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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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934
Commission File Number 0-12379
FIRST FINANCIAL BANCORP.
(Exact name of registrant as specified in its charter)
-------------------
Ohio 31-1042001
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 High Street 45011
Hamilton, Ohio (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (513) 867-4700
-------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $8 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.[ ]
As of March 1, 1996, there were issued and outstanding 13,022,970 shares of
Registrant's Common Stock. The aggregate market value of the voting stock held
by non-affiliates of the Registrant computed by reference to the sales price of
the last trade of such stock as of March 1, 1996, was $442,781,000. (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, 1995 are incorporated by reference into Parts I and II.
Portions of the proxy statement dated March 15, 1996 for the annual meeting
of shareholders to be held April 23, 1996 are incorporated by reference into
Part III.
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FORM 10-K CROSS REFERENCE INDEX
Page
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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 1995) F-6
Additional Item - Executive Officers F-6
- ----------------------------------------------------------------------------------------------------------------------------
PART II Item 5 Market for the Registrant's Common Equity and Related
Shareholder Matters F-7
Item 6 Selected Financial Data F-7
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations F-7
Item 8 Financial Statements and Supplementary Data F-10
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure F-10
- ----------------------------------------------------------------------------------------------------------------------------
PART III Item 10 Directors and Executive Officers of the Registrant F-11
Item 11 Executive Compensation F-11
Item 12 Security Ownership of Certain Beneficial Owners and
Management F-11
Item 13 Certain Relationships and Related Transactions F-11
- ----------------------------------------------------------------------------------------------------------------------------
PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K F-12
- ----------------------------------------------------------------------------------------------------------------------------
SIGNATURES F-14
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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 twelve
wholly owned subsidiaries, First National Bank of Southwestern Ohio (First
Southwestern), Van Wert National Bank (Van Wert National), Bright National Bank
(Bright National), all national banking associations, Citizens Commercial Bank
& Trust Company (Citizens Commercial), Clyde Savings Bank Company (Clyde), both
Ohio banking corporations, Union Trust Bank (Union Trust), Indiana Lawrence
Bank (Indiana Lawrence), Citizens First State Bank (Citizens First), Union Bank
& Trust Company (Union Bank), and Peoples Bank and Trust Company (Peoples
Bank), all Indiana banking corporations, Fidelity Federal Savings Bank
(Fidelity Federal), and Home Federal Bank, A Federal Savings Bank (Home
Federal), both federal savings banks. Bancorp provides management and similar
services for its twelve subsidiary financial institutions. Since it does not
itself conduct any operating businesses, Bancorp must depend largely upon its
twelve 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 38 of Bancorp's Annual Report to
Shareholders, which is incorporated by reference in response to this item.
Bancorp was formed in 1982 for the purpose of becoming the parent holding
company of First Southwestern. For additional information, please see
"Subsidiaries" on page F-2.
Bancorp is registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended. Bancorp is also a savings and loan holding company
under the savings and loan holding company provisions of the Home Owners' Loan
Act of 1933, as amended by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA). As such, Bancorp is subject to strict
regulation regarding the acquisition of additional financial institutions and
the conduct, through subsidiaries, of non-banking activities (see "Regulation"
on page F- 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.
The range of banking services provided by Bancorp's subsidiaries to their
customers includes commercial lending, real estate lending, consumer credit,
credit card, and other personal loan financing. Fidelity Federal and Home
Federal are full service savings banks with their primary business being the
promotion of thrift through the solicitation of savings accounts from the
general public and the promotion of home ownership through the granting of
mortgage loans, primarily to finance the purchase, construction, and
improvement of residential real estate. First
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F-2
Southwestern, Citizens Commercial, Van Wert National, Citizens First, Clyde,
and Bright National also offer lease financing. In addition, the institutions
offer deposit services that include interest-bearing and noninterest-bearing
deposit accounts and time deposits. Most subsidiaries provide safe deposit
facilities. A full range of trust and asset management services is provided by
Bancorp's subsidiaries, excluding the savings banks. 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, 1995,
and is incorporated herein by reference.
At December 31, 1995, Bancorp and its subsidiaries employed 1,173 employees.
Bancorp's executive office is located at 300 High Street, Hamilton, Ohio
45011, and its telephone number is (513)867-4700.
Subsidiaries
- ------------
First Southwestern was formed as the result of a consolidation of the First
National Bank and Trust Company of Hamilton and the First National Bank of
Middletown in 1980. On April 26, 1983, Bancorp acquired all of the outstanding
capital stock of First Southwestern. At December 31, 1995, First Southwestern
had 29 offices located in Butler, Warren, Preble, and Hamilton Counties in Ohio
with total deposits of $769 million. First Southwestern has a total of 29
automated teller machines (ATM) of which four ATM's are at sites other than
branches.
Bancorp acquired 100% of the outstanding stock of Citizens Commercial on April
29, 1983. Citizens Commercial operates five offices and two ATM's in Mercer
County, Ohio, one of which is at a site other than a branch with deposits of
$182 million at December 31, 1995.
On July 31, 1988, NB Banc Corp, the parent holding company of Van Wert
National, merged into and out of existence with Bancorp leaving Van Wert
National as a wholly owned subsidiary of Bancorp. Van Wert National operates
five offices and has two ATM's in Van Wert County, Ohio with deposits of $104
million at December 31, 1995.
Union Trust merged with Bancorp on September 1, 1989, as a wholly owned
subsidiary. Union Trust has one ATM and operates two offices in Randolph
County, Indiana and had $36 million in deposits on December 31, 1995.
On September 1, 1989, ILB Financial Corp. was merged into and out of existence
with Bancorp. ILB Financial Corp. was the one bank holding company of Indiana
Lawrence. This merger resulted in Indiana Lawrence becoming a wholly owned
subsidiary of Bancorp. As of December 31, 1995, Indiana Lawrence had deposits
of $75 million, one ATM, and operated five offices in Wabash County, Indiana.
Fidelity Federal merged with Bancorp on September 21, 1990 as a wholly owned
subsidiary. Fidelity Federal operates three offices in Grant County, Indiana.
Total deposits at December 31, 1995 were $55 million.
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F-3
Citizens First joined Bancorp on October 1, 1990 as two separate entities,
Trustcorp Bank, Hartford City, and Trustcorp Bank, Dunkirk. These two entities
were purchased from Society Corporation for cash. On that same date, Trustcorp
Bank, Hartford City was renamed Citizens First State Bank of Hartford City and
Trustcorp Bank, Dunkirk was renamed Citizens First State Bank of Dunkirk. On
July 1, 1991, those two banks merged to become one wholly owned subsidiary of
Bancorp. Citizens First operates four offices in Blackford County, Indiana,
one office in Jay County, Indiana, and one office in Delaware County, Indiana.
Citizens First has four ATM's of which one is at a site other than branches,
and had total deposits of $88 million at December 31, 1995.
Bancorp purchased Home Federal on October 1, 1991. In November, 1995, Home
Federal and Fayette Federal combined operations, with Fayette Federal operating
as a division of Home Federal. Home Federal operates five offices in Butler
County, Ohio, two offices in Hamilton County, Ohio, one office in Fayette
County, Indiana and one office in Franklin County, Indiana, with total deposits
of $241 million at December 31, 1995. Home Federal has five ATM's of which
three are at sites other than branches.
On January 4, 1993, Jennings Union Bankcorp, the parent holding company of
Union Bank, merged into and out of existence with Bancorp leaving Union Bank as
a wholly owned subsidiary of Bancorp. Union Bank operates two offices in
Jennings County, Indiana with total deposits at December 31, 1995 of $71
million.
On June 1, 1994, First Clyde Banc Corp., the parent holding company of Clyde,
merged into and out of existence with Bancorp leaving Clyde as a wholly owned
subsidiary of Bancorp. Clyde operates two offices and one ATM in Sandusky
County in Ohio, with $60 million in total deposits as of December 31, 1995.
On July 16, 1995, Peoples Bank and Trust Company merged with Bancorp. Located
in Sunman, Indiana, Peoples Bank operates one office in Ripley County, Indiana
with total deposits of $43 million at December 31, 1995.
On October 1, 1995, Bright Financial Services, Inc., Flora, Indiana merged with
and into Bancorp leaving its subsidiary, Bright National Bank, as a wholly
owned Bancorp subsidiary. With deposits at December 31, 1995 of $103 million,
Bright National operates four offices in Carroll County, Indiana, two offices
in Tippecanoe County, Indiana and one office in Clinton County, Indiana.
Regulation
- ----------
First Southwestern, Van Wert National and Bright National, as national banking
associations, are subject to supervision and regular examination by the
Comptroller of the Currency. Citizens Commercial and Clyde, as Ohio state
chartered banks, are subject to supervision and regular examination by the
Superintendent of Banks of the State of Ohio. First Southwestern, Citizens
Commercial, Van Wert National, Clyde, Peoples Bank and Bright National are
members of the Federal Reserve System and, as such, are subject to the
applicable provisions of the Federal Reserve Act. Citizens Commercial is also
subject to regular examination by the Federal Reserve System. Union Trust,
Indiana Lawrence, Citizens First, Union Bank and Peoples Bank, as Indiana state
chartered banks, are subject to supervision and regular examination by the
Indiana Department of Financial Institutions. Fidelity Federal and Home
Federal, as federal savings banks, are subject to supervision and regular
examination by the Office of Thrift Supervision. Since
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F-4
Fidelity Federal is located in Indiana, it is also subject to examination by
the Indiana Department of Financial Institutions. All twelve institutions are
insured by the Federal Deposit Insurance Corporation and are subject to the
provisions of the Federal Deposit Insurance Act.
To the extent that the information below consists of summaries of certain
statutes or regulations, it is qualified in its entirety by reference to the
statutory or regulatory provisions described.
Bancorp is subject to the provisions of the Bank Holding Company Act of 1956,
as amended (the Act), which requires a bank holding company to register under
the Act and to be subject to supervision and examination by the Board of
Governors of the Federal Reserve System. As a bank holding company, Bancorp is
required to file with the Board of Governors an annual report and such
additional information as the Board of Governors may require pursuant to the
Act. The Act requires prior approval by the Board of Governors of the
acquisition by a bank holding company, or any subsidiary thereof, of 5% or more
of the voting stock or substantially all the assets of any bank within the
United States. Prior to the passage of FIRREA, it was not possible for bank
holding companies, such as Bancorp, to acquire "healthy" thrift institutions.
Although such acquisitions are now authorized, mergers between bank holding
companies and thrift institutions must be approved by the Federal Reserve Board
and the Office of Thrift Supervision. Once a bank holding company acquires a
thrift institution, it is then considered a savings and loan holding company,
as well, which is subject to regulation and examination by the Office of Thrift
Supervision. As a bank holding company located in the State of Ohio, Bancorp
is not permitted to acquire a bank or other financial institution located in
another state unless such acquisition is specifically authorized by the
statutes of such state, as is the case in Indiana. The Act further provides
that the Board of Governors shall not approve any such acquisition that would
result in a monopoly or would be in furtherance of any combination or
conspiracy to monopolize or attempt to monopolize the business of banking in
any part of the United States, or the effect of which may be to substantially
lessen competition or to create a monopoly in any section of the country, or
that in any other manner would be in restraint of trade, unless the
anti-competitive effects of the proposed transaction are clearly outweighed in
the public interest by the probable effect of the transaction in meeting the
convenience and needs of the community to be served.
The Act also prohibits a bank holding company, with certain exceptions, from
acquiring 5% or more of the voting stock of any company that is not a bank and
from engaging in any business other than banking or performing services for its
banking subsidiaries without the approval of the Board of Governors. In
addition, the acquisition of a thrift institution must be approved by the
Office of Thrift Supervision pursuant to the savings and loan holding company
provisions of the Home Owners' Loan Act of 1933, as amended by FIRREA. The
Board of Governors is also authorized to approve, among other things, the
ownership of shares by a bank holding company in any company the activities of
which the Board of Governors has determined to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. The Board
of Governors has, by regulation, determined that certain activities, including
mortgage banking, operating small loan companies, factoring, furnishing certain
data processing operations, holding or operating properties used by banking
subsidiaries or acquired for such future use, providing certain investment and
financial advice, leasing (subject to certain conditions) real or personal
property, providing management consulting advice to certain depository
institutions, providing securities brokerage services, arranging commercial
real estate equity financing, underwriting and dealing in government
obligations and money market instruments, providing consumer financial
counseling, operating a collection agency, owning and operating a savings
7
F-5
association, operating a credit bureau and conducting certain real estate
investment activities and acting as insurance agent for certain types of
insurance, are closely related to banking within the meaning of the Act. It
also has determined that certain other activities, including real estate
brokerage and syndication, land development, and property management, are not
related to credit transactions and are not permissible.
The Act and the regulations of the Board of Governors prohibit a bank holding
company and its subsidiaries from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property, or
furnishing of services. The Act also imposes certain restrictions upon dealing
by affiliated banks with the holding company and among themselves including
restrictions on interbank borrowing and upon dealings in respect to the
securities or obligations of the holding company or other affiliates.
The earnings of banks, and therefore the earnings of Bancorp (and its
subsidiaries), are affected by the policies of regulatory authorities,
including the Board of Governors of the Federal Reserve System. An important
function of the Federal Reserve Board is to regulate the national supply of
bank credit in an effort to prevent recession and to restrain inflation. Among
the procedures used to implement these objectives are open market operations in
U.S. Government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
These procedures are used in varying combinations to influence overall growth
and distribution of bank loans, investments and deposits, and their use also
may affect interest rates charged on loans or paid for deposits.
Monetary policies of the Federal Reserve Board have had a significant effect on
the operating results of commercial banks in the past and are expected to
continue to do so in the future. The effect, if any, of such policies upon the
future business and earnings of Bancorp cannot accurately be predicted.
Bancorp makes no attempt to predict the effect on its revenues and earnings of
changes in general economic, industrial, and international conditions or in
legislation and governmental regulations.
ITEM 2. PROPERTIES.
The registrant and its subsidiaries operate from 50 offices in Ohio, including
Bancorp's executive office in Hamilton, Ohio and 26 offices in Indiana.
Twenty-eight of the offices are located in Butler County, Ohio, of which four
branches are built on leased land and there are seven branches wherein the land
and building are leased. Excess space in three facilities is leased to third
parties. Five offices are located in Mercer County, Ohio, five in Van Wert
County, Ohio, three in Preble County, Ohio, three in Warren County, Ohio, three
in Hamilton County, Ohio, and two in Sandusky County, Ohio. Five offices are
located in Wabash County, Indiana, of which one office is built on leased land
with a purchase option on the land. Two offices are in Randolph County,
Indiana, three in Grant County, Indiana, one in Jay County, Indiana, four in
Blackford County, Indiana, one in Fayette County, Indiana, one in Franklin
County, Indiana, two in Jennings County, Indiana, four in Carroll County,
Indiana, two in Tippecanoe County, Indiana and one in Clinton County, Indiana.
One office is located in Delaware County, Indiana, of which both the land and
building are leased. All leases are comparable to other leases in the
respective market areas and
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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
1995.
ADDITIONAL ITEM - EXECUTIVE OFFICERS.
Listed below are the Executive Officers of Bancorp as of December 31, 1995.
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 23, 1996 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 49 President and Chief Executive Officer, Director
Richard E. Weinman 61 Executive Vice President, Chief Financial
Officer, Secretary, and Treasurer
James J. Ashburn 65 Senior Vice President
Rick L. Blossom 48 Senior Vice President, Chief Lending Officer
The following is a brief description of the business experience over the past
five years of the individuals named above.
Stanley N. Pontius became Chief Executive Officer of Bancorp in July, 1992.
Mr. Pontius was Chief Operating Officer from March, 1991 until July, 1992.
Upon joining Bancorp in March, 1991 he assumed the responsibilities of
President and Chief Operating Officer, as well as a director. He also became
President, Chief Executive Officer, and a director of First Southwestern.
Prior to coming to Bancorp, Mr. Pontius served as President and Chief Executive
Officer of Bank One, Mansfield, Mansfield, Ohio from 1988 to 1991.
Richard E. Weinman retired in the first quarter 1996, after forty years of
service with First Southwestern and 12 years with Bancorp. Mr. Weinman became
Executive Vice President, Chief Financial Officer, Secretary and Treasurer in
December, 1994. Since December 30, 1988, Mr. Weinman had served as Senior
Vice President, Chief Financial Officer, Secretary and Treasurer of Bancorp.
Mr. Weinman has served as Bancorp's Principal Financial Officer since its
formation in 1982. In December of 1994, Mr. Weinman also became Executive Vice
President and Chief Financial Officer of First Southwestern. Since October,
1991, Mr. Weinman had been Senior Vice President and Chief Financial Officer of
First Southwestern. Mr. Weinman was Cashier of First Southwestern from
November 1980 to October 1991. He served as Senior Vice President of First
Southwestern for over five years.
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F-7
James J. Ashburn became Senior Vice President of Bancorp on December 30, 1988.
He had been Vice President of Bancorp since April, 1983. He has served as a
Senior Vice President and Senior Trust Officer of First Southwestern for over
five years.
Rick L. Blossom became Chief Lending Officer of Bancorp effective January 12,
1996. Mr. Blossom remains Senior Vice President of Bancorp, a position he has
held since September 26, 1990. On January 12, 1996, he also became Executive
Vice President of First Southwestern, retaining his Chief Lending Officer
status. He previously held the title of Senior Vice President/Retail Lending
of First Southwestern. On March 4, 1991, he was promoted to Chief Lending
Officer of First Southwestern, while retaining his Senior Vice President
status. He had served as First Vice President/Retail Lending of First
Southwestern since March, 1989.
Michael R. O'Dell became Senior Vice President, Chief Financial Officer and
secretary of Bancorp on January 12, 1996. He had served as Bancorp's
Comptroller since December, 1994. Mr. O'Dell was also promoted to Senior Vice
President and Chief Financial Officer of First Southwestern in January, 1996.
He had served as First Vice President and Comptroller since 1991.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
Bancorp had 3,938 common stock shareholders of record as of March 1, 1996.
Bancorp's common equity is listed with the National Association of Securities
Dealers, Inc. (NASDAQ) and is traded on the Over-the-Counter Market. The
information contained on page 48 of Bancorp's Annual Report to Shareholders for
the year ended December 31, 1995 is incorporated herein by reference in
response to this item.
ITEM 6. SELECTED FINANCIAL DATA.
The information contained in Table 1 on page 22 of Bancorp's Annual Report to
Shareholders for the year ended December 31, 1995 is incorporated herein by
reference in response to this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information contained on pages 21 through 31 of Bancorp's Annual Report
to Shareholders for the year ended December 31, 1995 is incorporated herein by
reference in response to this item.
The financial and statistical data presented on the following pages, when
viewed along with the financial and statistical data presented in pages 21
through 48 of Bancorp's Annual Report to Shareholders, provides a detailed
review of Bancorp's business activities.
Investment Portfolio
- --------------------
At December 31, 1995, Bancorp's investment portfolio included no investments
which were not issued by the U.S. Government, its agencies, or corporations and
which exceeded ten percent of Bancorp's shareholders' equity.
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F-8
Loan Portfolio
- --------------
The following table shows the composition of Bancorp's loan portfolio at the
end of each of the last five years:
December 31
-------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Commercial $ 340,942 $ 286,635 $ 247,052 $ 237,935 $ 236,050
Real estate--construction 41,845 29,273 31,597 15,283 28,831
Real estate--mortgage 788,805 746,150 665,390 658,689 701,150
Installment 329,034 285,412 214,600 195,947 210,461
Credit card 15,406 15,599 16,703 17,946 19,216
Lease financing 16,557 16,102 14,872 13,035 11,115
---------- ---------- ---------- ---------- ----------
Total loans $1,532,589 $1,379,171 $1,190,214 $1,138,835 $1,206,823
========== ========== ========== ========== ==========
Nonperforming Assets
- --------------------
The accrual of interest on a loan is discontinued and interest collected on
such loan is credited to loan principal if, in the opinion of management, full
collection of principal is doubtful. The following table summarizes Bancorp's
nonaccrual loans, restructured loans, other real estate owned/in-substance
foreclosures, and past due loans as of the end of each of the last five years:
December 31
---------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(Dollars in thousands)
Nonaccrual loans $ 2,764 $ 2,412 $ 4,679 $ 9,216 $18,847
Restructured loans 517 1,429 605 719 1,868
OREO and ISF* 1,677 2,116 3,673 9,549 4,528
------- ------- ------- ------- -------
Total nonperforming assets $ 4,958 $ 5,957 $ 8,957 $19,484 $25,243
======= ======= ======= ======= =======
Nonperforming assets as a
percent of total loans plus
OREO and ISF 0.32% 0.43% 0.75% 1.70% 2.08%
Accruing loans past due
90 days or more 1,071 683 1,321 1,547 1,940
*Other Real Estate Owned and In-Substance Foreclosures
As a result of management's continued effort to improve asset quality, OREO and
ISF decreased $439,000 in 1995, $1,557,000 in 1994 and $5,876,000 in 1993. Of
the $5,021,000 increase in 1992 compared to 1991, approximately 30.0% was
farming properties with the majority of the remaining increase being commercial
real estate properties.
Of the $25.2 million in total nonperforming assets in 1991, 52.0% were a result
of the acquisition of two financial institutions each of which had a large
amount in nonperforming assets. These nonperforming assets were known in
advance of the acquisitions and were taken into consideration in their pricing.
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F-9
Potential Problem Loans
- -----------------------
At December 31, 1995, Bancorp had $3,354,000 in loans for which payments were
presently current, but the borrowers were experiencing financial difficulties.
These loans are a combination of commercial, real estate, and installment loans
and are not included as part of nonaccrual loans, nor are they included within
restructured loans or loans past due 90 days or more and still accruing.
However, these loans are subject to constant monitoring by management, and
their status is reviewed on a continual basis. These loans were considered by
management in determining the adequacy of the recorded allowance for loan
losses at December 31, 1995.
Loan Loss Data
- --------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(Dollars in thousands)
Transactions in the allowance for loan losses:
Balance at January 1 $18,609 $18,380 $17,014 $17,739 $14,061
Loans Charged off:
Commercial 790 648 1,634 3,600 2,136
Real estate--construction 1,059 64
Real estate--mortgage 26 124 320 1,763 726
Installment and other
consumer financing 1,721 1,248 1,580 1,936 3,037
Lease financing 107 132 155 44 52
------- ------- ------- ------- -------
Total loans charged off 2,644 2,152 3,689 8,402 6,015
------- ------- ------- ------- -------
Recoveries of loans previously charged off:
Commercial 546 384 538 346 505
Real estate--construction 8 56 10
Real estate--mortgage 39 41 65 143 123
Installment and other
consumer financing 592 653 676 582 558
Lease financing 17 35 29 7 21
------- ------- ------- ------- -------
Total recoveries 1,202 1,113 1,308 1,134 1,217
------- ------- ------- ------- -------
Net charge-offs 1,442 1,039 2,381 7,268 4,798
Allowance acquired through mergers
and acquisitions 1,162 3,090
Provision for loan losses 2,108 1,268 3,747 6,543 5,386
------- ------- ------- ------- -------
Balance at December 31 $20,437 $18,609 $18,380 $17,014 $17,739
======= ======= ======= ======= =======
Ratios:
Net charge-offs as a percent of:
Average loans outstanding 0.10% 0.08% 0.21% 0.63% 0.56%
Provision 68.41% 81.94% 63.54% 111.08% 89.08%
Allowance 7.06% 5.58% 12.95% 42.72% 27.05%
Allowance as a percent of:
5 year moving average of
net charge-offs 603.64% 402.18% 347.24% 313.95% 381.86%
Year-end loans, net of
unearned income 1.33% 1.35% 1.54% 1.50% 1.47%
12
F-10
Allocation of the Allowance for Loan Losses
- -------------------------------------------
The following table shows an allocation of the allowance for loan losses for
each of the five years indicated:
December 31
---------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------- ------------- ------------- ------------ ------------
$ % $ % $ % $ % $ %
------- ---- ------- ---- ------- ---- ------ ---- ------ ----
Balance at End (Dollars in thousands)
of Period Appli-
cable to:
Commercial $ 4,254 22% $ 4,395 21% $ 4,457 21% $ 5,088 21% $ 4,377 20%
Real estate-
construction 210 3% 340 2% 300 3% 64 1% 462 2%
Real estate-
mortgage 3,713 52% 2,552 54% 4,305 56% 4,796 58% 5,367 58%
Installment &
credit card 4,184 22% 3,298 22% 3,104 19% 3,308 19% 4,316 19%
Lease financing 196 1% 154 1% 512 1% 733 1% 113 1%
Unallocated 7,880 N/A 7,870 N/A 5,702 N/A 3,025 N/A 3,104 N/A
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
$20,437 100% $18,609 100% $18,380 100% $17,014 100% $17,739 100%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
$ - Dollar Amount
% - Percent of Loans in Each Category to Total Loans
Dividend Payout Ratio
- ---------------------
The dividend payout ratios for 1995, 1994 and 1993 were 42.5%, 41.9%, and
39.2%, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and report of independent auditors
included on pages 32 through 47 of the Annual Report to Shareholders for the
year ended December 31, 1995 are incorporated herein by reference.
The Quarterly Financial and Common Stock Data on page 48 of the Annual Report
to Shareholders for the year ended December 31, 1995 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.
13
F-11
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 5
of Bancorp's Proxy Statement, dated March 15, 1996 with respect to the Annual
Meeting of Shareholders to be held on April 23, 1996 which was filed pursuant
to Regulation 14(A) of the Securities Exchange Act of 1934 and which is
incorporated herein by reference in response to this item.
Reference is also made to "Additional Item - Executive Officers" included in
Part I of this Form 10-K in partial response to Item 10.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under "Meetings of the Board of Directors and
Committees of the Board" on page 6, "Executive Compensation" on pages 7 through
11, and under "Compensation Committee Report" on pages 12 through 13 of
Bancorp's Proxy Statement dated March 15, 1996 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 and 3 of Bancorp's Proxy
Statement dated March 15, 1996 is incorporated herein by reference in response
to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing in Note 14 of the Notes to Consolidated Financial
Statements included on page 44 of Bancorp's Annual Report to Shareholders is
incorporated herein by reference in response to this item.
14
F-12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the Report: Page*
-----
(1) Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . . . . . 47
Consolidated Balance Sheets as of December 31, 1995 and 1994 . . . . . . . . . 32
Consolidated Statements of Earnings for year ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Cash Flows for year ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Changes in Shareholders' Equity
for year ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 36
(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, 1995 WHICH ARE INCORPORATED
HEREIN BY REFERENCE.
15
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 2-27-96
- -------------------------------------
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.
(Signed) /s/ Richard J. Fitton (Signed) /s/ Michael R. O'Dell
- ----------------------------------------- ----------------------------------------
Richard J. Fitton, Director Michael R. O'Dell,
Chairman of the Board Senior Vice President, Chief Financial
Officer, and Secretary
Date 2-27-96 Date 2-27-96
------------------------------------- -----------------------------------
(Signed) /s/ Stanley N. Pontius (Signed) /s/ Murph Knapke
- ----------------------------------------- ----------------------------------------
Stanley N. Pontius Murph Knapke, Director
President and Chief Executive Officer
Date 2-27-96 Date 2-27-96
------------------------------------- ------------------------------------
(Signed) /s/ Carl R. Fiora (Signed) /s/ Barry Levey
- ----------------------------------------- ----------------------------------------
Carl R. Fiora, Director Barry Levey, Director
Date 2-27-96 Date 2-27-96
------------------------------------- ------------------------------------
(Signed) /s/ Charles T. Koehler (Signed) /s/ Arthur W. Bidwell
- ----------------------------------------- ----------------------------------------
Charles T. Koehler, Director Arthur W. Bidwell, Director
Date 2-27-96 Date 2-27-96
------------------------------------- ------------------------------------
16
F-15
SIGNATURES (CONT'D)
(Signed) /s/ Elden Houts (Signed) /s/ Vaden Fitton
- ----------------------------------------- ----------------------------------------
F. Elden Houts, Director Vaden Fitton, Director
Date 2-27-96 Date 2-27-96
------------------------------------- ------------------------------------
(Signed) /s/ Lauren N. Patch (Signed) /s/ Don M. Cisle
- ----------------------------------------- ----------------------------------------
Lauren N. Patch, Director Don M. Cisle, Director
Date 2-27-96 Date 2-27-96
------------------------------------- ------------------------------------
(Signed) /s/ Thomas C. Blake (Signed) /s/ Joseph M. Gallina
- ----------------------------------------- ----------------------------------------
Thomas C. Blake, Director Joseph M. Gallina, Comptroller
Date 2-27-96 Date 2-27-96
------------------------------------- ------------------------------------
(Signed) /s/ Barry S. Porter
- -----------------------------------------
Barry S. Porter, Director
Date 2-27-96
-------------------------------------
17
1995
FIRST FINANCIAL BANCORP
ANNUAL REPORT
TABLE OF CONTENTS
Service Creed ............................................................. 1
Letter to Shareholders .................................................... 3
Editorial Review .......................................................... 6
Affiliate Office Locations ................................................ 17
Bancorp Board of Directors and Officers ................................... 20
Affiliate Directors and Officers .......................................... 20
Management's Discussion and Analysis ...................................... 21
Consolidated Financial Statements ......................................... 32
Notes to Consolidated Financial Statements ................................ 36
Quarterly Financial and Common Stock Data ................................. 48
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders
will be held in Hamilton, Ohio, at
the Fitton Center for Creative Arts,
101 South Monument Avenue,
on Tuesday, April 23, 1996, beginning at 2:00 p.m.
FORM 10-K
Copies of First Financial Bancorp's Form 10-K may be
obtained by writing to:
Michael R. O'Dell, Comptroller
First Financial Bancorp
300 High Street, P.O. Box 476
Hamilton, Ohio 45012-0476
513-425-7573 (FAX)
TRANSFER AGENT AND REGISTRAR
First National Bank
of Southwestern Ohio
Trust Division
2 North Main Street, P.O. Box 220
Middletown, Ohio 45042-0220
513-425-7569
513-425-7573 (FAX)
NASDAQ OTC NATIONAL MARKET
Common Stock Symbol: FFBC
18
FIRST FINANCIAL BANCORP * 1995 ANNUAL REPORT * FIRST FINANCIAL BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is presented to facilitate the
understanding of the financial position and results of operations of First
Financial Bancorp. (Bancorp). It identifies trends and material changes that
occurred during the reporting periods and should be read in conjunction with
the consolidated financial statements and accompanying notes.
Bancorp is a bank and savings and loan holding company headquartered in
Hamilton, Ohio. As of December 31, 1995, Bancorp owned twelve subsidiaries
located primarily in western Ohio and eastern and west-central Indiana. Also,
as of December 31, 1995, Bancorp was in the process of incorporating a new
subsidiary to be named First Finance Mortgage Company of Southwestern Ohio,
Inc. Management currently intends to conduct business under the name of "First
Finance." This new organization will be a finance company and is expected to
open during the first quarter of 1996 in Fairfield, Ohio.
On November 28, 1995, the Board of Directors approved a regular
quarterly cash dividend of 30 cents per share payable January 2, 1996, to
shareholders of record as of December 8, 1995.
The major components of Bancorp's operating results for the past five
years are summarized in Table 1 and discussed in greater detail on subsequent
pages which should be read in conjunction with the statistical data and
consolidated financial statements on pages 31 through 48.
RECENT AND PENDING MERGERS
On September 11, 1995, Bancorp signed a Plan and Agreement of Merger
with F&M Bancorp (F&M). F&M's only subsidiary, Farmers & Merchants Bank of
Rochester (Farmers & Merchants), has its main office and one other office in
Rochester, Indiana and one office in Kewanna, Indiana. Upon consummation of the
merger, F&M will be merged out of existence and Farmers & Merchants will be
merged with and into Indiana Lawrence Bank, a wholly owned subsidiary of
Bancorp. Farmers & Merchants' offices will become branches of Indiana Lawrence
Bank, the surviving entity. Subject to regulatory approval and approval by
F&M's shareholders, the merger is expected to occur during the second quarter
of 1996. Bancorp anticipates the merger will be accounted for using the
pooling-of-interests accounting method.
On October 1, 1995, Bancorp issued 442,876 shares of its common stock
for all the outstanding common stock of Bright Financial Services, Inc. (Bright
Financial). Upon consummation of the merger, Bright Financial was merged out of
existence and its only subsidiary, Bright National Bank (Bright), became a
wholly owned subsidiary of Bancorp. This merger was accounted for using the
pooling-of-interests method of accounting. The consolidated financial
statements for prior periods have not been restated due to immateriality.
On July 16, 1995, Bancorp issued 354,645 shares of its common stock for
all the outstanding common stock of Peoples Bank and Trust Company (Peoples).
Upon consummation of the merger, Peoples became a wholly owned subsidiary of
Bancorp. This merger was accounted for using the pooling-of-interests
accounting method. The consolidated financial statements for prior periods have
not been restated due to immateriality.
On June 1, 1994, Bancorp issued 287,699 shares of its common stock for
all the outstanding common stock of First Clyde Banc Corp. Upon consummation of
the merger, First Clyde Banc Corp was merged out of existence and its only
subsidiary, The Clyde Savings Bank Company (Clyde), became a wholly owned
subsidiary of Bancorp. This merger was accounted for as a pooling-of-interests,
and accordingly, the consolidated financial statements, including earnings per
share, have been restated for the periods prior to the merger to include the
accounts and operations of Clyde.
On February 1, 1994, Bancorp issued 198,386 shares of its common stock
for all the outstanding shares of Highland Federal Savings Bank (Highland).
Upon consummation of the merger, Highland was merged into Home Federal Bank, A
Federal Savings Bank (Home Federal). Home Federal, a wholly owned subsidiary of
Bancorp, was the surviving entity with Highland's offices becoming branches of
Home Federal. This merger was accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements, including earnings per
share, have been restated for the periods prior to the merger to include the
accounts and operations of Highland.
On January 4, 1993, Bancorp issued 287,414 shares of its common stock
for all the outstanding common stock of Jennings Union Bankcorp. Upon
consummation of the merger, Jennings Union Bankcorp was merged out of existence
and its only subsidiary, Union Bank & Trust Company (Union), 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
merger to include the accounts and operations of Union.
OVERVIEW OF OPERATIONS
- ----------------------
Bancorp's earnings during 1995 reached a record $31,789,000 or $2.55 per
share, representing a 12.8% growth over 1994's net earnings and a 10.4%
increase over 1994 earnings per share. Net earnings in 1994 were $28,173,000
($2.31 per share), reflecting an 11.8% increase from 1993 net earnings of
$25,194,000 ($2.06 per share). The 1995 earnings increase was achieved
primarily through an increase in net interest income. The 1994 earnings
increase was achieved through an increase in net interest income and a
reduction in the provision for loan losses, which was due to Bancorp's improved
asset quality.
Key industry performance ratios increased in 1995 over the previous two
years. Bancorp's return on assets was 1.64%, 1.54% and 1.41% for 1995, 1994 and
1993, respectively. Bancorp's return on equity for 1995 was 15.0% compared to
14.9% and 14.5% for 1994 and 1993, respectively.
NET INTEREST INCOME
- -------------------
Net interest income, Bancorp's principal source of earnings, is the
excess of interest received from earning assets over interest paid on
interest-bearing liabilities. Bancorp's net interest income for the years 1991
through 1995 is shown in Table 1. For analytical purposes, a section showing
interest income on a tax equivalent basis is also presented in Table 1. The tax
equivalent adjustment recognizes the income tax savings when comparing taxable
and tax-exempt assets and assumes a 35.0% tax rate in 1995, 1994 and 1993 and a
34.0% tax rate in prior years.
The amount of net interest income is determined by the volume and mix of
earning assets, the rates earned on such earning assets and the volume, mix and
rates paid for the deposits and borrowed money that support the earning assets.
Table 2 describes the extent to which changes in interest rates and changes in
volume of earning assets and interest-bearing liabilities have affected
Bancorp's net interest income during the years indicated. The combined effect
of changes in both volume and rate has been allocated proportionately to the
change due to volume and the change due to rate. Table 2 should be read in
conjunction with the Statistical Information shown on page 31.
Tax equivalent total interest income was $158,137,000 in 1995, an
increase of $19,151,000 over 1994. Approximately $9,845,000 of this increase
was due to an increase in average rates earned from 8.15% during 1994 to 8.75%
during 1995. The increase
21
19
FIRST FINANCIAL BANCORP * 1995 ANNUAL REPORT * FIRST FINANCIAL BANCORP
TABLE 1 * FINANCIAL SUMMARY
(Dollars in thousands, except per share data)
1995 1994 1993 1992 1991
----- ----- ---- ----- -----
Summary of operations
Interest income $ 153,851 $ 133,504 $ 130,739 $ 143,439 $ 152,649
Tax equivalent adjustment 4,286 5,482 5,922 5,875 6,222
------- ------- ------- ------- -------
Interest income - tax equivalent 158,137 138,986 136,661 149,314 158,871
Interest expense 63,516 49,587 51,880 66,958 85,140
------- ------- ------- ------- -------
Net interest income - tax equivalent $ 94,621 $ 89,399 $ 84,781 $ 82,356 $ 73,731
======= ======= ======= ======= =======
Interest income $ 153,851 $ 133,504 $ 130,739 $ 143,439 $ 152,649
Interest expense 63,516 49,587 51,880 66,958 85,140
------- ------- ------- ------- -------
Net interest income 90,335 83,917 78,859 76,481 67,509
Provision for loan losses 2,108 1,268 3,747 6,543 5,387
Noninterest income 20,558 17,462 19,589 19,814 16,124
Noninterest expenses 63,345 62,139 62,038 60,639 54,616
------- ------- ------- ------- -------
Income before income taxes and cumulative
effect of changes in accounting principles 45,440 37,972 32,663 29,113 23,630
Income tax expense 13,651 9,799 7,469 7,343 5,030
Income before cumulative effect of changes in ------- ------- ------- ------- -------
accounting principles 31,789 28,173 25,194 21,770 18,600
Cumulative effect of changes in accounting principles 1,698
------ ------- ------- ------- -------
Net earnings $ 31,789 $ 28,173 $ 25,194 $ 23,468 $ 18,600
======= ======= ======= ======= =======
Tax equivalent basis was calculated using a marginal federal income tax rate of
35.0% in 1995, 1994 and 1993 and a 34.0% tax rate for all other years
presented
Per share data (1)
Income before cumulative effect of changes in
accounting principles 2.55 $ 2.31 $ 2.06 $ 1.77 $ 1.51
Cumulative effect of changes in accounting principles 0.14
---- ---- ---- ---- ----
Net earnings $ 2.55 $ 2.31 $ 2.06 $ 1.91 $ 1.51
====== ====== ====== ==== =====
Cash dividends declared
First Financial Bancorp $ 1.08 $ 0.98 $ 0.82 $ 0.74 $ 0.66
Jennings Union Bankcorp (2) N/A N/A $ 2.00 $ 2.00
Highland Federal Savings Bank N/A $ 0.85 $ 0.75 $ 0.75
First Clyde Banc Corp (3) N/A $ 0.50 $ 2.00 $ 1.80 $ 1.60
Average common shares outstanding (in thousands) 12,488 12,211 12,211 12,319 12,358
Selected year-end balances
Total assets $ 2,103,375 $ 1,922,643 $ 1,810,673 $ 1,816,414 $ 1,860,955
Earning assets 1,941,274 1,764,616 1,670,009 1,662,413 1,721,867
Investment securities held-to-maturity 93,522 135,187 438,461 457,919 319,266
Investment securities available-for-sale 294,052 242,410
Investment securities held for sale 123,572
Loans, net of unearned income 1,532,016 1,378,867 1,189,790 1,137,482 1,204,860
Deposits 1,785,562 1,587,324 1,580,546 1,604,053 1,663,310
Noninterest-bearing demand deposits 220,061 201,331 182,192 181,696 155,888
Interest-bearing demand deposits 302,119 266,601 277,444 249,531 224,274
Savings deposits 359,638 374,378 403,845 400,632 354,170
Time deposits 903,744 745,014 717,065 772,194 928,978
Long-term borrowings 2,820 3,983 4,564 5,119
Shareholders' equity 234,175 194,673 181,252 167,694 154,207
Ratios based on average balances
Loans to deposits 89.01% 80.79% 74.14% 72.40% 73.54%
Net charge-offs to loans 0.10% 0.08% 0.21% 0.63% 0.44%
Shareholders' equity to
Total assets 10.98% 10.29% 9.73% 8.84% 8.77%
Deposits 13.06% 12.05% 11.10% 9.94% 9.82%
Return on Assets 1.64% 1.54% 1.41% 1.30% 1.11%
Return on Equity 14.97% 14.93% 14.54% 14.70% 12.64%
Net interest margin (tax equivalent basis) 5.24% 5.25% 5.14% 4.91% 4.72%
(1) First Financial Bancorp's per share data has been restated for all stock
dividends and material pooling-of-interests mergers through 1995.
(2) Jennings Union Bankcorp was the parent company of Union Bank & Trust Company and was
merged out of existence on January 4, 1993.
(3) First Clyde Banc Corp was the parent company of The Clyde Savings Bank Company and was merged out of
existence on June 1, 1994.
22
20
FIRST FINANCIAL BANCORP * 1995 ANNUAL REPORT * FIRST FINANCIAL BANCORP
in rates earned was due to a general increase in market rates and to a shift in
average asset balances of approximately $77,784,000 from securities into higher
yielding loans. The remaining $9,306,000 of the $19,151,000 increase in tax
equivalent total interest income was due to an increase of $101,889,000 in
average total earning assets during 1995. Outstanding loan balances increased
$182,082,000 while investment securities and other instruments decreased
$80,193,000.
Total interest expense was $63,516,000 in 1995, an increase of
$13,929,000 over 1994. Most of the increase, approximately $9,923,000, was due
to increases in average rates paid on deposits and borrowings, from 3.41%
during 1994 to 4.19% during 1995. The increase in rates was primarily due to a
general increase in market rates and to a shift in average balances of
approximately $45,484,000 from lower rate interest-bearing demand and savings
deposit accounts to higher rate time deposit accounts. The remaining $4,006,000
of the $13,929,000 increase was due to an increase of $64,344,000 in average
total interest-bearing liabilities during 1995.
Tax equivalent net interest income, the difference between tax
equivalent total interest income and total interest expense, increased
$5,222,000 during 1995. The $9,306,000 effect of the volume increase in earning
assets was greater than the $4,006,000 effect of the volume increase in
interest-bearing deposits, thereby contributing $5,300,000 to the increase in
net interest income. This volume increase was slightly offset by rate
influences on net interest income. The $9,845,000 effect of the rate increase
in earning assets was less than the $9,923,000 effect of the rate increase in
interest-bearing liabilities, resulting in a $78,000 decrease to net interest
income.
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 1995, 1994 and 1993 was $2,928,000, $2,742,000 and
$2,592,000, respectively.
Bancorp's interest rate spread (the average rate on earning assets minus
the average rate on interest-bearing liabilities) declined slightly from 4.74%
for 1994 to 4.56% for 1995. This decrease was the result of the cost of
interest-bearing liabilities increasing 78 basis points (a basis point equals
0.01%) while the yield on earning assets increased only 60 basis points. This
trend is likely to continue into 1996. The 1994 interest rate spread of 4.74%
was greater than the 1993 spread of 4.64% due to the yield on earning assets
declining less than the cost of interest-bearing liabilities.
As with Bancorp's interest rate spread, the net interest margin (net
interest income on a tax equivalent basis divided by average earning assets)
also declined, but by only one basis point. The net interest margin was 5.24%,
5.25% and 5.14% for 1995, 1994 and 1993, respectively.
During 1995 and 1994, approximately $51,193,000 and $16,134,000,
respectively, of tax-exempt municipal securities earning a tax equivalent yield
of 13.4% and 12.5%, respectively, were called by their issuers or matured.
Bancorp believes another $12,620,000 of municipal securities earning a tax
equivalent yield of 11.9% may be called or mature during 1996. In the current
economic environment, Bancorp may not be able to reinvest these funds in
similar earning assets at acceptable risk levels. The loss of such tax-exempt
municipal securities will likely continue to negatively influence the interest
rate spread and net interest margin in the future.
NONINTEREST INCOME
- ------------------
A listing of noninterest income for 1995, 1994 and 1993 is reported in
Table 3. Noninterest income, excluding investment securities transactions,
increased $1,002,000 or 5.21% in 1995, while 1994 showed a decrease of $444,000
or 2.26% from 1993.
Service charges on deposit accounts increased $374,000 or 4.55% over
1994 primarily due to increases in noninterest-bearing demand deposit balances.
Service charges during 1994 decreased $291,000 or 3.42% from 1993 mainly as a
result of a decrease in the number of insufficient fund charges on checking
accounts.
TABLE 2 * VOLUME/RATE ANALYSIS - TAX EQUIVALENT BASIS(1)
1995 change from 1994 due to 1994 change from 1993 due to
------------------------------------------------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------------------------------------------------------------------------------
(Dollars in thousands)
Interest income
Loans $ 15,884 $ 8,238 $ 24,122 $ 9,015 $ (3,323) $ 5,692
Investment securities (2)
Taxable (3,320) 1,684 (1,636) (1,037) (97) (1,134)
Tax-exempt (3,129) (312) (3,441) (1,188) (324) (1,512)
---------- ----------- ---------- ---------- ---------- ----------
Total investment securities interest (2) (6,449) 1,372 (5,077) (2,225) (421) (2,646)
Interest-bearing deposits with other banks (138) 101 (37) (301) 111 (190)
Federal funds sold and securities
purchased under agreements to resell 9 134 143 (716) 185 (531)
---------- ----------- ---------- ---------- ---------- ----------
Total 9,306 9,845 19,151 5,773 (3,448) 2,325
Interest expense
Interest-bearing demand deposits (140) 182 42 30 (998) (968)
Savings deposits (990) 430 (560) 139 (1,587) (1,448)
Time deposits 4,567 8,322 12,889 (467) (937) (1,404)
Short-term borrowings 615 1,015 1,630 1,238 393 1,631
Long-term borrowings (46) (26) (72) (198) 94 (104)
---------- ----------- ---------- ---------- ---------- ----------
Total 4,006 9,923 13,929 742 (3,035) (2,293)
---------- ----------- ---------- ---------- ---------- ----------
Net interest income $ 5,300 $ (78) $ 5,222 $ 5,031 $ (413) $ 4,618
========== =========== ========== ========== ========== ==========
(1) Tax equivalent basis was calculated using a marginal federal income tax rate of 35.0%.
(2) Includes both investment securities held-to-maturity and investment securities available-for-sale.
23
21
FIRST FINANCIAL BANCORP * 1995 ANNUAL REPORT * FIRST FINANCIAL BANCORP
Trust revenues in 1995 increased $606,000 or 8.64% over 1994 and
increased $592,000 or 9.21% in 1994 over 1993. The increase during 1995 was due
to an increase of $115,609,000 in trust assets serviced, from $1,025,388,000 at
December 31, 1994 to $1,140,997,000 at December 31, 1995. Nearly all of the
increases in 1995 and 1994 are attributed to new business, estate settlement
fees and growth in the number of accounts.
Other income during 1995 increased $22,000 or 0.55% over 1994 primarily
due to an increase in safe deposit box rental income, partially offset by a
decrease in gains from sales of other real estate owned. The decrease in gains
from sales of other real estate owned reflects a lower amount of foreclosed
real estate properties held during 1995. See the "Asset Quality" section on
page 26 for more information on other real estate owned.
Other income in 1994 decreased $745,000 or 15.8% from 1993. A
significant portion of 1994's decrease is due to reduced gains on the sale of
loans and a decrease in the amount of safe deposit box rent. Bancorp's
subsidiaries sell certain fixed rate mortgage loans immediately after
origination. Due to interest rate increases which occurred in 1994, the demand
for fixed rate mortgage loans decreased and resulted in a reduction in loan
sale activity and related gains.
Investment securities gains increased $2,094,000 in 1995, from a loss of
$1,754,000 in 1994 to a gain of $340,000 in 1995. Net gains were recorded by
Bancorp during 1995 primarily due to the proceeds from sales of $39,514,000 of
securities available-for-sale. Bancorp recorded $1,754,000 gross losses on the
sale of $82,735,000 of securities available-for-sale during 1994. A $71,000
loss was reported in 1993 due to the sale and call of $17,869,000 of investment
securities.
Bancorp expects 1996 noninterest income to increase over 1995 due to
increased deposit balances, which would result in an increase in service
charges on deposit accounts. In addition to the growth of deposits, Bancorp's
subsidiaries conduct periodic reviews of noninterest income and service
charges. Through the review of these charges, Bancorp is able to offset some
increases in operational expenses. While Bancorp expects trust revenues to
increase due to increased trust balances, trust revenues are based on the
market value of the trust portfolios. These market values are, of course,
dependent upon the condition of the economy.
NONINTEREST EXPENSES
- --------------------
A listing of noninterest expenses for 1995, 1994 and 1993 is reported in
Table 3. Noninterest expenses in 1995 increased $1,206,000 or 1.94% over 1994
and 1994 expenses increased $101,000 or 0.16% over 1993. The stability of
noninterest expenses reflects management's rigorous efforts to closely monitor
and control these expenses.
The largest component of noninterest expenses is salaries and employee
benefits, which increased $1,966,000 or 6.28% over 1994 due to wage and salary
increases, an increased number of employees (primarily due to the addition of
two new subsidiaries during 1995) and increased expense relating to the pension
plan covering substantially all employees of Bancorp and its subsidiaries.
Salaries and employee benefits in 1994 rose $1,663,000 or 5.61% over 1993 due
to wage and salary increases.
Deposit insurance expenses decreased during 1995 primarily due to a
decrease in the Bank Insurance Fund (BIF) premium charged by the Federal
Deposit Insurance Corporation (FDIC) from a range of $0.23 to $0.31 per $100 of
insured deposits to a range of $0.04 to $0.31 per $100, effective June 1, 1995.
The FDIC lowered the BIF premium after meeting its capitalization target of
$1.25 per $100 of deposits in May, 1995. The exact amount paid by a bank
depends on its capitalization and other qualitative factors considered by the
FDIC. Bancorp affiliates are considered well capitalized and have historically
paid the minimum premium amount. Ten of Bancorp's twelve subsidiaries are
insured by the BIF and received the premium reduction.
Bancorp's remaining two affiliates are insured by the Savings
Association Insurance Fund (SAIF). Also, one bank subsidiary purchased SAIF
insured deposits from the Resolution Trust Corporation. These deposits continue
to be insured by the SAIF. As the SAIF has not yet reached its capitalization
target, SAIF insured institutions will continue paying the higher premium rates
during the foreseeable future.
Both the House of Representatives and the Senate are considering bills
that would require an immediate recapitalization of the SAIF through the
levying of a one-time special assessment on all SAIF insured institutions. The
assessment, if passed and signed by the President, will be based on insured
deposits as of March 31, 1995. The amount of the assessment will be determined
by the FDIC's calculation
TABLE 3 * NONINTEREST INCOME & NONINTEREST EXPENSES
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
% CHANGE % CHANGE % CHANGE
INCREASE INCREASE INCREASE
TOTAL (DECREASE) TOTAL (DECREASE) TOTAL (DECREASE)
-------------------------------------------------------------------------------
(Dollars in thousands)
Noninterest income
Service charges on deposit accounts $ 8,596 4.5% $ 8,222 (3.4%) $ 8,513 9.0%
Trust revenues 7,623 8.6% 7,017 9.2% 6,425 8.7%
Other 3,999 0.6% 3,977 (15.8%) 4,722 10.3%
----------- ----------- -----------
Subtotal 20,218 5.2% 19,216 (2.3%) 19,660 9.2%
Investment securities gains (losses) 340 N/M (1,754) N/M (71) N/M
----------- ----------- -----------
Total $ 20,558 17.7% $ 17,462 (10.9%) $ 19,589 (1.1%)
=========== ====== =========== ====== =========== ======
Noninterest expenses
Salaries and employee benefits $ 33,262 6.3% $ 31,296 5.6% $ 29,633 4.9%
Net occupancy 4,340 3.1% 4,211 (0.2%) 4,219 9.4%
Furniture and equipment 3,352 11.5% 3,006 (4.5%) 3,147 (2.5%)
Data processing 5,165 (0.8%) 5,205 9.8% 4,741 0.3%
Deposit insurance 2,204 (37.7%) 3,537 2.0% 3,468 (2.4%)
State taxes 1,637 (5.2%) 1,726 1.3% 1,704 4.0%
Other 13,385 1.7% 13,158 (13.0%) 15,126 (1.6%)
----------- ----------- -----------
Total $ 63,345 1.9% $ 62,139 0.2% $ 62,038 2.3%
=========== ====== =========== ====== =========== ======
N/M = Not meaningful
24
22
FIRST FINANCIAL BANCORP * 1995 ANNUAL REPORT * FIRST FINANCIAL BANCORP
of the amount needed to reach the $1.25 per $100 of insured deposits
capitalization target. An assessment of between $0.80 and $0.85 per $100 of
insured deposits is generally considered necessary to recapitalize the SAIF. If
the assessment rate is $0.85 per $100, Bancorp estimates that its two SAIF
insured subsidiaries and its bank subsidiary with SAIF insured deposits will be
assessed an aggregate total of approximately $2,900,000. The Emerging Issues
Task Force of the Financial Accounting Standards Board has issued an opinion
that SAIF member institutions should not accrue a liability for the special
assessment until the legislation is enacted and signed by the President.
Accordingly, Bancorp has not accrued a liability for the potential assessment.
The efficiency ratio (noninterest expenses as a percentage of
noninterest income, excluding investment securities transactions, plus tax
equivalent net interest income) reflects how much, on average, an institution
expended to generate each dollar of revenue. The combined effect of an increase
in net interest income with the stability of noninterest expenses resulted in
improvements in the efficiency ratio. Bancorp's efficiency ratio for 1995, 1994
and 1993 was 55.2%, 57.2% and 59.4%, respectively.
Salary and employee benefits are expected to show a moderate increase in
1996. The expense, however, will be especially dependent on the status of
health care costs. Net occupancy and equipment will probably increase due to
anticipated capital expenditures. Bancorp is in the process of converting all
subsidiaries to a standard data processing system within the next three years.
Conversion costs for these five subsidiaries and contractual increases based on
inflation will result in increased data processing expenses. Once all the
subsidiaries are converted to a standard data processing system, the costs
should be maintained, if not decline. The reduction in FDIC expense, which was
effective in mid-1995, will show a full year's effect in 1996. State franchise
taxes are expected to increase at a minimal level.
INCOME TAXES
- ------------
In August, 1993, President Clinton signed the Omnibus Budget
Reconciliation Act of 1993, which was effective for tax years beginning on or
after January 1, 1993. This act included a provision increasing the top
corporate income tax rate from 34.0% to 35.0% for taxable income over
$10,000,000.
Net deferred tax assets at December 31, 1995, 1994 and 1993 were
$3,369,000, $5,904,000 and $5,802,000, respectively. Due to Bancorp's strong
historical earnings trend and the expectation that this trend will continue,
management has determined that it is more likely than not that the net deferred
tax asset will be realized. Therefore, no valuation allowance has been
established. Management will continue to evaluate quarterly the need for a
valuation allowance.
Bancorp's tax expense in 1995 totaled $13,651,000 compared to $9,799,000
in 1994 and $7,469,000 in 1993, resulting in effective tax rates of 30.0%,
25.8% and 22.9% in 1995, 1994 and 1993, respectively. The increase in 1995's
effective tax rate was primarily due to the absence of tax losses recognized on
tax-exempt municipal securities called during 1994 and to a decline in average
tax-exempt investments held during 1995 as compared to 1994.
The tax effects of investment securities transactions was a tax expense
of $17,000 during 1995 and tax benefits of $1,634,000 and $463,000 in 1994 and
1993, respectively.
Further analysis of income taxes is presented in Note 10 of the Notes to
Consolidated Financial Statements.
LOANS
- -----
Total loans, net of unearned income, increased $153,149,000 or 11.1%
during 1995 and $189,077,000 or 15.9% in 1994. Approximately $101,444,000 of
the 1995 increase was due to the addition of two new subsidiaries. All loan
categories, except credit cards, increased during 1995 and all loan categories,
except real estate-construction and credit cards increased in 1994. A favorable
market with respect to loan demand, combined with aggressive loan campaigns and
the pursuit of new business, led to net increases during 1995 of $54,307,000 or
18.9% in commercial loans, $12,572,000 or 42.9% in construction loans,
$42,655,000 or 5.72% in mortgage loans, $43,353,000 or 15.2% in installment
loans, net of unearned income, and $455,000 or 2.83% in lease financing. Credit
card lending decreased $193,000 or 1.24% during 1995.
Bancorp's loans cover a broad range of borrowers characterizing the
western Ohio and eastern and west-central Indiana markets. There were no loan
concentrations of multiple borrowers in similar activities at December 31, 1995
which exceeded 10.0% of total loans.
Bancorp's subsidiaries consist of community banks dedicated to meeting
the financial needs of individuals and businesses living and operating in the
communities they serve. Bancorp's loan portfolio is therefore primarily
composed of residential and commercial real estate mortgage loans, commercial
loans and installment loans. At December 31, 1995, real estate mortgage loans
composed 51.5% of
TABLE 4 * LOAN MATURITY/RATE SENSITIVITY
- --------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Maturity
-----------------------------------------------------
AFTER ONE BUT
WITHIN WITHIN FIVE AFTER FIVE
ONE YEAR YEARS YEARS TOTAL
-----------------------------------------------------
(Dollars in thousands)
Commercial $ 208,676 $ 72,426 $ 59,840 $ 340,942
Real estate - construction 30,131 7,787 3,927 41,845
-------------- ------------- ------------- ----------
Total $ 238,807 $ 80,213 $ 63,767 $ 382,787
============== ============= ============= ==========
Sensitivity to changes
in interest rates
-------------------------
PREDETERMINED VARIABLE
RATE RATE
-------------------------
(Dollars in thousands)
Due after one year but within five years $ 19,904 $ 60,309
Due after five years 14,742 49,025
-------------- ----------
Total $ 34,646 $ 109,334
============== ==========
25
23
FIRST FINANCIAL BANCORP * 1995 ANNUAL REPORT * FIRST FINANCIAL BANCORP
Bancorp's total loan portfolio and installment loans composed another 21.4% of
the total loan portfolio. Commercial loans equaled 22.3% of the total portfolio
and real estate-construction, credit card lending and lease financing made up
the remaining 4.80% of the portfolio.
Residential real estate mortgage loans are generally considered to be
the safest loan investments because of the real estate securing the loans.
Installment loans include unsecured loans, second mortgage loans, secured lines
of credit, secured and unsecured home improvement loans, automobile loans,
student loans and loans secured by savings, stocks or life insurance. Bancorp
subsidiaries offer a wide variety of commercial loans, including small business
loans, agricultural loans, equipment loans and lines of credit.
In accordance with Bancorp's decentralized management structure and
subject to Bancorp guidelines, credit underwriting and approval occur within
the subsidiary originating the loan. Depending on the subsidiary, loan
applications are approved by either a loan committee or by one or more loan
personnel with designated approval authority. Loan committees are composed of
senior management and loan personnel and, at some subsidiaries, members of the
subsidiary's board of directors. Loan applications for principal amounts
greater than a designated amount, which varies by subsidiary, require Bancorp
approval. Any plans to purchase or sell a participation in a loan also require
Bancorp approval.
Bancorp subsidiaries receive requests to renew maturing loans as a
normal part of business. Such requests are especially common with real estate
loans that are scheduled to mature before being fully amortized and with
commercial loans. The requests are reviewed by the subsidiary's loan committee
or by designated loan personnel, as appropriate, and may be approved, approved
with modifications or disapproved. Required modifications may include, among
other items, a reduction in the loan balance, a change in the interest rate or
the initiation of monthly principal payments.
Table 4 indicates the contractual maturity of commercial loans and real
estate-construction loans outstanding at December 31, 1995. Loans due after one
year are classified according to their sensitivity to changes in interest
rates.
ASSET QUALITY
- -------------
Bancorp's subsidiaries record a provision for loan losses (provision) in
the Consolidated Statements of Earnings to provide for expected credit losses.
Actual losses on loans and leases are charged against the allowance for loan
losses (allowance), which is a reserve accumulated on the Consolidated Balance
Sheets through the provision. The recorded values of the loans and leases
actually removed from the Consolidated Balance Sheets are referred to as
charge-offs and, after netting out recoveries on previously charged off assets,
become net charge-offs. Bancorp's policy is to charge off loans when, in
management's opinion, collection of principal is in doubt. All loans charged
off are subject to continuous review and concerted efforts are made to maximize
recovery.
Management records the provision, on an individual subsidiary basis, in
amounts sufficient to result in an allowance that will cover future risks
believed to be inherent in the loan portfolio of each subsidiary. Management's
evaluation in establishing the provision includes such factors as the
historical loss and recovery experience, estimated future loss for loans, known
deterioration in loans, periodic external loan evaluations, prevailing economic
conditions that might have an impact on the portfolio and ratios of
delinquencies and nonaccruals. The evaluation is inherently subjective as it
requires material estimates, including the amounts and timing of future cash
flows expected to be received on impaired loans, that may be susceptible to
significant change. The evaluation of these factors is completed at Bancorp's
subsidiaries through a group of senior officers from the financial and lending
areas.
The provision increased from $1,268,000 in 1994 to $2,108,000 in 1995.
The increase was primarily due to the increase in loan volume mentioned
previously. The allowance on December 31, 1995 was $20,437,000 or 1.33% of
loans, net of unearned income. This compares to $18,609,000 or 1.35% of loans,
net of unearned income, at December 31, 1994. Although the balance of the
allowance increased $1,828,000, the significant increase in total loans
outstanding resulted in a constant allowance to loan ratio. The provision
decreased $2,479,000 in 1994, from $3,747,000 in 1993 to $1,268,000 in 1994,
due to improvement in asset quality.
The level of nonaccrual and restructured loans and leases is an
important element in assessing asset quality. Loans are classified nonaccrual
when, in the opinion of management, collection of interest is doubtful.
Nonaccrual loans at December 31, 1995, 1994 and 1993 were $2,764,000,
$2,412,000 and $4,679,000, respectively.
Loans are classified as restructured when management, to protect its
investment, grants concessions to the debtor that it would not otherwise
consider. Restructured loans at December 31, 1995, 1994 and 1993 were $517,000,
$1,429,000 and $605,000, respectively.
Another element associated with asset quality is Other Real Estate Owned
(OREO). OREO primarily represents properties acquired by Bancorp's subsidiaries
through loan defaults by customers. The balances of OREO at December 31, 1995,
1994 and 1993 were $1,677,000, $2,116,000 and $3,673,000, respectively.
Loans 90 days or more past due which were still accruing interest
totaled $1,071,000, $683,000 and $1,321,000 at December 31, 1995, 1994 and
1993, respectively.
Nonaccrual and restructured loans and leases and OREO are discussed or
summarized in Notes 1 and 9 of the Notes to Consolidated Financial Statements.
Bancorp adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," (SFAS No. 114) as amended
by Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures," (SFAS
No. 118) in January, 1995. SFAS No. 114 and SFAS No. 118 require that lenders
measure an impaired loan, as defined in the statements, at the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. If the measure of
the impaired loan is less than the creditor's recorded investment in the loan,
the creditor must record a valuation allowance for the amount of the
difference. Implementation of this statement did not have a material effect on
Bancorp's allowance or provision.
INVESTMENT SECURITIES
- ---------------------
Bancorp's investment securities increased $9,977,000 or 2.64% during
1995 to a balance of $387,574,000. The major portion of this growth was due to
the addition of two new subsidiaries and occurred primarily in the U.S.
government agencies and corporations component of the investments portfolio.
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 17.6% of Bancorp's investment portfolio at December
31, 1995. All U.S. Treasury Securities were classified as available-for-sale at
that date and are available for liquidity management purposes. Another 27.1% of
the investment portfolio is composed of securities issued by U.S. government
agencies and corporations, primarily the Federal Home Loan Bank (FHLB), Federal
Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association
(FNMA), Student Loan Marketing Association (SLMA) and Federal Farm Credit Bank.
Included in the U.S. government agencies and corporations securities category
at December 31, 1995 were structured notes totaling $8,338,000. The structured
notes held by Bancorp are multistep coupon debentures issued by the FHLB,
FHLMC, FNMA and SLMA and, accordingly, are rated AAA. All U.S. government
agency and corporation securities
26
24
FIRST FINANCIAL BANCORP * 1995 ANNUAL REPORT * FIRST FINANCIAL BANCORP
were classified as available-for-sale at December 31, 1995 and are available
for liquidity management purposes. Due to the government guarantees, 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 28.9% of the investment
portfolio at December 31, 1995. MBSs represent participations in pools of
mortgage loans, the principal and interest payments of which are passed to the
security investors. MBSs are subject to prepayment risk, especially during
periods of decreasing interest rates. Prepayments of the underlying mortgage
loans may shorten the lives of the securities, thereby affecting yields to
maturity and market values. Bancorp invests primarily in MBSs issued by U.S.
government agencies, such as FHLMC, FNMA, and the Government National Mortgage
Association (GNMA). Such securities, because of government agency guarantees,
are considered to have low credit risk and high liquidity.
CMOs totaled $62,937,000 at December 31, 1995, all of which were
classified as available-for-sale. CMOs are collateralized by pools of mortgage
loans or MBSs. Substantially all of the CMOs held by Bancorp are rated AAA by
Standard & Poor's Corporation or similar rating agencies. Bancorp does not own
any interest-only securities, principal-only securities, accrual bonds, inverse
floaters or other high risk CMOs. All CMOs held as of December 31, 1995 passed
the stress test required by the Federal Financial Institutions Examination
Council at the last testing date and, therefore, are not considered high risk
by regulatory definition.
State, county, and municipal securities composed 21.8% of Bancorp's
investment portfolio at December 31, 1995. The securities are diversified as to
states and issuing authorities within states, thereby decreasing portfolio
risk. Bancorp management views investments in state, county, and municipal
securities as primarily long-term investments and, accordingly, about 86.3% of
such investments at December 31, 1995 were classified as held-to-maturity.
The remaining 4.60% of Bancorp's investment portfolio at December 31,
1995, termed "other securities," was primarily composed of stock ownership in
the Indianapolis and Cincinnati District Federal Home Loan Banks and in the
Federal Reserve Bank and in corporate debt securities. Bancorp invests only in
corporate debt securities that are rated investment grade by nationally
recognized rating organizations.
Table 5 sets forth the maturities of investment securities
held-to-maturity and investment securities available-for-sale as of December
31, 1995, and the average yields of such securities calculated on the basis of
the cost and effective yields weighted for the scheduled maturity of each
security. Tax equivalent adjustments (using a 35.0% rate) have been made in
calculating yields on tax-exempt obligations of state, counties and
municipalities.
At December 31, 1995, the market value of Bancorp's held-to-maturity
investment securities portfolio exceeded the carrying value by $6,990,000. The
available-for-sale investment securities are reported at their market value of
$294,052,000, as required by Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities," (SFAS
No. 115). 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 increased $14,705,000, from $97,000 at December 31, 1994 to
$14,802,000 at December 31, 1995. The increase was primarily for liquidity
purposes. Bancorp monitors this position as part of its asset/liability
management.
Bancorp adopted the provisions of SFAS No. 115 for investments held as
of, or acquired after, January 1, 1994. Securities with a market value of
$272,856,000 were reclassified as available-for-sale at that time. In
accordance with SFAS No. 115, prior period financial statements were not
restated to reflect the change in accounting principle. As of January 1, 1994,
the cumulative effect (net of $1,960,000 in deferred income taxes) of adopting
SFAS No. 115 was to increase shareholders' equity by $3,638,000 to reflect
unrealized holding gains on securities classified as available-for-sale,
previously carried at amortized cost or lower of cost or market.
TABLE 5 * INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Maturing
-----------------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Held-to-Maturity
Mortgage-backed securities (2) $ 739 8.03% $ 4,775 6.75% $ 12,546 8.86%
State, county, and
municipal securities $ 7,830 11.66% 35,783 12.10% 19,319 12.17% 9,846 12.55%
Other securities 718 7.59% 1,966 7.87%
----------- ---------- ----------- ----------
Total $ 8,548 11.32% $ 38,488 11.81% $ 24,094 11.10% $ 22,392 10.48%
=========== ===== ========== ===== =========== ===== ========== =====
Available-for-Sale
U.S. Treasury securities $ 53,871 5.92% $ 14,511 6.59%
Securities of other U.S.
government agencies
and corporations 10,415 6.96% 83,021 6.74% $ 9,563 6.52% $ 1,905 6.65%
Mortgage-backed securities (2) 143 5.63% 6,487 5.90% 6,359 6.38% 81,080 5.98%
State, county, and
municipal securities 727 8.09% 5,209 9.07% 4,048 7.20% 1,547 9.03%
Other securities 3,099 6.22% 106 7.01% 11,961 6.14%
----------- ---------- ----------- ----------
Total $ 65,156 6.11% $ 112,327 6.77% $ 20,076 6.62% $ 96,493 6.06%
=========== ===== ========== ===== =========== ===== ========== =====
(1) Tax equivalent basis was calculated using a marginal federal income tax rate of 35.0%.
(2) 56.8% of the mortgage-backed securities maturing after five years are variable rate.
27
25
In November, 1995, the Financial Accounting Standards Board (FASB)
released a special report titled "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (Guide). The
Guide permitted businesses to make a one-time reassessment of the
classification of all securities held. Under the provisions of the Guide, a
business was able to make a one-time reclassification of securities from
held-to-maturity to available-for-sale without calling into question the intent
to hold other debt securities to maturity. Such reassessment and
reclassification was required to occur no later than December 31, 1995. Bancorp
management analyzed the investment portfolio during this period and decided
that classification adjustments were not needed.
Bancorp does not use off-balance-sheet derivative financial instruments
(such as interest rate swaps) as defined in Statement of Financial Accounting
Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments."
DEPOSITS AND BORROWINGS
- -----------------------
Bancorp's subsidiaries solicit deposits by offering a wide variety of
savings and transaction accounts, including checking accounts, regular savings
accounts, money market deposit accounts and time deposits of various maturities
and rates. In accordance with Bancorp's decentralized management structure and
in an effort to respond to local conditions, each Bancorp subsidiary designs
and prices the savings and transaction accounts offered in its local marketing
area.
Total deposits increased $198,238,000 or 12.5% in 1995. Approximately
$145,660,000 of this increase was due to the addition of two subsidiaries
during 1995. Time deposits increased $158,730,000, interest-bearing demand
accounts increased $35,518,000 and noninterest-bearing demand deposits
increased $18,730,000. These increases were partially offset by a decline in
savings deposits of $14,740,000. The average rate paid on time deposits
increased 106 basis points, from 4.34% in 1994 to 5.40% in 1995, while the
average rate paid on total interest-bearing deposits increased only 74 basis
points, from 3.38% in 1994 to 4.12% in 1995.
Table 6 shows the contractual maturity of time deposits of $100,000 and
over that were outstanding at December 31, 1995. These deposits represented
only 8.35% of total deposits.
Short-term borrowings decreased from $123,119,000 at December 31, 1994
to $58,372,000 at December 31, 1995. This decrease in borrowings was due to
increased deposit funding. Long-term borrowings at December 31, 1995 totaled
$2,820,000, while no long-term borrowings were outstanding at December 31,
1994.
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 $3,615,000 for 1995 and $4,364,000 for 1994. Capital
expenditures for 1995 included approximately $800,000 for construction of a new
branch. Remodeling is a planned and ongoing process given the 76 offices of
Bancorp and its subsidiaries. Material commitments for capital expenditures as
of December 31, 1995 were $2,276,000. A significant portion of these
commitments are associated with plans for an additional branch office presently
under construction and construction of a lockbox facility.
Bancorp subsidiaries' source of funding is predominately deposits
within each of their respective market areas. The deposit base is diversified
between individuals, partnerships, corporations and public entities. This
diversification helps Bancorp avoid dependence on large concentrations of
funds. Bancorp does not solicit time deposits from brokers.
Liquidity is derived primarily from core deposit growth, principal
payments received on loans, the sale and maturity 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
$294,052,000 at December 31, 1995. 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 $8,548,000 at December 31, 1995. In addition, other
types of assets--such as cash and due from banks, federal funds sold and
securities purchased under agreements to resell, and loans and interest-bearing
deposits with other banks maturing within one year--are sources of liquidity.
Certain restrictions exist regarding the ability of Bancorp's
subsidiaries to transfer funds to Bancorp (see Note 6 of the Notes to
Consolidated Financial Statements). Management is not aware of any other
events or regulatory requirements which, if implemented, are likely to have a
material effect on Bancorp's liquidity.
INTEREST RATE SENSITIVITY
- -------------------------
Interest rate risk is the exposure to Bancorp's earnings and capital
arising from changes in future interest rates. All financial institutions
assume interest rate risk as an integral part of normal operations. Managing
and measuring interest rate risk is a dynamic, multi-faceted process that
ranges from reducing the exposure of Bancorp's net interest margin to swings in
interest rates to assuring
TABLE 6 * MATURITIES OF TIME DEPOSITS GREATER THAN OR EQUAL TO $100,000*
DECEMBER 31, 1995
--------------------
Maturing in (Dollars in thousands)
3 months or less $ 80,790
3 months to 6 months 25,561
6 months to 12 months 17,952
over 12 months 24,791
--------
Total $149,094
========
*All time deposits greater than or equal to $100,000 were in certificates of
deposit.
28
26
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 various disciplines, whose function
is to develop policies an