present position in compensation, responsibility and stature and for which you are suited by education and background and that: (a) you are, and will continue to be, eligible to participate in any employee benefit plan of FFBC in accordance with its terms; and (b) you will be entitled to the same treatment under any generally applicable employment policy or practice as any other member of Executive Management Group whose position in the organization is comparable to yours. Those plans, policies and practices that generally apply to other members of the Executive Management Group will be referred to in this Agreement as your "Employment Benefits." Your Employment Benefits may be modified from time to time after the date hereof without violation of this Agreement if the changes apply generally to other members of the Executive Management Group. 3. TERM OF AGREEMENT. This Agreement shall become effective on the date of this Agreement ("Commencement Date") and shall continue in effect through the earlier of (i) the fifth anniversary of the Commencement Date; (ii) the date of your retirement, death or total and permanent disability; or (iii) the completion of full payment of all benefits promised hereunder. 3 Brian D. Moriarty January 27, 1998 Page 3 Absent your death, total and permanent disability or retirement, this Agreement shall be renewed annually from and after the fifth anniversary of the Commencement Date unless written notice to the contrary is given by you or by FFBC at least six (6) months prior to the expiration of the term, including any extension thereof. 4. TERMINATION OF EMPLOYMENT. Your employment may be terminated in accordance with any of the following paragraphs, but only upon one (1) month's advance written notice (which period shall be referred to in this Agreement as the "Notice Period"): (a) INVOLUNTARY TERMINATION. FFBC may terminate your employment without cause. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice Period. The expiration of the Notice Period shall be your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the release and covenant not to sue described in Section 5. (b) INVOLUNTARY TERMINATION FOR CAUSE. FFBC may terminate your employment for "Cause" with written notice setting forth the Cause for termination. "Cause" means a willful engaging in gross misconduct materially and demonstrably injurious to FFBC. "Willful" means an act or omission in bad faith and without reasonable belief that such act or omission was in, or not opposed to, the best interests of FFBC. The expiration of the Notice Period is your "Date of Termination for Cause." Upon your Date of Termination for Cause, you shall only be entitled to those benefits provided under Section 6. (c) VOLUNTARY TERMINATION. You may voluntarily terminate your employment. In such an event, you shall continue to receive your full salary and Employment Benefits during the Notice period provided you satisfactorily perform your duties during the Notice Period unless relieved of those duties by FFBC. The expiration of the Notice Period is your "Voluntary Date of Termination." Upon your Voluntary Date of Termination, you shall only be entitled to those benefits provided under Section 6. (d) VOLUNTARY TERMINATION FOR GOOD REASON. You may terminate your employment by notice setting forth a Good Reason for termination if the notice is delivered to FFBC within thirty (30) days following the occurrence of any "Good Reason." "Good Reason" means a (i) change in the duties of your position, or the transfer to a new position, in violation of Section 2; (ii) substantial alteration in the nature or status of your responsibilities in violation of Section 2; (iii) 4 Brian D. Moriarty January 27, 1998 Page 4 reduction in your base salary; (iv) refusal by FFBC, or its successor, to renew the term of this Agreement for any reason, prior to your reaching your normal retirement date under the FFBC Pension Benefit Plan; or (v) changes in your Employment Benefits in violation of Section 2. If you give notice of termination for Good Reason, you shall continue to receive your full base salary and Employment Benefits during the Notice Period as in effect prior to the event that is the Good Reason for termination, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2. The expiration of the Notice Period is your "Date of Termination." Upon your Date of Termination, you shall be entitled to those benefits provided under Section 5, provided you give FFBC the written release and covenant not to sue described in Section 5. 5. SPECIAL SEVERANCE BENEFITS. If your employment with FFBC is involuntarily terminated in accordance with Section 4(a) or you voluntarily terminate your employment for Good Reason in accordance with Section 4(d) and you provide FFBC with a separate, written release and covenant not to sue (on a form provided by and satisfactory to FFBC) which releases FFBC from all claims arising from your employment and termination of your employment, and you do not revoke this release and covenant not to sue, then you shall receive the following benefits, less any applicable withholding required for federal, state or local taxes: (a) your base salary shall be continued in effect for a period of twenty-four (24) months from your Date of Termination (hereinafter called your "Severance Pay Period"); (b) if, prior to your Date of Termination, you have participated in the FFBC Performance Incentive Plan for a complete calendar year, you will receive an incentive compensation payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to 2.0 times the percentage of the incentive payment made or required to be made for the calendar year pursuant to the Performance Incentive Plan immediately preceding the calendar year in which your Date of Termination occurs; (c) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment within thirty (30) days of your Date of Termination in one lump-sum in an amount equal to the total of the following: 5 Brian D. Moriarty January 27, 1998 Page 5 (i) With respect to any shares of Stock subject to an Option granted to you as of the time of the Change in Control under the First Financial Bancorp 1991 Stock Incentive Plan (the "Incentive Plan") that you cannot exercise as a result of your termination of employment, the difference between the fair market value of such Stock, determined as of your Date of Termination, and the Option Price. (ii) With respect to any Restricted Stock granted to you under the Incentive Plan as of the time of the Change in Control which you forfeit as a result of your termination of employment, the fair market value of such Restricted Stock, determined as of your Date of Termination and as if all restrictions had been removed. (iii) For purposes of this Section 5, "Stock," "Options," "Option Price," "Restricted Stock" and "Committee" will have the meaning given those terms in the Incentive Plan, and your right to exercise Options or to receive Restricted Stock without forfeiture will be determined after any adjustments made by the Committee under Sections 8.8 and 11.1 of the Incentive Plan, and after any amendments made to the Incentive Plan in connection with the Change in Control. (iv) For purposes of this Section 5, "Change in Control" will have the following meaning: (a) a plan has been approved by the shareholders of FFBC and consummated for FFBC to be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation will be owned in the aggregate by the former shareholders of FFBC as the same shall have existed immediately prior to such merger or consolidation; (b) an agreement for the sale by FFBC of substantially all of its assets to another corporation which is not a wholly owned subsidiary has been approved by the shareholders (or the Board of Directors or appropriate officers if shareholder approval is not required) and consummated; (c) "beneficial ownership" as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") of twenty percent (20%) or more of the total voting capital stock of FFBC then issued and outstanding has been acquired by any person or "group" as defined in Section 13(d)(3) of the Exchange Act; or (d) individuals who were members of the Board of FFBC immediately prior to a meeting of the shareholders of FFBC involving a contest for the election of directors do not constitute a majority of the Board immediately following such election, unless the election of such 6 Brian D. Moriarty January 27, 1998 Page 6 new directors was recommended to the shareholders by the management of FFBC. The Board of FFBC has final authority to determine the exact date on which a Change in Control has occurred under the foregoing definitions. (d) your Employment Benefits shall be continued during your Severance Pay Period, subject to the right of FFBC to make any changes to your Employment Benefits permitted in accordance with Section 2; provided, however, that you shall not: (i) accumulate vacation pay for periods after your Date of Termination; (ii) first qualify for long-term disability benefits or sickness and accident plan benefits by reason of an illness, accident or disability occurring, or a sickness or illness first manifesting itself, after your Date of Termination; (iii) be eligible to continue to make contributions to any Internal Revenue Code ss. 401(k) plan maintained by FFBC or qualify for a share of any employer contribution made to any tax-qualified defined contribution plan; or (iv) be eligible to accumulate service for pension plan purposes; (e) you shall qualify for full COBRA health benefit continuation coverage upon the expiration of your Severance Pay Period; (f) you shall be entitled to full executive outplacement assistance with an agency selected by FFBC with the fee paid by FFBC in an amount not to exceed five percent (5%) of your annual base salary; (g) with respect to the Endorsement Method Split Dollar Plan Agreement (the "Split Dollar Agreement") to which you are a party (and solely for purposes of the Split Dollar Agreement), the duration of your Severance Pay Period shall be considered as if it were active employment for purposes of determining whether you were eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan, as provided in Section VI(B) of the Split Dollar Agreement; and (h) if your Date of Termination is within twelve (12) months after a Change in Control, you will receive a payment (the "Split Dollar Payment") within ninety (90) days of your Date of Termination in one lump-sum equal to the present 7 Brian D. Moriarty January 27, 1998 Page 7 value of the death benefit you would have received under the Split Dollar Agreement, determined as if you had terminated on your Date of Termination, were then eligible to receive a retirement benefit under the early retirement provisions of First Financial Bancorp Employees' Pension Plan (whether or not this is actually the case), and died at age 75 when the Split Dollar Agreement was still in effect. For purposes of this Section 5, present value will be determined using an annual discount rate of 7%. Notwithstanding the prior two sentences, if you elect to receive an assignment of the policy under Section X of the Split Dollar Agreement, the Split Dollar Payment shall be applied to the cash payment to FFBC required under Section X of the Split Dollar Agreement, and any portion of the Split Dollar Payment in excess of the amount required under Section X shall be paid to you. (i) Notwithstanding any other provision of this Agreement, if the receipt of any payment under Section 5 of this Agreement, in combination with any other payments to you from FFBC or its affiliates, shall, in the opinion of independent tax counsel of recognized standing selected by FFBC, result in the payment by you of any excise tax provided for in Section 280G and Section 4999 of the Internal Revenue Code, then the amount of payments under Section 5 of this Agreement shall be reduced to the extent required, in the opinion of independent tax counsel, to prevent the imposition of such excise tax. The reduction of payments under this Agreement shall be made after any reduction made under Section 11.2 of the First Financial Bancorp 1991 Stock Incentive Plan and you will have the right to select the order in which payments under this Section 5 will be reduced. The release and covenant not to sue which you agree to provide prior to the receipt of special severance benefits under this Section 5 of this Agreement shall comply with the requirements of the Older Workers Benefit Protection Act and applicable state and federal laws and regulations. If you do not provide FFBC with a written release and covenant not to sue, any claims concerning this Agreement or otherwise arising from your employment with FFBC, or its affiliate banks, shall be subject to final and binding arbitration as described in Section 7. 6. BENEFITS UPON VOLUNTARY TERMINATION OR TERMINATION FOR CAUSE. Upon your Date of Termination for Cause in accordance with Section 4(b) or your Voluntary Date of Termination in accordance with Section 4(c), all special severance benefits under this Agreement will be void. In such an event, you shall be eligible for any benefits provided in accordance with the plans and practices of FFBC that are applicable to employees generally. 8 Brian D. Moriarty January 27, 1998 Page 8 7. ARBITRATION. Any dispute under this Agreement, and any claims of wrongful or discriminatory termination based on any state or federal statute, tort, public policy, contract or promissory estoppel theory, including any dispute as to the cause or reason for termination, shall be submitted to final and binding arbitration, subject to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association, effective June 1, 1997, except as hereinafter provided: (a) FFBC shall pay the arbitrator's fee; (b) Each party shall bear the cost of its own attorney's fees. However, if you prevail in a challenge to FFBC's determination as to cause for your termination or if you prevail on any claim that you were discriminated against in violation of any federal law or statute, you shall be reimbursed by FFBC for the filing fee and any reasonable costs or expenses incurred in such a challenge, including reasonable attorney's fees; (c) The arbitration hearing shall be held in Hamilton, Ohio, unless the parties mutually agree to another location; (d) Each party shall exchange documents to be utilized as exhibits in the arbitration hearing and each party shall be limited to two (2) pre-hearing depositions of two (2) hours each, unless the arbitrator orders additional discovery; (e) The arbitrator shall be appointed in accordance with Rule 12 of the above-referenced Rules of the American Arbitration Association, except that if, for any reason, an arbitrator cannot be selected by the process described in Rule 12, subparts (i) through (iii), the American Arbitration Association shall submit the names of seven (7) additional arbitrators from its Roster and the parties shall select the arbitrator by alternately striking names with the party requesting arbitration first striking; and (f) Either party shall be entitled to an injunction or other appropriate equitable relief to enforce the arbitration provisions of this Agreement and FFBC shall be entitled to an injunction to prevent any breach, pending arbitration, of the Confidentiality Agreement described below in paragraph 8 or the Covenant Not to Compete described below in paragraph 10. It is the intention of the parties to avoid litigation in any court of all claims concerning this Agreement, or otherwise arising from your employment with FFBC, or its affiliate bank, and that all such claims will be subject to this arbitration agreement. 9 Brian D. Moriarty January 27, 1998 Page 9 Neither party shall commence or pursue any litigation on any claim that is or was the subject of arbitration under this Agreement. Each party agrees that this agreement to arbitrate and the arbitration award are enforceable under and subject to the Federal Arbitration Act, 9 U.S.C. ss. I, et seq. ("FAA"). If the FAA is held not to apply for any reason and the law of the state in which you are employed recognizes the enforceability of this Agreement and the arbitration award, then this Agreement and the arbitration award are enforceable under the laws of the state in which you are employed. Both parties consent that judgment upon the arbitration award may be entered in any federal or state court that has jurisdiction. The acceptance of any benefit under this Agreement shall be deemed ratification of this agreement to arbitrate claims. In the event you breach this Agreement by filing a lawsuit, at the time your lawsuit is filed, you will return any Special Severance Benefits paid to you and be subject to injunctive relief enforcing this Agreement. 8. CONFIDENTIALITY. You will not disclose to any person or use for the benefit of yourself or any other person any confidential or proprietary information of FFBC without the prior written consent of the Chief Executive Officer of FFBC. Upon your termination of employment, you will return to FFBC all written or electronically stored memoranda, notes, plans, customer lists, records, reports or other documents of any kind or description (including all copies in any form whatsoever) relating to the business of FFBC and fully comply with any separate confidentiality agreement to which you and FFBC are parties. 9. CONFLICTS OF INTEREST. You agree for so long as you are employed by FFBC to avoid dealings and situations that would create the potential for a conflict of interest with FFBC. In this regard, you agree to comply with the FFBC policy regarding conflicts of interest and all applicable state or federal regulations concerning conflicts of interest applicable to commercial bank or savings bank officers. 10. COVENANT NOT TO COMPETE. During the term of this Agreement, and for a period of six (6) months following the termination of your employment for any reason other than as set forth in Section 4(b), you agree not to be employed by, serve as officer or director of, consultant to or advisor to any business that engages either directly or indirectly in commercial banking, savings banking or mortgage lending in the geographic area of Ohio, Indiana, Michigan or Kentucky or which is reasonably likely to engage in such businesses in the same 10 Brian D. Moriarty January 27, 1998 Page 10 geographic area during the six (6) month period following your termination of employment. 11. NOTICE. Notices required or permitted under this Agreement shall be in writing and shall be deemed to have been given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, in a properly addressed envelope. Notices to FFBC shall be addressed to the Chief Executive Officer. 12. MODIFICATION; WAIVER; SUCCESSORS. No provision of this Agreement may be waived, modified or discharged except pursuant to a written instrument signed by you and the Chief Executive Officer of FFBC. This Agreement is binding upon any successor to all or substantially all of the business or assets of FFBC. 13. VALIDITY; COUNTERPARTS. This Agreement shall be governed by and construed under the law of the State of Ohio. The validity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Sincerely yours, FIRST FINANCIAL BANCORP By: /s/Stanley N. Pontius, Pres. ---------------------------- and FIRST NATIONAL BANK OF SOUTHWESTERN OHIO By:___________________________ 11 Brian D. Moriarty January 27, 1998 Page 11 ACCEPTED AND AGREED TO THIS 28th DAY OF JANUARY, 1998. /s/ Brian D. Moriarty - ----------------------------- Brian D. Moriarty EX-10.11 3 EXHIBIT 10.11 1 EXHIBIT 10.11 FIRST FINANCIAL BANCORP. DIRECTOR FEE STOCK PLAN 1. NAME AND PURPOSE. (a) The plan set forth herein shall be known as the First Financial Bancorp. Director Fee Stock Plan (the "Plan"). The Plan, as set forth herein, is effective as of May 25, 1999 (the "Effective Date"). (b) The purpose of the Plan is to enable Directors of First Financial Bancorp. (the "Corporation") to acquire a proprietary interest in the growth and performance of the Corporation and thereby an increased incentive to work for the future success of the Corporation, by delivering common shares, without par value, of the Corporation (the "Common Shares") to the Directors in payment of their annual retainer. 2. ADMINISTRATION. (a) The plan shall be administered by the Compensation Committee of the Board of Directors of the Corporation (the "Committee"). (b) The Committee shall, subject to the applicable provisions of the Plan, have full authority and discretion to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to prepare forms to use with respect to the Plan, to prepare material explaining the Plan to Directors, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee's determination as to any matter relating to the interpretation of the Plan shall be conclusive on all persons. (c) The Committee may delegate to any other persons the ability to act on behalf of the Committee with respect to any of the duties assigned to the Committee under the Plan, including the duty to appoint and/or terminate an independent manager in accordance with the provisions of paragraphs (d) and (f) of this Section 2. Any action of such persons, when within the scope of their authority as assigned by the Committee, shall be treated the same as if it had been performed by the Committee. The Committee shall, if it delegates any of its duties to other persons, oversee the activity of such persons to ensure that the duties delegated to such persons are being performed competently. (d) Further, the Committee shall appoint a bank, a brokerage house or any other entity, which is not part of the controlled group of corporations (within the meaning of section 1563 of the Internal Revenue Code) that includes the Corporation, to act as an independent manager of certain stock accounts required under the subsequent provisions of the Plan, to issue statements to Directors concerning their accounts, and to do any other duties assigned to the independent manager by the terms of the Plan or by the Committee (such bank, brokerage house or other entity being herein called the "Independent Manager"). 2 (e) The compensation of the Independent Manager for providing services for the Plan shall be determined by agreement between the Committee and the Independent Manager. (f) The Independent Manager shall serve at the pleasure of the Committee and may be terminated at any time by the Committee upon at least 60 days prior written notice to the Independent Manager (or upon such lesser notice as is agreed to by the Committee and the Independent Manager). Similarly, the Independent Manager may resign its position at any time upon at least 60 days prior written notice to the Committee (or upon such lesser notice as is agreed to by the Committee and the Independent Manager). If any Independent Manager is terminated or resigns, the Committee shall appoint another bank, brokerage house or other entity, which is not part of the controlled group of corporations that includes the Corporation, to serve as Independent Manager under the Plan as of the effective date of the prior Independent Manager's termination or resignation. (g) Except as otherwise may be expressly provided in the Plan, all expenses of administering the Plan, including the compensation of the Independent Manager and commissions and brokerage fees incurred for the purchase of Common Shares under the Plan, and any applicable city income tax deposits attributable to the directors' annual retainer, shall be paid by the Corporation. 3. ELIGIBLE EMPLOYEES. For purposes of the Plan, a "Director" refers to, as of any date, a person who is serving as a director of the Corporation. 4. DIRECTOR FEE CONTRIBUTIONS. (a) On July [20,] October [20,] January [20] and April [20] of each year (or if any such date is not a business day, on the next succeeding business day) (the "Payment Date"), the Corporation will forward to the Independent Manager the Quarterly Amount for each Director, which Quarterly Amount will be allocated to a non-interest bearing account maintained by the Independent Manager in the name of the Director (the "Director's Fee Account") until such amounts are applied to purchase Common Shares. The "Quarterly Amount" is the quotient of (i) amount of the annual retainer authorized (as of such Payment Date) to be paid to each Director (ii) divided by four. (b) In addition, amounts which are attributable to cash dividends paid on Common Shares held in a Director's Stock Account will, to the extent provided in Section 6(b) below, also be allocated to the Director's Fee Account until such amounts are applied to purchase Common Shares or are distributed in accordance with the provisions of Section 5 below. (c) No interest shall be paid or allocated on any amounts allocated to a Director's Fee Account. 5. PURCHASE OF COMMON SHARES. -2- 3 (a) The Independent Manager shall use the amounts allocated under Section 4 above to a Director's Fee Account to purchase, as soon as the Independent Manager determines that it is legally and commercially practical to buy the Common Shares then required for the Plan, as many whole Common Shares as can be purchased with such amounts. The Independent Manager will use its best efforts to purchase such Common Shares by the last day of the calendar quarter in which it receives the Quarterly Amounts. Any such purchase of Common Shares will be made in the name of the Independent Manager's nominee for the account of the Plan and effected in accordance with the following provisions. The Common Shares will be purchased on the largest national securities exchange on which Common Shares are then listed, at the then prevailing market prices of such shares. (b) In the event that, after the maximum whole number of Common Shares has been purchased with respect to the amounts allocated to a Director's Fee Account as of any date under the foregoing provisions of this Section 5, an amount remains held under such Director's Fee Account, such amount will be used, to the extent possible, to purchase Common Shares under and in accordance with the foregoing provisions of this Section 5 as soon as the Independent Manager determines that it is legally and commercially practical on or after any date on which additional amounts are allocated to such account under the provisions of Section 4 above (or, if earlier, on or after any date on which such amounts are able on their own to purchase one or more whole Common Shares) to purchase the Common Shares then required for the Plan. (c) Common Shares purchased with respect to amounts allocated to a Director's Fee Account shall be held in an account maintained by the Independent Manager in the name of the Director (the "Stock Account"). (d) If any amount is still allocated to a Director's Fee Account as of a Payment Date which begins after he has ceased to serve as a Director of the Corporation and has requested his entire Stock Account under Section 6 below, then such amount will, to the extent it cannot then purchase a whole number of Common Shares, be paid in cash by the Independent Manager to the Director as soon as administratively practical after such Payment Date. 6. DISTRIBUTION OF STOCK ACCOUNT. (a) Until distributed or sold under the following provisions of this Section 6, all Common Shares purchased under the Plan with respect to a Director shall be held in the Director's Stock Account. Any Common Shares held in a Director's Stock Account shall at all times constitute assets of the Director and not of the Independent Manager or the Corporation, and the Director shall be entitled to all the rights and privileges of a shareholder with respect to shares held in his Stock Account, including full voting and dividend rights applicable to Common Shares. (b) Further, any dividends paid with respect to Common Shares held in a Director's Stock Account shall be used, as soon as the Independent Manager determines that it is legally and commercially practical following the payment of such dividends to buy the Common Shares then required for the Plan, to purchase for the Director's Stock Account the maximum whole number of Common Shares which such amounts can purchase. Such purchase shall be -3- 4 made in accordance with the provisions of Section 5 above. Any remaining amount of such dividends which is not then sufficient to purchase additional whole Common Shares shall at such time be allocated to the Director's Fee Account. (c) A Director (or, in the case of the Director's death, his estate) may request at any time, pursuant to any reasonable administrative rules established by the Committee and the Independent Manager for this purpose, that the Independent Manager distribute to him (or, if applicable, his estate) the Director's entire Stock Account or any portion of such Stock Account. As soon as administratively practicable following such request, the Independent Manager shall distribute to the Director (or, in the event of the Director's death, his estate) the portion of the Director's Stock Account which has been requested in accordance with the following provisions: (i) Except as otherwise provided below, such distribution shall be effected by the Independent Manager distributing, or causing to be distributed, to the Director (or, if applicable, to his estate) a stock certificate for the number of Common Shares then held in that portion of the Director's Stock Account which has been requested. At the date of distribution, if such Common Shares have not been held in the Director's Stock Account for at least 12 months after their date of purchase, the stock certificates shall bear the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF REGISTRATION OR THE AVAILABILITY OF AN EXEMPTION UNDER THE SECURITIES ACT OF 1933. THE ISSUER WILL NOT EFFECTUATE THE TRANSFER OF THESE SECURITIES UNLESS AND UNTIL THE SECURITIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE ISSUER HAS BEEN ADVISED BY COUNSEL SATISFACTORY TO IT THAT AN EXEMPTION FROM THE REGISTRTION REQUIREMENTS OF SUCH ACT IS AVAILABLE FOR SUCH TRANSFER. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO, AND ARE TRANSFERABLE ONLY ON COMPLIANCE WITH THE FIRST FINANCIAL BANCORP. DIRECTOR FEE STOCK PLAN. Prior to any sale or other distribution (except a gift) of the distributed Common Shares by the Director, the Director must hold (including the time period during which the Common Shares were held in the Director's Stock Account) such distributed Common Shares for at least 12 months after their date of purchase. (ii) Further, notwithstanding the foregoing but subject to the following provisions of this paragraph (c), the foregoing provisions of this paragraph (c) regarding the 12 month holding period for sales by a Director and the Director's compliance with all legal requirements pertaining to his sale of Common Shares, the Director (or, in the event of the -4- 5 Director's death, his estate) may request that the Independent Manager cause to be sold, on behalf of the Director (or, if applicable, on behalf of his estate) and on the largest national securities exchange on which Common Shares are then listed, all of the Common Shares then held in that portion of the Director's Stock Account which has been requested, for the then prevailing market prices of such shares less any commission or other expenses of such sale, in which case the net proceeds of such sale shall be distributed to the Director (or, in the event of the Director's death, to his estate) instead of a stock certificate being distributed to the Director (or his estate). (iii) In the event a portion but not all of a Director's Stock Account is to be distributed or sold under the foregoing provisions of this paragraph (c), that portion of such Stock Account which is to be distributed or sold shall be deemed to consist to the extent possible of Common Shares purchased at the earliest points in time. (iv) Notwithstanding any of the foregoing provisions of this paragraph (c), a Director or a Director's estate who or which is an insider (as defined below) may not request that the Independent Manager cause to be sold, on his or its behalf, any Common Shares then held in the Director's Stock Account under subparagraph (ii) of this paragraph (c) during any closed period (as defined below). For purposes of this subparagraph (iv), an "insider" means any person or entity covered by the Company's policies providing insider trading prohibitions. Also, for purposes of this subparagraph (iv), a "closed period" means each period which begins 30 days before the end of any calendar quarter and ends three business days after the release to the public of the Corporation's earnings statements for such calendar quarter or any other period during which the Corporation reasonably determines that Common Shares should not be traded by insiders by reason of applicable securities laws. (d) In addition, notwithstanding any other provision of the Plan, all persons who have ceased to serve as Directors (or, in the event of any such persons' deaths, their estates) must file, within 180 days of ceasing to be a Director, a request for the distribution of their then existing Stock Accounts under the procedures described in paragraph (c) of this Section 6. In the event that any such persons or estates fail to file such requests, their Stock Accounts shall be distributed in the manner described in paragraph (c)(i) of this Section 6. (e) Within 15 days after the end of each calendar quarter (or at such other intervals as the Committee may prescribe), each Director who then has a Stock Account under the Plan shall be furnished by the Independent Manager a statement showing the number of shares then credited to his Stock Account, the amount of cash then credited to his Director's Fee Account, and such other information as the Committee prescribes. In addition, the Independent Manager shall furnish the Committee a duplicate copy of each statement furnished a Director under this paragraph (e) at the same time as such statement is furnished the Director. 7. MISCELLANEOUS PROVISIONS. (a) The Corporation shall have, with respect to any Director, the right (without notice to the applicable Director) to withhold from any amounts payable to the Director by the Corporation (including amounts contributed by the Corporation that are used to purchase Common Shares for the Director's Stock Account under the Plan) an amount sufficient to satisfy -5- 6 all federal, state, and local withholding tax requirements that may apply with respect to amounts contributed under the Plan for the Director. (b) If at any time the Committee shall determine, in its discretion, that the listing of Common Shares purchased under the Plan on any securities exchange, the registration or qualification of such shares under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the purchase, issue, or transfer of such Common Shares purchased under this Plan, then such Common Shares shall not be purchased, issued, or transferred unless and until one of the following conditions is satisfied: (i) such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee, or (ii) the applicable Director shall have agreed that the Common Shares may be issued or transferred subject to any restrictions that will make it unnecessary to effect or obtain such listing, registration, qualification, consent or approval. 8. NO RIGHT OF EMPLOYMENT. Nothing contained in the Plan shall confer on any Director any right to be continued in the position of "director" of the Corporation. 9. AMENDMENT OR TERMINATION OF PLAN. (a) The Board of Directors of the Corporation (the "Board") shall have the right to amend, suspend, or terminate this Plan. It is provided, however, that no action to amend, suspend, or terminate the Plan shall affect adversely the rights of any Director under this Plan with respect to Common Shares purchased prior to such action. (b) Further, the Board may, by adopting an appropriate resolution at a valid meeting of the Board or in a writing signed by all members of the Board, delegate to any person or committee any or all of its rights and duties hereunder to amend, suspend, or terminate the Plan. Any such delegation shall be valid and binding on all persons, and the person or committee to whom or which authority is delegated shall have full power to act in all matters as delegated until the authority expires by its terms or is revoked by the Board, as the case may be. Any action taken by such person or committee in accordance with such delegation may be evidenced by a writing signed by such person or committee and, if such action is within the scope of authority so delegated, shall be given the same effect as if the Board had taken such action itself. 10. GOVERNING LAW. The laws of Ohio shall govern all matters relating to this Plan except to the extent they are superseded by the laws of the United States. 11. GENDER. Any words used herein in the masculine shall be read and construed in the feminine where they would so apply. 12. EFFECTIVE DATE OF PLAN. The Plan is effective as of May 25, 1999. -6- 7 IN WITNESS WHEREOF, the Corporation has hereunto caused its name to be subscribed to this Plan on the 25th day of May, 1999. FIRST FINANCIAL BANCORP. By: /s/ Stanley N. Pontius ------------------------------------------ Stanley N. Pontius, President and Chief Executive Officer EX-13 4 EXHIBIT 13 1 Exhibit 13 MISSION STATEMENT To provide a balanced offering of innovative, quality differentiated financial products and extraordinary customer service to our clientele. To safeguard the interests of our depositors. To maximize the return on investment to our shareholders by consistently earning the highest possible returns, while being ever mindful of the associated ethical and moral considerations necessary to ensure the Bancorp's financial stability and long-term independence. To promote the economic growth and development of the communities we serve. To provide a stimulating work environment and optimal career path potential for all Bancorp associates in order to instill the highest level of commitment and dedication to First Financial Bancorp and our varied constituencies. SHAREHOLDER INFORMATION ANNUAL MEETING The Annual Meeting of Shareholders will be held at the Fitton Center for Creative Arts 101 South Monument Avenue Hamilton, Ohio Tuesday, April 25, 2000, 2:00 p.m. FORM 10-K For copies of First Financial Bancorp's Form 10-K write to: Michael R. O'Dell Chief Financial Officer First Financial Bancorp 300 High Street, P.O. Box 476 Hamilton, OH 45012-0476 513-867-4951 513-867-3112 (FAX) Terri.Ziepfel@FFBC-OH.com (e-mail) TRANSFER AGENT AND REGISTRAR Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 1-800-368-5948 908-497-2310 (FAX) NASDAQ OTC NATIONAL MARKET Common Stock Symbol: FFBC DIRECTORS Barry J. Levey, Chairman of the Board, First Financial; Retired Ohio State Senator, 4th District; Retired Partner, Frost & Jacobs -- Middletown, Attorneys-at-Law. Stanley N. Pontius, President and Chief Executive Officer, First Financial, and Chairman of the Board, First Southwestern. Richard L. Alderson, Partner, Real Estate Investment and Development. Martin J. Bidwell, President, Magnode Corp. Don M. Cisle, President, Don S. Cisle Contractor, Inc. Dan R. Dalton, Dean, Kelley School of Business, Indiana University. Corinne R. Finnerty, Partner, McConnell & Finnerty, Attorneys-at-Law. Carl R. Fiora, Retired President and Chief Executive Officer, Armco Steel Co., L.P. James C. Garland, President, Miami University, Oxford, Ohio. F. Elden Houts, Chairman of the Board, Community First Bank & Trust. Murph Knapke, Owner, Knapke Law Office, Attorney-at-Law. Bruce E. Leep, Chairman and Chief Executive Officer, Sand Ridge Bank. Stephen S. Marcum, Partner, Parrish, Fryman & Marcum Co., L.P.A. Barry S. Porter, Chief Financial Officer, The Ohio Casualty Corp. Steven C. Posey, President, Posey Management Corp. Perry D. Thatcher, President and CEO, Ample Industries, Inc. DIRECTORS EMERITI Arthur W. Bidwell, Thomas C. Blake, Merle F. Brady, Don S. Cisle, Jr., Edward N. Dohn, Richard J. Fitton, Vaden Fitton, Robert M. Jones, Charles T. Koehler, Robert W. Long, Joseph L. Marcum, Robert Q. Millan, Frank C. Neal, James L. Pease, Jr., C. Wesley Rowles, Joel H. Schmidt, Hon. C. William Verity, Jr. OFFICERS President and Chief Executive Officer Stanley N. Pontius Senior Vice President Mark W. Immelt Senior Vice President, Human Resources Brian D. Moriarty Senior Vice President, Chief Financial Officer, and Secretary Michael R. O'Dell Senior Vice President, Consumer Banking and Operations Michael T. Riley First Vice President, Investments Gary A. Eppley First Vice President, Comptroller C. Douglas Lefferson Vice President, Business Development Cheryl R. Lipp Acting Chief Lending Officer Howard Stammen Compliance Officer Terence M. Fitz Auditor Daniel C. Mergy 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS FIRST FINANCIAL BANCORP 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, 1999, Bancorp owned seventeen subsidiaries located in western Ohio, Indiana, northern Kentucky and southern Michigan. These subsidiaries include thirteen commercial banks, two savings banks, one finance company and a service corporation. On November 23, 1999, the board of directors declared a 10% stock dividend to be distributed on January 3, 2000, to shareholders of record as of December 3, 1999. All per-share data has been restated to reflect the stock dividend. In addition, the Board declared a quarterly cash dividend of 15 cents per share for each post-stock-dividend share, also payable January 3, 2000, to shareholders of record as of December 3, 1999. 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. For a thorough understanding of Bancorp's financial results and conditions, this discussion should be read in conjunction with the statistical data and consolidated financial statements on Pages 12 through 31. RECENT MERGERS AND ACQUISITIONS On June 30, 1999, Union Trust Bank (Union Trust), a wholly owned subsidiary of Bancorp, merged into Community First Bank & Trust (Community First), also a wholly owned subsidiary of Bancorp. Upon completion of the merger, Union Trust's three offices located in Randolph County, Indiana, became offices of Community First. On June 1, 1999, Bancorp issued 5,114,878 shares of its common stock for all the outstanding common stock of Sand Ridge Financial Corporation (SRFC). Upon consummation of the merger, SRFC was merged out of existence and its only subsidiary, Sand Ridge Bank, became a wholly owned subsidiary of Bancorp. Sand Ridge Bank operates five offices, an operations center, and a network of 17 ATMs in Lake County, Indiana. Its main office is located in Highland, Indiana, which is about 20 miles southeast of Chicago. The merger was accounted for using the pooling-of-interests method of accounting; 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 SRFC. On June 1, 1999, Bancorp issued 1,222,599 shares of its common stock for all the outstanding common stock of Hebron Bancorp, Inc. (HBI). Upon consummation of the merger, HBI was merged out of existence and HBI's only subsidiary, Hebron Deposit Bank, became a wholly owned subsidiary of Bancorp. Hebron Deposit Bank has three offices located in Boone County in northern Kentucky. This merger represents Bancorp's first association with a Kentucky bank. The merger was accounted for using the pooling-of-interests method of accounting; 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 HBI. OTHER STRATEGIC INITIATIVES Bancorp formed First Financial Bancorp Service Corporation (Service Corporation) on June 1, 1999. The Service Corporation was formed to provide support services to Bancorp's other affiliates. Services include information systems, bankcard and ATM services, items processing, deposit services, lock box operations, mail and messenger services and the Y2K project office. The success of community banking depends largely on the ability to deliver quality customer service. Technological advances will play an increasingly significant role in Bancorp's growth and ability to deliver products and services to its customers. By forming the Service Corporation, Bancorp intends to keep operations strong and reliable while maximizing its return from future investments in technology and operations. OVERVIEW OF OPERATIONS Bancorp's net earnings before merger and restructuring charges increased 9.43% to $55,777,000, compared to net earnings of $50,972,000 during 1998. Excluding the merger and restructuring charges, Bancorp's diluted earnings per share increased 10.2%, from $1.08 during 1998 to $1.19 during 1999. The merger and restructuring charges relate to the mergers with Hebron Bancorp, Inc. and Sand Ridge Financial Corporation and the consolidation of some operational functions. The charge related to the operational functions involved the sale of several facilities, the more effective use of other existing properties, the merger of Union Trust into Community First and the discontinuance of an accounts receivable financing product. (See Note 21 of the Notes to Consolidated Financial Statements for more information about the restructuring charges.) Bancorp's adjusted diluted earnings per share on a "cash basis," which excludes the effect of amortization of goodwill and core deposits (tax affected when applicable), and merger and restructuring charges, were $1.24 for 1999, which is an 8.77% increase over 1998. Including merger and restructuring charges, Bancorp's net earnings for 1999 were $50,323,000, a 1.27% decrease from 1998's net earnings. Diluted net earnings per share were $1.07, or a 0.93% decrease from 1998 earnings per share. Bancorp's net earnings during 1998 were $50,972,000 or $1.08 per share on a diluted basis, representing an 8.84% increase over 1997 net earnings and a 9.09% increase over 1997 earnings per share on a diluted basis. Bancorp's diluted earnings per share on a "cash basis" for 1998 were $1.14, which is a 10.5% increase over 1997 earnings per share on a "cash basis." Bancorp's return on equity for 1999, excluding the merger and restructuring charges, was 15.2%, which compares to 14.6% for both 1998 and 1997. Bancorp's return on assets for 1999, again excluding merger and restructuring charges, was 1.51%. This compares with return on asset ratios of 1.53% and 1.61% for 1998 and 1997, respectively. Including the merger and restructuring charges, Bancorp's return on equity for 1999 was 13.8% and its return on assets was 1.37%. 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 1995 through 1999 is shown in Table 1. For analytical purposes, 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 for all years presented. 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 FIRST FINANCIAL BANCORP 1 1999 ANNUAL REPORT 3 TABLE 1 - FINANCIAL SUMMARY
1999 1998 1997 1996 1995 (Dollars in thousands, except per share data) SUMMARY OF OPERATIONS Interest income $ 282,398 $ 262,670 $ 231,993 $ 207,539 $ 187,844 Tax equivalent adjustment 5,246 4,862 4,927 5,120 5,785 --------- --------- --------- --------- --------- Interest income - tax equivalent 287,644 267,532 236,920 212,659 193,629 Interest expense 117,194 110,434 96,576 87,827 80,803 --------- --------- --------- --------- --------- NET INTEREST INCOME - TAX EQUIVALENT $ 170,450 $ 157,098 $ 140,344 $ 124,832 $ 112,826 ========= ========= ========= ========= ========= Interest income $ 282,398 $ 262,670 $ 231,993 $ 207,539 $ 187,844 Interest expense 117,194 110,434 96,576 87,827 80,803 --------- --------- --------- --------- --------- Net interest income 165,204 152,236 135,417 119,712 107,041 Provision for loan losses 9,232 8,247 6,656 5,029 3,436 Noninterest income 41,312 39,512 31,295 25,747 24,011 Noninterest expenses 120,661 107,845 91,229 82,818 75,035 --------- --------- --------- --------- --------- Income before income taxes 76,623 75,656 68,827 57,612 52,581 Income tax expense 26,300 24,684 21,995 17,525 15,619 --------- --------- --------- --------- --------- Net earnings $ 50,323(2) $ 50,972 $ 46,832 $ 40,087(3) $ 36,962 ========= ========= ========= ========= ========= Tax equivalent basis was calculated using a 35.0% tax rate in all years presented PER SHARE DATA (1) NET EARNINGS - BASIC $ 1.07 $ 1.08 $ 1.00 $ 0.87 $ 0.85 ========= ========= ========= ========= ========= NET EARNINGS - DILUTED $ 1.07 $ 1.08 $ 0.99 $ 0.87 $ 0.85 ========= ========= ========= ========= ========= Cash dividends declared First Financial Bancorp $ 0.57 $ 0.52 $ 0.47 $ 0.42 $ 0.36 Sand Ridge Financial Corporation(4) $ 4.75 $ 18.00 $ 17.00 $ 16.00 $ 15.00 Hebron Bancorp, Inc.(5) $ 1.50 $ 5.50 $ 5.00 $ 4.00 $ 2.50 Average common shares outstanding - basic (in thousands) 46,849 46,984 47,014 45,868 43,540 SELECTED YEAR-END BALANCES Total assets $3,940,693 $3,538,869 $3,189,663 $2,775,819 $2,588,120 Earning assets 3,572,755 3,253,574 2,911,760 2,562,674 2,396,749 Investment securities held-to-maturity 31,765 37,782 62,511 84,255 98,781 Investment securities available-for-sale 490,126 550,394 503,936 432,574 435,507 Loans, net of unearned income 3,036,376 2,654,146 2,322,953 2,025,867 1,838,278 Deposits 2,991,213 2,872,067 2,692,688 2,323,772 2,202,750 Noninterest-bearing demand deposits 408,712 392,999 370,960 289,260 267,915 Interest-bearing demand deposits 314,735 307,752 338,968 375,848 357,568 Savings deposits 778,405 758,808 655,719 518,888 494,420 Time deposits 1,489,361 1,412,508 1,327,041 1,139,776 1,082,847 Long-term borrowings 161,799 120,777 46,570 6,506 2,820 Shareholders' equity 372,539 358,265 336,256 301,975 272,818 RATIOS BASED ON AVERAGE BALANCES Loans to deposits 98.28% 89.07% 89.04% 85.76% 86.20% Net charge-offs to loans 0.20% 0.24% 0.18% 0.27% 0.10% Shareholders' equity to Total assets 9.93% 10.46% 11.04% 10.89% 10.33% Deposits 12.61% 12.64% 13.29% 12.86% 12.19% Return on Assets 1.37% 1.53% 1.61% 1.51% 1.54% Return on Equity 13.75% 14.59% 14.63% 13.90% 14.93% Net interest margin (tax equivalent basis) 4.98% 5.07% 5.17% 5.04% 5.02%
(1) First Financial Bancorp's per share data has been restated for all stock dividends, stock splits, and material pooling-of-interests mergers through 1999. (2) 1999 net earnings includes $6,930,000 ($5,454,000 after tax) in merger and restructuring charges. (3) 1996 net earnings includes the effect of a $2,144,000 ($1,389,000 after tax) charge for a special assessment paid to the Savings Association Insurance Fund which reduced earnings by 4.0%. (4) Sand Ridge Financial Corporation was the parent company of Sand Ridge Bank and was merged out of existence on June 1, 1999. (5) Hebron Bancorp, Inc. was the parent company of Hebron Deposit Bank and was merged out of existence on June 1, 1999. FIRST FINANCIAL BANCORP 2 1999 ANNUAL REPORT 4 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 12. Tax equivalent interest income was $287,644,000 in 1999, an increase of $20,112,000 or 7.52% over 1998. The increase was due to an increase of $324,991,000 in the volume of earning assets, from an average of $3,096,940,000 during 1998 to $3,421,931,000 during 1999. Average outstanding loan balances increased $391,260,000, while investment securities and other instruments decreased $66,269,000. The increase due to volume was partially offset by a 23-basis-point (a basis point equals 0.01%) decrease in average yields earned on total earning assets, from 8.64% during 1998 to 8.41% during 1999. Total interest expense was $117,194,000 in 1999, an increase of $6,760,000 over 1998. This was due to an increase of $299,230,000 in total interest-bearing liabilities, from an average of $2,611,140,000 during 1998 to an average of $2,910,370,000 during 1999. The increase due to volume was partially offset by a 20-basis-point decrease in the average rate paid for deposits and borrowings, from 4.23% during 1998 to 4.03% during 1999. Tax equivalent net interest income, the difference between tax equivalent total interest income and total interest expense, increased $13,352,000 during 1999. The increased interest income was greater than the increased interest expense, thereby causing net interest income to increase. The interest rate spread and the net interest margin are two ratios frequently used to measure differences in net interest income. Although the average rate paid for deposits and borrowed money decreased from 4.23% during 1998 to 4.03% for 1999, the average rate earned on loans and investments decreased more. The average rate earned during 1998 was 8.64%, compared to an average rate of 8.41% during 1999. The result was a decrease in the interest rate spread and the net interest margin. The interest rate spread (the average rate on earning assets minus the average rate on interest-bearing liabilities) was 4.38% for 1999 and 4.41% for 1998, a difference of three basis points. The net interest margin (net interest income on a tax equivalent basis divided by average earning assets) decreased nine basis points, from 5.07% during 1998 to 4.98% during 1999. 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 1999, 1998, and 1997 was $8,269,000, $6,799,000, and $5,328,000, respectively. NONINTEREST INCOME AND NONINTEREST EXPENSES A listing of noninterest income and noninterest expenses for 1999, 1998, and 1997 is shown in Table 3. Although the mergers that occurred during 1998 and 1997 did not materially affect net earnings, they influenced the individual line items for noninterest income and expense. Affiliates that joined Bancorp during 1998 and 1997 are included in the Consolidated Statements of Earnings starting with their date of acquisition. The mergers that occurred during 1999 were accounted for using the pooling-of-interests method of accounting, and the consolidated financial statements for prior years were restated to include account balances and results of operations for the companies acquired.
TABLE 2 - VOLUME/RATE ANALYSIS - TAX EQUIVALENT BASIS(1) 1999 CHANGE FROM 1998 DUE TO 1998 CHANGE FROM 1997 DUE TO VOLUME RATE TOTAL VOLUME RATE TOTAL (Dollars in thousands) INTEREST INCOME Loans $ 34,513 $ (9,863) $ 24,650 $ 28,912 $ 232 $ 29,144 Investment securities (2) Taxable (5,215) (15) (5,230) 4,386 (1,790) 2,596 Tax-exempt 1,979 (895) 1,084 1,120 (1,348) (228) --------- --------- --------- -------- --------- --------- Total investment securities interest(2) (3,236) (910) (4,146) 5,506 (3,138) 2,368 Interest-bearing deposits with other banks 113 (65) 48 19 1 20 Federal funds sold and securities purchased under agreements to resell (343) (97) (440) (809) (111) (920) --------- --------- --------- -------- --------- --------- TOTAL 31,047 (10,935) 20,112 33,628 (3,016) 30,612 INTEREST EXPENSE Interest-bearing demand deposits (136) (623) (759) (225) (355) (580) Savings deposits 1,902 (1,529) 373 2,680 (694) 1,986 Time deposits 1,806 (4,458) (2,652) 10,894 (1,013) 9,881 Short-term borrowings 7,037 115 7,152 (578) (125) (703) Long-term borrowings 2,735 (89) 2,646 3,471 (197) 3,274 --------- --------- --------- -------- --------- --------- TOTAL 13,344 (6,584) 6,760 16,242 (2,384) 13,858 --------- --------- --------- -------- --------- --------- NET INTEREST INCOME $ 17,703 $ (4,351) $ 13,352 $ 17,386 $ (632) $ 16,754 ========= ========= ========= ======== ========= =========
(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 3 1999 ANNUAL REPORT 5 The purchase of 11 branches from KeyBank National Association closed on December 8, 1997. The assumption of $246 million in deposits and the purchase of $60 million in loans were included in the branch purchase. Income and expense for a full year are therefore reported in the Consolidated Statements of Earnings for the first time in 1998, since the purchase had only a minor influence on 1997 earnings. NONINTEREST INCOME 1999 vs. 1998. Total noninterest income, exclusive of securities gains or losses, increased by $2,810,000 or 7.31% during 1999. Service charges on deposit accounts increased $2,079,000 or 14.3% over 1998 primarily due to an increase in the number of transaction accounts and to pricing adjustments. Trust revenues, which are primarily calculated using the market value of trust assets held, increased $1,264,000 or 10.4% in 1999 due to an increase in the number of trust relationships. 1998 vs. 1997. Noninterest income, excluding securities transactions, increased $7,304,000 or 23.4% in 1998. Service charges on deposit accounts increased $1,708,000 or 13.3% over 1997 primarily due to higher number of accounts created by recent mergers and acquisitions and to pricing adjustments. Trust revenues increased $2,096,000 or 20.9% over 1997 due primarily to an increase in the market value of trust assets held and to pricing adjustments. Other noninterest income increased $3,500,000 or 42.4%. Contributing to the increase were increased gains from sales of real estate loans, income as a result of recent mergers and acquisitions, and other miscellaneous items. NONINTEREST EXPENSES 1999 vs. 1998. Not including the restructuring charge of $6,930,000, noninterest expenses in 1999 increased $5,886,000 or 5.46% over 1998. The largest component of noninterest expenses is salaries and employee benefits, which increased $4,171,000 or 7.26% during 1999. Noninterest expenses were $12,816,000 or 11.9% greater during 1999 when compared to the previous year if the restructuring charge is included. (See Note 21 of the Notes to Consolidated Financial Statements for more information about the restructuring charges.) The efficiency ratio (noninterest expenses as a percentage of noninterest income, excluding securities transactions, plus tax equivalent net interest income) reflects how much, on average, an institution expends to generate each dollar of revenue. Bancorp's 1999 efficiency ratio, exclusive of the restructuring charge, was 53.7%, compared to ratios of 55.1% and 53.2% for 1998 and 1997, respectively. Including the restructuring charge, the 1999 ratio was 57.0%. 1998 vs. 1997. Noninterest expenses in 1998 increased $16,616,000 or 18.2% over 1997. Salaries and employee benefits increased $8,289,000 or 16.9% in 1998 when compared to 1997. Additional employees needed to support business growth and to staff the 11 branches purchased from KeyBank, increased incentive compensation, and general increases in wages and salaries contributed to the increase. Net occupancy expense increased $670,000 or 11.5% primarily due to branch acquisitions and new facilities. Furniture and equipment expense increased $414,000 or 7.50% during 1998. Increased costs for service contracts on Bancorp's equipment and costs related to new facilities and to the 11 branches acquired from KeyBank affected equipment expense. TABLE 3 - NONINTEREST INCOME AND NONINTEREST EXPENSES
1999 1998 1997 % CHANGE % CHANGE % CHANGE INCREASE INCREASE INCREASE TOTAL (DECREASE) TOTAL (DECREASE) TOTAL (DECREASE) (DOLLARS IN THOUSANDS) NONINTEREST INCOME Service charges on deposit accounts $ 16,629 14.3% $ 14,550 13.3% $ 12,842 15.2% Trust revenues 13,410 10.4% 12,146 20.9% 10,050 19.9% Other 11,223 (4.5%) 11,756 42.4% 8,256 31.1% -------- -------- -------- Subtotal 41,262 7.3% 38,452 23.4% 31,148 20.6% Investment securities gains 50 N/M 1,060 N/M 147 N/M -------- -------- -------- TOTAL $ 41,312 4.6% $ 39,512 26.3% $ 31,295 21.3% ======== ===== ======== ====== ======== ====== NONINTEREST EXPENSES Salaries and employee benefits $ 61,614 7.3% $ 57,443 16.9% $ 49,154 13.1% Net occupancy 7,019 7.8% 6,512 11.5% 5,842 8.6% Furniture and equipment 6,256 5.5% 5,932 7.5% 5,518 10.4% Data processing 6,471 0.4% 6,447 12.2% 5,747 4.5% Deposit insurance 551 16.2% 474 9.7% 432 (85.2%) State taxes 2,025 11.0% 1,824 0.9% 1,808 6.0% Amortization of intangibles 3,674 (8.5%) 4,015 202.8% 1,326 101.8% Restructuring charge 6,930 N/M 0 N/M 0 N/M Other 26,121 3.7% 25,198 17.7% 21,402 17.8% -------- -------- ------ -------- TOTAL $120,661 11.9% $107,845 18.2% $ 91,229 10.2% ======== ===== ======== ====== ======== ======
FIRST FINANCIAL BANCORP 4 1999 ANNUAL REPORT 6 One-time charges related to the conversions of three Bancorp affiliates to a new data service provider and the transfer of the data processing system for the offices acquired from KeyBank to Community First's system contributed to the $700,000 or 12.2% increase in data processing expenses. Contractual fee increases paid to Bancorp's data processing providers also contributed to the increase. Amortization of intangibles increased $2,689,000 or 202.8% due to amortization of intangible core deposits and goodwill resulting from the purchase of the branches from KeyBank and the merger consummated during 1998. Other noninterest expenses increased $3,796,000 or 17.7% due to costs related to new facilities from mergers and branch acquisitions and to general increases in costs. Included in this category are costs related to the Year 2000 computer issue. YEAR 2000 ISSUES Many older computer systems processed transactions using two digits for the year of the transaction rather than a full four digits. As a result, these systems might not have functioned properly at the beginning of the Year 2000 without some proactive hardware and software changes. Bancorp devoted significant time and attention to the Year 2000 issue regarding checking accounts, savings accounts, certificates of deposit, Individual Retirement Accounts, loan and lease accounts, automated teller machines, physical facilities, etc. Bancorp tested and validated against undetected problems and communicated with key business partners regarding Year 2000 preparedness. Several regulatory agencies and authorities issued regulations and guidelines that financial institutions used in measuring their progress toward Year 2000 preparedness. Five commonly recognized phases of Year 2000 remediation were awareness, assessment, renovation, validation and implementation. Bancorp's computer systems fall into three broad categories: those processed through a service bureau relationship, those processed in-house, and those processed on a personal computer or client/server platform. All mission critical and significant computer systems in these categories were renovated and validated and implementation occurred prior to December 31, 1999. As in 1997 and 1998, Bancorp's Year 2000 Operating Committee met regularly during 1999 to direct and oversee all significant Year 2000 tasks. The Operating Committee regularly updated senior management and the Board of Directors, who had given their full support to the Year 2000 project. The Year 2000 Loan Committee, comprised of affiliate senior lenders, assessed the impact of Year 2000 on commercial and retail borrowers and took steps to mitigate the risk inherent in those loans. The Asset/Liability Committee and Operating Committee assessed and estimated the impact of liquidity and currency demands that could have occurred during the latter part of 1999 and impact the Year 2000. Management of each subsidiary took steps to insure that they had appropriate funding resources and currency on hand to meet anticipated customer demands. As Bancorp grew and as Year 2000 approached, Bancorp, as well as many other financial institutions, developed plans concerning alternative sources of funding, if needed. Many of Bancorp's affiliates executed agreements with the Federal Home Loan Bank for their "Year 2000 Liquidity Line of Credit" making guaranteed lines of $201,000,000 available to them. Most affiliates completed the necessary legal documentation and pre-pledged collateral consisting of eligible investment securities or loan assets to the Federal Reserve Discount Window. Bancorp spent a great deal of time ensuring that it had an effective program in place to address and resolve the Year 2000 issue. To mitigate both controlled and uncontrolled risks, Bancorp developed contingency plans in the event any particular system, including significant service providers such as telecommunication and utility systems, did not function properly. The contingency plans for information technology systems primarily called for manual intervention where required. None of the contingency plans required activation. During 1999, Bancorp incurred approximately $1,116,000 in noninterest expense for costs related to Year 2000 issues, bringing the total amount charged to operations since 1997 to $3,007,000. An additional $1,117,000 was capitalized in 1999, bringing the total amount capitalized to $1,303,000. Based on management's current assessment, Bancorp expects to spend approximately $100,000 during 2000 for the close down of its Year 2000 Project Office. Bancorp's computer systems functioned very smoothly on January 1, 2000, and up to the time of this report. There are several other critical dates during the Year 2000. Bancorp will continue to monitor its systems to ensure that it provides timely, accurate, uninterrupted services to its customers. This Year 2000 information is designated as a "Year 2000 Readiness Disclosure" falling under the provision of the "Year 2000 Information and Readiness Disclosure Act." INCOME TAXES Bancorp's tax expense in 1999 totaled $26,300,000 compared to $24,684,000 in 1998 and $21,995,000 in 1997, resulting in effective tax rates of 34.3%, 32.6% and 32.0% in 1999, 1998, and 1997, respectively. The increase in 1999 and 1998's effective rate was primarily due to a decline in the amount of tax-exempt investments held during those years. Further analysis of income taxes is presented in Note 11 of the Notes to Consolidated Financial Statements. LOANS Total loans, net of unearned income, increased $382,230,000 or 14.4% during 1999. A favorable market with respect to loan demand, combined with aggressive loan campaigns and the pursuit of new business, led to net increases during 1999 of $79,930,000 or 11.6% in commercial loans, $37,253,000 or 50.2% in construction loans, $161,526,000 or 12.4% in mortgage loans, $85,123,000 or 15.9% in installment loans, $1,102,000 or 5.17% in credit card loans, and $17,296,000 or 59.2% in lease financing. Bancorp's loans cover a broad range of borrowers characterizing the western Ohio, southern Michigan, northern Kentucky and Indiana markets. There were no loan concentrations of multiple borrowers in similar activities at December 31, 1999, which exceeded 10.0% of total loans. Bancorp's subsidiaries consist of community banks dedicated to meeting the financial needs of individuals and businesses 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, 1999, real estate-mortgage loans composed 48.3% of Bancorp's total loan portfolio and installment loans composed another 20.4% of the total loan portfolio. Commercial loans equaled 25.3% of the total portfolio; and real estate-construction, credit card lending and lease financing made up the remaining 6.00% 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. FIRST FINANCIAL BANCORP 5 1999 ANNUAL REPORT 7 TABLE 4 - LOAN PORTFOLIO
December 31, 1999 1998 1997 1996 1995 (Dollars in thousands) Commercial $ 769,454 $ 689,524 $ 554,728 $ 456,535 $ 397,368 Real estate-construction 111,458 74,205 65,468 46,862 44,714 Real estate-mortgage 1,467,591 1,306,065 1,140,628 1,063,569 971,907 Installment 623,091 537,156 516,368 433,194 394,264 Credit card 22,408 21,306 20,055 18,510 17,101 Lease financing 46,508 29,212 27,260 14,821 16,557 --------- --------- --------- --------- --------- TOTAL $3,040,510 $2,657,468 $2,324,507 $2,033,491 $1,841,911 ========= ========= ========= ========= =========
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 either by 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 plan to purchase or sell a participation in a loan also requires Bancorp approval. 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 denied. Required modifications may include, among other items, a reduction in the loan balance, a change in the interest rate, an increase in collateral, or the initiation of monthly principal payments. Table 5 indicates the contractual maturity of commercial loans and real estate-construction loans outstanding at December 31, 1999. 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. Net charge-offs are charge-offs less recoveries on previously charged off assets. 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 risks believed to be inherent in the loan portfolio of each subsidiary. Management's evaluation in establishing the provision includes such factors as historical loss and recovery experience, 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. TABLE 5 - LOAN MATURITY/RATE SENSITIVITY
December 31, 1999 MATURITY AFTER ONE AFTER WITHIN BUT WITHIN FIVE ONE YEAR FIVE YEARS YEARS TOTAL (Dollars in thousands) Commercial $ 482,521 $ 199,184 $ 87,749 $ 769,454 Real estate-construction 83,690 23,508 4,260 111,458 -------- -------- ------- -------- TOTAL $ 566,211 $ 222,692 $ 92,009 $ 880,912 ======== ======== ======= ========
SENSITIVITY ACTIVITY TO CHANGES IN INTEREST RATES
Due after one year but within five years $ 71,993 $ 150,699 Due after five years 31,964 60,045 ---------- -------- TOTAL $ 103,957 $ 210,744 ========== ========
FIRST FINANCIAL BANCORP 6 1999 ANNUAL REPORT 8 TABLE 6 - SUMMARY OF ALLOWANCE FOR LOAN LOSSES AND SELECTED STATISTICS
1999 1998 1997 1996 1995 (Dollars in thousands) Balance at beginning of year $34,800 $31,660 $25,803 $24,453 $21,679 Loans charged off Commercial 4,120 4,022 2,053 3,520 1,010 Real estate-construction 0 0 28 0 0 Real estate-mortgage 325 352 257 249 64 Installment and other consumer financing 4,484 3,720 3,044 2,849 2,158 Lease financing 432 293 57 187 107 ------ ------ ------ ------- ------ Total loans charged off 9,361 8,387 5,439 6,805 3,339 Recoveries of loans previously charged off Commercial 2,340 1,541 684 532 708 Real estate-construction 0 0 0 0 8 Real estate-mortgage 79 99 142 70 48 Installment and other consumer financing 1,114 800 786 870 734 Lease financing 36 34 15 62 17 ------ ------ ------ ------- ------ Total recoveries 3,569 2,474 1,627 1,534 1,515 ------ ------ ------ ------- ------ Net charge-offs 5,792 5,913 3,812 5,271 1,824 Allowance acquired through mergers 0 806 3,013 1,592 1,162 Provision for discontinued product line 1,100 0 0 0 0 Provision for loan losses 9,232 8,247 6,656 5,029 3,436 ------ ------ ------ ------- ------ Balance at end of year $39,340 $34,800 $31,660 $25,803 $24,453 ====== ====== ====== ====== ====== Ratios Net charge-offs as a percent of Average loans outstanding 0.20% 0.24% 0.18% 0.27% 0.10% Provision 62.74% 71.70% 57.27% 104.81% 53.08% Allowance 14.72% 16.99% 12.04% 20.43% 7.46% Allowance as a percent of year-end loans, net of unearned income 1.30% 1.31% 1.36% 1.27% 1.33%
TABLE 7 - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, (Dollars in thousands) 1999 1998 1997 1996 1995 PERCENT PERCENT PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS --------- ------- --------- ------- ---------- -------- --------- ------- --------- ------- Commercial $ 8,221 25% $ 9,909 26% $ 8,202 24% $ 6,510 22% $ 6,775 22% Real estate-construction 470 4% 910 3% 246 3% 172 2% 210 2% Real estate-mortgage 8,798 48% 5,395 49% 5,645 49% 3,794 53% 4,142 53% Installment and credit card 10,978 21% 9,750 21% 8,323 23% 6,582 22% 5,250 22% Lease financing 477 2% 630 1% 483 1% 327 1% 196 1% Unallocated 10,396 N/A 8,206 N/A 8,761 N/A 8,418 N/A 7,880 N/A --------- ------- --------- ------- ---------- -------- --------- ------- --------- ------- Total $39,340 100% $34,800 100% $31,660 100% $25,803 100% $24,453 100% ========= ======= ========= ======= ========== ======== ========= ======= ========= =======
FIRST FINANCIAL BANCORP 7 1999 ANNUAL REPORT 9 The provision increased from $8,247,000 in 1998 to $9,232,000 in 1999. The provision recorded during 1998 was $1,591,000 greater than 1997's provision of $6,656,000. The increases during 1999 and 1998 were primarily due to the growth in the loan portfolio mentioned previously. The allowance at December 31, 1999, was $39,340,000 or 1.30% of loans, net of unearned income, which compares to $34,800,000 or 1.31% of loans, net of unearned income, at December 31, 1998. The level of nonaccrual and restructured loans and leases is an important element in assessing asset quality. Loans are classified as nonaccrual when, in the opinion of management, collection of interest is doubtful. Loans are classified as restructured when management, to protect its investment, grants concessions to the debtor that it would not otherwise consider. 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. (See Table 8 for a summary of Bancorp's nonaccrual and restructured loans and OREO properties.) Nonaccrual loans increased $3,802,000 during 1999, restructured loans increased $1,553,000 and OREO increased $1,486,000. The $3,802,000 increase in nonaccrual loans during 1999 is composed primarily of commercial, multi-family and 1-4 family residential investment properties. Approximately $1,100,000 of the $1,553,000 increase in restructured loans is from an unsecured commercial loan. The remaining amount of the increase in restructured loans is from commercial and 1-4 family residential mortgage loans. OREO increased $1,486,000, primarily from foreclosures on commercial, multi-family and 1-4 family residential mortgage loans. Nonaccrual and restructured loans and leases and OREO are discussed or summarized in Notes 1 and 9 of the Notes to Consolidated Financial Statements. INVESTMENT SECURITIES Bancorp's investment securities decreased $66,285,000 or 11.3% during 1999 to a balance of $521,891,000. The decrease in investment securities was used to help fund loan portfolio 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 2.17% of Bancorp's investment portfolio at December 31, 1999. All U.S. Treasury Securities were classified as available-for-sale at that date and are available for liquidity management purposes. Another 22.8% 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. No structured notes were included in the U.S. government agencies and corporations securities category at December 31, 1999. All U.S. government agencies and corporations securities were classified as available-for-sale at December 31, 1999, 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 37.4% of the investment portfolio at December 31, 1999. 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 and corporations, 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 96.8% of Bancorp's MBSs are classified as available-for-sale. TABLE 8 - NONPERFORMING ASSETS
December 31, 1999 1998 1997 1996 1995 (Dollars in thousands) Nonaccrual loans $11,283 $ 7,481 $ 7,845 $13,502 $ 3,132 Restructured loans 2,244 691 2,447 890 517 OREO 1,707 221 1,150 264 1,677 ------- ------- ------- ------- ------- TOTAL NONPERFORMING ASSETS $15,234 $ 8,393 $11,442 $14,656 $ 5,326 ======= ======= ======= ======= ======= Nonperforming assets as a percent of total loans plus OREO 0.50% 0.32% 0.49% 0.72% 0.29% Accruing loans past due 90 days or more $ 2,777 $ 2,923 $ 2,392 $ 2,203 $ 2,021
FIRST FINANCIAL BANCORP 8 1999 ANNUAL REPORT 10 CMOs totaled $75,839,000 at December 31, 1999, all of which were classified as available-for-sale. Pools of mortgage loans or MBSs collateralize CMOs. 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. Securities of state and other political subdivisions composed 31.4% of Bancorp's investment portfolio at December 31, 1999. The securities are highly diversified as to states and issuing authorities within states, thereby decreasing portfolio risk. About 84.7% of such investments at December 31, 1999, were classified as available-for-sale. The remaining 6.23% of Bancorp's investment portfolio at December 31, 1999, termed "other securities," was primarily composed of stock ownership in the Indianapolis and Cincinnati District Federal Home Loan Banks, the Federal Reserve Bank, and in taxable obligations of state and other political subdivisions. Table 9 sets forth the maturities of investment securities held-to-maturity and investment securities available-for-sale as of December 31, 1999; 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 and other political subdivisions. At December 31, 1999, the market value of Bancorp's held-to-maturity investment securities portfolio exceeded the carrying value by $733,000. The available-for-sale investment securities are reported at their market value of $490,126,000, 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.) Bancorp's federal funds sold and securities purchased under agreements to resell decreased $3,033,000, from $8,654,000 at December 31, 1998, to $5,621,000 at December 31, 1999. The decrease was used to help fund loan growth. Bancorp monitors this position as part of its asset/liability management. Bancorp does not use derivative financial instruments such as futures, forward contracts, option contracts, interest rate swaps or other financial instruments with similar characteristics. 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. TABLE 10 - MATURITIES OF TIME DEPOSITS GREATER THAN OR EQUAL TO $100,000*
December 31, 1999 (Dollars in thousands) Maturing in 3 months or less $ 124,853 3 months to 6 months 73,411 6 months to 12 months 42,599 over 12 months 19,318 --------- TOTAL $ 260,181 =========
*All time deposits greater than or equal to $100,000 were in certificates of deposit. Total deposits increased $119,146,000 or 4.15% in 1999. The growth in deposits was used to finance loan growth. Comparing Bancorp totals at December 31, 1999 and 1998, time deposits increased $76,853,000, savings deposits increased $19,597,000, interest-bearing demand deposits increased $6,983,000 and noninterest-bearing demand deposits increased $15,713,000. TABLE 9 - INVESTMENT SECURITIES
December 31, 1999 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 (Dollars in thousands) HELD-TO-MATURITY Mortgage-backed securities(2) $ 2 11.34% $ 1,370 6.43% $ 2,598 8.47% $ 2,375 8.80% Obligations of state and other political subdivisions 5,137 7.12% 13,007 10.77% 5,447 8.05% 1,506 10.67% Other securities 0 0.00% 248 5.99% 0 0.00% 75 7.25% ------- ------- ------- ------- TOTAL $ 5,139 7.12% $ 14,625 10.28% $ 8,045 8.19% $ 3,956 9.48% ======= ===== ======= ====== ======= ===== ======= ====== AVAILABLE-FOR-SALE U.S. Treasury securities $ 7,854 5.45% $ 3,457 5.59% Securities of other U.S. government agencies and corporations 4,490 6.27% 64,236 6.15% $ 49,341 6.50% $ 771 6.45% Mortgage-backed securities(2) 544 5.92% 32,710 6.22% 22,699 6.34% 133,009 6.42% Obligations of state and other political subdivisions 4,647 8.60% 22,922 7.80% 35,847 8.10% 75,402 7.76% Other securities 450 6.06% 1,244 6.08% 97 6.65% 30,406 7.12% ------- ------ ------- ------- TOTAL $ 17,985 6.49% $124,569 6.45% $107,984 6.98% $239,588 6.94% ======= ===== ======= ====== ======= ===== ======= ======
(1) Tax equivalent basis was calculated using a marginal federal income tax rate of 35.0%. (2) 32.9% of the mortgage-backed securities maturing after five years are variable rate. FIRST FINANCIAL BANCORP 9 1999 ANNUAL REPORT 11 Table 10 shows the contractual maturity of time deposits of $100,000 and over that were outstanding at December 31, 1999. These deposits represented only 8.70% of total deposits. Short-term borrowings increased from $155,064,000 at December 31, 1998, to $382,118,000 at December 31, 1999. The increase was used to support loan portfolio growth and to finance an increase in cash-on-hand at year-end. Like most other banks and financial institutions, Bancorp increased year-end cash balances to meet potential Year 2000 related cash withdrawal demands. Cash and due from banks on the balance sheet was $61,337,000 greater at December 31, 1999, than at the end of 1998. Actual withdrawal activity at the end of 1999 was not significantly greater than normal, and the excess cash balances were used to partially pay down short-term borrowings during January, 2000. Long-term borrowings increased from $120,777,000 at the end of 1998 to $161,799,000 at the end of 1999. The increase was used to support loan portfolio growth. 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 $8,422,000 for 1999 and $8,690,000 for 1998. Remodeling is a planned and ongoing process given the 115 offices of Bancorp's subsidiaries. Planned capital expenditures for the Year 2000 currently total $2,250,000. Bancorp subsidiaries' source of funding is predominantly 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. 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 $490,126,000 at December 31, 1999. 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 $5,139,000 at December 31, 1999. 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. TABLE 11 - MARKET RISK DISCLOSURE
PRINCIPAL AMOUNT MATURING IN: 2000 2001 2002 2003 2004 THEREAFTER (Dollars in thousands) RATE SENSITIVE ASSETS Fixed interest rate loans $ 534,520 $ 178,385 $ 124,260 $ 94,355 $ 74,811 $ 423,688 Average interest rate 7.45% 8.34% 8.18% 7.87% 7.51% 8.20% Variable interest rate loans 497,053 87,098 72,033 58,205 62,134 829,834 Average interest rate 9.89% 9.66% 9.74% 9.91% 10.46% 9.92% Fixed interest rate securities 23,122 25,097 28,475 28,970 30,583 321,397 Average interest rate 6.63% 5.90% 5.92% 6.05% 6.04% 7.36% Variable interest rate securities 2 104 21 22 24 67,074 Average interest rate 11.34% 8.10% 7.09% 7.09% 7.09% 6.71% Other earning assets 14,488 -- -- -- -- -- Average interest rate 5.65% -- -- -- -- -- RATE SENSITIVE LIABILITIES Noninterest - bearing demand 408,712 -- -- -- -- -- Savings and interest- bearing checking 118,096 975,044 -- -- -- -- Average interest rate 2.04% 2.04% -- -- -- -- Time deposits 1,209,808 181,623 56,321 21,810 13,258 6,541 Average interest rate 5.10% 5.38% 5.32% 5.41% 5.00% 4.67% Fixed interest rate borrowings 13,393 4,129 23,296 11,200 22,500 96,282 Average interest rate 6.09% 5.54% 5.80% 4.81% 5.68% 5.45% Variable interest rate borrowings 373,117 -- -- -- -- -- Average interest rate 5.74% -- -- -- -- --
PRINCIPAL AMOUNT MATURING IN: FAIR VAUE DECEMBER 31, TOTAL 1999 (Dollars in thousands) RATE SENSITIVE ASSETS Fixed interest rate loans $1,430,019 $1,407,589 Average interest rate 7.88% Variable interest rate loans 1,606,357 1,625,892 Average interest rate 9.91% Fixed interest rate securities 457,644 459,344 Average interest rate 6.98% Variable interest rate securities 64,247 63,280 Average interest rate 6.71% Other earning assets 14,488 14,488 Average interest rate 5.65% RATE SENSITIVE LIABILITIES Noninterest - bearing demand 408,712 408,712 Savings and interest- bearing checking 1,093,140 1,093,140 Average interest rate 2.04% Time deposits 1,489,361 1,452,826 Average interest rate 5.14% Fixed interest rate borrowings 170,800 166,170 Average interest rate 5.54% Variable interest rate borrowings 373,117 373,117 Average interest rate 5.74%
FIRST FINANCIAL BANCORP 10 1999 ANNUAL REPORT 12 INTEREST RATE SENSITIVITY Table 11 details the maturities and yields of interest-bearing financial instruments at December 31, 1999, for the next five years and thereafter. Also included with each category is the fair value of those instruments. The values represent the contractual maturity of each instrument. For loan instruments without contractual maturities, such as credit card loans, management has allocated principal payments based upon historical trends of payment activity. When there is no set maturity, as in the case of some interest-bearing liabilities, management has allocated the amounts based upon its expectation of cash flows, incorporating internal core deposit studies and current expectations of customer behavior. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities. The data in Table 11 was aggregated by type of financial instrument -- fixed and variable rate loans, fixed and variable rate investments, other earning assets, deposits, and other fixed and variable rate interest-bearing liabilities. First Financial Bancorp has no interest rate swaps, interest rate caps, or interest rate floors. Therefore, data concerning these instruments is not included in the table. The primary source of market risk for the financial instruments presented is interest rate risk; that is, the risk that an adverse change in market rates will adversely affect the market value of the instruments. Generally, the longer the maturity, the higher the interest rate risk exposure. While maturity information does not necessarily present all aspects of exposure, it may provide an indication of where risks are prevalent. 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. FORWARD-LOOKING STATEMENTS Certain statements contained in this report which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the Act). In addition, certain statements in future filings by Bancorp with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of Bancorp which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to, projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items, statements of plans and objectives of Bancorp or its management or Board of Directors, and statements of future economic performances and statements of assumptions underlying such statements. Words such as "believes," "anticipates," "intends," and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the strength of the local economies in which operations are conducted; the effects of and changes in policies and laws of regulatory agencies; inflation, interest rates, market and monetary fluctuations; technological changes; mergers and acquisitions; the ability to increase market share and control expenses; the effect of changes in accounting policies and practices that may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board and the Securities and Exchange Commission; the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and the success of Bancorp at managing the risks involved in the foregoing. Such forward-looking statements are meaningful only on the date when such statements are made, and Bancorp undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such a statement is made to reflect the occurrence of unanticipated events. FIRST FINANCIAL BANCORP 11 1999 ANNUAL REPORT 13 STATISTICAL INFORMATION
1999 1998 BALANCE INTEREST YIELD BALANCE INTEREST YIELD Daily average balances and interest rates; (Tax equivalent basis; dollars in thousands) EARNING ASSETS Loans (1) Commercial (2) $ 734,982 $ 69,774 9.49% $ 610,200 $ 60,431 9.90% Real estate (2) 1,475,943 116,126 7.87% 1,288,838 106,846 8.29% Installment and other consumer 603,730 60,704 10.05% 534,949 55,282 10.33% Lease financing (2) 39,144 2,796 7.14% 28,552 2,191 7.67% ---------- ---------- ---------- ---------- Total loans 2,853,799 249,400 8.74% 2,462,539 224,750 9.13% Investment securities (3) Taxable 380,520 23,451 6.16% 465,132 28,681 6.17% Tax-exempt (2) 173,607 14,137 8.14% 149,788 13,053 8.71% ---------- ---------- ---------- ---------- Total investment securities (3) 554,127 37,588 6.78% 614,920 41,734 6.79% Interest-bearing deposits with other banks 6,575 331 5.03% 4,487 283 6.31% Federal funds sold and securities purchased under agreements to resell 7,430 325 4.37% 14,994 765 5.10% ---------- ---------- ---------- ---------- TOTAL EARNING ASSETS 3,421,931 287,644 8.41% 3,096,940 267,532 8.64% NONEARNING ASSETS Allowance for loan losses (37,303) (33,732) Cash and due from banks 131,863 123,743 Accrued interest and other assets 169,675 151,788 ---------- ---------- TOTAL ASSETS $ 3,686,166 $ 3,338,739 ========== ========== Interest-bearing liabilities Deposits Interest-bearing demand $ 288,865 5,820 2.01% $ 295,073 6,579 2.23% Savings 797,396 18,845 2.36% 719,754 18,472 2.57% Time 1,438,145 72,887 5.07% 1,403,990 75,539 5.38% ---------- ---------- ---------- ---------- Total interest-bearing deposits 2,524,406 97,552 3.86% 2,418,817 100,590 4.16% Borrowed funds Short-term borrowings 251,273 12,365 4.92% 108,217 5,213 4.82% Long-term borrowings 134,691 7,277 5.40% 84,106 4,631 5.51% ---------- ---------- ---------- ---------- Total borrowed funds 385,964 19,642 5.09% 192,323 9,844 5.12% ---------- ---------- ---------- ---------- TOTAL INTEREST-BEARING LIABILITIES 2,910,370 117,194 4.03% 2,611,140 110,434 4.23% NONINTEREST-BEARING LIABILITIES Noninterest-bearing demand deposits 379,276 345,997 Other liabilities 30,503 32,267 Shareholders' equity 366,017 349,335 ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity $ 3,686,166 $ 3,338,739 =========== =========== Net interest income and interest rate spread $ 170,450 4.38% $ 157,098 4.41% =========== ====== ========= ===== Net interest margin 4.98% 5.07% ====== =====
1997 BALANCE INTEREST YEAR Daily average balances and interest rates; (Tax equivalent basis; dollars in thousands) EARNING ASSETS Loans (1) Commercial (2) $ 487,251 $ 48,534 9.96% Real estate (2) 1,154,751 96,627 8.37% Installment and other consumer 484,930 48,996 10.10% Lease financing (2) 18,817 1,449 7.70% --------- ---------- Total loans 2,145,749 195,606 9.12% Investment securities (3) Taxable 395,319 26,085 6.60% Tax-exempt (2) 137,619 13,281 9.65% --------- ---------- Total investment securities (3) 532,938 39,366 7.39% Interest-bearing deposits with other banks 4,183 263 6.29% Federal funds sold and securities purchased under agreements to resell 30,716 1,685 5.49% --------- ---------- TOTAL EARNING ASSETS 2,713,586 236,920 8.73% NONEARNING ASSETS Allowance for loan losses (28,240) Cash and due from banks 107,610 Accrued interest and other assets 107,925 --------- TOTAL ASSETS $ 2,900,881 ========= Interest-bearing liabilities Deposits Interest-bearing demand $ 304,852 7,159 2.35% Savings 616,175 16,486 2.68% Time 1,201,777 65,658 5.46% --------- ---------- Total interest-bearing deposits 2,122,804 89,303 4.21% Borrowed funds Short-term borrowings 120,163 5,916 4.92% Long-term borrowings 21,468 1,357 6.32% --------- ---------- Total borrowed funds 141,631 7,273 5.14% --------- ---------- TOTAL INTEREST-BEARING LIABILITIES 2,264,435 96,576 4.26% NONINTEREST-BEARING LIABILITIES Noninterest-bearing demand deposits 286,968 Other liabilities 29,297 Shareholders' equity 320,181 ---------- ---------- Total liabilities and shareholders' equity $2,900,881 ========== Net interest income and interest rate spread $ 140,344 4.47% ============ ====== Net interest margin 5.17% ======
(1) Nonaccrual loans are included in average loan balances 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. FIRST FINANCIAL BANCORP 12 1999 ANNUAL REPORT 14 CONSOLIDATED BALANCE SHEETS
December 31, 1999 1998 (Dollars in thousands) ASSETS Cash and due from banks $ 225,837 $ 164,500 Interest-bearing deposits with other banks 8,867 2,598 Federal funds sold and securities purchased under agreements to resell 5,621 8,654 Investment securities held-to-maturity (market value of $32,498 at December 31, 1999; $40,159 at December 31, 1998) 31,765 37,782 Investment securities available-for-sale, at market value (cost of $500,361 at December 31, 1999; $542,355 at December 31, 1998) 490,126 550,394 LOANS Commercial 769,454 689,524 Real estate-construction 111,458 74,205 Real estate-mortgage 1,467,591 1,306,065 Installment 623,091 537,156 Credit card 22,408 21,306 Lease financing 46,508 29,212 ---------- ---------- Total loans 3,040,510 2,657,468 Less Unearned income 4,134 3,322 Allowance for loan losses 39,340 34,800 ---------- ---------- Net loans 2,997,036 2,619,346 Premises and equipment 59,004 57,980 Goodwill 30,077 31,416 Other intangibles 10,522 11,164 Deferred income taxes 8,008 3,072 Accrued interest and other assets 73,830 51,963 ---------- ---------- Total assets $ 3,940,693 $ 3,538,869 =========== =========== LIABILITIES Deposits Noninterest-bearing $ 408,712 $ 392,999 Interest-bearing 2,582,501 2,479,068 ---------- ---------- Total deposits 2,991,213 2,872,067 Short-term borrowings Federal funds purchased and securities sold under agreements to repurchase 83,353 59,159 Federal Home Loan Bank borrowings 294,235 94,678 Other 4,530 1,227 ---------- ---------- Total short-term borrowings 382,118 155,064 Federal Home Loan Bank long-term borrowings 161,799 120,777 Accrued interest and other liabilities 33,024 32,696 ---------- ---------- TOTAL LIABILITIES 3,568,154 3,180,604 SHAREHOLDERS' EQUITY Common stock -- no par value Authorized -- 160,000,000 shares Issued -- 46,869,107 shares in 1999 and 36,320,338 shares in 1998 373,447 306,709 Retained earnings 5,904 50,160 Accumulated comprehensive income (6,398) 4,949 Restricted stock awards (414) (408) Treasury stock, at cost, 0 and 118,638 shares 0 (3,145) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 372,539 358,265 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,940,693 $ 3,538,869 ========== ==========
See Notes to Consolidated Financial Statements. FIRST FINANCIAL BANCORP 13 1999 ANNUAL REPORT 15 CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31, 1999 1998 1997 (Dollars in thousands, except per share data) INTEREST INCOME Loans, including fees $ 249,113 $ 224,467 $ 195,338 Investment securities Taxable 23,451 28,681 26,085 Tax-exempt 9,178 8,474 8,622 ---------- ---------- ---------- Total investment securities interest 32,629 37,155 34,707 Interest-bearing deposits with other banks 331 283 263 Federal funds sold and securities purchased under agreements to resell 325 765 1,685 ---------- ---------- ---------- TOTAL INTEREST INCOME 282,398 262,670 231,993 INTEREST EXPENSE Deposits 97,552 100,590 89,303 Short-term borrowings 12,365 5,213 5,916 Long-term borrowings 7,277 4,631 1,357 ---------- ---------- ---------- Total interest expense 117,194 110,434 96,576 ---------- ---------- ---------- Net interest income 165,204 152,236 135,417 Provision for loan losses 9,232 8,247 6,656 ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 155,972 143,989 128,761 NONINTEREST INCOME Service charges on deposit accounts 16,629 14,550 12,842 Trust revenues 13,410 12,146 10,050 Investment securities gains 50 1,060 147 Other 11,223 11,756 8,256 ---------- ---------- ---------- TOTAL NONINTEREST INCOME 41,312 39,512 31,295 NONINTEREST EXPENSES Salaries and employee benefits 61,614 57,443 49,154 Net occupancy 7,019 6,512 5,842 Furniture and equipment 6,256 5,932 5,518 Data processing 6,471 6,447 5,747 Deposit insurance 551 474 432 State taxes 2,025 1,824 1,808 Amortization of intangibles 3,674 4,015 1,326 Restructuring charge 6,930 0 0 Other 26,121 25,198 21,402 ---------- ---------- ---------- TOTAL NONINTEREST EXPENSES 120,661 107,845 91,229 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 76,623 75,656 68,827 Income tax expense 26,300 24,684 21,995 ---------- ---------- ---------- NET EARNINGS $ 50,323 $ 50,972 $ 46,832 ========== ========== ========== NET EARNINGS PER SHARE - BASIC $ 1.07 $ 1.08 $ 1.00 ========== ========== ========== NET EARNINGS PER SHARE - DILUTED $ 1.07 $ 1.08 $ 0.99 ========== ========== ========== AVERAGE SHARES OUTSTANDING - BASIC 46,848,851 46,984,480 47,013,881 ========== ========== ========== AVERAGE SHARES OUTSTANDING - DILUTED 46,985,782 47,172,423 47,157,234 ========== ========== ==========
FIRST FINANCIAL BANCORP 14 1999 ANNUAL REPORT 16 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1999 1998 1997 (Dollars in thousands) OPERATING ACTIVITIES Net earnings $ 50,323 $ 50,972 $ 46,832 Adjustments to reconcile net earnings to net cash provided by operating activities Provision for loan losses 9,232 8,247 6,656 Provision for depreciation and amortization 9,196 9,012 6,195 Net amortization of premiums and accretion of discounts on investment securities 83 615 424 Deferred income taxes 2,059 2,706 (111) Realized gains on investment securities (50) (1,060) (147) Originations of mortgage loans held for sale (224,541) (171,902) (65,748) Gains from sales of mortgage loans held for sale (2,993) (1,984) (839) Proceeds from sales of mortgage loans held for sale 227,534 173,886 66,587 Increase in cash surrender value of life insurance (17,168) (3,236) (3,264) Increase in interest receivable (4,082) (2,203) (781) Decrease (increase) in prepaid expenses 1,276 567 (576) Increase (decrease) in accrued expenses 351 (9) 932 Increase in interest payable 311 815 94 Other 712 (5,224) 777 --------- --------- -------- Net cash provided by operating activities 52,243 61,202 57,031 INVESTING ACTIVITIES Proceeds from sales of investment securities available-for-sale 13,520 49,953 24,477 Proceeds from calls, paydowns, and maturities of investment securities available-for-sale 159,916 259,762 183,143 Purchases of investment securities available-for-sale (135,915) (335,389) (255,796) Proceeds from calls, paydowns, and maturities of investment securities held-to-maturity 12,215 28,513 22,361 Purchases of investment securities held-to-maturity (1,901) (2,805) (1,293) Net (increase) decrease in interest-bearing deposits with other banks (6,269) 989 1,592 Net decrease in federal funds sold and securities purchased under agreements to resell 3,033 10,155 7,827 Net increase in loans and leases (393,706) (300,617) (186,880) Proceeds from disposal of other real estate owned 622 2,176 999 Recoveries from loans and leases previously charged off 3,569 1,050 1,185 Net cash acquired in purchase of financial institutions 0 0 147,963 Cash (used) acquired in mergers with other financial institutions 0 (12,231) 8,288 Purchases of premises and equipment (8,422) (8,690) (4,247) --------- --------- -------- Net cash used in investing activities (353,338) (307,134) (50,381) FINANCING ACTIVITIES Net increase in total deposits 119,146 126,581 34,066 Net increase (decrease) in short-term borrowings 227,054 70,703 (27,445) Net increase in long-term borrowings 41,022 74,207 36,360 Cash dividends (25,570) (21,436) (20,271) Purchase of common stock 0 (8,773) (282) Proceeds from exercise of stock options 780 788 657 --------- --------- -------- Net cash provided by financing activities 362,432 242,070 23,085 --------- --------- -------- Increase (decrease) in cash and cash equivalents 61,337 (3,862) 29,735 Cash and cash equivalents at beginning of year 164,500 168,362 138,627 --------- --------- -------- Cash and cash equivalents at end of year $ 225,837 $ 164,500 $ 168,362 ========= ========= ======== SUPPLEMENTAL DISCLOSURES Interest paid $ 116,884 $ 109,399 $ 96,333 ========= ========= ======== Income taxes paid $ 23,080 $ 24,356 $ 22,697 Recognition of deferred tax assets (liabilities) ========= ========= ======== attributable to SFAS No. 115 $ 6,995 $ 187 $ (551) ========= ========= ======== Acquisition of other real estate owned through foreclosure $ 2,252 $ 1,324 $ 1,265 ========= ========= ======== Issuance of restricted stock awards $ 174 $ 220 $ 220 ========= ========= ========
See Notes to Consolidated Financial Statements FIRST FINANCIAL BANCORP 15 1999 ANNUAL REPORT 17 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON COMMON ACCUMULATED RESTRICTED STOCK STOCK RETAINED COMPREHENSIVE STOCK SHARES SHARES SURPLUS EARNINGS INCOME AWARDS (Dollars in thousands) BALANCES AT DECEMBER 31, 1996 14,727,772 $ 117,822 $ 47,125 $ 93,369 $ 1,162 $ (220) ADJUSTED FOR POOLING-OF-INTERESTS OF SAND RIDGE FINANCIAL CORP. (SRFC) 5,114,878 40,919 (35,719) 28,070 1,319 ADJUSTED FOR POOLING-OF-INTERESTS OF HEBRON BANCORP, INC. (HBI) 1,222,599 9,781 (6,557) 5,753 (73) ----------- ---------- ----------- ---------- ----------- ----------- ADJUSTED BALANCES AT DECEMBER 31, 1996 21,065,249 168,522 4,849 127,192 2,408 (220) NET EARNINGS 46,832 UNREALIZED HOLDING GAINS ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD 2,224 TOTAL COMPREHENSIVE INCOME CASH DIVIDENDS DECLARED (BANCORP - $0.47 PER SHARE; SRFC - $17 PER SHARE; HBI - $5 PER SHARE) (20,271) SHARES ISSUED IN HASTINGS FINANCIAL CORPORATION MERGER 322,386 2,579 (1,733) 4,238 1 EXERCISE OF STOCK OPTIONS, NET OF SHARES PURCHASED 2,471 38 (168) 10% STOCK DIVIDEND 1,505,479 12,025 54,896 (66,984) PURCHASE OF COMMON STOCK RESTRICTED STOCK AWARDS 9 (220) AMORTIZATION OF RESTRICTED STOCK AWARDS 102 ----------- ---------- ----------- ---------- ----------- ----------- BALANCES AT DECEMBER 31, 1997 22,895,585 183,164 57,853 91,007 4,633 (338) NET EARNINGS 50,972 UNREALIZED HOLDING GAINS ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD 316 TOTAL COMPREHENSIVE INCOME CASH DIVIDENDS DECLARED (BANCORP - $0.52 PER SHARE; SRFC - $18 PER SHARE; HBI - $5.50 PER SHARE) (21,436) PURCHASE OF COMMON STOCK EXERCISE OF STOCK OPTIONS, NET OF SHARES PURCHASED 6,135 (1,266) (314) TRANSFER OF SURPLUS TO COMMON STOCK (NO PAR VALUE) 57,536 (57,536) 2 FOR 1 STOCK SPLIT 16,560,780 10% STOCK DIVIDEND 3,195,315 67,275 (70,383) RESTRICTED STOCK AWARDS (3) (220) AMORTIZATION OF RESTRICTED STOCK AWARDS 150 ----------- ---------- ----------- ---------- ----------- ----------- BALANCES AT DECEMBER 31, 1998 42,657,815 306,709 0 50,160 4,949 (408) NET EARNINGS 50,323 UNREALIZED HOLDING LOSSES ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD (11,347) TOTAL COMPREHENSIVE INCOME CASH DIVIDENDS DECLARED (BANCORP - $0.57 PER SHARE; SRFC - $4.75 PER SHARE; HBI - $1.50 PER SHARE) (25,570) EXERCISE OF STOCK OPTIONS, NET OF SHARES PURCHASED 1,331 (951) 10% STOCK DIVIDEND 4,213,712 67,700 (69,009) RESTRICTED STOCK AWARDS (3,751) (11) (174) AMORTIZATION OF RESTRICTED STOCK AWARDS 168 ----------- ---------- ----------- ---------- ----------- ----------- BALANCES AT DECEMBER 31, 1999 46,869,107 $ 373,447 $ 0 $ 5,904 $ (6,398) $ (414) =========== ========== =========== ========== =========== ===========
TREASURY TREASURY STOCK STOCK SHARES AMOUNT TOTAL (Dollars in thousands) BALANCES AT DECEMBER 31, 1996 (25,907) $ (776) $ 258,482 ADJUSTED FOR POOLING-OF-INTERESTS OF SAND RIDGE FINANCIAL CORP. (SRFC) 34,589 ADJUSTED FOR POOLING-OF-INTERESTS OF HEBRON BANCORP, INC. (HBI) 8,904 --------- ---------- ------------ ADJUSTED BALANCES AT DECEMBER 31, 1996 (25,907) (776) 301,975 NET EARNINGS 46,832 UNREALIZED HOLDING GAINS ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD 2,224 -------- TOTAL COMPREHENSIVE INCOME 49,056 CASH DIVIDENDS DECLARED (BANCORP - $0.47 PER SHARE; SRFC - $17 PER SHARE; HBI - $5 PER SHARE) (20,271) SHARES ISSUED IN HASTINGS FINANCIAL CORPORATION MERGER 5,085 EXERCISE OF STOCK OPTIONS, NET OF SHARES PURCHASED 23,817 787 657 10% STOCK DIVIDEND (212) (63) PURCHASE OF COMMON STOCK (5,965) (282) (282) RESTRICTED STOCK AWARDS 6,948 208 (3) AMORTIZATION OF RESTRICTED STOCK AWARDS 102 --------- ---------- ------------ BALANCES AT DECEMBER 31, 1997 (1,319) (63) 336,256 NET EARNINGS 50,972 UNREALIZED HOLDING GAINS ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD 316 -------- TOTAL COMPREHENSIVE INCOME 51,288 CASH DIVIDENDS DECLARED (BANCORP - $0.52 PER SHARE; SRFC - $18 PER SHARE; HBI - $5.50 PER SHARE) (21,436) PURCHASE OF COMMON STOCK (284,894) (8,773) (8,773) EXERCISE OF STOCK OPTIONS, NET OF SHARES PURCHASED 76,494 2,368 788 TRANSFER OF SURPLUS TO COMMON STOCK (NO PAR VALUE) 2 FOR 1 STOCK SPLIT (8,563) 10% STOCK DIVIDEND 95,819 3,108 RESTRICTED STOCK AWARDS 3,825 215 (8) AMORTIZATION OF RESTRICTED STOCK AWARDS 150 --------- ---------- ------------ BALANCES AT DECEMBER 31, 1998 (118,638) (3,145) 358,265 NET EARNINGS 50,323 UNREALIZED HOLDING LOSSES ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD (11,347) -------- TOTAL COMPREHENSIVE INCOME 38,976 CASH DIVIDENDS DECLARED (BANCORP - $0.57 PER SHARE; SRFC - $4.75 PER SHARE; HBI - $1.50 PER SHARE) (25,570) EXERCISE OF STOCK OPTIONS, NET OF SHARES PURCHASED 65,725 1,731 780 10% STOCK DIVIDEND 45,313 1,265 (44) RESTRICTED STOCK AWARDS 7,600 149 (36) AMORTIZATION OF RESTRICTED STOCK AWARDS 168 --------- ---------- ------------ BALANCES AT DECEMBER 31, 1999 0 $ 0 $ 372,539 ========= ========== ============
See Notes to Consolidated Financial Statements. FIRST FINANCIAL BANCORP 16 1999 ANNUAL REPORT 18 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, Indiana, northern Kentucky and southern Michigan, include the accounts and operations of Bancorp and its 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 25 years. Core deposit intangibles are being amortized over varying periods, none of which exceeds 10 years. Investment securities - Statement of Financial Accounting Standards (SFAS) No. 115 classifies debt and equity securities in three categories: trading, held-to-maturity and available-for-sale. 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 as 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 gains (losses). 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 impaired loans. 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. Mortgages held for sale are reported at the lower of cost or aggregate market value primarily as determined by outstanding commitments from investors. Capitalized mortgage servicing rights (MSRs) are evaluated for impairment based on the fair value of those rights, using a disaggregated approach. MSRs are amortized on an accelerated basis over the estimated period of net servicing revenue. 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 losses inherent in the portfolio. 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 - Other real estate owned represents properties acquired by Bancorp's subsidiaries through loan defaults by customers. The property is recorded at the lower of cost or fair value minus estimated costs to sell at the date acquired. Subsequently, the property is valued at the lower of the amount recorded when the property was placed into other real estate owned 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 - Basic net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares, nonvested stock and dilutive common stock equivalents outstanding during the period. Common stock equivalents consist of common stock issuable under the assumed exercise of stock options granted under the Bancorp's stock plans, using the treasury stock method. Cash flow information - For purposes of the statement of cash flows, Bancorp considers cash and due from banks as cash and cash equivalents. Capital - During 1999, Bancorp issued a 10% stock dividend. All share amounts presented in the financial statements have been adjusted to reflect these transactions. On April 27, 1999, the shareholders approved an amendment to the Articles of Incorporation to increase the number of authorized common shares from 60,000,000 to 160,000,000. Reporting comprehensive income - Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Disclosure about segments and related information - Bancorp operates as one community banking segment in contiguous geographic markets. Derivative Instruments - SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was released in June, 1998, and is effective for all fiscal quarters of fiscal years beginning after January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. Reclassifications - Certain reclassifications of prior years' amounts have been made to conform to current year presentation. Such reclassifications had no effect on net earnings. FIRST FINANCIAL BANCORP 17 1999 ANNUAL REPORT 19 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 1999 and 1998 were approximately $23,748,000 and $19,472,000, respectively. NOTE 3 - BUSINESS COMBINATIONS Bancorp consummated the following business combinations in 1999, 1998, and 1997:
ACQUISITION SHARES PURCHASE DATE ASSETS DEPOSITS ISSUED PRICE (Dollars in thousands) Pooling-of-interests Sand Ridge Financial Corporation June 1, 1999 $ 591,325 $ 516,413 5,114,878 Hebron Bancorp, Inc. June 1, 1999 110,089 94,624 1,222,599 Hastings Financial Corporation January 1, 1997 49,989 44,156 322,386 Purchase transactions The Union State Bank April 1, 1998 68,020 52,798 $ 13,600 KeyBank branches December 8, 1997 93,486 246,120 28,837 Southeastern Indiana Bancorp June 1, 1997 55,071 46,774 7,800
On June 1, 1999, Bancorp issued 5,114,878 shares of its common stock for all the outstanding shares of Sand Ridge Financial Corporation (SRFC). Upon consummation of the merger, SRFC was merged out of existence and its only subsidiary, Sand Ridge Bank, became a wholly owned subsidiary of Bancorp. 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 acquisition to include the accounts and operations of SRFC. Also on June 1, 1999, Bancorp issued 1,222,599 shares of its common stock for all the outstanding shares of Hebron Bancorp, Inc. (HBI). Upon consummation of the merger, HBI was merged out of existence and its only subsidiary, Hebron Deposit Bank, became a wholly owned subsidiary of Bancorp. The 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 acquisition to include the accounts and operations of HBI.
Three months ending March 31, December 31, 1999 1998 1997 (Dollars in thousands) Net interest income Bancorp $ 34,108 $ 131,064 $ 115,352 SRFC 4,663 17,196 15,782 HBI 945 3,976 4,283 ---------- ----------- ----------- Combined $ 39,716 $ 152,236 $ 135,417 ========== =========== =========== Net earnings Bancorp $ 11,130 $ 44,106 $ 40,308 SRFC 1,635 5,447 4,993 HBI 316 1,419 1,531 ---------- ----------- ----------- Combined $ 13,081 $ 50,972 $ 46,832 ========== =========== ===========
FIRST FINANCIAL BANCORP 18 1999 ANNUAL REPORT 20 NOTE 4 - LEASE FINANCING Leases included in the loan portfolio at December 31 were composed as follows:
1999 1998 (Dollars in thousands) Direct financing $ 32,148 $ 21,354 Leveraged 28 1,302 Non-recourse debt, principal and interest 0 (936) -------- ---------- Net rentals receivable 32,176 21,720 Estimated residual value of leased assets 21,872 12,986 Less unearned income 7,540 5,494 -------- ---------- INVESTMENT IN LEASES, NET $ 46,508 $ 29,212 ======== ==========
Direct financing lease payments receivable as of December 31, 1999, for the next five years and thereafter are as follows:
(Dollars in thousands) 2000 $10,980 2001 9,620 2002 6,850 2003 3,437 2004 1,078 Thereafter 183
NOTE 5 - PREMISES AND EQUIPMENT Premises and equipment at December 31 were summarized as follows:
1999 1998 (Dollars in thousands) Land and land improvements $ 12,221 $ 11,778 Buildings 52,683 55,002 Furniture and fixtures 46,256 43,748 Leasehold improvements 3,379 1,446 Construction in progress 2,070 2,914 --------- --------- 116,609 114,888 Less accumulated depreciation and amortization 57,605 56,908 --------- --------- TOTAL $ 59,004 $57,980 ========= =========
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, 1999, Bancorp's subsidiaries had retained earnings of $171,291,000 of which $39,200,000 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 $18,028,000 and $18,022,000 at December 31, 1999, and 1998, 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 FIRST FINANCIAL BANCORP 19 1999 ANNUAL REPORT 21 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 counter- party. The collateral held varies, but may include securities, real estate, inventory, plant or equipment. Bancorp had commitments outstanding to extend credit totaling $508,366,000 and $469,577,000 at December 31, 1999, and 1998, respectively. Management does not anticipate any material losses as a result of these commitments. NOTE 8 - INVESTMENT SECURITIES The following is a summary of investment securities as of December 31, 1999:
HELD-TO-MATURITY AVAILABLE-FOR-SALE AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE (Dollars in thousands) U.S. Treasury securities $ 11,364 $ 2 $ (55) $ 11,311 Securities of U.S. government agencies and corporations 122,103 11 (3,276) 118,838 Mortgage-backed securities $ 6,345 $ 116 $ (47) $ 6,414 191,894 638 (3,570) 188,962 Obligations of state and other political subdivisions 25,097 752 (83) 25,766 142,743 955 (4,880) 138,818 Other securities 323 0 (5) 318 32,257 4 (64) 32,197 ---------- ------- ------- -------- ---------- ------- --------- ---------- TOTAL $ 31,765 $ 868 $ (135) $ 32,498 $ 500,361 $ 1,610 $ (11,845) $ 490,126 ========== ======= ======= ======== ========== ======= ========= ==========
The following is a summary of investment securities as of December 31, 1998:
HELD-TO-MATURITY AVAILABLE-FOR-SALE AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE (Dollars in thousands) U.S. Treasury securities $ 30,498 $ 217 $ 30,715 Securities of U.S. government agencies and corporations $ 2,031 $ 80 $ 2,111 112,643 1,154 $ (20) 113,777 Mortgage-backed securities 9,117 252 $ (19) 9,350 226,786 1,954 (379) 228,361 Obligations of state and other political subdivisions 26,118 2,058 (2) 28,174 151,261 5,310 (225) 156,346 Other securities 516 8 0 524 21,167 28 0 21,195 ---------- ------- ------- -------- ---------- ------- --------- ---------- TOTAL $ 37,782 $ 2,398 $ (21) $ 40,159 $ 542,355 $ 8,663 $ (624) $ 550,394 ========== ======= ======= ======== ========== ======= ========= ==========
The carrying value of investment securities as of December 31, 1997, by category was as follows: U.S. Treasury $55,121,000, U.S. government agencies and corporations $92,799,000, mortgage-backed $214,576,000, obligations of state and other political subdivisions $160,706,000, and other $21,927,000. During the year ended December 31, 1999, available-for-sale securities with a fair value at the date of sale of $13,482,000 were sold. The gross realized gains on such sales totaled $38,000. During the year ended December 31, 1998, available-for-sale securities with a fair value at the date of sale of $48,749,000 were sold. The gross realized gains on such sales totaled $900,000. During the year ended December 31, 1997, available-for-sale securities with a fair value at the date of sale of $24,462,000 were sold. The gross realized gains on such sales totaled $206,000 and the gross realized losses totaled $106,000. There were net investment gains after taxes of $106,000, $738,000 and $105,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The applicable income tax effects were a benefit of $56,000 for 1999 and expenses of $322,000 and $42,000 1998, and 1997, respectively. The carrying value of investment securities pledged to secure public deposits and for other purposes as required by law amounted to $241,164,000 at December 31, 1999. The amortized cost and market value of investment securities, including mortgage-backed securities at December 31, 1999, 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.
HELD-TO-MATURITY AVAILABLE-FOR-SALE AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE (Dollars in thousands) Due in one year or less $ 5,139 $ 5,147 $ 17,982 $ 17,985 Due after one year through five years 14,625 15,301 126,123 124,569 Due after five years through ten years 8,045 8,106 110,168 107,984 Due after ten years 3,956 3,944 246,088 239,588 -------- -------- --------- --------- TOTAL $ 31,765 $ 32,498 $ 500,361 $ 490,126 ======== ======== ========= =========
FIRST FINANCIAL BANCORP 20 1999 ANNUAL REPORT 22 NOTE 9 - LOANS Information on nonaccrual and restructured loans at December 31 was as follows:
1999 1998 1997 (Dollars in thousands) Principal balance Nonaccrual loans $ 11,283 $ 7,481 $ 7,845 Restructured loans 2,244 691 2,447 --------- -------- --------- TOTAL $ 13,527 $ 8,172 $ 10,292 ========= ======== ========= Interest income effect Gross amount of interest that would have been recorded at original rate $ 885 $ 631 $ 862 Interest included in income 286 197 226 --------- -------- --------- NET IMPACT ON INTEREST INCOME $ 599 $ 434 $ 636 ========= ======== =========
At December 31, 1999, 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 $1,707,000, $221,000 and $1,150,000 at December 31, 1999, 1998 and 1997, respectively. Changes in the allowance for loan losses for the three years ended December 31 were as follows:
1999 1998 1997 (Dollars in thousands) Balance at beginning of year $ 34,800 $ 31,660 $ 25,803 Allowance acquired through mergers 0 806 3,013 Provision for discontinued product line 1,100 0 0 Provision for loan losses 9,232 8,247 6,656 Loans charged off (9,361) (8,387) (5,439) Recoveries 3,569 2,474 1,627 -------- ----------- ------- BALANCE AT END OF YEAR $ 39,340 $ 34,800 $31,660 ======== =========== =======
The 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. At December 31, 1999, 1998, and 1997, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $2,688,000, $3,218,000, and $4,169,000, respectively. The related allowance for loan losses on these impaired loans was $1,433,000 at December 31, 1999, $1,449,000 at December 31, 1998, and $1,115,000 at December 31, 1997. There were $20,000 of 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, 1999, was approximately $2,407,000 versus $4,640,000 for the year ended December 31, 1998, and $3,780,000 for the year ended December 31, 1997. For the years ended December 31, 1999, 1998, and 1997, Bancorp recognized interest income on those impaired loans of $88,000, $129,000 and $37,000, 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 $394,978,000, $301,695,000 and $227,977,000 at December 31, 1999, 1998 and 1997, respectively. Custodial escrow balances maintained in connection with servicing these mortgage loans were approximately $2,344,000, $1,908,000 and $1,670,000 at December 31, 1999, 1998 and 1997, respectively. NOTE 10 - FEDERAL HOME LOAN BANK LONG-TERM BORROWINGS Long-term borrowings at December 31, 1999 consisted exclusively of Federal Home Loan Bank advances with rates ranging from 4.28% to 6.90%, with interest payable monthly. The advances were secured by certain residential mortgage loans with a book value of $1,045,355,000 at December 31, 1999. The advances mature as follows: $4,392,000 in 2000, $4,129,000 in 2001, $23,296,000 in 2002, $11,200,000 in 2003, $22,500,000 in 2004, $2,282,000 in 2006, $20,000,000 in 2007, $46,000,000 in 2008, and $28,000,000 in 2009. FIRST FINANCIAL BANCORP 21 1999 ANNUAL REPORT 23 NOTE 11 - INCOME TAXES Income tax expense consisted of the following components:
1999 1998 1997 (Dollars in thousands) Current Federal $ 21,613 $ 21,462 $ 21,704 State 2,633 2,024 2,103 ------------ ------------ ------------ Total 24,246 23,486 23,807 Deferred (benefit) expense 2,054 1,198 (1,812) ------------ ------------ ------------ INCOME TAX EXPENSE $ 26,300 $ 24,684 $ 21,995 ============ ============ =============
The difference between the federal income tax rates, applied to income before income taxes, and the effective rates were due to the following:
1999 1998 1997 (Dollars in thousands) Income taxes computed at federal statutory rate of 35% $ 26,818 $ 26,420 $ 24,014 State income taxes, net of federal tax benefit 1,711 1,322 1,373 Effect of tax-exempt interest (2,885) (2,933) (3,085) Other 656 (125) (307) --------- --------- ----------- INCOME TAX EXPENSE $ 26,300 $ 24,684 $ 21,995 ========= ========= ===========
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 1999, 1998, and 1997. The major components of the temporary differences that give rise to deferred tax assets and liabilities at December 31, 1999 and 1998, are as follows:
1999 1998 (Dollars in thousands) Deferred tax assets Allowance for loan losses $ 12,237 $ 10,971 Mark to market adjustment (985) 2,321 Other real estate owned 2 2 Postretirement benefits other than pensions liability 936 990 Pension liability 832 326 Other 3,930 938 ----------- ------------ Total deferred tax assets 16,952 15,548 Deferred tax liabilities Tax greater than book depreciation 1,125 1,251 Leasing activities 4,308 3,489 Federal Home Loan Bank stock basis difference 5,546 1,009 Deferred loan fees 1,421 782 Purchase accounting adjustment (276) 1,023 Other 733 1,845 ----------- ------------ Total deferred tax liabilities 12,857 9,399 ----------- ------------ Net deferred tax asset recognized through the statement of earnings 4,095 6,149 Net deferred tax asset (liability) from valuation adjustments of investment securities available-for-sale, recognized in equity section of balance sheet 3,913 (3,077) ----------- ------------ TOTAL NET DEFERRED TAX ASSET $ 8,008 $ 3,072 =========== ============
FIRST FINANCIAL BANCORP 22 1999 ANNUAL REPORT 24 NOTE 12 - 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 certain 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 dividing Tier 1 capital by average total assets less certain intangibles. While Bancorp's 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.
December 31, 1999 1998 (Dollars in thousands) Tier 1 capital Shareholders' equity $ 372,539 $ 358,265 Less certain intangibles 37,610 40,605 Less accumulated comprehensive income (6,398) 4,949 ------------ ----------- Total Tier 1 capital $ 341,327 $ 312,711 ============ =========== Total risk-based capital Tier 1 capital $ 341,327 $ 312,711 Qualifying allowance for loan losses 35,636 31,742 ------------ ----------- Total risk-based capital $ 376,963 $ 344,453 ============ =========== Risk weighted assets $ 2,847,221 $ 2,536,301 ============ =========== Risk-based ratios Tier 1 capital 12.0% 12.3% ============ =========== Total risk-based capital 13.2% 13.6% ============ =========== Leverage 9.4% 9.1% ============ ===========
NOTE 13 - EMPLOYEE BENEFIT PLANS Bancorp sponsors a non-contributory defined benefit pension plan covering substantially all employees. Plan assets were administered by the trust departments of First National Bank of Southwestern Ohio (First Southwestern) and Community First Bank & Trust (Community First), both subsidiaries of Bancorp, during 1998. First Southwestern became the sole administrator during 1999. Plan assets primarily consist of equity and debt mutual funds, stocks, corporate bonds, and money market funds. Approximately 95.8% and 90.2% of plan assets at December 31, 1999 and 1998, respectively, were invested in collective trust funds with First Southwestern. Also included in plan assets was a $100,000 certificate of deposit invested with Community First at each date. The pension plan does not own any shares of Bancorp common stock. The following tables set forth information concerning amounts recognized in Bancorp's Consolidated Balance Sheets and Consolidated Statements of Earnings:
December 31, 1999 1998 (Dollars in thousands) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 27,408 $ 24,393 Service cost 1,972 1,769 Interest cost 1,941 1,811 Transfer from merged plan 0 320 Actuarial (gain) loss (1,043) 2,107 Benefits paid (3,742) (2,992) ------------ ------------ Benefit obligation at end of year 26,536 27,408 CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 25,676 23,738 Actual return on plan assets 828 3,128 Employer contributions 136 1,495 Transfer from merged plan 0 307 Benefits paid (3,742) (2,992) ------------ ------------ Fair value of plan assets at end of year 22,898 25,676 ------------ ------------ Funded status (3,638) (1,732) Unrecognized transition amount (1,036) (1,342) Unrecognized prior service cost 1,327 1,579 Unrecognized actuarial loss 493 141 ------------ ------------ NET AMOUNT RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS (ACCRUED BENEFIT LIABILITY) $ (2,854) $ (1,354) ============ ============
FIRST FINANCIAL BANCORP 23 1999 ANNUAL REPORT 25 WEIGHTED-AVERAGE ASSUMPTIONS
December 31, 1999 1998 Discount rate 7.50% 7.00% Expected return on plan assets 9.00% 8.00% Rate of compensation increase 3.50% 3.50%
COMPONENTS OF NET PERIODIC BENEFIT COST
December 31, 1999 1998 1999 (Dollars in thousands) Service cost $ 1,972 $ 1,769 $ 1,502 Interest cost 1,941 1,811 1,734 Expected return on assets (2,223) (1,900) (1,765) Amortization of transition asset (305) (305) (305) Amortization of unrecognized prior service cost 252 252 261 Amortization of actuarial loss 0 0 64 ---------- -------- --------- NET PERIODIC PENSION COST $ 1,637 $ 1,627 $ 1,491 ========== ======== =========
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. Bancorp contributions are at the discretion of the Board of Directors. During 1999 and 1998, Bancorp contributed $0.50 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. Total Bancorp contributions to the 401(k) plan were $775,000 during 1999, $701,000 during 1998, and $566,000 during 1997. NOTE 14 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Some Bancorp subsidiaries maintain health care and, in limited instances, life insurance plans for current retired employees. 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:
1999 1998 (Dollars in thousands) Benefit obligation at beginning of year $ 1,439 $ 1,669 Interest cost 96 106 Plan participants' contributions 25 29 Actuarial gain (192) (328) Benefits paid (190) (37) Benefit obligation at end of year 1,178 1,439 Fair value of plan assets at beginning and end of year 0 0 Funded status (1,178) (1,439) Unrecognized actuarial gain (1,370) (1,282) --------- ---------- Unrecognized prior service cost (29) (33) --------- ---------- NET POSTRETIREMENT LIABILITY RECOGNIZED IN THE BALANCE SHEETS $ (2,577) $ (2,754) ========= ========== Net periodic postretirement benefit cost includes the following components: Interest cost $ 96 $ 106 Amortization of unrecognized prior service cost (4) (3) Amortization of actuarial gain (103) (90) --------- ---------- NET PERIODIC BENEFIT COST $ (11) $ 13 ========= ==========
The discount rate used to determine the accumulated postretirement benefit obligation was 7.50% at December 31, 1999, and 7.00% at December 31, 1998. The assumed health care cost trend rates used in determining the accumulated postretirement benefit obligation are shown in the table to the right. If the health care cost trend rate assumptions were increased by 1.00%, the accumulated postretirement benefit obligation as of December 31, 1999, would be increased by approximately $95,000. If the health care cost trend rate assumptions were decreased by 1.00%, the accumulated postretirement benefit obligation as of December 31, 1999, would be decreased by approximately $86,000.
1999 8.10% 2000 7.30% 7.30% 2001 6.60% 6.50% 2002 6.00% 6.00% 2003 5.50% 5.50% Thereafter 5.00% 5.00%
FIRST FINANCIAL BANCORP 24 1999 ANNUAL REPORT 26 NOTE 15 - EARNINGS PER SHARE
1999 1998 1997 (Dollars in thousands, except per share data) The following table sets forth the computation of basic and diluted earnings per share: Net income--numerator for basic and diluted earnings per share income available to common stockholders $ 50,323 $ 50,972 $ 46,832 =========== =========== =========== Denominator for basic earnings per share - weighted average shares 46,848,851 46,984,480 47,013,881 Effect of dilutive securities - employee stock options 136,931 187,943 143,353 ----------- ----------- ----------- Denominator for diluted earnings per share - adjusted weighted average shares 46,985,782 47,172,423 47,157,234 =========== =========== =========== Basic earnings per share $ 1.07 $ 1.08 $ 1.00 =========== =========== =========== Diluted earnings per share $ 1.07 $ 1.08 $ 0.99 =========== =========== ===========
NOTE 16 - STOCK OPTIONS The 1991 Stock Incentive 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 1,610,510 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, 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. On April 27, 1999, the shareholders approved the 1999 Stock Incentive Plan which provides for 6,500,000 similar options and awards. 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 1999, 1998 and 1997, respectively: risk-free interest rates of 4.74%, 5.59% and 6.72%; dividend yields of 2.35%, 2.45%, and 3.67%; volatility factors of the expected market price of Bancorp's common stock of .202, .193 and .195; and a weighted average expected life of the options of 2.83, 4.20, and 7.57 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:
1999 1998 1997 (Dollars in thousands, except per share data) Pro forma net earnings $ 49,238 $ 50,187 $ 46,556 ========= ======== ======== Pro forma earnings per share $ 1.05 $ 1.07 $ 0.99 ========= ======== ========
Activity in the above plan for 1999, 1998, and 1997 is summarized as follows:
1999 1998 1997 NUMBER OF OPTION NUMBER OF OPTION NUMBER OF OPTION SHARES PRICE SHARES PRICE SHARES PRICE Outstanding at beginning of year 527,780 452,470 408,656 Granted 321,737 $20.23-23.69 209,727 $20.04-22.68 129,831 $11.69-13.81 Exercised (79,316) $ 7.72-20.04 (134,417) $ 7.50-11.86 (84,686) $ 7.73-11.86 Cancelled (27,797) $ 23.69 (1,331) $ 11.69 --------- ------- ------- OUTSTANDING AT END OF YEAR 742,404 $ 7.50-23.69 527,780 $ 7.50-22.68 452,470 $ 7.50-13.81 ========= ======= ======= EXERCISABLE AT END OF YEAR 448,441 318,030 323,901 $ 7.50-11.86 ========= ======= ======= AVAILABLE FOR FUTURE GRANT 7,019,241 680,250 901,230 ========= ======= ======= WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING THE YEAR $ 3.56 $ 3.89 $ 2.56 ========= ======= =======
FIRST FINANCIAL BANCORP 25 1999 ANNUAL REPORT 27 NOTE 17 - LOANS TO RELATED PARTIES Loans to directors, executive officers, principal holders of Bancorp's common stock and certain related persons totaled $35,568,000 and $29,961,000 at December 31, 1999, and 1998, respectively. Activity of these loans was as follows:
1999 1998 (Dollars in thousands) Beginning balance $ 29,961 $ 33,792 Additions 17,092 12,453 Collected 11,485 16,284 Charged off 0 0 --------- ------------ Ending balance $ 35,568 $ 29,961 ========= ============ 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 18 - SHAREHOLDER RIGHTS PLAN Bancorp has a "shareholder rights plan" under which the holders of Bancorp's common stock are entitled to receive one "right" per share held. 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 $40.91, one share of common stock of the corporation. Subject to the "exchange option" described below, 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 $40.91, 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. At any time after any person becomes an "acquiring person" or an "adverse person," the plan gives Bancorp's board of directors the option (the "exchange option") to exchange all or part of the outstanding "rights" (except "rights" held by an "acquiring person" or an "adverse person") for shares of Bancorp's common stock at an exchange ratio of 0.9 shares of common stock per "right." In the event that Bancorp's board of directors adopts the "exchange option," each "right" would entitle the holder thereof to receive only 0.9 shares of common stock per "right." Any partial exchange would be effected pro rata based on the number of "rights" held by each holder of "rights" included in the exchange. 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. FIRST FINANCIAL BANCORP 26 1999 ANNUAL REPORT 28 NOTE 19 - DISCLOSURES AB0UT 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 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:
1999 1998 CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (Dollars in thousands) Financial assets Cash and short-term investments $ 240,325 $ 240,325 $ 175,752 $ 175,752 Investment securities held-to-maturity 31,765 32,498 37,782 40,159 Investment securities available-for-sale 490,126 490,126 550,394 550,394 Loans Commercial 769,454 766,457 689,524 687,650 Real estate-construction 111,458 105,154 74,205 73,958 Real estate-mortgage 1,467,591 1,413,537 1,306,065 1,318,404 Installment, net of unearned income 618,957 678,673 533,834 534,174 Credit card 22,408 22,481 21,306 21,312 Leasing 46,508 47,179 29,212 30,828 Less allowance for loan losses 39,340 34,800 --------- --------- --------- --------- Net loans 2,997,036 3,033,481 2,619,346 2,666,326 Accrued interest receivable 30,550 30,550 26,467 26,467 Financial liabilities Deposits Noninterest-bearing 408,712 408,712 392,999 392,999 Interest-bearing demand 314,735 314,735 307,752 307,752 Savings 778,405 778,405 758,808 758,808 Time 1,489,361 1,452,826 1,412,508 1,416,015 --------- --------- --------- --------- Total deposits 2,991,213 2,954,678 2,872,067 2,875,574 Short-term borrowings 382,118 382,118 155,064 155,064 Long-term borrowings 161,799 157,169 120,777 118,419 Accrued interest payable 10,825 10,825 10,514 10,514
FIRST FINANCIAL BANCORP 27 1999 ANNUAL REPORT 29 NOTE 20 - FIRST FINANCIAL BANCORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS December 31, 1999 1998 (Dollars in thousands) ASSETS Cash $ 32,200 $ 40,587 Investment securities 46 75 Subordinated notes from subsidiaries 7,500 0 Investment in subsidiaries Commercial banks 286,669 280,114 Savings banks 37,085 31,440 -------- -------- Total investment in subsidiaries 323,754 311,554 Bank premises and equipment 1,426 286 Other assets 17,842 13,375 -------- -------- TOTAL ASSETS $382,768 $365,877 ======== ======== LIABILITIES Dividends payable $ 6,980 $ 6,515 Other liabilities 3,249 1,097 -------- -------- TOTAL LIABILITIES 10,229 7,612 SHAREHOLDERS' EQUITY 372,539 358,265 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $382,768 $365,877 ======== ========
STATEMENTS OF EARNINGS YEAR ENDED DECEMBER 31, 1999 1998 1997 (Dollars in thousands) INCOME Interest income (other) $ 140 $ 57 $ 24 Dividends from subsidiaries 38,348 52,974 47,139 -------- -------- -------- TOTAL INCOME 38,488 53,031 47,163 EXPENSES Salaries and employee benefits 3,211 2,589 1,198 Other 5,683 2,188 1,948 -------- -------- -------- TOTAL EXPENSES 8,894 4,777 3,146 -------- -------- -------- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARIES 29,594 48,254 44,017 Income tax benefit (1,310) (984) (769) -------- -------- -------- Income before equity in undistributed net earnings of subsidiaries 30,904 49,238 44,786 Equity in undistributed net earnings of subsidiaries 19,419 1,734 2,046 -------- -------- -------- NET EARNINGS $ 50,323 $ 50,972 $ 46,832 ======== ======== ========
FIRST FINANCIAL BANCORP 28 1999 ANNUAL REPORT 30
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1999 1998 1997 (Dollars in thousands) OPERATING ACTIVITIES Net earnings $ 50,323 $ 50,972 $ 46,832 Adjustments to reconcile net earnings to net cash provided by operating activities Equity in undistributed net earnings of subsidiaries (19,419) (1,734) (2,046) Provision for depreciation and amortization 60 32 13 Deferred income taxes 78 173 (71) Increase in dividends payable 465 528 618 Increase (decrease) in accrued expenses 2,251 662 (781) (Increase) decrease in receivables (4,550) (3,261) 3,004 -------- -------- -------- Net cash provided by operating activities 29,208 47,372 47,569 INVESTING ACTIVITIES Subordinated notes from subsidiaries (7,500) 0 0 Capital contributions to subsidiaries (4,200) (1,200) (39,400) Purchase of subsidiary 0 (13,600) (7,800) Purchases of premises and equipment (1,189) (286) 0 Other 84 7 (43) -------- -------- -------- Net cash used in investing activities (12,805) (15,079) (47,243) FINANCING ACTIVITIES Cash dividends (25,570) (21,436) (20,271) Purchase of common stock 0 (8,773) (282) Proceeds from exercise of stock options, net of shares purchased 780 788 657 -------- -------- -------- Net cash used in financing activities (24,790) (29,421) (19,896) -------- -------- -------- (DECREASE) INCREASE IN CASH (8,387) 2,872 (19,570) Cash at beginning of year 40,587 37,715 57,285 -------- -------- -------- CASH AT END OF YEAR $ 32,200 $ 40,587 $ 37,715 ======== ======== ========
NOTE 21 - MERGER AND RESTRUCTURING CHARGES In December 1998, Bancorp announced plans for a merger and restructuring charge to coincide with its mergers with Sand Ridge Financial Corporation and Hebron Bancorp, Inc. As discussed in Note 3 of the Notes to Consolidated Financial Statements, Bancorp completed the mergers on June 1, 1999. In the second quarter of 1999, Bancorp recorded merger and restructuring charges of approximately $6,900,000 before taxes or $5,500,000 million after taxes. The merger and restructuring charge consisted of two general components. The first component was for merger related charges of approximately $2,900,000 before taxes, or $2,800,000 after taxes, for investment banking and other professional services specifically associated with the SRFC and HBI mergers. Investment banking fees and other professional services such as legal, accounting, and consulting represented $2,400,000 of the $2,900,000 pre-tax merger charge. The remaining approximately $500,000 was incurred primarily for system conversions and personnel charges. Of the merger related charges, $2,700,000 have been paid. The second component included in the overall merger and restructuring charges of $5,500,000 after taxes related to restructuring charges for the planned consolidation of some operational functions including the sale of four facilities and more effective use of existing properties. Under its restructuring plan, Bancorp also discontinued its accounts receivable financing line of business and merged two of its affiliates, Union Trust Bank, Union City, Indiana, into Community First Bank & Trust, Celina, Ohio. The restructuring component totaled approximately $4,000,000 before taxes and $2,700,000 after taxes. Of the $4,000,000 pre-tax restructuring component, approximately $1,600,000 was related to the disposals of properties. The four facilities to be disposed of were written down to fair value (estimated selling price). As of December 31, 1999, two properties had not yet been sold. The $4,000,000 pre-tax restructuring component also consisted of a $1,100,000 provision for loan losses associated with the discontinuance of the accounts receivable financing line of business. Losses of approximately $900,000 associated with the discontinuance of the accounts receivable financing have been recognized through December 31, 1999. Of the $4,000,000 component, $1,300,000 was related to the consolidation of operational functions and affiliate restructuring. Approximately $800,000 of the $1,300,000 related to operational and affiliate restructuring, has been paid. Revenues and operating income of activities discontinued are not significant to Bancorp's operating results. The table below summarizes the major components of the merger and restructuring charge. Bancorp expects that the remaining balance will be substantially utilized during 2000.
MERGER DISPOSALS DISCONTINUED OPERATIONS/AFFILIATE COSTS OF PROPERTY PRODUCT RESTRUCTURING TOTAL (Dollars in thousands) Merger and restructuring charge $2,899 $1,574 $1,100 $1,357 $6,930 Amount paid/written off 2,680 1,459 933 834 5,906 ------ ------ ------ ------ ------ Balance as of December 31,1999 $ 219 $ 115 $ 167 $ 523 $1,024 ====== ====== ====== ====== ======
FIRST FINANCIAL BANCORP 29 1999 ANNUAL REPORT 31 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, 1999, and 1998, 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, 1999. 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 auditing standards generally accepted in the United States. 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, 1999, and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Cincinnati, Ohio January 17, 2000 FIRST FINANCIAL BANCORP 30 1999 ANNUAL REPORT 32
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) 1999 Interest income $ 66,938 $ 68,804 $ 72,274 $ 74,382 Interest expense 27,222 27,776 30,269 31,927 -------- -------- -------- -------- Net interest income 39,716 41,028 42,005 42,455 Provision for loan losses 2,532 1,378 2,117 3,205 Noninterest income Investment securities gains (losses) 55 (8) 9 (6) All other 10,041 9,999 10,484 10,738 Noninterest expenses 27,667 35,187 28,914 28,893 -------- -------- -------- -------- Income before income taxes 19,613 14,454 21,467 21,089 Income tax expense 6,532 5,739 6,932 7,097 -------- -------- -------- -------- Net earnings $ 13,081 $ 8,715 $ 14,535 $ 13,992 ======== ======== ======== ======== Per share Net earnings - basic $ 0.28 $ 0.19 $ 0.31 $ 0.30 ======== ======== ======== ======== Net earnings - diluted $ 0.28 $ 0.19 $ 0.31 $ 0.30 ======== ======== ======== ======== Cash dividends paid $ 0.14 $ 0.14 $ 0.14 $ 0.14 ======== ======== ======== ======== Market price High bid $ 27.55 $ 22.73 $ 21.36 $ 23.56 ======== ======== ======== ======== Low bid $ 19.77 $ 19.09 $ 18.46 $ 18.75 ======== ======== ======== ======== 1998 Interest income $ 62,873 $ 65,504 $ 66,820 $ 67,473 Interest expense 26,111 27,405 28,689 28,229 -------- -------- -------- -------- Net interest income 36,762 38,099 38,131 39,244 Provision for loan losses 1,630 1,528 2,738 2,351 Noninterest income Investment securities gains 173 302 247 338 All other 8,866 8,792 9,645 11,149 Noninterest expenses 26,245 26,173 26,859 28,568 -------- -------- -------- -------- Income before income taxes 17,926 19,492 18,426 19,812 Income tax expense 6,011 6,402 6,214 6,057 -------- -------- -------- -------- Net earnings $ 11,915 $ 13,090 $ 12,212 $ 13,755 ======== ======== ======== ======== Per share Net earnings - basic $ 0.25 $ 0.28 $ 0.26 $ 0.29 ======== ======== ======== ======== Net earnings - diluted $ 0.25 $ 0.28 $ 0.25 $ 0.29 ======== ======== ======== ======== Cash dividends paid $ 0.13 $ 0.13 $ 0.13 $ 0.13 ======== ======== ======== ======== Market price High bid $ 24.27 $ 26.35 $ 24.27 $ 28.18 ======== ======== ======== ======== Low bid $ 19.84 $ 21.28 $ 20.66 $ 22.73 ======== ======== ======== ========
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 as if (a) the mergers of Sand Ridge Financial Corporation and Hebron Bancorp, Inc. on June 1, 1999 and (b) the 10.0% stock dividends declared in 1998 and 1999 and the two-for-one stock split declared in 1998, occurred January 1, 1998. Both mergers were accounted for as a pooling-of-interests. FIRST FINANCIAL BANCORP 31 1999 ANNUAL REPORT EX-21 5 EXHIBIT 21 1 EXHIBIT 21 FIRST FINANCIAL BANCORP. SUBSIDIARIES First National Bank of Southwestern Ohio, organized as a national banking association under the laws of the United States Community First Bank & Trust, incorporated in the state of Ohio 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 The 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 National Bank of Hastings, organized as a national banking association under the laws of the United States Vevay Deposit Bank, incorporated in the state of Indiana Sand Ridge Bank, incorporated in the state of Indiana Hebron Deposit Bank, incorporated in the commonwealth of Kentucky First Financial Bancorp Service Corporation, incorporated in the state of Ohio 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 17, 2000 included in the 1999 Annual Report to Shareholders of First Financial Bancorp. We also consent to the incorporation by reference of our report dated January 17, 2000 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, 1999 in the following documents: - - Registration Statement (Form S-8 No. 33-46819) pertaining to the First Financial Bancorp 1991 Stock Incentive Plan and in the related Prospectus. - - Registration Statement (Form S-8 No. 333-86781) pertaining to the First Financial Bancorp 1999 Stock Incentive Plan for Officers and Employees and in the related Prospectus. - - Registration Statement (Form S-8 No. 333-86781) pertaining to the First Financial Bancorp 1999 Stock Incentive Plan for Non-Employee Directors and in the related Prospectus. - - Registration Statement (Form S-3 No. 333-25745) pertaining to the First Financial Bancorp. Dividend Reinvestment and Share Purchase Plan and in the related Prospectus /s/ Ernst & Young LLP Ernst & Young LLP March 21, 2000 Cincinnati, Ohio EX-27 7 EXHIBIT 27
9 0000708955 FIRST FINANCIAL BANCORP 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 225,837 8,867 5,621 0 490,126 31,765 32,498 3,036,376 39,430 3,940,693 2,991,213 382,118 33,024 161,799 0 0 373,447 (908) 3,940,693 249,113 32,629 656 282,398 97,552 117,194 165,204 9,232 50 120,661 76,623 50,323 0 0 50,323 1.07 1.07 8.41 11,283 2,414 2,777 79 34,800 9,361 3,569 39,340 28,944 0 10,396
EX-27.1 8 EXHIBIT 27.1
9 0000708955 FIRST FINANCIAL BANCORP 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 164,500 2,598 8,654 0 550,394 37,782 40,159 2,654,146 34,800 3,538,869 2,872,067 155,064 32,696 120,777 0 0 306,709 51,556 3,538,869 224,467 37,155 1,048 262,670 100,590 110,434 152,236 8,247 1,060 107,845 75,656 50,972 0 0 50,972 1.08 1.08 8.64 7,481 2,923 691 191 31,660 8,387 2,474 34,800 26,594 0 8,206
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